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Edited Transcript of SFBS earnings conference call or presentation 21-Oct-19 9:15pm GMT

Q3 2019 ServisFirst Bancshares Inc Earnings Call

Birmingham Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of ServisFirst Bancshares Inc earnings conference call or presentation Monday, October 21, 2019 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Davis S. Mange

ServisFirst Bancshares, Inc. - VP IR Accounting Manager

* Henry F. Abbott

ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer

* Thomas Ashford Broughton

ServisFirst Bancshares, Inc. - Chairman, President & CEO

* William M. Foshee

ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Kevin Patrick Fitzsimmons

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Tyler Stafford

Stephens Inc., Research Division - MD

* William Jefferson Wallace

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the ServisFirst Bancshares, Inc. Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Davis Mange, Investor Relations for ServisFirst Bank. Please go ahead.

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Davis S. Mange, ServisFirst Bancshares, Inc. - VP IR Accounting Manager [2]

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Good afternoon, and welcome to our third quarter earnings call. We'll have Tom Broughton, our CEO; and Bud Foshee, our CFO, covering some highlights from the quarter, and we will 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 projection 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.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [3]

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Thank you, Davis, and good afternoon to everybody. Before I jump into the numbers, I would like to mention we elected a new director today, Chris Mettler. Chris Mettler has been on our Charleston Board of Directors. He has a technology background, and we're thrilled to have Chris as a new director of the company. So we think he'll be a -- really a great asset for the bank and the holding company as well. So welcome to Chris, and thank you for joining us.

In regards to the quarter, we were very pleased all in all. The only thing we didn't like, we had a little bit of margin slippage. It was unexpected, and Bud is going to talk about our plans to bring it back up to the 350 basis point range. So that's something we're working on, and I'll mention that later, the flexibility we have on -- given our strong deposit growth.

The loan growth in the third quarter was modest. Our best growth was in Nashville and West Florida. The Birmingham region had some CRE paydowns that affected growth in the quarter, plus we didn't have any large loan closings in the quarter.

The loans are up 10% year-over-year. We do tend to have a lumpiness. Last quarter, we had tremendous loan growth. This quarter, it's just lumpy and that's all I can tell you is, if you ask about the economic outlook and somebody always ask every call, it does seem that clients are more cautious given the trade war with China and the media focus on the economy and I thought about it. We really hadn't gotten many requests to finance new boats and airplanes likely. So that tends to be a sign that people are being a little bit on the cautious side.

Our pipeline is up a good bit over the last quarter. Even that we have a much higher projected payoffs in the fourth quarter than normal and it is around several projects, they are not CRE projects. They are C&I -- they are medical projects. They are going to bond financing. So the flip side of lower interest rates is that people can go to the permanent market with some things that you can't do and when rates are higher. So good for our clients that some of those projects will be back -- most of those projects will be backfilled with new projects they'll start construction on.

So we typically have good closings in the fourth quarter, and we expect that there's no reason we don't expect the same this year. We did add 6 new bankers in the third quarter. We had a great team in Charleston, 3 of them -- 3 bankers and 1 each in 3 Florida cities. So we hired 20 new bankers year-to-date, just an outstanding group of people of new bankers. We have -- excluding trainees, we have 139 bankers total today. We're really proud of the new people we've added this year. We've had substantial upgrades in staff this year. The numbers don't reflect the people that we've added this year. They certainly will in 2020 and 2021. And we've added significant new overhead for these new hires.

I mentioned earlier, we do have a very strong deposit growth, 17% annualized for the quarter and 19% year-over-year. The growth was very broad based this quarter, where 7 of our 10 regions have an outstanding deposit growth. We do have a lot of flexibility to manage our margin. Unlike many other buy-ins. We have -- we've never accepted broker deposits or used a listing service. And we have never had a Federal Home Loan bank advances. So we have substantial excess liquidity. We've been trying to manage it down, but it is a bit of a champagne problem and that's a good thing to have.

One new initiative bud is going to talk about for 2020 would be expense control, something we've never focused on. But we think it's a good time to do so. We'll limit hiring to revenue production personnel in 2020. So we're also going to look at expense control, of vendor cost and look at all of our fees and cost-providing services to our clients.

