Good afternoon, and welcome to the Service First Bancshares Inc. 1st Quarter Earnings Conference Call. All participants will be in listen only mode. 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 Ed Woody, Controller. Please go ahead.
Good afternoon, and welcome to our Q1 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 will take your questions. Some of the discussions during our calls may include forward looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10 ks and 10 Q filings. Forward looking statements speak only as of the date they are made and ServiceSource 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 continue to see rapid improvement in the Southeastern United States economy. Supply chains are still not rebuilt, so line utilization has not improved during the Q1. And I think we're seeing inflation, and a lot of our customers are reporting large inflation in their material cost.
And so that should lead to line utilization improvement as the year goes on. We I've talked to 1 diversified manufacturer wholesaler last week who said everyone is gouging everyone out there. And I know that there's a shortage of labor in most every industry today. The unemployment rates in our state are at 4.7% in February, and we are seeing improvement monthly in that number. And I can only recall one Q1 of any of our 16 years where we had any reasonable loan growth in the Q1 and certainly this year fits the normal pattern of not having and we did have a little bit of growth in the quarter, but one of our largest clients had seasonal pay downs that offset the growth in the non PPP loan balance.
As I've mentioned before, we have not seen the utilization the line utilization rebound as of yet, but do expect improvement through the rest of the year. And talking about our loan pipeline, our loan pipeline hit 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 Q2. This includes expected fundings as well as draws on construction loans. And while our pipeline is not exact and you do have unexpected payoffs, this is the highest pipeline in the last 12 quarters of over $300,000,000 Our goal for the year is to replace our PPP loans with other loans by year end.
Bud Foshy will give a PPP program update in a few minutes after Henry Abbott. So I do feel confident we will see loan growth this year. We do continue to see more opportunity due to mergers. Our performance with PPP and attracting new clients and incumbent banks for performance with PPP. 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% in the Q1. The growth has been very broad across the entire company. While the industry does have substantial liquidity today as our bank does, we do feel confident core deposits will add value over time. New account openings have steadily improved over the past 6 months and were very, very high in the month of March. So now I'm going to stop and turn it over to Henry Abbott to talk about credit quality.
Thank you, Tom.
I'm extremely pleased with our Q1 results and our bank's credit quality. Our numbers generally speak for themselves, so I'll give a few key metrics and hit the high points. Non performing assets were down to under $20,000,000 on a total loan portfolio of $8,500,000,000 The $19,900,000 in NPAs is a $5,500,000 reduction from the Q4 and roughly a $21,000,000 reduction from the Q1 of 2020. This results in NPAs to total assets of 16 basis points, which is a 5 basis point reduction from Q4 and a 28 basis point reduction from the same period in the prior year. A key driver in our reduction in NPAs was various sales from our OREO portfolio to bring it to its lowest level in more than 10 years.
The now $2,000,000 balance in our OREO is a 68% drop from year end. Our core key credit metrics have not been this low since 2015. As referenced, our continued exceptional asset quality and strong balance sheet lead me to be optimistic about our bank's future. This NPA reduction was not achieved at the expense of the income statement as we had extremely minimal charge offs in the Q1. The $487,000 in net charge off to average loans for the Q1 on an annualized basis were 2 basis points versus 41 basis points in the 4th quarter and 26 basis points in the Q1 of 2020.
On strictly a dollar amount, net charge offs have not been that low since the Q1 of 2016 and at that time the loan portfolio was only $4,300,000,000 which is roughly half of where we are today. Our past due to total loans were 7 basis points, dollars 6,000,000 a 34% decrease from year end. We grew our ALLL by $7,000,000 in the 1st quarter. Our ALLL to total loans was 1.12. However, excluding PPP from total loans, our ALLL 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.
Thank you, Henry. Good afternoon. Net interest margin for the Q1 was 3.20 versus 3.27 in the Q4 of 2020. The adjusted margin was 3.08, excluding the average PPP loan balances of $956,000,000 and PPP interest income and loan fees of 11,400,000 dollars Adjusted margin for the 4th quarter was 3.23, excluding the average PPP loan balances of $1,010,000,000 and PPP interest income and loan fees of 10,100,000 dollars The adjusted margin was 3.27, excluding the increase in excess funds of $411,000,000 4th quarter adjusted margin was 3.36%, excluding the increase in excess funds of $311,000,000 The remaining net PPP deferred fees at threethirty onetwenty 1 are 20,400,000 dollars $9,000,000 relates to round 1 $11,400,000 to round 2. CD maturities for the remainder of 2021 are 452,000,000 dollars 171,000,000 for the Q2.
