Q2 2021 ServisFirst Bancshares Inc Earnings Call
In our conference call, we won't reach of the off of our press release, we assume you can read it yourself so.
Call. That's our practice is not to read from the 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 need workers in almost all of the industry is not just fast food, it's almost every industry.
And so hopefully as unemployment benefits expires, we will see job openings field.
We do in the Birmingham area for example of a large metro areas, we have of lowest unemployment rate in the United States at 2.2% so pretty much of a full employment economy and made the areas of the southeast so the.
On the economy is robust and continuing improve greatly.
I was talking to 1 of the customer last night.
On an open house on them.
On New office in Fort Walton Beach, Florida.
He said, we can't keep boats in inventory.
Wondering what why are people spending so much money for the government stay at the stimulus money.
We see the can't be a couple of 12 of $200 stimulus check.
It is of good question his theories of people or just after the pandemic just said on.
Joined the things I've always wanted the Joey and the pandemic might make people spend money. So it would be interesting to see.
As we move forward, how the how the car.
The only moves alone.
And talking about our results we were.
Solid loan growth surged to a record level in the quarter.
Line utilization is still well below year.
The year end 2019 levels.
The line utilization has not improved and the customers continue for the supply chains are still disrupted.
I've been saying that we thought we would see.
The improvement in line utilization this year it has not happened yet.
And from talking with customers.
On the fed ex like the supply change of only refer to just a few months' time, but from talking with customers we don't.
See that happening so it may be.
Towards the 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.
The second half and 2022 tailwind from construction line draws we have a number of projects underway that where we expect substantial draws in and of course, we do expect.
The utilization just to improve from the inflationary effects of higher prices for steel lower than many other raw materials, so that'll be helpful as well.
Our loan pipeline is down 10% from April but is still 77% higher than it was at year end 2020, and as of the second highest level ever.
Our loan growth is broad based and the centered around commercial real estate and commercial and industrial loans.
We do continue to see deposit inflows.
Though they are more of the normal historical growth rates. So the mid teens for our bank rather than the.
The large surge in deposits we saw during the pandemic.
Our liquidity continues to bill to historic levels to buy despite the record loan growth in the quarter.
We are very pleased with asset quality.
As Andrew will talk about the few minutes we had.
<unk> had negative charge offs in the quarter and.
Thought we should have a celebration and interest ask that we postponed the celebration of until we could see.
What happens when we have the withdrawal of government stimulus.
Whether it relates to <unk>.
Some uptake in <unk>.
Future losses, and some loan categories, but personally I don't see many business is struggling its up for some that are quarterly managed.
And now I will turn it over to Henry Abbott are key for it ops or give a little bit more.
The detail of our credit outlook Henry.
Thank you Tom.
Second quarter results continued the very positive trend started in the first quarter 2021, and the second quarter. We even showed a net recovery, which has not occurred and at least the past 5 years as far back as I look and we continued to show strong asset quality trends across the board.
Our number of generally speak for themselves. So I will give a few key metrics.
Non performing assets to total assets were 15 basis point versus the 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 500 for.
$40000 and Oreo expenses for the quarter I.
I am pleased to say, we posted net recovery of $112000 for the quarter has mentioned as far back as I look we have not posted a quarterly of recovery.
Our path to the pedal on 4.8 basis point $6.7 million of 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 and this new economic environment.
We were pleasantly surprised by the $517 million in loan growth. This is excluding the runoff of PPP loans.
Our zero percent risk weighted assets.
Primarily because of the loan growth in the above referenced uncertainty given the end of Triple T. We grew our AA AAA out by $9.7 million in the second quarter are a triple out of loans ex.
Excluding PPP loans was 1.3 of <unk> at quarter end up from 1 <unk> 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 path to fully understand the long term impact on our client. Thus it is appropriate to continue to build our reserve at this time.
Our core key credit metrics continued 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 Poachy, our CFO. Thank you Andrew and good afternoon.
Net interest margin for the second quarter was 3.6 versus $3 <unk> in the first quarter.
The adjusted margin was $2.96, excluding the average trip paid loan balances of $860 million.
And triple pay interest income and loan fees of $8 million.
Adjusted margin for the first quarter horse 3 point ex.
<unk>, the triple pay average loan balances of $956 million.
The triple pay interest income and loan fees of $11.4 million.
