Apr 21, 2015
Executives
Davis Mange - Investor Relations Manager Thomas Broughton - President and CEO William Foshee - CFO
Analysts
Enrique Acedo - Raymond James Kevin Fitzsimmons - Hovde Group Brad Milsaps - Sandler O'Neill Christopher Marinac - FIG Partners
Operator
Good morning and welcome to the ServisFirst Bancshares' First Quarter 2015 Earnings Conference Call. All participants will be in listen only mode.
[Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Davis Mange. Mr.
Mange, please go ahead.
Davis Mange
Thanks Gary. Good morning 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 any questions you might have. I'll now cover our forward-looking statements disclosure and 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 may 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'll now turn the call over to Tom Broughton.
Thomas Broughton
Good morning to all. We're glad to have you on the call this morning.
If you are new to our call, I'll point out that we don’t read the press release to anybody. We assume everybody on the call can read and we will not read it to you.
The first quarter is usually a very soft quarter seasonally with very little growth in loans or deposits, so we were pleased to have organic loan growth of a little over $100 million for the quarter, 12% annualized. The loan growth, Birmingham led the way 15% annualized loan growth.
We had nice growth in Mobile, Nashville and Montgomery as well. We did have some modest deposit growth in the quarter which is a typical about 8% annualized and we're pleased with that.
That's pretty nice for the first quarter. A little bit about our loan pipeline.
Again, I don’t put a lot of stock in loan pipelines. Loan pipelines are always good.
Ours is always good. But ours is much better for this time of the year than I remember in a long time it is very strong.
The pipeline, again it is not a scientific measurement or anybody that – if somebody knows how to scientifically calculate their loan pipeline I wish they would share it with me because we're not smart enough to do that. But any way just my sense is that the loan pipeline is very, very good.
It is very strong for this time of the year, 120 day [ph] forward pipeline. Also our line of utilization is up for the first time in a long time.
It ticked up about a nose full amount in the first quarter, so that was nice and also we're being a little bit pickier on loans. Organic loan growth is better than it has been in a long time, so we can be a little bit pickier and passing on thin price deals and we take RFPs [ph] and throw them in the thrash because there is no way to make money for our shareholders in RFP [ph].
Our production team we've honed out in the press release that we had our largest growth in the quarter. And our new production team, our production team, they break down as follows, they are precisely people, we inherited eight with Metro acquisition.
One of those was actually new, so he is really organic growth, but we had four in Charleston in the first quarter, three in Atlanta and three in Birmingham. We had a lift out of a small business banking unit in Birmingham from a large buyer.
And just to hone out what's going on with our different offices, we're still ramping up hiring in Atlanta. Bud will talk about our merger expenses and where we think we've captured everything in the first quarter related to the Metro acquisition.
In Atlanta, Metro closed their Canton [ph] office before merger. They are moving the main office to Marietta which is on the north side of Atlanta, north of Buckhead if you are familiar with Atlanta area they are in the process.
They still have some, we'd still like to do some, add some new production members of our team in Atlanta would like to have three or four more this year. Moving to Charleston, we do have a full staff in Charleston South Carolina.
Now we have a temporary office. We're not really in position there to run a full service branch at this point and the full staff is in place itself for retail branch personnel with which the full main office will be open in the fall.
So we're making do in a temporary office until that time. So Bud can reference any numbers that you'd like to hear and I'm going to turn it over to Bud Foshee now to run through some numbers.
William Foshee
Thanks Tom, good morning. First, just a recap of our Metro Bank acquisition, which closed on January 21.
The merger expenses related to that transaction were $2.1 million, goodwill $16 million, core deposit intangible was $2.1 million and 40% of that amount is just allowed to Tier One capital as that will phase in overtime and I think that covers the general points of Metro. From an RE [ph] standpoint, our margin improved 24 basis points in the quarter, 4 basis points was due to the mark-to-market accretion for loans and CDs for Metro and majority of the other increase is due to change Fed funds sold [ph] decreased $181 million during the quarter.
So they are a little bit lower liquidity, but we had margin improvement from that end. From a core earnings, we made an adjustment.