The average rate is 1.11 for the year and 1.08 for the 2nd quarter maturities. We expect majority of these CDs to reprice at 0.40 or below. The repricing will result in a $1,300,000 annual expense reduction or $717,000 for the 2nd quarter maturities. Quarter to date cost of interest bearing deposits has decreased 0.38 in the first quarter versus 0.44 in the Q4 of 2020. Our quarter end deposit costs, total deposits was 0.25, total interest bearing DDAs, 0.25 and our total interest bearing deposits, 0.36.
Reminder, we have no accretion income related acquisitions. And for our PPP recap, round 1, 4,962 approved loans. The total loan amount was $1,090,000,000 total fees $34,400,000 And Service First ranked 89th out of 4,839 participating banks. The balance of loans at the end of 2020 was $900,000,000 Round 2, 2,287 approved loans, total loan amount of $407,000,000 dollars total fees of $16,700,000 and Service First ranked 87th out of 4,628 Pennsylvania banks in round 2. Triple P balance at the end of March 2021 was 9 $68,000,000 2021 round 1 loan forgiveness is $334,000,000 43 loans $2,000,000 and above have been submitted for forgiveness.
Only one for $2,200,000 has been forgiven. And the dollar amount of loans awaiting forgiveness is $130,000,000 Monthly yield, including Triple P fee accretion around 2 loans will be about 45 basis points lower, the loan term being 5 years versus 2 years for round 1. Liquidity excess funds were 600,000,000 dollars when we started funding PPP loans in April 2020. Excess funds were $2,700,000,000 at threethirty onetwenty 1. Non interest income, credit card spend amount $169,800,000 in the Q1 is $168,400,000 in the Q4 of 2020.
And the Q1 of 2020, the spend amount was $146,100,000 Credit card net income, 1st quarter was $1,200,000 which included an accrual adjustment of $290,000 1st quarter net would have been $1,500,000 without that accrual adjustment. 4th quarter of 2020 to actual was $913,000 dollars and that included a rebate accrual adjustment of $870,000 In Q1 of 2020, net income was $1,800,000 Merchant services fees year to date 'twenty one is $191,000 versus $100,000 for year to date 2020. And we have 2 officers dedicated to selling this service. Mortgage banking income is $2,700,000 in the Q1 versus $3,100,000 in Q4 and Q1 2020 was 1,100,000 dollars Reminder, we do not sell any government guaranteed loans generating non interest income. Non interest expense, total producers at the end of 2020 were 133, March 31, 21, 131.
Total employees at the end of 2020 were 4.99 and same number at the end of March of this year. Total non interest expenses in the Q1 of 2020 were $27,900,000 Q1 of 2021, dollars 28,900,000 So for the increases, 1st quarter expense for incentives was $3,700,000 versus $2,700,000 for 2020 and increase is primarily based on projected production from new producers. Our unfunded commitment reserve for the Q1 was $600,000 mortgage commissions increased by $308,000 and FDIC insurance increased by $224,000 For decreases, the net ORE expenses were 157,000 dollars The PPP FASB 91 deferral was $1,100,000 in the Q1 for round 2 loans. And just note that our salary increase year over year was only $11,300 Capital, despite a $2,800,000,000 increase in deposits year over year, the bank's Tier 1 leverage ratio remains well above the regulatory minimum. Earnings retention year to date is 79%.
Tax update, 1st quarter the rate was 20.18 percent. For 2020, that number was 18.76 percent and the projected rate for 2021 is 22%. And that concludes our presentation.
Our first question today comes from Graham Dick with Piper Sandler.
Good afternoon.
So just starting on credit, just wanted to ask what might have caused the CECL model to require you guys to build the reserve further this quarter. I was just kind of surprised to see this considering credit quality metrics improved and seems like the economy has done the same since 4Q.
Well, Graham, that's a reasonable question, a very reasonable question, I would say. But I think that we are we do feel really good about where we are, but it's just we've been through the worst pandemic and that I've ever experienced and you have experienced. So we just want to be a little bit cautious in terms of doing anything in the way of a loan loss reserve release at this point in time. So it's nice just to have a little bit more drop out of 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 fair. So I guess just kind of going forward, do you expect any more reserve build or are you pretty comfortable with this like $126,000,000 level of reserves ex PPP?
