ServisFirst Bancshares Inc (SFBS) 2021 Q3 法說會逐字稿

Good day, and welcome to the ServisFirst Bancshares, Inc. Third Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Davis Mange, Director of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to our third 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, and thank you for joining us on our call. I'll talk a few minutes about our loan growth for the quarter. We had $369 million of net loan growth for the quarter, which is an annualized growth rate of 18%. Our goal is to -- has been to have a monthly loan growth goal of $100 million a month, and we've exceeded that goal over the last 2 quarters, and certainly, we're pleased to see.

We had thought that we would see line utilization improve in the second half of the year, but we saw no improvement this past quarter. We do not know when we will see an improvement in line utilization, given the continued low inventories at our customers and supply chain issues that continue, but we certainly expect it to be a tailwind for us at some point in the future. So that's certainly something we look forward to.

We did see net paydowns in commercial and industrial loan balances in the quarter, excluding PPP loans. Well, this is both a result of the second round of PPP stimulus as well as we're seeing very strong profitability in our customer base in commercial and industrial companies. Loan growth for the quarter was highest in the West of Central Florida, Charleston, Dothan and Northwest Florida regions. And looking at our -- our loan pipeline is about 10% above last quarter and is back at historically high levels. We've looked back at our pre-pandemic pipelines, and our pipelines today are roughly double where we were prior to the pandemic.

On the deposit side, we do continue to see deposit growth, though most of the growth was in our correspondent division this quarter. Other regions are seeing a flattening in growth during the quarter. Most of the correspondent division growth is attributed to new account growth in South Florida market with an addition of a key banker in South Florida. Our noninterest-bearing accounts doubled in the quarter in correspondent from $500 million to $1 billion.

A few minutes to talk about capital. We were -- when we started in the pandemic 18 months ago, we were under $10 billion in assets. And I remember analysts and investors were asking us what our plans to do with all our excess capital. And our answer was it is nice to have excess capital on hand to fund future growth. 18 months later, we are all at $15 billion in assets. So we're quite happy we had the capital to support a bigger balance sheet.

The question now is how much of the deposit growth is transitory, if any. I don't think any of us know the answer to that question. But what certainly seems logical is that as the massive stimulus -- fiscal stimulus wears off, our deposits will flatten or decline slightly over the next couple of years. As of this morning, we're sitting on $4.6 billion in cash at the Fed, and we do have a negative carry on that $4.6 billion. I did see an analyst report recently saying we're in the top 10 for cash as a percentage of assets and -- but we'll go over our plans in a few minutes to invest those funds over time.

So on the hiring front, we continue to have many conversations, more than in the past few years. Again, it's -- more merger activity has led to more discussions with more teams. Early in the pandemic, we took a very conservative approach and did not really tell everybody that we talked to that we really didn't want to hire anybody or do anything during the early part of the pandemic. We wanted to see. We just thought the best thing to do was to be conservative. And that's usually the best thing to do in the banking business is almost always to be conservative. So that's something we'll continue to look at. And we see many opportunities and we're -- our goal is to only bring in a small number of very high-quality bankers.

So now I'd like to turn it over to Henry Abbott, our Chief Credit Officer, to talk about our credit situation.

Thank you, Tom. I'm very pleased with the bank's performance in the third quarter, and the loan portfolio continues to perform well in the current economic environment. I will give a brief overview of the key ratios for the quarter, but we continued to see strong asset quality, which can be attributed to ServisFirst's strong client selection, credit servicing and the vitality of the markets in our footprint.

Nonperforming assets to total assets were down to 11 basis points versus 15 basis points last quarter and 29 basis points in the third quarter of 2020. For the quarter, NPAs were down to $16.5 million. This is a 15% reduction from the prior quarter and a 50% reduction from the third quarter of 2020. This drop is attributed to OREO continuing to be at near record lows in line with the prior quarter and a $2.7 million reduction in nonperforming loans. Our past due to total loans were 8 basis points, $6.8 million, on par with last quarter and a 27% reduction from the end of the third quarter in 2020.

