Below is transcript of the ServisFirst Bancshares, Inc. (NASDAQ:SFBS)’s Fourth Quarter 2014 Earnings Conference Call, held on Wednesday, January 21, 2015 at 9:30 a.m. EST.
ServisFirst Bancshares, Inc. (NASDAQ:SFBS) is a bank holding company. The Company’s wholly owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through 12 full-service banking offices located in Alabama and the panhandle of Florida, as well as a loan production office in Nashville, Tennessee.
Company Representatives:
Davis Mange, Investor Relations Manager
Thomas Broughton, President & CEO
William Foshee, CFO
Analysts:
Michael Rose, Raymond James
Kevin Fitzsimmons, Hovde Group
Brad Milsaps, Sandler O’Neill
Christopher Marinac, FIG Partners.
Operator
Good morning and welcome to the ServisFirst Bancshares Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode, should you need assistance, please signal a conference specialist by pressing the * key, followed by 0. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdrawal your question, please press * then 2. Please note, this event is being recorded.
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 are made, and ServisFirst assumes no duty to update forward-looking statements. I would now like to turn the conference over to Davis Mange, Director of Investor Relations. Please go ahead sir.
Davis Mange – Investor Relations Manager
Thank you, Denise. Good morning and welcome to the ServisFirst Bancshares fourth quarter earnings call. I am Davis Mange, Investor Relations Manager. Leading today’s call will be Tom Broughton, CEO; and Bud Foshee, CFO who will begin with a brief overview and then take questions. I will now turn the call over to Tom Broughton.
Thomas Broughton – President & CEO
Good morning to all out again. This is our second conference call. And if you are new to our conference call we are not going to read the press release to you. We know you can all read and we assume you’ve read everything that you wanted to read in it.
I will give a brief overview of a few high points and then Bud can do a few numbers and then you can ask your questions and go about your day.
First of all the loan growth, loan growth was good for the quarter, 25% annualized. One question last quarter was, where was the loan growth? And I will also cover, when was the loan growth? The when was about, over half of our loan growth in the… our loan growth was about $200 million for the quarter, $110 million of that came in December and much of that came in the second half of December.
I’ve had various people ask me why we have such great loan growth in the fourth quarter and that’s the best of the year and I have given different theories about people worried about changes in text policy or whatever. And finally yesterday one of our people said, Tom, we pay all our production people year after year in and they don’t get a close by year-end, it’s the next year. So they have to wait another year to get their incentive pay. So that’s probably a better reason why we have good loan growth than I have ever given you before. That’s probably the real reason. So that did impact, loan kind of impacts our margin for the quarter because the loan growth was late in the quarter but where it came from, about half the loan growth came from Birmingham; Birmingham continues to be our flagship operation.
Annualized loan growth for the fourth quarter Birmingham was 24%. Number two was Nashville, they had about, they had $47 million of loan growth and a large percentage increase for them that they are getting traction in the Nashville market and doing very-very well. In addition we had good loan growth in Mobile, Pensacola and Montgomery, Alabama. So those were good markets for us for the quarter.
Also I will mention that we mentioned, it’s in the press release of course that the Metro Bank merger in Atlanta is on track to close end of this month. We also plan to add new bankers in Atlanta this year. They are in the process of closing, Metro was closing their office in Charleston, we will apply for permission with the Georgia Banking Department to close their office and hopefully before, it will happen before we have the merger become effective.
We also announced in the quarter that we’d entered the Charleston, South Carolina market. We have as of this morning four banker there in Charleston. We are excited about potential in South Carolina. Again we are an organic growth story that is the reason we’ve bought a bank in Atlanta is because we could not find a team in Atlanta and Tim Barber is a fine banker and a fine person and a good friend that we have known for many years and feel very comfortable with. And we intend to stick to our organic growth opportunities. We think there are many opportunities for us. We are talking to two different teams today in two new markets; they are in the South East, but not in the South West. Again we plan to stick to what we said in non-deal roadshow and that’s the best to continue the organic growth story.
