ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Good day and welcome to the ServisFirst Bancshares Incorporated Second 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. Please note, this event is being recorded.
I would now like to turn the conference over to Ed Woodie, Controller. Please go ahead sir.
Good afternoon and welcome to our second quarter earnings call. CEO, Tom Broughton will share his thoughts on the quarter; and then we will hear from Henry Abbott, our Chief Credit Officer; and Bud Foshee, Chief Financial Officer for their detailed reviews. We will then take your questions.
I’ll now cover our forward-looking statements disclosure. Some of the discussion in today’s earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to forecast described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as to the date they are made and ServisFirst assumes no duty to update them.
With that, I’ll turn the call over to Tom.
Thank you, Ed, and thank you for joining our second quarter conference call. We were very pleased with the quarter and before I talk a little bit about our results, I'll give you a little bit of background on the Southeast economy. And again, we – in our conference call we won't read to you of our press release, we assume you can read it yourself. So, if you're new to our call that’s – our practice is not to read from the press release.
In the Southeast, we do continue to see lower unemployment compared to the rest of the country. And we hear from all of our customers as employers that they cannot find the needed workers in almost all industries. It is not just fast food, it's almost every industry. So, hopefully as unemployment benefits expires we will see job openings field.
In the Birmingham area, for example, of large metro areas, we have the lowest unemployment rate in the United States at 2.2%. So, we've pretty much a full employment economy in many areas of the southeast. So, the economy is robust and continuing to improve greatly. I was talking with a customer last night at a – we had an open house in our new office in Fort Walton Beach, Florida and he said, you know we can't keep boats in inventory. And you know, he was wondering, why are people spending so much money? As far the government says it’s stimulus money. He said, it can't be a [couple of $1,200] stimulus check.
So, it is a good question. His theory is that people are just – after the pandemic he said, you know, I want to enjoy the things I've always wanted to enjoy. The pandemic made people spend money. So, it'd be interesting to see as we move forward, how the economy moves along. And talking about our results, we were – saw loan growth soars to a record level in the quarter. Line utilization is still well below year-end 2019 levels. The line utilization has not improved, and the customers continue to report that supply chains are still disruptive.
You know, I've been saying that we thought we would see improvement in line utilization this year. It has not happened yet. And from talking with customers, you know, the [Fed acts] like the supply chains are going, we repaired in just a few months time. But from talking with customers, we don't see that happening. So, it may be, you know, towards next year before we see substantial improvement in land utilization. So, we're glad we had some organic loan growth to, sort of fill the gap.
We do expect to see second half in 2022 tailwind from construction [line draws]. We have a number of projects underway that where we expect substantial draws and of course, we do expect line utilization just to improve from inflationary effects of higher prices for steel, lumber and many other, you know raw materials. So, that'll be helpful as well.
Our loan pipeline is down 10% from April, but it's still 77% higher than it was at year-end 2020 [in a second half] level ever. Our loan growth is broad based and is centered around commercial real estate and commercial industrial loans. We do continue to see deposit inflows though they are more – the normal historical growth rates of the mid-teens for our bank rather than the large surge in deposits we saw during the pandemic. Our liquidity continues to build to historic levels despite the record low growth in the quarter.
We were very pleased with asset quality. You know, as Henry will talk about in a few minutes, we, you know, had negative charge-offs in the quarter. And, you know, I thought we should have a celebration and Henry just asked that we postpone the celebration until we could see what happens when we have the withdrawal of government stimulus to it – whether it will lead to some uptick in future losses and some long categories. But personally, I don't see many businesses struggling. It's up for some that are poorly managed.
And now, we'll turn it over to Henry Abbott, our Chief Credit Officer to give a little bit more detail on my credit outlook. Henry?
Thank you, Tom. Our second quarter results continued the very positive trends started in the first quarter of 2021. And the second quarter, we even showed a net recovery, which has not occurred in at least the past five years as far back as I look, and we continue to show strong asset quality trends across the board. Our numbers generally speak for themselves. So, I'll give a few key metrics.
