ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Good day, and welcome to the ServisFirst Bancshares Incorporated First Quarter Earnings Conference Call and Webcast. 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 Mr. Davis Mange, Vice President of Investor Relations. Please go ahead.
Good afternoon, and welcome to our first quarter earnings call. We will have Tom Broughton, our CEO; and Bud Foshee, our CFO, covering some highlights from the quarter, and we will then take your questions. I will now cover our forward-looking statements disclosure and then we can get started.
Some of the discussion in today's earnings call may include forward-looking statements subject to assumptions, risks, and uncertainties. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update them.
With that, I will turn the call over to Tom.
Thank you, Davis. Good afternoon, and welcome to our first quarter 2019 conference call. We had a really great quarter. We are pleased with how the quarter ended up. As most of you know, typically the first quarter is not the best quarter of our year for ServisFirst, but we are very pleased with the solid growth that we did have in the first quarter, which is above average for our company over the last several years.
On the deposit side, we had annualized deposit growth for the quarter of 10%, and it was very broad-based with Atlanta, Tampa, Mobile, Huntsville, and Pensacola having the best growth. Typically in the first quarter, we have very little if any deposit growth, but this quarter we had really good solid growth. We do have one region that has a very large seasonal account that runs off in the first quarter, and it certainly is large enough that it affects our overall not only their numbers, but it's large enough to affect our overall numbers as well. So that's sort of unusual type situation, but it is a very profitable account. We do continue to focus on building core relationships. Our new account openings continue to be very strong. 2019 is off to a wonderful start, and Atlanta and Tampa Bay had the best -- looking at the first quarter they really have come on very strong with account openings this year.
On the loan side, we've experienced very solid loan growth during the first quarter. Montgomery and Atlanta were our best regions of the company. Our typical loan growth last year I think were up in the first quarter was 5% annualized and this year's 8% annualized in the first quarter. So we continue to see very strong growth there. Bud will discuss our solid credit quality and credit metrics in a few minutes, but just a few other things I'd like to cover. One is on our loan pipeline. It is on a very solid footing today, it is up a good bit from the first -- into the year for the first quarters, it's very strong. It is up net -- it's still up net of projected payoffs, projected payoffs were up a bit as well for the next 120 days, but we're seeing a very solid growth in the pipeline.
At our production level, we today have 133 producers. We added five new ones. We had one retire and two departed. So, we're seeing really good upgrades in our staff level. We're talking to a number of people -- individual producers today and are adding a number of people actually in the month of April. So, these numbers don't reflect though the hiring of a number of production trainees that we've done over the last year or so. We had hired about 10 production trainees over the last year. That will hopefully there -- it will be a while before they contribute, but we look forward to getting them into production in the next couple of years.
So, with that, I'll stop for a moment and turn it over to Bud to talk about the numbers.
Thank you, Tom. Good afternoon. First, I will cover our growth and net interest margin. Our loan and deposit growth were strong in the first quarter, year-over-year loans grew 12.3% and deposits 18.5%. Our net interest margin decreased from 3.63% in the fourth quarter to 3.56% in the first quarter. One of the contributing factors was an increase in excess funds of $140 million. Our loan yield increased by 13 basis points. That's primarily due to the increase in prime rate after the Fed rate increase in December of 2018.
Funding our loan growth, our deposit costs did increased by 20 basis points, and 23 basis points for Fed funds purchased. Funding costs related to our correspondent banking relationships will continue to move with Fed rate changes. The beta for those borrowings is 100%. For the remainder of 2019, we project the margin be in a range of 3.60% to 3.65%. And again a reminder, we have no accretion income related to acquisitions.
Next section I want to cover is salaries. Year-over-year salaries have increased $1.1 million. We added in 2018 -- we added managers for purchase cards and merchant services. As we talked about in our fourth quarter earnings call, we are the endorsed vendor from American Banking Association for our Agent Credit Card program. We have now dedicated two employees full-time to the sales for that to accommodate the referrals we are receiving. Also, we added production offices. We have a Pensacola mortgage office. We also added a loan production office in Fort Walton. And from a back office standpoint, we had no net ads in compliance or IT, but we did have salary increases and we've upgraded certain positions.
Next section, our non-interest income; mortgage banking continues to be a small portion of our total interest income. The net contribution income is not that meaningful. Credit card income continues to grow, it increased 321,000 from 2018. And just a reminder that we do not sell any government guaranteed loans generate non-interest income.
Next, let's talk about loan loss provision. Our first quarter net charge-offs were $3.3 million. $2.1 million of the charge-offs were fully impaired and $1.2 million were unimpaired charge-offs. We have an improving trend in net charge-offs to average loans. It was 0.25 in the third quarter of 2018, 0.30 in the fourth quarter, and 0.20 over the first quarter of this year.
