ServisFirst Bancshares Inc (SFBS) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the ServisFirst Bancshares, Inc. first quarter earnings conference call. (Operator Instructions) Please note, this event is being recorded. I would now like turn the conference over to Davis Mange. Please go ahead.

Thank you, Austin. Good afternoon, and welcome to our first quarter earnings call. We will have Tom Broughton, our CEO; and Bud Foshee, our CFO, covering some highlights from the quarter, and we'll then take your questions.

I'll now cover our forward-looking statements disclosure, and then we can get started. Some of the discussion in today's earnings call may include forward-looking statements subject to assumptions, risks and uncertainties. Actual results may differ from any projection shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them.

With that, I'll turn the call over to Tom.

Thank you, Davis, and good afternoon. I'll cover a few of the normal things that I cover in the conference call, and then Bud will talk about the numbers. We had a, what we thought, was a pretty good quarter. To start the year, from a loan growth standpoint, it was pretty typical for the first quarter. In fact, in some years, we have better loan growth in the first quarter. This was -- we had pretty good C&I loan growth, but we had a reduction in real estate construction loan balances. That category declined by $75 million for the quarter, so had some payoffs -- excuse me, had some payoffs on some commercial construction. That tends to be lumpy when you get payoffs when they're going to permanent market. As many of you know, our best growth in loans was in the Tampa Bay and the Huntsville markets for the quarter. And again, we did have some pretty good C&I growth, it was just offset by the real estate construction loan paydowns.

From a deposit standpoint, we normally have sometimes seasonal runoff in the first quarter. On average, the last 5 years, we've had 0 growth. No addition and no subtraction, 0 growth in the last 5 years on average. Of course, this year, we had some runoff. Three accounts accounted for that runoff. Two were sale of companies before year-end, the money was on deposit. The money ran off in the first quarter. Those balances were -- and we also had another company that has a -- is a very large account but is a seasonal co-op account, and the money flows out in the first quarter. So if you took all of those together, there were a couple of hundred million dollars in runoff from those 3 accounts. For the quarter, the best deposit growth was in correspondent, and Atlanta and Mobile markets had the best year-to-date.

From a pipeline standpoint, the pipeline is consistent with -- it's slightly above year-end, is consistent with where it has been in the last several quarters, which is strong. The pipeline is strong. We're trying to continue to scrub on our pipeline and keep -- make sure there's not anything stale in there that's misleading. And certainly, we've never -- I've never represented that the pipeline is 100% accurate. I'm sure we could make it accurate if we build a department of about 20 employees around here just to keep track of that. But I don't think the shareholders want to pay for that, so we continue to do it the way we've been doing it.

The number of producers, at the end of the quarter, we had 128, which is down 1 from year-end. We added 5 new bankers in the quarter and eliminated 6 production people. So that's consistent. We're probably where we've been the last several quarters, the number's been static. We're just trying to, as I say, upgrade a bit there in our staple of production people, which we think are some of the very best in the industry, I'm very proud of them, what they do for us.

I'm going to stop now and turn it over to Bud to talk about some of the numbers, and then I'm sure you'll have some questions around probably some more of the numbers than anything else. Go ahead, Bud.

Thanks, Tom. Good afternoon. Our margin increased from 3.66 in the fourth quarter to 3.81 in the first quarter. We had very minimal impact from our muni yield after-tax reform. Our investment portfolio is only 8% of our total assets and tax-exempt munis, are only 21% of the total portfolio, so very minimal impact on our margin.

Our excess liquidity decreased by $227 million in first quarter which helped our margin improvement. From a loan yield standpoint, we increased by 13 basis points. We had the Fed rate increase in December and in March. And together, those 2 increases added $1.1 million to margin for the quarter. Also, we'll have $866 million in loans that -- their rate will reset in April. They did not reset in March, they had an April reset date.

From our total floating rate portfolio -- excuse me, 31% of our floating rate portfolio was tied to LIBOR. $768 million of that is tied to 30-day LIBOR, $117 million to 1-year LIBOR.

Deposit cost, we increased by 9 basis points during the fourth quarter. It went from 0.77 to 0.86. And we did increase our posted rates on January 1 of this year.

Noninterest expenses. Our salaries increased by $580,000 year-over-year, which is 7%. During 2017, we hired a Chief Risk Officer. We added 3 people in compliance. We added at Atlanta, who's now Atlanta Regional President. And then we had some adds, production adds, in some of our newer markets.

