ServisFirst Bancshares Inc (SFBS) 2019 Q4 法說會逐字稿

Good day and welcome to the ServisFirst Bancshares, Inc. Fourth Quarter Earnings Conference Call. (Operator Instructions) 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.

Thanks, Chuck. Good afternoon, and welcome to our fourth quarter earnings call. We'll 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.

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 to restate to you, most of you've heard it, what we say we are, we say we're a 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 for the year, the year was negatively influenced by a confluence of 3 main events. One obviously is we encountered unexpected margin pressure in 2019. The result to that was obviously everybody realizes where we are with that. Maybe we were a little bit slow to react to it possibly, but anyway, that was honestly 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, they were 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 2 years as we have already transitioned to a large bank regulatory team from the state of Alabama and FDIC.

So all in all, saw 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. There's margin improvement, and Bud will go over it by month in a minute but -- by month but it's much improved over where it was in the third quarter. And 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 on 2020, we see those 24 new producers starting to really pay off. In 2020, we added new banker teams in Charleston, 3 bankers there; Nashville, 5 bankers; in West Florida, we added 7 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 1 year ago, and a lot of the impetus for that is these new bankers and the efforts they put forth in the -- on average, most of them have been here 6 month or less. They are starting to contribute. So we're seeing loan growth and seeing good loan pipeline in 2000 -- the first part of 2020.

In addition, I would also say that with the heightened payoffs that we've seen on a quarterly basis the last -- really the last 3 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've had some CRE payoffs there. So we think that'll abate, and it feels like, in the first half of 2020, there'll be substantially lower payoffs than the last 3 quarters of 2019. So certainly, that will help us going forward. When you say we earn -- we've 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. It's a -- we mentioned in the 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've 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 have spent 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 this little overview there, where we think 2020 will be, I'm now going to turn it over to Bud to -- for more details on the financial results.

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 fourth quarter was partly due to our decision to be more proactive in reducing deposit rights 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 -- 2/3 of our loan growth did take place in December. So the margin will fill that impact more in first quarter than it did in the fourth quarter 2019.

For 2020, for our net interest margin, we're forecasting a range of 3.50% to 3.55%, and just a reminder, we have no accretion income related to acquisitions. Our noninterest 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 to generate noninterest income.

Noninterest 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, that run rate will stay the same for 2020, and if that's the case, our 2020 expense would increase 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, $816,000.

Loan loss provision, fourth quarter net charge-offs were $6.5 million. 83% were previously impaired. We'll continue to be proactive with our problem credits. $5 million of our charge-offs were related to 4 credit relationships. 3 of the 4 are in bankruptcy, and we have no remaining exposure to the fourth quarter.

As we discussed in the third quarter, the bank participated in the state of Alabama operated loan guarantee program. It was terminated in the third quarter. We were notified of this in July 31, and we had 86 loans enrolled in the program. And we had about $53 million total loan dollars. We lost $22 million in guarantees in favor of a onetime payment of $7.4 million, and $1.3 million of that $7.4 million reserve was used in the fourth quarter for 1 credit. We've analyzed the remaining portfolio and determined that 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 can address any credit-related questions.

One comment on CECL. We have to make a day 1 adjustment this month to retain the earnings, and that adjustment will be a positive $1.5 million. Taxes for 2019, our year-to-date rate was 20.1%, it's 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. Then quarter -- fourth quarter 2018, the rate was 18.9% or 22.2% without option credits of $1.5 million. For 2020, we're projecting a rate between 2%. We'd lose some new market tax credits in 2020, so that's the reason for the increase in the tax rate.

That concludes my comments. I'll turn the program back over to Tom.

Thank you, Bud. And in a minute, we'll take questions about this, 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 a successful bank, and those core relationships are doing very well. And we feel like we've got momentum in all of our markets and we're doing quite well there.

So with that, we'll open it up to questions if there are any.

(Operator Instructions) And our first question will come from Brad Milsaps of Piper Sandler.

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, Bud, 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, 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 kind of where you think those can fall out?

