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ServisFirst Bancshares, Inc. (NASDAQ:SFBS)
Q3 2018 Earnings Conference Call
October 17, 2018, 5:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the ServisFirst Bancshares, Inc. third quarter 2018 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 zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone on your telephone keypad. To withdraw your question, please press * then 2. Please note, this event is being recorded.

I would now like to turn the conference over to Davis Mange, Vice President, Investor Relations. Please go ahead.

Davis Mange -- Vice President of Investor Relations

Good afternoon and welcome to our third quarter earnings call. We will have Tom Broughton, our CEO, and Bud Foshee, our CFO, covering some highlights from the quarter and we'll then take your questions. I'll 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'll turn the call over to Tom.

Thomas Ashford Broughton III -- President and Chief Executive Officer

Thank you, Davis and good afternoon. We're pleased to have everyone on the call today and we're most pleased with our quarter that we just finished. ServisFirst continues to be an organic growth story. Mind you, we were founded in the year 2005 and we've had over $7.3 billion in organic growth in the last 13 years. So, we're very pleased with the quarter and all of our metrics that we'll cover with you today.

I'm going to go over a few things and then Bud Foshee will cover a few financial items and I'll come back after Bud covers those. So, in talking about our loan growth, we've had a nice solid loan growth during the quarter with Dothan, Tampa Bay, Charleston, and Nashville having the best loan growth in the quarter. So, we're very pleased there and I'll talk about it in a minute a little bit more about loan demand in general.

From a deposit standpoint, obviously, it was outstanding growth for the quarter. It was probably one of the strongest growth quarters we've ever had. Almost every market had solid deposit growth in the quarter. We typically do see most of our deposit growth in the second half of the year. This is a typical year so far, as we had outstanding growth in the third quarter. Typically, the fourth quarter is our strongest quarter from a deposit growth standpoint, but it would certainly be hard to top the third quarter. It was really such a good solid quarter.

From a loan pipeline standpoint, our loan pipeline is very solid. To remind you, the analysts that listen on a regular basis, typically, our fourth quarter is usually our strongest quarter. Loan closings, typically, again too, we typically have most of our loan closings toward the end of the quarter, so it doesn't help the income in the quarter. It helps the income in the following quarter. So, I probably would see that trend repeating itself again in the fourth quarter.

We realize that loan demand with investors is certainly on a national basis a question mark with investors and we're often asked when we're meeting with investors and investor conference s with the firm to cover us about loan demand and what it's like and we realize this is probably not the greatest on a national basis, but I'll answer by saying we continue to see very strong, solid loan demand. It's certainly at the point where we can continue to be very disciplined in terms and structure on all of our credits.

I think the only time that we probably had to make a few allowances when loan demand was a little slow during the recession, we did some credits -- they weren't bad credits, but they were typically credits where we didn't have a full relationship. They were just deals to get some learning assets on the books. We certainly don't like to do those and we don't have to do those at all now. We're certainly going to take care of our good clients, but we can pick and choose what we do. We'll continue to see very solid loan demand.

On the producer's front, we added eight new bankers during the quarter and six less. So, we today have 127 bankers, production people in our bank. We continue to get calls from great bankers and our staff continues to get stronger. So, we're certainly pleased with where we are from that standpoint.

I'll turn it over to Bud now to cover a few of the financial items.

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

Thanks, Tom. Good afternoon. We continue to have phenomenal organic growth, annualized loan growth in the quarter was 15%. As Tom mentioned, the fourth quarter is normally our strongest growth period in loans. So, we are optimistic. Annualized deposit growth for the third quarter was 27%. Funding costs related to this growth led to a slight decline in the manager's margin. We're optimistic for the fourth quarter and net interest margin at the prime rate and 30-day LIBOR rate increased in the third quarter.

The deposit rate pressure seems to have moderated a bit but may increase if we see near certainty of another Fed rate increase. Higher-tenured treasury rates are a positive for the future. Regarding credit quality, year to date charge-offs are well in line with last year. We don't seem to have any large storm clouds on the horizon. The charge in the third quarter was one C&I credit where fraud was involved. Our asset quality continues to be strong.

That concludes my section. I'll turn it back over to Tom.

Thomas Ashford Broughton III -- President and Chief Executive Officer

Thank you, Bud. I'll kind of wrap it up. We're aware of what investors are interested in and we try to cover some of that before questions. We know the investor focus today is on net interest margin, deposit betas, and the yield curve. What we're trying to do is follow what we think are the best strategies to grow earnings per share. Our focus is on new accounts. So, our focus is on serving clients and winning in the marketplace.

Our recent market share data came out from the FDIC on June 30th, '18. Year over year, we had really strong market share growth in nine out of our ten markets. The new account we did have outstanding growth in was a market that has a lot of excess deposits generated in that market. Our new account openings continue to show very impressive growth.

We are very optimistic about the future of our bank based on the talent that we have, which we think is second to none in the industry. Everything we see tells us that we're winning in the marketplace, which is the best metric, we think, for future earnings growth.

We'd be glad to take any of your calls and questions now. I'll turn it back over to you, Davis.