Non-performing assets to total assets were 15 basis points versus 16 basis points last quarter, and 26 basis points in the second quarter of 2020. Our OREO was roughly $2 million near record lows in our bank history, and in-line with the first quarter. We had roughly $540,000 in OREO expense for the quarter. I'm pleased to say, we posted net recovery of $112,000 for the quarter. As mentioned, as far back as I looked, we have not posted a quarterly recovery.
Our past due to total loans were 8 basis point $6.7 million, a 27% decrease from year-end. While we are optimistic given the bank's financial performance throughout the past 18 months, we also want to be realistic that the unprecedented government aid helps stabilize various businesses, and with PPP round two now complete, those businesses will have to be self sustaining in this new economic environment.
We were pleasantly surprised by the $517 million in loan growth. This is excluding the runoff of PPP loans, which are 0% risk weighted assets, primarily because of the loan growth and the above referenced uncertainty given the end of PPP we grew our ALLL by $9.7 million in the second quarter. Our ALLL loans, excluding PPP loans was 1.30 at quarter-end, up from 1.26 at the end of the first quarter.
We have been diligent throughout the pandemic on our credit servicing to monitor for problem loans, but need to continue to allow for more time to pass 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 continue to be exceptional and even improving, which I think can be credited to our high quality customer base, as well as our granular and diversified loan portfolio.
With that, I'll hand things over to Bud Foshee, our CFO.
Thank you, Henry, good afternoon. Net interest margin for the second quarter was 3.06 versus 3.20 in the first quarter. The adjusted margin was 2.96, excluding the average PPP loan balances of 860 million and PPP interest income and loan fees of 8 million. Adjusted margin for first quarter was 3.08, excluding the PPP average loan balances of 956 million and PPP interest income and loan fees of 11.4 million.
The adjusted margin was 3.19, excluding the increase in excess funds of 525 million. First quarter adjusted margin was 3.27, excluding the increase in excess funds of 411 million. The remaining net PPP deferred fees at June 30 are 16.8 million, 2.2 million relates to Round One and 14.6 million to Round Two. CD maturities for the remainder of 2021 are 365 million, a 163 million for the third quarter. Average rate on the CDs is 0.95 for the year, 1.11 for the third quarter maturities.
We expect majority of these CDs to reprice at 0.40 or below. The repricing will result in a $500,000 annual expense reduction, 290,000 for the third quarter maturities. Our quarter-to-date cost of interest bearing deposits decrease is 0.34 in the second quarter versus 0.38 in the first quarter. Our quarter-end deposit costs, total deposits was 0.24. Total interest bearing DDA is 0.24, and total interest bearing deposits is 0.34. Remainder, we have no accretion income related to acquisitions.
Our PPP recap, Round One to balance at year-end 2020 was 900 million. The balance at June 30, 2021 was 184 million. Fees recognized during the second quarter were 6.8 million and 15.7 million year-to-date, and the remaining net fees are 2.2 million. Round Two, the balance at June 30 was 411 million. Remaining net fees are 14.6 million. We recognize 1.24 million of fees in the second quarter and 1.45 million year to date. And the total PPP balance was 595 million at June 30.
For forgiveness for Round One in 2021 it was 379 million for the second quarter, 730 million year-to-date, and for Round Two 6.9 million for the quarter and year-to-date. Liquidity excess funds were 600 million when we started funding PPP loans in April 2020, excess funds at the end of June 30, 2021 were [3.1 million.]
Non-interest income, credit card spend improved significantly 197.4 million in the second quarter versus 169.8 million in the first quarter, and the second quarter of 2020 span was 134 million. The credit card net income second quarter was 1.9 million. The first quarter was 1.2. We also had an accrual adjustment of 290,000 in the first quarter, which would have made first quarter net of 1.5 million, and second quarter 2020 the net was 1.4 million.
Our merchant services fee income continues to improve. Year-to-date 2021 is 480,000 versus 2020 year-to-date of 234,000. Mortgage banking income was 2.7 million in the second quarter and same amount in the first quarter. Second quarter 2020 was 2.1 million. A reminder, we did not sell any government guaranteed loans to generate non-interest income.
