ServisFirst Bancshares' (SFBS) CEO Tom Broughton on Q3 2016 Results - Earnings Call Transcript

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ServisFirst Bancshares, Inc. (NASDAQ:SFBS) Q3 2016 Earnings Conference Call October 17, 2016 5:15 PM ET

Executives

Davis Mange - IR Manager

Bud Foshee - EVP, CFO

Tom Broughton - President and CEO

Analysts

Kevin Fitzsimmons - Hovde Group

Brad Milsaps - Sandler O'Neill

Tyler Stafford - Stephens

William Wallace - Raymond James

Operator

Welcome to the ServisFirst Bancshares' Third Quarter 2016 Earnings Conference Call.

[Operator Instructions] Please note this conference is being recorded.

Davis Mange of Investor Relations, please go ahead.

Davis Mange

Thank you, Nicole. Good afternoon and welcome to our third quarter earnings call. I'm Davis Mange, Investor Relations Manager.

Leading today's call, Tom Broughton, CEO; and Bud Foshee, CFO. They'll open with a brief overview of the quarter and then take your questions.

I'll now cover our forward-looking statements disclosure and then we'll get started. Some of the discussion in today's earnings call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, giving our expectations, predictions, and future financial or business performance conditions. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties which change over time. Actual results may differ materially from any projections shared today. So please refer to our most recent 10-K and 10-Q filings for a more complete description of factors which could influence such projections. Forward-looking statements speak only as of the date they are made. ServisFirst assumes no duty to update forward-looking statements.

I'll now turn the call over to Bud Foshee.

Bud Foshee

I'm going by just one comment before Tom starts. On the third page of the earnings release, at the top, where we talk about income tax expense, on the excess tax benefits, the $421,000 is not -- it should read third quarter of 2016, and the amount is $1.2 million instead of $421,000. The year-to-date number of $4.7 million is correct. So I just wanted to clarify that before we get started.

Sorry. Go ahead, Tom.

Tom Broughton

Thank you, Bud. This is Tom Broughton. Good afternoon to all of you. Thanks for joining the call, and I'll try to, as always, if you've been on the call before, I won't read you from the press release, assuming everybody on the call can read, I will just try to hit a few highlights.

We were pleased with the quarter, never satisfied, but we were pleased with where we ended up for the quarter.

Talk about loan growth to begin with, it's probably a little bit lower than we expected. The loan growth was a little bit lower than we'd expected for the quarter. The greatest percentage growth in loans came in Nashville, Atlanta, and Charleston, and the largest dollar volume growth came in Birmingham.

From the deposit growth standpoint, you know, it was a really strong quarter from deposit growth, continues to drive new core relationships. And so we're very -- we could not be more pleased with where we are from the deposit growth standpoint. The best growth from a percentage standpoint was in Nashville, Charleston, Atlanta, and Birmingham. And from a dollar standpoint, the best growth was in Birmingham and Nashville.

From the loan pipeline standpoint, I will cover that. The pipeline -- we hit an all-time record one year ago, and then it dropped at yearend of course due to -- we have so many closings in the fourth quarter typically, and then we hit another record high in the long pipeline at March 31, and then a little drop in June. But now we're, again, our loan pipeline is at a record level at June 30, 2016. So it's the highest -- the loan pipeline is as high as it's ever been. And again I will say that -- it's not a scientific calculation. I can't say that, you know, there's necessarily 100% correlation between the high pipeline and when loans close, but we see really good activity there and we're encouraged with the size of our pipeline today.

From a production standpoint, we added four net new loan production people in the quarter, typical for this time of the year, with 126. We actually hired six new ones and two departed, so we're pleased with where we are. And again we're focused on improving the productivity of all our production people and the number of loans and deposits outstanding by officers is something we're striving to improve.

We have made good progress in the quarter, but outlined it in the press release comment about we reached profitability in Nashville, and pretty good profitability, and our losses in our three new markets are declining pretty rapidly in Charleston, Atlanta, and Tampa Bay. So we're pleased with that.

