ServisFirst Bancshares, Inc. (SFBS) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon and welcome to the ServisFirst Bancshares Inc. First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 discussion during our 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.

Good afternoon. We are very pleased with our quarter and we are 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’ve seen inflation and 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 talked to one diversified manufacturer, wholesaler last week who said everyone is gouging everyone out there and I know that there is a shortage of labor in most every industry today. The unemployment rates in our State [indiscernible] 4.7% in February and we are seeing improvement monthly in that number. And I can only recall one first quarter 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. We did have a little bit of growth in the quarter, but one of our largest clients has seasonal pay downs it offset the growth and the non-PPP loan balance. As I have mentioned before, we have not seen the utilization, the line utilization rebound as of yet, but do expect improvement for 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, you know our pipeline is not exact, and you do have unexpected payoffs, this is the highest pipeline in the last 12 quarters 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 long growth this year. We do continue to see more opportunity due to mergers, our performance with PPP in attracting new clients, and [indiscernible] 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, you know 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 [today] [ph] as our bank does, we do feel confident core-deposits will add value over time. New account openings have steadily improved over the past six months and were 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. Non-performing 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 fourth quarter and roughly a $21 million reduction from the first quarter of 2020. This results in NPA to total assets of 16 basis points, which is a 5 basis point reduction from Q4 and 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 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 or 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-off has 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 due 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, primary example being PPP has 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 3/31/2021 are 20.4 million, 9 million relates to Round One and 11.4 million to Round Two. CD maturities for the remainder of 2021 are 452 million, a 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 the 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. 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 DDA is 0.25, and our total interest bearing deposits 0.36. Remainder, we have no accretion income related to acquisitions. And for our PPP recap, Round One 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 Two, 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 Two. PPP balance at the end of March 2021 was 968 million. 2021 Round One loan forgiveness was 334 million. 43 loans 2 million and above have been submitted for forgiveness. Only one for 2.2 million has been forgiven, and the dollar amount of loans awaiting forgiveness is 130 million. Monthly yield, including PPP fee accretion around loan will be about 45 basis points, the loan-term being five years versus two years for Round One. Liquidity, excess funds were 600 million, more started funding PPP loans in April 2020. Excess funds were 2.7 billion at 3/31/2021. Non-interest income, credit card spend amount 169.8 million in the first quarter is 168.4 in the fourth quarter 2020, and 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 for that that accrual adjustment. Fourth quarter of 2020, the actual was 913,000, and that included a rebate accrual adjustment of 870,000. First quarter of 2020 net income was 1.8 million. Merchant services fees year-to-date 2021 is 191,000 versus 100,000 for year-to-date 2020, and we have two 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 a 1.1 million. A reminder, we do not sell any government guaranteed loans to generate non-interest income. Non-interest expense, total producers at the end of 2020 were 133, March 31, 21, a 131. Total employees at the end of 2020 were 499 and same number at the end of March of this year. Total non-interest expenses in the first quarter of 2020 were 27.9 million, first quarter of 2021 28.9 million. So for the increases, first quarter expense for incentives were 3.7 million versus 2.7 million for 2020, and increase is primarily based on projecting production from the producers. Our unfunded commitment reserve for the first quarter was 600,000. [Mortgage commissions] increased by 380,000, 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 Two 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 right was 20.18%. For 2020, that number was 18.76%. And the projected rate for 2021 is 22%. And that concludes our presentation.

[Operator Instructions] Our first question today comes from Graham Dick with Piper Sandler.

Hey, guys, good afternoon.

Hi, Graham.

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, you know, we do feel really good about where we are. But you know, it's just – we've been through the worst pandemic, and you know, that I've ever experienced and you've ever experienced. So, we just want to be a little bit cautious in terms of, you know, [doing anything][ph] in the way of, you know, loan loss reserve release at this point in time. So, you know, it's nice just to have a little bit more dropout there in the event of something unexpected. We don't know of anything, and don't – and feel good about it. There's just, you know, 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 126 level of reserves ex-PPP?

Yeah, I think – well, I think because of our projected loan growth in the second quarter, we will have reserve build, but not, you know 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 second quarter because of the projected higher loan volumes. Did that make sense? Did it answer your question, Graham?

Yeah, absolutely, it's perfect. And then I guess, turning to loan growth, with 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 quarters, specifically?

Well, you know, we said, [if you're in] [ph], 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, you know, I feel better about that goal today than I did when we said that three months ago, right. So, just because we see pretty clear, pretty substantial loan growth, as we've already had some pretty good loan growth this quarter, in the first, you know two-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, you know, the real question to me is, you know, 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 an inventory that's leading to – that should lead to improvement in line utilization in time, but just, you know the good old fashioned, you know, 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, you know, 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. Do you guys have the loan yield, excluding PPP loans? The [relationship ] [ph] total loan yield, I'm just trying to get a sense for how much more pressure there may be on core loan yields, if any at all?

Yeah, for the first quarter, so the margin was [3.20] [ph], exclude PPP was [3.08] [ph].

No, he's asking yield, loan yield.

