Apr 18, 2016
Executives
Davis Mange - IR Tom Broughton - CEO Bud Foshee - CFO
Analysts
Tyler Stafford - Stephens Brad Milsaps - Sandler O’Neill Kevin Fitzsimmons - Hovde Group William Wallace - Raymond James
Operator
Good afternoon everyone and welcome to the ServisFirst Bancshares' First Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode.
[Operator Instructions] Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Davis Mange of Investor Relations.
Please go ahead.
Davis Mange
Thanks, Jamie. Good afternoon and welcome to our first quarter earnings call.
I'm Davis Mange, Investor Relations Manager. Leading today's call will be Tom Broughton, CEO; and Bud Foshee, CFO.
They will 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 then 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 or predictions of future financial or business performance or 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're made and ServisFirst assumes no duty to update forward-looking statements. I'll now turn the call over to Tom Broughton.
Tom Broughton
Thank you, Davis, and good afternoon to all. I'll cover again as been on our call, we don't restate the obvious and read to you from our press release, we will just cover what we think are the highlights in the press release and then answer a few questions.
Let me start by saying typically in the first quarter we have minimal loan growth and zero or negative deposit growth typically. Last year in 2015 in the first quarter we had some nice loan growth and we actually surpassed that this year, so this is the best first quarter loan growth we've ever had and as well our deposit growth was annualized 11% in the first quarter, so we had some nice deposit growth as well in both the -- this quarter.
So, from a loan growth standpoint, it was pretty well spread throughout our footprint. It was led by from a dollar standpoint; the loan growth was led by Birmingham, Nashville, Charleston, Atlanta, and Mobil.
In -- from a percentage standpoint in terms of loans, it would be ranked Charleston, Nashville, Atlanta, Mobil, and Birmingham. From a deposit growth standpoint, again, it was pretty well widespread throughout the company, but we were led by our Dothan, Birmingham, Huntsville, Montgomery, and Mobil regions.
Our pipeline at the -- again I caution you by saying that we don't -- I don't believe the pipelines are exactly a good predictor of future loan growth, but I would prefer to have a high pipeline than a low pipeline to be very obvious there. So, our pipeline at the end of March surpass the half point that we reached last year.
So, it was above that. It was above last September's loan pipeline and up some $175 million above where we were at year end.
We did have some procedures [ph] doing us in the first quarter were up to $122 million or 21% annualized in the first quarter. Bud, I'll turn it over to you to make some comments on the financials.
Bud Foshee
All right. Thank you, Tom.
Good afternoon. One in 2015, we over accrued own incentives and the related taxes on incentives is about $1.3 million.
We will reverse that over the entire year. We didn’t take back all of that in the first quarter, it will be spread out over the entire year.
From a net interest margin standpoint, we increased one basis point during the quarter, we're at 3.57. Excess liquidity actually increased in the first quarter, it went up by $22 million.
Excellent credit quality, non-performing loans to total loans, 0.15, it was 0.18 at the end of 2015. Non-performing assets to total assets also decreased from 0.20 versus 0.26 at year end.
Net charge-offs for the quarter low at 333,000 in net charge-offs. Occupancy expense, we will move into new building in mid-2017, so we accelerated the tenant improvement depreciation for our existing building, so that increased occupancy expense for the quarter.
Also in Nashville, in Charleston, they moved into new permanent locations in the first quarter, so they had increased rent expense and tenant improvement depreciation. Tax rate, 32.8% for the first quarter and on the fourth quarter on our conference call, I had estimated 32.5%, so we are little above our -- my estimated rate from a tax standpoint.
And that's my summary and I'll turn it back to Tom for any more comments.
Tom Broughton
You know we got a little lucky with lack of charge-offs in the first quarter. From a standpoint of -- I guess when I meet with investors, people say do you see -- what kind of trends do you see.
