ServisFirst Bancshares Inc (SFBS) 2017 Q1 法說會逐字稿

Good afternoon and welcome to the ServisFirst Bancshares conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to [Ed Woody]. Please go ahead.

Thank you, Amy. Hi, everyone, thank you for your time this afternoon and your interest in our Company. Today we will have Tom Broughton, our CEO, and Bud Foshee, our Chief Financial Officer, reviewing the first quarter with us followed by an opportunity for you to ask questions.

We may make forward-looking statements during the call giving our expectations of future financial performance. These forward-looking statements are subject to assumptions, risks and uncertainties which change over time. Actual results may differ materially due to factors that affect our business. We encourage you to review our description of these factors in our 10-K filed with the SEC in early March.

With that I will give the call to Tom for his opening comments. Tom.

Thank you, Ed. This is Tom Broughton and good afternoon, thank you for joining us for our conference call. We are pleased with the way the first quarter ended up and I will give you a little bit more detail on it. And then Bud Foshee will give a good bit of financial detail as well. And again, if you are new to our calls, we don't read anything from the press release to you; we assume you can read anything you want to read in the press release and we will just talk about a few other little things.

So one, the highlighted quarter loan growth was extremely strong in the first quarter; typically it is our weakest quarter of the year. But this year it was very strong with loan growth of $241 million in the quarter. The loan growth was strong across our entire footprint; there were really no weak regions.

Most of our regions are reporting very a pronounced increase in loan activity since the first of the year, a great deal of optimism among the customer base in the southeast. So that is pretty much across the board they are very optimistic and seeing more activity, more increase.

Now I would say the C&I growth was above average for the quarter. CRE was a little lower than our -- the average mix has been. So I think C&I and owner-occupied commercial was over 70% of the growth in the first quarter. We'll probably -- sometime this year we will have some pay downs in CRE on some multi-family that is going to permanent, so that could even -- the CRE could even drop as a percentage over the next couple of quarters by some small amount.

From a pipeline standpoint we have sort of a new methodology for this quarter. Using the old methodology the pipeline would be at an all-time high compared -- excuse me, using the new methodology and using the old method -- the new methodology for last quarter -- for year end 12-31-16, the pipeline is up a fair amount from year end. So -- using the new methodology. So it is very strong.

Again, we are seeing a good bit of activity there. We do expect some pay downs in the next couple of quarters that could temper the strong growth there. So far so good. From a number of producers we added seven -- I think we put it in the release, we added seven new producers or a net increase of five in the quarter.

Those five we added are in Tampa. Tampa -- moved in our new main office, as obviously we have outlined in the release. And so they have room to -- and also they are in a permanent office so they don't have to commute to Pascoe County, Florida anymore where the non-competes expired. And we also added one new lender in Nashville and one in Atlanta.

From a deposit standpoint we had some large temporary deposits we had taken at the end of last year, over $150 million that we took as a favor to some clients. They knew it was going to run off and we knew it was going to run off, but [we took] it as a favor. But it was not quite matured and they wanted a little bump in the rate and we said no. So they moved it to somebody. I guess that favor didn't impress them too long. But that is okay. We are trying to control our cost of funds.

If you exclude the temporary deposits, our deposits grew 8% annualized for the quarter. Again, typically we have runoff in the first quarter. We don't expect to have very strong growth in the first quarter of the year. The deposit growth was strongest in Birmingham, Huntsville and Atlanta. So, it is typical to have tax payments in the first quarter, corporate tax payments usually are some of our biggest contributors to runoff. Bud Foshee is now going to cover some of our financial results.

Thanks, Tom, good afternoon. First I will start with our net interest margin. Margin improved from 3.30% in the fourth quarter to 3.53% in the first quarter of 2017. That is due to the Fed rate hike in December 2016, mid-March 2017, and an improved balance sheet mix in first quarter. Our excess liquidity decreased by $313 million on average.

Loans -- that went into loans, loans average went up $300 million, investment securities $71 million, and deposits $45 million. Excellent credit quality, our nonperforming assets to total assets was 0.34% in December and that decreased to 0.27% at March 31.

Our elevated loan loss provision is due to, one, above average loan growth for the first quarter. Loans grew $240 million, which was very good for us for the first quarter of the year. Plus we had higher charge-offs, one charge-off in particular, it was fully charged off in the first quarter.