Yes, I think well, I think because of our projected loan growth in the Q2, we will have reserve bill, but not as percentage. It will not increase. It certainly will decrease as we go forward. So we'll add dollars to the loan loss reserve in the Q2 because of the projected higher loan volumes. That makes any sense.
Did I answer your question, Graham?
Yes, absolutely. It's perfect. And then I guess turning to loan growth with you guys sitting on that record loan pipeline and a 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 that at year end our goal is to replace all the PPP loans that were outstanding at year end with other loans, obviously non Triple P loans. So that's some $900,000,000 That's our goal of what we'd like to replace for the year. And I feel better about that goal today than I did when we said that 3 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 first 2 thirds of the quarter here, and we feel good about the rest of the quarter in terms of some substantial loan production. And we're not yet seeing the line utilization improve, Graham.
That's the real question to me is we have had some customers come in and increase their lines just because they said the cost of steel is going up, the cost of lumber is going up or whatever else they keep in inventory. That's leading to some that should lead to improvement in line utilization in time. But just the good old fashioned the $300,000,000 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 that's 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 will happen some of that will happen in the second half of the year, Graham.
Okay, great. That's helpful. And I guess just lastly, just a quick one here. Do you guys have the loan yield excluding PPP loans? The relationship shows the total loan yield, and I'm just trying to get a sense for how much more pressure there may be on core loan yields, if any at all?
Yes. For the Q1, so the margin was 3.20%, excluding CCC, it was 3.08. Loan yield. Loan yield, just new production?
More particularly on just the average loan yield ex PPP, like I see here that the taxable loan yield was up quarter bps quarter over quarter, just trying to get what the core loan yield was there?
I don't have that one. No, I can email that to you. Yes, I just told the margin. I don't remember the actual loan yield.
Okay. Yes, no problem. Thank you, guys. Congrats on a good quarter.
Thank you.
And our next question comes from Will Curtis with Hovde Group.
Hey, good afternoon, everyone.
Good afternoon, Will. 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 the noise from PPP that maybe over the next couple of quarters and you kind of manage through the liquidity headwinds. Just curious how you're thinking about the trajectory of the margin from here?
Yes. Well, like Tom was somewhat, if we can replace $900,000,000 we had in BBB by the end of the year, it has definitely has a positive impact because new loans are going on around the $425,000,000 yield level. So we expect the key to the whole margin improvement is having that much in new loan production this year. So we have that margin kind of takes care of itself as these PPP loans pay out or get forgiven.
Got it. Okay. And then I think, Budd, I may have missed this, just you may have provided it, but the average balance of PPP for this first for the Q1, did you give that number?
Yes, 956,000,000 dollars
Okay.
Got it. All right. And then just the last one here on the 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 think about the 2021 expense base?
Yes, I think so. Like we talked about, the biggest increase will be our core conversion. We budgeted a $2,000,000 increase related to that. So we still think excluding that, we'll keep our expenses under control. And I think we talked about the Q4 call that we're adding people, it's mainly production people.
So they've got to come in and produce pretty quickly to pay for themselves.
Got it. All right. I appreciate the color. Thank you.
Thank you, Will.
Our next question comes from Kevin Fitzsimons with D. A. Davidson.
Hey, good afternoon, everyone.
Hi, Kevin. Good afternoon. Good afternoon.
I was wondering if maybe we can we've talked about loan growth and we've talked about margin. Maybe just if we can simplify it and talk about dollars of NII, because a lot of times we're dealing this quarter with 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 stays soft or relatively soft to positive, but then picks up over the course of the year as you get more production in loads?
Let me think on that. So you're saying so even though we're going to replace you kind of want to I mean, what we're going to add on new loans versus what's rolling off for given.
Yes, I mean, it's a lot
of moving parts, obviously, with you guys are trying to replace PPP with new loans and then the elevated liquidity is that's uncertain, right, as far as when and how that rolls off and just wondering how smooth of a trajectory that would be?
Yes. And what also complicates it, you have $9,000,000 in fees relating to round 1. And if all those loans are forgiven, round 1 loans are forgiven by the end of the year, you've got $9,000,000 in additional accretion that will come in. So that definitely impacts how you're looking at the the margins here.