Charge-offs and OREO expenses for the quarter were $1.8 million, an 85% reduction from the $11.5 million in the third quarter of 2020. Our net credit expense annualized for the third quarter would be 8 basis points. And I'm proud to say that year-to-date, net credit expenses, when annualized, would be 4 basis points versus credit expenses for 2020 for the whole year of 38 basis points.

In the face of strong competition, loans grew by $370 million, excluding PPP payoffs. Including PPP payoffs, our loan outstanding still grew by $163 million. Primarily due to loan growth, we grew our ALLL by $4.2 million in the third quarter versus roughly $9.7 million last quarter. Our ALLL to loans, excluding PPP loans from total loans is 1.29%.

Even as we put some of the more dramatic COVID economic impact in the rearview mirror, given the bank's continued strong loan growth and the unprecedented government aid still helping borrowers, we felt it appropriate to continue to grow our loan loss reserve. 2021 continues to be a very strong year for the bank, and our core key credit metrics continue to improve and charge-offs continue to be near historic lows.

With that, I'll hand it over to Bud.

Thank you, Henry. Good afternoon. Liquidity, tom mentioned, we have a plan to invest a portion of our excess funds. Our initial goals are to purchase 15-year mortgage-backs and 5- and 7-year treasuries. The net monthly investment security growth will be about $100 million, and we will increase these monthly purchases over time. The current yield on mortgage-backs is approximately 1.30%. Current yield on 5-year treasuries is approximately 1.08% and 1.38% for 7-year treasuries.

We also decided to retain a portion of our mortgage originations. For the third quarter, we sold $33 million to investors and retained $53 million. Net interest margin, average loans, exclusive of PPP, increased by $424 million in the third quarter. Average PPP loans decreased by $387 million for a net average growth of $37 million. PPP fees and interest income were $6.4 million in the third quarter compared to $10.2 million in the second quarter. Also an increase of $971 million in average excess funds decreased the margin by 20 basis points in the third quarter.

Noninterest expenses. Salaries increased $852,000 comparing third quarter 2021 to 2020. The majority of this increase was in West Central Florida as we added production staff and opened the Orlando office. Western Florida had the highest year-over-year loan growth. We've also hired 15 new producers in 2021. We increased the incentive accrual in the third quarter by $1.1 million based on high dollar volume of loan production this year.

Also, we invested in a new market tax credit during the quarter. The investment write-down increased noninterest expenses by $2.8 million for the quarter, but was more than offset by income tax reduction of $3.3 million.

Noninterest income. Credit card income continues to grow at $2.04 million in the third quarter versus $1.8 million in the third quarter 2020. And third quarter spend was $216 million in 2021 versus $151 million in 2020.

And that concludes my remarks, and I'll turn the program back over to Tom.

Thank you, Bud. We do continue to be optimistic about our future growth due to strong pipelines and conversations with clients regarding their future plans. So all in all, we're pleased with the quarter. We're pleased with the outlook. And we'll be more than happy to answer any questions you might have.

Thank you. Let's open the floor for questions.

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

Tom, I was just curious, obviously, another great quarter of loan growth. If you could give us a sense of kind of where your new loans are coming on the books kind of relative to the current book yield?

Yes, Brad, it's Bud. The -- with the fees, we're still putting loans on at 4.15% to 4.20%, right?

Okay. Great. And Bud, based on your comments, I wanted to make sure I heard you correctly. You thought that the pace of securities purchases would be right around $100 million a month, so about $300 million a quarter. Is that correct?

Right. Yes. Well, we're just going to watch, right? I know 5- and 7-year treasuries have been trending up. So we'll just watch it. We'll -- I'm sure we'll look at increasing that purchase amount over time, but that's $100 million a month and $300 million a quarter is our current goal.

Yes. So all else equal, you might get the securities portfolio up to $2 billion or so by the end of next year?

Yes, yes. That's right, yes.

Got it. And obviously, Bud, no one has a crystal ball, but just kind of curious, if we got 50 basis points or 75 starting late next year, aside from the obvious, your cash balances would get a higher rate. What do you think the impact would be for you guys, however you want to express it, in terms of NIM? Just kind of curious what the impact could be on loan yields with the higher Fed funds and taking into account anything you might have sitting at floors, et cetera?