So I'll now turn it over to Bud to get into more detail on the numbers.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [4]

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Thank you, Tom. Good afternoon. Net interest margin did decrease in the third quarter, went from 3.44% in the second quarter to 3.36% in the third quarter. A couple of factors. Average excess funds increased by $269 million in the third quarter. Also LIBOR-based loans, 30-day LIBOR, we have $879 million in loans tied to that index. That rate is moving ahead of Fed rate cuts. It decreased 17 basis points from June 30 to August 1, decreased 19 basis points from August 2 to September 18 and has since decreased about 15 basis points.

On a positive note, we've lowered deposit rates after the Fed cut rates in July and September. The cost of our interest-bearing DDAs was 1.71% in July, decreased to 1.57% in August, lowered again to 1.49% in September, and our estimate for October is 1.32%.

For October, we see an improvement in margin of $250,000 to $275,000. That will be a 3 to 4 basis point increase in our margin. I have detail on the different components if anyone would like for me to e-mail that to you. Also just as we add $50 million in loans, that will add 2 basis points per margin also.

The ALCO committee will meet on October 23 and will develop a plan to cut deposit rates both with and without a Fed rate cut at the end of the month. A reminder, we have no accretion income related to acquisitions.

Noninterest income. Our credit card income continues to grow, $1.2 million year-to-date increase. And quarter-over-quarter 2019 versus 2018, we increased $454,000. Earlier this year, the bank received an endorsement from American Bankers Association for our correspondent bank agent credit card program, and we've added 16 banks to this program in 2019.

Our mortgage banking income grew $899,000 year-to-date. And quarter-over-quarter 2019 versus 2018, it increased $656,000. In early October, the bank purchased $75 million of bank-owned life insurance. The tax equivalent yield on that insurance is 4.77%. A reminder, we do not sell any government-guaranteed loans to generate noninterest income.

Noninterest expense. We increased our third quarter incentive accrual by $500,000 based on anticipated year-end payouts to new lending teams we've added in 2019. And Tom mentioned, we'll have a new budgeting plan for 2020, a zero-based budgeting plan. This is not a traditional cost-cutting plan. First, you justify what expenses to keep versus what to remove. Second, you consider activities that should be or shouldn't be performed and how they should be performed. One area that we see improved efficiencies in is our wire processing area. And last, budgeting is not connected to prior year spending. It's based on necessary activities.

Loan loss provision. Our third quarter net charge-offs were $8.8 million. $6.2 million were impaired. Unimpaired charge-offs were $2.6 million. We've been proactive on our larger problem credits. Our Chief Credit Officer, Henry Abbott, is on the call and can answer any credit-related questions.

The bank participated in the State of Alabama operated loan guarantee program. This program was terminated in the third quarter. Alabama State Banking Department notified us that this was effective July 31. At that time, we had 76 loans enrolled in the program consisting of roughly $53 million in total loans. ServisFirst is losing $22 million in loan guarantees in favor of a onetime payment of $7.4 million.

Management decided to book the $7.4 million to loan loss reserve, and this was based on potential credit downgrades over the life of this loan portfolio. General loans that had a collateral shortfall and other enhanced risks were enrolled in the program. It required a 1% fee on the commitment. These were loans that would have otherwise not met the bank's lending criteria, thus the credit enhanced -- monetized the bank to land in this situation.

Taxes. Year-to-date tax rate for 2019 is 20.2%, 21.04% without stock option credits of $1.2 million. The tax rate for 2018 was 18.9%, is 20.9% without stock option credits of $2.4 million. Third quarter rate for 2019 was 20.2%, 20.7% without stock option credits of $231,000. Third quarter of 2018, the rate was 19%, 20.3% without stock option credits of $539,000. For the remainder of 2019, projected tax rate is 21.3%.

Shareholder value. Book value excluding unrealized gain on AFS securities is up 16% year-over-year, and book value including the unrealized gain is up 19% year-over-year.