Clarence -- I think has specific questions, Clarence Pouncey is in the room, our Chief Operating Officer, who can answer credit questions better than I, but my answer that I give is that we don't see any credit trends. The loans that we see that are migrating to our watch list or substandard are due to poor business practices, not due to any industry.
There's no trend that we see of any kind other than -- most people are there -- they have credit deposit or loan outstanding, not cause of an industry. We don't have any significant energy exposure and what little energy exposure we have is doing quite well that we have no rating credits at all.
We have various minor, oil and gas and we have some coal and as are doing quite well in the present time. So I’ll just say that because some of the investors are on the call and I know they want to ask questions.
We don’t see any trend towards problem. In fact, I’m surprised, you read -- obviously the dollar is very strong versus the rest of the world’s currencies and I know it’s hurting on a national basis is obviously hurting manufacturing in United States.
But we don’t see -- we don’t have any -- I don’t think we have any manufacturers on our watch list, plans or at all. We don’t see any trends there that are of negative nature from standpoint.
So we certainly have tuned to it and trying to watch for anything that might popup, but we don’t see anything at this point in time. Dave, I just don’t have anything else.
So then, we will glad to have a nice quarter and we’re happy -- any of us we’re happy to answer any questions any of you might have. Jamie if we would open up the floor.
Operator
[Operator Instructions] Our first question today comes from Tyler Stafford from Stephens. Please go ahead with your question.
Tyler Stafford
Hey, good afternoon, guys.
Bud Foshee
Good afternoon, Tyler.
Tom Broughton
Hi, Tyler.
Tyler Stafford
I was – Tom, I was curious on the region that you were referring to in the press release that didn’t see any loan or deposit growth during the first quarter or those the same markets and anything specific you attribute that to was it seasonal or something else?
Bud Foshee
It was very wide spread, the loan growth. It was led by those regions; those were just the top regions, Tyler.
There is not anywhere we active out of been coupled where they didn’t have any significant loan growth, but that’s pretty typical in the first quarter and in some region had a significant payoff or pay down that would affecting as well but it was -- growth was widespread throughout the company without regard to from a loan types standpoint. If you look at our loan growth, 31% was C&I, 31% owner occupied commercial and that trends -- the numbs are right in line with what our portfolio is at this point in time.
Our consumer growth was negative in the first quarter, but we don’t have much consumer anyway from that standpoint. They were not -- I don’t know if I answer your question, Tyler, but they were not.
Tyler Stafford
Well, the press release called out two markets, two regions and all regions saw growth in loan and deposit except the one. I didn’t know if that what I was referring to my question and if there were a specific -- the lack of growth came from specific to single region or if anything else was driving that?
Bud Foshee
No, it’s very widespread. It’s very spread out and widespread in terms of loan growth was.
Tyler Stafford
Okay. That’s fine.
But over on the margin, any outlook for the liquidity heading into the second quarter and overall margin expectation for the rest of the year.
Bud Foshee
No, Ty, that’s really hard to forecast. I guess I look at it positive; we have that excess liquidity so we’re fine to fund loan growth in the coming quarters.
I mean overtime it starts getting better and the second quarter, third quarter, fourth quarter so it’s just we expect improvements, it’s hard to forecast when those excess funds will shrink, but I always probably start seeing improvements in the second quarter.
Tyler Stafford
Okay. And last….
Tom Broughton
Over last three to four years, we’ve been pretty consistent on margins so we expect that to continue. No, no one really what feds [indiscernible].
We still think we can be pretty consistent from margin standpoint based on what we’ve done in the last few years.
Tyler Stafford
Okay. Last one from me.
Do you have the accretion number for 1Q or what the core name was?
Bud Foshee
290,000
Tyler Stafford
Okay. And what was that in last quarter?
Bud Foshee
Not a lot of difference.
Tyler Stafford
Okay.
Bud Foshee
That number will play out. That will probably be in early 2017, that number will play out.
Tyler Stafford
Okay. Thanks guys.
