ServisFirst Bancshares Inc (SFBS) 2020 Q4 法說會逐字稿

Good day, and welcome to the ServisFirst Bancshares, Inc. Fourth Quarter Earnings call. (Operator Instructions). Please note, this event is being 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'll have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions.

I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom.

Thank you, Davis, and good afternoon. Welcome to our year-end conference call -- earnings call. Going back on time to last March, if you had asked me that if I thought we would report record earnings for 2020, I certainly would have said I feel fairly certain we will not report record earnings 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 and 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 by $2.5 billion in the past year, a 33% increase, a very large deposit surge because of the pandemic. We are beginning the transition to a $10 billion bank, and we've been planning this for several years. The pandemic just sped up the time line a bit. We do have all the infrastructure in place to make the transition.

Our regulators have been very proactive with working 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 showed us we really don't need as much brick-and-mortar as we have even a bank with a branch like model like ours. It has also made our clients transition more quickly as well. We are very fortunate to be based entirely in the southeast, where we have had very few shutdowns and less affected customers than in other parts of the country. Our unemployment rate is a good bit lower. More workers have jobs, and our economy is in much better shape. We are seeing a large migration into our footprint. We expect it to continue.

I've always said that given a choice between a bad bank in a good market or a good bank in a bad market, I would pick the bad bank in a good market as we can fix a bad bank but we cannot fix a bad market.

Talking a little bit, our loan growth for the quarter, particularly, 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 is the fear of higher tax rates, capital gains rates led several customers to sell their companies and other assets to lock in the current rates. We also lost a few loans on rate and structure. We continue to emphasize being a disciplined lender. Our credit quality was evident in the 2008-2010 recession and is proven again to be the same in 2020. Loan pipeline is off a bit from October, but we are starting to see some projects that have been on hold 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, our C&I line utilization was around 49%. It fell to 37%, and it's 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. We're starting to see some prices 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 paydowns, which is obviously -- very obvious that you would have that. So the newer regions had very less business on the books and had less paydowns from the line utilization drop. We do expect significant loan opportunities going forward for several reasons. One is we made many PPP loans to clients of other banks who will transition their banking to us. In addition, we've had many -- who had a bad experience, another bank with PPP and plan to move their banking to us after their loan forgiveness is done.

Also, many banks closed their offices and were working remotely and not returning client calls, which led to a number of dissatisfied clients, leading to new client opportunities for ServisFirst. We also expect substantial growth in construction loan [draws] in the next year. And we do -- combining that with the line utilization rebound should lead to some natural loan growth even without any organic loan growth, which we expect as well.

To mention where we are on the new round of the PPP program. We've just got a few days in it. We did start to last Tuesday, so we've had less than a week as of this morning. So we expect that we will have demand of about 25% to 35% of the last round of PPP. We did have -- I think we made almost 5,000 loans and [50 million] in loans last year in that program. So obviously, there's a -- it's more needs-based this time, so we're seeing lower volumes with the fee -- the actual fee income is slightly higher. We do see lower expenses delivering this program with less overtime and other expenses.

I'm going to stop there now, and I'm going to turn it over to Henry Abbott for a credit update. Henry?

Thanks, Tom. I'm pleased with the bank's fourth quarter results and how the bank's loan portfolio performed throughout pandemic and optimistic how we're positioned for 2021 and beyond. Our total past dues to loans was 11 basis points, which is roughly $9 million, and that's on par with the third quarter, which is near historic lows. Nonperforming assets were $25.5 million on a total loan portfolio of $8.5 billion. The $25 million in NPAs is an $8 million reduction from the third quarter and an $18.8 million reduction from year-end 2019.

These resulted in NPAs to total assets of 21 basis points, which is an 8 basis point reduction from the third quarter and a 29 basis point reduction or over half from the same period in the prior year. I'm proud to say past due to total assets and nonperforming assets to total assets have not been this low since 2015.

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. Two of the specific charge-offs we took in the fourth quarter were related to borrower misrepresentations on C&I relationships, and these charges accounted for just over half of the charge-offs for the quarter. And I'd also note the charge-offs were down from our third quarter results.

We have grown our ALLL by over $11 million in the past year. As of year-end, our ALLL to loans was 1.04. However, excluding PPP from total loans, our ALLL to total loans was 1.16, which is higher than we've been at a year-end in roughly 10 years.

