ServisFirst Bancshares, Inc. (SFBS) Q3 2021 Earnings Report, Transcript and Summary

00:05 Good day, and welcome to the ServisFirst Bancshares Incorporated Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. 00:23 I would now like to turn the conference over to Davis Mange, Director of Investor Relations. Please go ahead, sir.

00:30 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 will take your questions. 00:43 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. 01:04 With that, I'll turn the call over to Tom.

01:06 Thank you, Davis, and good afternoon, thank you for joining us on our call. I'll talk a few minutes about our loan growth for the quarter. We had three hundred and sixty nine million dollars of net loan growth for the quarter, which is an annualized growth rate of eighteen percent. Our goal is to -- has been to have a monthly loan growth goal of one hundred million dollars a month and we've exceeded that goal over the last three quarters, and certainly, we're pleased to see. 01:36 We had thought that we would see line utilization improve in the second half of the year, but we saw no improvement in 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. 02:08 We did see net pay downs in commercial and industrial loan balances in the quarter excluding PPP loans. Well, this is both the result of the second round of PPP stimulus, as well as, as we're seeing very strong profitability in our customer base in the commercial and industrial companies. Loan growth for the quarter was highest in the West Central Florida, Charleston, Dothan and Northwest Florida regions. And looking at -- our loan pipeline is about ten percent above last quarter and is back at historically high levels. 02:47 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 -- 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 the South Florida market with an addition of a key banker in South Florida. Our non-interest bearing accounts doubled in the quarter in correspondent from five hundred million dollars to one billion dollars. 03:32 Few minutes to talk about capital. We were -- when we started the pandemic eighteen months ago we were under ten billion dollars 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's nice to have excess capital on hand to fund future growth. Eighteen months later we are all at -- fifteen billion dollars in assets. So we are quite happy, we had the capital support of bigger balance sheet. 04:03 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 four point six billion dollars in cash at the Fed and we do have a negative carry on that four point six billion dollars. I did see an analyst report recently saying we're in the top ten for cash as a percentage of assets. And Bud will go over our plans in a few minutes to invest those funds over time. 04:49 So on the hiring front, we continue to have many conversations more than in the past few years, again, as 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 told 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 actually it was the best thing to do in the banking business is almost always to be conservative. 05:25 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. 05:37 So now I'd like to turn it over to Henry Abbott, our Chief Credit Officer to talk about our credit situation.

05:45 Thank you, Tom. Very pleased with the bank's performance in the third quarter and the loan portfolio continues to perform well in the current economic environment. 05:55 I'll give a brief overview of the key ratios for the quarter, we continue to see strong asset quality, which can be attributed to ServisFirst’s strong client selection, credit servicing and the vitality of the markets and our footprint. 06:10 Non-performing assets to total assets were down to eleven basis points versus fifteen basis points last quarter, and twenty nine basis points in the third quarter of twenty twenty. For the quarter, NPAs were down to sixteen point five million dollars, this is a fifteen percent reduction from the prior quarter and a fifty percent reduction from the third quarter of twenty twenty. This drop is attributed to OREO continuing to be at near record lows in line with prior quarter and a two point seven million dollars reduction in non-performing loans. 06:50 Our past due to total loans were eight basis points, six point eight million dollars on par with last quarter and a twenty seven percent reduction from the end of the third quarter in twenty twenty. Charge offs and OREO expenses for the quarter were one point eight million dollars, an eighty five percent reduction from the eleven point five million dollars in the third quarter of twenty twenty. 07:15 Our net credit expense annualized for the third quarter would be eight basis points, and I'm proud to say that year to date, net credit expenses when annualized will be four basis points versus credit expenses for twenty twenty for the whole year of thirty eight basis points. 07:34 In the face of strong competition, loans grew by three seventy million dollars excluding PPP payoffs. Including PPP payoffs our loan outstanding still grew by one hundred and sixty three million dollars. Primarily due to loan growth, we grew our ALLL by four point two million dollars in the third quarter versus roughly nine point seven million dollars last quarter. Our ALLL to loans, excluding PPP loans from total loans is one point two nine percent. 08:05 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 unprecedented government aid still helping borrowers, we felt it’s appropriate to continue to grow our loan loss reserve. 08:21 Twenty twenty one 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. 08:31 With that, I'll hand it over to Bud.

