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ServisFirst Bancshares Inc (SFBS -2.81%)
Q4Â 2019 Earnings Call
Jan 21, 2020, 4:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the ServisFirst Bancshares Incorporated Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
I would now like to turn the conference over to Mr. Davis Mange, Investor Relations. Please go ahead, sir.
Davis Mange -- Investor Relations
Thanks, Chuck. Good afternoon and welcome to our fourth quarter earnings call. We will have our CEO, Tom Broughton; and our CFO, Bud Foshee, covering some highlights from the quarter and then we'll take your questions.
I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. 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 & Chief Executive Officer
Thank you, Davis. And good afternoon to everybody on the call. We'll -- first thing I'll do is kind of recap 2019 and then talk about 2020 a little bit moving forward. So you know to restate to you, most of you have heard it what we say, we always say we're disciplined growth company that sets high standards for performance. And I think 2019 did not meet our high standards for performance that we would like.
To give you a recap of the year, the year was negatively influenced by a confluence of three main events. One, obviously is we encountered unexpected margin pressure in 2019. The result of that was obviously everybody realized where we are with that, maybe we were a little bit slow to react to it possibly, but anyway that was obviously one of the factors; the second, is we hired 24 great new producers in 2019. Those great producers are going to pay off in 2020, but certainly that would drag to income in 2019; and the third thing is that, we were -- we've had added substantial new hires at the suggestion of our regulators over the last two years as we have already transitioned to a large bank regulatory team from the State of Alabama and FDIC. So all in all, -- so the year was like a golfer would call a sun in all shot, not what you wanted, but we'll take it.
So with that, we'll talk a little bit about where things really got better in the fourth quarter. It was margin improvement and Bud it will go over it by month in a minute, but -- by month, but it is much improved over where it was in the third quarter. Our management team spent a lot of time on margin management in the fourth quarter and we're certainly pleased with the results. The loan growth for the quarter was 14% annualized and 11% year-over-year and the deposit growth was very solid at 9% year-over-year.
To give you a little bit overview of 2020. We see those 24 new producers as starting to really pay off in 2020. We added new banker teams in Charleston, three bankers there, Nashville five bankers, and West Florida, we added seven new bankers, with the rest scattered among our other regions. To give you an example, typically our pipeline is at a seasonal low at year-end, our pipeline today is 50% higher than one year ago and lot of the impetus for that is these new bankers and the efforts they put forth on average, most of them have been here six months or less, they are starting to contribute. So we're seeing loan growth and seeing good loan pipeline in 2000 -- first part of 2020.
In addition, I would also say the heightened payoffs that we've seen, on a quarterly basis, the last -- really the last three months of 2019, both C&I and -- as most of you know, we're not as big a CRE bank as most banks, but we had some CRE payoffs there. So we think that will abate and it feels like in the first half of 2020 to be substantially lower pay payoffs than in the last three quarters of 2019. So certain that will help us going forward. When you say, we earn -- we had loan growth of 11% year-over-year, certainly that loan growth in a normal year with normal payoffs would have been well in excess of 15%, if we'd had the normal level of payoffs. So just to give you an example.
We also placed an increased emphasis on enhancing fee income. Going forward, we realize that we are lower than most banks in fee income category, but we're doing everything we can from service charges to many other things to enhance fee income. We're also trying to enhance low income -- loan income in terms of origination fees, unused fees and other matters like that. So we're working on enhancing income where possible and combining that with expense management. We mentioned last quarter that's an increased focus for us. Going forward, we're looking at every expense category we possibly can. We think, obviously, we'll have some expense increases in 2020 from all the hires we made in 2019. There's obviously a carryover effect, but we expect to see improvement in almost every quarter this year and also we'll see improvement in expense growth in 2021.
We've always tried to be highly efficient and try to be good stewards of our shareholders' money. We've asked all of our partners, vendor partners, to work with us, to manage our costs down. And we've certainly been pleased with the response. Bud and his team has spend a lot of time working with our vendors. We've also found that we increased in size, we do have better purchasing power in some areas, so we're certainly that's been -- enhancing income and controlling expenses has been a big focus for us.
So just to give you a little overview there of what we think 2020 will be. And now I'm going to turn it over to Bud for more details on the financial results.