Recap of our non-interest expense. Total producers at the end of 2020 was 133. We had 134 at June 30, 2021. Total employees at the end of 2020 was 499 and at the end of June 2021 was 534. Our total non-interest expenses in the second quarter of 2020 was 28.8 million and the second quarter of 2020 was 31.3 million.
For the increases, the FASB 91 deferral increased 1.7 million. The second quarter of 2020 includes deferrals of 2.4 million related to Round One of PPP. FDIC insurance increased 800,000, unfunded commitment reserve in the second quarter of 2021 was 500,000, data processing increased 443,000, and that increased expense is due to the – our current [indiscernible] provider increase in our contract based on converting [indiscernible].
Salaries increased 326,000 related to new hires in our West Central Florida region in our Fort Walton and Columbus offices. Business mails increased 290,000. Office rent 235,000, primarily due to our new lease space for the national office. Decreases, incentives decreased 1.1 million. The second quarter 2020 expense for incentives was 4.9 million, versus 3.9 million for 2021. Second quarter 2020 include 2.5 million related to PPP incentives. Net OREO expenses decreased 764,000. And then operational losses in the second quarter 2020 included a $500,000 accrual for potential [indiscernible].
Our capital [it’s about] [$1.6 billion] increase in deposits year-over-year, the bank's Tier 1 leverage ratio remains well above the regulatory minimum. Earnings retention year to date is 78.7%. The quarter to date tax rate for both 2020 and 2021 was 21%. The year-to-date tax rate for 2021 was 20.6 and the year-to-date rate in 2020 was 20%. And projected right for the remainder of this year is 21%.
This concludes my comment, and I'll turn the program back over to Tom.
Thank you, Bud. Well, we are very optimistic about, you know, the rest of the year, as you could tell from the timing of what we've had to say here, we’ve seen, you know, loan demand has improved. We've seen a bounce back in the economy. There was clearly some pent up demand for loans that we've enjoyed in the second quarter. So, we're very optimistic.
Also, you know, you see in the results a couple of things. One is the new bankers we hired in a year ago, are seeing substantial loan growth this year, and we expect the same next year. You know, we've had a number of key hires this year that will provide, you know, good growth in 2022.
The second reason I would tell you is we're optimistic is, we had a policy last year of not working from home, I don't think any of us, you know missed a day of work last year, here in the office. So, that's resulted in better customer service and better growth rates than the industry average. And we expect that to continue.
So with that, we'll be happy to answer any questions you might have.
Thank you. [Operator Instructions] And the first question will come from Graham Dick with Piper Sandler. Please go ahead.
Hey, guys, good evening.
Hi, Graham.
So, obviously, loan growth was really strong across pretty much all of your lending verticals. Did the group you all added in Central Florida earlier this quarter contributed all maybe by moving loans over service first? And then also, I think we had talked previously about organic loan growth, maybe being able to at least replace any PPP runoff that might occur? Do you think they might be possible for you to surpass this target, given what we saw this quarter and how you think the growth outlook is evolving today?
Graham, we don't expect to have a quarter like that every quarter. So, I'd rather under promise and over deliver if possible. So, I think our, sort of our goal for the rest of the, you know, year is probably look at a, you know, 300 million a quarter, you know, loan long growth to get to where, you know, that would be above where, you know, above the 900 million that we had mentioned we'd like to replace. So yeah, that would be, it'd be a little above, but not – 500 a quarter is a little aggressive. And actually, we really, the hires earlier this year have not you know, had time to do too much. Most of the production is coming.
It's pretty broad based, you know, really the, you know, the top three regions were West Central Florida and Birmingham. So, Birmingham is just, you know, getting some growth back. You know, we obviously, lost C&I loans, you know, last year, as a result of the pandemic and PPP stimulus, you know, not only line utilization, but also people will postpone in project.