That charge-off amount was $2.2 million and we had an impairment on that one credit, $1.4 million, so it was a net of $800,000. And we only have one credit in the industry, so it is not an ongoing issue. That is just one C&I credit that is now fully charged off.

Our tax rate in the first quarter was 26.1% versus 24.5% in the first quarter of last year. Stock option credits, we recorded $2.1 million in the first quarter this year, $2.3 million in the first quarter of 2016.

And looking back by quarter if you take the five quarters that we have recorded those stock-option credits, on average that has been $1.4 million in credits each quarter. At the end of March the realized stock-option credits was $15.8 million based on the stock price end of March.

Efficiency ratio we improved from 39.96% in the fourth quarter to 37.58% March 31, that is primarily due to the increase in our margin. Our margin increased by $2.9 million quarter over quarter. And that is the end of my summary. We will be glad to answer any questions anybody has.

(Operator Instructions). Kevin Fitzsimmons, Hovde Group.

I just want to ask a little bit of an outlook on the margin going forward. A big bump in that this quarter versus fourth quarter. And I know you guys talked about last quarter's call being hopeful that that excess liquidity was going to work itself off. So, it seems like from your comments that it worked itself off a lot quicker than you might have thought.

But when you look at where the percentage margin came out and looking forward do you think this is kind of a more normalized (technical difficulty) for you guys or should we expect it to bounce around a little over the next few quarters?

Kevin, this is Bud. One, we can't really controlled our deposit costs, so we haven't increased that much even with two Fed increases. But we know that we'll have to look at that over time. There will be -- from a loan side there will be improvement in the second quarter.

We went back and analyzed all of our floating-rate loans. We had some loans that were tied to either prime or 30-day LIBOR where the next reset date would have been the first of the month. So those loans do not reset on March 15 so they will reset on April 1. That is about $450 million in loans that were re-priced April 1.

Then we have other loans that they are at their floors now. It would take another Fed increase for those to increase, but that is $576 million of loans that didn't increase this last time but would with the next Fed increase.

Yes, Kevin it is kind of -- the margin is kind of complicated. We got curious on why we didn't get more increase in the first quarter. I mean, our loan yields were up but not up what we thought they would be. And then you start breaking it down and, well, there is still some floors that we are just now getting through and there is some that don't reset until the 15th of the month or the 1st of the month.

It is just all kind of -- and of course a Board member this morning asked why. And when we did what the customer wants, the loan to reset on the 15th or the 1st of the month, that is when we do it. So it is not quite as simple as it would seem.

Right, right, understood. Okay, great, that is helpful. And then just one quick follow up on loan growth. I know we talked about on last quarter's call the late quarter surge we saw in loan growth and that definitely seemed to play through this quarter with average balances.

But just one thing we are hearing a lot of banks talk about is this increased optimism. But a lot of banks have -- over the last few months, have been saying with the caveat that it is not necessarily translating into increased activity. So do you think there is something different about your markets or is this not necessarily the kind of optimism they are talking about?

In other words, if they are referring to just post-election optimism and that not necessarily translating into increased activity, is this something different? Because you guys are definitely seeing increased activity. Thanks.

Yes, Kevin, this is Tom, I think just in general, wealthy people in general -- and I am not making any political commentary, I don't get into politics. But they were generally just more optimistic after the election looking forward to tax relief. I don't think that necessarily translates into economic activity. But I think there is a little bit of it and I think they are certainly hopeful on tax rates decrease.

But I just think in the southeast it is probably maybe a little bit different than most parts of the country. It probably was more welcoming of a Republican president in our footprint here just in general, more so than certainly the Northeast or the West Coast or somewhere like that. So, perhaps there is just more activity in the Southeast.

I don't know if that's -- and I read what you read, that loan demand is down from last year in the first quarter it seems. But we just see a lot of activity in our markets and we see a lot of opportunities for us. So that is all we are -- and I guess we don't look at it too closely, we don't look the gift horse in the mouth. We are happy to see it.

And this is -- Tom, is this more real expansion activity or is it you guys just being more successful taking market share or is it a little of both?

I think it is real new activity, it is not just taking market share. And again, we are known as a commercial lender. And so, I think that is where we add expertise in many cases is to -- a Company comes to us because we can add value to their Company and they want us to be their commercial bankers. So we think that adds value for our customer base.