We would certainly not buy a bank that can’t grow faster than we can, so that rules out most of the banks that are for sale. We don’t think that our core competency is buying banks and doing financial engineering to boost earnings per share. We think the best value for our shareholders is best to growth organically and we intend to do that.
We were asked last quarter how many new bankers we’d added in the quarter, and I think I fumbled around the question. And we added 13 new commercial and private bankers for a total of 91. It probably should be 90 because my rain making is down to a mere shower every now and then these days. But that excludes mortgage bankers of course too; mortgage bankers are in a separate category.
The asset quality continues to improve as we’ve noted in the press release. We feel comfortable about where we are there. We plan to grow. We have plans to have 14 FTUs in South Carolina by year end for those of you asking. It will be just like any other region that we have cranked up. They typically, they all follow pretty much the same script amazingly. They have all gone about the same. Some a little faster than others, some we’ve had them get to breakeven as quickly as six months and we’ve had them get to breakeven in 18 months. And so somewhere between that’s usually the case and we ramp up a region and they will [inaudible] fair amount of money per month. So we think we can manage through with that. I am going to turn it over to Bud to cover a few things on the numbers.
William Foshee – CFO
Yes, good morning. From a non-interest expense standpoint, we are now seeing external pay from increased expense standpoint, we made the year end incentive adjustment, we decreased our accrual by 1.1 million in the fourth quarter. From an accrual standpoint, we are always going to have an adjustment in the fourth quarter. We are going to accrue based on anybody gaining the maximum, and we will adjust that in the fourth quarter of each year.
Going forward, from a tax rate standpoint, everybody knows the rate going forward should be 31%. We feel like that’s a good number based on our current tax position and tax credits.
Managed income decreased and fourth quarter, well that had to do with our fed funds, balance increased by about 100 million which had a minimal impact of 6 basis points per quarter. It’s really hard to predict our excess funds each quarter. So, we feel like 365 is probably a normal net interest margin range. Again, it’s a little hard to predict just based on our excess funds like Tom talked about.
We had a good loan growth in the fourth quarter, a lot of that came towards end of the quarter. So that definitely had an impact on our margin per quarter. And that’s the highlights from my side, and let’s go to questions.
Operator
Very good. We will now begin the question and answer session. To ask a question you may press * then 1 in your telephone keypad. If you are using a speaker phone, please pick up the handset before pressing the keys. If your question has been addressed and you would like to withdrawal from the queue, you may press * then 2. And our first question will come from Michael Rose of Raymond James. Please go ahead.
Q: Hey, good morning guys, how are you?
Thomas Broughton – President & CEO
Morning.
William Foshee – CFO
Hey Mike.
Q: A couple of questions here. Just, obviously you guys had good loan growth. Looks like it was very backend weighted. As we move into 2015, can you give a little color around your pipelines and then maybe what you might expect from Charleston, you know overtime obviously I can look at the demographic trends but can we get a sense for the size of the book that individually get hired that you ran at the institution and [inaudible]? Thanks.
Thomas Broughton – President & CEO
I will do second half of that. Answer’s a little harder probably on the Charleston question. We have four bankers on the ground there and I guess I will come back. The first quarter is usually the slowest in terms of loan growth because again they’ve crossed to get enclosed, they came in the fourth quarter. So they can get incentive banquets. And so we typically bail through the year but Michael the loan pipelines are always good. I mean they are always good so I am not going to tell you that they won’t tolerate when they have a big loan pipeline like our producers do. So they always have a big pipeline and they are always wrong about when they are going to close and let’s say it’s going to close in 30 days and it drags into 120 days. So the pipelines are good and I feel good about, what I really feel good about is we’re having a lot of accounts. As long as we are opening accounts I feel good and I’ll look at that on a weekly basis and I get a sense of where we are. But with Charleston numbers we conservatively project those starting at , so we had to cover what we do on a projection basis on a new region.
William Foshee – CFO
Yes, talking on a new region from a growth standpoint, we don’t hire a banker less than growth of 300 million in five year. I mean that’s an overall goal when we hire somebody from the region. But first year you don’t look at a net loss of 1.5 million to 2 million is what we normally project and I think that’s a reasonable number from Charleston based on the staff that’s going to hire and just gear up and give everybody a place to produce.