You heard us say all the loans except one over $2,000,000 of PPP from round 1 are hung up. They have been 0 forgiveness. That was one forgiven on the 1st day that the portal opened. I think that was forgiven by mistake. So all the other 43 out of 44 still and really no word at all from the nor do I think any of our competitors have had any forgiveness there either.
Yes, I've certainly talked to peers and nobody is getting forgiveness on $2,000,000 greater loans. I mean they all seem to be held up at this time.
And your guess is as good as mine on that. We're earning 1% on those loans instead of 10 bps at the Fed, so I'm not completely unhappy about it. I like it. It suits me fine. So at least I know our customers want forgiveness and they won't get it out of their plate and I don't blame them a bit, but in the meantime, it's okay.
How about if 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 in 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 team in place right now for everything you see coming?
Yes. We will have some announcements in the next week, 10 days, Kevin, on that. We just can't do it just yet. We actually have some people in hand, and we're working on a press release on a new market this imminent. Actually, they're on board.
They started today. So we just can't talk about it yet, but we will have them. And we also have a group coming in Friday from another state to visit. So we have some potential to onboard. This is moving time of year, as you know.
So for people that are time to they were an asset force, have become a liability. It's time for them to leave and it's time for new people to join us. So it's moving time right now. So we feel pretty good about where we are.
Okay. And just one last one, Tom. We always ask from time to time about M and A and that's never really been your focus. You guys really focus exclusively on organic growth and bringing in teams or producers. Although there's been a lot of merger activity we've seen recently and with larger banks and now you guys have 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 we would certainly obviously, our multiples are a little bit higher than the industry as a whole and the right opportunity, we're always interested and we're always willing to talk. It's just finding something that's branch like and is a good cultural fit, there just aren't many of those out there, which you well know. So we're more than willing to talk, and we understand the potential synergies of the right group in the right at the right time, in the right place. It would make a lot of sense for us and for the group that we merged with. So we certainly are interested in it at the right opportunity.
And you mentioned that you'd want a 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 of a hurdle with regulators? Or how do you look at that?
Yes. I think it becomes I think it's a hurdle. And I think there are a lot of people who would like to lighten the branch load right now and they can't there are a lot of reasons they can't do it. I mean, we've got a couple of offices we need to close and we can't get our own people on board to close them, right? I mean you think and we're only a 16 year old bank.
So it's a lot of our internal people, all in us, that's a branch where I could cash my checks. I don't want to close that branch. I mean that's it gets out of things like that Kevin. I mean you think it wouldn't, but it does. And so it's in a bank that's been around 30, 40 years and they've had these branches and you certainly got key issues regulators in closing branches and it just feels like the bank has failed in some fashion when you start closing branches.
That's the biggest problem in closing branches is like what's wrong, why is my bank having to close these offices? Is my bank in trouble? I mean what's the problem? And you try to explain it to people and there's just not a good explanation out there. There's just not a whole lot of fun for anybody.
But 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, but now I think they found additional channels. So I don't think we're going to see a I think it's a secular trend that's going to continue for branches to continue to wither away. But they're not going to die quick death, they're going to die slow death and it's going to be a drip, drip, drip losses in the retail branch front for years there.
Yes, all great points. Thanks Tom.
Thank you, Kim.
Our next question comes from William Wallace with Raymond James.
Thanks. Good evening, guys.
Hi, William. Hi, William.
Hey. 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 weren't really that interested in mergers. Are there partners that fit what you just sort of described as a potential kind of attractive partnership that exists out there? And are you having conversations?
Or is this if the right thing just happens to fall in your lap, you'd take a look?
Yes. I won't say they're unicorns, Wally. But 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 is we'll see some people that are I had a friend in actually in Texas said, hey, there's a bank, you need to buy it.
And I said, well, the CEO 76, who's his backup management, say he doesn't have any. You'd have to send somebody. And so we don't send people to Texas. They're not accepted. So I don't care if Georgia or Alabama, Mississippi, they're not accepted in Texas.
So we certainly weren't interested in buying that bank. So it makes it hard to find a fit where the reasons for the bank to sell and reasons for us to want to buy it and they all match up. I mean, I think you're it's a little they're not unicorns, Wally, but they are not numerous. Let's put it that way. I think we have some friends in the Midwest that buy banks and they us how many potential bank targets they had.