The adjusted margin was 3.1 on excluding the increase in excess funds of 5.
The $525 million for.
First quarter adjusted margin was $3.2 7 <unk>.
Excluding the increase in excess funds of $411 million.
The remaining net triple pay deferred fees at June 30 of.
Our $16.8 million.
$2.2 million relates to round 1.
$14.6 million to round 2.
CD maturities for the remainder of 2021 or 365 million.
$163 million for the third quarter.
Average rate.
The 9.5 for the year 111 for the third quarter maturities.
We expect the majority of the Cds to reprice at point for or below the.
The right pricing for Tso $500000.
The annual expense reduction.
290000 for the third quarter maturities on.
Quarter to date.
Cost of interest bearing deposits decreased 0.3 for in the second quarter versus point the.
3.8 in the first quarter.
Our quarter end deposit cost total deposits.
0.2 for.
Total interest bearing DDA is point to for.
And total interest bearing deposits point threshold.
A reminder, we have no accretion income related to acquisitions.
Triple pay recap round 1 of the balance at year end 2020 was $900 million.
The balance at June 30 of 2021 for the $184 million.
Phase recognized during the second quarter were $6.8 million.
$15.7 million year to date.
And the remaining net phase of $2.2 million.
For round 2.
At June 30.
$411 million for.
Remaining net fees of 14.6 million.
We recognized 1 point to $4 million of fees in the second quarter.
And 1 for $5 million year to date.
And the total triple pay balance was 595 million.
At June 30.
For forgiveness for around 1 of 2021.
379 million for the second quarter.
$713 million year to date.
And for ramp to $6.9 million for the quarter.
And year to day.
Liquidity excess funds were $600 million when we started on a triple pay loans in April 2020.
The excess funds at the end of June 30 of 2021 were 3.1 day.
Noninterest income credit card spend improve significantly hunter.
$197.4 million on the second quarter.
Versus the $169.8 million in the first quarter.
And the second quarter of 2020 spend was $134 million.
The credit card net income.
Current quarter was $1.9 million.
The first quarter was 1 point too.
We also had an accrual adjustment of 2.
290000 in the first quarter, which 1 of my first quarter net of $1.5 million.
And second quarter 2020 of the net was $1.4 million.
Our merchant services fee income continues to improve.
Year to day 2021 was.
480000 per.
Versus 2020 year to date.
234000.
The mortgage banking income.
$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 with 133.
We had 134 at June 32021.
In total employees.
At the end of 2020 was for 99.
And at the end of June 'twenty.
2021 was 534 of them.
Our total noninterest expenses for the second quarter of 2020 was $28.8 million.
And the second quarter of 2021 of his $31.3 million.
Of the increases the <unk>.
<unk> be 91 deferral, Inc.
The increase of 1.7 million the SEC.
Quarter of 2020, and close deferrals of coupon of $4 million.
Related around 1 of the Triple T.
FDIC insurance increased 800000.
Unfunded.
<unk> reserve in the second quarter of 2021 was 500000.
Data processing increased 443000 and debt increased expenses due to the current day pay for better increase in our contract.
Based on converting faster.
Salaries increased 326000.
The related to new hires in our west Central.
Florida region.
In our Fort Walton and Columbus offices.
Business mails increased 290000.
Office rent 235000, primarily due to our new lease space for the National office.
Decreases incentives.
<unk> $1.1 million.
The second quarter 'twenty 'twenty expenses for incentives was $4.9 million.
Versus $3.9 million for 2021.
The second quarter 2020 include $2.5 million for <unk>.
Triple pay incentives.
Net Oreo expenses decreased 764000.
And then operational losses.
<unk> quarter 2020 included a 500 dollar accrual for potential losses settlement.
Capital.
<unk> of $1.6 billion increase in deposits year over year of the bank's tier 1 leverage ratio for <unk>.
<unk> well above the regulatory minimum.
Earnings retention year to date.
78, 7%.
The court of date tax rate for both 2020 in 2021 was 21%.
The year to date tax rate for 2021 was 26.
And the year to date rate in 2020.
It 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 Budd.
Well, we are very optimistic about the rest of the year as you can tell from.
The timing of of what we've had to say here, we see loan demand has improved we've seen a bounce back of the economy.
Clearly some pent up demand for for.