We had an over accrual which is for 2014. We reversed that first quarter that was $570,000.
We've detailed this a little bit in our release. We have set up an unfunded loan commitment reserve and there is $0.5 million you've got to remember that's really accumulation of 10 years that's what we had for unfunded commitments flowed through that calculation and made that reserves and we will adjust that going forward by some of the formulas what we consider is unfunded loan commitments.
And that's my recap.
Thomas Broughton
I guess Bud, this is Tom Broughton again, the conversion of the Metro volume we haven’t even done that yet, that's scheduled for…
William Foshee
Right, yes, conversion will happen the last week in May, so that's still upcoming week for, we're already planning for that, so we don’t see any issues with that. They are on Jack Henry [ph], we're on Jack Henry, so we don’t see any issues with that for that effort.
Thomas Broughton
In terms of – its Tom Broughton, in terms of – I think if you get any heavy questions about, we've got to convert Metro. We've got our – we want to get that done before we can think about any other expansion.
But most of our expansion we're thinking about is organic growth and we're in discussions with two teams at the present time that are not in the market teams in any of our existing markets where there will be further diversification, so that's what we have in mind for growth. We again, we're – because of the new production teams we've brought onboard in this quarter we're optimistic that we can continue to grow the volume organically without any further dilution at the present time.
Bud, you got anything before we take questions? All right so do you have any questions?
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Enrique Acedo with Raymond James.
Please go ahead.
Enrique Acedo
Good morning gentlemen, good quarter.
Thomas Broughton
Thank you.
William Foshee
Good morning.
Enrique Acedo
Sure, so you guys actually already answered most of my questions pertaining to NIM and the $500,000 you guys backed out of operating. So, if we look at loan growth for the remaining of the year, how should we think about that?
Thomas Broughton
Gee, I mean, I don’t, you know I don’t know, so I can't tell you. You know that's being as honest as I can be.
We are optimistic. Yes I mean, this is Tom Broughton again.
I think the challenge for all banks over the long period of time is build a core deposit to not make any loans and that is my - what we focus on. I've noticed people are – you won't see us buying a finance company to enhance our earning asset yield.
I mean, we bought something to beat enhance core deposits. So we think we can generate loans and I think the constraining factor over a long period of time will be building core deposits to fund our growth.
That's about the best answer I can give you right now.
William Foshee
And Enrique the only thing I would add, this is Bud Foshee, the only thing I would add with Charleston is just up and going their staff we expect good loan growth from them in 2015, same with Metro, they've staffed up to change their lending staff, so they've got more capital than they had so they can make much larger loans. So we expect the growth out of that market also.
So yes, really two new markets that we think will add to loan growth for 2015.
Enrique Acedo
Okay that's helpful. And then on the M&A front you guys said that you prefer to get Metro done before you kind of, go on the prowl for other transactions.
With you guys finishing off the conversion in May, do you guys think you guys could maybe be looking or considering additional M&A opportunities maybe in the back half of the year?
Thomas Broughton
We will consider it, but we prefer the organic growth if we can. I mean, we're not fond of dilution with shareholders.
We certainly wouldn’t do anything that's dilutive from this point forward. Atlanta was a special need for us in our mind because it is the closest big market to our home base.
So we didn’t mind that the right team might get a transaction that's dilutive to shareholders in the short term and we feel like that's a good way for the shareholders over time. But certainly going forward we will be lot pickier and I think we still a - probably a decent spread between [indiscernible] between buyers and sellers.
Sellers' expectations are much higher than I think we'd be willing to pay at this point in time.
Enrique Acedo
Okay, well that’s very helpful. Thanks for taking my questions.
Thomas Broughton
Next one.
Operator
The next question comes from Kevin Fitzsimmons with Hovde Group. Please go ahead.
Kevin Fitzsimmons
Hey, good morning guys.
Thomas Broughton
Good morning Kevin.
Kevin Fitzsimmons
I just wanted to follow up on the expenses, so you mentioned the 500K for the initial funding of the reserves for the unfunded loan commitments, what is, maybe I just didn’t have this on my radar screen as much, but why is this new requirement for you, or is this something for everyone and should we look at it as even though you are going to have to adjust it in coming quarters, based on a formula this is really like a non-run rate expense the way we should look at it, you are not going to have another 500K next quarter for this, right?