Taxes, for the first quarter the rate was 19.5%, 21.3% without the stock option credits of 772,000. Tax rate for the first quarter of 2018 was 17.8%, 21.4% were without stock option credits of 1,453,000. For the remainder of 2019, the projected tax rate is 21.3%.
And that concludes my section, and I'll turn it over to Davis.
All right. With that, let's open up the floor for questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Hey, good afternoon.
Hey, Brad.
Good afternoon, Brad.
Maybe -- Bud I appreciate it, and Tom I appreciate all the color on everything. I wanted to maybe follow-up on the net interest margin. I think you mentioned kind of a 3.60 to 3.65 type range for the remainder of the year. I was just kind of curious you know, kind of what was behind, what were the drivers kind of behind that guidance, specifically what are you assuming in terms of deploying that excess liquidity that you've built up, and then maybe talk a little bit about the deposit market and what you're seeing in terms of rates, cost of funding on that side of things now that it appears that the Fed has stopped raising rates?
Yes, Brad really right now we're probably higher than normal at this time of year on excess funds. We'll probably stay in $750 million, somewhere in that range, which we expect some of that to decrease over time, kind of does in the second-half of each year as our loan and deposit growth both pick up, but deposits still are -- well, I think we're going to -- with our newly anticipated Fed rate increases, we're hoping that deposit pricing gets a little more back to normal, but we still know that it can be moving up 20 basis points in the first quarter. So I think that's the -- the biggest unknown is just what deposit costs are going to be.
I don't know what other people -- I think that from what we've heard that deposit pricing is a little bit higher in the Southeast than some of the other regions, so that would be something we always have to look at, but we're going to continue to grow. So, we will just have to figure out from a funding side the best way to doing that.
Got it, and maybe just a follow-up on that, it does look like a lot of the growth does tend to come or at least the last few quarters in that money market category, which was up to almost 180 basis points cost this quarter. Might you slow that a bit, or do you think that's going to be kind of the primary category that you're going to find the easiest path to sort of funding the loan growth that you got untapped for the remainder of the year?
I think based on our customer, we just don't see more, I mean over time we see more in the money market account. We just don't have that much in -- you know, CDs, it's still only about 10% of our deposits, that's just not where we've really grown since the bank opened. That's just 10% to 12% is probably the normal CD growth, or CD as a percentage of total deposits.
Got it, and then just final question maybe for Tom, I know BB&T and SunTrust don't overlap in all your markets, but certainly some, just kind of curious, I know it's early, but anything you guys might be doing to take advantage of disruption in terms of people, customers et cetera?
Yes, Brad. First of all, I know everybody -- most everybody -- BB&T and SunTrust people are pretty smart people. I imagine they're going to do everything they can to hold on to their good people, because unless they have extremely much lower IQ than I think they have. So, yes, there will be some disruption overlap, but it hasn't happened yet, I think until there's odd man out. Yes, we're just -- all we can do in the early days has been a process just trying to -- what we always are doing is try to meet great people, potential bankers in all of our markets, and some markets where we're not -- we're not located today, but we don't really have a -- we're not doing anything special for that. We're just always trying to meet new bankers in our existing and new markets. So, it's no different than what we're already doing today.
Great. Thank you, guys.
Thank you, Brad.
Our next question comes from Tyler Stafford with Stephens. Please go ahead.
Hey, good afternoon guys.
Hi, Tyler.
Good afternoon, Tyler.
Hey, I just wanted to also follow-up or start on the margin. So, lower the margin outlook five basis points from last quarter. I don't think you had a rate hike built into it in the fourth quarter outlook. So I'm just curious if the slightly lower margin is -- given the expectation for the higher liquidity from here or if it's maybe greater deposit competition that you'd expected to see, or I guess less abating than you'd expected to see?
I think it's more from deposit side. Again, I think that liquidity is -- just based on the history of the bank, I think some of that liquidity will decrease over time, probably more in the second-half of the year, so -- just a bit.
Yes. What Bud means by that is we will make loans, we won't run off. I think one factor in the first quarter is the -- the growth in the correspondence side was really strong in the first quarter, and remind you, their deposit beta is always going to be 100%. It's not going to be 99% or 98%. It's going to be exactly 100.
Okay.
So, that's a factor in that as well.
Excluding the corresponding deposits, did you see pricing or competition moderate more towards the back-end of the quarter than the beginning part of the quarter?
I think it moderated during the entire quarter, Tyler. I think the -- shooting right down the road and you see a bank and a house trader advertising a higher rate CD with a banner take to the side of it, usually smaller community banks, and they're not major players in the market, but there's still a bit of a catch-up effect from the people that kind of call you and say, "Hey, I've been earning 25 bps on a checking account, like, do bit better than that." So, you get a little bit of catch-up with that as well, Tyler. So I'm not at all convinced that a rate cut would help bank’s margins to tell you the honest truth. I don't know -- I know the investors don't believe that, but I don't know any reason why it wouldn't be a good thing.
