ServisFirst Bancshares Inc (SFBS) 2018 Q4 法說會逐字稿

Good day, and welcome to the ServisFirst Bancshares Inc. Fourth Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) And please note that today's event is being recorded.

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

Good afternoon, and welcome to our fourth 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.

Thank you, Davis. Good afternoon, I'm glad to have you on our call today, and I'm going to kind of make some general comments and then turn it over to Bud for some more specifics on the financials. And I'm going to talk a little bit about sort of the economy and what we're seeing because I get a lot of questions on that, so we thought it might be helpful to do so. First of all, I'd say we had a great quarter, and a great end of a record year. We -- very excited to go over $8 billion in assets, all that's organic growth except for less than $150 million, so $7.85 billion of organic growth in the last 13 years with our -- we're also very proud that our return -- quarterly return on asset -- average assets exceeded 21% for the first time to go over 21%, so we're excited about that. First, I'd like to say our new markets are doing very well. I'm really proud of the regional CEOs and their teams and the job they're doing in these large, urban markets. The biggest question mark I thought people had about us over the last few years, we proved we could be successful in Dothan, Alabama and Mobile, Alabama. But could we be successful in Nashville, and I'll say that last year, Nashville and Atlanta had very strong return on average assets and contributed to profitability very nicely. So those are the 2 urban markets we've been in, they're the oldest and they're doing very, very well.

Looking at the economy, we don't see any signs of recession at this point in time. The losses we've had on credit relationships in the last 2 years were all poorly managed companies or companies that made bad acquisitions that damaged their business. Also, people seem to -- I realize the investment community is very worried about a recession, and I'd like to point out that we benefited greatly in the last recession. As clients moved to a strong financial bank like ours. I remember in 2008, when Wachovia was having problems in the month of August, we grew 10% in 1 month and it was pretty much all Wachovia customers joining us, so we see opportunity when times might be difficult that other people don't see. Again, our credit quality, I think, is very strong. We -- certainly, we try to provide for any loss that we expect in every quarter. But certainly, at year-end, we are very careful to make sure that any expected loss is provided for by the end of the fourth quarter, Bud will cover, that's typically why you see our charge-off's a bit higher in the fourth quarter.

Talking about deposits, we had very, very strong growth in the quarter, 25% annualized. We do see opportunities for growth. We are managing -- again, our goal is to grow earnings per share. We realize that many investors are focused on the net interest margin, but we are doing what we think is in the best interest of the -- short term and long term for the shareholders, so we continue to focus on growing core deposits. From a deposit pricing standpoint, we get that question a lot. We have seen less deposit pricing pressure since the last fed rate increase in December than we have in the prior 2 or 3 quarters before that, so it seems to have settled down a bit. I think part of it is, I've often said that banks tend to pay up ahead of an expected fed rate increase and right now nobody expects any fed rate increases anytime soon, in 2019. So I assume that's why the deposit pricing pressure has calmed down a bit, and we just don't see it -- that we've seen, like we did in prior quarters. So again, we have never run a -- we've never led with pricing. That's not what we -- that's not part of our value proposition that we lead with, nor have we ever run an ad, so -- an advertisement, I should say. But I do feel better about our margins than I really have felt in a good while, going forward.

On the loans front, we had very solid growth in the fourth quarter. The -- pretty widespread in the quarter. We looked at where the best growth was, it was Atlanta, Mobile, Tampa Bay, Birmingham and Nashville, those were the top regions in terms of closings for the quarter. Again, we don't focus just on quarter-by-quarter results. But the analysts on this call always ask, so there's your answer. It's slightly below where we thought probably what I expect you to see in growth in the fourth quarter, there were just really no large closings in the quarter, just kind of the way it turned out and plus we -- our real estate construction loan portfolio declined for both the quarter and for the year. It continues to shrink and we do very little AD&C lending, we only lend to very strong clients and -- so I will say on the loan front, all the newer markets are showing great growth year-over-year, so we're very, very pleased about that.