So, we saw some [pent-up] demand this quarter and but yeah, we think the things we’ve hired this year will produce more so next year, most of what we saw. But it is just broad based, you know, it was a pretty broad based and that was net off, you know, we had some payoffs, you know, including, saying not really in terms of rate as much as structure, you know, non-recourse lenders coming in – the West Coast lenders coming in our Southeast market in a couple of cases, and we have some significant payoffs.
So, you know, we're fighting that like everybody else, Graham, it is just a matter of putting on more than you're losing and having a good structure and you know, well thought out sound credits. Did I answer your question, Graham?
Yeah, absolutely. That's very helpful. And then you guys weren't – you're obviously not alone in the liquidity issue that's facing the industry right now. I'm just curious to hear how you think this dynamic might evolve over the next few quarters? I know you said, deposit inflows have sort of slowed a bit, but I guess, just wondering how you guys are thinking about this. And maybe if you'll had a securities portfolio at all over the next couple quarters, similar to how we saw in 1Q or 2Q or if you think it's kind of settled out, and you can just really focus on moving this into the loan book from here?
You know, if you aren't, you can sit there and argue with yourself all day Graham, whether to, you know, wait for higher rates, or, you know, I mean, I'll say the [indiscernible] several years ago, and I say what when rates go up, and a man looked at me to control the largest bank in Japan and said Tom, I've been waiting for rates to go up in Japan for 10 years. You're not coming back until, [but and] we need to quit waiting. We need to buy some securities now. You know, so we, we can't have a strategy of just trying to split the difference Graham. We do a little. We're not going to say, we're waiting for higher rates.
I mean, we, you know, everything I see says, we're going to have inflation, but you know, I mean, show me, find me an economist who has gotten rich doing accurate economic forecast, and I'd like to shake his hand. I don't think he or she exists. So, you know, the best thing we can do is just, you know, we'd like to find more loans you know, good short-term loans at floating rates or short fixed rates and, you know, the securities portfolio we tend to agree with most everybody else in the industry yet, you know, when the [indiscernible] eventual equates mine, every security this created, there'll be a little bit better yield and you can get over, but can't buy mortgage backed securities, you know, short mortgage banks don't really exist almost.
Not a good yield anyway. You have season type or you're going to probably get about 80 basis points.
Okay, that's helpful as well. That's for me. I'll hop out of the queue. Thanks and congrats on a great quarter guys.
Thank you, Graham.
The next question will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hey, good afternoon, guys.
Hi, Kevin.
Tom, I guess, you know, on the subject, at the beginning of the call, you talked about the line utilization and maybe, you know, it seems like you're a little less hopeful than you were last quarter in terms of that coming back. And maybe if you can, just – what's kind of driving that? Is it just more, you mentioned talking to customers, but you know, just what's driving that – that shift and thinking?
Yeah, just, you can't get – the supply chains are just, you know, they're still broken. And people – companies cannot get inventory. And it's just, you know, it's the [indiscernible] economy I've ever seen. Kevin, I mean, you know, people buying houses, cars, boats, I mean, everything. You can get a bicycle, why bicycles in short supply? I mean, you know, it's just, none of this makes any sense in a way. So, you know, the companies are – so the answer is, I thought supply chains, you know, based on what the feds been saying, but they clearly don't know much more than we know.
They're not, you know, supply chains aren't getting rebuilt very quickly. So, we're not counting on the line utilization improvement in the short-term. I think, if I had to guess, I’d guess they're going to improve and probably the fourth quarter, you know, Kevin, but I don't see it. You know, I don't see gaining back the $300 million in loan volume we lost last year, I don't see gain back this year. I’d hope that we get 100 – half of it back, say 150 million. So, you know, maybe I'm a little less optimistic on that today than I was, you know, last quarter. But, you know, we've got to count on organic loan growth to get to where we need to be.
But I guess other than the line utilization, you kind of were characterizing the organic growth you have this quarter is more of a real, it really got accelerated because of this pent up, catch up, I guess, and that you still expect it to be healthy over the balance of the year, but not explosive, like what you saw this quarter. Is that accurate?
