Q4 2020 ServisFirst Bancshares Inc Earnings Call
[music].
Good day and welcome to the service first Bancshares incorporated fourth quarter earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being.
Our recorded I would now like to turn the conference over to Mr. Davis Mange. Please go ahead Sir.
Good afternoon, and welcome to our fourth quarter earnings call, we will have Tom Broughton, our CEO Bud Foshee, our CFO and Henry Abbott Chief Credit officer, covering some highlights from the quarter and then we'll take your questions.
I'll now cover on forward looking statements disclosure.
Some of the discussion on 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 day. They are made on service versus assumes no duty to update them with that I'll turn the call over to Tom. Thank you Davis and good afternoon welcome to our <unk>.
Year end.
Conference call earnings call.
You don't go on back on time last March.
If you had asked me if I thought we would report record earnings for 2020.
Certainly would have said I feel fairly certain we will not reported record orange with a looming pandemic in front of us. So we are very pleased to be able to report record earnings I think it speaks very well for the quality of our team.
In our asset quality.
Our credit quality has never been stronger.
As Henry Abbott, our Chief Credit Officer will discuss in more detail in a few minutes.
Our deposits grew about two and a half billion.
In the past year or.
33% increase or very large deposit surge because of the pandemic.
We are beginning the transition to $10 billion bank and we've been planning this for several years. The pandemic just sped up the time line a bit.
Have all the infrastructure in place to make the transition.
Our regulators have been very proactive with working on us to ensure a smooth transition and our chief risk officer, Mark Mcvay has done an outstanding job.
The pandemic helped us transition quickly to new technology and.
And showed us we really don't need as much brick and mortar as we have even at a buy.
Our branch light model like ours.
It is also our clients transition more quickly as well.
We are very fortunate to be based entirely on the southeast.
Where we have had very few shutdowns in less affected customers.
And in other parts of the country.
Our unemployment rate is good bit lower.
Mobile workers have jobs in our economy is a much better shape.
We are seeing on large migration into our footprint and we expect it to continue.
I've always said that given a choice between a bad bank and a good market or a good bike in a bad market I would pick the bad bank and a good market as we can fix a bad bank, but we cannot fix a bad market.
Talk a little bit on loan growth.
For the quarter, particularly we.
We did see 6% annualized growth in the fourth quarter I thought it would be a bit higher than that.
We did not I did not anticipate there is the fear of higher tax rates capital gains rates led several customers to sell their companies and other assets to lock in the.
The current rates we.
We also launched a few loans on rate and structure, we continue to emphasize being a discipline.
<unk>.
Our credit quality was evident in the 2008 and 2010 recession has proven again to be be the same in 2020.
The loan pipeline is off a bit from October, but we are starting to see some projects.
<unk> been on whole starting to move forward.
We just lost a chunk of the year to the pandemic on the loan side.
Line utilization is still at historically low levels, we've had a very modest rebound to recap before the pandemic are.
C&I line utilization was around 49% net fail to 37% and is back up to 38, 5%.
At the end of this quarter.
I do expect the line utilizations to rebound over the next year or so supply chains are not rebuilt for our clients their inventories are still very low risk.
Starting to see some price increase on steel lumber, which will lead to higher inventories as well for our customers.
Our legacy offices with the largest market share had the most pay downs, which is obviously.
Very obvious you would have debt. So the newer regions had very less business on the books and had less pay downs from the line utilization drop.
We do expect significant loan opportunities going forward for several reasons. One is we made many triple P loans to clients of other bi it will transition their banking to us.
In addition, we have had many who've had a bad experience another bind with triple play and plan to move their banking to us after their loan forgiveness.
Is done.
Also.
Many banks closed their offices and we're working remotely and not returning client cost, which led to a number of dissatisfied clients lately to new client opportunities for service first.
We also expect substantial growth in construction loans loan draws in the next year and we do combine that with the line utilization rebound should lead to some natural loan growth.
Even without any organic loan growth for should we expect as well.
To mentioned, where we are on the new round of the Triple T program. We just got a few days in it.
We did start to last Tuesday, So we've had less than a.
We as of this morning.
So we expect that we will have demand of about 25% to 35%.
The last <unk>.
Round of Av.