Also, we get questions a lot about loan competition. And to talk about that, what -- when we meet with investors, we say that we want to be a disciplined growth company with high standards for performance. And first and foremost, that means we try to be disciplined about loan pricing, structure and guarantees. And certainly, we don't think now is the time to loosen our standards. It's always -- I've been in the business since 1977 and it's been competitive every year since 1977, so people say you have a lot competitors, it has always been competitive, so there is nothing to change there. We do get questions now, a few of the questions about non-bank lenders. I have to say we don't see non-bank lenders in our space and certainly, I think that's for the bigger banks, where they see that. And we certainly -- we don't compete -- we are bothered by some of the Fintech lenders. We don't -- what they do is make large unsecured loans to small businesses and individuals, and we wouldn't make those loans. It -- but in some cases, they are going to loan into small businesses where we have debt to them -- ahead of them, and then they complicate trying to salvage a workout on some of those companies, it's really they're just -- most of them are just payday lenders, lending at higher rates with huge monthly payments, so the people couldn't possibly repay. So that's why I call them payday lenders, they seem -- that's what they are to me. And looking at our loan pipeline for the year-end, it continues to be very solid. It's up a bit from the prior quarter. You know, you don't -- we think over the course of year-over-year, we'll continue to see the kind of growth that we've had in the past. We don't see any reason, we've seen -- the only time we have ever changed our standards a bit was during the recession when we had a hard time finding good loans. What we did, we had big deposit inflows and new customers, and so we were trying to look for earning assets and we found that we did some things then that we wouldn't normally do. We gave mainly on -- we were doing some transactional-type loans. We didn't really give on credit or pricing but we gave on -- we gave a bit on pricing probably then, but we gave more on doing transactional non-customer related loans. So we've not felt the need to do anything at this time. We still enforce what we think are high standards.

On the number of headcount of producers, we grew by 4 in the quarter to 131 producers. We added 6 in 5 markets, and we had 1 retirement and 1 departed. And again, we try to be -- we're trying to be more efficient with our bankers. We still have a goal to get them all to $50 million in loans and $50 million in deposits, and we're making progress on that goal. So we do talk to a lot of people, we hire a small percentage of the people we talk to. We are looking for the right cultural fit and people that want to join us for the right reasons, so we're encouraged on that front. We do continue to see strong growth in new account openings, and we are very optimistic about the future.

So with that, I'll turn it over to Bud Foshee.

Thanks, Tom. Good afternoon. Fourth quarter loan and deposit growth was very strong, as Tom mentioned, annualized basis, loans grew 12%. Deposit is 25%. Our margin did decrease in the fourth quarter and went from 3.77% in the third quarter to 3.63% in the fourth quarter. One factor was excess funds increased by $266 million in the fourth quarter. Also, we had 2 loan relationships that we placed on nonaccrual in the fourth quarter, so we had interest reversal of $390,000 related to those credits and that decreased our margin by 2 basis points.

Interest-bearing liability cost increased by 20 basis points in the third quarter. We discussed as long as we continue to see strong loan growth, we realize we'll have to pay up for some deposits, so we kind of anticipated that deposit increase but our loan growth has been strong. Funding cost related to our correspondent bank relationships will continue to increase if we have fed increases. The beta flow of those relationships is 100%. For 2019, we anticipate a margin range of 3.65% to 3.70%. Just a reminder, we have no accretion income related to acquisitions. We reviewed 1 bank's margin and accretion income made up 26 basis points of their margin.

Credit quality, 2 relationships I wanted to discuss. 1 is that traditional C&I operating company in Alabama. We had a fourth quarter charge off of $2 million and an increased impairment of $850,000. The balance for this relationship after the charge off is $10.4 million and we have a total impairment of $3.7 million. This loan in prior quarters was in restructured loans. It's now -- it was moved to nonaccrual status in the fourth quarter. We are working to liquidate assets. The other credit is a senior-housing project in Alabama. We had fourth quarter impairment of $1.5 million and loan was placed on nonaccrual. The total exposures is about $5 million and we are working on liquidating our position on the asset. From a system standpoint, we're going to make some upgrades. In 2019, we're going to upgrade our online banking, imaging, remote capture and deposit account platforms. So we'll have increased expenses between $800,000 and $1 million as we have to -- we'll be paying the old vendor and the new vendor, so those will be onetime charges for that conversion in 2019. In the fourth quarter, our incentive accrual adjustment was $816,000, we're working on trying to reduce that adjustment in the fourth quarter of each year. It's just hard based on strong growth in the fourth quarter, but we are working on trying to reduce that adjustment each quarter. In the fourth quarter of 2017, we adjusted the incentive accrual by $790,000 but after we made the final payment we were under-accrued and we made an adjustment of $300,000 in the first quarter of 2018.