I don't know if I have a good answer just right off the top of my head, especially when you go into the loan side. I'd really have to look at that.

How much cash are we going to have on deposit at the Fed?

Yes. Yes. That's a lot of...

$1 billion or $3 billion.

[A lot of haves on] that one.

Yes. Well, maybe asked differently, can you just remind us of your kind of split between sort of prime or LIBOR-based loans versus fixed rate?

What now, the mix?

Yes, between floating...

Yes, yes.

Gee, let me think. We're at 60-something percent of fixed. Brad, let me look -- that one, I think we're probably 60% to 65% on fixed. I know that's been shrinking, but I just don't have it right here, and I didn't bring that up. I didn't have that in my notes, I don't think. So sorry, I can e-mail it to you then.

Yes, okay. No problem. All right, great. Well, I'll hop back in queue, let some other folks hop in.

Yes. All the cash is floating rate. The $4.6 billion is in a floating rate, Brad.

Sure. Absolutely. Yes. Got it.

That's the biggest float rate asset we have, that's cash.

The next question will come from Kevin Fitzsimmons with D.A. Davidson.

Just digging into the loan growth a little bit, Tom, you mentioned in the release about the economy, the economic recovery. You also had cited, just a few minutes ago, the line utilization really hasn't picked up like you would have hoped. But where -- if you would really attribute this growth to just pure economic expansion versus the effect of your hiring efforts and bringing folks over, and that probably dovetails with the deals that are going on?

So maybe it's not just from hiring, but you're getting some loan opportunities because of some of the consolidation that's going on in your markets. If you can just sort of point to what are the main driving forces for that loan growth.

Yes. I don't really know the -- I'm giving you a guess, but I think it's probably half and half, probably half in new hires and half is projects from existing customers that people put projects on hold, obviously, during the pandemic and they're -- we didn't want to do anything and they didn't want to do anything. So now they're moving forward with new projects like a lot of commercial real estate.

I mean the loan demand is not that good in the commercial and industrial sector. I mean our loans declined in the last quarter in the C&I book just because of strong profitability and continued stimulus, unprecedented stimulus and strong corporate profitability. So -- and supply chain was -- and hiring issues. So -- but I'd just give you a guess, Kevin. I haven't broken -- we haven't broken it down.

Yes. What's your -- you've mentioned that a few times. And obviously, that's a big issue for everyone, that supply chain disruption, the employee shortages that are out there affecting different companies. Is that -- when you're looking at that, is that something that in your mind is just preventing a more healthy pace of C&I growth or -- and/or is it something that is starting to get on your radar in terms of credit -- in terms of getting concerned and getting -- watching things like that more carefully?

Yes. We don't have any credit concerns. But yes, we think that supply chain is getting -- if they ever do get fixed, which we don't think is going to be anytime soon, certainly we'll see more inventory, higher inventories. There is a tremendous lack of supply, and there's unprecedented demand that we seeing today. So we hear it from every customer that we have.

The other place where we're getting a little pick up in demand and steel prices have gone up and our customers, they -- for example, in the steel fabrication business there, they've had to increase inventories. And some of our scrap dealers are borrowing a little bit more money today. But it's not been an overwhelming change in the numbers there.

Okay. Great. And one last one from me is just you mentioned capital, how you went from this position of having a lot of excess capital and it was a good thing to have and you put it to use. And where you sit now, though, there's a lot of uncertainty in terms of what happens to this excess funds. But how do you feel about your capital levels now? And if you have this kind of loan growth still going forward and we don't have a major change in the balance sheet, is it something that you might look at to getting more capital?

Yes. Kev, we've talked to our regulators where our tailwind leverage was 8.25% at the end of the quarter. We'll just reassess it in the fourth quarter and see. But I think that 8% is the magical number, but I think we would have leeway in that, and it will be monitored.