You know, yeah. And, you know, a lot of what I think we're seeing out there in the economy is, you know, a lot of so many companies got PPP stimulus. They really didn't need to sustain operations, with hindsight, they didn't need it; they thought they needed it. And, you know, hopefully, they're going to pay that money out in dividends and people are going to buy a new boat, and then they'll start using our line of credit here, again. You get a new airplane and a new boat. Airplanes are in short supply too. So, you know, everything's selling, it’s pretty amazing.
Yeah. Just one last one for me, you mentioned about the new hires in the new markets, in terms of their contributing, are there, you know, if we think the economy is going to continue to reopen, and there's a lot of – there's, you know, additional growth out there, are you looking at any additional markets or making moves to invest in any new markets that you're not currently in right now?
Yeah, we're talking to teams in a couple of markets that nothing's, you know, in the next, you know, couple months, Kevin, but, you know, one would probably be towards the end of the year, and one would be probably towards, you know, sometime in the third quarter. So, we also still look at, you know, the bolt-ons, we like the bolt-ons to, you know, in existing region are also very profitable for us when we can add people in, you know, that are – used to support to the regional hub. We're talking to, you know, a lot of people right now.
Okay, great. That's all I had. Thanks, Tom. Thanks, Bud. Thanks.
Thank you, Kevin.
The next question will come from William Wallace with Raymond James. Please go ahead.
Thanks. Good afternoon, guys. Hope you all are well.
Yes sir.
I like to maybe circle back on the liquidity question. I'm just kind of looking at some of the balance sheet items, you know, obviously, the cash is up about a billion, the deposits were up about a billion, why are you putting on Fed Funds purchase? Those are up a couple hundred million, you got so much liquidity. Why do you need to grow it in that line? Does that has something to do with the different line item or are you worried about some deposits or something?
Well, this is Rodney Rushing. No, we're not worried, but you know, we got over 300 downstream correspondent banks have accounts for this. And like us, they're flush with cash. So, they're selling us more of the funds. One thing we have done is, we're moving as much as we can into DDA so that those banks can pay for their Fed charges and other services with an earnings credit, but to answer your question, correspondent balances have grown, and they'll probably continue to grow over the next couple of quarters.
We're adding accounts. And we, you know, to us, it is core deposits, because it acts just like a corporate cash management account. We're accompanying with bank as their main working deposit account here. They pay all their bills, run all their business through that DDA account, and then it automatically sweeps in the money market where they automatically borrow [indiscernible] from us if they need it. That's exactly how our correspondent accounts work. And we loan them money in Fed funds or we buy the Fed funds and they're flush and we're flush right now, but we perceive it as valuable deposits. I hope that answers your question.
I think so. Do you have to carry slightly more liquidity against those deposits just given potential volatility?
That’s good question. Right now, Bud is selling that excess liquidity to the Fed. We did use this opportunity to lower our – when the Fed went up, what they were paying on excess reserves from 10 basis points to 15. We did not increase on a regular Fed funds. We could take that money and sell it to the Fed as agent. And we could do that in the future if we wanted to. Right now, we just choose not, so we're buying it all, as principal and it's on our balance sheet.
Okay.
The regulators would love to have more and more liquidity. You cannot have too much liquidity with the regulators. So, it is a [indiscernible] problem to have.
No, that's, yeah, fair. I agree. Okay, and you highlighted it in the press release, and you highlight it in the prepared remarks, but I still don't understand what it is that you're referring to, with the PPP forgiveness going away that's causing you to build your reserves to loans up? I mean, it seems like all of the metrics that we see are positive economically.
Yeah, and I would say, it's not as much the PPP forgiveness, but the PPP going away, and that the added stimulus, and the government support is being tapered. And that, you know, as you said, the credit metrics in general are all positive. But, you know, we have lost out on some support these businesses had that coupled with the loan growth of $500 million, you know, what kind of the drivers in and increasing [the reserve].