Yes. Really go back to salaries, I think is the biggest thing. We'll probably have a increase at around 6% in salaries. We added some teams in 2019, but for 2020, we'll only add revenue-producing personnel. So they're very -- we didn't add that many in the budget, so really, we see that as being the biggest line item that we're able to control, just not adding staff in 2020.

Okay. And then maybe just one follow-up, Tom, on loan growth. 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 paydowns won't be as high in 2020. Does that mean you can kind of do better than that 11%, 12-ish kind of percent growth?

Yes, we project loan payoffs just like we project the pipeline. So the payoff pipeline is down. There's a few in the first quarter, but then after that, it seems to be that we're seeing a tailing off of paydowns, Brad. So that's based on that and plus just -- you get a general feeling from -- you don't hear as much about what -- payoff on this or payoff on that. But a lot of stuff's paid off obviously. So after a lot of stuff's paid off, there's not as much stuff to be paid off. So that's why we -- if that answers your question, Brad.

Our next question will come from William Wallace of Raymond James.

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 hadn't been accelerated, your loan growth would have been what in '19?

Over 15%.

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 '19?

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'll be -- certainly, the net loan growth, we think it'll be stronger than 2019, just -- probably the same level of production and just less in the way of payoffs if that makes any sense, Wally.

Okay. So based on your -- what you're seeing in the pipeline and I think you said you get lots of anecdotal evidence that's giving you confidence that payoffs should normalize, does that mean that a 15% growth rate in 2020 is kind of in line with your expectations? Or is that -- you would still expect some level of payoffs above what is normal?

Yes, we would have some payoffs. So having a net run rate of 15% would be on the aggressive side, Wally, we think.

Yes. Okay. And Bud, you mentioned -- you gave some good color, and I didn't -- I wasn't able to write it all down, about trends on the cost and yields. But if you kind 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?

Yes. We think our range should be 3.5% to 3.55% for 2020.

Okay. And I apologize if you gave that in the prepared commentary. One -- 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.

Yes. Even though the option pool is running down, I mean a lot -- there's -- I'm not sure how much we have left, but I mean we'll probably have some activity. We just don't include that in our forecast.

Yes. There'll be some, Wally, probably the reduced run rate from what we had in -- some a bit reduced from 2019 and I don't think it -- by the way, on 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 that -- which they're collecting, they're acting like, well, we may have a lot of problem bank 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 what -- the way they do it. But it is an area of the government, so we're just -- we'll wait and see what happens there.

You just had to do what they tell you.

Correct. Exactly.

(Operator Instructions) Our next question will come from Kevin Swanson of Hovde Group.

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?

Yes. Without getting into specifics, who we're talking to and where, Kevin, yes, we see they're starting to be -- it's never too early in the process as people think it's going to be. It's always later in the process of where that happens. So like -- and also, you still got some situations where there are banks that are having some issues and not only -- particularly, they are bigger banks. So you see a little bit of movement there from some people that are looking around but have never looked around much in the past. So in any event, we are -- we see good activity out there right now. We're -- again, we're talking to people all the time, Kevin, and we see good activity. We see good possibilities. And a lot of them are within our existing footprint, which is even better certainly since we've already got an office in these markets, the 10 markets we're in -- 10 or so markets we're in. It's much easier to hire people. So yes, we're starting to see that anywhere there's a merger, that's going to create a little bit of activity for us.

And then I guess if we're kind of talking on 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 would 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? Do you think the NIM could outperform I guess? What would be kind of the targets that will lead to kind of better performance, I guess, in your mind?

Well, certainly, revenue growth number one; but expense control number two. We're going -- again, I think you'll see improvement not necessarily in the salaries the 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 a little bit better job of controlling the shareholders' money. So we feel good about those 2 things. Certainly, we've used excess liquidity in our quest to improve the margin, but we want to keep our margin in that range where we are today, the 3.50% to 3.55% range. We'd certainly like it to be better, but for the time being, we'll take it.

And then maybe just one kind of follow-up. It looked like overall, on a credit perspective, some of the metrics improved. Was there anything new in any of the buckets or anything that left? Maybe just kind of share any additional color on just kind of credit in general.

This is Henry. And 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 rather, we exited some credits.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.