So with that, I'm going to turn it over to Bud to go over the financial highlights of the quarter.

Bud Foshee

Thank you, Tom. The margin, our excess liquidity increased by $270 million in the third quarter, caused our margin to decrease from 3.51% in the second quarter to 3.35% in the third quarter.

Average growth in the third quarter, loans was $164 million, deposits $394 million, and Fed funds purchased correspondents decreased by $69 million. Net growth in the third quarter, loans was $118 million, deposits $416 million, and Fed funds decreased by $76 million, and on a year-to-date basis, loans have grown $441 million, deposits $819 million, and Fed funds decreased $8 million.

Excellent credit quality. Non-performing loans to total loans was 0.14. It increased slightly from June. June was 0.11. Non-performing assets to total assets was 0.16, and that was 0.17 at June 30.

Third quarter net charge-offs annualized to average loans was 13 basis points. We had a $1 million charge-off related to a construction company credit that was already fully impaired. Tax rate was 28.1% for the third quarter, and without the stock option credit of $1.2 million, that rate was 32.4%. Year to date, the rate is 27% and 32.9% without the year-to-date credit of $4.7 million.

ORE, we were at $6 million in September of 2015, we're $3 million at June 30 -- I mean, 9/30/16. So we've cut that in half. ORE expenses did increase some in third quarter, $178,000 in the third quarter versus $41,000 in the second quarter. And then from pending litigation, we had a total accrual of $400,000 in the third quarter for pending litigation.

And that concludes my summary. Tom?

Tom Broughton

We'll take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Our first question comes from Kevin Fitzsimmons of Hovde Group. Please go ahead.

Kevin Fitzsimmons - Hovde Group

Hey, good afternoon guys.

Tom Broughton

Hey, Kev.

Bud Foshee

Hey, Kev.

Kevin Fitzsimmons - Hovde Group

Tom, I was just, if I could go into the loan growth subject. You said on one hand it appeared to slow a little in the third quarter, but then you said that, and we did see that the end-of-period linked-quarter growth was slower than average balances, but at the same time you say the pipelines are at a new record. So, is it really just about, you know, just the quarter-to-quarter timing of posings and not really -- you're not really seeing any kind of slowdown out there in the market or any kind of deliberate pullback on your part?

Tom Broughton

No, I mean we, you know, we lost a couple of credits for, you know, on rate terms that we're not willing to, you know, we've got to have discipline on rate in terms of loans. And so that's, you know, we lost a couple of credits, and that's okay. That's just part of the, you know, you don't know how far we are in the cycle, nobody knows how far along we are in the cycle, but if you are far along in the cycle, you don't need to be giving on rate and terms because you'll be sorry, if you are at the end of the cycle. So we try to be careful about that and thoughtful about what we do and how we do it.

And that's a rambling comment, Kevin, but from the standpoint of -- our loan pipeline would not be at a record high if we probably had -- if we'd had a lot of closings during the quarter. That's the thing. A lot of things just get pushed back, and I will remember in my early years at AmSouth Bank, I had a boss that thought we could turn loan demand on and off like a spigot. You know, we’d say , all right, we need more, now, no, stop, you know. And well, it's not that simple. It's not exactly -- it didn't always happen in stair-step.

I'd love for loans to increase by a percentage -- standard percentage increase each quarter, but we don't -- Kevin, we don't see, you know, we don't see any -- I mean I don't know, everybody looks for a reason when sometimes there's just not a reason for things. I mean I can't imagine a business person not making investment because they're worried about the election or, you know, you hear that, but that just doesn't -- that sounds a bit illogical to me in terms of, you know, if you're a manufacturer and you can sell what you make, why would you not make an investment today. That's a little bit illogical.