So yes, certainly we are taking -- trying to take business from competitors as well. And we are really just kind of getting cranked. We are in so many fairly new markets that have very strong activity, whether it is Nashville and we are just getting started in Tampa. So there is a lot of activity, a lot of activity there.

Right, you are growing off a low base in those markets, right (multiple speakers)?

Right. But there is a lot of activity. And when you add seven or eight new lenders in a new markets it doesn't take much of a pipeline to get rolling pretty well.

Got it. Okay, guys, that is all I had. Thanks again.

Tyler Stafford, Stephens.

I wanted to first follow-up maybe on Kevin's margin outlook and asset sensitivity question. Can you share with us just what you guys are assuming on the deposit beta side for -- embedded within your interest rate outlook?

Tyler, this is Bud. We are looking at -- we are probably focusing more on the special rate accounts. So far we have not really had to increase those rates with the two Fed increases, it is just something we are watching just to see what is going to happen from that. It is hard to predict.

Tyler I guess we had assumed, what, a deposit beta around 60% on this last rate increase and it may still happen. But to date we have not had to increase rates significantly, we certainly -- in any major form. So I would say it is going to be -- certainly there will be some increases over time. I think bankers being bankers they will -- what we have chosen to do is just like those special rate, the temporary deposits we had taken.

They ask, can we bump up the rate for the temporary deposit? No. Take it or leave it and so they left. The money is going to run off anyway. So I don't really -- I'm not giving you a good answer. I don't think -- we don't know what other banks' behavior is going to be at this point in time. And I think deposit betas is a little bit of gibberish in that regard because we don't really know -- things could change tomorrow from what customers do.

Sure.

We think that there is probably another Fed rate increase or two before you see a lot of significant movement. So hopefully we will be able to hold onto at least 50% of any rate increase over the next couple of rate increases. And, Bud, would you -- we have a plan for each rate increase. We have a plan for what our next rate increase will be, rate hike, what we think will happen and what we -- what our officers should expect to see from us.

Yes. No, that is helpful, Tom. It just seems like based on your balance sheet mix that you guys should see and realize more of a benefit with rates up then what your current disclosures are. So I didn't know if you were maybe being overly conservative on the deposit side. But that is fine.

Maybe just going back to one of the also earlier comments about the $576 million of loans that will re-price with the next Fed increase. Is there a chunk of loans beyond that that are still at the floor that would need I guess the second incremental rate increase from here? Or will that last -- this next increase fully move those -- that $576 million off?

Let's see, let me add these up what I have got here. That is going to be -- I mean there is some out there, there is a group of loans that will take like the third or fourth Fed increase just based on what the floor is. But it is not -- I didn't even factor that in when I did this because overall I don't think that is a significant amount of money.

Yes, it is not a small amount of money, you know, when we have a floor of six or something like that -- or five.

Yes, yes.

Yes, okay. And then maybe Tom going back to your earlier opening commentary about the CRE balances and the pipeline. Is that intentional on your part? Are you pulling back on CRE or is that more just a reflection of other banks maybe in the market kind of being more aggressive in that product?

No. If you had asked me where we had had the growth in the quarter I would have told you it was going to be in CRE, I would've just given you the wrong answer if I just -- because we are seeing a little bit -- we are seeing better pricing on CRE today than we saw a year ago and up to 100 basis points better.

Still probably a little thin by our standards, but it is better than it has been. And sometimes what we are seeing increased competition on is equipment packages, in certain industries pricing gets beat down, people just are willing to take pretty low yields for -- on a fixed basis for five years or so.

Okay, maybe just last one for me, just M&A, Tom. Can you update on your current M&A thoughts? Obviously you guys have a strong currency that you could put to work. How are you thinking about the M&A environment right now and options for you?

Yes, if we can keep growing organically at the rate we are doing, again, we -- we are interested in buying a bank. If they can grow more quickly than we can we are interested in talking to them. And they don't have a legacy large branch network that is certainly -- so when you have those two requirements it really cuts down on banks that we might buy. And when I say better growth, they need to have better organic growth rate than we have, Tyler.

To double back on the margin question a little bit, we would expect to see still some incremental increase in the margin as we get more rate increases. We expect to see more in April and I don't know how many basis points that translates to, Bud, it is not a huge number is it?