This concludes my comments, and I'll turn the program back over to Tom.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [5]

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Thank you, Bud. We certainly -- from an economic outlook standpoint, we don't see a recession on the horizon, but obviously that's all the focus is. It seems to be from certainly the media. Our thought is, if there is a recession coming, we're well prepared for a recession. We have a very strong balance sheet. We have very strong profitability. I've always -- I've argued with the regulators over the years. Regulators argue that capital is the best defense against losses. And I've always argued that's not true. The best defense against loss is to have a strong stream of income to offset any potential losses. Our nonperforming assets, our balance sheet, our credit quality is pristine. Our nonperforming assets are 0.5% to 1% of assets. So we like where we are if we see a recession. If there is a recession coming, we're just well prepared as any bank in the United States.

So with that, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [2]

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Maybe, Bud, let's start on the margin. So the 3 to 4 basis point increase and you said the different components that you could e-mail us, could we just walk through that on the line here? And how you expect to get that 3 to 4 basis point increase in the margin, particularly given a fourth quarter that's usually a seasonally high liquidity build? And I appreciate the commentary on the deposit cost, but if you could just go over that. I think you said a 1.32% interest-bearing cost for October is what you expect, so a pretty sizable step-down. Did I hear that correctly?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [3]

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Right. That's interest-bearing DDAs. It does not include CDs. But yes, a big decrease. It was 1.49% September. And then after all the rate cuts, we're estimating 1.32% in October. I mean you've got -- let's see. You've got prime loans that reprice immediate -- that's about $1.35 billion prime loans that reset once a month. That's $488 million excess -- our excess funds have decreased so far in October. So that definitely has a positive impact on earnings, fed funds purchased. Of course, we've lowered that rate when Fed cut rates in September.

Don't know how much detail you asked with the each component. And so what current -- when the loans reset -- because you have to really go through like on the prime loans that reset once a month or 30-day LIBOR kind of going through when those would reset in October and then calculating that impact on the margin.

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Tyler Stafford, Stephens Inc., Research Division - MD [4]

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Right. But if we do get an October cut, you would still expect that basis point improvement for the fourth quarter?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [5]

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Yes. Because like when we have our outcome meeting on Wednesday, we'll have a plan to cut rates even with or without a Fed rate cut. It's just something we've got to address. Like Tom said, we really didn't cut enough back in July, and we did a much deeper cut in September after the Fed cut on the 18th. I mean excess funds is really the key. I mean it's -- that is decreasing and that's kind of what's -- when it goes up $269 million in third quarter, we didn't forecast that. And that has a big impact on your -- on the margin.

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Tyler Stafford, Stephens Inc., Research Division - MD [6]

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Right. But isn't seasonally fourth quarter pretty high from a liquidity standpoint if I go back the last several years? Would you expect something different for this year?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [7]

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Well, I guess, what we would anticipate probably is higher loan growth. I mean I think that's traditionally a higher loan and that's -- if you look at where we are from a budget standpoint, we're well behind the loan. So I think we'll have a stronger fourth quarter from a loan growth standpoint. This is more -- I mean based on historical data, we would need a loan growth.

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Tyler Stafford, Stephens Inc., Research Division - MD [8]

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Just last for me on the margin. Do you have what the 9/30 total -- or September 30 total deposit cost was?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [9]

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Yes. Total was 1.12% for total cost.

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Tyler Stafford, Stephens Inc., Research Division - MD [10]

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Okay. Got it. And then maybe just shifting gears over to credit. A couple of questions there. So the $14 million increase in the nonaccruals, can you just talk about how many loans, what type of loans were included in that increase? And then on the $22 million of loans that you lost to guarantee, what was the status of those loans from a credit rating standpoint at this point at 9/30?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [11]

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Yes. Henry Abbott, our Chief Credit -- he's going to talk about those components.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [12]

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Yes. And I'll hit the loan loss guarantee program question first. The status of that pool was, as Bud mentioned, those were typically, I guess, I'd say, collateral-light loans. But to date our loan loss on that pool has been very minimal and all the loans were current at the end of -- well, I guess, all but one relationship was current at the end of the quarter. But other than that, all loans were current except for one relationship. The primary driver in the increase in nonaccruals -- of the increase roughly $10 million was associated with one credit that is a rural hospital system out of our Nashville market and that was the primary driver of the jump in nonaccrual.