Congrats on the nice quarter.
Tom Broughton
Thank you, Tyler.
Operator
Our next question comes from Brad Milsaps from Sandler O’Neill. Please go ahead with your question.
Brad Milsaps
Hey, Tom. Hey, Bud.
Tom Broughton
Hey, Brad.
Bud Foshee
Hey, Brad.
Brad Milsaps
Hey, Tom, I appreciate the color on asset quality. Just kind of curious -- kind of how you guys are thinking about the reserve -- I guess it’s kind of been bounce around kind of 105 basis points of loans.
I think you guys’ new stuff maybe providing less than that directionally if you charge off state here, where would you be willing to take that just trying to get a sense of kind of where your provision could go?
Bud Foshee
Brad, its Bud. I think we talked about on roadshows, I mean you can only do so much from loan while standpoint.
You can’t really project the charge offs. And based on our current mix of loans just based on net growth, we provide about 72 basis points for that growth in our current environment.
So beyond that I don’t know if I can really give you a good number. I mean we could have -- we look at impairments each quarter, charge offs all that goes into the model.
That’s how it comes out. I can’t tell you it’s going to be a certain percentage of the loan portfolio.
You’re just limited from accounting standpoint and what she can really do. Might not be a good answer, that’s just how we look.
I mean we go through the analysis and that’s kind of way to take that lead.
Brad Milsaps
You did add a reserve or new markets in this quarter.
Bud Foshee
We did. We added some additional reserve for our new markets.
But beyond that it was the usual analysis we do on the reserve each quarter.
Brad Milsaps
Okay. Great.
And then, Bud, just some back on the expenses. Borrowing, you guys make any additional hires which are probably likely, but do you think the first quarter would be sort of a higher wire mark for expenses if you got some other things as you adjust the set of accruals, you get throughout the year or anything else in terms of -- I know you mentioned the headquarters move, et cetera, anything else that would drive that number materially higher as you move through the year?
Bud Foshee
No. Without additional hires, I don’t see any time that we’ll do that.
Brad Milsaps
Okay.
Bud Foshee
Right now.
Brad Milsaps
And I know, Tom, you mentioned that you really -- in the past, you really want to leverage what you’ve put in place in some of the new markets. Around this time can be a time where lot of bankers move around.
What are you forecasting regards to new hires in your existing footprint?
Tom Broughton
Brad, we don’t really do. We’re just opportunistic.
We don’t really have a forecast. We might find -- we have such huge growth.
I think last year we went from 91 to 116, so that was percentage standpoint that was tremendous growth in staff in 2015, so I think it’ll certainly moderate. You don’t see that all growth in 2016.
So we’re always looking for quality people, but we’re not -- at this point topping any very large teams. They’re all pretty small groups that we’re talking to Brad.
Brad Milsaps
No, that’s helpful. Thanks, guys.
Appreciated.
Tom Broughton
Yes, sir. Thank you.
Bud Foshee
Thank you.
Operator
[Operator Instructions] Our next question comes from Kevin Fitzsimmons from Hovde Group. Please go ahead with your question.
Kevin Fitzsimmons
Hey, guys. Good evening.
Tom Broughton
Hi, Kevin.
Bud Foshee
Good evening, Kim.
Kevin Fitzsimmons
Tom, could you give us a quick rundown of the new regions. I think we talked about it on last quarter’s call in terms of where you stand on getting to profitability.
I know each of them has their own unique timeline and now we have some more expenses getting built in this quarter with a new hires and what the buildings open. Just how to think of each those new regions?
Tom Broughton
I guess, Nashville is not new. We start on LPO almost – this is a third year for Nashville and they are heading their strive.
They’re doing extremely well and it became profitable and it will get more profitable as a year goes on. And they’ve done a tremendous job from a standpoint on Charleston; their losses will start dropping every month this year.
They have moved in from headquarters. They’ve just gotten their permanent office about 45 days ago.