No, not for the quarter no. But it will -- that will improve over time just based -- and you've got higher rates on what is going on with the new production going on with the two rate increases. So loan growth keeps up margins should gradually increase.

Bud, do you have what those new production yields were this quarter?

I have -- I remember March, March was 445 for total for new loans.

Okay. Thanks, guys. I appreciate it.

Brad Milsaps, Sandler O'Neil.

Hey, Bud, you didn't mention in any of your prepared comments, but just curious were there any kind of nonrecurring or items and expenses this quarter? It looked pretty straightforward, but I always like to check with you to see if there is anything you would take out or add back as you kind of think about the expense run rate.

No, not really. ORE expense was real low for the quarter from any kind of accruals, we don't really adjust those to the fourth quarter. I mean that is just based on how we budget it. So I can't remember anything, Brad, that just stands out as would be a nonrecurring income or expense [item].

I guess other than a lumpy -- that lumpy charge-off. Commercial charge-offs tend to be -- unlike consumer they are very lumpy. It was elevated for the quarter.

Got it. Tom, as you think about this year are there any initiatives kind of related to deposits that you plan to put out that you will approach the market differently? Do you continue to press on with correspondent bank deposits or are there other things you are looking at as you kind of think about funding the strong loan growth you are seeing?

This, we feel pretty good about our deposit growth keeping up with the loan growth, Brad. And we have not had to do anything from a standpoint of certainly no rate concessions to generate deposits. Again, we are -- what we want is transactional deposits. That is what we focus on -- excuse me, relationship not transactional accounts.

So we want full relationships and that is what we base our -- we want real core deposit growth and we will continue with the correspondent space to add new settlement accounts in the correspondent space every month. We certainly -- we push that every month. So we have how many correspondent settlement accounts today, Rodney?

We have a little over 80 banks that are full sum with us and then what we call fee sum. You add the two together and it is right at 100, a third of our 303 banks.

So there is a pretty good prospect list there of banks we would like to convert to full settlement customers.

Got it. And then just final question. I know you kind of had the one-off credit situation this quarter that you dealt with. Any other areas of C&I book that give you any concern? Seen a couple banks kind of with a few healthcare credits that have caused them problems here and there. Any thoughts on that sector or any others that you are not feeling maybe as rosy about at this point?

No, we don't see anything, Brad, on the horizon that -- Clarence Pouncey is in the room and I can ask Clarence. But Clarence, you respond to that?

No, nothing in particular, Brad. The credits that C&I credit that we dealt with in the first quarter simply was a case of poor management. The Company -- and we recognize our exposure and got it behind us in the first quarter. But in terms of any industry sector that is problematic within our portfolio, we are not seeing any.

I mean, Don Owens, our Chief Credit Officer, Clarence works with him every day and they are looking for trends. We can't find any trends yet, Brad. A couple things you would think would slow down first would be maybe automobile dealers, we don't -- prices are pretty healthy there for dealerships. We don't see any slow down there in the automotive dealers yet. So they are still doing quite well. We don't -- again, as Clarence just said, all of our problems on our watch list are -- most all of our substandard credits are just poor management in some fashion.

All right, thank you, guys. I appreciate it.

William Wallace, Raymond James.

If I look at your earning asset mix, I mean do you kind of feel you are at the optimal mix now with loans around 83% or so of earning assets? Or do you think there is opportunity to continue to deploy liquidity into the loan portfolio?

There is still room -- I mean we are at -- Fed Funds sold are staying around $400 million a day, so we are 6.5% to 7% of assets. And we could go lower than that and still be fine from a liquidity standpoint. So I mean, just from liquidity I think we would be fine.

Are you strategically -- is your desire to run the Fed Fund solds down to a lower portion of the mix?

Well, I mean that's just part of the -- I guess that depends on what we are talking about on the loan and deposit pipeline to see how that shakes out. I mean, we are not going to let it get down to a critical stage and redo the emphasis on loans to deposits. I don't --.

Yes, we think we are okay. We think we could be a little bit more -- have a little bit higher mix of loans to total assets there, Wally. We don't see a need to do anything differently yet.

And then if I look at your loans to deposits ratio, what do you kind of think about as the optimal run rate there? I mean you have been at 100% in the past, would you prefer to be lower or is that a totally fine level for you guys to run at? What are your thoughts there?