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Tyler Stafford, Stephens Inc., Research Division - MD [13]

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Okay. And then just lastly from me just on the FDIC credit just to make sure I'm clear. So the $1.7 million credit you got this quarter, would you expect the run rate of that to -- in the fourth quarter and go forward to flip back towards kind of your historical FDIC insurance expense?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [14]

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Right. It will. Yes. From what we gather, that will be a normal expense, I guess, you would say, in the fourth quarter.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [15]

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Tyler is very confusing. This is Tom. We've gotten some -- the indication we got from the -- really primarily from the American Bankers Association is that you could expect a credit for the fourth quarter equal to half of what you got in the third quarter. So that's -- I don't understand why there can't be more specificity around this number, but nevertheless, maybe you can find out. We can't seem to find out a whole lot.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [16]

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It's a moving target. And even if we do have excess liquidity build in the fourth quarter, you can assume that from a margin standpoint, it'll neither add to or take away from earnings. It'll be revenue-neutral. So hopefully.

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Operator [17]

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Our next question will come from Brad Milsaps with Sandler O'Neill.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [18]

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Bud, I appreciate all the color on the NIM. Maybe just want to talk about the other side of the balance sheet. Loan yields, I guess, were down 6 basis points or so linked quarter. Just kind of curious if that would be kind of what you might expect in the third quarter and then maybe if we also get an October cut and just kind of how that compares to kind of what new loan yields are as they come on the books. And then to the extent you guys have loan floors, how might that protect you?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [19]

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Yes. Let me talk about floors first. We have $1.4 billion -- of floating rate. We got $3.1 billion in floating rate loans, variable rate loans. $1.4 billion has floors, 46%. Rate floor -- well, or the loan rate equal the floor rate at the end of September, that increased to $518 million. It was $265 million at the end of June. So with 2 Fed rate cuts, that had a big impact. The -- let's see. Let me look at the -- loan yields went down a little bit in September. Some of it had to do with a couple of lower rate credits, just had a lower loan yield because it was $516 million in July, $519 million in August, $481 million in September. But I'll say, like, $510 million to $515 million is our normal run rate on new loans.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [20]

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Nonaccrual affected. Nonaccrual status on the rural health care credits is the primary reason for the drop in the loan yield.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [21]

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Yes. We had a cut -- we had some nonaccrual reversals in the third quarter.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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Got it. Got it. And you said 46% of the loans that have floors are at the floors. Is that what I heard?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [23]

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No. 46% of our variable rate portfolio has a floor rate.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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Okay. Got it. And then it was $500-some-odd million?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [25]

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Yes. $518 million is at the floor rate at the end of September.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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Okay. All right. Great. And then just to follow up on expenses. I know you guys are probably in the budget process right now. Last couple of years, you guys have kind of been up high single digits, tracking maybe closer to double digits this year. I know it's early, but is this something that you think you can kind of hold to kind of mid-single-digit growth in 2020 or you guys are really efficient? So is there much room to cut, so to speak, or pull back?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [27]

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Yes. Brad, we're going to look hard at every expense. And we're really looking hard at our vendors. We're going to ask every vendor to partner with us and help us drive the payer expenses. So we think it's an achievable -- very achievable goal, Brad. Certainly, we're continuing to look at adding a revenue production personnel like we always have. We added a lot this year. We've added -- again, the 20 people we've added, significant new overhead, but we think they'll pay off for us in next year 2020. So we would like to draw the line on the overhead and try to have a really good year. If we're not satisfied with where we are this year, this is not our standard of performance. So we're certainly not satisfied, and we're sending the message throughout our company that this is not satisfactory performance.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

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And typically you guys have an adjustment in the fourth quarter particularly on personnel. I mean it sounds like you got a pretty full accrual in the third quarter. Does that take a step back in the fourth as you kind of true things up?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [29]

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Well, we hope we pay out more than we've got accrued, Brad. That will be good news if we do. But certainly, management accrual -- bonus accruals are going to be down from last year, I can tell you that, because we just haven't had the kind of year that we want to have.

