Q4 2019 Earnings Call

Good day and welcome to the service first Bancshares incorporated fourth quarter earnings Conference call. All participants will be in listen only mode. So you need assistance. Please signal conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to X questions. Please know that did you been it's 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 , but bushy 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 projection shared today due to factors described in her most recent 10-K, you 10-Q balance forward looking statements speak only as of today, they're made servisfirst assumes no duty to update.

With that I'll turn color John .

Thank you divest and good afternoon, everybody on the call will.

First thing I'll do it was kind of a recap 3000 might change and then.

Talk about 2020, a little bit moving forward so.

You know to restate till you most of you hard at what we say, we always say, we're disciplined growth company to say, it's high standards for performance enough I think 2019 did not meet our half standards for performance said, we would like.

To give you a recap of the year it where the year was negatively influenced by a confluence of 3 million events.

Oh, one obviously is is we encountered unexpected margin pressure in 2019.

Oh, you know the result of that was obviously everybody realizes where we are well that maybe we were a little bit slow to react to it.

Possibly but 80 that that was obviously one of the factors in the second as we.

We hire 24, great new producers in 2019 of those.

Right producers or don't pay off in 2020, but certainly that would drag to income in 2019.

In the third thing is that we were.

We've had added substantial new hires.

At the suggestion about regulators over the last two years.

As we have already transition to a large by regulatory team up on the state of Alabama and FDIC. So.

You know all in all.

So the year was like a golf or would call a son in law shot.

No not what you wanted but we'll take it so with that we'll we'll we'll talk little bit about.

Where things really got better in the fourth quarter.

Well, there's margin improvement a bottle go over it by month in a minute but.

<unk>.

By month, but it.

As much improved over where it was in the third quarter to our management team spent a lot of time a margin management in the fourth quarter and where we're certainly please.

Well 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.

Give you a little bit overview on 2020, we see the those 24, new producers is starting to really pay often.

2020.

We added.

New banker teams and Charleston, three bikers there.

Nashville, five bankers and West, Florida, we at or added seven new bankers.

With the rest scattered among other regions.

Give me example.

Typically our pipeline is it a seasonal low at year end.

Our pipeline today is 50% higher than one year ago, and a lot of the the impetus for that as these new bankers in the effort say, but fourth in the you know on average most of I've been here six months or less of that youre starting to contribute so we're seeing good.

Loan growth and see them good loan pipeline in 2000, and the first part of.

2020.

In addition, I would also say that with the heightened.

I'll sit we've seen on a quarterly basis. The last you know what really the last three months of 2019.

Most C and and as most of you know, we're not as big a C. R E bike as most banks.

But we've had some see already pay offs there so.

We think that will abate and it feels like in the first half of 2020 to be substantially lower payoffs in the last three quarters of 2019, So certainly that'll help US you know going forward.

You know when we say we are and we had loan growth of 11% year over year, certainly that loan growth in a normalized year, what normal payoffs would have been well in excess of 15% if we'd had the normal level payoff. So just to give you an example.

We also placed an increased emphasis on enhancing the income.

Going forward, we realize that we are lower than most bites in fee income cattle category, but we're doing everything we can.

From service charges due to many other things.

Enhance fee income we're also trying to enhance low income in 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 as we mentioned last 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, Theres, obviously, a carryover effect, but we expect to see improvement.

In almost every quarter. This year and also we will see improvement in expense growth in 2021.

We've always tried to be highly efficient and try to being good stewards of our shareholders' money.

We've asked color our partners vendor partners to work with us to manage our cost down and we certainly been policed.

With the response mud and his team has spent a lot of time working with our vendors.

We've also found that increased in size, we do have better purchasing power in some areas. So were certainly that's been a you know enhancing income and controlling expenses has been a big focus for us so.

Just to give you a little overview, there, where we think 2020 it'll be a now ill turn it over to Budd to.

For more details on the financial results.

Thanks, Tom Good afternoon.

Our net interest margin increased from 3.36 in the third quarter 3.47.

In the fourth quarter.

By mine 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 rates across the board.

Our average excess funds decreased by 162 million in the fourth quarter.

Cost of our interest bearing DDH for the fourth quarter.

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 ended December .

Our loan yield.

It was 5.17 for the third quarter.

And 5% for fourth quarter.

Again by month.

Tober was 5.0 for.

November 4.97.

In December 4.98.

Our long growth two thirds of our loan growth did take place in December so the margin will.

Phil that impact more in first quarter than it did in the fourth quarter.

29.

For 2020.

For our net interest margin we're forecasting.

Range of 3.50 to 3.55.

And just a reminder, we have no accretion income related to acquisitions.

Non interest income.

842000 quarter over quarter.

