Q1 2021 ServisFirst Bancshares Inc Earnings Call
[music].
Good afternoon, and welcome to the service first Bancshares, Inc. First quarter earnings Conference call, all participants will be in listen only mode true.
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Ask a question you May press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ed Woodie Controller. Please go ahead.
Good afternoon, and welcome to our first quarter earnings call, we will have Tom Rone, RCM Bud Foshee, our CFO and Henry Abbott is our chief credit officer, covering some highlights from the quarter.
And then we will take your questions.
Some other discussions during our calls.
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 in service for snakes assumes no duty to update them.
With that I'll turn the call over to Tom Good afternoon.
We're very pleased with our quarter and we're glad you could join us on our call today, we do.
We continue to see rapid improvement in the southeastern United States economy.
Supply chains are still not rebuild.
On line utilization has not improved.
During the first quarter.
And I think we're seeing inflation in a lot of our customers are reporting large inflation in material cost.
And so that should lead to line utilization improvement as the year goes on.
Yeah.
Ill talk one diversified manufacturer wholesaler last week.
So to everyone as gouging, everyone out there and I know that day.
There is a shortage of labor in most every industry today.
The unemployment rates on our site.
For 7%.
In February and we are seeing improvement monthly in that number.
And I can only recall one first quarter of any of our 16 years, where we had any reasonable loan growth in the first quarter and certainly this year efficiency normal pattern of.
We did have a little bit of growth in the quarter, but one of our largest clients and seasonal pay downs that offset the growth in the non pay for a big loan balance.
As I've mentioned before we have not seen that utilization the line utilization rebound as of yet, but do expect improvement for the rest of the year.
And talking about our loan pipeline on our loan pipeline at record levels.
At the end of.
March beginning of April.
Our 90 day pipeline has doubled since January and we do expect significant loan growth in the second quarter.
Close expected fundings as well as draws on construction loans.
And while our pipeline is not exact and you do have unexpected expected pay offs. This is the highest.
Pipeline in the last 12 quarters by over $300 million.
Our goal for the year is to replace our triple pay loans with other loans by year end.
Bud Foshee will give will triple pay program update in a few minutes after Henry Abbott. So I do feel confident we'll see loan growth this year.
We do continue to see more opportunity due to mergers.
Our performance was triple pay and attracting new clients and incumbent banks for performance with Triple T.
Based on pent up demand.
We do see continued improvement in our footprint.
On the deposit side, we do continue to attract deposits.
With annualized growth of 24% on the first quarter.
The growth has been very broad across the entire company.
While the industry does have substantial liquidity day as our mind does we do feel confident core deposits will add value over time.
New account openness is steadily improved over the past six months and we're very very high on the month of March.
So that I'm going to stop and turn it over to Henry Abbott talk about credit quality. Thank you Tom.
I'm extremely pleased with our first quarter results and our banks credit quality, our numbers generally speak for themself. So I'll give a few key metrics and hit the high point non performing assets were down to under $20 million on a total loan portfolio of $8 5 billion to $19 $9 million in NPA.
Is it $5 $5 million reduction from the fourth quarter roughly at $21 million reduction from the first quarter of 2020.
This results in NPA to total assets of 16 basis points, which is a five basis point reduction from Q4, and 28 basis point reduction from the same period in the prior year.
A key driver and a reduction in npa's with various sales from our Oreo portfolio to bring it to its lowest level in more than 10 years now $2 million balance in our Oreo is 68% drop from year end, our core key credit metrics have not been this low since two.
15, as you referenced our continued exceptional asset quality and strong balance sheet lead me to be optimistic about our bank future.
This NPA reduction was not achieved at the expense of the income statement as we had extremely minimal charge offs in the first quarter net $487000 of net charge offs to average loans for the first quarter on an annualized basis for two basis points versus 41 basis points in the fourth quarter.
And 26 basis points in the first quarter of 2020 on strictly a dollar amount net charge offs have not been that low since the first quarter of 2016 and at that time for loan portfolio was only $4 3 billion.
Which is roughly half of where we are today.
Our past due to total loans were seven basis points $6 million or 34% decrease from year end.
