ServisFirst Bancshares Inc (SFBS) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to the ServisFirst First Bancshares, Inc. First 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.

Good afternoon, and welcome to our first 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 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-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst makes -- 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 first quarter. 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.

I've talked -- we -- I've talked to one diversified manufacturer wholesaler last week who said everyone is gouging everyone out there, and I know that the -- there's a shortage of labor in most every industry today. The unemployment rates in our states are averaging 4.7% in February, and we are seeing improvement monthly in that number.

And I can only recall on first quarter of any -- of our 16 years where we had any reasonable loan growth in the first quarter, and certainly this year, fits the normal pattern of not having it. We did have a little bit of growth in the quarter, but one of our largest clients had seasonal paydowns that offset the growth in the non-PPP loan balance. As I've mentioned before, we have not seen any 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 second quarter. 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 by over $300 million.

Our goal for the year is to replace our PPP loans with other loans by year-end. Bud Foshee 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 first quarter. The growth has been very broad across the entire company. While the industry does have substantial liquidity date 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 with that, 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 first quarter 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.

Nonperforming assets were down to under $20 million on a total loan portfolio of $8.5 billion. The $19.9 million in NPAs is a $5.5 million reduction from the fourth quarter and roughly a $21 million reduction from the first quarter 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.

The 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 million 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 first quarter. The $487,000 in net charge-off to average loans for the first quarter on an annualized basis were 2 basis points versus 41 basis points in the fourth quarter and 26 basis points in the first quarter of 2020. On strictly a dollar amount, net charge-offs have not been that low since the first quarter of 2016, and at that time, the loan portfolio was only $4.3 billion, which is roughly half of where we are today.

Our past dues to total loans were 7 basis points, $6 million, a 34% decrease from year-end. We grew our ALLL by $7 million in the first 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, the 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 first quarter was 3.20% versus 3.27% in the fourth quarter of 2020. The adjusted margin was 3.08%, excluding the average PPP loan balances of $956 million and PPP interest income and loan fees of $11.4 million. Adjusted margin for the fourth quarter was 3.23%, excluding the average PPP loan balances of $1.01 billion and PPP interest income and loan fees of $10.1 million. The adjusted margin was 3.27%, excluding the increase in excess funds of $411 million.

Fourth quarter adjusted margin was 3.36%, excluding the increase in excess funds of $311 million. The remaining net PPP deferred fees at 3/31/21 are $20.4 million. $9 million relates to round 1 and $11.4 million to round 2.

CD maturities for the remainder of 2021 are $452 million, $171 million for the second quarter. The average rate is 1.11% for the year and 1.08% for the second quarter maturities. We expect the majority of these CDs to reprice at 0.40% or below. The repricing will result in a $1.3 million annual expense reduction or $717,000 for the second quarter maturities. The quarter-to-date cost of interest-bearing deposits has decreased 0.38% in the first quarter versus 0.44% in the fourth quarter 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 to acquisitions.

And for a PPP recap. Round 1, 4,962 approved loans. The total loan amount was $1.09 billion; total fees, $34.4 million. And ServisFirst ranked 89th out of 4,839 participating banks. The balance of loans at the end of 2020 was $900 million.

Round 2, 2,287 approved loans. Total loan amount of $407 million; total fees of $16.7 million. And ServisFirst ranked 87th out of 4,628 participating banks in round 2.

PPP balance at the end of March 2021 was $968 million. 2021 round 1 loan forgiveness is $334 million. 43 loans, $2 million and above, have been submitted for forgiveness. Only 1 for $2.2 million has been forgiven. And the dollar amount of loans awaiting forgiveness is $130 million. Monthly yield, including PPP fee accretion of round 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 million when we started funding PPP loans in April 2020. Excess funds were $2.7 billion at 3/31/21.