William Foshee
Right, yes, Kevin this is Bud. We get, you know everybody has to do this.
You have to reach a number where it is material to your financials and we discussed this with our external audit group at the end of 2014. So the $0.5 million expense that’s really where we are after 10 years of being in business with all our unfunded commitments we booked a $0.5 million.
What it is going to be going forward, there will be some adjustments, but no, we're not going to have another $0.5 million expanse in the second quarter. You just had that incremental increase each quarter based on the change in our unfunded commitments.
Kevin Fitzsimmons
Got it, but what was the other thing you mentioned, you said, I thought you said you had an over accrual of certain amount and you reversed it?
Thomas Broughton
Yeah, that was the, we did that every year in the first quarter. We threw up our incentive accrual from the year before.
We were over accrued to $570,000 so we adjusted that in the first quarter.
Kevin Fitzsimmons
So that in the first quarter relative to next quarter that helped you by $570,000?
Thomas Broughton
Correct. Yes.
Kevin Fitzsimmons
Okay, so we shouldn’t lock in…
Thomas Broughton
You know, first quarter of 2014 we did the same. I mean, in the first quarter of each year we going to make that adjustment for points in it.
I guess another way to say it Kevin is, we didn’t have to accrue as much. We accrued a $1.07 million in additional expansion in the first quarter, but we would have to accrue more without that carrier.
It is so hard to actually predict at year end how much you’re going to have payouts. Of course we hope we have maximum payouts every year, because that’s good news for the shareholders.
Kevin Fitzsimmons
Right, right, okay, but from a run rate perspective we should look at comp expenses and really take, add 570K into it for next quarter, all else being equal?
Thomas Broughton
Yeah, you still got, there have been some terminations for the Metro acquisition that will, well actually yes that one plays out, there is still probably some may be on that list. Charleston might add a few more sites, it’s a little too hard to predict right now, there is still some things shaking out in the second quarter, I can’t give you a good number, but sometimes it might happen.
Kevin Fitzsimmons
Got it, okay. And one last follow up just you brought up the Charleston entry and how that’s going and that you are in discussions with two other teams in two new markets.
Any kind of sense that Tom if you can give us what new markets that you are not in right now at the top of your radar screen? And when you say new market, are you talking about a new Metro area or Atlanta is a big market and you guys just kind of stepped into the western part of that, are you referring more to different parts of Metro Atlanta to try and round that out?
Thanks.
Thomas Broughton
Actually, you know, no we are not in active discussions like today with teams in Atlanta, but there the existing footprint of - that we'd like to be in Tennessee, Georgia, South Carolina are our top three in terms of where we think there is good economic growth in there culturally compatible with our company and we are active in all of those markets. And I'm going to see a potential new group tomorrow, so and we are actively talking to the people all the time.
We probably don’t plan to make any additional acquisitions in Atlanta area. That is just going to be organic growth market and again our emphasis is going beyond northern end of Atlanta, that’s where our new main office is in Marietta.
So that is the focus of our company in Atlanta. It is not on the western side and we are certainly ahead of there and have a dugout for an office, but Kennesaw and Marietta will probably be where most of our growth would be in the future there.
Kevin Fitzsimmons
Okay, all right great, thanks guys.
Thomas Broughton
Thank you. Next one?
Operator
The next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Brad Milsaps
Hey, good morning.
Thomas Broughton
Hey, good morning Brad.
William Foshee
Good morning, Brad
Brad Milsaps
Guys just don’t want to beat the expense thing, but just trying to compare may be the first quarter and the fourth quarter, it was up may be about $4 million linked quarter and you talked about the $0.5 million for the unfunded commitments and the $0.5 million or so for the incentive accrual reversal, maybe there was a kind of a wash, you had Metro for about two months, I think may be that was about a $1 million. So, maybe there was another 2.5 or 3 there, is there any way you could break that down between sort of what piece of that was Charleston, what piece of that was maybe core service first?