Oh, loan yield. Just new production.

More particularly on just the average loan yield ex-PPP like I see here that the taxable loan yield [indiscernible] quarter-to-quarter, just trying to get what the core loan yield was there?

I don't have that one. No. I can email it to you. I just told the margin. I don't remember the actual loan yield.

Okay. Yeah, no problem. Thank you, guys. Congrats on a good quarter.

Thank you.

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

Hi, good afternoon, everyone.

Good afternoon, Will.

I appreciate the details on, kind of what you have coming up from a deposit repricing, I'm just curious, you know, if you can kind of size up what the expectations are for the margin when you back out, you know, all the noise from PPP that, you know, maybe over the next couple of quarters, and you kind of manage through the through the liquidity headwinds. Just curious how you're thinking about the trajectory of the margin from here?

Yeah, you know, [indiscernible] somebody, if we can replace the 900 million we had in PPP by the end of the year, it definitely has a positive impact, because new loans are going on around the 425 yield level. So, we expect - the key to whole margin improvement is having that much in the loan production this year. If we have that margin [kind of takes care] [ph] 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 the first quarter, did you give that number?

Yeah, 956 million.

Okay. Got it. Alright. And then just the last one here on the – I think last time, you guys talked about expense growth this year being, sort of similar to, kind of what we saw last year. So, I'm just curious if you know if that was still kind of a fair expectation as we think about the 2021 expense base.

Yeah, I think so. You know, like we talked about, the biggest increase will be our core conversion. We boasted a $2 million increase related to that. So, we still think, excluding that we'll look to keep our expenses under control. And I think we talked about the fourth quarter call that, you know, we're adding people, it's mainly production people. So, they've got to come in and produce pretty quickly to pay for themselves.

All right, appreciate the color. Thank you.

Thank you, Will.

[Operator Instructions] Our next question comes from Kevin Fitzsimmons with D.A. Davidson.

Hey, good afternoon, everyone.

Hi Kev.

Good afternoon.

I was wondering if, maybe we can, you know, we've talked about a loan growth and we talked about margin, maybe just if we can simplify 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, you know 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 – I say that we're going to [indiscernible] what we're going to add on new loans versus what's rolling off or given?

Yeah, 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, you know that's uncertain right, as far as when and how that rolls off and just wondering Yeah, how smooth of a trajectory that would be?

Yeah. And what also have complicated, you have 9 million in fees relating to Round One and if all those loans are forgiven, Round One loans are forgiven by the end of the year you get 9 million in additional accretion that will come in, so that definitely impacts how you're looking at the margins there.

Yeah, right.

You heard us say all the loans except one over $2 million, a PPP from Round One are hung up. They have been zero forgiveness. Actually was one forgiven on the first day that the portal open. I think that was forgiven by mistake. So, all the other 43 out of 44 still and there's no word at all from the, [indiscernible] I think any of our competitors have had any forgiveness there either. So…

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

And your guess is as good as mine on that. You know [indiscernible] 1% on those loans instead of 10 bips to 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 now, blame them a bit. But you know, in the meantime it's okay.

How about, you know, 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, do you have the team in place right now for everything you see come?

Yeah. We will have some announcements in the next, you know, wait 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. It's the same. 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 great coming in Friday from another state to visit. So, we have some potential to own board and this is moving time of the year, as you know. So, you know, for people that are found – because 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 one last one Tom. You know, we always asked 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, you know, 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? Are you just consistent with how you've looked at it over the years?

Yeah, I think we would certainly, obviously, we, you know, our multiples are a little higher than the industry as a whole. And, you know, the right opportunity we're always interested and we’re always willing to talk is just the, you know, finding something that's branch [indiscernible] is a good cultural fit. You know, there just aren't many of those out there. You know, as you well know. So, we're more than willing to talk and we understand the, you know, potential synergies of the, right, you know, group in the right – at the right time in the right place, would make a lot of sense for us and for the group that we merged with. So, we certainly are interested in the right opportunity.

And, you know, 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?

Yeah, I think it becomes – I think it's a hurdle. And I think there are a lot of people who would like to lighten their branch load right now, you know, and they can't. There are a lot of reasons, you know, they can't do it. I mean, we've got, you know, we've got a couple 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 buy. So, you know, a lot of our internal people [are in us], you know, [us branch] where I go cash my checks. I don't close that, right. I mean, that's, you know, it gets out of things like, Kevin. I mean, you think it wouldn't, but it does. And so it's in a bank that’s, you know, been around 30, 40 years, and they've had these branches. And when you’ve certainly got key issues regulators in closing, and, you know, 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, well, what's wrong? Why is my bank having to close these offices? Is my bank in trouble or I mean, you know, what's the problem and you try to explain it to people and they're just not a good explanation out there. And it's just not a lot of fun for anybody, but it's certainly I think, the pandemic – we’ll see, but I don't think branch traffic is going to pick up in the industry, you know, post pandemic. You know, the people quit coming because of the pandemic. They might have initially, but now I think they found additional channels. You know, so I don't think we're going to see, I think it's a secular trend that’s going to continue for branches to continue to wither away, but, you know, they're not going to die a quick death, they're going to die a slow death and it's going to be a, you know, it's going to be dreadful losses in the retail branch front, you know, for years there.