And you know the monthly growth rate starts at, just for a region starts at 4 million a month in loans and deposits and ramps up to 8 million a month in loans and deposits on a conservative basis Michael, that’s what we project. So it won’t be a meaningful contribution to 2015, the real contribution will come in ’16, ’17.
Q: Okay. And then maybe as a follow-up. I appreciate the commentary on the accrual expense and how that works. But as it relates to the hires in South Carolina, how much of that expense base was in the fourth quarter run rate?
Thomas Broughton – President & CEO
It’s not much at all. There was none.
William Foshee – CFO
Yes, we forecast that into 2015 as we hire people there is usually upfront incentives, that’s really a 2015 expense base
Q: Any sense for kind of magnitude of what you might expect in terms of incremental from here?
Thomas Broughton – President & CEO
Incremental incentive?
Q: Incremental expenses from the Charleston market once they get kind of ramped up and then fully staffed up?
William Foshee – CFO
You mean monthly, I mean we insist [inaudible] their loans to be 1.5 million through 2015.
Q: Okay, that’s helpful.
William Foshee – CFO
Yes, it’s hard to predict by month or quarter, just pay the ones they hire for each one, get up and going.
Q: Understood. And then just one kind of follow-up question on the margin. Where is or where are you on average if you have a sense for where your production born yields are and what is kind of an optimal level of liquidity that you would call, I mean obviously the increase in cash from quarter to quarter was pretty significant. So trying to get a sense for, a few deposits on that cash next quarter, what kind, [inaudible] sense the even margin could be? Thanks.
Thomas Broughton – President & CEO
Yes, we would like I would say 3% of assets would be a normal range. Then that’s higher than that I think in 2014. So that’s again it’s kind of hard to forecast.
William Foshee – CFO
And we don’t have deposit growth in the first quarter, typically. We tax payments and what have you with this, we pretty much tread water on deposits in the first quarter.
Thomas Broughton – President & CEO
True.
Q: Right. And then new production loan yields?
Thomas Broughton – President & CEO
I would say 4.5.
William Foshee – CFO
We are staying about 4.45 to 4.50 on our loan yield.
Q: Okay, that’s all. Thanks for taking my questions.
William Foshee – CFO
Thank you.
Operator
Our next question will come from Kevin Fitzsimmons of Hovde Group. Please go ahead.
Q: Hey, good morning guys.
Thomas Broughton – President & CEO
Morning.
William Foshee – CFO
Good morning, Kevin.
Q: Just wanted [inaudible] a question into how you think about these new market entries or expansions. So Charleston, just in terms of the timing and what order you go after them, is it more that this was a market you really had your eye on and was next up and you kind of went after these people proactively or does it more it’s went up several markets you might be interested in and it just so happens that the leader kind of comes to you and it sort of falls together. And how do those usually play out in that sense?
Thomas Broughton – President & CEO
That’s a good question. Kevin, we’ve said since we started the bank 2005 that we are just looking for a good bank and a good market. We don’t have any. We don’t have a idea of putting pins in a map. But South Carolina, I think and that’d be a roadshow because if you were interested in and I said South Carolina. And the reason why is very thoughtfully very similar to what we are used to. It is a great growth market. I mean there’s good potential growth in South Carolina. There is a vibrant market. We found that office space is very expensive in Charleston which is a sign that it’s a really good market. So we are optimistic about it and we have a fairly wide connection of contacts in the industry and meet people all the time. We are talking to two other bank CEOs in two other markets that are of interest to us and we’re just try to be opportunistic and we think it’s a ServisFirst in South Carolina.
Q: And Tom when you look at the South East as a big region, when you look at the different States you are in right now, your own turf is Alabama, you have a LPO in Nashville, you’ve getting this toeholds in Atlanta through the acquisition and now into South Carolina. When you are talking new markets from here, will they most likely be in the existing States you are currently in or not necessarily you’d be willing to look at any other States within South East?