Incentives increased $1.1 million or 59%. In the first quarter of 2017, we had a reversal. We had over accrued, so we had a reversal of $300,000 from 2016. And in the first quarter of this year, we had under accrued by $331,000 at year-end 2017. So we've made that adjustment in the first quarter of this year.

Credit. Nonperforming loans to total loans 0.16, and that was 0.19 at the end of 2017. Also, nonperforming assets to total assets improved to 0.22 at March and 0.25 at the end of 2017. And then first quarter, net charge-offs annualized 10 basis points to average loans, and that was up in the fourth quarter, that was 56 basis points. Also, nonperforming assets decreased by $2 million from year-end, they're $15.5 million at March. ORE also decreased by $1 million from year-end, it's at $5.7 million at the end of March.

From a tax standpoint, our rate for the first quarter was 17.8%. Without the stock option credit, it was 21.4%. And then in the fourth quarter of last year, without the deferred tax allowance adjustment and the stock option credits, it was 33.7%. So our rate with tax reform decreased by 12.3%.

And that's our recap, and I'll turn it back to Tom.

Yes, I think we'll take questions at this point.

(Operator Instructions) And our first question will come from Brad Milsaps with Sandler O'Neill.

Hey, Bud, I just wanted to follow up on kind of some of the NIM commentary. I was writing fairly quickly there. Did you -- what was the number again on the number of loans repricing that still will reprice in April? It was about $860 million, is that what you said?

Right. $866 million will reprice in April.

Okay. In this quarter, you got about 15 basis points of NIM expansion. It looks like maybe half of that was related to kind of mix. Going forward, with each rate increase, would you expect a similar amount of expansion? Or do you think -- you talked about raising your advertised deposit rates, just want to get a sense of how impactful further moves from the Fed may or may not be in your opinion.

Let's see. First, we've got -- one of the best things that has helped us over the last year is we got 84% of loans with floors are now above their floors. That number slows down a little bit now on the rest of the floors. Deposit cost, that's something we're looking at. It's going to creep up some with a -- with a Fed increase. It's just hard to say what you're going to have to do from a rate standpoint. I think we're all going to have -- all banks are going to have to look at that. I mean, you can't -- the Fed can't increase 25 basis points and we sit here, bump up rates just a few basis points. It's just something we'll have to look at each time there's a rate increase, especially as much as we have now in money markets because only 10% of our deposit base is CDs.

Brad, this is Tom. I'm not -- I don't remember exactly the last time that a net interest margin of 4 was common in the industry. It's been a while. So I don't know what prime has to get to, to make that a common net interest margin. But certainly, that's our goal, is we all think that to be successful in the banking business and be profitable, you need to -- whether you're a low-cost operator or a high-cost operator, you need to have a NIM of somewhere in the 400 basis point range to be successful. So I'd be interested to see if -- maybe when -- you all have got those analysts got time on their hands digging up, do a lot of stuff. So they do -- show a chart out and show the last time what was prime when we all had a 4% margin would be a good question. But I would anticipate -- my guess is, every time, we want to get something for the shareholders out of every rate increase. And that's -- whether it's a 60% beta at the end of -- though I'm sure there will come one rate increase where we -- there'll be 100% deposit rate. I just don't know where it will be. I don't know if it's 1 more quarter or 2 quarters or 3 quarters or 4 quarters. I mean it's somewhere in there. I'm sure it's -- that's just how it's going to happen. But to this point in time, we see competitors being reasonably rational, we think, surprisingly rational. And I think the people we see paying up more than others are -- surprisingly, are people with a large branch network regional banks like kind of like -- well I thought that's why you had all those branches. But in any event, that's what we see for the most part.

That's helpful. And just to follow up on the loan growth. I know it's hard to predict payoffs and when those are going to happen. It sounds like the pipeline is really strong. But anything else about this quarter that would stick out? Did it look like the construction balances are going to kind of hold from here and maybe build some as stuff funds up in the better building months or whatever? Just kind of curious to your thoughts around predicting those paydowns and kind of how that might impact the quarters going forward.