Noninterest income, credit card spend amount $169.8 million in the first quarter is $168.4 million in the fourth quarter 2020. In the first quarter of 2020, the spend amount was $146.1 million. Credit card net income. First quarter was $1.2 million, which included an accrual adjustment of $290,000. First quarter net would have been $1.5 million for that accrual adjustment. Fourth quarter 2020, the actual was $913,000, and that included a rebate accrual adjustment of $870,000. First quarter 2020 net income was $1.8 million.

Merchant services fees year-to-date '21 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 $2.7 million in the first quarter versus $3.1 million in the fourth quarter. And first quarter 2020 was $1.1 million. Reminder, we do not sell any guaranteed loans to generate noninterest income.

Noninterest expense. Total producers at the end of 2020 were 133; March 31, '21, 131. Total employees at the end of 2020 were 499, and same number at the end of March of this year.

Total noninterest expenses in the first quarter of 2020 were $27.9 million; first quarter of 2021 million, $28.9 million. So for the increases, first quarter expense for incentives was $3.7 million versus $2.7 million for 2020. And the increase is primarily based on projecting production from new producers.

Our unfunded commitment reserve for the first quarter 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. The PPP FASB 91 deferral was $1.1 million in the first quarter for round 2 loans.

And just note that our salary increase year-over-year was only $11,300.

Capital, despite a $2.8 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 79%.

Tax update. First quarter, the rate was 20.18%. For 2020, that number was 18.76%. And the projected rate for 2021 is 22%.

And that concludes our presentation.

Our first question today comes from Graham Dick with Piper Sandler.

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've ever 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 dry powder there in the event of something unexpected. We don't know of anything and don't -- and feel good about it, but it's just -- we're just a little bit gun shy because of where we've been for the last year.

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 1.26% level of reserves, ex PPP?

Yes. I think -- well, I think because of our projected loan growth in the second quarter, we will have reserve bill, but not -- as a percentage, it will not increase. It will certainly will decrease as we go forward. So we'll add dollars to loan loss reserve in the second quarter because of the projected higher loan volumes, if that makes any sense. Did I answer your question, Graham?

Yes, absolutely. It's perfect. And then I guess turning to loan growth, you guys seeing 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 the year-end, our goal is to replace all the PPP loans that were outstanding at year-end with other loans, obviously, non-PPP loans. So that's some $900 million. 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 2/3 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 increased our lines. Just because they see 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 million 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'll happen -- some of that will happen in the second half of the year, Graham.

Okay. Great. That's helpful. And I guess just lastly, a quick one here. You guys have the loan yield, excluding PPP loans. The release just shows the total on loan yield, and I'm just trying to get a sense for how much more pressure they may be on core loan yields, if any, at all.

Yes. For the first quarter -- so the margin was 3.20%. Excluding PPP was 3.08%.

No, he's asking yields, loan yields.

Oh, loan yields, just new production?

More particularly on just the average loan yield, ex PPP, like I see here that the taxable loan yield is at 40 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 thought margin. I don't remember the actual loan yield.

And our next question comes from Will Curtiss with Hovde Group.

I appreciate the details on kind of what you have coming up from 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 time with some of it, if we can replace the $900 million we had in PPP by the end of the year, it has -- definitely had a positive impact because new loans are going on around the 4.25% yield level. So we expect the key to whole margin improvement is having that much in new loan production this year. So if we have that margin, contacts care of itself as these PPP loans pay out -- or get forgiven.

Got it, okay. And then I think, Bud, I may have missed this. Just you may have provided it, but the average balance of PPP for this first -- for the first quarter, did you give that number?

Yes, $956 million.

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 million increase related to that, so we still think excluding that, we'll work to get to keep our expenses under control. And I think we talked about in the fourth quarter call that if we're adding people, it's mainly production people. So they've got to come in and produce pretty quickly to pay for themselves.

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

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 loans?

Let me think on that. So you're saying -- so even there we're going...

I guess...

You kind of want to know -- I mean what we're going to add on new loans versus what's rolling off, forgiven?

Yes. I mean it's a lot of moving parts, obviously, with you guys 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 that you have $9 million 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 million in additional accretion that will come in. So that definitely impacts how you're looking at the margin for the year.