Triple pay we did have I think we've made of almost 5000 loans and a 1 billion per.
<unk> million dollars in loans last year in that program.
So obviously there is more needs based this time, so we are seeing.
Lower volumes, but the fee.
The actual fee.
<unk> income is slightly higher.
We do see lower expenses to deliver on this program with less overtime and other expenses.
I'm going to stop there now I will turn it over to Henry Abbott for a credit update Henry Thank you Tom.
I am pleased with the bank fourth quarter results and how the banks loan portfolio informed throughout the pandemic and optimistic how we're positioned for 2021 and beyond.
Total past dues to loan was 11 basis points, which is roughly $9 million and that's on par with the third Corps third quarter, which is near historic lows nonperforming assets were $25 $5 million on the total loan portfolio eight 5 billion.
The $25 million in NPA is an $8 million reduction from the third quarter and an $18 $8 million reduction from year end 2019.
These resulted in NPA to total assets of 21 basis points, which is an eight basis point reduction from the third quarter and a 29 basis point reduction for over half from the same period in the prior year I'm proud to say past due to total assets and nonperforming assets total assets have.
Not been this low since 2015 as.
As referenced asset quality improved which leads me to be optimistic about our outlook in these uncertain times.
We did have roughly $9 million in charge offs for the quarter as we have historically referenced we are proactive in our credit servicing and take appropriate actions as needed on credit in the fourth quarter.
The overwhelming majority of these charge offs, we took in the fourth quarter were related to previously impaired loans to the specific charge offs. We took in the fourth quarter were related to borrower misrepresentations on C&I relationship and these charges accounted for just over half of the charge offs for the quarter and I'd also note the chart.
<unk> were down from our third quarter results.
We have grown our <unk> by over $11 million in the past year as of year end, our <unk> loans.
1.0 for however, excluding PPP from total loans are <unk> to total loans was one six which is higher than we've been at a year end and roughly 10 years as we move to the <unk> calculation in 2020, the difference between the amount of credit losses allowance required under our incurred losses.
Methodology and amount required under the <unk> methodology resulted in a $2 million reduction, which we've shown in our fourth quarter results.
Net pass back to you Tom.
Thank you Henry Thank you for that update I will now turn it over to Bud Foshee, our Chief financial Officer for financial update.
Thank you Tom and good afternoon net interest margin for the fourth quarter was 327 versus three one for the third quarter.
The adjusted margin was 323.
<unk>, the average ship or pay balances of one point or $1 billion.
Triple pay interest and loan fees of $10 1 million.
The adjusted margin for the third quarter was $3 two five the average PPP balances were 105 billion and triple pay interest and fees were $6 6 million.
Adjusted margin was 336, excluding the increase in excess funds of $311 million in it.
Third quarter adjusted margin was 333.
With an increase in average excess funds for $610 million.
The remaining net triple T deferred fees $12 31 in 20 or $17 8 million.
CD maturities for 2021.
Our $530 million.
Wondered $37 million in the first quarter.
Average rate is one to five.
And it's 133 for the first quarter maturities.
We expect the majority of the day to reprice it for.
For <unk> or below.
The re pricing so in the $2 three.
$3 million annual expense reduction.
Just the first quarter maturities will reduce annual expenses by $1.1 million.
For today's cost of interest bearing deposits has decreased it was 0.58 in the third quarter.
And for for in the fourth quarter.
And the last deposit rate cut that we made was on November 23rd.
End of the year deposit comps total deposits was <unk> two eight.
Total interest bearing DDA was <unk> five.
Total interest bearing deposits was <unk> three nine.
Just for minor would have no accretion income related to acquisitions.
Liquidity.
Excess funds were 600 million when we started funding to triple paid loans in April of 2020.
For the end of the year on the excess funds were $2 1 billion.
For non interest income.
Credit card spend.
$168 4 million in the fourth quarter versus 151 4 million in the third quarter.
Total year, guys spend for 2020 with $601 million.
And in 2019 that was $515 million.
Credit card net income we made on an accrual adjustment of 870000 in the fourth quarter related to rebates.
So fourth quarter net would have been on 178 million actual was 913000 versus one 8 million in the third quarter.
Merchant services fee income year to date.
