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spk01: and welcome to the Service First Bank Shares Incorporated Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Woody, Controller. Please go ahead, sir.
spk00: 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 forecasts described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as to the date they are made, and service first assumes no duty to update them. With that, I'll turn the call over to Tom.
spk06: 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 off our press release. We assume you can read it yourself. So if you need our call, 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's not just fast food. It's almost every industry. So hopefully, as unemployment benefits expire, we will see job openings filled. We do, in the Birmingham area, for example, of large metro areas, we have the lowest unemployment rate in the United States at 2.2%. So it's 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. We had an open house. our new office in Full Walton Beach, Florida. He said, you know, we can't keep boats in inventory. And, you know, he was wondering why, you know, why are people spending so much money? And I said, well, the government says it's stimulus money. He said it can't be a couple of $1,200 stimulus checks. So it is a good question. His theory is that people are just, after the pandemic, just said, you know, I want to enjoy the things I've always wanted to enjoy. And the pandemic made people spend money. So it would be interesting to see as we move forward, how the economy moves along. In talking about our results, we saw loan growth surge 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 disrupted. You know, I've been saying that we thought we would see improvement in line utilization this year. It has not happened yet. From talking with customers, the Fed acts like the supply chains are going to be repaired in just a few months' time, but from talking with customers, we don't see that happening. It may be towards next year before we see substantial improvement in line utilization. We're glad we had some organic loan growth to fill the gap. We do We expect to see a second half in 2022 tailwind from construction line draws. We have a number of projects underway 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 raw materials. So that will 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, and it's at the second highest 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 loan growth in the quarter. You know, 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 has asked that we postpone the celebration until we can see what happens when we have the withdrawal of government stimulus to whether it will lead to some uptake in future losses in some loan 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 our credit outlook. Henry?
spk05: Thank you, Tom. Our second quarter results continue the very positive trend started in the first quarter of 2021. In 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 looked, 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's 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 a 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 dues to total loans were eight basis points, $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 helped stabilize various businesses, and with PPP Round 2 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 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 impacts on our clients. 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.
spk03: 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 triple P loan balances of $860 million and triple P interest income and loan fees of $8 million. Adjusted margin for the first quarter was 3.08, excluding the Triple P average loan balances of 956 million and Triple P 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 Triple P deferred fees at June 30th are $16.8 million, $2.2 million relates to Round 1, and $14.6 million to Round 2. CD maturities for the remainder of 2021 are $365 million, $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 the 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 decreased. It was 0.25. 3.4 in the second quarter versus .38 in the first quarter. Our quarter end deposit cost, total deposits, was .24. Total interest-bearing DDAs, .24. And total interest-bearing deposits, .34. A reminder, we have no accretion income related to acquisitions. Triple P recap. Round one, the balance at year end 2020 was $900 million. The balance at June 30th, 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 30th 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 triple P balance was 595 million at June 30th. For forgiveness for round one in 2021, it was 379 million for the second quarter $713 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 Triple P loans in April 2020. Excess funds at the end of June 30, 2021, were $3.1 billion. 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 2020 spend 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 is $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 non-interest income. Recap of our non-interest expense. Total producers at the end of 2020 was 133. We had 134 at June 30th, 2021. And total employees At the end of 2020 was $499 million, and at the end of June 2021 was $534 million. Our total non-interest expenses, the second quarter of 2020 was $28.8 million, and the second quarter of 2021 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 1 of Triple P. 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 expenses due to the our current DP provider increase in our contract based on converting to Fiserv. Salaries increased $326,000 related to new hires in our West Central Florida region and our Fort Walton and Columbus offices. Business meals 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 included $2.5 million related to Triple P incentives. Net REO expenses decreased $764,000. And then operational losses, the second quarter 2020 included a $500,000 accrual for potential lossy settlement. Capital, in spite of $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%. 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 rate 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.