We grew our <unk> by $7 million in the first quarter are a triple to total loans was for one two however, excluding PPP from total loans are a triple al to loans was 1.26.
Government aid and stimulus primary example, being PPP have helped soften the blow from Covid that said, our credit culture, geography, and diverse nature of our commercial loan portfolio should help us be well positioned to grow and prosper as the economy fully opens up and expands.
With that I'll turn it over to Bud.
Good afternoon net interest margin for the first quarter was three <unk> versus 3.27.
Fourth quarter 2020 day adjusted margin was 3.8.
Excluding the average PPP loan balances of 956 million in triple pay interest.
Come in loan fees of $11 4 million adjusted margin for the fourth quarter.
Was 323.
Excluding the average triple pay loan balances of $1 1 billion and.
And triple pay interest income and loan fees of $10 1 million.
Adjusted margin was 327 <unk>.
Excluding the increase in excess funds of $411 million.
Fourth quarter adjusted margin was 336, excluding the increase in excess funds $311 million.
The remaining net triple pay deferred fees at $3 31 on 'twenty, one our 24 million 9 million relates to around one on 11 4 million to round two.
CD maturities for the remainder of 2021 or $452 million.
<unk> $71 million for the second quarter.
The average rate is 1.11 for the year 1.8 for the second quarter maturities.
We expect the majority of they see days to re price at point for <unk> or below.
The re pricing, where we're so for the $1 3 million annual expense reduction.
717000 for the second quarter maturities.
The quarter to day cost of interest bearing deposits has decreased.
Three eight in the first quarter versus point for for in the fourth quarter 2020.
Our quarter end deposit cost total deposits was <unk> two five.
Total interest bearing DDA is two five.
And our total interest bearing deposits 0.36.
As a reminder, we have no accretion income related to acquisitions.
For our triple play ratio.
Round one for <unk>.
962 approved loans, the total loan amount was $1 <unk> billion.
Total fees $34 4 million.
Service for our shrank 89th for 839 participating banks.
The balance for those loans at the end of 2020 was $900 million.
Around 2287 approved loans total loan amount of $407 million total fees of $16 7 million.
And service force ranked 87th out of 4628 corresponding banks in round two.
Triple play balance at the end of March 2021 was $968 million.
2021 round, one loan forgiveness $334 million.
43 loans $2 million on above has been submitted for forgiveness on only one for $2 2 million has been forgiven and the dollar amount of loans awaiting forgiveness is $130 million.
Monthly yield, including Triple pay fee accretion around two loans will be about 45 basis points lower long term be five years versus two years for around one.
Liquidity excess funds were 600 million, which started funding triple pay loans in April 2020 ex.
Excess funds for two 7 billion at $3 31 'twenty one.
Noninterest income credit card spend amount.
$169 8 million in the first quarter. It was $168 4 million in the fourth quarter 2020.
In the first quarter of 2020, the spend amount was $146 one weighted.
Credit card net income first quarter was $1 2 million, which included an accrual adjustment.
290000.
First quarter net would have been $1 five for that for accrual adjustment.
Fourth quarter for 2020 to actual was 913000.
And that included a rebate accrual adjustment of 870000.
On the first quarter of 2020 net income was $1.8 million.
Merchant services fees year to date 21 is 191000 versus 100000 per year to day 2020.
We have two officers dedicated selling this service.
Mortgage banking income is $2 7 million in the first quarter versus $3 1 million in the fourth quarter.
And first quarter 2020 was $1 1 million.
A reminder, we do not sell any government guaranteed loans to generate non interest income.
Non interest expense total producers at the end of 2020 were 133.
At March 31, 20 131.
Total employees at the end of 2020 were for 99.
And same number at the end of March of this year.
Total non interest expenses in the first quarter of 2020.
Were $27 9 million for.
First quarter of 'twenty, 'twenty, one 'twenty $8 9 million.
So for the increases.
First quarter expense for.
Incentives was $3 7 million.
Versus $2 7 million for 2020.
And the increase is primarily based on projected production from new producers.
Our unfunded commitment reserve for the first quarter was 600000.
Mortgage commissions increased by 308000.
FDIC insurance decreased about 224000.
For decreases.
The net.
