ServisFirst Bancshares Inc (SFBS) 2021 Q2 法說會逐字稿

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

I would now like to turn the conference over to Ed Woodie, Controller. Please go ahead, sir.

Good afternoon, and welcome to our second quarter earnings call. CEO, Tom Broughton, will share his thoughts on the quarter, and then we will hear from Henry Abbott, our Chief Credit Officer; and Bud Foshee, Chief Financial Officer, for their detailed reviews. We will then 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 forecast described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as to 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, Ed, and thank you for joining our second quarter conference call. We were very pleased with the quarter. And before I talk a little bit about our results, I'll give you a little bit of background on the Southeast economy. And again, we -- in our conference call, we won't read to you of our press release, we assume you can read it yourself. So if you knew our call, that's -- our practice is not to read from the press release.

In the Southeast, we do continue to see lower unemployment compared to the rest of the country. And we hear from all of our customers as employers that they cannot find the needed workers in almost all industries. It's not just fast food, it's almost every industry. So hopefully, as unemployment benefits expires, we will see job openings filled. We do -- in the Birmingham area, for example, of large metro areas, we have our lowest unemployment rate in the United States at 2.2%. So it's pretty much a full employment economy in many areas of the Southeast. So the economy is robust and continuing to improve greatly.

I was talking with a customer last night, we had an open house in a new office in Fort Walton Beach, Florida. And he said, "We can't keep boats in inventory." And he was wondering why are people spending so much money, the government says it's stimulus money. He said it can't be a couple of $1,200 stimulus checks. So it is a good question.

His theory is that people are just -- after the pandemic, just said, I'll enjoy the things I always wanted to enjoy. And the pandemic make people spend money. So it'd be interesting to see as we move forward, how the economy moves along. And talking about our results, we were -- saw loan growth soars to a record level in the quarter.

Line utilization is still well below year-end 2019 levels. The line utilization did not improve and the customers continue to report that supply chains are still disruptive. I've been saying that we thought we would see improvement in line utilization this year, it has not happened yet. And from talking with customers, the FED acts like the supply chains are going to be repaired in just a few months' time. But from talking with customers, we don't see that happening. So it may be towards next year before we see substantial improvement in line utilization. So we're glad we had some organic loan growth to sort of fill the gap.

We do expect to see second half and 2022 tailwind from construction line draws. We have a number of projects underway where we expect substantial draws. And of course, we do expect line utilization just to improve from the inflationary effects of higher prices for steel, lumber and many other raw materials. So that will be helpful as well.

Our loan pipeline is down 10% from April, but it's still 77% higher than it was at year-end 2020 and it's at the second highest level ever. Our loan growth is broad-based and is centered around commercial real estate and commercial and industrial loans.

We do continue to see deposit inflows, though they are more -- the normal historical growth rates of the mid-teens for our bank rather than the large surge in deposits we saw during the pandemic. Our liquidity continues to build to historic levels despite the record loan growth in the quarter.

We are very pleased with asset quality. As Henry will talk about in a few minutes, we had negative charge-offs in the quarter. And I thought we should have a celebration, and Henry has asked that we postpone the celebration until we could see what happens when we have the withdrawal of government stimulus to whether it will lead to some uptick in future losses in some loan categories. But personally, I don't see many businesses struggling, except for some that are poorly managed.

And now we'll turn it over to Henry Abbott, our Chief Credit Officer, to give a little bit more detail on our credit outlook. Henry?

Thank you, Tom. Our second quarter results continued the very positive trends started in the first quarter of 2021. In the second quarter, we even showed a net recovery, which has not occurred in at least the past 5 years as far back as I look, and we continue to show strong asset quality trends across the board. Our numbers generally speak for themselves. So I'll give a few key metrics.

Nonperforming assets to total assets were 15 basis points versus 16 basis points last quarter and 26 basis points in the second quarter of 2020. Our OREO was roughly $2 million, near record lows in our bank's history and in line with the first quarter. We had roughly $540,000 in OREO expense for the quarter. I am pleased to say we posted a net recovery of $112,000 for the quarter as mentioned as far back as I looked, we have not posted a quarterly recovery.

Our past dues to total loans were 8 basis points, $6.7 million, a 27% decrease from year-end. While we are optimistic given the bank's financial performance throughout the past 18 months, we also want to be realistic that the unprecedented government aid helped stabilize various businesses. And with PPP round 2 now complete, those businesses will have to be self-sustaining in this new economic environment.