William M. Foshee -- Executive Vice President, Treasurer, Secretary & Chief Financial Officer
Thanks, Tom. Good afternoon. Our net interest margin increased from 3.36% in the third quarter to 3.47% in the fourth quarter. By month, the margin was 3.41% in October, 3.47% in November, and 3.52% in December. The decrease in our deposit balances for the fourth quarter was partly due to our decision to be more proactive in reducing deposit rates across the board. Our average excess funds decreased by $162 million in the fourth quarter.
Cost of our interest bearing DDAs for the fourth quarter was 1.21% compared to 1.59% for the third quarter. And by month, it was 1.32% in October, 1.17 in November and 1.14% in December.
Our loan yield was 5.17% for the third quarter and 5% for the fourth quarter. Again, by month, October was 5.04%, November, 4.97% and December 4.98%. Our loan growth, two-thirds of our loan growth did take place in December. So the margin will feel that impact more in first quarter than it did in the fourth quarter of 2019. For 2020, for our net interest margin, we're forecasting the range of 3.50% to 3.55%. And just a reminder, we have no accretion income related to acquisitions.
Non-interest income were up $842,000 quarter-over-quarter, that was primarily driven by an increase in the cash surrender value of BOLI purchase of $75 million in early October. Year-over-year, our credit card income increased $1.5 million or 27%. We added 26 new companies to our credit card program in 2019, including 23 through our American Bankers Association Credit Card Referral Program.
Mortgage banking income grew $1.6 million year-over-year or 57%. A reminder, we do not sell any government guaranteed loans, generally non-interest income. Non-interest expense is up $458,000 quarter-over-quarter. Our FDIC assessment returned to a normal run rate during the fourth quarter. In our budget, we are assuming that run rate will stay the same for 2020, and if that's the case, our 2020 expense will increase by about $2.5 million.
In the fourth quarter, we made a $1 million adjustment to our incentive accrual, we decreased that accrual during December. And in fourth quarter of 2018, we had a reversal of $816,000.
Loan loss provision, fourth quarter net charge-offs were $6.5 million, 83% were previously impaired. We continue to be proactive with our problem credits, $5 million of our charge-offs were related to four credit relationships, three of the four are in bankruptcy and we have no remaining exposure to the fourth quarter. As we discussed in the third quarter, the bank participated in State of Alabama operated loan guarantee program, it was terminated in third quarter, we were notified of this in July 31st. We had 86 loans enrolled in the program. We had about $53 million in total loan dollars, we lost $22 million in guarantees in favor of a one-time payment of $7.4 million. And $1.3 million of that $7.4 million reserve was used in the fourth quarter for one credit. We've analyzed the remaining portfolio and determined that the reserve of $3 million is adequate as of 12/31/19.
For 2020, we're budgeting net charge-offs of 25 basis points of year-to-date average loans. Our Chief Credit Officer, Henry Abbott is on the call and he can address any credit related questions.
One comment on CECL. We have to make a day one adjustments this month to retain earnings and that adjustment will be a positive $1.5 million.
Taxes for 2019, our year-to-date rate was 20.1%, 20.9% without stock option credits of $1.5 million. In 2018, that rate was 18.9% or 21.2% without option credits of $3.9 million. For the fourth quarter, the rate was 20% or 20.6% without option credits of $297,000. In quarter -- fourth quarter 2018, the rate was 18.9% or 22.2%, without option credits of $1.5 million. For 2020, we're projecting the rate between [Indecipherable] will lose some new market tax credits in 2020. So that's the reason for the increase in the tax rate.
That concludes my comments, and I'll turn the program back over to Tom.
Thomas Ashford Broughton III -- President & Chief Executive Officer
Thank you. Bud. And in a minute we'll take questions, but I'll just finish by saying we are -- we feel good about the start to the year. Again, our loan pipeline is good, we see good activity out there. We're seeing good activity in terms of increasing our core relationships, core deposit relationships as well as loan relationships. So we -- obviously building those relationships is the key to building successful buying and those core relationships are doing very well and we feel like we've got momentum in all of our markets and are doing quite well there.
So with that, we'll open it up for questions if there are any.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Brad Milsaps of Piper Sandler. Please go ahead.
Brad Milsaps -- Piper Sandler -- Analyst
Hey guys, how are you doing?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Hi, Brad.
William M. Foshee -- Executive Vice President, Treasurer, Secretary & Chief Financial Officer
Hi Brad. How are you doing?