Got it. Okay. Bud, do you happen to have this spot deposit cost at the end of the quarter on hand?
No. For the month of March or for the last day of the month?
Yes, just the total deposit cost at the end of the quarter, if you had it.
Yes, I will e-mail it to you. I don't have it here.
And then just on the credit side, just curious if there's any update on the two larger non-accruals that we talked about last quarter, I think we talked about being able to start working those out. Just curious where you are in that process?
– Clarence Pouncey is here, looking at Clarence, , there is no new impairments.
Tyler, we continue to work both the relationships out of the bank in a prudent manner. We've got one operating company and one healthcare-related asset that we're prudently moving out of balance sheet, to help balance sheet with the help of our bank counsel.
Got it, okay.
But nothing new, Tyler, or no new exposure there.
Okay. And just lastly from me, can you just remind us if you guys have any syndicated credits on the balance sheet and just -- if so, what does total absolute balances are, just trying to gauge what the potential size of that is?
It's around $50 million, seven or eight relationships, and these are relationships we have that we owe. We know the CEO. We know the CFO, and we have a past relationship. They're just not transactions that we bought from shared national credit facilities.
And Clarence, any industry-specific or is it fairly broad-based?
It's broad-based.
Okay. All right, that's it for me. Thanks, guys.
Thanks. And I guess, Tyler with the one healthcare credit we have, we expect to be made whole on that credit as well. We expect 100% repayment. We have no impairment on that credit.
Okay. Thanks, Tom.
Okay. Well we know who’s next.
[Operator Instructions] Our next question comes from William Wallace with Raymond James. Please go ahead.
Good afternoon, guys.
Hey, Wallace, my screen was dark for a minute. I saw your name also on next on the list of questions.
I was worried if you thought it was going to be me or not.
I didn't. I didn't. I didn't. I'm not psychic. I saw your name on the list. I just figured it was you.
I would have been impressed. But it sounds like you don't have the numbers at your fingertips, one of my questions was around the margin as well, just curious if you had the average cost of deposits by month in the first quarter, but sounds like you don't have that handy?
I have that for February and March. Total cost of deposits or interest bearing deposits?
Total cost of deposits.
Okay. Total cost in February was 1.30, 1.32 in March, and up on January -- 20th January.
Are you guys seeing any change in borrower behavior around what they're looking for on structure? Are you seeing anybody looking maybe to more now towards variable or shorter terms, whereas before people were trying to go as long as they could?
I don't think we see a change, Wallace. People who want to flow usually want to flow from the people that won't [indiscernible] no matter what's happened, and so I don't -- we really haven't had a problem with that. We'll see people in the market offering loan fixed rates that they cannot hedge profitably. So they're clearly just putting some 10 and 15-year loans on the balance sheet with default that they will -- I don't know what they think it is, but we have not done that.
And when you look at your different markets, do you see on the loan pricing side any markets that are frustratingly competitive or irrational on the pricing front?
No. I don't think we would say that any of them are much different than -- you see people -- certain banks typically larger regional banks are offering some 10 and 15-year fixed, but it's always on owner-occupied commercial real estate loans. They're not doing any other product. They clearly are trying to -- obviously the regulators won't be able to do a lot more owner-occupied CREs. So I don't think the regulators want everybody to do lot of long-term fixed rate CRE loans, but that's not what they're asking really. So that's all that we see it on really.
Okay. The last question I would have would be, given your expectations on your guide for margin and your visibility into loan growth, do you think your efficiency ratio has room for improvement or you think you kind of hit the level of efficiency that the best level that you can achieve?
First quarter is the only lower; I'm sorry, higher, because you have -- when company to fourth quarter you had two less business days in a month. That's probably about I think made in half, and that net interest margin for those two days. So, first quarter is always going to show higher efficiency ratio.
So, I'm thinking maybe more bigger picture like for the year, 2019 versus 2018?
We have hired a lot of people in the last two years. A lot of them are back office people. Those are expenses we don't think we'll have to schedule as much going forward as we have in the past. We know we had pretty good increase in payroll year-over-year first quarter '19 versus '18, lot of it is production-related, and a lot of it has been back office people. So, our efficiency ratio we think can improve from here, but it's certainly something you know, about improvement in the efficiency ratio.
I know it's important to you. That was all the questions I had. I appreciate the time, but if you're able to get that January cost, I'd love to see it.
Yes, I will pull it soon to you, will get of.
Okay, appreciate it.
Thank you all.
And this concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation and you may now disconnect.