As we move to the CECL calculation in 2020, the difference between the amount of credit losses, allowance required under our incurred loss methodology and amount required under the CECL methodology resulted in a $2 million reduction, which was shown in our fourth quarter results. With that, I'll pass it back to you, Tom.

Thank you, Henry. Thank you for that update. I'll now turn it over to Bud Foshee, our Chief Financial Officer, for a financial update.

Thanks, Tom. Good afternoon. Net interest margin for the fourth quarter was 3.27% versus 3.14% in the third quarter. The adjusted margin was 3.23% excluding the average PPP balances of $1.01 billion and PPP interest and loan fees of $10.1 million. The adjusted margin for the third quarter was 3.25%, the average PPP balances were $1.05 billion and PPP interest and fees were $6.6 million. Adjusted margin was 3.36%, excluding the increase in excess funds of $311 million. And in the third quarter, the adjusted margin was 3.33% with an increase in average excess funds of $610 million.

The remaining net PPP deferred fees at 12/31/20 are $17.8 million. CD maturities for 2021 are $530 million, $137 million in the first quarter. Average rate is 1.25 and it's 1.33 for the first quarter maturities. We expect the majority of these CDs reprice at 0.40 or below. The repricing will result in the $2.3 million annual expense reduction and just the first quarter maturities will reduce annual expense by $1.1 million.

Quarter-to-date cost of interest-bearing deposits has decreased. It was 0.58 in the third quarter and 0.44 in the fourth quarter. And the last deposit rate cut that we made was on November 23. End of the year deposit costs, total deposits was 0.28. Total interest bearing DDAs was 0.25, and total interest-bearing deposits was 0.39.

Just a reminder, we have no accretion income related to acquisitions. Liquidity -- excess funds were $600 million when we started funding the PPP loans in April of 2020. And at the end of the year, the excess funds were $2.1 billion. For noninterest income, credit card spend, $168.4 million in the fourth quarter versus $151.4 million in the third quarter. Total year-to-date spend for 2020 was $601 million. And in 2019, that was $515 million.

In credit card net income, we made an accrual adjustment of $870,000 in the fourth quarter related to rebates. So fourth quarter net would have been $1.78 million, actual was $913,000 versus $1.8 million in the third quarter. Merchant services fee income year-to-date, income is $565,000 versus $416,000 in 2019, and we have 2 officers dedicated to selling this service.

Mortgage income in the fourth quarter, $3.1 million versus $2.5 million in the third quarter. The Durbin amendment that has changed that will take effect for us on July 1, 2022. Anticipated loss of revenue is around $950,000. And just a reminder, we do not sell any government guaranteed loans to generate noninterest income.

Noninterest expense. Total producers at the end of 2019 were 139. At the end of 2020, 133. And total employees, 12/31/19, there was 504. And at end of 2020, it was 499.

Total noninterest expenses. When you adjust for PPP expenses, the PPP FASB deferral on ORE expenses, in the first quarter, they were $27.2 million, second quarter, $26.4 million, third quarter $26.2 million and increased to $28.4 million in the fourth quarter. Increase in the fourth quarter, several components. The fourth quarter expense for reserve unfunded commitments was $1.2 million, and the increase was due to portfolio line utilization. It decreased from 52.7% at 12/31/19 to 47.8% at 12/31/20.

Salaries increased $116,000. We had new hires in Nashville and West Florida. We did open a new office in Venice, Florida, but we also closed in Atlanta office. Also, we will review potential closing of 2 additional offices when their current leases expire. [Problem] credit expense has increased $236,000. We also had PPP expenses round 1 expenses of $209,000 and round 2 of $50,000.

The bank's Tier 1 leverage ratio was 8.75% at 12/31/20, well above the 8% minimum required by the regulators. Earnings retention for 2020 was 77.6%. Taxes -- quarter-to-date tax rate for 2020 was 22.1%. The fourth quarter of 2019 was 20.1%. Year-to-date 2020, the rate is 20.7%, and the year-to-date rate for 2019 was 20.1%. And the projected tax rate for 2021 is 23%. This concludes my comments.

I'll turn the program back over to Tom.