<unk> expenses.
For 157000.
Triple T sand has been 91 deferral was $1.1 million in the first quarter for round two loans and just note that our salary increase year over year was only $11300.
Capital.
Despite a two for one.
The increase in deposits year over year, the bank's tier one leverage ratio remains well above the regulatory minimum.
On.
<unk> retention year to date is 79%.
Tax.
Date.
First quarter the rate was 21, 8%.
For 2020 that number was 18 seven 6%.
And the projected rate for 2020 long is 22%.
And that concludes our presentation.
We will now begin the question and answer session.
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Our first question today comes from Graham Dick with Piper Jaffray.
Hey, guys good afternoon, Hi, Greg.
Sure.
So just starting on credit.
Wanted to ask what might have caused the CECO model to require you guys to build the reserve for this quarter.
I was just kind of surprised to see this considering credit quality metrics improved and it seems like the economy has done the same thing for Q.
Well, Greg vessel, that's a reasonable question.
A very reasonable question I would say, but I think debt.
Sure.
Do feel really good about where we are but it's just we've been through the worst pandemic in.
Good I've ever experienced and you have experienced so we just want to be a little bit cautious in terms of.
Anything in the way of loan loss reserve release at this point in time so.
Nice just to have a little bit more dry powder there in the event of.
Something unexpected we don't know of anything and don't feel good about it but it's just.
We're just a little bit gunshot because of where we've been for the last year.
Definitely definitely share.
So I guess just kind of going forward do you expect any more reserve build or are you pretty comfortable with this like $1 26 level of reserves on ex PPP.
Yes.
I think.
I think because of our our projected loan growth in the second quarter, we will have reserve bill, but not as a percentage it will not it will not increase it will certainly will decrease as we go forward. So we will add dollars to the loan loss reserve in the second cohort because of the projected higher loan volumes.
That makes Inc.
To answer your question, Brian Yes.
Yes, absolutely it's perfect.
And then I guess turning to loan growth what do you guys seeing on on that record loan pipeline.
Load of excess liquidity.
How strong do you think loan growth can be this year I guess over the next couple of quarters specifically.
Well, we said it.
At year end, our goal is to replace all of the Triple T loans that were outstanding at year end with.
Other loans, obviously non triple T loans, so thats, some $900 million thus for.
Our goal on what wed like to replace for the year end.
I feel better about that goal today than I did when we set that three months ago right. So.
Just because we see.
Pretty clear.
Pretty substantial loan growth actually we've already had some pretty good loan growth.
This quarter in the <unk>.
First.
Two thirds of the quarter here.
And we feel good about the rest of the quarter in terms of some substantial loan production.
We're not we're not yet so you're on the line utilization improved gray on us.
The real question to me is.
We have had some customers come in and increased our lines just for calculation of the cost of steel is going up the cost of lumber is going up or whatever else they keep in inventory.
Leading to so that should lead to improvement in line utilization and time, but just the good old fashion.
$300 million, we lost last year I don't know when we're going to get that back and I can only hope that we get some of that.
Just a natural lift you get without having to do a whole lot of hard work right. So I'm looking for that and hopefully that'll happen some with some of that will happen on the second half for the year.
Graham.
Okay, Great. That's helpful and I guess, just lastly, a quick one here.
Do you guys have the loan yield excluding PPP loans.
Thanks for taking the total on loan yield on I'm, just trying to get a sense for how much more pressure they may be on core loan yields if any at all.
Yeah for the first quarter on so the margin was 320.
Excluding triple play with three away.
No he is asking.
Total loan yield.
Just new production.
More particularly on.
The average loan yield ex PPP like I see here that the taxable on yields.
We made this quarter over quarter I'm, just trying to get with the core loan yield wise there.
I don't have that one now.
I can email it to you.
Out of total margin I don't remember the actual loan growth okay.
No problem. Thank you guys congrats on a reported revenue.
And our next question comes from will Curtiss with Hovde group.
Hey, good afternoon, everyone.
Good afternoon.
I appreciate the details on kind of what you have coming up from a deposit repricing I'm. Just curious if you can kind of size up what the expectations are for the margin when you back out.