I think 95% to 100% would be fine. We have gone through the -- we had a concern from a regulatory standpoint at one time thinking that they would have an issue with that. But they told us there is no issues even over 100%. And I think really they look at the Fed Funds purchased correspondence and see how stable that is. And we really -- it is almost considered part of our -- we consider that part of our deposit base really because it is so stable. And so, yes, I think 95% to 100% would be fine from that ratio.

I think what the regulators look at is we are a relationship based bank, we don't have transactional deposits. And we don't have any broker deposits, we don't do any [CREs], I mean any form of broker deposits. We don't accept -- we have never accepted a broker deposit and don't plan to. So I think what they see is a bank with good core deposit growth and they are very comfortable -- I think they are comfortable to this point with our loan to deposit ratio at an elevated level.

Okay. And then --.

(Multiple speakers) CDs are only 10% of our deposit mix, so you don't really have CD runoff rate shoppers so that helps also.

And, Tom, you mentioned that your CRE pricing has improved, is up. And I am just curious -- I mean you guys have always grown significantly better than the industry. I am curious if you're seeing any change in the competition. Presumably the competition's loan pricing is up as well on the CRE loans. But I am just curious if you are seeing any change in behavior, maybe some of the guys who are more aggressive are stepping back or any kind of commentary that you could speak to in your markets.

We don't know -- I am sure there is a lot -- there may be significant changes in the transactional CRE business but we are not in that -- we don't do transactional business. And a lot of the CRE world is transactional, Wally, as you well know. But we are seeing better yields available, so that tells me somebody has pulled back from where they were a year ago, they have gotten full in terms of CRE exposure.

Okay, okay. You hired seven lenders, five net. You mentioned one in Nashville, one in Atlanta and then Tampa. Was Tampa -- was that three net in Tampa or was that five net in Tampa?

That is --.

Or maybe said another way, what were the two that -- where were the two that are no longer with you, what markets were they in?

I don't know the answer to that question, Wally. I think one was in Atlanta and one was in Tampa is my best --.

Okay.

Does that sound right, Clarence?

So Tampa -- you have really beefed up in Tampa?

Right, right, right. We just opened our office in March down there. I mean last -- two weeks ago. So we didn't have a place to put anybody, so we had some people that were scheduled to come on but we just couldn't take them until we had a place to put them.

Okay. In the past you have mentioned some other markets in the Southeast that are of interest to you. I am curious if you have gotten to a point now with maybe Tampa kind of coming on line a little bit better, are you getting closer to entering a new market organically?

We don't have any plans today, Wally, to enter new markets. I mean one reason we have been really picky on our growth is because we had good growth where we are today. We are growing quite well in our existing markets. And it is clearly more profitable to not add a whole new regional overhead, regions overhead, obviously. So we certainly are -- would prefer to grow in the markets where we are today.

We do -- through our Birmingham office, we cover a fair number of other markets in the Southeast that are within a few hundred miles. We think we cover some of those effectively today. So we continue with the same plan we have today. But now we are always talking to people, we just don't have any plans today.

Okay, okay. And then just my last question is what did you change about your pipeline methodology just out of curiosity?

Trying to drill down on better percentage -- a better probability of whether they are going to close or not and when they are going to close. And we are trying to scrub it better. Producers like to have a big pipeline, it makes them feel good about themselves, adds a little swagger to their step. And we are all for them having a lot swagger in their step but we want a pipeline that is highly accurate as well.

And I have always said it is not scientific. I am sure we can make it scientific if we add a department of overhead to make it a scientific. And I don't think that is -- at the end of the day it is not going to change the actual result, it is just going to change the forecast of the result 90 days out. So we think this will be a little bit more accurate. It shows a lower pipeline than the old methodology, but we think it will be much more accurate over time.

And when did you -- when did the change go into effect internally?

This quarter, just this quarter. But we back tested last quarter and it shows that our pipeline is up this quarter over last quarter.

Right, right. Under the new methodology?

Right and it is up some 7% over last quarter.

Right, right. Okay, that is -- you have covered everything -- everything that I had. So appreciate the time, guys. Thank you.

Anybody have anything else? That will wrap us up. Thank everybody for joining our call and we appreciate your participation and interest in ServisFirst Bank.

Thank you for attending. You may now disconnect.

Thank you.