Thank you, Bud. A couple more things before we take questions. One, I thought you might be interested in a COVID update. Like all banks, we took all precautions early on and continue to do so, but we worked remotely in rotation. We required mask. We use barriers, plexiglass and other things. And we've also had many redundant systems, which have proven to be very beneficial. I checked with our HR last week and 17% of our employees have tested positive for COVID. A total of 57% have either been sick, have been out due to exposure or quarantine for other reasons. So we continue to operate the bank, even though over half of our employees have been out for one reason or another. None of our employees have been hospitalized, and we really learned that most of them are not too sick to work remotely. So that's been certainly helpful to operating the bank.

We don't think we've had -- I think, with some employees going to lunch together, that's probably how there's probably been some in our office. Transmission is just people leaving together and going to launch.

Most of the stories I hear from our employees is they went to a [waiting]. They went to a social event. They went to a large family Thanksgiving or Christmas function. So -- holiday function of some kind. So anyway, that's your update on COVID.

So we're fortunate -- we pushed through that with no one being hospitalized here in the office. As Bud mentioned, we did open our new office in Venice, Florida last week with an experienced team as we add to the West Florida region. We're also opening a new Fort Walton Beach office this year and one in Summerville, South Carolina. So as we continue to [both look and assess] how many offices we need, we do continue to open new offices.

We are optimistic about our growth prospects, as Bud mentioned. We had a number of very fine officers join us in the fourth quarter, not a large number. We have much higher quality officers we're adding to our banking ranks. So, 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 [earning] 10 basis points. So again, we strive to be a disciplined growth company that sets high standards for performance. We'll be happy to answer any questions you have. Thank you.

(Operator Instructions) And our first question will come from Brad Milsaps with Piper Sandler.

Tom, I appreciate your optimism around loan growth. I'm just kind of curious, would you expect kind of with what you have out in you can kind of get back to that sort of low double digit, maybe even higher growth rate that you guys have experienced in the past. Or do you think that's more of a second half '21 and '22 kind of proposition?

That's a really good question, Brad. The timing of when does the rebound in loan demand. The line utilization, we think, will bounce back, but I couldn't say that it's going to be evenly over the next 4 quarters, right? that would be speculative on my part. And the construction loan line draws -- we have a fair pipeline of construction loan draws that will happen this year that will add to the -- be additive to our loan growth. So I feel good about that part. Just the line utilization, I don't know exactly when we'll see the rebound that I would expect there, Brad.

But the pipeline is never really strong in the first quarter because we closed everything we can get closed by year-end, right? For incentive purposes, everybody wants to get their deals closed by the fourth quarter all our bankers do. So the first quarter is always a little on the slim side. So I would expect to pick up a good bit in the second, third and fourth quarter, Brad.

And 2 things. We're in the throes of PPP, the current program right now. So that's sort of got our -- nobody is out doing a prospecting right now. We're trying to make sure all our clients' needs are taken care of, first of all. And also, we're still in pandemic and companies moving their banking to us, they say, yes, we're going to do it. But when we get through the pandemic, when we get through a loan forgiveness of our existing banks. So moving their banking is not top of mind right now for our customers. So that's -- we need a little bit of time, I think, to get this pandemic behind us perhaps.

And Tom the growth that you are seeing, what types of rates are you seeing on the new loan originations that are coming on?

Brad, it's Bud. With the phase I would say we're getting [4.25%] on new deals.

Okay. Great. And then maybe just another follow-up, Bud. Obviously, liquidity continues to be a big headwind for the margin. Kind of curious, are you guys just 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 of how you're thinking about that big liquidity bucket that you've got on the balance sheet right now?

Well, we like to try but Fed buys up everything. So there's really nothing to buy. You're about -- like if you breakeven every month, that what pays down on mortgage backs, you can buy. It'd be hard to build it up by that much, just based on what's out there from an inventory standpoint right now.

(Operator Instructions) Our next question will come from Kevin Fitzsimmons with D.A. Davidson.

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 you're seeing in terms of migration into criticized and classifieds, whether any of the big decline we've seen in deferrals has migrated to those categories yet?

No. I mean -- I think for the year, we were up in criticized assets, but for the quarter, we were down in the fourth quarter on our criticized assets. And we're -- as folks got off of the deferrals, they started making payments again. We haven't increased TDRs. They're continuing to pay. So for the quarter, we did see a decrease. But as of 12/31/2019 we were in a pandemic. So they are up for the year.