All of the noise from PPP that maybe over the next couple of quarters and you kind of manage through the for the liquidity headwinds just curious how youre thinking about the trajectory of the margin from here.
Yeah.
Well, our time with some of it if we can replace the $900 million had a triple day by the end of the year.
Okay.
<unk> has a positive impact because.
New loans are going on.
Around the 425 level.
So we expect the kita how margin parameters, having that much of new loan production. This year. If we have that margin context care of itself as these triple pay loans pay out for get forgiven.
Got it okay.
And then I.
I think but I may have missed this just inc.
He may have provided it but the average balance of PPP for this for the first quarter did you give that number.
$956 million okay.
Got it Alright, and then just the last one here on the yes.
I think last time, you guys talked about expense growth for this year being sort of similar to kind of what we saw last year. So I'm. Just curious if that was still kind of a fair expectation as we as we think about the 2021 expense base.
Yes, I think so like we talked about.
The biggest increase will be our core conversion.
We budgeted for $2 million increase related to that so we still think.
Excluding that.
With a debt to keep our expenses under control.
I think we talked about the fourth quarter call that we are.
We're adding people, it's mainly production people so they've got to come on and produce pretty quickly to pay for themselves.
Got it alright I appreciate the color. Thank you.
Thank you.
And again, if you have a question you can press star bottom line.
Next question comes from Kevin Fitzsimmons with D. A davidson.
Hey, good afternoon, everyone.
Hey, Kevin afternoon afternoon.
Was wondering if.
Maybe we can.
We've talked about our loan growth and we've talked about margin maybe just.
Can simple simplify and talk about dollars of NII, because a lot of times, we're dealing this quarter with <unk>.
Growth in the balance sheet, but the margin gets hit but what's your outlook for dollars of NII going forward do you think it's.
Stays.
Softer relatively soft to positive, but then picks up over the course of the year as you get more production in loans.
Let me think on that so youre, saying, so even though we're going to report I guess economy. There is does that mean of what we're going to add on new loans versus what's rolling off for a given yes, I mean, it's a lot of moving parts. Obviously with you guys are trying to replace.
Replace PPP with.
With new loans and then the elevated liquidity is.
That's uncertain right as far as when when and how that rolls off and just wondering.
How smooth trajectory that would be yes.
What also complicates that you have.
Non may in fees for lighting around one.
If all of those loans are forgiven round, one loans are forgiven by the end of the year, you got $9 million and additional accretion that will that will come in so that debt.
That definitely impacts how you're looking at the.
Margin for the year.
Yes.
Right right.
So all of the other.
All alone simple on over $2 million of Triple play from round. One are hung up there. They have been zero forgiveness ash was one for forgiving on the first day that the portal open I think that was forgiven by mistake.
Although other 43 out of 40 for steel and we are just no word at all from the.
Nor do I think any of our competitors have had any.
Forgive us there either so yes, certainly talked to peers and nobody is getting forgiveness on $2 million greater loans I mean, they are now into the held up at this time and your guess is as good as mine on that.
For square.
We're earning 1% on those loans instead of 10 bps for the fed so I'm not completely on happy about it.
I like it seeks may fund so at least I know our customers won't forgiveness and they won't get it out off their plate and I don't blame them a bit but.
In the meantime, it's okay.
How about.
Yeah.
We're expecting the economy to continue to reopen and growth to materialize can you talk about.
New market expansions I know you opened an office from Florida fairly recently.
And just the state of are there any new markets on the docket. As you look forward are there new teams that you would like to go out and hire.
Or do you have the do you have the team in place right now for everything you see come.
Yes, we will have some announcements in the next.
Yeah.
Week 10 days, Kevin on that we just can't do it.
Just yet we have to actually have some people in hand, and we're working on a press release on a new market.
The same on that actually they are on board. They started today. So we just can't talk about it yet, but we will have them in.
We also have.
A great coming in on Friday from another state.
So we have some potential.
To onboard.
Is that this is moving time of year as you know so.
For.
People that are.
For <unk>.
Because there were an asset for us have become a liabilities time for them to leave at this time for new people to join us. So.
Moving time right now so we feel pretty good about where we are.
Okay, and one last one Tom.