Brad Milsaps -- Piper Sandler -- Analyst
I'm doing great. Bud, I appreciate all the guidance. I was writing quickly, I know you guys have talked a lot about managing the expense line in 2020. I think but some of your comments were maybe specifically addressing the FDIC line item in terms of that increasing $2.5 million. But just kind of curious you know bigger picture on expenses last couple of years it's been kind of a net 9%, 10%, 11% range. It sounds like based on your comments you're going to be able to back off that a little bit and just curious any more color there on where you think those can fall out?
William M. Foshee -- Executive Vice President, Treasurer, Secretary & Chief Financial Officer
Yeah, really go back to salaries, I think is the biggest thing. We'll probably have an increase of around 6% in salaries. We added some teams in 2019, but for 2020 we'll only add revenue producing personnel. So we're very -- we can add that many in the budgets. So really we see that as being the biggest line item that we're able to control is not adding staff in 2020.
Brad Milsaps -- Piper Sandler -- Analyst
Okay. And then maybe just one follow-up Tom, on loan growth, it sounds like you're pretty confident around the loan pipeline. You've been up double digits the last couple of years. Just curious what gives you confidence that pay downs won't be as high in 2020? Does that mean you can do better than that 11%, 12%-ish kind of growth?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Yeah, we project loan payoff just like we project the pipelines. So the payoff pipeline is down I think there's a few in the first quarter, but then after that it seems to be we're seeing a tailing off of pay downs Brad. So that is based on that and plus just -- you get a general sailing from -- you don't hear as much about payoff on this or payoff on that, but a lot of stuff is paid off obviously. So after a lot of stuff is paid off there's not as much stuff to be paid off. So that's why -- if that answers your question Brad.
Brad Milsaps -- Piper Sandler -- Analyst
Yes, sure. That's helpful. I appreciate the additional color.
Thomas Ashford Broughton III -- President & Chief Executive Officer
Yes, sir.
Operator
Our next question will come from William Wallace of Raymond James. Please go ahead.
William Wallace -- Raymond James -- Analyst
Thanks. Just Tom as a quick follow-up to the last question. So you said in your prepared remarks and I apologize I missed it, you said if payoffs had been normal or have been accelerating your loan growth would have been what in 2019?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Over 15%
William Wallace -- Raymond James -- Analyst
Okay. And are you anticipating that your loan production in 2020 will be similar to 2019? Or do you expect an acceleration given all of the new producers that you hired in 2019?
Thomas Ashford Broughton III -- President & Chief Executive Officer
That's a good question. It's hard to project out more than about 90 days on the pipeline, Wally but we're generally optimistic about the future of the year. So -- but we think it will be sort of the net loan growth we think it will be stronger than 2019 just probably the same level of production, just less than payoffs if that makes any sense Wally.
William Wallace -- Raymond James -- Analyst
Okay. So based on your -- what you're seeing in the pipeline and I think you said you get lots of anecdotal evidence is giving you confidence that payoffs should normalize, does that mean that a 15% growth rate in 2020 is in line with your expectations or is that -- you would still expect some level of payoffs above -- normal?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Yeah, we would have some payoffs. So having a net run rate of 15% would be on the aggressive side, Wally we could.
William Wallace -- Raymond James -- Analyst
Yeah. Okay. And Bud you mentioned, you gave some good color and I wasn't able to write it all down about trends on the cost and yields. But if you can of put it together to net interest margin, what are your expectations for 2020 given what you're seeing and assuming we don't see any more movement from the Fed?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Yeah, we think our range should be 3.5% to 3.55% for 2020.
William Wallace -- Raymond James -- Analyst
Okay. And I apologize if you gave that in the prepared commentary. Just one little ticky-tack question on tax rate, you said, you anticipate about 22%. I assume that's your statutory rate and your -- you would expect to continue to see some level of benefit from options and restricted stock?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Yeah even though the option pool was running down, I mean, a lot -- there's -- I'm not sure, how much we have left, but I think we'll probably have some activity, we just don't include that in our forecast.