We were pleasantly surprised by the $517 million in loan growth. This is excluding the runoff of PPP loans, which are 0% risk-weighted assets. Primarily because of the loan growth and the above-referenced uncertainty given the end of PPP we grew our ALLL by $9.7 million in the second quarter. Our ALLL loans, excluding PPP loans, was $1.30 million at quarter end, up from $1.26 million at the end of the first quarter.

We have been diligent throughout the pandemic on our credit servicing to monitor for problem loans, that need to continue to allow for more time to pass to fully understand the long-term impact on our clients. Thus, it is appropriate to continue to build our reserve at this time. Our core key credit metrics continue to be exceptional and even improving, which I think can be credited to our high-quality customer base as well as our granular and diversified loan portfolio.

With that, I'll hand things over to Bud Foshee, our CFO.

Thank you, Henry. Good afternoon. Net interest margin for the second quarter was 3.06% versus 3.2% over the first quarter. The adjusted margin was 2.96%, excluding the average PPP loan balances of $860 million and PPP interest income and loan fees of $8 million.

Our adjusted margin for the first quarter was 3.08%, excluding the PPP average loan balances of $956 million and PPP interest income and loan fees of $11.4 million. The adjusted margin was 3.19%, excluding the increase in excess funds of $525 million.

First quarter adjusted margin was 3.27% excluding the increase in excess funds of $411 million. The remaining net PPP deferred fees at June 30 were $16.8 million, $2.2 million relates to Round 1 and $14.6 million to Round 2. CD maturities for the remainder of 2021 are $365 million, $163 million for the third quarter. Average rate on the CDs is 0.95 for the year, 1.11 for the third quarter maturities.

We expect the majority of these CDs to reprice at 0.40 or below the repricing will result in a $500,000 annual expense reduction $290,000 for the third quarter maturities. Our quarter-to-date cost of interest-bearing deposits decreased 0.34 in the second quarter versus 0.38 in the first quarter.

Our quarter end deposit costs, total deposits was 0.24, total interest-bearing DDAs 0.24, and total interest-bearing deposits 0.34. A reminder, we have no accretion income related to acquisitions. A PPP recap, Round 1 the balance at year-end 2020 was $900 million. The balance at June 30, 2021 was $184 million. Fees recognized during the second quarter were $6.8 million, and $15.7 million year-to-date, and the remaining net fees are $2.2 million.

Round 2, the balance at June 30 was $411 million, remaining net fees of $14.6 million, we recognized $1.24 million of fees in the second quarter and $1.45 million year-to-date. And the total PPP balance was $595 million at June 30.

For forgiveness for Round 1 in 2021, it was $379 million for the second quarter, $713 million year-to-date and for Round 2 $6.9 million for the quarter and year-to-date. Liquidity excess funds were $600 million when we started funding PPP loans in April 2020. Excess funds at the end of June 30, 2021 were $3.1 million. Noninterest income, credit card spend improved significantly, $197.4 million in the second quarter versus $169.8 million in the first quarter and the second quarter of 2020 spend was $134 million.

The credit card net income, second quarter was $1.9 million. The first quarter was $1.2 million. We also had an accrual adjustment of $290,000 in the first quarter, which would have made first quarter net of $1.5 million. And second quarter 2020, the net was $1.4 million. Our merchant services fee income continues to improve. Year-to-date, 2021 was $480,000 versus 2020 year-to-date of $234,000.

Mortgage banking income, it's $2.7 million in the second quarter and same amount in the first quarter. Second quarter 2020 was $2.1 million. A reminder, we do not sell any government-guaranteed loans to generate noninterest income.

Recap of our noninterest expense. Total producers at the end of 2020 was 133. We had 134 at June 30, 2021 and total employees at the end of 2020 was 499, and at the end of June 2021, it was 534 million. Our total noninterest expenses in the second quarter of 2020 was $28.8 million, and the second quarter of 2021, it was $31.3 million. With the increases the FASB 91 deferral increased $1.7 million in the second quarter of 2020 includes deferrals of $2.4 million related to Round 1 of PPP.

FDIC insurance increased $800,000, unfunded commitment reserve in the second quarter of 2021 was $500,000. Data processing increased $443,000, and that increased expense is due to the -- our current DP provider increase in our contract based on converting the supply serve. Salaries increased $326,000 related to new hires in our West Central Florida region and our Fort Walton and Columbus offices.