08:33 Thank you, Henry, good afternoon. Liquidity, as Tom mentioned, we have a plan to invest a portion of our excess funds. Our initial goals are to purchase fifteen year mortgage banks and five and seven year treasuries. The net monthly investment security growth will be about one hundred million dollars and we will increase these monthly purchases over time. 08:58 Current yield on mortgage banks is approximately one point three zero percent, current yield on five year treasuries is approximately one point zero eight and one point three eight for seventy year treasuries. We also decided to retain a portion of our mortgage originations. For the third quarter we sold thirty three million dollars to investors and retained fifty three million dollars. 09:22 Net interest margin, average loans, exclusive of PPP increased by four twenty four million dollars in the third quarter. Average PPP loans decreased by three eighty seven million dollars for net average growth of thirty seven million dollars. PPP fees and interest income were six point four million in the third quarter compared to ten point two million dollars in the second quarter. Also an increase of nine seventy one million dollars in average excess funds decreased the margin by twenty basis points in the third quarter. 10:02 On non-interest expenses, salaries increased eight hundred and fifty two thousand dollars compared third quarter twenty twenty one to twenty twenty. Majority of this increase was in West Central Florida as we added production staff and opened the Orlando office. West Central Florida had the highest year-over-year loan growth. We've also hired fifteen new producers in twenty twenty one. 10:32 We increased the incentive accrual in the third quarter by one point one day and based on high dollar volume of loan production this year. Also, we invested in new market tax credits during the quarter. 10:47 The investment write-down increased non-interest expenses by two point eight million dollars for the quarter, but was more than offset by income tax reduction of three point three million. Non-interest income, credit card income continues to grow, it’s two point zero four million dollars in the third quarter versus one point eight million dollars in the third quarter twenty twenty. And third quarter spend was two sixteen million dollars in twenty twenty one versus one hundred and fifty one million dollars in twenty twenty. 11:24 And that concludes my remarks and I’ll turn the program back over to Tom.

11:28 Thanks, Bud. We do continue to be optimistic about our future growth due to strong pipelines and conversations with clients regarding their future plan. So, all in all, we were pleased with the quarter, we’re pleased with outlook, and we'll be more than happy to answer any questions you might have.

11:47 Thank you. Let's open floor for questions.

11:52 We’ll now begin the question-and-answer session. [Operator Instructions] And the first question will come from Brad Milsaps with Piper Sandler. Please go ahead.

12:23 Hey, good afternoon, guys.

12:24 Hey, Brad.

12:26 Hey, Brad.

12:28 Tom, I was just curious at – 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?

12:43 Brad, it’s Bud. With the phase we're still putting loans on at four point one five percent to four point two zero percent, right?

12:55 Okay, great. And -- but based on your comments, I just want to make sure I got you correctly, you thought that the pace of securities purchases would be right around one hundred million dollars a month, so about three hundred million dollars a quarter, is that correct?

13:07 Right. Yes. We're just going to watch right. Five and seven year treasuries have been turning up. So we'll just watch it. I'm sure we'll look at increasing that purchase amount over time, but that's hundred million dollars a month and three hundred million a quarter is our current goal.

13:25 Yes. So, all else equal, you might get the security portfolio up to two billion dollars or so by the end of next year?

13:32 Yes. That’s right, yes.

13:36 Got it. And obviously Bud, none of the one has a crystal ball, but just kind of curious, if we got fifty basis points or seventy five 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? How you want to express it in terms of NIM? Just kind of curious, what the impact would be on loan yields with higher Fed funds and taking into account anything you might add sitting at floors, etcetera?

14:13 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 really have to look at it.

14:22 How much cash we're going to have on deposit in the Fed.

14:28 Yes. That's [Multiple Speaker]

14:28 One billion dollars or three billion dollars [Multiple Speaker].

14:32 Yes. Well, maybe ask differently, can you just remind us of your kind of split between sort of prime or Libor based loans versus fixed rate?