So Charleston will become more profitable. Not maybe profitable this year, but they got a short at region certainly at region breakeven this year from a standpoint of Tampa Bay of course, they just ramped up their expenses.
They probably hadn’t hit high water mark of expenses yet. And they are in a temporary office in Pasco County, Florida to avoid some not complete issues in Helzberg County.
So from that standpoint they probably won’t see the – expenses continue looking at the hired people at Tampa Bay area in office and Pasco County. Does that answer your question?
Kevin Fitzsimmons
Yeah, that’s perfect. Thank you.
Just one quick follow-up. Bud, I appreciate the commentary earlier about the margin and how you guys over the years have maintained pretty consistent margin.
I just want to re-ask I guess a question from earlier about the excess liquidity because I was under the impression from last quarter’s call that because that was pretty substantial margin compression we saw in fourth quarter in that I thought in fairly short order a lot of that excess liquidity was going to be put to work and we’re going to see a stronger, more substantial rebound in the margins. So I’m just trying to get a sense on what’s kind of governing that pace.
Is that going slower than you would like or is it just more seasonal thing on this snapback of that excess liquidity? Thanks.
Tom Broughton
Let me restate. Kevin, this is Tom.
Wouldn’t we typically see hedge funds run-off about around the couple of hundred million dollars in the first quarter that we didn’t see run-off and we typically deposit, no deposit growth and we have really nice deposit growth in the first quarter. What we typically see, it isn’t really a problem.
[indiscernible] any net income, what does hurt net income and it’s kind of nice to have liquidity messes what you’re models a bit, but it does hurt owner per share and I rather have excess liquidity than need money. So Bud, go ahead and answer.
Bud Foshee
Yeah, I think like the net loan growth was $125 million, that’s above normal like Tom says that was record first quarter. But we also had very strong deposit growth plus we have $130 million increase for the quarter in hedge funds purchase from our correspondence.
So like I said on an average, we went up by $22 million in the first quarter.
Kevin Fitzsimmons
So is it …
Tom Broughton
We don’t normally see that much growth. And it was just quarter up by round [ph].
Kevin Fitzsimmons
So is some of that having to do with the correspondent business? Maybe you can comment on that is are you guys seeing some substantial gains there and that’s a good problem to have to just have a lot of excess funding as a result.
Bud Foshee
Yes, I agree with Tom’s comment. We used in the first quarter to see some run-off in funds, so two is from our correspondent.
We actually didn’t see that. Our existing customers were pretty consistent with the funding that they were giving us.
The other thing is our new markets in correspondent have continued to growth on regions in Florida and Tennessee and Texas and 11 states. The growth in the correspondent relationship.
It was first quarter as Bud said; we grew funding in the correspondent $530 million. So, Kevin I would tell you is much a growth in the relationships to -- as the fleet.
Kevin Fitzsimmons
Got it. Okay.
Thanks guys.
Tom Broughton
Thank you. Thank you, Kevin.
Operator
And our next question comes from William Wallace from Raymond James. Please go ahead with your question.
William Wallace
Good afternoon guys.
Tom Broughton
Afternoon Wally.
William Wallace
Tom, maybe to follow-up to Kevin's question, excess liquidity aside, would we assuming you kind of -- your liquidity position doesn’t change all, would you anticipate that there will some pressure on the -- kind of the core or whatever you want to call it, NIM from pricing on the launch side. And it also looks like maybe you're seeing some funding cost come up on the deposit side.
So, I'm just trying to think maybe about margin more holistically outside of the liquidity position.
Tom Broughton
On the deposit side, Wally, we paid up a little bit on some special -- we got customers that we pay above stated rate owned. We paid up on five or six accounts.
I know in the first quarter, people that had $30 million to $70 million in balances whatever. So that had a little -- an impact from a deposit standpoint.
I don't think we really see the loan pricing pressure. If it’s a long-term fixed rate deal, we walk away from it.