For loans debt.
<unk> enjoyed in the second quarter, so we're very optimistic.
Also you're seeing the result of a couple of things 1 is the the new bankers, we hired in a year ago.
The <unk> 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 want to.
Hey.
We are optimistic as we head of policy last year of not working from home I don't think of any of us missed.
The day of work last year here in the office.
So that resulted in better customer service and better growth rates for the industry average and we expect that to continue so with that we'll be happy to answer any questions you might have.
Thank you we will now begin the question and answer session.
Asked a question in the press Star then 1 on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 and at this time, we will pause momentarily to assemble our roster.
And the first question will come from Graham <expletive> with Piper Sandler. Please go ahead.
Hey, guys good evening.
Hi, Greg.
So obviously loan growth was <unk>.
Really really strong across pretty much all of your all's lending verticals.
The degree you all added in Central Florida earlier this quarter contributed all maybe by moving along so great service spares.
And then also I think we had talked previously about organic loan growth may be being able to at least replace any PPP runoff that might occur.
Do you think that might be possible for you to surpassed this target given what we saw this quarter and how you think the.
Our growth outlook is evolving today.
Graham we don't expect to have the core like that every quarter. So I would rather under promise of nowhere delivery of possible. So I think our.
Sort of our goal for the rest of the year is probably look at the.
$300 million of quarter loan growth to get to get.
That would be above where.
Above the 900 million debt, we had mentioned wed like to replace so yes that would be it would be a little above but not in the 500.
<unk> is a little aggressive.
Actually we really the.
<unk> early this year have not had time to do.
The do too much most of the production is coming from it's pretty broad based.
Really the.
The top top 3 regions West Central Florida in Birmingham, So Birmingham is just getting some some growth back we obviously launched last C&I loans.
Last year net.
As a result of the pandemic and triple face stimulus.
Not only line utilization, but also people will postpone in projects. So we saw some pent up demand this quarter in the.
But 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.
So you're not really in terms of rate as much of structure.
Non recourse.
Lenders coming into the West coast lend.
Lenders coming in our southeast market.
And a couple of cases, we have some significant pay offs. So we're fighting for that like everybody else crime. It's just a matter of putting on more than you're losing them and having a good structure.
Well well thought out sound credits.
Thanks for your question Greg.
Yes, absolutely that's that's very helpful.
Sure.
And then you guys Werent Youre, obviously not alone in the <unk>.
The issue that space in 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 of sort of slowed a bit.
But I guess just wondering how you guys are thinking about this and maybe if youll add to the securities portfolio at all over the next couple of quarters similar to how we saw in <unk> 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.
Okay.
Yes.
You are sitting on arguably yourself all diagram on whether the.
Wait for higher rates are up.
I'll say the dinner several years ago.
I will say when rates go up the EMEA and looked at many of the control of the largest mine from Japan, It's Tom I've been waiting for rates to go out of Japan for 10 years.
I came back to tell but we don't know we need the quick way, 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.
Everything I say it says we're going to have an ablation, but.
Joe May find me in the economy has gotten rich do an accurate economic forecasts and I'd like to shake his hand, I don't think of your sheet exists. So the.
Best thing we can do is just we'd like to find more loans good share.
Short term loans.
Floating rates or short fixed rates.
The securities portfolio, we tend to agree with most everybody else on the industry yet.
When the bad.
<unk> mine every security this created there'll be a little bit better yield and you can get on robust cash by mortgage backs.
Mortgage backs don't really exist almost.
Not a good yield anyway.
Yeah, you have seasoned paper youre going to probably get about 80 basis points.
Okay.
Okay, that's helpful as well.
You heard me on.
How about the queue, thanks, and congrats on a great quarter guys.
Thank you. Thank you.
The next question will come from Kevin Fitzsimmons with D. A Davidson. Please go ahead.
Hey, good afternoon guys.
Hey, good afternoon, Ken.
Yes.
Tom I guess.
On the subject.
The beginning of the call you talked about the line utilization and maybe.
It seems like you're you're a little less hopeful than you were.
Last quarter in terms of that coming back and maybe if you could just.
Whats kind of.
What's kind of driving that is it just more you mentioned talking to customers but.
Just what's driving that.
That shift in thinking.
Yes, just you can't get the supply chains are just they're still broken of people companies cannot get inventory and interest.