Yes. I think, Kevin, if I -- very, very few of our credit problems have anything to do with the pandemic. I mean they're some. I mean -- but probably Henry would 5% or 10% of our problem credits being tied to the pandemic be damaged from the pandemic, would that be?

Yes. I mean from a loss perspective, I can really only park on one, and that was when we talked about last quarter (inaudible) impact. But other than that, these are existing credits we've just been working through.

That's really -- our credit problems have really nothing to do with the pandemic. So…

Okay. 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?

We are, Kevin. It's just a good time to take a hard look, especially the fourth quarter, you don't want to carry something over from year-to-year that has any sort of loss potential in it, right? So you as a former examiner would not appreciate us doing that if we were a bank. So we are -- we do try to be fairly aggressive these days and looking at everything out there. It's a good time to go ahead and deal with the problem.

Sounds very reasonable to me. Can you -- Bud 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 remaining on round 1 and the recognition of the fees in terms of over the next few quarters? Will it all occur in the first quarter? Will it be spread between the next 2 quarters? And then do you feel -- likewise on round 2, do you think that is basically all buttoned up by the end of this quarter that -- in terms of timing on that?

Yes. On the current it is spread throughout the year. I know it's a little bit elevated more in the -- probably in the first half of the year. So we anticipate we had, whatever, $17 million left or $17.8 million. So essentially, all that will payoff. We don't -- we see maybe just a small amount left, maybe at the end of 2021. But as far as the fees, I would say it's more first half weighted. On the new round, I really don't (inaudible).

I don't have any feel for it. I'm sorry.

Yes, too early. We think it'll all be paid off in this calendar year, we think Kevin. I can't tell you, though, the timing though.

And just to dovetail a little on Brad's question on the excess liquidity. So you've already got this very excess liquid position, but isn't it likely now to get even more elevated because now you basically are getting cash coming from the SBA on round one. And then is your expectation that -- I know there's a 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 is forgiven?

That would be -- our assumption is that we will see deposits migrate out at some point, but we are projecting net deposit growth for this year. So each of our regions, we roll up their numbers into our own. And so they are optimistic. They continue to grow their balance sheet. We need to find some loans.

(Operator Instructions) Our next question will come from William Wallace with Raymond James.

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 help you 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 of the potential cost pressures from going over $10 billion? And what relief valves you may have on the branch side or whatever other side there is? And then maybe just kind of help us think about where we end up the year from an expense perspective?

I'll let Bud address most of the question, Wally. We are looking at branch rationalization. As we open new branches, we're going to always be saying, where can we 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 we think we can consolidate. We're obviously consolidating one in the Atlanta region, starting in March. It will be closed. So that will be add to our efficiency a little bit. But it's going to be a noisy year because we're going through a system conversion, and I'll let Bud refer to that. And from -- and also your overall question of expenses on compliance. So go ahead, Bud.

Yes. Well, on the compliance side, the regulators have really been working with us for several years on what we would need. So we don't see an elevated expense from a compliance side. We feel like we're pretty well staffed in that area. Really on the system conversion, the system conversion will take place -- we'll phase that in starting in February. So really, you've got elevated costs from our current provider because we're under a short-term agreement with them. And then the cost for the new system will only be there for a couple of months this year. So we will have elevated IT expenses this year, but we'll have a lower IT expense next year with a new provider.

Going back to compliance, I mean, we're just not a consumer bank. I think that's where a lot of banks have increased expenses as they cross $10 billion, which is -- that's just something we don't have to worry about from that side as far as the staffing and infrastructure.

Okay. And maybe just trying to put a bow on this, you did about, I don't know, it's like 8% or 9% growth in your expense in 2020. Do you think that the growth is at that range in '21? Or is it above that? Or do you think that you've got opportunities to slow that growth down?

I would say it's still going to be that range, mainly because of the elevated IT expenses.

Okay. And then just one housekeeping question. I couldn't find it anywhere. It was probably (inaudible). But what was the period end PPP balance?

$900 million. The balance -- what you asked what's the balance? I didn't hear that.

Yes.

Yes, [end] of the year balance. I got the average. I just didn't get the end year.

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.