Did I answer your question, Kevin, or did --

Kevin Fitzsimmons - Hovde Group

Yeah, that's perfect, Tom. Just one follow-up. The subject of regulatory CRE concentrations is getting a lot of attention, a lot of airplay these days. You guys are mainly a C&I lender. So I'm just wondering, how do you look at this issue. On one hand, I could see it being an opportunity, if you all have low CRE concentrations and people are pulling back in terms of or better, you could if you wanted to dive in there a little more. And on the other hand, if a lot of these CRE-heavy banks are, you know, now as a necessity getting more involved in C&I, it could drop down -- it could hurt the pricing for you all. So I'm just wondering how you all look at that kind of threat and opportunity from that issue.

Tom Broughton

I think you're correct on both counts. You know, you see people, you know, the regulators, usually if a bank is good at CRE, they kind of need to stick to my opinion and they need to stick to CRE. That's a -- you do what your -- you play to your strengths, but we're seeing it. We've picked up -- we talked about our board meeting this morning at length, this subject of we see CRE -- was it last week, Clarence -- saw a deal where we can -- getting better, pricing on a CRE deal because there are less people out there in the market, and we're looking for, like everybody else, good, solid pricings with good sponsorship.

But at the same time you see, on equipment financing deals, pricing, you know, on a good, clean deal, the pricing is very, very span in some cases and we just pass on it. So, yeah, I think you're correct on both of those things, we see it as an opportunity, and we see it as a threat for both, Kevin. I couldn't disagree that there's some truth in both of those possible outcomes there.

Kevin Fitzsimmons - Hovde Group

Okay. Thanks, Tom; thanks, Bud.

Tom Broughton

You're welcome, Kevin.

Operator

Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.

Brad Milsaps - Sandler O'Neill

Hey guys.

Tom Broughton

Hey, Brad.

Bud Foshee

Hey, Brad.

Brad Milsaps - Sandler O'Neill

Hey, Bud, sorry if I missed it in your prepared remarks, but just curious on the deposit growth, how much is coming from the correspondent bank channel and how big is that as a percentage of the total deposit base at September 30?

Bud Foshee

As you all know, the Fed funds purchased and the DEAs [ph], is that what your --

Brad Milsaps - Sandler O'Neill

That's right. Yes. From the correspondent group.

Bud Foshee

Okay. From a growth standpoint, deposits correspondent went up $68 million for the quarter and Fed funds decreased by $76 million.

Brad Milsaps - Sandler O'Neill

So it was basically a wash.

Bud Foshee

Yeah.

Brad Milsaps - Sandler O'Neill

Okay. Okay. And can you just maybe expand on, you know, the deposit growth you did seek on what -- where are you seeing success and what kind of sources that's being -- any particular area that might be chunkier than another?

Tom Broughton

Brad, it's Tom. It's just all, you know, these operating accounts, for middle market companies for the most part. And again the growth from, you know, biggest dollar growth was by far Birmingham. But from a percentage standpoint, Nashville, Charleston and Atlanta had -- did really well along with Birmingham, in terms of, you know, if you look at Birmingham annualized growth rate for the third quarter was 46%, which is pretty strong since that's our largest, you know, our largest market that we serve. So I don't answer your question, but it's not -- certainly it's not in CDs or, you know, certainly not in -- we don't have any purchased broker deposits on the balance sheet.

Brad Milsaps - Sandler O'Neill

Got it. Got it. No, that's helpful.

And then just quickly on the income statement, I think you guys talked in the release about, you know, I think a new credit card product. Is that kind of the big driver of some of the kind of the other fee income line items this quarter?

Tom Broughton

Yeah, definitely. That number continues to increase. Purchase card has gone over real well. Because really the service charge income is pretty stable. So, yeah, it's credit cards more than anything that's driven that.

Brad Milsaps - Sandler O'Neill

Okay, great. Thank you guys.

Tom Broughton

You got -- and Brad, I mean you've got three, you know, you got credit cards, purchase cards, and we also do a program with the correspondent banks where they get part of the profit off that. So it's really three components that make up that credit card [inaudible].

