ServisFirst Bancshares, Inc.

Good day and welcome to the Service First Bancshares, Inc. 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 will be an opportunity to ask questions. 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 will 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 filing. Forward-looking statements speak only as of the date they are made, and Service First assumes no duty to update them. With that, I turn the call over to Tom.

Thank you, Davis, and good afternoon. Welcome to our year-end conference call, earnings call. Going back in time to last March, if you had asked me 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. 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 timeline 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 McVeigh, 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 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, 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 bank and 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. Talking a little bit about 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. What 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 and 2010 recession and has proven again to be the same in 2020. The 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 a 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 utilization 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 pay downs, which is obviously very obvious that you would have that. So the newer regions had 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 banks who will transition their banking to us. In addition, we've had many who've had a bad experience in another bank with Triple P and plan to move their banking to us after their loan forgiveness is done. 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 service first. We also expect substantial growth in construction loan draws in the next year. 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 Triple P program, we just got a few days in it. We didn't start until 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 Triple P. We did have I think we made almost 5,000 loans and $1.5 billion in loans last year in that program. Obviously, it's more needs-based this time, so we're seeing lower volumes. 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?

Thank you, Tom. I'm pleased with the bank's four-quarter results and how the bank's loan portfolio has performed throughout the 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. Non-Performing 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 dues 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 took appropriate actions as needed on credits 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 An 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.

Thank you, 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 billion. 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. In the third quarter, the adjusted margin was 3.33 with an increase in average excess funds of $610 million. The remaining net Triple P deferred fees at 12, 31, and 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 to reprice at 0.40 or below. The repricing will result in a $2.3 million annual expense reduction, and just the first quarter maturities will reduce annual expense by 1.4. One million. The quarter-day 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 23rd. 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 accruition income-related acquisitions. Liquidity, excess funds were $600 million when we started funding the Triple P loans in April of 2020. At the end of the year, 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-to-date spend for 2020 was $601 million, and in 2019 that was $515 million. And 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 two officers dedicated to selling this service. Mortgage income in fourth quarter, $3.1 million versus $2.5 million in the third quarter. The Durbin Amendment, that is changed. That will take effect for us on July 1st, 2022. Anticipated loss of revenue is around $950,000. And just a reminder, we do not sell any government-guaranteed loans to generate non-interest income. Non-interest expense, total producers at the end of 2019 were 139. At the end of 2020, 133. And in total employees, 1231.19, there was 504. And at the end of 2020, it was 499. Total non-interest expenses, when you adjust for Triple P expenses, the Triple P FASB deferral and ORE expenses, in the first quarter, they were $27.2 million. Second quarter, $26.4 million. Third quarter, $26.2 million. 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 to $116,000. We had new hires in Nashville and West Florida. We did open a new office in Venice, Florida, but we also closed an Atlanta office. Also, we will review potential closing of two additional offices when their current leases expire. Problem credit expense, it increased $236,000. We also had Triple P expenses, round one expenses of $209,000 and round two 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%. Quarterback tax rate for 2020 was 22.1%. The fourth quarter of 2019 was 20.1%. Year-to-date 2020, the rate's 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. I'll cover 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 continued to do so. But we worked remotely in rotation. We required masks. We used barriers, plexiglass, and other things. We've also had many redundant systems, which have proven to be very beneficial. I checked with our HR last week. 17% of our employees have tested positive for COVID. A total of 57% have either been sick, have been out due to exposure or quarantined 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, and that's probably how there's probably been some interoffice transmission is just people leaving together and going to lunch. Most of the stories I hear from our employees is they went to a wedding, they went to a social event, they went to a large family Thanksgiving or Christmas function. A 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 added the West Florida region We're also opening a new Fort Walton Beach office this year and one in Somerville, South Carolina. So as we continue to look at assessing 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. much higher quality officers we're adding to our banking ranks. 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. 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.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And our first question will come from Brad Millsaps with Piper Sandler. Please go ahead.

Hey, guys. Hey, Brad. Tom, I appreciate your optimism around loan growth. Just kind of curious, you know, would you expect kind of with what you have out in front of you that you can kind of get back to that, you know, sort of low double-digit, you know, maybe even higher, you know, growth rate that you guys have experienced in the past? You think that's more of a second half 21 into 22 kind of proposition?

