Good day and welcome to the ServisFirst Bancshares Incorporated Fourth Quarter 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [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. We will then take your questions. I will 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 will turn the call over to Tom.

Thank you, Davis. Good afternoon. I am glad to have you on our call today. And I am going to kind of make some general comments and then turn it over to Bud for some more specifics on the financials and I am going to talk a little bit about sort of the economy and what we are seeing, because I get a lot of questions on that, so we thought we might be helpful to do so. First of all, I would say we had a great quarter, great end of a record year. We are very excited to go over $8 billion in assets, all of 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 are also very proud that our quarterly return on average assets exceeded 21% for the first time to go over 21%, so we are excited about that. First, I would like to say our new markets are doing very well. I am really proud of the regional CEOs and their teams and the job they are doing in these large urban markets. The biggest question mark I thought people had about us over the last few years is we improved, we can be successful in Dothan, Alabama and Mobile, Alabama, but could we be successful in Nashville. And I will say that last year, the Nashville and Atlanta had very strong return on average assets, contributed to profitability very nicely. So, those are the two urban markets we have been in, they are the oldest and they are doing very, very well. Looking at the economy, we don’t see any signs of recession at this point in time. The losses that we have had on credit relationships in…

Thanks, Tom. Good afternoon. Fourth quarter loan and deposit growth was very strong. As Tom mentioned, annualized basis loans grew 12%, deposits 25%. Our margin did decrease in the fourth quarter. It 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 fourth quarter. Also, we had two loan relationships that we placed on non-accrual in the fourth quarter, so we had an interest reversal of $390,000 related to those credits and that decreased our margin by 2 basis points. Interest-bearing liability costs increased by 20 basis points in the third quarter, we discuss as long as we continue to see strong loan growth, we realize we will have to pay up for some deposits, so we kind of anticipated that deposit increase with our loan growth have been strong, funding cost related to our correspondent bank relationships will continue to increase if we had Fed increases. The beta flows relationships, is 100%. For 2019, we anticipate a margin range of 3.65% to 3.70%. And just a reminder, we have no accretion income related to acquisitions. We review one bank’s margin and accretion income made up 26 basis points of their margin. Credit quality, two relationships I wanted to discuss. One is the 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 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 was moved to non-accrual status in the fourth quarter and 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…

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

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be William Wallace with Raymond James. Please go ahead.

Thank you. Good afternoon, gentlemen.

Hi, Wallace.

Hi, William.

Couple of questions for you. So first off, you crossed over $8 billion at the end of the year, so almost a $1 billion in total asset growth in 2018. It puts you that much closer to $10 billion. I am curious if from a strategic planning process if you started to think about whether or not you will 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 am just curious, if you have 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 are 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 year, year and a half. To meet our regulatory expectations, we will have heightened the regulatory scrutiny when we cross the $10 billion. You are right, there is certainly less formal stress testing that will be required than before, but we are not sure – nobody is sure what will – Ms. McWilliams at the FDIC has not weighed in yet with any significant changes. We have no idea of what will be required and what she is thinking would be the appropriate level of stress testing, if any. So we’re waiting a bit, we’ve got time, we think we – without – you can forecast the run rate just like I can, I don’t – but you can see what it is, you know what it is. So we think we’ve got adequate time. The – certainly the most – Bud is certainly – Clarence Pouncey is here, they’re both getting prepared for work, 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 if I answered your questions. Bud, did I leave anything out you want to add?

The only thing I would say Wally is I think even though you don’t have a formalized stress testing, what they’re – 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’re 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’re asking that will you expand with our quarterly testing of liquidity.

So from an expense standpoint and an 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 built pressure to add people in the back office over the last, certainly, a year, probably year and a half 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, that makes some sense. We’re looking for ways and certainly we always believe in having a couple of golden bullets that you can 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 – is a competitive advantage, but something we can do in the event of a short-term need.

Okay, thank you. On the loan growth, Tom, 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 will grow in 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, while the – as 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 no particular lines of business where something might dry up or you guys 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, you know we’re pretty stringent about our requirements for the type of people we loan money to and we could relax that a bit. We’re not relaxing the credit quality, but we can relax, like – much like we did during the recession, we could pick up some booking additional loans, if we found it necessary.

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 to the 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 and the retirement bus from the retirement home, theirs is always some room [ph] to take your CDs to the highest bidder, so we don’t do that kind of business. We’re two-pronged. We try to be competitive, we don’t want to lose customers. 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 here, we’d probably be very concerned about having a loan deposit beta, so we can keep our margins 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. You can reduce deposit bucks. I mean, 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 and continue to grow our market share and that’s what we’re proud of as we’re growing our market share. Last year, we grew 9 of our 10 markets significantly improved their market share and the other one is really 10 out of 10, that was somebody is in the market that is something odd, it might look funny, but – so we’re growing market share in all of our markets, which we think is a way to grow net – we’re trying to grow net income per share.

Okay. I’ll hop out. Thanks for the time. I appreciate it.

Thank you.

And the next questioner today will be Tyler Stafford with Stephens, Inc. Please go ahead.

Hey, good morning, guys or afternoon guys.

Hey, Tyler.

Good afternoon, Tyler.

Hey. 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 has 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 non-accrual 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 hit their goals, but some people exceed their goals and some fall short of goals. So you 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 don’t happen again this year certainly and not reducing that accrual based on what we expect. So it is an art, not a science. And Bud, I’ll see if you can add to that confidence.

Yes. Tyler, I think the biggest thing is 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 of 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’s your incentive payouts are.

And I must – I will say that there’s 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 are – that’s a gross loan oversimplification of our system.

Yes.

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, I mean it was just blowout quarter. You got to pay. So –

Okay. 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, if any, credit plays a factor in that? And I guess part B to that, how much if at all the non-accrual increase factored into the incentive reversal this quarter?

The non-accruals had nothing to do with it.

Okay.

There’s a disqualifier or certainly – it’s certain for the both reduction people and our regional CEOs, this says. the plan says at a certain level of charge-offs, their plan – their payout can be haircut and we did, 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 two non-accrual increases this quarter. Did you give what I guess the existing reserve is for each of these two individual credits that moved to non-accrual or can you give that?

You gave the impairment.

Yes. Like the – first was the balance after the charge-off was 10.4 and the total impairment on that particular loan is 3.7.

Okay.

The second one, the 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%.

Okay.

You don’t take short hand, Tyler.

I was trying to catch it all. And then just –

Bud can talk, he yelled me in a meeting with him all the time, so, slow down Bud, let me write all this down. I don’t take short hand either.

I will slow down next quarter.

He’s relevant.

No. That’s alright. That’s okay. And just last one from me, again, just on the ‘19 outlook you gave, the NIM range at 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 say, I’ll explain that. If we had had an interest – we wouldn’t be at that 3.65% in the fourth quarter without the non-accrual reversal. So with no Fed increases or that I really predicted in the first half of 2019, but 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 pricing loans 30 days to 60 days or more after that, those ain’t deposit rate increases. That’s really what – that’s what really I guess drove the margin down last year. So I’m basing it out, 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.

Okay, alright.

Right now, that’s what we’re anticipating. And if you look like in the fourth quarter, we had all that excess bunch that significantly impacted our margin through.

Yes, okay.

Well, the deposit growth outpaced loan growth, which is not a bad problem to have at the same time.

Sure, absolutely. Now that was clear. Okay, guys. Nice quarter. That’s it from me. Thanks.

Thanks, Tyler.

Thank you, Tyler.

And the next questioner today will be Brad Milsaps with Sandler O’Neill. Please go ahead.

Thanks. It’s actually Peter Ruiz on for Brad.

Hey, Peter. Good afternoon.

Good afternoon. 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’s been any sort of portfolio-wide analysis, and just in terms of looking at if there have 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 you 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, really 25 basis points or so in 2017. So certainly, we are at the very top quality of the range of industry, so we feel really good about that. But we’re 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 – 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’s going to be an agricultural recession, well, how is that going to affect you? We’ll say, well, 3.55% of our loans are agricultural, so that goes into ditch we’re founded. 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 should put our finger on in deterioration.

Okay. That’s it from me. I’ll step back for now.

Thank you.

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.