Brad Milsaps - Sandler O'Neill

Okay, great. Thank you.

Operator

Our next question comes from Tyler Stafford of Stephens. Please go ahead.

Tyler Stafford - Stephens

Hey. Good afternoon guys.

Tom Broughton

Hey, Tom.

Tyler Stafford - Stephens

Hey. First one from me, just a follow-up to Kevin's question around loan growth and the competition. You mentioned earlier around rate and term. The C&I growth was fairly muted this quarter. Is that pressure more pronounced out of the C&I portfolio that you're seeing or is that just kind of the way the chips fell at the end of the quarter around the C&I growth?

Tom Broughton

Well, the credits we've lost in the second and third quarter were C&I credits and, again, you know the banks that are heavy on real estate trying to place the regulators and doing some thin pricing and thin sponsorship, you know, C&I credit. So the regulators, you know, be careful what you wish for, your wishes may come true. So, yeah, that's the case.

Tyler Stafford - Stephens

Okay. And then, Bud, I know we tried to pin down in the past around liquidity going forward. Any outlook or color you can give us on the liquidity for 4Q?

Bud Foshee

No. I would have probably been wrong in every quarter [inaudible] it went up $270 million this quarter. This is -- it's just been a very good -- we've had a good year from a loan growth standpoint, we're up $441 million in deposits, just almost doubled that at $819 million. So it's hard to say when that will reverse. We'll need that liquidity one day, so it's not a concern from our standpoint.

Short-term margin compression, but that's really all I'll really say.

Tyler Stafford - Stephens

Yeah, fair enough. And what about on a normalized tax rate we should expect to see?

Bud Foshee

I was going to say 33%, without any of the stock option credits.

Tyler Stafford - Stephens

Okay. All right, that's it for me guys. Thanks.

Bud Foshee

Thanks, Tyler.

Tom Broughton

And just to add another comment. We've had some C&I company sell where we've had pretty good outstandings this year. So, none in the quarter, but certainly on the year-to-date basis, that's a fair amount [ph]. You know, we took a long view, all these people are selling companies, I get $50 million, $100 million, they're going to be back in business doing, they're going to buy another company, and so we'll be right back in business with them again. So we don't worry about it too much. It certainly hurts in the short term, but that's just kind of part of the plan.

Operator

Pardon me. [Operator Instructions]

Our next question comes from William Wallace of Raymond James. Please go ahead.

William Wallace - Raymond James

Good evening guys.

Tom Broughton

Hi, Will.

William Wallace - Raymond James

Maybe just kind of following on on the deposit question some more. I mean the deposit growth is so strong. And looking at the average balances, your money market deposits are up about half a billion or so on an average basis year to date, and the costs are coming out too. Are you running specials in that product to bring deposits in or -- just curious why the costs are going up. It sounds like you're not chasing it.

Bud Foshee

Yeah. We have some special -- I think we covered this in the second quarter, we have about $1.2 billion or so that are what we consider special rate deposit accounts, and we're paying 68 basis points on those funds. So that does, you know, it drives up the total cost a little bit. But that's stable funding, just was some other things going on with the other banks. We had to raise rates on certain accounts, large accounts.

Tom Broughton

Will, it's Tom. You know, when these companies sell, they put the money in the bank. So we end up with, you know, it's a flip from a loan -- net loan amount to big deposit amount. So we have some, you know, that's one thing that's driven our excess liquidity this year, is companies selling out and they stick the money in the bank, which we're glad they do. We're glad to have them. But we're not doing any rate specials or paying up this time.

William Wallace - Raymond James

So the special rate funds are customers of the bank on the loan side that had a liquidity event that asked for a little bit higher rate basically, is that a fair characterization of what you're saying?

Tom Broughton

No. These are loans, you know, these are deposit accounts that, if we'd known rates would stay so low for so long, we would have done something about them a long time ago. But we all keep thinking we'll have a rate increase one day soon. But these are all -- these are normal rates. I can't answer the question of why the cost is going up, but it's not paying up on when companies sell. They just put it in at normal posted rates. We have no reason today to pay up at all for funds on any basis.