So, we really haven’t seen that so far in any market that I'm aware of from -- we're just not going to give business away. Wally on fed fund purchase side, that's probably what we saw a little bit more liability cost go up and let me from a loan yield standpoint, we continue to see very consistent loan yields.
We don't -- again I'll restate what Bud just said, we don't see really pressure there. Luckily with our balance sheet, we got a lot of money market accounts and I don't think anything of the Alco models are specially good and I know everybody's model shows that they are asset sensitive.
But by saying this, time has thought me that -- thought us that CDs [ph] are a lot more price sensitive than money markets and we got almost no -- we got very little CDs [ph] and we got a lot of money markets. And so that's the rate that we can administer a lot better.
So, we feel good about where we are in a rising rate environment with the type of liabilities that we have on our balance sheet, Wally.
William Wallace
Okay, that's helpful. So, if I were to think about your margin then or just for spread revenue in general, the characterization would probably be that you are relatively stable with the purchase accounting accretion and the liquidity position driving kind of moves in the GAAP margins, is that a fair characterization?
Tom Broughton
I didn’t follow that Wally.
William Wallace
So, your margin is stable and then the movement that we see in margin will be due to changes in your liquidity position and declining contribution from purchase accounting works?
Tom Broughton
The purchase accounting is not really -- I think meaningful anymore really. I mean that will stay -- I think that will stay pretty consistent from 2016.
I understand all that -- the accretion will go away in early to mid-2017, just the right way it's being accretive. And $290,000 a quarter is not a major deal of the margin.
It's really excess funds. I mean deposit cost, I don't see changing that much, loan pricing is pretty consistent.
William Wallace
Okay. Yeah.
Perfect. That's helpful.
And then on the expense side, so should we anticipate that your expense levels should be relatively flattish from where you are in the first quarter? Or is it going to be moving in one direction or the other that we should be anticipating?
Bud Foshee
Without -- if we were fully staffed today, I'd say would be pretty consistent rest of the year. But like Tom said, once we get people and tamp, it's still some people -- I just can't -- I don't think it will increase significantly from the quarter Wally.
William Wallace
Okay. Thanks.
And then--
Bud Foshee
What we have to look is I don't know if it would be a significant number, but they have the move FDIC regulations out there which will go into effect sometime this year sort of going into effect for banks over $10 billion and that will impact us somewhat when those go into effect. But it will impact everybody because they got -- you got to increase the fund up to 1.3 by 2018 and right now it's right at 1.15.
So, we'll all be paying more in FDIC insurance going forward.
William Wallace
Okay.
Tom Broughton
Hopefully, it's not going be a big major number. We don't think it will be a major number going forward and we're going to do somethings to keep it from being a major number which that many things we can do.
The one thing we can do is force some cash down from a holding company to the buying to improve, that reduces the premium. So, we certainly don't do that prior to the -- I mean I think those -- that could kick-in win as early as third quarter, Bud?
Bud Foshee
Third quarter. That's just something we're keeping our eye on.
William Wallace
Okay.
Bud Foshee
I'll put away when I have the final rate, we will know what to--
William Wallace
We actually--
Bud Foshee
Okay.
William Wallace
Thanks. And then Bud last question, you mentioned, you had some commentary around your tax rate in the prepared remarks.
It was pretty close to what you said it was going to be, is it still -- I can't remember now 32.5, that's what you anticipate, so we kick now to close to 32.8 to 33?
Bud Foshee
Actually 32.8 to 33, just -- I was a little bit low, so 32.8 to 33 probably a good number.
William Wallace
Thanks. We appreciate the time guys.
Tom Broughton
Thank you.
Bud Foshee
Thank you.
Operator
And ladies and gentlemen, at this time, it's showing no additional questions. We'll conclude today's question-and-answer session.
We do thank you for attending today's conference. It has now concluded.
You may now disconnect your telephone lines.