Income is 565000 <unk>.
<unk> 460002 thousand 19.
And we've got two officers dedicated to sell on the service.
Mortgage income in fourth quarter, $3 1 million.
Versus $2 5 million in the third quarter.
The Durbin Amendment.
That has changed that would take effect for us on July one.
2022.
I anticipate it allows for revenues around 950000.
And just a reminder, we do not sell any government guaranteed loans to generate noninterest income.
Noninterest expense total producers.
The end of 2019 were 139.
The end of 2020 133.
And in total employees.
12, 31, $19 five for <unk>.
End of 2020, it was 499.
Total noninterest expenses when you adjust for triple pay expenses.
The Triple P fast we deferral on our expenses in the first quarter they were $27 2 million.
Second quarter 'twenty six for.
Third quarter.
$26 two.
Increased to $28 4 million in the fourth quarter.
Increase in the fourth quarter several components.
The fourth quarter expense for reserve for unfunded commitments was $1 2 million.
The increase was due to portfolio line utilization.
Decrease from 52, 7% at 12 31 19.
To 47, 8% at 12 31 'twenty.
Salaries increased to 116000.
We had new hires in Nashville, and West Florida.
It opened a new office in Venice, Florida, but we also closed an Atlanta office.
We will review potential closing two.
Two additional offices when their current leases leases expire.
Problem credit expense increased 236000.
We also had triple pay expenses round one expenses.
209000.
And round two.
50000.
The bank's tier one leverage ratio was 8.7.
75%.
At 12, 31, 'twenty well above 8%.
Minimum required by the regulators.
Earnings retention for 2020 was 77, 6%.
Taxes quarterback tax rate for 2020 was $22 one.
The fourth quarter 2019 was 21.
Year to date 2020 day rates 27.
The year to date rate for 2019 was $20 one.
And the projected tax rate for 2021 is 23%.
This concludes my comments on alternative program back over to Tom. Thank you Budd.
For a couple more things before we take questions. One I'll talk to you might be interested in them and a COVID-19 update.
Right.
<unk>, we took all for caution is early on and continue to do so.
We work remotely.
<unk> required mask.
We use barriers.
Plexiglass and other things. We've also had many redundant systems, which is fragrance.
Very beneficial I checked with our <unk>.
Last week and.
17% of our employees have tested positive for Covid.
A total of 57% have either been say had been out due to exposure or quarantine for other reasons. So we continue to operate the bank, even though over half of our employees, who have been out for on one rates or another.
None of our employees have been hospitalized.
And we really learn the most of them non optics fit to work remotely.
So thats been certainly helpful to operating the bi.
We don't think we've had I think with some employees go to lunch together and Thats, probably how there's probably been some inner office transmission is just people, leaving together and go into launch.
Most of the stores out here for <unk>.
They went to awaiting they went to a social event.
They went to a large family.
Given our Christmas function, so holiday function of some kind so anyway that share your update.
On Covid.
So we're fortunate that we pushed through that with other one being hospitalized here and here in the office.
As Bud mentioned, we did open our new office in Venice, Florida.
Last week when experienced team as we added West Florida region.
We're also opening a new Footwall Beach office this year and one in <unk> South Carolina.
We continue to look at SaaS and.
How many offices, we need we do continue to.
Opening new offices.
We are optimistic about our growth prospects as Bud mentioned, we had a number of.
Very fine officers, Joe on us in the fourth quarter not a large number.
We have much higher quality offices, where officers were adding to our biking ranks.
<unk>.
Again, the bank mergers are very helpful for us both for hiring new bankers and obtaining new clients.
The pandemic deposit surge will allow us to grow quality loans as we currently have over $2 billion on deposit at the federal reserve on a 10 basis points.
So again, we strive to be a disciplined growth company that sets high standards for performance.
We will be happy to answer any questions you have thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
And our first question will come from Brad Millsaps with Piper Sandler. Please go ahead.
Hey, guys.
Hi, Brian.
Tom I appreciate your optimism around.
Loan growth just kind of curious would you expect kind of with what you have on for everybody can kind of get back to that.
Sort of low double digit.
Maybe even higher growth rate that you guys are experiencing in the past or do you think that's more of a.
Second half 'twenty, one into 'twenty, two kind of proposition.