Yes, we're not a huge multifamily type, and we won't -- that type of real estate to not be a large part of our bank's balance sheet. We want C&I to be the predominant asset class of our balance sheet. It's certainly more predictable. We think it has lower loss potential in a downturn. So large -- the problem of multifamily projects today is the minimum size is 200 units to economically manage a unit. So you're talking about a $35 million project. That's a -- if it doesn't rent up, I mean, you've got a nonperforming loan, let's say, a 200-unit apartment complex, that's a pretty big nonperforming loan. So we don't really want any nonperforming loans, a $25 million nonperforming loan, which is what we would have at that point in time. So we continue to -- that's not our emphasis on our growth, Brad, is to the -- I think competitive stand -- competitively, I think that we see pricing come down again on real estate construction projects. It got firmer for a couple of years, and now it seems to be going the other way. So we're not going to -- we're going to be a disciplined lender, and we're not going to make loans where we don't think we can be compensated appropriately. And we prefer to deal with the people that are serial developers that we've dealt with over many years that are -- have a great track record. So I'm not really answering any question, Brad, but that's my answer.

And our next question is from Tyler Stafford with Stephens.

This actually Gordon McGuire on for Tyler this afternoon. So I just wanted to start actually on reflecting back on the loans. So I noticed the average balances were up pretty nicely on a quarter-to-quarter basis, but the end-of-period was a little bit softer. Outside of the construction book, is there anything you could talk about as far as utilization trends this quarter? And just generally, what you're -- anything you're hearing from your market precedence as far as spend and investment expectations from your more core commercial borrowers?

Yes. Actually, our utilization is up a couple of points from the fourth quarter. We see a lot of optimism out there among the borrower base. I mean, I mean I would -- we all have to agree that from an industry standpoint, it has not translated into strong loan demand for the entire industry. But Gordon, from a standpoint of -- we worry about taking market share from our competitors, and that's -- there's business out there to be had. There's plenty of business for a bank that's under $10 billion of assets in the southeast United States. So we just keep plowing and trying to take our -- pick up our share, a greater share, of the banking business out there.

Got it. So it sounds like you're still pretty optimistic about kind of growth picking up in the back half of this year. Maybe just touching on kind of your newer markets, in Nashville in particular. Can you provide an update on how that market's trending, kind of where you're at from a profitability standpoint and just kind of your expectations there?

Yes, we reached $500 million in assets in Nashville. We're solidly profitable there today. But they have -- the team there has done an outstanding job of -- first quarter growth rate was not -- it was good but not great, 9% annualized for the first quarter in Nashville. But it has been a very dynamic market. Our large -- largest exposure there is all C&I. A good bit of it is health care because that's a big industry sector, and we have almost 0 -- I shouldn't say 0 but very close to -- Clarence, correct me if I'm -- it's very close to 0 in commercial construction.

We've got one project, one meaningful project.

So out of a $500 million in assets, that's -- it's probably a $20 million, $25 million project, so that's not a meaningful number there, Gordon. But -- so we don't really -- as far as, if there's a -- if multifamily or hospitality or anything else is getting overbuilt in Nashville, it doesn't involve us.

Okay. And just kind of switching to the deposits, just the funding side of the balance sheet, are you seeing any kind of -- any discernible differences amongst your markets as far as deposit or demand competition? Like where might be the pressure points in your footprint to kind of see a little bit more aggressive deposit pricing competition?

Probably, if you have, say, a day in and day out, the most competitive market in my career has been Atlanta. So that's -- as long as I can remember, Gordon, I would say Atlanta is the most competitive. It happened that -- so many new banks moved into Atlanta. And so many -- remember the days of all the foreign bank set up loan production offices there and just -- it's just -- it's always attracted a lot of competitors in the market. And that, by and large, I would have to say has always been the most competitive. And nothing has changed on that front today. There's a lot of opportunity in Atlanta, but it certainly is one of the most competitive markets there is.

Sure, sure. And so are you still pretty optimistic on seeing pretty robust deposit growth? I know seasonality probably had a good bit to do with it. But with your loan deposits, I think around 99%, kind of the highest it's been in a little bit. I guess, can you talk generally about how you're seeing your ability to kind of match your loan growth and expectations around deposit growth this year?

Yes. We've had -- we really, outside of the 3 account balances [decline] and 2 through the sale of the companies, we've seen really nice deposit inflows. Opening new accounts has all been strong in the first quarter, so we don't see any change there. Customer behavior, I don't think has changed significantly. I don't think -- these rate levels don't -- they're not encouraging to pick -- take money out -- people to take money out of the market yet and buy a CD, that's for sure. They're still very low by historical standards. So we don't see customers stretching for yield or doing anything like that at this point in time.

Okay. And then last thing for me. I know you mentioned you moved the posted rates on January 1. Are you able to quantify how much those moved and whether this was across the portfolio or maybe just a specific bucket within deposit base?

