ServisFirst Bancshares, Inc.

Q3 2021 Earnings Conference Call

10/18/2021

spk01: Good day, and welcome to the Service First Bankshear's Incorporated Third 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 Davis Mains, Director of Investor Relations. Please go ahead, sir.
spk09: 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 we'll 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 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 Service First assumes no duty to update them. With that, I'll turn the call over to Tom.
spk10: 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 $369 million of net loan growth for the quarter, which is an annualized growth rate of 18%. Our goal has been to have a monthly loan growth goal of $100 million a month, and we've exceeded that goal over the last two quarters. We certainly were pleased to see. We had thought that we would see line utilization improve in the second half of the year, but we saw no improvement 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 continued but we certainly expect it to be a tailwind for us at some point in the future. So that's certainly something to look forward to. We did see net paydowns in commercial industrial loan balances in the quarter, excluding triple P loans. Well, this is both the result of the second round of triple P stimulus, as well as we're seeing very strong profitability in our customer base in commercial industrial companies. Loan growth for the quarter was highest in the west of central Florida, Charleston, Dothan, and northwest Florida regions. And looking at our loan pipeline is about 10% above last quarter and is back at historically high levels. 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, though 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-instrument accounts doubled in the quarter, in correspondence from $500 million to $1 billion. A few minutes to talk about capital. When we started the pandemic 18 months ago, we were under $10 billion in assets, and I remember analysts and investors were asking us what are 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're all at all but at $15 billion in assets, so we're quite happy we had the capital support of a bigger balance sheet. 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 $4.6 billion in cash at the Fed, and we do have a negative carry on that $4.6 billion. I did see an analyst report recently saying we're in the top 10 for cash as a percentage of assets, and Bud will go over our plans in a few minutes to invest those funds over time. So on the Hiring front, we continue to have many conversations, more than in the past few years. Again, 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 tell 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 just thought the best thing to do was be conservative. And that's usually the best thing to do in the banking business is almost always to be conservative. So that's something we'll continue to look at, and we see many opportunities. Our goal is to only bring in a small number of very high-quality bankers. So now I'd like to turn it over to Henry Abbott, our chief credit officer, to talk about our credit situation.
spk03: Thank you, Tom. 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. I will give a brief overview of the key ratios for the quarter, but we continue to see strong asset quality, which can be attributed to service-first strong client selection, credit servicing, and the vitality of the markets in our footprint. Non-performing assets to total assets were down to 11 basis points versus 15 basis points last quarter, and 29 basis points in the third quarter of 2020. For the quarter, NPAs were down to $16.5 million. This is a 15% reduction from the prior quarter and a 50% reduction from the third quarter of 2020. This drop is attributed to Oreo continuing to be at near record lows in line with prior quarter and a $2.7 million reduction in non-performing loans. Our past due to total loans were eight basis points, $6.8 million on par with last quarter and a 27% reduction from the end of the third quarter in 2020. Charge-offs and OREO expenses for the quarter were $1.8 million an 85% reduction from the $11.5 million in the third quarter of 2020. 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 would be four basis points versus credit expenses for 2020 for the whole year of 38 basis points. In the face of strong competition, Loans grew by $370 million, excluding PPP payoffs. Including PPP payoffs, our loan outstanding still grew by $163 million. Primarily due to loan growth, we grew our ALLL by $4.2 million in the third quarter versus roughly $9.7 million last quarter. Our ALLL to loans, excluding PPP loans from total loans, is $1.29 million. Even as we put some of the more dramatic COVID economic impacts in the rearview mirror, given the bank's continued strong loan growth and unprecedented government aid still helping borrowers, we felt it appropriate to continue to grow our loan loss reserve. 2021 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. With that, I'll hand it over to Bud.
spk08: Thank you, Henry. Good afternoon. Liquidity, Tom mentioned we have a plan to invest a portion of our excess funds. Our initial goals are to purchase 15-year mortgage backs and five and seven-year treasuries. The net monthly investment security growth will be about $100 million, and we will increase these monthly purchases over time. Current yield on mortgage backs is approximately 1.30%. Current yield on five-year treasuries is approximately 1.08 and 1.38 for seven-year treasuries. We also decided to retain a portion of our mortgage originations. For the third quarter, we sold $33 million to investors and retained $53 million. Net interest margin, average loans exclusive of Triple P increased by $424 million in the third quarter. Average Triple P loans decreased by $387 million for net average growth of $37 million. Triple P fees and interest income were $6.4 million in the third quarter compared to $10.2 million in the second quarter. Also, an increase of $971 million in average excess funds decreased the margin by 20 basis points in the third quarter. non-interest expenses. Salaries increased 852,000 compared third quarter 2021 to 2020. The 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 15 new producers in 2021. We increased the incentive accrual in the third quarter by $1.1 million based on high dollar volume of loan production this year. Also, we invested in a new market tax credit during the quarter. The investment write-down increased non-interest expenses by $2.8 million per quarter, but was more than offset by income tax reduction of $3.3 million. Non-interest income, credit card income continues to grow. It's $2.04 million in the third quarter versus $1.8 million in the third quarter of 2020. And third quarter spend was $216 million in 2021 versus $151 million in 2020. And that concludes my remarks, and I'll turn the program back over to Tom. Thank you, Bud.