That's a really good question Brad on the timing of when does the.
The rebound in loan demand.
The line utilization, we think will bounce back, but I couldnt say that it's going to be evenly over the next four quarters right that would be that would be.
Speculative on my part.
Construction on blood draws we Havent fair.
Pipeline of construction on all dry draws that will happen this year.
Add to the.
Added it to our loan growth. So I feel good about that that part I just the line utilization I don't know exactly when we'll see the rebound debt that I would expect there Brad but.
The pipeline's never.
Never really strong in the in the first quarter, because we close everything we can get close by year end right. That's for for incentive purposes, everybody wants to get the deals closed by the fourth quarter. All our bankers do so the first quarter is always a little on the slam side, So I would expect to pick up.
A good bit on the second second third and fourth quarter Brad.
Two things.
We're on the throes of Triple pay.
Current program right now so that's sort of got our.
Nobody is out doing a prospect on right now we're trying to make sure all our clients needs are taken care of.
First of all and also.
We're still a pandemic.
Companies moving their banking to us, let's say, yes, we're going on do it but when we get through the pandemic when we get through a loan forgiveness on our existing bank. So moving their banking is not top of mind right now for our customers. So that when a little bit of time I think to get this pandemic behind us perhaps.
And Tom for the.
Both debt you are seeing what types of rates are you seeing on the new loan originations that are coming on.
Hi, Brad, but with phase I would say, we're getting for on a quarter.
On new deals.
Okay, Great and then maybe just another follow up.
Obviously your liquidity.
<unk> continues to be.
A big headwind for the margin.
Kind of curious are you guys going to kind of hold that kind of wait for the loan growth to come would you increase the bond book at all just kind of trying to get a sense of kind.
Kind of how you're thinking about that that big liquidity.
Bucket that you've got on the balance sheet right now.
Well, we like to try but.
Handbags up everything so there's really nothing to buy.
Lucky for you breakeven every month about what pays down on mortgage backs you can you can buy.
It would be hard to build it up by that much just based on whats out there from an inventory standpoint right now.
Okay, Great I'll hop back in queue.
Thank you.
Again, if you have a question. Please press Star then one our next question will come from Kevin Fitzsimmons with D. A Davidson. Please go ahead.
Hey, good afternoon, everyone.
Hey, Curt.
Just.
Just curious it sounds like everything is going in the right direction in terms of credit and you guys. All feel comfortable I'm wondering what youre seeing.
In terms of migration into criticized and classifieds weather.
Any other big decline, we've seen in deferrals has migrated to.
For those categories yet thanks.
No I mean, I think for the year, we were up in criticized assets for the quarter, we were down in the fourth quarter on our criticized assets.
As folks got off of the deferrals. They started making payments again, we haven't increased DDR, if they're continuing to pay.
For the quarter, we did see a decrease.
As of 12, 31, 2019, we werent the pandemic. So they are up for the year.
Yes, I think.
Kevin.
Very very few of our credit problems are behind the day with the pandemic I mean, there are some I mean.
But probably.
But Andrew wood, five or 10% of our problem credit space tied to the pandemic the damage from the pandemic for that big yes.
From a loss perspective that I can really only harp on one and that was when we talked about last quarter. It rightly impacts but other than that these are neither existing credits we've just been working through.
That's really our that's great credit high credit problems have really nothing to do with the pandemic. So.
Yeah Okay.
Sure.
Is it fair to say, though you're are you taking a more not more proactive but are you taking a deliberate approach because of the pandemic to work those through the pipe a little quicker than you might if you didn't have the pandemic looming out there for.
We are Kevin is just a good time to take a hard look, especially.
The fourth quarter, you don't want to.
You don't want to carry something over from year to year that has any sort of loss potential in it right. So.
He was a former examiner would not appreciate us doing that if we were.
So.
We are we try to be.
Fairly aggressive.
Days and looking at everything out.
Out there.
It's a good time to.
Go ahead, David on the problem.
Sounds very reasonable to me.
Can you.
But I appreciate all the numbers on PPP some of those were coming kind of quick if you.
How should we look at the timing of.
The forgiveness on what's what's remaining on round, one and the recognition of the fees in <unk>.