So you're asking can we say how much was attributed to the posted rate increase?

Yes, I think (inaudible) back in...

Yes. No, we didn't break it down quite that level. But honestly, CD rates and money markets were most of the -- certainly, the immediate dollar impact is the money markets, obviously, not CDs. But those are the -- where we've tried to be, make sure we're continuing to be competitive. If you look at rates in the industry, you go look at treasury bills, and they're kind of higher than a lot of bank rates. So certainly, we don't think our industry's cost of funds is getting out of hand at this point in time.

Our next question is from Nancy Bush with NAB Research.

Could you just talk a little bit about the proposed changes in Dodd-Frank? There's a lot of sort of back and forth about whether they help the smaller banks, don't help the smaller banks. Could you just give your view as you know it right now?

Yes. I think, certainly, what we see is doing away with the DFAST testing for the $10 billion bank. As we're approaching that level, that will be huge to us, Nancy. We think it'd be -- save us $2 million a year. And there are some meaningful changes in the mortgage side that are beneficial to us. I think in general, too, just a reduced regulatory environment where there is certainly -- there's not as much contentiousness between the regulators and the banks. I think we're all seeing the day having -- the FDIC is under new leadership OCC. We see change there, perhaps coming more slowly, just because those are huge ships to turn. But -- well, I think everybody's increasingly optimistic about it. And I see comments, if somebody running a small bank says that this Senate Bill 2155 don't do anything for my bank, and that's just not true. I mean, for a bank that size, the qualified mortgage -- the mortgage rule recast is huge for those banks. It's huge, especially in these local markets. You get a rural market, you can't get a Fannie Mae approved loan on a $50,000 house loan in Wilson, North Carolina. But so the banker in Wilson, North Carolina has got to deal with it and have enough -- reduced mortgage rules is very helpful to the smaller banks.

Do you get a sense from your contacts in Washington or in the industry about when -- if this gets passed, when do we start to see the real impacts of it? Is it a late 2018 event? Or do we have to wait until 2019 to really see this -- the real tangible benefits hit?

I'm not sure that most of the benefits won't be intangible, Nancy. I would (inaudible) sounds stupid, I know. But in terms of not just dollar and cents cost, but just, I think, just in the intangible of having a little bit more realistic regulatory environment is good for everybody and is good for our industry. And I think it would lead to greater optimism inside the industry. So -- but yes, I would think it will be -- the House seems to be in no hurry to move forward on the bill. Hopefully, they'll move forward with the bill as quickly as possible.

Okay. And secondly, the CRE paydowns that you saw in the first quarter, is this a historical pattern? Or is there something particular going on this year?

No. Our historical patterns, we don't have -- originations are typically lower in the first quarter than the rest of the year. But it's just because that they went to permanent market. I mean, if you had a commercial real estate project, and you could go to permanent market and get a fixed rate loan, you would probably do it as you well know. You would. I would. So they're doing it, too.

Okay. But you expect that, going forward, is this pattern going to uphold for a while? Or do you think that we're kind of seeing most of it behind us now?

I think we have -- I know of one pretty good size project where we're getting a paydown on in the second quarter that's 25 -- $20 million. But it's hard to say. We'll start some new ones, it will just take a while to build back up. They tend to be lumpy. The paydowns tend to be lumpy and withdrawals are very slow. So you can get some lumpy paydowns there in a quarter or 2.

The next question is from William Wallace with Raymond James.

So you talked a little bit about Nashville. I'm wondering if you could just give some similar commentary about what you're seeing in Charleston? I feel like we haven't spoken about Charleston in a little while.

Yes. I mean, obviously, Charleston is a great market, first of all. What you have a lot of there is rooftop growth that doesn't really affect our bank. We don't participate in -- we certainly don't do a lot of housing construction, and we don't do lot development, so that doesn't really -- and there are some very large developments north of Charleston, towards Summerville that are planned developments that are huge housing tracks that are being built as well as office buildings as well. So it has attracted a lot of competitors. I think anytime you get rooftop growth, that tends to have banks want to be in that market, I think the more bank can be in a market, they can tell the analyst, especially if they've been in a low growth areas of a state, for example, and they've moved in to Charleston now, they're going to be in the high-growth Charleston market, there aren't a lot of enough good Charleston bankers to go around for everybody. So somebody is just building a branch, and it's not going to have -- they're not going to have the kind of team they need to be competitive in the market. We think our -- we think we have the best team in the Charleston market, an outstanding group of bankers that's just hitting the ground running, and they're having a tremendous year, starting off the year. So that's one of our bright spots. But it's just -- it's not -- I don't think it's because of the rooftop growth of Charleston. While if it was a no-growth market -- in Alabama, if we have those same quality of people, we'd be doing the same kind of growth rate, I think. I think the growth in the market is almost a negative to say because you just -- you get so many competitors that -- I mean, like -- in Alabama, it's certainly -- Alabama is certainly one of the less desirable markets in the southeast if you had to be objective about it. But for years, we've had banks from Mississippi and other rural areas. They want to come open an office in Birmingham, they think the streets are paved with gold here, and you scoop it up when you come into town. So yes, I think fast growth of somewhere like a Charleston is a bit of a negative sometimes.