It was in the 100s. Ours are certainly not in the 100s. It's more like in the 10s right than 100s.
Okay. Okay. All right. Thanks. That's helpful.
And I apologize if you gave this in the very beginning, but I believe last quarter you were talking about utilization rates down in the kind of 38%, 38.5% range. Are they still down there? Have you seen some usage increase?
I didn't give it, Wally. So that at twelvethirty one, see, let me go back. At the end of 2019, it was 48.1. The end of 20, 39.5 and it's even lower today at 37.7 because of the Triple T round 2 decreased line utilizations again. So we got to get all the government cheese spent and out of the way so we can start getting some draws back on these lines.
Okay. All right. Yes, well. And then another follow-up on the net interest margin conversation. If you look at new loan production, are the yields on those loans or are you seeing competitive pressures or are they holding in or are you actually seeing belief?
It's competitive. I won't say that, but we try to be disciplined, Wally. We think the banks that are disciplined are going to be the winners. We think we'll get the finish line. I see some people that aren't disciplined, but I don't think I think they're living for today.
That maybe want to show an analyst some growth today and they're not worried about tomorrow because they're planning on being they're planning on being retired to their beach house in Florida tomorrow at some point, right? So we want to be in this long term and for the long game. So we are certainly trying to be as disciplined as we possibly can from a pricing standpoint. And we see some pretty good opportunities right now. We think it's things we've been impressed with how things have opened up month by month each of the last 3 months.
And we're thrilled to be in the Southeast United States. Again, I say that every quarter, but and we're thrilled not to be in the retail banking business. I think we're I like our space of where we have the bank is positioned and I like our markets. I like our asset diversity and feel good about where we are. I'll leave anything
out. All right. So generally speaking, absent a couple of maybe players here and there, the pricing pressures have stabilized. Is that fair characterization?
Yes, 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. Obviously, I'm not one of those. I tend to see we certainly don't have some kind of wage inflation because nobody can hire anybody today in certain industries. So everywhere we go our customers tell us that.
So especially the restaurant workers are still they're getting more than they were working so they have no incentive to go back to work.
Yes, okay. But on the expense question, are there any like was there any deferred comp related to the PPP Part 2 that will be bouncing back into the run rate or does that get offset by a reduction in the incentive accruals? Just kind of want to make sure we don't surprise anything.
It was $1,100,000 in the Q1, Wally, but it was part of that net number that I gave. So net fees and FASB deferral was $11,400,000 at the end of March for Round 2. So we'll give a net number.
But again, that's the question. Okay.
So, yes, I understand over the life alone, yes.
Yes. So there's going to be $1,100,000 that comes back into the run rate in the second quarter, is that correct?
Well, the loans are over 5 years. So round to 5 years, so it just factors in over the life of the loan.
Right. Yes, right.
So if we get forgiveness, they come in more quickly. So yes, good question, Wally. The deferrals are a little bit misleading. Triple P has been a wonderful narcotic for all the banks. The problem is we just want to live without it in 2022.
And we won't be prepared to live without it and be successful without it and continue to grow earnings.
Yes. Okay. And then just one last question. I too was kind of curious to see your reserves increase just 1 quarter after you took them down when you adopted CECL. So I'm curious if you adjusted your Q factors to be more aggressive or if there was some risk rating migration or something that in the model that caused the reserve requirement to increase.
I'm just kind of curious, it just seemed like a pretty quick shift one quarter after adopting it?
There wasn't any risk grade migration to necessarily drive that, but rather just kind of what the model dictated in general. So no major shift. I mean there were some small changes in certain Q factors in certain industries, but nothing wholesale changed in our model.
Our unfunded loan commitment expense went up, right, which not in the loan loss reserve, but it should be. To me, I don't know why that's a separate line item on expense factors. It doesn't make any sense, but we just feel like losses were extraordinarily low in the Q1. I don't count on that run rate for very long while the 2 basis points per annum, they haven't been that. I don't I have not been associated with a bank that had 2 basis points of losses in the history of my career.
I think typically I've seen banks that operated between 5 10 basis points a year charge offs, but usually around 10, so but not that low.
Right. Yes, okay.
We've actually a little bit of common sense there, Wally.