That's a really good question, Brad, of the timing of when does the rebound and 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 four quarters. That would be speculative on my part. The construction line draws, we have a fair... A pipeline of construction law draws that will happen this year that will 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's never really strong in the first quarter because we close 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. 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. Two things. We're in the throes of Triple P, the current program right now, so that's sort of got our You know, nobody's out doing any prospecting right now. We're trying to make sure all our clients' needs are taken care of, first of all. And also, you know, we're still in a pandemic, and, you know, companies moving their banking to us, you know, they say, yeah, we're going to do it, but, you know, when we get through the pandemic, when we get through, we'll own forgiveness of our existing banks. So moving their banking is not top of mind right now for our customers. So that's, you know, we need a little bit of time, I think, to get this pandemic behind us, perhaps.

Tom, for the growth that you are seeing, what types of rates are you seeing on the new loan originations that are coming on? Hey, Brad.

With phase, I would say we're getting four and a quarter on new deals. Okay, great.

And then maybe just another follow-up, but obviously liquidity continues to be a big headwind for the margin. Kind of curious, are you guys just going to kind of hold that, you know, kind of wait for the loan growth to come? Would you, you know, 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'd like to try, but, you know, Fed buys up everything, so there's really nothing to buy. You're about lucky if you break even every month. About what pays down on mortgage backs you can buy. It'd be... It'd be hard to build it up by that much, just based on what's 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 1. Our next question will come from Kevin Fitzsimmons with DA Davidson. Please go ahead.

Hey, good afternoon, everyone. Thank you. 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. Thanks.

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. As folks got off of the deferrals, they started making payments again. We haven't increased TDRs. They're continuing to pay. For the quarter, we did see a decrease, but as of 12-31-2019, we weren't in a pandemic, so they are up for the year.

Yeah, I think, you know, Kevin, very, very few of our credit problems have anything to do with the pandemic. I mean, there are some. I mean, you know, but probably, Henry, would 5% or 10% of our problem credits be tied to the pandemic, be damaged from the pandemic? Would that be?

Yeah, I mean, from a loss perspective, I can really only harp on one, and that was, you know, one we talked about last quarter. Right. But other than that, these are existing credits we've just been working through.

Our credit problems have really nothing to do with the pandemic.

Is it fair to say, though, 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 lost potential in it, right? So you as a former examiner would not appreciate us doing that if we were a bank. So we do try to be fairly aggressive these days in looking at everything out there. It's a good time to go ahead and deal with the problem.

Sounds very reasonable to me. But I appreciate all the numbers on PPP. Some of those were coming kind of quick. How should we look at the timing of the forgiveness on what's remaining on round one 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 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 timing on that? Thanks.

Yeah, the current Triple T, it's spread throughout the year. I know it's a little bit elevated more probably in the first half. We anticipate you had 17.8 million left, so essentially all that will pay off. 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 get any.

I don't have them filled for you. I'm sorry.

Too early.

We think it will all be paid off in this calendar year. I can't tell you the timing though.

Just to dovetail a little on Brad's question on the excess liquidity. 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 Thank you, David. Thank you.

Again, if you have a question, please press star, then 1. 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 helped you learn that the branch network is not as necessary, 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? We think there are opportunities as leases come up. It takes a little bit of time, but we've got a couple offices we think we can consolidate. We are obviously consolidating one in the Atlanta region starting in March. It will be closed, so that will be added to our efficiency a little bit. But, you know, 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 also your overall question of expenses on compliance. So go ahead, Bud.

Yeah, well, on the compliance side, You know, 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 you will have elevated IT expenses this year, but we'll have a lower IT expense next year with the new provider. Going back to compliance, we're just not a consumer bank. I think that's where a lot of banks have increased expenses as they cross $10 billion. That's just something we don't have to worry about from that side as far as staffing and infrastructure.

Okay, and maybe just trying to put a bow on this, you did about, I don't know, it looks like 8% or 9% 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 somewhere. But what was the period in PPP balance?

Oh, let's see here. $900 million.

Okay. Thank you. The balance, would you ask what's the balance? I didn't hear that. Yeah. Okay. Yeah.

Yeah, the end-of-year balance. I got the average. I just didn't get the end-of-year. Thank you, guys.

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.