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 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 question. 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. First thing I'll do is, kind of, recap 2019 and then talk about 2020 a little bit, moving forward. So, I'll restate to you -- most of you heard it, what we say, we always say, we're a disciplined growth company that sets high standards for performance. And, I think, 2019 did not meet our high standards performance that we would like.
To give you a recap for 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 realizes where we are with that and maybe we were a little bit slow to react to it, possibly, but in any event, that was obviously one of the factors.
The second is we hired 24 great new producers in 2019. Those great producers don't pay off in 2020, but certainly they were a 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. 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. 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 of overview on 2020, we see those 24 new producers is starting to really pay off. In 2020, we added new banker teams in Charleston, three bankers there; Nashville, five bankers. In 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 a lot of the impetus for that is these new bankers and the efforts they put forward in the -- on average. Most of them have been here six month or less, they are starting to contribute. So we're seeing loan growth and seeing good loan pipeline in -- the first part of 2020.
In addition, I would also say that we -- 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've had some CRE payoffs there. So we think that will abate and it feels like in the first half of 2020 it will be substantially lower payoffs than the last three quarters of 2019. So certainly that will help us going forward.
When we say we had a 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've 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 buy-ins 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, loan use fees and other matters like that. So we are 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 an increase 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.
And I'll 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 the 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 fill that impact more in first quarter than it did in the fourth quarter 2019.
For 2020, for our net interest margin we are forecasting a range of 3.50% to 3.55% and just a reminder we have no accretion income related to acquisitions. Our non-interest income, which were up $842,000 quarter-over-quarter that was primarily driven by an increase in the cash surrender value of 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 during non-interest income.
Non-interest expense is up $458,000 quarter-over-quarter. Our FDIC assessment return 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 will 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 of $816,000.
Loan loss provision, fourth quarter net charge-offs were $6.5 million; 83% were previously impaired. We're continuing to be proactive with our problem credits. $5 million of our charge-offs were related to forward 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 in total loan dollars.
We've 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 loan credit. We've analyzed the remaining portfolio and determined that reserve of $3 million is adequate as of 12/31/2019.
For 2020, we're budgeting net charge-offs of 25 basis points of year-to-date as of the loans. Our Chief Credit Officer, Henry Abbott is on the call and can address any credit-related questions.
One comment on CECL, we’ll have to make a day one 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% we've got 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 the quarter -- fourth quarter 2018, the rate was 18.9% or 22.2% for that option credit of $1.5 million. For 2020 we are projecting a rate between 2%, we'd lose 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 as we are we feel good about the start to the year. Our loan pipeline is good. We see good activity out there we're seeing good activity in terms of increasing our core relationships, our core deposit relationships as well as loan relationships. So we -- obviously building those relationships is a key to building successful buy-ins and those core relationships are doing very well we feel like we got momentum in all of our markets and 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. Please go ahead.
Hey, guys. How are you doing?
Hi, Brad.
Hi, Brad. How are you doing?
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 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?
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 many on 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.
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 pay downs won't be as high in 2020? Does that mean you can do better than that 11%, 12%-ish kind of growth?
Yeah, we project loan payoff just like we project the pipelines. So the payoff pipeline is down there's a few in the first quarter and 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 the general theme you don't hear as much about what do payoff on this or payoff on that. But a lot of stuff is paid off obviously. So for a lot of stuff that's paid off there's not as much stuff to be paid off. So that's why -- if that answers your question Brad.
Yeah sure, no. That’s helpful. I appreciate the additional color.
Our next question will come from William Wallace of Raymond James. Please go ahead.
Thanks. Just Tom as a quick follow-up to the last question. So you said in your prepared remarks 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?
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 2019?
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 the net loan growth we think it will be stronger than 2019 just probably the same level of production and there's less than 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 just 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?
Yeah. We would have some payoffs. So having a net run rate of 15% we'll be able to on an aggressive side Wally we could.
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 a 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?
Yeah. 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?
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.
Yeah. So, there will be some, Wally, probably to reduce run rate with 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 by 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.
It had to do what they tell you?
Correct. Exactly.
I'll let somebody else ask a question. Thank you, Tom.
Thank you, Wallace.
[Operator Instructions] Our next question will come from Kevin Swanson of Hovde Group. Please go ahead.
Hi, guys.
Hey, Kevin.
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?
Yeah. We'll not get into specifically, we are talking to 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, 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 this 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.
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?
Well certainly revenue growth number one; the expense control number two, we'll know -- 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 controlling the shareholders' money. So we feel good about those two things. Certainly, we reduce access liquidity in our quest to beat 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.
Thanks. And then maybe just one kind of follow-up. It 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.
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.
Okay. Thanks for the time.
We see most of our credit quality trends all pretty much improved in the fourth quarter, but it's time to do it, I mean we should see some improvement. We are optimistic on that part as well.
Thanks guys.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.