So from here, is it safe to assume that you feel like you, you know, from an utmost of precaution, you kind of guided to where it should be, and then assuming we continue to see the economic metrics that we are watching that are variables in your CECL model that we will start to see some release?
And also Wally I think, you know, it's taken us a year sometimes to collect on the SBA guarantee. So, you know, nobody's really tried to collect on any of these PPP loans from the SBA yet. So, you know, we could get, you know, you think [indiscernible] going to be clean and neat, but, you know, sometimes they want the government's just a little bit messy. So, you know, we're just prepared for every, you know eventuality out. It's not a lot of considered, we've made a, you know, we've got about, you know, a few million dollars in loan reserve there. But, you know, we booked a $1.5 billion of PPP loans. So, it's not – by comparison it's not a lot of money, but that's part of the equation too, Wally, it’s just whether the forgiveness will, you know, work profitably and if doesn't, you know, did I try to avoid a guarantee in some fashion?
So, if I remember correctly, I believe you had actually set aside some reserve early on against the PPP loans, just in case, but I was looking at the reserves, excluding all the PPP loans, have you built that sort of, I don't know what you would call it, but that reserve about potential PPP loans? [Indiscernible] have you built that more?
Wally, no. I don’t – in the past, we have not had a specific reserve on PPP loans. You know, we did this quarter set aside, as Tom mentioned, a small reserve associated with potential for fraud, we know of no fraud. We have been successful in our forgiveness that we've applied for, but at the end of the day, you know, on a billion dollars, you know, there might be some issues related to fraud. So, we just want to be conservative in setting aside some funds for that potential. And as Tom mentioned, you know, nobody has applied for the FDA to actually pay on their guarantee versus pay on their forgiveness. So, just making sure we're kind of marked a little bit there, but not a huge factor in our model.
Okay. Moving on, what are the utilization rates? I believe you might have told us last quarter, but just in case, Tom, where are we sitting right now?
Yeah, we're 38.77 at the end of the quarter. It was up from 37.67 in the end of the first quarter, but in the end of 2020 it was 39.54. If we are going back in time, at the end of 2019 it was 48.13%. So, we're a [full 10] percentage points below, where we were before the prior to the pandemic.
Okay.
And also, you know, my problem with SBA loans is always traditionally has been that when, you know, one administration takes over from another administration, they try to undo what the prior administration did. And so that's, you know, actually what we've got in place is we've got, you know, the republican administration did the PPP program, and now we have a new administration in place. And, you know, it pays to be cautious in preparing to deal with the SBA. Not that we've – we’ve had very great experience with them. Absolutely, no issues whatsoever at this point in time, Wally, it’s best to be prepared.
Yeah. Understood. Okay. And then one last question, just kind of housekeeping thing, Bud I believe you mentioned that it was $8 million of PPP net interest income in the quarter, in the release, it says $8 million of net fees. Does that $8 million, does that include the interest income or were you just citing the fee acceleration or total fees that were booked as part of NII?
Let me go back to [indiscernible].
Your script Bud says, interest income and loan fees, [right].
Yeah. So, I'm saying it’s both from what I had.
Okay. All right. Very good. That's all I had. I appreciate you all taking the time. Take care.
Thank you.
[Operator Instructions] And this will conclude our question-and-answer session. Actually, it seems that we have a question that just came in from Mr. Graham Dick with Piper Sandler. Please go ahead.
Hey, guys. Just one follow up here on PPP, mainly as it pertains to expenses, it doesn't look like you guys did much in the way of PPP originations this quarter, but I was just wondering if there was any FAS 91 deferred origination costs incurred this quarter or if you guys are pretty much behind that, and this $16.9 million salary level is similar to what we might see over the next couple of quarters?
No. I don't – it was not a significant amount in the second quarter. That was mainly in the first – I don't have the exact number. I can send that to you. But most of that occurred in the first quarter for Round Two.
No, no. Okay, that's perfect. That's all I wanted. That's great. Thanks.
You asked a great question.
And this [indiscernible].
If there is no more questions, thank you.
Yes, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.