Business (inaudible) increased $290,000, office rent $235,000, primarily due to our new lease space for the Nashville office. Decreases -- incentives decreased $1.1 million. The second quarter 2020 expense for incentives was $4.9 million versus $3.9 million for 2021. Second quarter 2020 included $2.5 million related to PPP incentives. Net OREO expenses decreased $764,000. And then operational losses, the second quarter 2020 included a $500,000 accrual for potential lawsuit settlement.

Capital saw $1.6 billion 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 78.7%. Quarter-to-date tax rate for both 2020 and 2021 was 21%. The year-to-date tax rate for 2021 was 20.6%, and the year-to-date rate in 2020 was 20%. And projected rate for the remainder of this year is 21%.

This concludes my comments, and I'll turn the program back over to Tom.

Thank you, Bud. Well, we are very optimistic about the rest of the year, as you could tell from the tone of what we've had to say here. We see loan demand has improved. We've seen a bounce back in the economy. There was clearly some pent-up demand for loans that we enjoyed in the second quarter. So we are very optimistic.

Also, you've seen the result of a couple of things. One is that the new bankers we hired a year ago are seeing substantial loan growth this year, and we expect the same next year. We've had a number of key hires this year that will provide good growth in 2022. The second thing, the reason I would tell you is we're optimistic is we had a policy last year of not working from home. I don't think any of us missed a day of work last year here in the office. So that's resulted in better customer service and better growth rates than the industry average, and we expect that to continue.

So with that, we'll be happy to answer any questions you might have.

(Operator Instructions) And the first question will come from Graham Dick with Piper Sandler.

So obviously, loan growth was really, really strong across pretty much all of your all lending verticals. Did the group you all added in Central Florida earlier this quarter contributed all maybe by moving loans over to ServisFirst? And then also, I think we had talked previously about organic loan growth maybe being able to at least replace any PPP runoff that might occur.

Do you think that it might be possible for you to surpass this target given what we saw this quarter and how you think the growth outlook is evolving today?

Graham, we don't expect to have a quarter like that every quarter. So I'd rather underpromise and overdeliver, if possible. So I think our -- sort of our goal for the rest of the year is probably look at $300 million a quarter loan growth to get to where that would be above where -- above the $900 million that we had mentioned we'd like to replace.

So yes, that would be -- it'd be a little above, but not -- $500 million a quarter is a little aggressive. And actually, we really -- the hires earlier this year have not had time to do too much. Most of the production is coming -- it's pretty broad-based. Really, the top 2 regions were West Central Florida and Birmingham. So Birmingham is just getting some growth back. We obviously lost a lot of C&I loans last year as a result of the pandemic and PPP stimulus, not only line utilization, but also people will postponing projects.

So we saw some pent-up demand this quarter and yes, we think that the teams we've hired this year will produce more so next year, most of what we saw. But we also -- it's just broad based. It was a pretty broad based. And that was net of -- we had some payoffs including, seeing not really in terms of rate as much as structured. Nonrecourse lenders coming in the -- West Coast lenders coming in our Southeast market, in a couple of cases, and we have some significant payoffs. So we're fighting that like everybody else, right? It was just a matter of putting on more than you're losing and having a good structure and well-thought out sound credits.

Does that answer your question, Graham?

Yes, absolutely. That's very helpful. And then you guys were -- you're obviously not alone in the liquidity issue that's facing the industry right now. I'm just curious to hear how you think this dynamic might evolve over the next few quarters. I know you said deposit inflows have sort of slowed a bit. But I guess just wondering how you guys are thinking about this and maybe if you'll have the securities portfolio at all over the next couple of quarters, similar to how we saw in 1Q or 2Q or if you think it's kind of settled out and you can just really focus on moving this into the loan book from here.

You can sit here and argue with yourself all day, Graham, on whether to wait for higher rates or I mean, I was at a dinner several years ago and I said say when rates go up, then a man looked at me that controlled the largest bank in Japan, Tom, I've been waiting for rates to go up in Japan for 10 years. I came back and told Bud. We don't we need to quit waiting. We need to buy some securities now. So we kind of have a strategy of just try to split the difference, Graham.

We do a little. We're not going to say we're waiting for higher rates. I mean we -- everything I see says we're going to have inflation. But I mean, show me -- find me an economist that's gotten and rich doing accurate economic forecasting. I'd like to shake his hand. I don't think he or she exists. So the best thing we can do is just we'd like to find more loans, good short-term loans at floating rates or short fixed rates and the securities portfolio. We tend to agree with most everybody else in the industry yet when the Fed eventually quits buying every security that's created, there will be a little bit better yield and you can get it. Bud can't find more back -- short mortgage backs don't really exist almost.