That was prior primarily driven by an increase in the cash surrender value of a boldly purchase of 75 million in early October .

Year over year, our credit card income increased one and a half may enter 27%.

We added 26, new companies started credit card program and 29 team, including 43.

Through our American Bankers Association credit card referral program.

Mortgage banking income.

Grew 1.6 million year over year or 57%.

A reminder, we don't we did not sell any government guaranteed loans to generate noninterest Inc.

Non interest expense is that 458000.

Quarter over quarter.

Our FDIC assessment returned to normal run rate during the fourth quarter.

In there and our budget, we are assuming that that run rate will stay the same for 22 warranty and if that's the case are 2020 expense will increase by about two and a half Megan.

In the fourth quarter, we made a 1 million dollar.

Just want to our incentive accrual would decrease that accrual.

During December and fourth quarter of 2018.

We had a reversal 816000.

Loan loss provision.

Fourth quarter net charge offs were six and a half million.

83% were previously impaired.

We continue to be proactive with our problem credits.

5 million of our Chargeouts were related to for credit relationships three of the for bankruptcy.

We have no remaining exposure.

To the fourth bar.

As we discussed in the third quarter.

The bank participate in a state of Alabama operate loan guarantee program. It was terminated third quarter.

We were notified of this in July .

31st.

We had 86 loans eroded the program.

And we had that 53 million.

Total loan dollars.

We lost 22 million and guarantees in favor of a onetime payment a 7.4 million.

At 1.3 million.

$7.4 million reserve was used in the fourth quarter for one credit.

We analyze the remaining portfolio and determined that reserve.

Three may is adequate.

As a 12 30 119.

For 2020, we're budgeting net charge offs.

25 basis points of year to date average loans.

Our chief Credit Officer, and your habits on Macau.

And can address any credit related questions.

One comment on say so.

We have to make a day one adjustment.

This month to retained earnings and that are just not will be a positive one and a half million.

Taxes for a 20 not taking our year day rate was 20.1.

As 20.9 without stock option credits, one and a half Megan.

In 2018 that right was 18.9 or 21.2 without option credits of 3.9 million.

For the fourth quarter the rate was 20%.

Our 20.6 without option credits at 297000.

Then.

Quarter fourth quarter 2018.

Right was 18.9 or 22.2%.

Well that option credit so wondering.

Or 2020, we're projecting the rate to be 22%.

We'd lose some new market tax credits in 2020, so thats the reason for the increase in the tax rate.

That concludes my comments on our current program back over to Tom.

Thank you, but and we will in a minute we'll take questions. Just finished 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 relationship as well as long relationship so we.

Obviously building those relationships is the key to build and successful buying and those core relationships are doing doing very well and were.

Feel like we've got momentum and all of our markets are doing quite well they are so.

With that we'll open up the questions if there arent.

We will now begin the question and answer session to actually question. You May Press Star then one touchtone phone. If you are using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble.

A roster.

[noise] and our first question will come from Brad Milsaps of Piper Sandler. Please go ahead.

Hey, guys are you doing.

Hi, Brad right.

I do right, but I appreciate all the guidance I was writing quickly I know you guys have talked a lot about.

Managing the expense line.

In 2020.

Thank god, but some of your comments were maybe specifically addressing the FDIC line item in terms of that increasing two and half million, but just kind of curious bigger picture on expenses last couple of years, it's been kind of in that you know 910, 11% range. It sounds like based on your comments, you're going to be able to back off down a little bit and and.

Just curious the anymore color, there and kind of where you think.

As can fall out.

Yeah really go back to.

Salaries have thanks to the biggest thing, we'll probably have a increase around 6% in salaries, we added some teams.

In 29 team, but for 2020 will only add revenue producing personnel. So theyre very lean add that many of the budgets. So really we see that is being the biggest line item that were.

We're able to control just not adding staff and 2020.

Okay, and then maybe just one follow up Tom on on loan growth on sounds like you're pretty confident around the loan pipeline you that up.

Double digits the last couple of years.

Just curious what gives you confidence that pay downs and won't be as high.

2020 does that mean, you can kind of do better than that you know 11, 12 ish kind of percent growth.

Yeah, We we project loan pay offs, just like we project pipeline. So the pay off pipeline is down yet there is even though you know in the first quarter, but then after that it seems to be that we're seeing a tailing off of.

Pay downs, Brad So that's based on that and plus just.

You get a general statement from you don't hear as much about well get a by all of this or pay off on that that allow self pay it off obviously, so yeah. You know it after a lot of stuff played off there's not much stuff to be paid off so.

Yeah, that's why we if that answers your question Brad.

Yes sure no that's helpful. I appreciate the additional color.

Yes, Sir.

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

Okay.

[noise] just Tom as a quick follow up to the till the last question. So.

You said in your prepared remarks, I apologize I Miss It you said, yes.

Yes, payoffs had been normal or had been accelerating your loan growth would've been white and 19 over 15%.

Okay and are you anticipating that your line 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.

You know.

You know that's a good question, it's hard to predict out more than about 90 days on the pipeline Wally, but but you know were generally optimistic about you know the feature of the year, So, but we think it will be.

Certainly the net loan growth, we think it will be stronger than 2019.

Just you know probably the same level of production this lesson in the way of payoffs.

If that makes in San Juan.

Okay.

So 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 that pay offs should normalize.

Does that mean that that a 15% growth rate in 2020 as as kind of inline with your expectations or is that.

So expect some level of pay offs above <unk>, yeah, we would have some payoffs you.

You know so having a net run rate of big thing would be illness, known aggressive side Wally we think.

Okay.

And but do you you mentioned you gave some good color and I didn't I wasn't able to write it all down about 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 anymore.

From the fed.

Yeah, we think our range would be three three and a half the frequent five five for 2020.

Okay, and I apologize if you gave that enough propellant commentary.

Oh, well why not just one one little Ticky tack question on on tax rate, you said, a anticipating about 22% I assume that's your statutory rated and you're you would expect to continue to see some level of benefit from.

Options and restricted stock.

Yeah, even though the option.

Who was running down I made a lot.

There's I'm not sure how much will have left but I mean, it will probably have some activity would just so we just don't include that in our forecast yeah.

Good morning, everybody on wildly you know probably probably to reduce run right. What we've had an.

Some sunbelt bit reduced from 2019.

I don't think get by the way on the FDIC.

Oh.

You know FDIC premiums I don't think Ngls now what they're going to do a while they don't just set a reduced.

Right, which they are collecting that's in line well, we may have a lot of problem by failures.

All of the sudden and.

So we're just going continue to charge in the normal rate and then we'll refunds you the money at some point so it out I don't think it doesn't make sense, what the why they do it but you know it is it isn't it is an area the government so.

Was it we'll wait and see what happens there.

I have to do what they tell you.

Correct.

I'll, let somebody else ask your question. Thank you Tom.

Thank you Wally.

Again, if you have a question. Please press Star then one our next question will come from Kevin Swanson of Hub Group. Please go ahead.

Hi, guys.

Hey, Hey.

Have you started see any impacts impossible merger dislocation.

With the some of the competitors linking up and some of the employees and maybe it's a plan similar to the past in terms of kind of how you attack that opportunity.

Yeah without getting specific because they were talking to acquire Kevin Yeah, we see and they're starting to be <unk>.

It's never is early in the process as people think is going into the it's always later in the process.

Where where that happens so you know what.

You know.

And also you've still got some some some situations where their buys that are having some issues that not only take who they are bigger banks. So you see a little bit a movement there.

Some people that looking around that I've never looked around much in the past so.

In any event, we are we see.

You know good activity out there right now you know were again the.

We're talking to people all the time, Kevin and we see we say good activity, we see good possibilities and a lot of them are within our existing footprint, which is even.

Even better and certainly since we've already got an office in these markets. The 10 markets were in or 10 or southern markets. We had as much much easier to hire people. So yeah. We're starting to say the anywhere there is a merger there's no Greg a little bit of activity for us.

Thanks, and then I guess, if <unk> <unk> kinda talk on his call years from now.

You know its results came in better than expected on something like growth that that others have touched on.

That is that kind of the only data point you think I'm.

Kind of look at throughout the year, where revenue growth could be in stronger or do you think you could you know there's still some liquidity on the balance sheet do you think that the NIM could outperform I guess, what would be kind of the the targets that would lead to kind of better performance I guess in your mind.

Well certainly you know revenue growth number one but expense control number two you know were home again I think you'll see.

The improvement.

No.

Not necessarily in the salaries. The first a couple of quarters, but every quarter you don't see you don't see improvement in expense line odd Kevin is a year goes on so we were getting control that do a little bit better job.

You know controlling shareholders money so.

We feel good about those two things certainly we both.

Reduce excess liquidity in our quest to break the margin, but we we want to keep our margin in that range, where we are today you know the free BP to 355 range, we certainly lucky to be better, but you know.

For the time van will take it.

Thanks, and then maybe just one kind of follow 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. Thanks.

Hi, This is Henry and <unk> I think in the fourth quarter. There was not anything new we actually did have some pay downs on.

I'm problem credits, so no new major watchlist items and rather we exited some credit.

Okay. Thanks for the time, we see most of our credit quality trends all pretty much improved in the.

Core and says, but it's time to do it I mean is we should see some improvement so.

We're optimistic on that that probably as well.

Thanks, guys.

Thank you.

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