You heard us say all the loans, except 1 over $2 million of PPP from round 1, are hung up there. They have been 0 forgiveness. Actually, there was one given on the first day that the portal open. I think that was forgiven by mistake. So all the other 43 out of 44 are still -- and really, there's no word at all from the -- nor do I think any of our competitors have had any forgiveness there either. So...

Yes, I certainly talk to peers, and nobody is getting forgiveness on $2 million or greater loans. I mean they're all seem to be held up at this time.

And your guess is as good as mine on that. We're earning 1% of those loans instead of 10 bps of 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 off 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 -- there were an asset forced to 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 one last one, Tom. We always ask from time to time about M&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, we -- our multiple is 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 light and is a good cultural fit, there just aren't many of those out there, as you well know. So we're more than willing to talk. And we understand the potential synergies of the right group and 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 merge with. So we certainly are interested in at the right opportunity.

And you mentioned that you'd want to 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 that a lot of people would like to like to lighten their 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 just a lot of our internal people are like here's a branch where I go 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 -- and a bank that's been around 30, 40 years and they've had these branches, and you certainly got key issues to 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? Or 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. The 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 -- I think it's a secular trend that's going to continue to -- for branches to continue to weather away. But they're not going to die a quick death. They're going to die a slow death, and it's going to be a drip of losses in the retail branch front for years there.

Our next question comes from William Wallace with Raymond James.

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 why see sometimes as we'll see some people that are -- I had a friend actually in Texas said, "Hey, there's a bank, you need to buy it." And so the CEO's 76. I said, who's his backup management, said he didn't have any. You'd have to send somebody. And we don't send people to Texas. They're not accepted. So I don't care if Georgia, Alabama or 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 brands in the Midwest that buy banks, and they told us how many potential bank targets they had, and it was in the hundreds. Ours are certainly not in the hundreds. It's more like in the tens, right, than hundreds. So...

Okay. Okay. All right. 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? Or have you seen some usage increase?

I didn't give it, Wally. So that -- at 12/31 -- let me go back. The end of '19, it was 48.1%. The end of '20, 39.5%. And it's even lower today at 37.7% because of the PPP round 2 decreased line utilizations again. So we got to get all the government cheese spending 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 -- are you seeing competitive pressures or are they holding in? Or are you actually seeing relief?

We -- 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 to the finish line. I see some people that aren't disciplined, but I don't think -- I think they're living for today. They maybe want to show an analyst some growth today, and they're not worried about tomorrow because 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 as 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. Didn't leave anything out, right?

All right. So generally speaking the -- absent a couple of maybe irrational players here and there, the pricing pressures are -- have stabilized. Is that a 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 are going to 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 won't get surprised or anything.

Well, that -- it was $1.1 million in the first quarter, Wally, but it was part of that net number that I gave. So net fees and FASB deferral was $11.4 million at the end of March for round 2. So we just -- we'll give a net number.

But -- yes, that's...

Over the life of loan, yes.

Yes. So there's going to be $1.1 million that comes back into the run rate in the second quarter? Is that correct?

Well, the loans are over 5 years. So round 2 is 5 years, so it just factors in over the life of the loan.

So if we get forgiveness, they come in more quickly. So yes, good question, Wally. The deferrals are a little bit misleading. PPP has been a wonderful narcotic for all the banks. The problem is we just and flew 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 one 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 seems like a pretty quick shift right 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.

Unfunded loan commitment, expense went up, right? But not in the loan loss reserve, but it should be. To me, I don't know why that's a separate line item on the expense factors. It doesn't make any sense. But we just feel like losses were extraordinarily low in the first quarter.

I don't -- don't count on that run rate for very long, Wally, the 2 basis point 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 -- I'd have banks that operated between 5 and 10 basis points a year charge-offs, but usually around 10, so -- but not that low. So it's just a little common sense. We think a little bit of common sense there, Wally.

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