Davis Mange -- Vice President of Investor Relations

Thanks, Tom. Yes, if we can please now open the floor for questions.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

The first question comes from William Wallace with Raymond James. Please go ahead.

William Wallace -- Raymond James --- Analyst

Thanks. Good afternoon, guys. So, on the deposit growth, you mentioned it was strong across all markets. Are you doing anything different that would explain the growth? Are you promoting? Are you incenting the lenders more on deposits? Can you talk a little bit about what might be driving that growth?

Thomas Ashford Broughton III -- President and Chief Executive Officer

Yeah. Probably we've probably been emphasizing a little bit more than normal, but we always emphasize it. We just see an opportunity. We see an opportunity to grow the bank. I kind of -- deposit betas and NIM may move around, but if we earn a 190 ROA and a 20% on equity and we grow the balance sheet consistently, I think the shareholders are going to come out OK on the whole deal.

But yeah, sometimes it's just how it pops. It's just how it falls, Wally. If you get some nice large accounts and they help a lot. In the first quarter, I know we had some companies that sold in the fourth quarter of last year. We had big deposits in the fourth quarter. They ran off a bit in the first quarter. That's just kind of how it goes sometimes, a little bit of luck. But yeah, we are emphasizing deposit growth as much as we have in a long time.

William Wallace -- Raymond James --- Analyst

It looks like a significant portion of the growth on an average balance basis is coming out of the money market account. So, are you promoting across all of your markets? Your end of period balance growth was stronger than the average balance. I'm wondering if you had an influx of transaction accounts or anything at the end of the quarter that will show different trends in the fourth quarter.

Thomas Ashford Broughton III -- President and Chief Executive Officer

I'm not sure I understood the question, Wally.

William Wallace -- Raymond James --- Analyst

It's sort of two questions. It looks like on an average balance basis, which is where we break out line item detail, I see almost $300 million in growth in the money market deposits, which I'm assuming -- I don't know, are they relationship accounts or are you promoting in your markets to onboard new deposits?

Thomas Ashford Broughton III -- President and Chief Executive Officer

Their relationship -- we've never done any advertising in 13 years at the bank and don't intend to. So, everything is one-on-one relationships. We don't do consumer advertising. We don't do commercial advertising. We don't do any kind of advertising. So, it's all just building relationships. We think that's the best way to build a bank.

I think you know this, Wally, but we don't have any broker deposits. We don't use any internet listing service or any other means and we're not a member of the Federal Home Loan Bank. So, we don't have any home loan bank advances. Our balance sheet is as clean as you're going to ever find.

William Wallace -- Raymond James --- Analyst

Okay. Moving on to the expense side of the equation, it's impressive that you've been able to hold the line and actually the expense has declined in this quarter with that kind of loan growth. I'm just curious how you're holding the line, how you see expenses moving going forward. I don't know, maybe if you want to talk about an efficiency ratio or just a dollar basis, anything to help us think about how you think you can leverage the operations that you have now, from an expense perspective.

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

Hey, Wally, this is Bud. The fourth quarter is usually when we make a lot of our adjustments, incentive accrual being one of the primary things. We look at everything -- marketing accruals, anything of that nature. It's really too early to judge that, especially based on historical fourth quarter growth as to what incentives might be. So, I can't really give you a great number just based on historical adjustments for fourth quarter.

William Wallace -- Raymond James --- Analyst

Okay. Well, maybe just bigger picture, I calculate a 32% efficiency ratio in the third quarter. Where do you think that could go?

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

I think we're going to stay 32% to 34% for range. I think that's a good target.

William Wallace -- Raymond James --- Analyst

Okay. And then lastly, if there's any commentary as to how you guys might be thinking about any desire to enter a new market versus the opportunity that you see in your existing markets and if you're not interested in anything new.

Thomas Ashford Broughton III -- President and Chief Executive Officer

Wally, we continue to be interested in -- we talk to people in a lot of different places on a regular basis. Probably most of the opportunities would be that we see the day -- we're certainly interested in adding people in some of our larger markets that we're already in. That certainly is extremely efficient, as you well know, to add people in market and in those markets, they're typically Nashville, Atlanta, Birmingham, Tampa Bay, and Charleston.

So, those are the markets that are larger where we can add people. We continue to talk to people and certainly, we probably have shied away from some smaller markets that at one time, we probably would have been a little bit more interested in going to Wally. We're probably being a little bit more choosy today than we have been in the past.

William Wallace -- Raymond James --- Analyst

Okay. That's helpful.

Thomas Ashford Broughton III -- President and Chief Executive Officer

From an expense standpoint, we talk about regulatory relief, but we hadn't seen a lot of it yet and we've added a lot of back office people for BSA compliance and all those sorts of things. Over the last year, if we look at our trend of employment, almost all the people we've added in the last year have been the back office people. We've had to try to be more efficient in other areas to drive our efficiency ratio lower, which is the goal. Our goal is to continue to drive it lower. We don't want to promise that, but we certainly want to try.

William Wallace -- Raymond James --- Analyst

Okay. But it would be prudent to stick around the range that you're in now?