Noninterest income. You'll see from our release that mortgage banking was down year-over-year. The income of mortgage banking is small business for our bank. The net contribution to income is not meaningful. Credit card income continues to grow, $2.4 million increase in 2018. Great news for the bank, we received an endorsement from the American Bankers Association for our correspondent bank agent credit card program and we think this is a great opportunity to grow that business. Also, a reminder on our noninterest income. We don't sell any government guaranteed loans to generate additional noninterest income. And going to our loan loss provision charge-offs, Tom had mentioned that fourth quarter is normally the highest for charge-offs. Fourth quarter this year, net charge-offs were $4.8 million. In 2017 that was $8.1 million and in 2016 that was $4.9 million.

Taxes. Our tax rate for the fourth quarter was 18.9%. 22.2% without the stock option credits of $1.45 million. We made an accrual adjustment of $300,000 in the fourth quarter each year, when we file the return in September we go back and adjust our accrual. And we found that we have to make an adjustment of $300,000. Tax rates for year-to-date, 18.9%. 21.2% without the stock option credits of $3,935,000. And in 2017, our stock option tax credits were $4.6 million and our projected tax rate for 2019 is 21.3%. That concludes my remarks.

And I'll turn it back over to Davis.

Thank you. Let's open the lines for questions.

(Operator Instructions) And the first questioner today will be from William Wallace with Raymond James.

Couple of questions for you. So first off, you crossed over $8 billion at the end of the year. So almost $1 billion in total asset growth in 2018, it puts you that much closer to $10 billion. I'm curious if -- from a strategic planning process, if you've started to think about whether or not you have to layer on expense to prepare for crossing over $10 billion. I know they took away the formal stress tests but it sounds like the regulators are still looking for kind of a more advanced approach to stress testing. So I'm just curious if you've done any planning around that and if you kind of take that into account and think bigger picture, how do you think your efficiency ratio might change as you approach $10 billion?

You're asking a very good question. My answer, first and foremost, we have added a lot of people in preparation for crossing the $10 billion threshold over the last 1 year, 1.5 years. We -- to meet our regulatory expectation, we will have heightened regulatory scrutiny when we cross the $10 billion. There -- you're right, there are certainly less formal stress testing that will be required than before, but we are not sure, nobody is sure what -- Ms. McWilliams of FDIC has not weighed in yet with any significant changes. We have no idea what will be required and what she's thinking would be the appropriate level of stress testing, if any. So we are waiting a bit, we've got time. We think we -- without -- you can forecast the run rate just like I can and I -- but you can see what it is. So we think we've got adequate time. Certainly, the most -- Bud is certainly, and Clarence Pouncey is here, they're both getting prepared for it, and what we'll have to do certainly is do some -- selection software, do some stress testing, so we think we can manage that. I don't know if I answered your question. Bud, did I leave anything out you want to add?

Only thing I would say, Wally, is I think even though you don't have a formalized stress testing, what they are -- the regulators want to see is, I guess liquidity events. Say, you lost a major team in a market or if your C&I utilization went up, say, 8% to 10%. They are looking for events like that to make sure you can handle those type of events, that's probably what we're seeing more than anything right now, that they are asking that we expand with our quarterly testing of liquidity.

So from an expense standpoint and operating leverage standpoint, it sounds like I'm hearing that you're not, at this point, anticipating that there would be much pressure?

I don't think so, at this point. I mean, we're -- Wally, we felt pressure to add people in the back office over the last, certainly year, probably 1.5 years from the regulatory community. So what we're trying to do is be more efficient on the front-end to offset that added expense that we layered on in the back office, if that makes any sense. We're looking for ways and certainly, we always believe in having a couple of golden bullets that you could shoot, couple of silver bullets if you need income and, one is certainly that our service charges are pretty well below market. So that's always certainly something that we could -- competitive advantage, that's something we can do in an event of a short-term need.

Okay. On the loan growth comment in your prepared remarks, you mentioned no reason to expect that your loan growth would slow from where it's been over, I think, you said the past couple of years. But if I look going back to '16 and '17, you were growing kind of in the mid-to high teens and in '18, it was more like low double digits, so should I kind of look at 2018 as more of a comparison point? Or do you think you could actually accelerate from '18 getting back to the '16 and '17 levels in the teens?