We always ask from time to time about M&A and that's never really been your focus you guys really focused exclusively on organic growth and bringing on teams or producers.
Although.
There's been a lot of <unk>.
<unk> activity, we've seen recently and with larger banks now you guys have a even more of a commanding multiple that you could use if you chose to use it do you feel any differently on that front or are you just consistent with how you've looked at it over the years.
Yes, I think I think we would certainly obviously.
Are multiples a little bit higher than the industry as a whole and the right opportunity were always.
Interest and are always willing to talk.
Finally on something this branch lie.
Good cultural fit.
There just aren't many of those out there.
As you will know.
So.
For more than willing to talk and we understand them.
Potential synergies.
Growth in the right at the right time, and the right place would make a lot of sense for us and for the.
The growth that we merged with so we certainly are interested in it right if the right opportunity.
And.
You mentioned that you'd want to target to be branch light.
Is it possible to get a target that's not branch light, but you make it branch light over time or is that too much about hurdle with regulators or how do you look at that.
Yes, I think as it becomes I think it's a hurdle.
There are a lot of people would like to lighten the branch low right now.
There are a lot of reasons.
They can't do it I mean, we've got.
We've got a couple of losses when needed to close when we can't get on our own people on board to close them right. I mean do you think.
And we're only a 16 year old bikes so.
A lot of our internal people.
As for branch, where I co cash not checks I don't want clothes that Brian.
It gets out of things like add Kevin.
I think it wouldn't wouldn't but it does and so it's in a bind.
Been around 30, 40 years and they've had these branches in.
And you certainly got key issues regulators in closing closing branches.
It just feels like the bank has failed in some fashion when you start closing branches.
That's the biggest problem in closing branches as Michael Walsh Arent lost my mind, Kevin to close these offs is my bank in trouble.
A problem and you try to explain it to people on and there's just not a good explanation out there and it's just not a lot of fun for for.
For anybody but it certainly.
I think the pandemic.
We'll see but I don't think branch traffic is going to pick up in the industry.
Post pandemic.
Did people quit coming because of the pandemic.
They might have initially been out they found additional channels.
So I don't think we're going on C. I think it's a secular trend that's going to continue.
Just for branches to continue to wither away, but they're there.
Theyre not go dark quick death or gone down slow death on this <unk>.
It's going to be a drip drip drip for losses in the retail branch front for years there.
Yes, all great points. Thanks, Tom.
Thank you Kim.
Okay.
Our next question comes from William Wallace with Raymond James.
Thanks, Good evening guys.
Sure.
So Tom that was your answer to the question just now actually to me was a little bit surprising I kind of felt after your last acquisition that you werent really that interest and mergers.
Are there partners debt that fit what you just sort of described as a as a potential kind of attractive partnership that.
That exist out there and are you having conversations or is this.
Right thing just happened to fall on your lapping.
Take a look.
Yes, I won't say, they're unicorns Wally.
Most of the people that would fit it are doing quite well on their own so why would they want to do anything.
Short of age issues and that's what we see sometimes it's mostly some people that are.
I had a friend.
Excellent text I said, Hey, there's a bank you need to buy in.
Also we will.
<unk> C O 70, Sixers backup management's day, he doesn't have any you'd have to send somebody in.
So we don't see people to Texas.
They are not accepted so I don't care, if with Georgia, Alabama, Mississippi, Theyre not accepted in Texas. So.
We certainly were initiated by on that volume so it makes it hard to for.
On a fit were the reasons for the bank to sale and reasons for US total bought and they all match up.
It's a little they're not unicorns quality, but they are not numerous let's put it that way I think we have some brands in the Midwest by banks.
Total how many potential targets they had as it was in the hundreds ours are certainly not in the hundreds is more like in the tens right then been Honduras. So.
Okay.
Okay, alright, thanks, that's helpful.
And I apologize if you gave this from the very beginning but I believe last quarter, you were talking about utilization rates down in the kind of 38 38, 5% range or are they.
Sales down there have you seen some usage increase I didn't give it wallach so.
Non.
At 12 31.
So let me go back.
The end of 19, it was $48 one day end of 'twenty 39, five and its even lower today at 37, 7%.