Not a good yield anyway. Yes. You have seasoned paper, you're going to probably get about 80 basis points.

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

Tom, I guess, on the subject at the beginning of the call, you talked about the line utilization and maybe it seems like you're a little less hopeful than you were last quarter in terms of that coming back. And maybe if you can just -- what's kind of driving that? Is it just more -- you mentioned talking to customers, but just -- what's driving that shift in thinking?

Yes. Just you can't get -- the supply chains are just -- they're still broken. People -- companies cannot get inventory. And it's the darnest economy I've ever seen, Kevin. I mean people buying houses, cars, boats, I mean, everything. You can't even get a bicycle. I mean why a bicycle is short supply? It's just -- none of this makes any sense in a way.

So the companies are -- so the answer is, I thought supply chain is based on what the Fed has been saying, but they clearly don't know much more than we know. They're not -- supply chains aren't getting rebuilt very quickly. So we're not counting on the line utilization improvement in the short term.

I think if I had to guess, I guess they're going to improve in probably the fourth quarter, Kevin. But I don't see gaining back the $300 million in loan volume we lost last year. I don't see a gaining back this year. I hope that we get 100 -- half of it back, say, $150 million. So maybe I'm a little less optimistic on that today than I was last quarter. But we've got to count on organic loan growth to get to where we need to be.

But I guess other than the line utilization, you kind of were characterizing the organic growth you had this quarter is more of a real -- it really got accelerated because of this pent-up catch up, I guess, and that you still expect it to be healthy over the balance of the year, but not explosive like what you saw this quarter. Is that accurate?

Yes, a lot of what I think we're seeing out there in the economy is a lot of -- so many companies got PPP stimulus, they really didn't need to sustain operations, with hindsight they didn't need it. They thought they needed it. And hopefully, they're going to pay those -- pay that money out in dividends and people are going buy then new boat and then they'll start using their line of credit here again. Get them a new airplane and new boat. So airplanes in short supply, too. So everything is selling. It's pretty amazing.

Just 1 last 1 for me. You mentioned about the new hires and the new markets in terms of their contributing. Are there -- if we think the economy is going to continue to reopen and there's a lot of -- there's additional growth out there, are you looking at any additional markets or making moves to invest in any new markets that you're not currently in right now?

Yes. We're talking to teams in a couple of markets but nothing is in the next couple of months, Kevin, but one would probably be towards the end of the year and one, it would be probably towards the -- sometime the end of the third quarter. So we also still look at the bolt-ons. We like the bolt-ons to -- in existing region are also very profitable for us when we can add people that are -- use the support of the regional hub. We're talking to a lot of people right now.

Next question will come from William Wallace with Raymond James.

I'd like to maybe circle back on the liquidity question. I'm just kind of looking at some of the balance sheet items. Obviously, the cash is up about $1 billion. Deposits are up about $1 billion. Why are you putting on Fed funds purchased? Those are up a couple of hundred million and you've got so much liquidity, why do you need to grow it in that line? Does that happen to do with a different line item? Or are you worried about some deposits or something?

Well, this is Rodney Rushing And no, we're not worried, but we've got over 300 downstream correspondent banks that have accounts with us. And like us, they're flushed with cash. So they're selling us more of the funds. One thing we have done is we're moving as much as we can into DDA so that those banks can pay for their Fed charges and other services with an earnings credit.

But to answer your question, correspondent balances have grown and they'll probably continue to grow over the next couple of quarters. We're adding accounts. And we -- to us, it is core deposits because it acts just like a corporate cash management account, where a company we bank has their main working deposit account here, that pay all their bills, run all their business through that DDA account, and then it automatically sweeps in the money market or they automatically borrow on their line from us if they need it. That's exactly how our correspondent accounts work. And we loan them money in Fed funds or we buy the Fed funds and they're flush and we're flush right now but we perceive it as valuable deposits. I hope that answers your question.

I think so. Does -- do you have to carry slightly more liquidity against those deposits just given potential volatility?

Well, that's a good question. Right now Bud is selling that excess liquidity to the Fed. We did use this opportunity to lower our -- when the Fed went up, what they were paying on excess reserves from 10 basis points to 15, we did not increase on our regular Fed funds. We could take that money and sell it to the Fed as agent and we could do that in the future if we wanted to. Right now, we just choose not to, we're buying it all as principle, so on our balance sheet.