spk06: Well, we are very optimistic about the rest of the year, as you can tell from the tone of what we've had to say here. We see loan demand has improved. We've seen a bounce back in the economy. There was clearly some pent-up demand for loans that we enjoyed in the second quarter, so we're very optimistic. Also, you've seen the results of a couple of things. One is that the new bankers we hired a year ago are seeing 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 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 missed a day of work last year here in the office. So that's resulted in better customer service and better growth rates in the industry average, and we expect that to continue. So with that, we'll be happy to answer any questions you might have.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you can press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Graham Dick with Piper Sandler. Please go ahead.
spk07: Hey, guys. Good evening. Hi, Greg. So, obviously, loan growth. It was really, really strong across pretty much all of your all's lending verticals. Did the group you all added in central Florida earlier this quarter contributed all maybe by moving loans over as 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 that it 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?
spk06: 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 sort of our goal for the rest of the year is probably look at $300 million a quarter you know, loan 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 in $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, you know, the top two regions were West Central Florida and Birmingham. So Birmingham is just, you know, getting some growth back. You know, we obviously lost a lot of C&I loans, you know, last year as a result of the pandemic and Triple P stimulus, you know, not only line utilization, but also people were postponing projects. So we saw some pit-up demand this quarter. But, yeah, 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, you know, it was a pretty broad-based, and that was net of, you know, we had some payoffs, you know, including, you know, not really in terms of rate as much as structure, you know, non-recourse lenders coming in, West Coast lenders coming in our southeast market in a couple of cases, and we had some significant payoffs. So, you know, we're fighting that like everybody else, Graham. It's just a matter of putting on more than you're losing and having a good structure and, you know, well-thought-out, sound credits. Does that answer your question, Graham?
spk07: 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 add the securities portfolio at all over the next couple quarters, similar to how we saw last one cue or two cue, 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.
spk06: You know, you can sit there and argue with yourself all day, Graham, on whether to, you know, wait for higher rates or, you know, I mean, I was at a dinner several years ago and I said, well, 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 know, I came back and told Bud, we don't know. We need to quit waiting. We need to buy some securities now. You know, 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. 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 that's gotten rich doing accurate economic forecasting. 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 that, you know, when the Fed eventually quits buying every security that's created. There will be a little bit better yield, and you can get them. But you can't find mortgage-backed securities. You know, short mortgage-backs don't really exist almost.
spk03: Not a good yield anyway. Yeah, you have season paper. You're going to probably get about 80 basis points.
spk07: 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.
spk01: The next question will come from Kevin Fitzsimmons with DA Davidson. Please go ahead.
spk02: Hey, good afternoon, guys. Hey, 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 could just, what's kind of driving that? Is it just more, you mentioned talking to customers, but, you know, just what's driving that shift in thinking?
spk06: You can't get the supply chains. They're still broken. Companies cannot get inventory. It's the darndest economy I've ever seen, Kevin. People are buying houses, cars, boats, everything. You can't even get a bicycle. Why are bicycles in short supply? None of this makes any sense in a way. The companies are... The answer is I thought supply chains, you know, based on what the Fed's 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 in 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 in the back this year. I'd hope that we'd get half of it back, say $150 million. So maybe I'm a little less optimistic on that today than I was last quarter. But we've got to count on organic loan growth to get to where we need to be.
spk02: But I guess other than the line utilization, you kind of were characterizing the organic growth you had this quarter as 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.
spk06: You know, a lot of what I think we're seeing out there in the economy is, you know, so many companies got a triple P 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 them a new boat and then they'll start using their line of credit here again. Get them a new airplane and a new boat. Airplanes and short supply too. Everything's selling. It's pretty amazing.
spk02: Just one last one 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 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?
spk06: Yeah, we're talking to teams in a couple of markets. Nothing's in the next couple of months, Kevin, but one would probably be towards the end of the year, and one would be probably towards the, you know, sometime end of the third quarter. So we also still look at, you know, the bolt-ons. We like the bolt-ons to, you know, an existing region are also very profitable for us when we can add people in, you know, that use the support of the regional hub. We're talking to, you know, a lot of people right now.
spk02: Okay, great. That's all I had. Thanks, Tom. Thanks, bud. Thank you, Kevin.
spk01: The next question will come from William Wallace with Raymond James. Please go ahead.
spk03: Thanks.
spk08: Good afternoon, guys. Hope you all are well.
spk03: Yes, sir.