14:45 What now, the mix?

14:50 Yes.

14:52 Let me think, we're at sixty something percent on fixed. Brad, let me look that one, I think we're probably sixty percent to sixty five percent on fixed. I know that's been shrinking, but I just don't have it right here and I didn't break that up. I don't have that in my notes, I’m sorry. I can email it to you then.

15:19 Okay. No problem. All right, great. Well, I’ll hop back in the queue and let some other folks hop in. Thank you, guys.

15:26 All the cash is floating rate -- four point six billion is floating rate Brad.

15:32 Sure. Absolutely. Yes. Got it. Thank you.

15:39 That’s the biggest float rate asset we have, that's cash.

15:40 Yes. Understood.

15:43 The next question will come from Kevin Fitzsimmons with D. A. Davidson. Please go ahead.

15:50 Hey, good afternoon, guys.

15:53 Good afternoon.

15:55 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 to attribute this growth to just pure economic expansion versus the effect of your hiring efforts in 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?

16:40 Kevin, I don't really know that. 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 and that people put projects on hold obviously during the pandemic, and we didn't want to do anything, and they didn't want to anything. So now they're moving forward with new projects, 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 the supply chain was -- hiring issue, so -- but I'm just given you a guess, Kevin. I haven't broken -- we haven't broken it down.

17:41 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? Thanks

18:14 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 it's going to be anytime soon. That certainly will see more inventory, higher inventories. There is a tremendous lack of supply and unprecedented demand that we are seeing today. So we hear from every customer that we have. The other place where we're getting a little pickup in demand, steel prices have gone up and our customer ended up, for example, in the steel fabrication business, they've had to increase inventories and some of our scrap dealers are borrowing a little bit more money today. But it is not have been an overwhelming change in the numbers there.

19:00 Okay. Okay, great. And one last one for me is, just that 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? Thanks

19:34 Yes. Kevin, we've talked to our regulators where our Tier 1 leverage was eight point two five percent in the quarter. We’ll just reassess it in the fourth quarter and see, but I think that eight percent is the magical number, but I think we would have leeway in that, and it would be monitored. The thing that really has driven it down like we grew over one billion dollar in deposits in the third quarter as spikes like that really cause the issues, and I think the regulators understand that. So I think, we could probably get by with -- without doing a capital raise or sub debt or something like that as long as that's a short term issue.

20:29 We think we will, based on projections -- and we think we are fine there from a -- we think we have more than adequate capital, Kevin, And also, again, the risk weighting on the four point six billion dollars at the Fed is zero, right? So we don't have a risk weighted capital issue with that much cash on the Fed reserve. So we think we're -- just absolutely, no problems at all, but we're glad we have that extra capital.

21:02 Yes, I know 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 is capital to be had whether weighing all those different variables about whether you should do it or weight. That was my point. Okay. Thanks very much guys.

21:30 Thank you.

21:31 Thank you.

21:32 The next question will come from William Wallace with Raymond James. Please go ahead.

21:39 Hey, good afternoon, guys. 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 you're liquidity has been building now for since really pre-COVID, I think. And four point six billion dollars is massive liquidity. One, Tom, I guess during your prepared remarks, I might have missed if you gave the timeframe. But I believe you said you're correspondent channel balances have doubled from five hundred million dollars to a one billion dollar. Is -- did I get that correct? And is that year-over-year, or was that in the quarter?

22:30 Go ahead, Rodney.

22:36 Yes, this is Rodney Rushing. You heard him correct. From since year-end, our correspondent DDA balances went from just over four hundred million dollars to over a one billion dollar. Total correspondent balances were just shy of two billion dollars at the beginning of the year and at three point six billion dollar. So what makes that up are the DDA balances where our downstream correspondent banks keep money on the DDA to pay their compensating balances with a settlement point at the Fed form for the cash flow. We than -- anything over that, we sweep into Fed funds or money market account. 23:22 So, right now our largest category by far are DDA balances, but that growth has come from new correspondent relationships, mainly in Florida. Last month alone we opened over twenty something correspondent accounts in the State of Florida. This month we opened another six correspondent accounts. In addition to those new accounts, our downstream correspondent liquidity is higher than it's ever been. They have a lot more cash just like we did. And it's -- we are 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.

