ServisFirst Bancshares, Inc. (NASDAQ:SFBS)
Q4 2015 Earnings Conference Call
January 25, 2016, 17:15 ET
Davis Mange - IR
Tom Broughton - CEO
Bud Foshee - CFO
Kevin Fitzsimmons - Hovde Group
Tyler Stafford - Stephens
William Wallace - Raymond James
Nancy Bush - NAB Research
Welcome to the ServisFirst Bancshares Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Mr. Davis Mange of Investor Relations. Please go ahead.
Thanks, Amy. Good afternoon and welcome to our fourth quarter earnings call. I'm Davis Mange, Investor Relations Manager. Leading today's call will be Tom Broughton, our CEO, and Bud Foshee, our CFO. They will open with a brief overview of the quarter and then take 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.
Thanks, Davis. Good afternoon to everyone on the call. If you’re joining us for the first time again we don't read our press release to you. We assume everybody on the call can read our press release just fine and we’ve realized that we’ve give an hour and 15 minutes to read the press release if long, if you had chance to start looking at so you may not have all your questions out today but over the next few days can try to get everything answered for all the analysts on the call.
We’re certainly pleased with the quarter. We're pleased with our annual and quarterly loan and deposit growth which drives these numbers, the earnings per share numbers. From a loan standpoint year-over-year the strongest growth markets in terms of loan production or Nashville, Birmingham, Mobil and Pensacola, though I would say that they were pretty much very strong across the entire footprint.
From a quarterly standpoint Charleston, Nashville and Birmingham had the strongest growth in the quarter. From a deposit standpoint year-over-year in the bought quarter -- the answer is that every market had really good strong deposit growth both in the quarter and for the year. So we’re very pleased with the quarter in terms of -- and the whole year in terms of deposit growth in all of our entire footprint, it was very strong and consistently strong.
Our loan pipeline is seasonally where it usually is is down a a bit from the levels of the last three quarters and that’s seasonally typical of what we saw after closings in the fourth quarter. The first quarter we typically don't have a strong production in first quarter. We’re excited that Greg Bryant joined us in the Tampa Bay area right after year-end. Greg has an experience [indiscernible] that hit it up by cities. Mike [ph] in the Tampa Bay area for some years and is a highly qualified, good commercial banker with strong ties in the market. So we've had a number of -- his group join us over the last couple of weeks. We have six officers in Tampa Bay area and in a loan production office in [indiscernible] Florida which is in Pasco County. We also have two permanent offices in Charleston and Nashville opening in the next few days, both of them are owned -- prior to open they have been -- Charleston has been a temporary office for a year. It took forever to get in our permanent office and Nashville is moving from a loan production office, high rise downtown building to permanent office out in the West end area of Nashville.
We've gone from 91 producers to 116 in 2016 in the year that's our largest one year growth in staff that we've ever had and that does not include of course the people in the Tampa Bay area of loan production. So we’re pleased with a number of production, people would have chosen to join our company. We think we’re an attractive place to work. We make it easy for them to be here and easy for them to serve their customers from service first buy.
And again it, you know that's what we like to talk about is we don't people that want to come here for money we want people that want to come here so they can serve their customers better than where they are today and that's the kind of people look for.
So I'm going to turn it over to Bud to talk about -- we had a pretty good quarter and Bud can talk about numbers in a little bit more detail.
Thanks, Tom, good afternoon. We had very strong EPS growth year-over-year, quarter-over-quarter. Fourth quarter fully diluted EPS was $0.74 per share, it was $0.61 per share in the third quarter. Expense reversals, we were over accrued on incentives about $2 million pretax, net after tax as a nickel per share. Charge-offs, we were higher in the fourth quarter 2.8 million majority of that was one loan was already impaired and we charged that loan out in the fourth quarter.
Margin erosion in the fourth quarter, net interest margin was 3.77 at the third quarter, that decreased to 3.56 in the fourth quarter. Our access liquidity increased by 200 million in fourth quarter plus in July this year we issued sub-debt 435 million [ph] and 5% and in the fourth quarter that had an impact on our net interest margin of six basis points. I will also point out just on a forecast bases when we look at it year-over-year that interest expenses on that sub-debt will increase by $1 dollars in 2016 because we had that for five months in 2015..