Thomas Broughton – President & CEO
I mean we would look at, I mean I guess you are saying, you know we probably are looking to go west particularly. So that would, there’s nothing wrong with shifting into Louisiana but it’s probably not the direction that we are facing in and probably to answer your question and the people we are talking to are primarily located in Alabama, Tennessee, Georgia and South Carolina. We think that’s a nice, there’s a lot of potential growth in those four states for ServisFirst and again, we try to be very targeted in where we choose to compete. We feel good about Nashville team. We have a team there that has a very laser focus on what they want to do and are doing and are doing a good job of building and getting good yields. And again in Atlanta we think there’s a great opportunity. In Atlanta there are not many banks like our size and there are a lot of big banks in Atlanta and there are a lot of small banks in Atlanta, small community banks but there aren’t any mid-sized banks that can serve the C&I market and we think that’s a opportunity in Atlanta for us.
Q: Okay, great. That’s helpful. Thanks guys.
Thomas Broughton – President & CEO
Thank you Kevin.
Operator
The next question will come from Brad Milsaps of Sandler O’Neill. Please go ahead.
Q: Hey, Tom, Bud.
Thomas Broughton – President & CEO
Morning.
William Foshee – CFO
Hey, morning Brad.
Q: Tom, I know you mentioned that deposit growth for you guys is usually a little weak in the first quarter, come on the heels of strong loan growth. I guess loan-deposit ratio’s up close to 100%. Can you talk a little bit about deposit initiatives you have got planned for the year? I know you got the corresponding banking piece but just how comfortable you are going over a 100 and kind of what that means to you guys?
William Foshee – CFO
Brad, it’s Bud. I think on the loan to deposit ratio we still feel comfortable in that 100% range. The corresponding fixed loans that have been stable source of funding. It is like it’s 200 million one day and 100 million the next. I mean that it’s grown overtime as we’ve had in corresponding banks. I think we are going down the road, I think we are going to come up with a limit on them. I don’t think the regulators would. I don’t think they want us to stay at that high percentage over a long period of time. But for now we feel very comfortable with that funding just that it has been very stable.
Thomas Broughton – President & CEO
Yes, we’ve had not pushback at all from regulators on where we are with that. So they feel very comfortable with where we are and we feel very comfortable with where we are and our people are incented to grow loans and deposits. So we know that overtime we have to grow for loan growth. Loans buy x dollars but deposits have to be the same. So it’s been more difficult, we focus more on loan growth last since the recession started just because that there were less loan opportunities and as the loan opportunities improve we will shift our focus back to more of a balanced approach to loans and deposits and we continue to track new deposits again. We are opening a lot of accounts and that’s what makes them feel good about where we are Brad.
Q: Absolutely, that’s helpful. And then just in terms of the acquisition, looks like you are going to close that fairly soon. Now you’ve gotten, you have been associated with them three or four months now. Anything changed in terms of kind of how you thinking about some of the parameters you gave at the time you announced that in terms of cost savings or other opportunities. I know you mentioned the closing of the Charleston office but anything else changed around those initial assumptions you guys talked about back in October?
Thomas Broughton – President & CEO
Not really. We still feel like the expense that would make the change, we really thought we would have a system converging sometime around April to mid-May that would be pushed into end of June. Could have a little more expense just people staying a little bit longer but the same cuts will be there. Now he’s got to ramp up his lending group to grow. I think that we’re forecasting five lenders and led five lenders in 2015 sell. I think that’s all in line with what, there might be a few more lenders than what we projected last year. But the staff cuts will still be there. A lot of that’s going, really their contribution to the bottom-line is going to be in 2016 if you factor in all the merger expenses and things of that nature.
Q: Got it. And then just a follow-up on Michael’s question on expenses. Sort of excluding Metro, would you, I mean it sound like with the investments in Charleston and other places that expense growth in ’15 would be sort of on par or similar to the last couple of years?
Thomas Broughton – President & CEO
Well we did was we are doing the budget. We took out the new expenses like Metro, Charleston, we looked at this, I would say, core non-interest expense year to year and that was a little over 4% increase. So we felt like we got, we felt like non-interest expense will be somewhere in that range exclusive of those new markets or new buyers.
Q:So you would expect non-interest expense growth in ’15 of kind of like a mid-single digit 4%, 5% excluding, that would be much lower than I guess what you have done over the last couple of years.