We're certainly hopeful we'll do better than '18, Wally. That's our expectation, is to do a little bit better than that. One thing to remember is we don't have any specialty lending units, so there's not a -- there's no particular lines of business where something might dry up or you have -- certainly have serious credit problems in a lot of business where you have to quit originating paper and certainly we have no indirect loan portfolios, which we would never have. So we feel good about the kind of loans we originate, we can ramp up our loan origination capability. We have the people to do it. We can, if necessary, do more transactional loan business. You've been following us for a while and you know we're pretty stringent of our requirements for the type of people we loan money to and we could relax that a bit. Not -- you're not -- we're not relaxing the credit quality but we can relax much like we did during the recession. We could pick up some -- look at additional loans if we found it necessary.

Okay, okay. And then my last question, Tom, I just want to push a little bit on the commentary around deposit costs. I don't know if you guys look at it this way. But if you look at your total deposit beta through this cycle relative to the industry, you're significantly higher than the median bank and I think your loan growth is also significantly higher. So I understand that to fund this loan growth you're paying up, I just -- I'm trying to figure out, if you're not advertising for deposits, are you resetting the rates across the board for your existing customers? I'm just trying to foot how your deposit costs have increased so much, if it sounds like you're not really having to be out and actively trying to bring deposits into the bank by advertising or marketing.

Right. Well, you don't get quality borrowers when you advertise, you're getting senior citizens, the retirement bus from the retirement home that just hauls them around to take your CDs to the highest bidder, so we don't do that kind of business. We have 2 problems, we try to be competitive, we don't want to lose customers. I also -- certainly, the retail customers are starting to wake up. We don't have retail customers particularly. But they're starting to wake up, they've been asleep and now they're starting to wake up just like the corporate borrowers have. We try to be competitive, so that we can -- if we had very low loan growth, sure, we'd probably be very concerned about having a low deposit beta. So we could keep our margins or improving -- trying to improve our net income. But our means of improving our net income is to grow the balance sheet at a reasonable margin. We can always manage the margin back up with -- you can reduce deposit bucks. You don't have to have a fed rate decrease to decrease deposit rates, you can do it with a stroke of a pen. You don't want to, because we want to be competitive, continue to grow our market share and that's what we're proud of, is we're growing our market share. Last year, we grew 9 of our 10 markets, significantly improved their market share, and the other 1 is -- it was really, really 10 out of 10, there was somebody in the market -- there was something odd that made it look funny, but -- so we're growing market share in all of our markets in which we think is a way to grow net -- we're trying to grow net income per share.

And next questioner today will be Tyler Stafford with Stephens Inc.

I just wanted to maybe start on the incentive reversal this quarter. Can you just remind us how the bankers and the executive management team is incentivized? What -- I guess goals that you had to hit that maybe you didn't hit for the full year that caused this incentive reversal? And just to what extent credit quality and the nonaccrual increase this quarter kind of played into that incentive reversal?

Tyler, it's a bit of an art and less of a science. And what we try to accrue is everybody hit their goals. And not everybody hits their goals but some people exceed their goals and some fall short of their goals, so you've got to blend the people that go over and the -- people, when they go over, we pay them extra. And when they fall short, we certainly -- they don't achieve their full payout of their plans, so we try to accrue. And Bud can give you a more precise explanation, I'll let him jump in here in a second. Last year, we got caught short. We reversed out $800,000 and we should have only reversed out $500,000. So we're making sure that doesn't happen again this year, certainly. And not reducing that accrual based on what we expect. So it is an art, not a science. Bud, see if you can add to it.

Yes. Tyler, I think the biggest thing is it's based on year-over-year growth, so really, what's the unknown. We've always had a strong fourth quarter and this was a strong fourth quarter on loan to deposits, probably a little bit less than we had the year before. So that's what makes it so hard, you really got to get through December to see what your net growth is to know what your incentive payouts are.

And I must -- I will say that there is more payouts for deposits than loans. So in a quarter when you have outstanding deposit growth like this, the incentive payments are higher. The mix is usually about 60% deposits, 40% loans, but they're -- that's a gross loan oversimplification of our system. But just in general, that's a -- there's more weight on deposits than loans. So when you have a blowout quarter like we had on deposit growth, it was just a blowout quarter. You've got to pay.