The thing that really has driven it down, like we grew over $1 billion in deposits in the third quarter, it's spikes like that, that really causes the issues. And I think the regulators understand that. So I think we could probably get by without doing a capital raise or sub-debt or something like that as long as that's a short-term issue.

And we think we will. I mean Bud has done his projections, and we think we're fine there from -- we think we have more than adequate capital, Kevin. And also, again, the risk weighting on the $4.6 billion of the Fed is 0, right? So we don't have a risk-weighted capital issue with that much cash that's getting in Federal Reserve. So we think we have just absolutely no problems at all, but we're glad we have an extra capital.

Yes. No. And definitely, and I guess part of the reason I asked the question is you're also sitting with a very strong currency. So I guess that's a variable too to look at where you're at in the market and your willingness to -- If there's capital to be had, whether weighing all those different variables about whether you should do it or wait. That was my point.

The next question will come from William Wallace with Raymond James.

So maybe just kind of following along with Kevin's kind of line of question. I mean the liquidity, from a capital perspective, you're saying it's the liquidity pressure, not a loan growth perspective. But your liquidity has been building now for -- since really pre-COVID, I think. And $4.6 billion is massive liquidity.

One, Tom, I guess, during your prepared remarks, I might have missed if you gave the time frame, but I believe you said your correspondent channel balances have doubled from $500 million to $1 billion. Is -- did I get that correct? And is that year-over-year? Or was that in the quarter?

Go ahead, Rodney.

Yes. This is Rodney Rushing. And you heard him correct. From -- since year-end, our correspondent DDA balances went from just over $400 million to over $1 billion. Total correspondent balances were just shy of $2 billion at the beginning of the year, and they're at $3.6 billion. So what makes that up are the DDA balances where our downstream correspondent banks keep money in the DDA to pay their compensating balances with the settlement point that the Fed form for the cash letter.

We then -- anything over that, we sweep into Fed funds or money market account. So right now, our largest category is by far our DDA balances. But that growth has come from new correspondent relationships mainly in Florida. Last month alone, we opened over 20-something correspondent accounts in the State of Florida. This month, we opened another 6 correspondent accounts.

In addition to those new accounts, our downstream correspondents liquidity is higher than it's ever been. They have a lot more cash just like we did. And it's -- we're taking this year like a spike I didn't predict and I don't think it will continue, but that's where it came from.

Yes. Because we think we're seeing a flattening -- as I mentioned, we're seeing a flattening, Wally, in the other -- all the other regions, for the most part, in deposit growth. And I don't know where your question is leading, but do you do a capital raise to support cash on the Federal Reserve where you have a negative carry? I don't think so.

You figure out some other solution to the problem. We could -- there are solutions to the problem that we have a way to offload some deposits in a third-party arrangement if we need to. So that would probably be the solution rather than a capital raise, Wally, if that's where you -- you may not be going there, though.

No, that's precisely where I was going is we've seen the channel grow. You've added a few billion dollars of liquidity from that channel alone over the past couple of years. And I'm just wondering, at what point do you start to maybe try to figure out ways to sweep some of that liquidity off the balance sheet, so you don't have to answer questions from the regulators about a leverage ratio sub-8%, et cetera. Are you there?

Wally, this is Rodney again. And what Tom alluded to was, we do have that ability. Right now, we're buying all these funds. Obviously, what goes into DDA is a deposit. What we purchase as Fed funds, we are purchasing as principal. If we want to, we can sell that money off to another bank or we can actually place it at the Fed. We would have to do that in an agent relationship, which we have the capability. We've just chosen not to do that up until now. We're buying it all as principal, and we'll see if we can put it to work.

Okay. So are we -- I guess, are we at the point where you are starting to make those decisions? I'm assuming the answer is yes, if you're going to start putting $100 million to work a month in securities and trying to figure out other ways to turn it into a positive carry. That's where we are today.

Well, that's more of a question for Bud and Tom, this is Rodney again, but I'll let them chime in. But as Tom said, it's leveled off.