And Wallace, the regulators would love us to have more and more liquidity. You cannot have too much liquidity with the regulators. It is a champagne problem to have.

No, that's -- yes. Fair. Great. Okay. And you highlighted it in the press release and you highlighted in the prepared remarks, but I still don't understand what it is that you're referring to with the PPP forgiveness going away that's causing you to build your reserves to loans up. I mean it seems like all of the metrics that we see are positive economically.

Yes. And I would say it's not as much the PPP forgiveness, but the PPP going away and that the added stimulus and the government support is being tapered. And that, as you said, the credit metrics in general, are all positive, but we have lost out on some support these businesses had. That, coupled with the loan growth of $500 million were kind of the drivers in increasing the reserve.

So from here, is it safe to assume that you feel like you -- from an utmost of caution you've kind of guided to where it should be? And then assuming we continue to see the economic metrics that we all watch and there are variables in your CECL model that we would start to see some release?

Well, and also, Wally, I think we -- it's taken us a year sometimes to collect on the SBA guarantee. So nobody has really tried to collect on any of these PPP loans from the SBA yet. So we could get -- you think it's all going to be clean and neat, but it's sometimes dealing with the government is just a little bit messy.

So we're just prepared for every eventuality. It's not a lot of -- consider we made a -- we've got about a few million dollars in a little reserve there, but we booked $1.5 billion of PPP loans. So it's not -- by comparison, it's not a lot of money. But that's part of the question, too, Wally, it's just whether the forgiveness will work properly. And if it doesn't, do they try to avoid a guarantee in some fashion.

So if I remember correctly, I believe you had actually set aside some reserve early on against the PPP loans, just in case, but I was looking at the reserves, excluding all the PPP loans. Have you built that sort of -- I don't know what you would call it, but that reserve about potential PPP loans. Have you built that more?

Wally, no, I don't -- in the past, we have not had a specific reserve on PPP loans. We did, this quarter set aside, as Tom mentioned, a small reserve associated with potential for fraud. We know of no fraud. We have been successful in our forgiveness that we've applied for. But at the end of the day, on $1 billion, there might be some issues related to fraud. So we just want to be conservative in setting aside some funds for that potential. And as Tom mentioned, nobody has applied for the SBA to actually pay on their guarantee versus pay on the forgiveness. So just making sure we're kind of marked a little bit there, but that's not a huge factor in our model.

Okay. Moving on, what are the utilization rates? I believe you might have told us last quarter, but just in case, Tom, where are we sitting right now?

Yes. We're 38.77% at the end of the quarter. It was up from 37.67% in the -- into the first quarter. But at the end of 2020, it was at 39.54%. But going back in time, at the end of 2019, it was 48.12%. So we're a full 10 percentage points below where we were before the prior to the pandemic.

And also my problem with SBA loans has always traditionally has been that when the one administration takes over from another administration, they try to undo what the prior administration did. And so that's actually what we've got in place. Is we've got the Republican administration did the PPP program, and now we have a new administration in place and it just -- it needs to be cautious and preparing to deal with the SBA. Not that we -- we have very great experience with them, absolutely no issues whatsoever. At this point in time, Wally, it's best to be prepared.

Yes. Understood. Okay. And then one last question, just kind of a housekeeping thing, but I believe you mentioned that it was $8 million of PPP net interest income in the quarter. In the release, it says $8 million of net fees. Does that $8 million -- does that include the interest income? Or were you just citing the fee acceleration or total fees that were booked as part of NII?

Let me go back to my script. Yes. So I'm saying (inaudible) for what I had.

(Operator Instructions)

And this will conclude our question-and-answer session. Actually, it seems that we have a question that just came in from Mr. Graham Dick with Piper Sandler.

Just 1 follow-up here on PPP, mainly as it pertains to expenses. It doesn't look like you guys did much in the way of PPP originations this quarter, but I was just wondering if there was any FAS 91 deferred origination costs incurred this quarter, or if you guys are pretty much behind that in this $16.9 million salary level is similar to what we might see over the next couple of quarters?

No. I don't -- it was not a significant amount in the second quarter. That was mainly in the first I don't have the exact number. I can send that to you, but most of that occurred in the first quarter. Around it.

And this will conclude...

No more questions. Thank you.

Yes, sir. The conference has now concluded. Thank you for attending today's Presentation. You may now disconnect.