William Foshee – CFO
Well then that, I mean you’ve got the Charleston market, you have got all of kind of Metro, we’ve got some additional lending staff in our existing markets. I am just talking about just core earnings, core non-interest expense one year to the next.
Q: Got it. And that includes your tax credits too as well?
William Foshee – CFO
Tax credits will be in that tax rate number.
Q:Excuse me, the losses from that goal above the line in expense?
William Foshee – CFO
Right, that was yes, that would be in it.
Q: Got it, okay, thank you Bud.
William Foshee – CFO
Thank you.
Operator
As a remainder, to ask a question you may press * and then 1. The next question will come from Christopher Marinac of FIG Partners. Please go ahead.
Q: Thanks, good morning. Tom just wanted to follow back up on sort of the strategic conversation that you had with us this morning. What’s your thought about buy versus build, just kind of comparing and contrast the decision in Atlanta that we saw recently with the news here today on Charleston?
Thomas Broughton – President & CEO
Yes, we are pretty much committed to an organic growth. That’s what we have done for almost these 10 years and we think that’s the best opportunity for us. We don’t think that buying banks is again, the buying banks and doing financial engineering to boost mid income is not what we think we need to be doing with our shareholders. We think our best way to be available to our shareholders is what we have done for the last 10 years Chris, and as long as we can always we can attract new people. We get calls all the time from people and we think we are a good place for people to do business and be bankers. And I think we’ve added, so we added 13 new bankers last year. I would expect we do more than that this year, Chris. We see a lot of opportunities from an organic growth side and that, we think that’s the best proposition for our shareholders.
Q: Great, Tom, thank you for that color. And just a follow-up I guess just to specifically talk about C&I, whether it’s Atlanta or Charleston. What would you envision sort of average deal size as being, it’s going to be any different from what you are already doing in Birmingham and Mobile, Nashville, et cetera?
Thomas Broughton – President & CEO
Yes, we think our sweet spot’s probably between $3 million and $20 million, that’s a pretty big range. But somewhere in there and probably you know, most of our deals are going to be south of 10 million dollars. You think $1 million loans not very big until it becomes non-performing and then it’s a really big loan. $1 million is a lot of money when you could look at writing up a loan. So will you like to stay on the conservative side of our, and there are also better yields at that level than the big loans. So we look at those big loans sort of big banks.
Q: Great. And then last question this has to do with sort of your general fee kind of trends. Do you see any changes coming in terms of fees and what customers are demanding what they are kind of a variable charge?
Thomas Broughton – President & CEO
Now we always I guess, Bud, we could, we try to stay about 20% under on some of our competitors on fee. So we try to be an attractive. We give our customers a reason to move their banking to us and we could always you know, there’s always two things we can do to boost margin and net income and that’s to increase fees and reduce deposit cost. And I always like having a couple of silver bullets in the holster and probably shooting one up and then [inaudible] have it any more. So it’s nice to have those in the holster if we ever needed to which we would use. If it became obvious to all of us to that rates will stay down forever, I don’t know how we’d ever know that but we certainly would reduce, would incur to reduce deposit cost. If you are so wise and you have done it already as we won’t be very competitive in the market. I am kind of, I am not answering your question now Chris, I guess I needed a quire.
Q: No that’s perfectly fine. I appreciate the feedback, Tom. Thanks a lot.
Thomas Broughton – President & CEO
Yes sir.
Operator
And ladies and gentlemen, that will conclude our question and answer session. I would like to turn the conference back over to Tom Broughton for his closing remarks.
Thomas Broughton – President & CEO
Thank you for joining in this morning. I had one thing I meant to address and that is last quarter people asked us where were the new bankers coming from and so for the year, we added two in Birmingham, four in Montgomery, two in Mobile, two in Nashville and three in Charleston. So in all the three in Charleston, came on in the last two weeks of the year and we expect to add more production people than that in this calendar year of 2015.
So we appreciate your participation and we would love any feedback from any of you on what you would like us to do differently and we would be glad to. And thank you again and appreciate you joining in this morning.
Operator
Thank you. Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect.