Excellent credit quality, non-performing loans to total loans 0.18 and non-performing assets to total assets was 0.26%. Tax credits, we had tax credit in the fourth quarter where we had the entire credit and write down of that credit in the fourth quarter. The tax credit was 3.3 million. The write down of the credit was 2.4 million, the net impact for earnings was 1.7 million or $0.06. fourth quarter effective tax rate was 18%, year-to-date 2015 it was 28% but going forward will that tax credits, our effective tax rate should be around 32.5%. Tom had mentioned Charleston and few other markets, Charleston still a little bit at the start-up mode since they don't have their permanent office which has impact them from a growth standpoint just want to mention that also and that’s everything from my end.
As far as our net interest margin, in the fourth quarter of last year was exactly the same as it was fourth quarter of this year so they both were characterized by excess liquidity. So really from the standpoint of the margin it pretty much remained the same year-over-year and again I would point out that we are making large investments in all of these markets like Charleston, the Tampa Bay area LPO, as well as Atlanta, we've added large group in Atlanta as well over the last six months. So we’re spending a lot of money in terms of investments that we're making in these people. It will impact earnings in the 2016 year that we typically original will lose money, fair amount of money. The first year something like 2.5 million pretax full region, when it's not an LPO, full office. The second year we typically break even for full twelve months, in the third year we make money. So the investments we're making right now payoff in three years. So there's not an immediate payoff in terms of what we get out of it but anyway we’re thrilled to have all these people on board and again we've talked to teams all the time. We're always open for business and talking to the quality kind of people we want.
So with that Davis I will turn it over for questions unless less anybody else here in our room has anything to add or missed?
Okay, Amy if we can open up the floor.
[Operator Instructions]. Our first question is from Kevin Fitzsimmons at Hovde Group.
I was wondering if you could give a little more color on your -- just looking forward your outlook for the margin. I know we have this big inflow of liquid assets so I would think it would be like last year and it would flow out in first quarter and you'll see a bounce to the margin but just wondering if we look out over the next two or three quarters how it's all going to net out with you know if you have a little more volatility in terms of accretion income, possibly that winding down and then effect from the fed rate hike if that has any impacts that you're seeing so far? Thanks.
I think from a range standpoint I think we will probably be in the 360 to 365 range. The accretion from the Atlanta acquisition that will slow down, that year-to-date number will decrease in 2016 versus what we took in 2015. In third quarter conference call we discussed the first fed rate hike and that would add the penny per share per quarter, not gross share -- the fed does something again, I'm not sure it we will have that much of a pickup. It's hard to get a good read on the fed and what they're going to do and just what competitors going to do -- I don't think anybody really feels comfortable on raising rates and what we're going to do from a deposit standpoint after the first fed hike.
Okay, so with that range for the margin seems a little lower than the bounce you guys got last first quarter's, is that just the environment and what's happening competitively with loan yields is that the reason for that?
It's just real hard to predict liquidity. I mean I wish I could but I mean that’s the best range I can get right now and really the accretion on the Atlanta market will have an impact going forward also.
And just a quick follow-up, you mentioned Tom, the new markets and the timeline of those in terms of losing money and then breaking even. So with you having on your plate Charleston and you mentioned Nashville and making investments in Atlanta, now Tampa Bay coming up on-board, are you guys -- do you like to have only a certain amount of those markets that are transitioning at once? So in other words do you just kind of say for now we're kind of off the table for new markets or are you always looking for that if new people come up and if they do what kind of markets would you be looking for if people became available? Thanks.
You know you're asking a good question. Probably, you know if we look at investments we're making in 2016 is probably $5 million roughly and startup losses which is pretty significant for us. We think that's a big number in a perfect world would it be less? Yes. In a perfect world we would only have one region losing money at a time and one transition at a breakeven but you know from our shareholders best interest standpoint, I cannot say that we wouldn’t hire another team to market -- I mean if we found the right people at the right time we think it's in the shareholders' best interest to bring on all the good people we can because they are hard to find. I mean these people don't -- they are not just wandering around out on the street and they're very -- we can go two or three years without finding the right group. Now having said that I don't -- we did a few years ago I don't like we are going to go two or three years anymore without finding the right people. I think it is sort of -- we've been kind of the words gotten out a little bit and we're in a good place to work and had a little success and I don't think we get more looks from people than we did a few years ago. Did I answer your question, Kevin?