Just trying to get a sense of - we sort of at the high watermark for expenses for the year once you convert Metro and really get some of those cost saves out, just trying to get a better handle on that, I know that’s a lot of questions at once, but hopefully you kind of see where they are coming from?
William Foshee
Yes, Kevin, this is Bud. The fourth quarter, that’s when we make a lot of accrual adjustments.
Brad Milsaps
Right.
William Foshee
One was, I know was incentive. We look at everything at that point, so that’s hugely the lowest quarter probably from the expense standpoint that we would only have, because we are making adjustments at that point.
Let’s say for Charleston we couldn’t see what they had, the salary expenses for Charleston run at $250,000.
Brad Milsaps
Okay. It is not a big number, okay.
William Foshee
Yes, their expenses start building out. Our organic model of new offices they all have been fairly predictable in terms of growth, asset growth, loan deposit growth and financial losses and they will peak at about $200,000 a month pre-tax run rate of loss, sometime later this year.
So, you know…
Brad Milsaps
Got it.
Thomas Broughton
We have added more production people than we had in our budget and that’s, you know we'll do that all day long as long as they are, I mean, they are expected to produce of course. But and luckily we've had more milder loan losses year-to-date then we expected, so that sort of offset the two.
It has been kind of, that’s the way I look at it that we'd probably be a little below our budget if we didn’t have a little bit luck on some loan losses.
Brad Milsaps
Got it.
William Foshee
And Brad we talked about it earlier and I know we have those expenses Charleston and Metro, but again, you know they are just now ramping up their loan and deposit production. So, we look for that to definitely improve for the remainder of the year.
Brad Milsaps
Okay.
Thomas Broughton
Are you saying - especially Charleston, Charleston is just getting staffed up even as I, they've got some loans and deposits on the books, so they are just getting ramped up now from a production standpoint.
Brad Milsaps
Okay.
Thomas Broughton
And hopefully going forward all the numbers will be clean, you know we don’t want to be one of those companies where they have some more merger expenses every quarter.
Brad Milsaps
Right.
Thomas Broughton
We hope we captured everything and we are not promising we'll get, but we think we have captured almost everything in the first quarter and it will behind us and we will have clean numbers in the second quarter.
Brad Milsaps
Anything within the two months that you had Metro that made you feel any differently about the cost saves that you showed, outlined initially?
William Foshee
I don’t know, this is Bud, I don’t think so.
Brad Milsaps
Okay.
William Foshee
We're still reviewing the staff. I know they are hiring the - ramping up their loan production staff.
So, some people might change positions, but I mean, it still going to be part of the overall cost of the loan production team that they will have to add to ramp up their loan production.
Brad Milsaps
Got it, and then just a follow up on the NIM, just kind of curious what you guys will look forward as you move through the year, do you feel like from the liquidity standpoint, you are fully deployed, or do you think you got some more room to move there on the cash? And Tom you commented on being real competitive, you are able to be choosy on loans and you guys have always done a great job holding the line on rate, how do you feel about that as you move through 2015 as it relates to your NIM going forward?
William Foshee
Brad, the hardest thing to predict from our end is, is really that liquidity each quarter just we're going to always go after deposits, loans kind of we could be picky from a loan standpoint. If I had to give a number right now, I would say our margin would probably be in 370 range if liquidity ramped up some, but I still think with the - especially with the full base upon increase for the Metro, I think that probably 370 would be a good range, even if liquidity does increase.
Thomas Broughton
You know Brad on the net margin if you start with a number less than 4% you are going to have a margin less than 4%. That is guarantee.
Brad Milsaps
Yes, I mean that works, yes.
Thomas Broughton
We want to get up, we want to start a number north of 4% somewhere so that we leave ourselves room to have these margins. Again, if I had known rates would have stayed as low as they've stayed for this long, we would have done things a little bit, we would have made some decisions to enhance our margin prior to this time.
And if we thought that rates would never go up, if we thought we were in a demand environment for 10 years, we would certainly do things today to enhance our margin. And so, we could do some things on the deposit cost side that we think might be a little bit more short sighted, but we'd certainly enhance the margin in the short-term that we could do if necessary.