Okay. But from the perspective of your balance sheet, your growth in that market is fine? I mean, it sounds like it's actually pretty positive year-to-date.

Yes, we've reached profitability in Charleston, and we're not at a 2% return on assets yet, but we certainly reached profitability and heading in the right direction. We think we have the very best bankers in the market.

Are you now profitable in every market but Tampa?

Yes, solidly profitable.

I'm sorry?

I said we're solidly profitable in all those markets.

Okay. And how close do you think you are on Tampa? I know that one lagged a little bit due to extraneous...

End of this year, we'll be where we need to be from a profitability standpoint on a monthly run rate.

Okay. Are you thinking about whether or not it makes sense to enter any other markets? Or do you feel like with the market presence that you currently have, that you got a pretty good runway?

Certainly, from a shareholder standpoint, the cheapest way to grow is in our existing markets. We all know that. That's a -- I've always -- we prefer that. But having said that, we constantly talk to people, and we've continued to be very selective about who we bring onboard to represent the bank. And we look at more the -- it's a combination of the market and the people. If it's a market that doesn't have much C&I, it's just probably not a good market for us no matter how good the people are. But the good people in a non C&I market, they're commercial real estate people for the most part. So that's just not a fit for us. And you and I both know the commercial real estate type of customers don't generate a lot of deposits to go along with it. So all of our regions have to generate their own deposits. So that's why we put such a focus on the C&I type bankers.

(Operator Instructions) Our next question is a follow-up from Tyler Stafford with Stephens.

This is Gordon again. Just 2 quick modeling questions. I thought mortgage banking was down quite a bit this quarter, both on a seasonal basis and kind of in the year-over-year. I think last call, you had discussed kind of flattish mortgage revenues in '18 versus '17. Is that view now changed? And can you just give us a general sense of what the drivers to the softness this quarter were?

Yes, Gordon. I think the issue right now is we've lost some originators in a couple of our markets and are looking to replace those. I think that really had an impact on the first quarter. I don't really know going down the road, with rates going up, what's out there, especially from a refinancing standpoint. So I don't really have a great forward forecast for that to be honest.

Sure. And can you remind how much of those originations I guess in '17 had been refi versus kind of new purchase? Do you have that on you?

No, I don't have that. I can look and send that to you though.

That would be great. I guess just the next question, my last one, the expense this quarter were up a good bit primarily in the compensation and occupancy line. How much of that was related to annual adjustments versus maybe some new hires in the quarter or some additional investments? And if it was kind of the latter, can you speak to those? And how you're thinking about reinvesting into the franchise this year?

You're looking at fourth quarter to first quarter, is that what you're looking at?

Right. So I'm seeing it looks like expenses -- or salaries were up about 16% and occupancy up about 25% quarter-over-quarter?

Yes, we had -- in fourth quarter, we had 2 big adjustments. We adjusted our depreciation. We were over depreciated for the year, plus we're over accrued in property taxes. And that was about $650,000 adjustment in the fourth quarter. Plus, we were -- we made an incentive accrual reversal in the fourth quarter of last year of $786,000. So surely, the fourth quarter was down due to adjustments more than we've added staff and really increased -- really haven't increased our expenses in 2018 that much, it's just fourth quarter was down due to those adjustments.

Base salary expense is up 6.8% year-over-year, quarter-over-quarter -- not year-over-year, quarter-over-quarter, first quarter-to-first quarter.

Yes, I'll get you some detail on refinance for last year.

But the refinance volumes have certainly dropped for not only us, everybody in the industry. But as most of you know, the mortgage business is not our largest contributor to net income on a recurring basis.

Well, thanks everybody for being on the call. If you have any other questions, please let us know. We appreciate your interest in our company. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.