spk08: I'd like to maybe circle back on the liquidity question. I'm just kind of looking at some of the balance sheet items. Obviously, the cash is up about $1 billion. your deposits are up about a billion. Why are you putting on Fed funds purchase? Those are up a couple hundred million. I mean, you've got so much liquidity. Why, why do you need to grow it in that line? Does that have something to do with a different line item or are you, are you worried about some deposits or something?
spk04: Well, this is Rodney rushing and no, we're not worried, but you know, we've got over 300 downstream correspondent banks that have a council of us. Um, 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. To us, it is core deposits because it acts just like a corporate cash management account where a company we bank has their main working deposit account here. They pay all their Their bills run all their business through that DDA account, and then it automatically sweeps into a money market, or they automatically borrow their line from us if they need it. That's exactly how our corresponding 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.
spk08: I think so. Does... do you have to carry slightly more liquidity against those deposits just given potential volatility?
spk04: Well, that's a good question. Right now, Bud is selling that excess liquidity to the Fed. We did use this opportunity to lower when the Fed went up what they were paying on excess reserves from 10 basis points to 15. We did not increase on our regular Fed funds. we could take that money and sell it to the Fed as agents. And we could do that in the future if we wanted to. Right now, we just choose not to. We're buying it all as principal and it's on our balance sheet. Okay.
spk06: Ken Wiley, you know, the regulators would love to just have more and more liquidity. You cannot have too much liquidity with the regulators. It is a champagne problem to have.
spk08: No, that's, yeah, fair. I agree. Okay, and you highlighted it in the press release and you highlighted 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.
spk05: 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 increasing the reserve.
spk08: So from here, is it safe to assume that you feel like you've, you know, from an utmost of caution, you've kind of got it to where it should be, and then assuming we continue to see the economic metrics that we all watch and that are variables in your CECL model, that we would start to see some release?
spk06: Well, 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 it's all going to be clean and neat, but, you know, it's sometimes dealing with the government, it's just a little bit messy. So, you know, we're just prepared for every eventuality. It's not a lot of Consider we've made a, you know, we've got about, you know, a few million dollars in a little reserve there, but, you know, we booked a billion and a half dollars in triple P loans. So it's not, by comparison, it's not a lot of money. But that's part of the question too, Wally, is just whether the forgiveness will, you know, work properly. And if it doesn't, you know, do they try to avoid a guarantee in some fashion?
spk08: 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? Have you built that more?
spk05: Hey, Wally, no, I don't. In the past, we have not had a specific reserve on PPP loans. 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, on a billion dollars, 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, nobody has applied for the SBA to actually pay on their guarantee versus pay on the forgiveness. So just making sure we're kind of marked a little bit there, but that's not a huge factor in our model.
spk08: 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?
spk06: Yeah, we're at 38.77 at the end of the quarter. It was up from 37.67 in the end of the first quarter, but at the end of 2020, it was at 39.54. We're going back in time. At the end of 2019, it was 48.12%. So we're a full 10 percentage points below where we were 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 Triple P program, and now we have a new administration in place. And, you know, it just pays to be cautious in preparing to deal with Not that we have very great experience with them, absolutely no issues whatsoever at this point in time. It's just, you know, it's best to be prepared.
spk08: 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?
spk03: Let me go back to my script, see what I had.
spk04: Your script both says interest income and loan fees.
spk03: Yeah, so I'm saying it's both for what I had. Okay. Okay. Yeah.
spk08: Okay. All right. Very good. That's all I had. I appreciate you all taking the time. Take care. Thank you all.
spk01: Again, if you have a question, please press star, then 1. 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.
spk07: 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 – any FAS 91 deferred origination costs incurred this quarter? Or if you guys are pretty much behind that in this $16.9 million salary level is similar to what we might see over the next couple quarters?
spk03: No, I don't remember. 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, yeah, most of that occurred in the first quarter. No, no.
spk07: Okay. That's perfect. That's all I wanted. That's great. Thanks. That's a good question.
spk01: And this question- Thank you, everybody.
spk06: If there's no more questions, thank you.
spk01: Yes, sir. The conference has now concluded. Thank you for attending today's presentation.
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