So it's more about the individual banker hitting their targets or not hitting their targets rather than a credit trigger like you -- like, I'm just trying to figure out how much of any credit plays a factor in that. And I guess part B to that, how much, if at all, the nonaccrual increase factored into the incentive reversal this quarter.

The non-accruals had nothing to do with it. There's a disqualifier certainly, it's certain for the postproduction people and our regional CEOs, the plan says that a certain level of charge-offs, their plan -- their payout can be haircut. And we -- at above a certain level. It depends on -- it does.

Yes, okay, that makes sense. I just wanted to make sure there was a credit piece, I just couldn't remember. Bud, you gave us a lot of information on the -- just sticking with the credit, you gave us a lot of information on the 2 nonaccrual increases this quarter. Did you give what I guess the existing reserve is for each of these 2 individual credits that moved in nonaccrual? Or can you give...

We'll see.

[You've got the] impairment.

Yes. Like, the first, when the balance after charge off was $10.4 million and the total impairment on that particular loan is $3.7 million. The second one, exposure is $5 million and the impairment is $1.5 million.

Okay, got it. Did you also give the tax rate guide, I may have missed that, for 2019?

Yes, for 2019, 21.3%.

You don't take shorthand, Tyler?

I was trying to catch it all. Just last one for me, again, just on the '19 outlook you gave the NIM range of 3.65% to 3.70%. I just want to make sure I'm, I guess, thinking about that right. So in '18, from peak to trough, the NIM moved 19 bps. So is the 3.65% to 3.70% range, is that a full year '19 kind of all-in range? Or is that 5 basis points the extent that we should see quarter-to-quarter kind of volatility within the NIM unlike what we saw in '18?

Well, let's see how to explain it. If we had, had the interest -- we wouldn't be at our 3.65% in the fourth quarter without the nonaccrual reversal. So with no fed increases or -- they don't really predict them in the first half of 2019, we don't see where that would change much. I guess what happened last year is you had banks moving up rates a month ahead of when fed would increase rates. So we're repricing loans 30 to 60 days or more after those deposit rate increases. That's what really, I guess, drove the margin down last year. So I'm basing it on fourth quarter 2018 NIM and really no fed increases for next year.

Okay. So -- but it's a full year NIM range. Is that correct?

Right. That's right. That's what we're anticipating. If you look, right in the fourth quarter we had all that excess funds. That significantly impacted our margin.

True.

Deposit growth outpaced loan growth, which is not a bad problem to have in this day and time.

And the next questioner today will be Brad Milsaps with Sandler O'Neill.

It's actually Peter Ruiz on for Brad. Most of my questions have been answered. But just wanted to kind of touch on credit here. Has there been any portfolio-wide kind of review or any sort of verticals that you've taken a bigger dive into? Just given some of the noise that we've seen in the last couple of quarters.

Peter, this is Tom Broughton. I need to understand a little bit more about what you're asking. Can you expand your question or...

Yes, just wondering if there has been any sort of portfolio-wide analysis in just -- in terms of looking at has there been any sort of systemic trends or anything like that within the portfolio. I know that you guys have commented that these are more one-off occurrences but just didn't know if you guys maybe did a deeper dive in this, any specific verticals, or anything like that?

Yes. We've looked at -- exposure to contractors is one thing that where we've had -- the charge-offs have been a little bit higher than we would like. Certainly, our charge-offs are much lower than the industry. I think our charge-offs were 21 basis points in 2018, I think 25 basis points or so in 2017. So certainly, we're the very top quality of the range of the industry. So we feel really good about that. But we -- a bit more careful on some of these contractor-type credits. Certainly, we have an outside loan review firm that looks at our loan review. We review 40% of the loans every year through that firm. They do that -- they affirm all our risk rates, so -- but what we like about our portfolio is if you look at it by industry, if you said, okay, ServisFirst, there is going to be an agricultural recession, how's that going to affect you? We'll say, well, 3.55% of our loans are agricultural, so if that goes in the ditch, we're -- the broadest category we have is manufacturing. So I don't think every manufacturer in the United States is going to get into the ditch at one time. So our portfolio, most everything is less than 5% exposure in any given industry. So we feel really good about where we are, Peter. And we feel good about -- again, we don't see any broad credit trends that we can put our finger on in deterioration.

And we have no further questions at this time. So this will conclude our question-and-answer session and today's conference call. Thank you all for attending today's presentation and you may now disconnect your lines.