<unk> economy I've ever seen cash.
7 of them.
Thank you for buying houses cars boats I mean everything.
You can't even get of Bostic on why.
The box Nicholson shorts plot.
None of this makes any sense.
The way so.
The companies are so the answer is I bought supply chain based on what the advancement of <unk>, but they clearly don't know much more of the winner.
Theyre not supply chains aren't getting rebuilt very quickly so we're not counting on the the.
The line utilization of improvement in the short term I think.
If I had to guess I would guess, they're going to approve and probably the fourth quarter.
Kevin, but I don't see it.
I don't see gaining back the.
$300 million in loan volume, we lost last year, we don't see gains in the back of this year.
I would hope that we'd get 100 half of the Bax $850 million. So.
Maybe I'm a little less optimistic on that today than I was last quarter, but.
We've got to count on the organic loan growth to get where we need to be.
But I guess other than the line utilization.
You're kind of characterizing the organic growth you had this quarter is more of a real sort of it really got.
Accelerated because of the pent up.
Catch up I guess in debt 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 are seeing out there in the economy is a lot of so many companies got triple pace stimulus day really didn't need to sustain operations with hindsight they didn't need it they thought they needed it.
Hopefully they won't pay those pay that money out of dividends and paper log Obama new boat and then they'll start using our line of credit here again.
On the new airplane on the bubble.
The <unk>.
Airplanes of shorts plot too so everything's.
Everything selling pretty.
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 the.
The additional growth out there are you looking at any additional markets for making moves.
To invest on any new markets that you're not currently in right now.
Yes, we're talking to.
The teams in a couple of markets nothing.
And the next.
A couple of months, Kevin, but 1 would probably be towards the end of the year and 1 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.
The existing region are also very profitable for us when we can add people.
That or use the support of the regional hub.
We're talking to.
The people right now.
Okay, Great. That's all I had thanks, Tom Thanks, Bob Thanks for that.
Kim.
The next question will come from William Wallace with Raymond James. Please go ahead.
Okay.
Thanks, Good afternoon, guys hotel are well well well.
Certainly.
Yes.
Wanted to maybe circle back on the liquidity question I'm, just kind of look at looking at some of the balance sheet items.
Obviously, the cash is up about a $1 billion.
Posits drop of about $1 billion why are you putting on fed funds purchased as of our up a couple of hundred million you've got so much liquidity.
Why do you need to grow it and that line is that cash on the Jos.
The different line item or are you worried about some deposits or something.
This is rodney rushing them no we're not worried but we got over 300 downstream correspondent banks.
Accounts for us.
And like US they are flushed with cash so there they are selling more of the funds..1 thing we have done is.
We're moving as much as we can into DDA.
So the dose those bikes can pay for it.
They are fed charges.
Other services with on earnings credit.
But to answer the question of correspondent.
Balances of grow.
And they will probably continue to grow over the next couple of quarters, we're adding the accounts.
And the.
To us it is it is core deposits because it acts just like a corporate.
The cash management accounts.
The company, we bank as their main working deposit account here.
The pay all of their <unk>.
Sales were on all of their business through that DDA account and the net automagical sweeps and money market or the automatically borrow on their lines from us if they need it.
That's exactly how our correspond on accounts for.
And we've lot of money on that.
<unk> are we by the fed funds and they're flush we're flush right now but.
We perceive it as the valuable deposits.
That answers your question.
Think of this.
Do you have to carry slightly more liquidity.
Against those deposits just given potential volatility.
Well.
<unk> has a good question.
Right now Budd is selling net excess liquidity to the fed.
We did use this opportunity to the lower or when the fed went up what they were paying on excess reserves from 10 basis points to 15, we did not increase of our regular fit for us.
We could take that money and sell it for the fed as agents and we can do that in the future. If we wanted to right now we just choose not to the we're buying at all as principal and some of our balance sheet.
Okay, Okay, and 1 of these Kent.
The regulators would love to have more and more liquidity you cannot have too much liquidity.
With the regulators.
So it is it is the champagne problem to have.
No that's yes.
Alright, great.
Okay.
You highlighted in the press release that you highlighted in the prepared remarks, but I still don't understand.
What it is debt youre, referring to west with the PPP forgiveness going away, that's causing you to build your reserves to loans.