We want the correspondent channels to grow because there are other aspects, either long participations that we purchase, we make them direct loans. And also, we're growing our credit card outstandings through the correspondent agent -- credit card agent program. So there are a lot of other things other than just deposits that lead to profits through our correspondent relationships. And we think we have a pretty good chance to be a reasonably good market share in the Southeast United States and as well we're seeing a national credit card program to date.

Okay. And then, Bud, it looks like you moved about $260 million into held-to-maturity this quarter. Can you just give us a kind of brief overview of the nature of those securities?

Yes. That was all mortgage-backed securities that we moved. Net realized -- unrealized gain was about $5.6 million, and that will just be amortized over the remaining life. So we get to keep that $5.6 million in our unrealized gain total. Really, that's to -- I think a lot of banks are looking at doing this. Really you don't have a negative impact from that $253 million down the road if rates go up 300 basis points, I guess. So that's -- it helps your book value by moving that to held-to-maturity.

Yes, exactly. And what's the duration on those average?

About 5 years.

Okay. And then on credit, you highlighted in the prepared remarks really just how strong credit is overall. Yet you decided to increase the reserves and the reserves to loans. I guess if you take PPP out of the equation, it's really just kind of holding flat on a reserve to loan basis. At what point do you, in your models, make the qualitative adjustments that would bring the reserves back down? Or do you think you're where you need to be?

I guess we -- this is Tom, Wally. We look at it on a quarterly basis. I mean that -- 2 basis points of charge-offs on a year-to-date basis is not reality. You and I both know that. I mean there's a loss somewhere in our portfolio. We just don't know where it is. And I've been President of the bank for 36 years. I've never seen losses as low in my career other than a one-off basis, but never as low as 2%. So good banks -- you and I both know good commercial bank, during good times, the charge-offs are 10 to 15 basis points.

And during bad times, they're probably 25 to 30 and a little bit higher if you're not -- your credit quality is not where it should be. So we just want to be prepared for when that happens, Wally. We think that there -- we'll see some charge-offs. We're in the banking business. There are going to be charge-offs. That's -- we'd rather be prepared than unprepared for that.

Okay. I appreciate that. And then my last question, just you've got your $100 million monthly loan production target that you have been exceeding. Has production itself been accelerating? Or are payoffs also declining? So you're kind of getting a double benefit?

We didn't have a -- payoffs are so lumpy, I can't even answer the question, Wally. But there were no significant -- the production was lower in the third quarter than the second quarter, and -- but we didn't have any significant payoffs. I think a lot of the people that wanted to sell their properties or companies and worried about increase in potential capital gains, taxes and other taxes have already done so.

People started doing it last year. We had customers selling assets last year to be prepared for higher tax rates. So it's just so -- it's just hard -- it's very hard to predict, Wally. But usually, fourth quarter is a good production time for us. We usually -- it's the highest of the year typically.

The next question will come from Dave Bishop with Seaport Global Securities.

Most of my questions have been asked and answered, but how should we think about operating expenses here? You mentioned the new market tax initiative. Should we think about this as sort of a good run rate? Conversely, the tax rate sort of remaining around that 18% moving forward with the tax credit investments?

Yes, maybe a little bit higher, but somewhere in the 19% to 20% range, yes. And the new markets, the tax credits, all -- and we actually look at, at the end of the period, you have a capital gain or a capital loss, and the new market that we purchased in the third quarter was there to offset -- it will have a capital loss that's offsetting capital gains.

So that's really where some of these tax credit deals come into play because you want to make sure that you're matched off as well as you can on the capital gains or losses. But that definitely impacted our noninterest expenses for the quarter.

Got it. So it seems like that could be a little bit of a give back moving forward here, probably maybe $1 million or $2 million or so heading into the third -- fourth quarter, I'm sorry?

You still have the -- the write-down will still be there. So that's -- it's about 900 -- well, whatever, $2.8 million each quarter that we'll have in write-down, but you'll have the $3.3 billion in tax reductions. Is that what you mean?

Yes. So that's a good run rate moving forward?

Yes. Yes.

This concludes our question-and-answer session as well as our conference call today. Thank you for attending today's presentation. You may now disconnect.