Yeah, all great points. Thanks, Tom.

Thank you, Kevin.

Our next question comes from William Wallace with Raymond James.

Thanks. Good evening, guys.

Good evening Wallace.

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 you know, if the right thing just happens to fall on your lap, you take a look?

Yeah, you know, I won't say they're unicorns, while they, you know, most of the people that would fit it are doing quite well on their own. So, why would they want, you know, do anything, you know, short of age issues. And any, you know, that's what we say, sometimes it will say some people that are, you know, I had a friend and, you know, in Texas said, hey, there’s a bank you need to buy and also we’re, you know, the CEO 76, who’s his backup management, so he didn't have any. You know, you'd have to send somebody and as we don't send people to Texas, You know, they’ll not accept it. So, I don't care if we've Georgia, Alabama, Mississippi, they're not accepted in Texas. So, you know, we certainly – we’re interested in buying that bank. So, it makes it hard to find a fit were the reasons for the bank to sale, and reasons for us to want to buy and they all match up. I mean, I think you’re – is a little. They're not unicorns [wildly], but they are not numerous, let's put it that way. I think we have some brands in the Midwest by banks, and they, you know, they tell us how many [potential backdoors] they had [indiscernible] it was in the hundreds. You know, ours are certainly not in the hundreds, it’s more like in the tens right then hundreds. So…

Okay. Okay. All right. Thanks. That's helpful. And I apologize if he 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, I haven’t seen some usage increase?

I didn't give it Wallace so that – if not at 12/31, let me go back, the end of 2019 it was 48.1, the end of 2020, 39.5. And it's even lower today. It's 37.7. Because of, you know, the PPP Round Two decrease, you know, 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. Yeah. 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 belief?

You know, we – you know it’s competitive. I won't say that, but we try to be disciplined, while we think the banks that are disciplined are going to be the winners. You know, we think we'll get to the finish line. You know, I see some people that aren't disciplined, but I don't think – I think they're living for today, you know, maybe want to show an analyst, you know, some growth today. And, you know, they're not worried about tomorrow, because they're going to plan on being – they're planning on being retired to their beach house in Florida tomorrow, at some point, right. So, you know, we want to be in this long-term and for the long game, so we're certainly trying to be as disciplined as we possibly can, from a pricing standpoint, and we see some pretty good opportunities. You know, right now, we think is, you know, things, we've been impressed with how things have opened up month by month, each of the last three months. And, you know, we're thrilled to be in the Southeast United States, again, I’d say that every quarter, but, you know – and we're thrilled not to be in the retail banking business, you know, I think we're, I like our space before we have the [Bankers position] and I like our markets, I like our asset diversity, and feel good about where we are. Did I leave anything out?

Okay. So, generally speaking, the absence, you know, a couple of maybe irrational players here and there, the pricing pressures have stabilized. Is that a fair characterization?

Yeah. 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, you know, 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, you know, especially as you know, the restaurant workers are still, you know, they're getting more than, you know, than they were working. So, they have no incentive to go back to work.

Yeah, okay. But on the expense question, are there any, like, was there any deferred comp related to the PPP, part two 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, well, surprise [indiscernible].

It was 1.1 million in the first quarter, while it was part of that net number that I gave. So, net, fees and [phase deferral] was 11.4 million at the end of March for Round Two. We were given that number.

Okay, but…

[Indiscernible] over the life of the loan, yes.

Yeah. So, there's going to be 1.1 million that comes back into the run rate in the second quarter, is that correct?

Well, so the loans are over five years. So, Round Two is five years, so just factors in over the [life of one].

Right, yeah, right.

So forgiveness, they come in more quickly. So yeah, good question, Wallace. The deferral is a little bit misleading. You know, PPP has been a wonderful [narcotic] for all the banks. The problem is we just went fully without it [until 2022]. And we won't be prepared to live without it and be successful without it, and, you know, continue to grow earnings.

Yeah. Okay. And then just one last question. I too was, kind of curious to see your reserves increase, just one quarter actually took them down when you 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 for adopting it.

There wasn't any risk grade migration to necessarily drive that. You know, I'd rather just, kind of what the model dictated in general. You know, 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 long commitment. Expense went up, but it’s not in the loan loss reserve, but it should be. To me, I don’t know what that’s a separate line item on the expense factor that didn’t make any sense, but just feel like, you know losses were extraordinarily low in the first quarter. I don’t get on the run rate until very long, while you have 2 basis points per annum. I don’t – I have not been associated with the with [bank] they had 2 basis points of losses in the history of my career. I think, you know, typically I've seen – I've had banks that operated between 5 basis points and 10 basis points a year charge off, but usually around 10. So – but not that low. So…

Yeah. Okay.

Yeah, [we've impacted] a little bit of common sense there, Wally.

Fair enough. Okay. Thanks for the time guys, I’ll hop out.

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.