Oh.
I mean, it seems like all of the metrics that we see are positive economically.
Yeah, and I would say, it's not as much.
On the PPD forgiveness for the PDP going away and net debt the added stimulus and the government support is the tapered and net.
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.
We're kind of the drivers in an increasing number there.
So from here.
Is it safe to assume that you feel like you're from.
On an utmost of caution you've kind of guidance of where it should be and then.
Assuming we continue to see the economic metrics that we all watch on that are variables in your seasonal model debt debt, we would start to see some release.
And then also all the I think.
This taken us of year, sometimes to collect on the SBA guarantee so nobody has really tried to the.
To collect on any of these PPP loans from the from the SBA.
SBA yet so.
We could get.
You think it's all of them be clean and neat but.
Sometimes dealing on the government just a little bit messy.
So.
We're just prepared for every eventuality is not a lot of considerably made of <unk>.
Got it.
A few million dollars of lower reserve, there, but we booked 1 billion of $5 of Triple T loans. So it's not my comparison is not of lot of money, but net net.
That's part of the equation tube quality is just the <unk>.
Whether the forgiveness will.
Work properly and if it doesn't.
The nice try and avoid the guarantee in some fashion.
So if I remember correctly I believe you had you had actually set aside some reserves.
Currently on against the PPP loans, just in case, but what I was looking at the reserves, excluding all of the PPP loans have you built that sort of.
I don't know what you would call it.
That reserve is about.
Essential PPP loans.
But have you built that more.
Well no I don't in the past, we have not had a specific reserve on PPP loan.
Okay.
Did this quarter set aside that Tom mentioned, a small reserve associated with potential for fraud, we know of no fraud, we have been successful and our forgiveness that we've applied for but at the end of the day on a $1 billion there might be some issues related to fraud. So we just.
To be conservative and setting aside some funds for that.
Potential on as Tom mentioned, nobody has applied for the SBA to actually pay on their guarantee versus pay on the forgiveness. So just making sure were kind of mark a little bit there, but not a huge factor on our model.
Okay.
Moving on what are the utilization rates I believe you might as well just last quarter, but just in case, Tom where are we sitting right now.
Yes.
The 38.707 the.
End of the quarter.
Up from $37.67 in the.
End of the first quarter, but at the end of 'twenty 2020 was of 39.5 for but going back in time. The end of 2019. It was 48, 1% to 2%. So we're full of 10 percentage points below.
Where we were before the prior to the pandemic.
Okay.
And also.
My problem with SBA loans is always traditionally has been the.
When the.
1 of administration takes over from another administration, they try to undo what the prior administration did.
So thats actually what we've got in place as we've got the <unk>.
Bumpkin administration did the triple the program and now we havent you'd ministration and place them.
It pays to be cautious.
Preparing to deal with.
The SBA not that we have very good great experienced with them absolutely no issues whatsoever at this point in time, all exist, especially for players.
Yes understood.
Okay and then 1 last question just kind of housekeeping thing by that point, you mentioned that it was $8 million of TT.
TTP net interest income.
In the quarter in the release, it says $8 million of net speed it.
Does that $8 million does that include the interest income.
For where you just citing the fee acceleration of total seats that were booked as part of NII.
We go back from that.
Script sort of ahead.
Okay.
Your script buses interest income and loan fees of 8 million.
Yes, I am sorry, it is both for what.
Okay. Okay.
Okay.
Okay, Alright very good.
That's all I had I appreciate you all taking the time day care.
Thank you all day.
Again, if you have a question. Please press Star then 1.
And this will conclude our question and answer session.
Actually it seems that we have a question that just came in from Mr. Graham <expletive> with Piper Sandler. Please go ahead.
Hey, guys just 1 follow up here on the on PDP, 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.
Any 591 deferred origination costs incurred this quarter.
Or if you guys are pretty much behind that in the $16.9 million.
Salary level is similar to what we might see over the next couple of quarters.
No I don't.
Not a significant amount in the second quarter that was mainly in the FERC I don't have the exact number I can send that to you, but most of that occurred in the first quarter.
For round 2 okay.
Okay. That's perfect that's all I wanted.
Thanks.
Yes, a good question.
And this is everybody the question.
There are no more questions. Thank you.
Yes, Sir.
Yes.
On the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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Yes.
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