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Operator [30]

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Our next question will come from Kevin Fitzsimmons with D.A. Davidson.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [31]

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Just to follow up on Brad's question. I just wanted to make sure I heard it right. I thought when you were initially describing the cost-cutting focus was that you were going to hold off on new hires. You were going to -- but then I thought I just heard you say you were going to continue with hiring of revenue producers. So I just wanted to clarify that, number one.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [32]

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Yes. I mean we'll continue to hire revenue production people, Kevin. But certainly, they're going to need to be slam dunks. They're going to need to pay for themselves very quickly. How about that?

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [33]

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And, Tom, what is that focus, say, about your willingness to look at new markets? And does make it less likely you would be entering a new market by entering -- hiring a team? Or is it -- it just depends what falls on your lap?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [34]

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Yes. I mean we look -- we talk to people all the time. I mean we talk to people at least monthly, talk to a group somewhere. So we're certainly not going to rule out expansion to a new market at all. They are not -- there's a point they're not -- they don't have a big effect almost in terms of -- but most part, when we open new market, our startup losses are going to be over an 18-month period about $2 million. I don't think that's going to make us or break us. I don't mean to minimize $2 million, but certainly we're open to new opportunities as we always have been, but we certainly have more of a laser focus on we need to meet profitability more quickly. And we want our managers to make -- to rationalize their resources. So they need to do with what they've got. If they want to bring on somebody new, then they -- we need to rationalize the resources we have on hand today.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [35]

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Okay. And that's great. And then just on the whole decision process of looking at cost cuts and with this increased focus, is it more due to the lower margin environment we're dealing? Or is it more looking ahead potentially? I know you said you feel very good about credit, but is it more to be prepared if we have a downturn? Or is it a little of both?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [36]

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No. We're not getting ready for a recession in that respect. It's just -- it's a reaction to the kind of year we've had, which is this year has not been a double-digit earnings increase, and that's the kind of year we expect. And we're going -- this probably sends a pretty good message to everybody that this is not acceptable. This is not acceptable performance, and that's purely a reaction to that, Kevin.

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Operator [37]

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

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [38]

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I was hoping maybe we could dig in a little bit more on credit. So first off, on the -- you mentioned there was a $10 million hospital facility, I believe you said, in Nashville that drove the third quarter increase.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [39]

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Yes. It's out of our Nashville office. Yes, that's the primary driver in nonaccrual.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [40]

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It's the same credit we've been talking about for a while, and it was going to be a liquidation sale of assets. And then we've gotten in [unscraped] with unsecured creditors who hired a lawyer from New Jersey to represent them. So we're fighting over the money. There's a pot of money. We just can't get to it until we have some final resolution through the bankruptcy judge. But go ahead. Go ahead, Wally.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [41]

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Was there a charge-off associated with this last year in the third quarter?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [42]

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Last year in the third quarter?

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [43]

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Yes.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [44]

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No.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [45]

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No.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [46]

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We had a charge this quarter.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [47]

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Okay. So what was the charge this quarter for that credit?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [48]

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Charge associated with that -- this credit this quarter was roughly $2 million.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [49]

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And then last year in the fourth quarter, your nonaccruals jumped up a little over $10 million and then they kind of sat. So it just feels like they're kind of coming in and then sitting. Was that one credit last quarter? Or was that a couple of credits? And can you talk about why it feels like they are sitting or suggest that they've moved off and others have come on?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [50]

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I don't remember specifically the fourth quarter. I have to follow up on that. I think it's a combination of both. I mean we are being proactive in removing credits. I mean, for instance, one of the drivers of the increase in net charge-offs was we sold a loan that had been on nonaccrual for quite some time, and we did take a loss on it. But we had very impaired to almost what our loss was. But we just felt like we need to sell it and that was roughly 30% of our net charge-offs for that quarter. So I mean I do think we're actively working on through the cycle if that's what your question was.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [51]