So that’s - we are optimistic that we can hold the line from - we see the numbers on everybody else, I mean I see the deteriorating margins and we have a plan to try to, I can’t sort of guarantee that we are certainly going to do our level best to enhance our margin rate than see it deteriorate.
Brad Milsaps
No, that’s fair. Thank you guys, I appreciate the color.
Thomas Broughton
Thank you.
Operator
[Operator Instructions] The next question comes from Christopher Marinac with FIG Partners. Please go ahead.
Christopher Marinac
Thanks, good morning. Bud and Tom, I was just curious if you could talk about the sort of investment cost in terms of the new hires in Atlanta, Charleston etc., how different is that in general from what you've historically done in Birmingham, Huntsville, and elsewhere?
Thomas Broughton
It is the same, I mean, it is following the exact pattern. The pattern I have seen over the years is it takes private bankers longer to become profitable than commercial bankers.
And of course we have a mix of both in terms of private bankers typically have a little bit better margin in their portfolio which is nice, but it takes longer to, it is a little sticker, it is harder to file away from the existing bank. So we feel good about the teams, the people, they are proven bankers and we give them and certainly give then an adequate period of time to get their production up you know Chris.
It is not - we are not leaning on the first month. We want to build a long-term successful bank and we want to work with them and help them be productive and so, but we're excited about the people that we brought on to date and we feel like we will continue to track new people because we think we are the best place to do business.
The people that we want are not the mercenaries that want to know what kind of rates you are going to give them. We want the people that say, I can serve my customers very well where I am today, and a lot of people we’ve been hiring are frustrated with the bank where they are and they can’t serve their clients, the different silos or the banks don’t talk to each other.
So, it’s a beautiful situation for us to bring these people in, put them in our system and we are an easy place with them to do business. Our credit people work very well with new people.
We train them on our systems that we use and we think we have bright prospects with the future in terms of additional hire increase.
Christopher Marinac
Okay, Tom, thanks for that and just a follow up I guess, just in general, on the margin discussion from the few minutes ago would you make any select kind of cost of fund increases with the various customers or just in general to kind of lock in this cost before, any potential shift in rates later this year or next?
William Foshee
Chris, this is Bud. You know, we've run, not and we've had share groups run all of our different scenarios, if rates go up and there is a slight increase the first year, if rates go up 100, but it improves the second year, we would really like rates, I know it sounds crazy, we like rates to go up.
I mean, just not from just a loan standpoint, but from investment standpoint and the investment portfolio we can’t replace yield at this point, so rates increasing does not concern us, we feel like we're like we are in very good shape from that standpoint.
Christopher Marinac
Okay.
Thomas Broughton
Did that answer your question Chris; I wasn’t sure what you were asking exactly.
Christopher Marinac
Yes, well I guess, I mean Bud's description was off, I guess my real question had to do with just sort of would you increase or get more competitive on certain rate types within your fund structure just in terms of patient of potential shift weight or is this a time to be provocative on pricing various deposits or your relationships?
Thomas Broughton
That’s a good question. We are not trying to do that Chris, we are trying to - we think we continue to track money co-relationships at reasonable pricing, but I do.
I have seen in the market that there are people doing, see these specials and that’s what always said, my mother lived in Collan Park, and they had a bus, assisted living facility, they take them around from bank to bank to move their CD money around, that’s the last thing we want the CDs from 90 year olds. So, but I see that and I'm sort of surprised about the CD specials obviously and our people paying up on money markets where they are easily teasers and we don’t like teasers and we tell our customers we don’t do teasers and that’s just not the way we do business.
Christopher Marinac
Got it. Okay.
William Foshee
Yes, Chris, this is Bud, I mean we had essentially low percentage of CDs or total deposits were in the 12% to 15% range. We just don’t see CD rates impacting us that much.
Christopher Marinac
Okay.
Operator
This concludes the question-and-answer session. I'd like to turn the conference back over to Tom Broughton for any closing remarks.
Thomas Broughton
Well, thank you for joining our call this morning. We are always glad to have you and hope you continue to follow our company.
Thank you very much.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.