Yes. So it sounds like you would never say never but there's a lot on your plate right now so there's no concerted effort to go and search for them but if you do happen to find them you would push forward with it or consider it?
Yes. And we continue to talk to people. We will continue to talk to people, we’re in talks with some people that have employment agreements today that expire a year from now. So I had a call today from a banker I didn’t know, but just call me.
The next question is from Tyler Stafford at Stephens.
Tom, maybe somewhat of a follow-up question to the prior question. I think in the past you said it would be very unlikely for you to ever open up another LPO again. So I was just curious as to what changed in your in your thought process as you move into the Tampa market with another LPO at this point?
Yes, that’s a good question, Tyler. Some of the new officers in Tampa Bay area had contrasts where they cannot be in a banking office in certain counties and so this is a temporary office, loan production office in Pasco County for up to a year where we'll operate out of there. So they cannot violate, certainly we have had a hired a number of officers that had contracts with [indiscernible] in the past and we have honored those officers, won't honor those contracts and we want them to honor out their contracts. So that’s one thing we are doing to make sure that we comply with those contracts. We have a bit of an inconvenience for upto a year and a year past more quickly than you think. So you’re correct, we’re not going to be in the LPO business but at the end of the year. We would plan to have an office in the wherever Greg wants to be in the Tampa Bay region.
And then on the loan growth obviously, I think 17% annualized growth we saw this quarter's strong and clearly above your 15% target but the last few years your growth has been more back half weighted and that didn't necessarily come to fruition in the third and fourth quarter. So I was just curious if you're seeing a change in dynamics there over the last two quarters or just more anomalies?
Tyler, I don't know the answer. I’ve had different theories in the past that have proven not to be true on why it's back loaded in the second half of the year or some of it was -- I thought was tax policy, people worried that that investment tax credit programs would not be renewed in the next calendar year by Congress and what we found in 2016 is we had some pretty darn good growth in the first quarter and then we had good solid growth second, third and fourth and which if you like it better I would like for that pattern to continue. I don’t anticipate the first quarter as last 2015 was the last good first quarter I think we've ever had in terms of loan growth to the best of my memory, Tyler. So when I say I don't know but that’s the honest answer is, I don’t know, might have a better answer than that Tyler.
Maybe one more on the margin, just curious if you guys had begun to see pressure from your depositors to take up deposit rates yet?
I think we're like a lot of banks in this area. We paid up our money markets and also some folks at pretty good rates at this point. So I think it would probably take another fed increase before we really get that pressure. It could change, I mean it really depends on the market come out and change rates today but we feel pretty comfortable right now with where we’re in the rate standpoint.
If you look at our average deposit cost, I mean it's pretty high already, Tyler, so we don’t think that -- we don't know like again we just don't know we can't predict what our competitors behavior will be. But we don't feel like there's going to be a big push anytime soon.
The next question is from William Wallace at Raymond James.
Just a quick follow-up really to that last line of questioning, what have you seen -- have you guys kind of unique perspective of multiple different markets that you're operating in across different states? Are you seeing any difference in your competitors behavior around deposits especially in some of the more competitive markets or is everybody kind of holding the line pretty steadily in all of your markets?
You know the really big national buyings, you know they really drove their deposit cost down pretty darn low. Of course they drive their loan yields down pretty low. So the result is not a lot of margin but we’re extremely competitive with those national players from today. Some of them have been paying 8 to 20 basis points on deposit accounts so we’re well above that, but from a standpoint of -- but I don't think there's any regional difference across our footprint in terms of the competitive pressure. I don't think we're seeing the comparative pressure on the deposit side, Wally. I would say that if we were a retail oriented bank you know you’re starting to see, CD ads pop-up again you know people offering and that’s just not our -- we have some CDs but it's a very small part of our funding base, so that’s really -- didn’t really impact us and we’re pleased we’re not a retail buying. We think there are a lot of headaches being a retail bank. We like that we don't have that headaches.
Okay. And then in some of those more competitive markets, is the loan pricing environment just as competitive as ever? Are you seeing any more kind of rationality from your competitors for their credits?
I think there is more loans to go around so that makes things a little bit better. I think as bankers we like to sit around and grumble about how bad things are and we always -- if we have some poor performance we're always -- if any of our regions have a bad quarter and loan growth, you know what it's due to, it's due to this crazy competitors and that’s kind of proud some of our -- we have got few regions that do pretty well considering they have a lot of the low ROE banks in their market and so it's very difficult for us to compete with a bank that’s happy with an 8% return on equity and we would love to get our return on equity at 20 someday, a boy can dream anyway.
So it's difficult from that standpoint and I'm proud of our people that they are -- a lot of times we would have to pass on deals and move on down the road.
My last question is still around margin, just kind of curious what's driving this large increase in liquidity in the fourth quarter that we've seen over the past couple of years?
We just had strong deposit growth in the fourth quarter but we had one temporary deposit, we knew the money would be here for about three months and that money left like mid-December so that was in there for a lot of the fourth quarter. You know Wally, it's just the phenomena of -- we have almost typically we had some deposit growth first quarter of 2015 but we never have a loan or deposit growth typically in the first quarter to speak of and then it starts building as the year goes on and then we just have tremendous growth in the fourth quarter and I think from the deposit standpoint I think we tend to open more accounts in the fourth quarter of the year that’s just when people I think, if they go make a banking move I think it's more prevalent in the fourth quarter of the year. And we don't really track a lot of statistics but that's just my sense of -- we pick up a lot of business in the fourth quarter.
[Operator Instructions]. Our next question is from Nancy Bush at NAB Research.
Quick question here that sort of tags on to the last one, could you just speak to your loan yields right now and how those sort of trended during the quarter? And if there were any markets that were sort of outliers one way or the other?
We may just like a range of rates for new loans something like that or?
I mean just sort of an indicator of competitive conditions. Are you seeing -- obviously you're doing very well and lending how are your yields trending and particularly in your newer markets?
If you look at our net interest margin by region it's always the lowest in the newest regions. And then it builds overtime. And I think part of it is you don't have the non-interest bearing DDA, you didn’t ask this question I know what you’re asking I'm -- so they have lower net interest margin and you probably do if you paying [ph] loans to begin in a region you just do some. I mean that’s just human nature of what we see. So the newest always have the lowest but from a standpoint of the loans we’re putting on the books today, the yields were consistent with average yield that we have on the books today. So they are not any higher, they're not any lower. I would like to tell you they are 50 basis points higher than what we have on the books but they're not Nancy, they're probably reasonably identical to where we’re but if I misspoke in any way do you want to correct me now?
No you’re right, I don't see anything really by region and loan yields have fairly consistent, but I’ve touched on it on the first call they will be impacted a little bit as the mark to market accretion for the Atlanta market goes away that would impact the yield more than anything.
Okay. Secondly I mean your overhead ratio continues to be something almost supernatural in the banking industry anyway. And I'm wondering if given your strong revenue growth if you're seeing an opportunity to do some spending right now that you might otherwise not have done. I mean you’re hovering around 40% efficiency ratio, is there going to be something horrible if it drifts up to 41? And how are you kind of looking at the interplay of efficiency and revenues and maybe see an opportunity to spend?
We had our holding company board meeting this morning, Nancy and one of the Director's asked you know he said we’re making a lot of investments in new people and some of these regions are going to lose money for longer than we've had in the past, I said we're doing bigger start-ups, we’re hiring more people. I think we couldn't afford to hire all these people at one time several years ago but now we can. So when I say we’re probably losing close to $0.20 a share and that’s a rough number, Nancy and the investments we're making in new people right in 2016 so that’s a pretty much unprecedented number for us from that standpoint. So we don't worry about keeping the efficiency ratio, if we didn’t have these new investment so it would be a lot lower than it clearly is today among efficiency ratio standpoint.
From a infrastructure system standpoint we added a new online banking system, or upgraded our commercial online system in 2015 to very [ph] those customers that were -- who like to make some credit card payments [ph] but all that can be done without a lot of upfront cost so there's really no real major IT expenses or anything that we’re looking at or really needed at this point to keep going.
As there are no additional questions this concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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