William M. Foshee -- Executive Vice President, Treasurer, Secretary & Chief Financial Officer
[Speech Overlap] probably to reduce run rate from what we had in -- some of that a bit reduced in 2019 and I don't think by the way on FDIC, FDIC premiums, I don't think any of us know what they're going to do. While they don't just set a reduced rate at which they're collecting, the action line, well, we may have a lot of problem bank [Phonetic] failures all of a sudden. And so we're just going to continue to charge the normal rate and then we'll refund you the money at some point. So I don't think, it doesn't make sense the way they do it, but it is an area of the government. So we'll just -- we'll wait and see what happens there.
William Wallace -- Raymond James -- Analyst
It had to do what they tell you?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Correct.
William Wallace -- Raymond James -- Analyst
I'll step back and let somebody else ask a question. Thank you, Tom.
Thomas Ashford Broughton III -- President & Chief Executive Officer
Thank you. Wally.
Operator
[Operator Instructions] Our next question will come from Kevin Swanson of Hovde Group. Please go ahead.
Kevin Swanson -- Hovde Group -- Analyst
Hi guys.
Thomas Ashford Broughton III -- President & Chief Executive Officer
Hi Kev.
Kevin Swanson -- Hovde Group -- Analyst
Have you started to see any impacts from possible merger dislocation with the some of the competitors linking up and some of the MOEs? And maybe is the plan similar to the past in terms of how you kind of attack that opportunity?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Yeah, without getting into specifics, I think we are talking with them Kevin. Yeah, we see they are starting to be -- it's never early in the process as people think it's going to be. It's always later in the process of where it happens. So you know -- and also you still got some situations where there are buyers that are having some issues not only particular they are all bigger buy ins. So you'll see a little bit of movement there for some people that are looking around that have never look around much in the past. So in any event we are -- we see good activity out there right now, again, we're talking to people all the time Kevin and we see good activity, we see good possibilities. A lot of them within our existing footprint, which is even better certainly since we've already got an office in these market, the 10 markets we're in -- 10 or so markets we're in, much easier to hire people. So yeah, we're starting to see that anywhere there's a merger there's, no -- create a little bit of activity for us.
Kevin Swanson -- Hovde Group -- Analyst
Thanks. And then I guess, if we're kind of talking in this call a year from now as results come in better-than-expected on some of the growth that others have touched on, is that kind of the only data point you think we will kind of look at throughout the year, where revenue growth could be in stronger? Or do you think you could -- there's still some liquidity on the balance sheet you think the NIM could outperform I guess? What would be kind of the targets that will lead to better performance I guess in your mind?
Thomas Ashford Broughton III -- President & Chief Executive Officer
Well certainly revenue growth number one, the expense control number two, we'll -- again I think you'll see improvement, not necessarily in the salaries first couple of quarters, but every quarter you're going to see improvement in expense line items Kevin as the year goes on. So we're getting control of that we're doing better job of controlling the shareholders' money. So we feel good about those two things. Certainly, we reduced access liquidity in our quest to improve the margin, but we want to keep our margin in that range where we are today, before it gets you to $3.55 range. We certainly like it to be better, but for the time being we'll take it.
Kevin Swanson -- Hovde Group -- Analyst
Thanks. And then maybe just one kind of follow-up. Look like overall on the credit perspective some of the metrics improved. Was there anything new in any of the buckets or anything that's left? Maybe just kind of share any additional color on just kind of credit in general? Thanks.
Henry Abbott -- Chief Credit Officer
This is Henry. I think in the fourth quarter there was not anything new. We actually did have some paydowns on some problem credits. So no new major watch list items and neither we exited some credit.
Kevin Swanson -- Hovde Group -- Analyst
Okay. Thanks for the time.
Thomas Ashford Broughton III -- President & Chief Executive Officer
We see most of our credit quality trends all pretty much improved in the fourth quarter and -- but it's time to do it, I mean we should see some improvement. So we're optimistic on that front as well.
Kevin Swanson -- Hovde Group -- Analyst
Thanks guys.
Thomas Ashford Broughton III -- President & Chief Executive Officer
Thank you.
Operator
[Operator Closing Remarks]
Duration: 26 minutes
Call participants:
Davis Mange -- Investor Relations
Thomas Ashford Broughton III -- President & Chief Executive Officer
William M. Foshee -- Executive Vice President, Treasurer, Secretary & Chief Financial Officer
Henry Abbott -- Chief Credit Officer
Brad Milsaps -- Piper Sandler -- Analyst
William Wallace -- Raymond James -- Analyst
Kevin Swanson -- Hovde Group -- Analyst