Thomas Ashford Broughton III -- President and Chief Executive Officer

Yeah, I think so.

William Wallace -- Raymond James --- Analyst

Okay. Thanks. I appreciate the commentary, guys. I'll let somebody else ask a question.

Thomas Ashford Broughton III -- President and Chief Executive Officer

Thank you, Wally.

Operator

Again, if you have a question, please press * then 1. The next question comes from Tyler Stafford with Stephens Inc. Please go ahead.

Tyler Stafford -- Stephens Inc. -- Managing Director

Hey, good afternoon, guys. I just wanted to start on the loan growth. I'm just wondering about your coastal markets you're in and what impacts, if any, you saw from the hurricanes this quarter and what impacts that might have had on business activity or loan closings or the fee income, mortgage banking or anything like that.

Thomas Ashford Broughton III -- President and Chief Executive Officer

Yeah. We're not aware. We're really not in markets that have been deeply affected by the storm. We're not in the area of certainly Panama City down to Tallahassee. We have no operations at all there. We took a look. Any of our exposure that would be in the Panama City market would be on the west side of Panama City where there's been certainly much less damage. So, we don't think that we'll have any exposure from the storm to be significant. Clarence Pouncey is here in the room, our Chief Operating Officer. I'll ask Clarence to speak, if you have any other...

Clarence Pouncey -- Chief Operating Officer

Thank you, Tom. No. We did not have any significant real estate property damage. We had a little damage with some institutional farmers in South Georgia with cotton, all of which had crop insurance. So, it should be fine.

Tyler Stafford -- Stephens Inc. -- Managing Director

Okay. Glad to hear it. Tom, I was just wondering, or Clarence, your C&I utilization rate today, have you seen an improvement there at all yet and where does that stand today?

Thomas Ashford Broughton III -- President and Chief Executive Officer

It's been remarkably static since we came out of the -- remarkably, I think surprisingly static since we came out of the recession. We haven't seen a big variance there, Tyler. You would think you would, but we have not seen a big change there. It's slightly higher, but it's not dramatically higher. We saw it pick up as we came out of the recession and then it's been generally pretty static since that time.

Tyler Stafford -- Stephens Inc. -- Managing Director

Okay. Maybe Bud, just on the margin, I'm just trying to better understand the dynamics of how the margin is going to be up the in fourth quarter. Is that just a reflection of better moving LIBOR and prime on the asset side? Are you expecting deposit betas at least in the near term to subside a little bit? What are the moving kind of puts and takes there?

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

Yeah. Prime increased, I believe it's September 27th. We have about $1.4 billion that reprices. We'll get the benefit of that in the fourth quarter. On 30-day LIBOR, we have about $820 million tied to 30-day LIBOR. That rate didn't really increase in the third quarter until September.

I think it went up 15 basis points in September. So, we'll get the benefit of that also in the fourth quarter. From a deposit rate standpoint, we feel like that's stabilized some. It probably still depends on what happens with the Fed in the fourth quarter, but we feel like that's stabilized some compared to what it's been in the first and second quarter.

Tyler Stafford -- Stephens Inc. -- Managing Director

Okay. Got it.

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

If you need a range, I would say 3.80 to 3.85 would be a good range for fourth quarter for NIM.

Tyler Stafford -- Stephens Inc. -- Managing Director

Okay. That's very helpful. Maybe just lastly, did the FDIC insurance premiums, those were down pretty substantially this quarter. Is this now a better run rate for those?

Thomas Ashford Broughton III -- President and Chief Executive Officer

Some of the multipliers have decreased, especially the FICO multiplier. It's also a lookback. It's always the prior quarter where they're basing the premium on. So, we had an adjustment -- we were over-accrued about $395,000.00. We made that adjustment in the third quarter.

Tyler Stafford -- Stephens Inc. -- Managing Director

Got it. Okay.

Thomas Ashford Broughton III -- President and Chief Executive Officer

It looks like the fund is getting close. I think the fund was at 1.32 at the end of the June and 1.35 is their goal. So, I guess we'll see what happens when they reach the goal for that.

Tyler Stafford -- Stephens Inc. -- Managing Director

I'm sorry, what did you say the goal was?

Thomas Ashford Broughton III -- President and Chief Executive Officer

1.35 from what I've read -- I'm sorry, it was 1.33.

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

They're very close to their goal. I keep thinking we're going to get there the next quarter and we never have. I thought we'd get there a long time ago.

Thomas Ashford Broughton III -- President and Chief Executive Officer

As long as the losses in the insurance fund become pretty much nonexistent, we should get there very quickly, I think. That will be good news for all the banks.

Tyler Stafford -- Stephens Inc. -- Managing Director

Okay. That's all the questions I had. Thanks so much.

Operator

This concludes our question and answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 23 minutes

Call participants:

Davis Mange -- Vice President of Investor Relations

Thomas Ashford Broughton III -- President and Chief Executive Officer

William M. Foshee -- Treasurer, Secretary, and Chief Financial Officer

Clarence Pouncey -- Chief Operating Officer

William Wallace -- Raymond James --- Analyst

Tyler Stafford -- Stephens Inc. -- Managing Director

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