Over the next few quarters will it all occur in the first quarter will it be spread between the next two quarters and then.
Do you feel.
Likewise on round two do you think that is basically all buttoned up by the end of this quarter.
In terms of the timing on that.
Yes.
The current pay.
Triple T.
It's spread throughout the year.
I know it's.
A little bit elevated more than the.
Probably in the first half.
Of the year. So we anticipate you had very for 17.
$17 million lift or SMT for 8 million. So essentially all of that will play out we don't.
We say it might be just a small amount left maybe at the end of.
2021, but.
As far as the phase I would say, it's more first half weighted.
They round I really don't.
On the <unk>.
I don't have any feel for yet.
Too early.
Thank you.
Thank you Paul.
We think it all be paid off on this.
This calendar year, we think but I can't tell you the timing.
And just to dovetail on Brad's question on the excess liquidity. So you've already got this very excess liquid.
Liquid position, but its in it likely now to get.
Even even more elevated because now you basically are getting cash coming from the SBA on ground one in and then.
Is your expectation that I know, there's limited amount of what you can do with it but do you expect some of it to some of the deposits that are related to PPP to go away once ppp's for Devon.
That that would be our assumption is that there is.
We will see.
Deposits migrate out at some point, but we are projecting net deposit growth for this for this year. So.
Each of our regions, while we roll up there.
Their numbers into our own and so they are optimistic that continue to grow their balance sheets.
We named five some loans.
Right understood Alright, guys. Thanks very much. Thank you. Thank you.
Again, if you have a question. Please press Star then one our next question will come from William Wallace with Raymond James. Please go ahead.
Thanks, Good evening guys.
So Tom in your prepared remarks, you mentioned crossing over 10 billion, which we generally assume comes with elevated costs around the compliance side of the business.
You also mentioned that the pandemic <unk> learned that the branch network is not as necessary. Even I believe you said even for a branch light network like yours can you talk a little bit about the push and pull.
The potential cost pressures from going over $10 billion and what relief valves. You may have on on the branch side or whatever other side. There is and then maybe just kind of help us think about where we end up.
So.
From an expense per.
Aspect.
I'll, let bud address most of the question Wally.
We are looking at branch rationalization as we opened new branches, we're going to always be.
Say on working.
Be more efficient and.
We think there are opportunities as leases come up it takes a little bit of time, but we've got a couple of offices, where we think we can can consolidate.
We are obviously consolidating one in Atlanta for agent.
Starting in March it'll be close.
Valvate add for our efficiency a little bit but.
It's called me a noisy year, because we're going through the system conversion and I'll, let bud refer to that in from it also.
Overall, our question of expenses owned on compliance. So go ahead, but.
Yes.
Well on the compliance.
The regulators have really been working on with us for several years on what we would.
Needs. So we don't see.
And elevated.
Expense from a compliance on we feel like we are.
For.
Pretty well staffed in that area.
Really on the system conversion the system conversion will take place.
We will phase out and starting in.
February so really you've got elevated costs from our.
Current provider because we're under short term.
<unk> with them and then the.
The cost for the new system will only be there for a couple of months. This year. So you will have elevated expenses. This year, but we will have a lower <unk> expense next year with the with the within day provider.
Going back to compliance I mean, we're just not.
Consumer Bank, I think Thats, where.
On a lot of banks have increased expenses as they cross 10 billion on it.
That's just something we don't have to.
Worry about per month.
From that side as far as staffing and infrastructure.
Okay, and maybe just trying to put a bow on this.
Did about I don't know its like eight or 9%.
Growth in your expense in 2020 do you think that the growth is.
At that range in 'twenty, one is it above that or do you think that <unk> got opportunities to slow that.
Gross down.
I would say it is still going to be that range, mainly because of the elevated on expenses.
Okay.
And then just one housekeeping question.
I didn't find it in any way I mean, it was probably somewhere but what was the period end.
PPP balance.
So.
$900 million.
Okay. Thank you.
<unk>, which you asked what's the balance I didn't hear that yes, yes, yes.
The year.
So I got the average I just didn't get the Kenny.
Thank you guys.
Thanks, a lot. Thank you. Thank you Ron.
This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
Thank you.
Okay.
Okay.
[music].