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There is a C&I credit that is pretty good. The next largest one is the C&I credit that will be -- we should have some resolution on starting this week. So -- but it's being going through the bankruptcy process. Anything that's filed bankruptcy, it takes forever, Wally.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

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Understood. I guess the reason I'm just digging in is because last year third quarter, your nonaccrual loans were just over $9 million and now we're approaching $36 million. And I understand that your NPAs are still relatively low, but that's a pretty big jump in 4 quarters. So I'm just trying to get a sense as to whether we're seeing any increase in inflows or anything outside of just a couple of one-offs or larger credits that are going bad. So I know your commentary is always that you're not seeing any signs of stress in the system. So I'm just trying to get a sense of why the big jump over fourth quarter.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [53]

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Yes. I mean, like you said, roughly $10 million of that was one credit we moved this quarter. And Tom mentioned our second largest NPA is one we're hoping to get some additional resolution through bankruptcy this week and get some paydowns on that credit.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [54]

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Okay. All right. And so -- and you mentioned, Tom, that there was one that moved off in the third quarter as well?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [55]

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This is Henry Abbott, and yes, I did mention we sold a credit and so it reduced nonaccruals accordingly this -- in the third quarter.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [56]

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It was assisted-living facility.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [57]

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Well, roughly, it was a $5 million credit and we had it roughly impaired by half and that was close to what we sold the debt for.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [58]

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So that reduced nonaccruals by $2.5 million. Is that what you are saying?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [59]

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Net. Yes.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [60]

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We had it impaired for half.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [61]

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Okay. All right. And then you had -- if I understand correctly, you received a $7.4 million payment to -- in the guaranteed program and you applied that entire $7.4 million to the reserves balance through the provision expense.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [62]

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Yes. Correct. And actually, one of our nonaccrual loans is in that pool, the one credit that has some pretty serious issues with it. But we've obviously identified that. And I'm looking at the nonperforming asset list at September 30, and I don't see anything on here that was in the nonaccrual last year, Wally. If there is, they're small. What I'm saying, there might be something for $250,000.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [63]

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But things aren't sitting?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [64]

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No, there is not anything. We move -- the good thing about C&I credits, they get in trouble fast and they get out of trouble. They resolve themselves fairly quickly. We found out during the recession that some of those real estate deals just take -- they just are like a tar baby, they just stay forever on your books, can't get rid of them.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [65]

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Yes. Okay. That's helpful. So on the provision expense, had you not moved that payment into your reserves, you would have a negative provision expense. So you would have been releasing reserves pretty substantially?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [66]

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Yes. We would have.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [67]

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So what would have been driving that release? Are you changing your -- any assumptions in the FAS 5 model?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [68]

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Well, we got this payment. This payment was not completely a bad thing. It's $7.4 million that we received.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [69]

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Okay. So there's no changes or anything on the assumptions in the underlying model?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [70]

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No. I mean you had lower loan growth. Is that what you mean? Didn't have to provide that much for loan growth, something like that.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [71]

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Yes. I'm just trying to get a sense of...

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [72]

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Yes. That would definitely have had an impact on what we put in the reserve for the quarter.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [73]

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Okay. Okay. And one last question on the FDIC reimbursement. Do you -- some banks have told us that they think there's going to be some reimbursement in the first quarter as well. Is that consistent with what you heard or no? Or do you not know?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [74]

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We've heard different stories. We're going to wait and see. The FDIC, half of what you got in the third quarter, you're getting in the fourth quarter and that should be according to them. But I've heard -- yes, there is quite such a mystery, I don't know, Wally.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [75]

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Yes. It's really confusing when the fund gets to a certain level what they do. I just -- we'll wait until we get it and then we'll book it.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [76]

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Quite frankly, I don't want to have a credit. I'd rather just people keep paying at a reduced rate. If you think about it, the banks that -- I don't want to have people not have to make payments. The people that -- the banks, they could pay or they don't, they need to be making a payment all the way up to when they fail. So I'd rather solve this, be paying at a reduced rate. But if they didn't -- the FDIC did not ask my opinion.

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Operator [77]

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(Operator Instructions) At this time, there are no further questions in the question queue, and this will conclude today's question-and-answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect.