ServisFirst Bancshares Inc (SFBS) 2014 Q4 法說會逐字稿

Good morning and welcome to the ServisFirst Bancshares fourth-quarter 2014 earnings conference call. (Operator Instructions) 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.

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. We will begin with a brief overview and then take questions.

I now turn the call over to Tom Broughton.

Good morning to all. Again, this is our second conference call and we -- 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 have read everything that you want to read in it. I will give you 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, on 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 -- our loan growth is 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 have had various people ask me why we have such great loan growth in the fourth quarter and that's the best of the year.

I've given different theories about people worried about changes in tax policy or whatever. And finally yesterday one of our people said, Tom, we pay all our production people after year-end. If they don't get it closed by year-end, it's the next year, so they have to wait another year to get their incentive pay.

So that is 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 -- Bud will cover how it 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, but 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'll mention and we mention -- it is in the press release of course that the Metro Bank merger in Atlanta is on track to close the end of this month. We are also plan to add new bankers in Atlanta this year. They are in the process of closing -- Metro is closing their office in Carrollton. They have applied for permission with the Georgia banking department to close that office and before -- hopefully before -- it will happen before we have the merger become effective.

We also announced in the quarter that we had entered the Charleston, South Carolina, market. We have, as of this morning, four bankers there in Charleston. We are excited about potential in South Carolina.

Again, we are an organic growth story. That is -- the reason we bought a bank in Atlanta is because we could not find a team in Atlanta and Ken Barber is a fine banker and a fine person and a good friend we've known for many years and feel very comfortable with.

We intend to stick to our organic growth opportunities. We think there are many opportunities for us. We're talking to two different teams today in two different -- two new markets that are in the Southeast, or not in the Southwest. Again, we plan to stick to what we've said on the IPO roadshow and that is to continue to be an 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. You know, 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 for us to grow organically and we intend to do that.

We were asked last quarter how many new bankers we had added in the quarter and I think I fumbled around the question. We have added 13 new commercial and private bankers for total of 91. It probably should be 90 because my rainmaking is down to a mere shower every now and then these days, but --.

This excludes mortgage bankers of course, too. Mortgage bankers are in a separate category, so --.

The asset quality continues to improve. As we noted in the press release, we feel comfortable about where we are there. We plan to grow -- we have plans to have 14 FTEs 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, and amazingly they've all gone about the same. Some a little faster than others. Some -- we have had them yet to breakeven as quickly as six months and we have had them get to breakeven in 18 months. And so somewhere in between is usually the case.

We ramp up a region and they will -- at the peak they will lose a fair amount of money per month, so we think we can manage through it though. I am going to turn it over to Bud to cover a few things on the numbers.

Yes, good morning. From a non-interest expense standpoint, it's been nothing extraordinary from increased expense standpoint. We have 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 everybody getting the maximum and we will adjust that in the fourth quarter of each year.

Going forward from a tax rate standpoint, let everybody know the rate going forward should be 31%. We feel like that's a good number based on our current tax position and tax credits.

Net interest income decreased in the fourth quarter. A lot of that had to do -- we had our Fed funds balance increased by about $100 million, which had a minimal impact of 6 basis points for the quarter. It is really hard to predict our excess funds each quarter, so we feel like 365 is probably a normal net interest margin range. But again that's just -- it's a little hard to predict just based on our excess funds activity.

And like Tom talked about, we had good loan growth in the fourth quarter. A lot of that came at the very end of the quarter, so that definitely had an impact on our margin for the quarter.

And that is the highlights from my side and let's go to questions.

(Operator Instructions) Michael Rose, Raymond James.

Good morning, guys. A couple questions here. Just obviously you guys had good loan growth. It looks like it was very backend waited.

As we move into 2015, can you give a little color around your pipelines and then maybe what you might expect from Charleston over time? Obviously I can look at the demographic trends, but can we get a sense for the size of the book that the individual that you hired, that he ran at the institution that he was formerly at? Thanks.

Yes, the second half of that answer is a little harder probably, but on the Charleston question; we have four bankers on the ground there and I guess I will come back.

The first quarter is usually our slowest in terms of loan growth because again they press to get everything closed they can in the fourth quarter so they can get incentive payments. And so we typically build through the year.

But, Michael, the loan pipelines are always good. They are always good so I'm not going to tell you that -- they walk taller when they have a big loan pipeline, our producers do, so they always have a big pipeline. And they are always wrong about when they are going to close. They will 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 are opening a lot of accounts. As long as we are opening accounts, I feel good. I look at that on a weekly basis and I get a sense of where we are.

But from Charleston numbers, we have conservatively project those starting at -- go ahead and cover, Bud, what we do on a projection basis on a new region.

Yes, in a new region, from a growth standpoint, we don't hire a banker unless they can grow to $300 million in five years. That is an overall go when we hire somebody for a region.

First year you are going to 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 for Charleston based on the staff they plan to hire and just gearing up and getting everybody in place to produce.

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 and 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 2016 to 2017.

Okay. Then maybe as a follow-up, and 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 space was in the fourth quarter run rate?

Not much at all. Almost none.

We forecast that into 2015 as he hires people, there's usually upfront incentives. That's really a 2015 expense based on --.

Any sense for kind of magnitude of what you might expect in terms of incremental from here?

Incremental incentives?

Incremental expenses from the Charleston market, once they get kind of ramped up and fully staffed up.

You mean monthly? We anticipate their loss to be $1.5 million for 2015 net.

Okay, that's helpful. And then --

It's hard to predict by months or quarter. It just depends on when they hire people and get up and going.

Understood. Then just one follow-up question on the margin.

Where is -- where are you on average if you have a sense for where new production loan yields are? What is kind of an optimal level of liquidity that you would hold?

Obviously the increase in cash from quarter to quarter was pretty significant, so trying to get a sense for, if you deploy some of that cash next quarter, what kind of the sensitivity in the margin could be? Thanks.

Yes, we would like -- I'd say 3% of assets would be a normal range. Been much higher than that I think in 2014, so that is -- again that is kind of hard to forecast.

And we don't have deposit growth in the first quarter typically. For tax payments and what have you, we pretty much tread water on deposits in the first quarter.

True.

And new production loan yields?

I would say 4.5. We are saying about 4.45 to 4.50 on our loan yield.

Okay, that's all. Thanks for taking the questions.

Kevin Fitzsimmons, Hovde Group.

Good morning, guys. I just want to lob a question into how you think about these new market entries or expansions. So Charleston, just in terms of the timing and in 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 one of 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? How do those usually play out in that sense?

That's a good question, Kevin. We have said since we started the Bank in 2005 that we are just looking for a good banker in a good market. We don't have any -- we don't have an idea of putting pins in a map, but South Carolina -- I think on the IPO roadshow people said, where are you interested in? And I said South Carolina.

The reason why, it's culturally very similar to what we are used to. It is a great growth market. There is good potential growth in South Carolina. There is a vibrant market.

I found -- 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 met -- 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.

We just try to be opportunistic and we think the opportunity is great for ServisFirst in South Carolina.

Tom, when you look at the -- the Southeast is a big region. When you look at the different states you are in right now, your home turf is Alabama. You have an LPO in Nashville. You are getting this toehold 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 of the states within the southeast?

You know, we would look at -- I guess you are saying we probably aren't looking to go West particularly, so that would -- there's nothing wrong with Mississippi and Louisiana, but that's probably not the direction that we are facing in.

And probably to answer your question, 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. Again, we try to be very targeted in where we choose to compete.

We feel good about Nashville, the 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 doing and getting good yields. Again, in Atlanta; we think there's a great opportunity in Atlanta that there are not many banks like our size.

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 many midsized banks that can serve the C&I market. And we think that is the opportunity in Atlanta for us.

Okay, great. That's helpful. Thanks, guys.

Brad Milsaps, Sandler O'Neill.

Tom, I know you mentioned that deposit growth for you guys is usually a little weak in the first quarter. Coming on the heels of strong loan growth, I guess your loan-to-deposit ratio is up close to 100%.

Can you talk a little bit about deposit initiatives you've got planned for the year? I know you got the correspondent banking piece, but just how comfortable you are going over 100% and kind of with that means to you guys.

Brad, it's Bud. I think on the loan-to-deposit ratio, we still feel comfortable in that 100% range. We -- the correspondent Fed funds have been a stable source of funding. It isn't like it's $200 million day and $100 million the next. It's grown over time as we have added correspondent banks.

I think we are going -- down the road I think we're going to have to come up with a limit on that. I don't think the regulators would -- I don't think they want us to stay at that high a percentage over a long period of time, but for now we feel very comfortable with that funding; just that it has been very stable.

We have had no 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. Our people are incented to grow loans and deposits, so we know that over time we have to grow for loan growth -- loans by X dollars, that deposits have to be the same.

So it's been more difficult. We focused more on loan growth the last -- since the recession started just because 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 are -- continue to track new deposits. Again, we are opening a lot of accounts and that is what makes me feel good about where we are, Brad.

Absolutely, that's helpful. Then, just in terms of the acquisition, it looks like you are going to close that fairly soon.

Now that you've got -- you've been associated with them three or four months now. Anything change in terms of how you're thinking about some of the parameters you gave at the time you announced it in terms of cost savings or other opportunities? I know you mentioned the closing of the Carrollton office, but anything else change around those initial assumptions you guys talked about back in October?

Not really. We still feel like the expense -- the only thing that changed, we really thought we would have a system conversion sometime around April to mid-May. That will be pushed into June. Could have a little more expense just from people staying a little bit longer, but still the cut -- the same cuts will be there.

Now he's got to ramp up his lending group to grow. I think that we are forecasting five lenders -- he will add five lenders in 2015. So I think that is all in line with what -- that might be a few more lenders than what we projected last year, but the staff cuts will still be there and a lot of that is going. Really their contribution to the bottom line is going to be in 2016 after you factor in all the merger expenses and things of that nature.

Got it. Then just to follow-up on Michael's question on expenses. Sort of excluding Metro, would you --? It sounds like with the investments in Charleston and other places that expense growth in 2015 would be sort of on par or similar to the last couple of years.

What we did when we were doing the budget, we took out the new expenses like Metro, Charleston, and we looked at just, I would say, core non-interest expense from year to year. And it was a little over a 4% increase. So we feel like we've got -- we feel like non-interest expense of the somewhere in that range exclusive of those new markets or new buyers.

So you would expect non-interest expense growth in 2015 of kind of like a mid-single-digit, 4% or 5%, excluding --? That would be much lower than I guess what you've done the last couple years.

I mean you've got the Charleston market; you've got all out of the Metro. We've got some additional lending staff in our existing markets. I'm just talking about just core earnings -- core non-interest expense one year to the next.

Got it. And that would include your tax credits as well?

Tax credits will be in that tax rate number. I will let (multiple speakers).

Excuse me, the losses from -- that go above the line in expenses.

Right, that would, yes, that would be in that.

(Operator Instructions) Christopher Marinac, FIG Partners.

Thanks, good morning. Tom, just wanted to follow back up on these strategic conversations you've been having with us this morning. What's your thoughts about buy versus build? Just kind of compare and contrast the decision in Atlanta that we saw a recently with the news here today on Charleston.

We are pretty much committed to an organic growth. That's what we have done for almost these 10 years and we think that is the best opportunity for us. We don't think that buying banks is -- again buying banks and doing financial engineering to boost net income is not what we think we need to be doing for our shareholders. We think the best way to build value for our shareholders is done what we've done for the last 10 years, Chris.

As long as we can attract new people; we get calls all the time from people and we think we're a good place for people to do business and be bankers. I think we have added -- I said we added 13 new bankers last year. I would expect we would do more than that this year, Chris. So we see a lot of opportunities from an organic growth side and we think that's the best proposition for our shareholders.

Great, Tom. Thank you for that color. Just a follow-up I guess this is specifically talking about C&I. Whether it is Atlanta or Charleston, what would you envision sort of average deal sizes being? Are they going to be any different from what you're already doing in Birmingham, Mobile, Nashville, etc.?

Yes, we think our sweet spot is probably between $3 million and $20 million; that's a pretty big range, but somewhere in there probably. Most of our deals are going to be south of $10 million.

You think $1 million loan is not very big until it becomes non-performing and then it's a really big loan. You know what I mean? $1 million is a lot of money when you are looking at writing off a loan, so we like to stay on the conservative side of our --. And there are also better yields at that level than the big loans, so we leave those big loans to the big banks.

Great. Then last question just has to do with your general fee trends. Do you see any changes coming in terms of fees, either what customers are demanding or kind of what you are able to charge?

No, we always -- I guess, Bud, we try to stay about 20% under some of our competitors on fees, so we try to be an attractive --. We give our customers a reason to move their banking to us and we could always -- there's always two things we can do to boost margin and net income, and that is to increase fees and reduced deposit costs.

I always like having a couple silver bullets in the holster. The problem with shooting one of them is then you don't have it anymore. 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 that rates will stay down forever, I don't how we would ever know that, but we certainly would reduce -- would and could reduce deposit cost. If you say why hadn't you done it already is we want to be very competitive in the market. I am kind of -- I'm not answering your question now, Chris. I guess I need to be quiet, but --.

No, that's perfectly fine. I appreciate the feedback, Tom. Thanks a lot.

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.

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. So for the year we added two in Birmingham, four in Montgomery, two in Mobile, two in Nashville, and three in Charleston. And all the three in Charleston came on in the last two weeks of the year. We expect to add more production people than that in this calendar year, 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. Thank you again and appreciate you joining in this morning.

Thank you. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.