Because of the Triple T round to decrease line Utilizations again so.
We got to get all the government cheese spent on out of the way. So we can start getting some from some draws back on these lines.
Okay, Alright, yeah Wow.
And then another follow up on the net interest margin conversation. If you look at new new loan production or the yields on those loans are you seeing competitive pressures or are they holding inc. Or are you actually seeing.
Police.
Yeah.
Yeah.
Competitive.
Say that but we try to be disciplined while we think the bikes that are disciplined we're going to be the winners.
Yeah.
We think we will get the finish line.
I would say some people that arent disciplined but I don't think I think they are living for today.
Maybe it won't show on analyst some growth today.
They're not worried about tomorrow, because they're going to plant on albeit they are planning on being retired to their BHA offs in Florida Tomorrow at some point right. So we won't be in this long term and for the long game. So we are certainly trying to be as this news will be possibly can from a price and standpoint and we.
We see some pretty good opportunities right now we think is.
Things that we've been impressed with how things have opened up month by month each of the last three months and.
We're thrilled to be in the southeastern United States again, I'll say that every quarter, but.
And we're thrilled not to be in the retail banking business I think we're right.
I like I like our space of where we're having our bankers position on our like our markets.
Like our asset diversity.
And feel good about where we are.
Right so yes.
So generally speaking.
Absent a couple of maybe irrational players here and there.
Pricing pressures are have stabilized is that fair characterization.
Yeah, I think it is I mean of course I think there are a lot of people that don't think we're ever going to have any inflation honestly I'm not one of those on.
I tend to say, we certainly don't have some kind of wage inflation, because nobody can hire anybody each day.
In certain industries so.
Everywhere, we go our customers tell us that so.
Especially as the restaurant workers are still they're getting more than.
Then there were.
Working so they have no incentive to go back to work.
Yes, okay.
But on the expense question are there any was there any deferred comp related to the PPP part two that will be bouncing back into the run rate or where does that get offset by a reduction in the incentive accruals just kind of want to make sure the surprise for us.
It was $1 1 million in the first quarter, Wally, but it was part of that net number.
So net.
Fees and Fei is good for <unk> was $11 4 million at the end of March for them too.
We'll give a net number.
But the answer Budd.
Yes.
Over the over the life of loan yes.
Yes, there's going to be $1 1 million net comes back into the run rate in the second quarter or is that is that correct well its debt.
The loans for over five years, so round two five years, so just factors and over the Wi for one right.
Okay forget forgiveness that come in more quickly so yeah. Good question Wally.
The deferrals are a little bit misleading.
Triple T has been a wonderful non narcotic for all the banks. The problem is we just went for live without it into 2022.
We won't be prepared to live without it and be successful without it in.
<unk>.
Continue to grow earnings.
Yes.
Okay, and then just one last question.
<unk> was kind of.
Curious to see your reserves increased just one quarter. After you took them down when you when.
When you adopted diesel so I'm curious.
If you adjusted your Q factors to be.
More more aggressive on steroids.
Risk weighting migration or something that in the model that caused the reserve requirement to increase I'm just kind of curious it just seems like a pretty quick shift.
For adoption.
There wasn't any risk grade migration to necessarily drive that.
I'd, rather just kind of what the model dictated on them.
General.
Yes, no major shift I mean, there were some small changes in certain key factors in certain industries, but nothing wholesale change down model.
Funded loan commitment expense went up right.
It's not in the loan loss reserve.
Should be to me I don't know why Thats a separate line item on expense factors that Mike doesn't make any sense, but.
We just for.
Your line.
Losses were extraordinarily low in the first quarter I don't count on that run rate for very long volume a two basis point per per annum.
I don't I have not been associated.
<unk> with the buying for had two basis points of losses.
And the history of Mt.
Career, I think typically I have seen.
Thanks for the operated between five and 10 basis points, a year charge offs, but usually around 10, so but not not that low.
Right.
Yes, okay.
Yes.
We've actually had a little bit of common sense there Wally.
Yes, okay.
Thanks for the time, guys I'll hop out.
Alright.
This will conclude our question and answer session on today's conference call. Thank you for attending today's presentation. You may now disconnect.