William Wallace - Raymond James

Okay. On the loan side --

Tom Broughton

Go ahead.

William Wallace - Raymond James

No, that's okay. On the loan side, you mentioned six total hires, four net on the production side. Were those folks just in any specific market or are they spread around?

Tom Broughton

Spread around. We don't have, you know, it's not a particular theme. I mean they were, you know, one in Birmingham, one Huntsville, correspondent banking, Tampa, Dothan and Nashville. So that's spread around.

William Wallace - Raymond James

Yeah, okay. And then maybe, could you -- would you be willing to update us on when you expect you might break even in Atlanta and Charleston?

Tom Broughton

We got real close in September.

William Wallace - Raymond James

In both markets?

Tom Broughton

Yeah. I mean, with -- certainly I would -- certainly by yearend I would think we'd be pretty close to breakeven there. We've got to be, very close.

William Wallace - Raymond James

Okay.

Tom Broughton

Just the way they've grown in the last couple of quarters, I think that's possible.

William Wallace - Raymond James

Okay. And then on the tax rates, last quarter you said there's -- I think you said $12 million that were future tax credit related to the stock compensation. So I take that $12 million, I just subtract the $1.2 million this quarter, and that's how we can keep track of what's left?

Bud Foshee

Right. And that -- I think we were assuming $50 stock price when we came out with that $12 million number.

William Wallace - Raymond James

Okay.

Tom Broughton

So if the price goes up, the amount goes up.

William Wallace - Raymond James

Yeah.

Tom Broughton

Yeah, that was -- I just wanted to clarify, that was based on a $50 stock price.

William Wallace - Raymond James

Okay, right. And then the other aspect is just the timing of when options are exercised, is that correct?

Tom Broughton

Right. Hard to tell. Sometimes you get to the end you have to exercise. And if there's ever a pullback, we seem to have more from the stock standpoint, triple exercise from a tax standpoint.

I think you could make an assumption that, you know, by year, you could make an assumption that 25%, 30% of that might be done for a year, but you certainly can't do it by the quarter like you do your models. I realize that's not very helpful comment to you.

William Wallace - Raymond James

No. It is. It's just a question of whether or not to try to model it on a GAAP basis because it's so significant.

Okay. And then I'd like to maybe, my last question, just maybe talk a little bit about the legal accrual, is that related to the Tampa lawsuit?

Bud Foshee

No.

Tom Broughton

You know, if somebody says, I intend to see you, you know, whether there's litigation or not, we try to immediately make a provision for what we expect to spend in legal fees up to our deductible. So that's where we go with that. And we had one week of, you know, it was threatened lawsuit that we agreed to settle. We've agreed to settle it for less than we have provided during the quarter, so, we feel good about our -- but it's not a meaningful amount. We're not talking about a meaningful amount of litigation or resulting in any cost to the shareholder [inaudible].

William Wallace - Raymond James

So there was one new potential threat of a lawsuit in the quarter, you accrued $400,000, and then settled it at less than that?

Bud Foshee

One was a continuation -- we had made an accrual for $175,000 in the second quarter, increased that about $100,000. And the other one was a settlement -- it did settle after the quarter closed, but of course we don't have the legal expenses either. So we felt like we made an adequate accrual based on settlement and pending legal.

William Wallace - Raymond James

Okay. Okay. I appreciate the color there. That's all I had. I appreciate the time guys. Thank you.

Bud Foshee

Thanks, Will.

Tom Broughton

Great. Thanks to everybody for joining the call. This is Tom. I don't have any other comments. Bud, you have anything else?

Bud Foshee

I don't have anything else.

Tom Broughton

Thanks everybody for joining us. Good day.

Operator

Thank you for attending today's presentation. This concludes the conference. You may now disconnect.

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