24:10 Yes it goes to -- we think -- we're seeing a flattening as I mentioned, we're seeing a flattening, Wally and other in all the regions for the most part in deposit growth. And, I don't know what your question is relating, but do you do a capital raise to support cash in 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, you might not be going there though.

24:57 No, that's precisely where I was going, 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 leverage ratio, sub eight percent, et cetera. Are you there?

25:27 Yes. William, 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 just chosen not to do that, up until now we buying all these principal and we'll see if we can put it to work.

26:11 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 start putting one hundred million dollars 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?

26:31 Well, that's more of a question for Bud and Tom, this is Rodney again. But I'll let them chime in, but Tom said it's leveled off.

26:39 We want the correspondent channel to grow because there are other aspects. You know either long participations that we purchase, we make them direct loans and also we're growing our credit card outstandings through the correspondent -- credit card agent program. So, there are 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.

27:19 Okay. Thank you. And then, Bud, it looks like you moved about two sixty million dollars into held to maturity this quarter. Can you just give us a kind of brief overview of the nature of those securities?

27:32 Yes, that was all mortgage bank securities that we moved, net realized -- unrealized gain was about five point six million dollars and that will just be amortized over the remaining life. So we get to keep that five point six million dollars million in our unrealized gain total. Really that's -- I think a lot of banks are looking to doing this, really you don't have a negative impact from that two fifty three million dollar down the road if rates go up three hundred basis points, I guess. So that's -- it helps your book value by moving that to held maturity.

28:13 Yes. Exactly. And what's the duration on those average?

28:17 About five years.

28:23 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 equations, 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?

29:03 I guess we -- this is Tom. Well, we look at it on a quarterly basis. I mean that two basis points of charge-offs on year-to-date basis is not reality. You and I both know that. I mean, there is a loss somewhere in our portfolio, we just don't know where it is. I've been a President of a Bank for thirty six years, I've never seen losses as low in my career than one-off basis, but never as low as two. 29:35 So good buying, you and I both know it’s good commercial buy during good times of charge-offs of ten to fifteen basis points and during bad times they are probably twenty five to thirty and a little bit higher, if you're not -- you credit quality is not where it should be. So we just want to be prepared for when that happens, while that we think that we'll see some charge-offs. We're in the banking business, they're going to be charge-offs. That's where we had to be prepared and unprepared for that.

30:10 Okay. I appreciate that. And then my last question, just you got your one hundred million dollar monthly loan production target that you have been exceeding. Has production itself been accelerating, or are payoffs also declining? So, you kind of getting a double benefit.

30:29 Yes, we didn't have a -- payoffs are so lumpy. I can't even answer the question. Well, 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 are worried about increase in potential capital gains taxes and other taxes have already done so. People started doing it last year. We had customer selling assets last year to be prepared for higher tax rate. 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.

31:21 Okay. Thank you very much for answering my question. I appreciate it guys.

31:27 Thank you, Wally.

31:29 The next question will come from Dave Bishop with Seaport Global Securities. Please go ahead.

31:36 Yes. Good evening, gentlemen. How are you?

31:38 Hi, Dave.

31:40 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 eighteen percent moving forward with the tax credit investments?

32:00 Yes, maybe a little bit higher, but somewhere in the nineteen percent to twenty percent range. And the new markets, the tax credits and we actually look at the end of the period, you have a capital gain or capital loss, the new market that we purchased in the third quarter was there to offset it. 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 non-interest expense for the quarter.

32:48 Got it. So it seems like that could be a little bit of a get back moving forward here, probably -- maybe one million dollar or two million dollars or so heading into third -- fourth quarter, I'm sorry.

32:59 You still have the -- the write down will still be there. So that's -- it's about nine hundred and – whatever, two point eight million dollars each quarter that we'll have in write-down, but you'll have the three point three million dollars in tax reductions. Is that what you mean?

33:15 Yes. So that's a good run rate moving forward?

33:18 Yes.

33:19 Got it. Okay, great. That's all I had. Thank you.

33:25 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.