spk10: We do continue to be optimistic about our future growth due to strong pipelines and conversations with clients regarding their future plans. So all in all, we were pleased with the quarter. We're pleased with the outlook. And we'll be more than happy to answer any questions you might have.
spk09: Thank you. Let's open the floor for questions.
spk01: We will now begin the question and answer session. To ask a question, you may 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 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Brad Millsaps with Piper Sandler. Please go ahead.
spk04: Hey, good afternoon, guys.
spk01: Hey, Brad. Hey, Brian.
spk04: Tom, I was just curious, you know, 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.
spk08: Yeah, Brad, with the fees, we're still putting loans on at 415 to 420, right?
spk04: Okay, great. And, Bud, based on your comments, I want to make sure I heard you correctly. You thought that the pace of securities purchases would be right around $100 million a month, so about $300 million and a quarter. Is that correct?
spk08: Right, yeah. Well, you know, we're just going to watch rates. I know five and seven-year treasuries have been trending up, so we'll just watch it. I'm sure we'll look at increasing that purchase amount over time, but that's $100 million a month and $300 million and a quarter is our current goal.
spk04: Yeah, so all is equal, you might get the securities portfolio up to $2 billion or so by the end of next year?
spk08: Yes, yeah. At that rate, yeah.
spk04: Got it. And obviously, Bud, no one has a crystal ball, but just kind of curious, you know, if, you know, we got, you know, 50 basis points, you know, or 75, you know, starting late next year, you know, aside from the obvious, you know, your cash flow, balances would get a higher rate. What do you think the impact would be for you guys, however you want to express it in terms of them? Just kind of curious what the impact would be on loan yields with higher fed funds and taking into account anything you might have sitting at floors, et cetera.
spk08: 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'd really have to look at that.
spk10: How much cash are we going to have on deposit at the Fed then?
spk08: Yeah. Yeah, that's a lot of... One billion or three billion? A lot of Fs on that one.
spk04: Yeah, well, maybe ask differently. Can you just remind us of your kind of split between sort of, you know, prime or your liable-based loans, you know, versus fixed rate?
spk08: Oh, what now, the mix? Yeah, between floating and fixed.
spk04: Yeah.
spk08: Yeah. Let me think. We're at 60-something percent on fixed. Let me look. That one, I think we're probably 60% to 65% on fixed. I know that's been shrinking, but I just don't have it right here. I didn't bring that up. I didn't have that in my notes, I don't think. Sorry. I can email it to you then.
spk04: Yeah, okay, no problem. All right, great. I'll hop back in queue and let some other folks hop in. Thank you, guys.
spk10: All the cash is floating rate. All the $4.6 billion is in a floating rate, Brad.
spk04: Sure, absolutely. Yep, got it. That's the biggest floating rate asset we have, that cash. Yep, understood.
spk01: The next question will come from Kevin Fitzsimmons with DA Davidson. Please go ahead.
spk05: Hey, good afternoon, guys. Just digging into the loan growth a little bit, Tom, you know, you mentioned in the release about the economy, the economic recovery. You also had cited just a few minutes ago that line utilization really hasn't picked up like you would have hoped. But where, you know, if you would really to, you know, attribute this growth to just pure economic expansion versus the effect of your hiring efforts and 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
spk10: point to what what are the main driving forces for that loan growth i don't really know that i'm giving you a guess but i i think it's probably half and half probably half the new hires and half is you know projects from existing customers and that you know people put projects on hold obviously during the pandemic and they're we didn't want to do anything and they didn't want to do anything so now they're moving forward with new projects a lot a lot of commercial real estate i mean the the The loan demand is not that good in the commercial 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. And supply chain woes and hiring issues. But I've just given you a guess, Kevin. We haven't broken it down.
spk05: Yeah, what's your – you've mentioned that a few times, and obviously that's a big issue for everyone, the 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 CNI growth, 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.
spk10: Yeah, we don't have any credit concerns, but yes, we think that supply chains getting, if they ever do get fixed, which we don't think is going to be anytime soon, that certainly we'll see more, you know, more inventory, higher inventories. There is a tremendous lack of, you know, supply and there's unprecedented demand that we're seeing today. So we hear from every customer that we have The only place we're getting a little pickup in demand is steel prices have gone up, and our customers, for example, in the steel fabrication business, they've had increased inventories, and some of our scrap dealers are borrowing a little bit more money today. But it's not been an overwhelming change in the numbers there.
spk05: Okay. Okay, great. And one last one for me is just that you mentioned capital, how you went from this – uh position of having a lot of excess capital it's a good thing to have and you put it to use and where you sit now though you know and i get there there's a lot of uncertainty in terms of what happens to this excess funds but uh 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 um is it something that you might look at to to getting more capital thanks yeah uh
spk08: Kev, we've talked to our regulators where our tier one leverage was 8.25 at the end of the quarter. We'll just reassess it in the fourth quarter and see, but I think that 8% 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 a billion in deposits in the third quarter. It's spikes like that that really caused issues, and I think the regulators understand that. So I think we could probably get by without doing a capital raise or sub debt or something like that, as long as that's a short-term issue.
spk10: We think we will. I mean, Bud's done some projections, you know, and we think we're fine there. We think we have more than adequate capital, Kevin. And also, you know, again, the risk weighting on the $4.6 billion of the Fed is, you know, zero, right? So we don't have a risk-weighted capital issue with that much cash on the Fed Reserve. So, you know, we think we're just absolutely, you know, no problems at all. But we're glad we have that extra capital, you know.
spk05: Yeah, no, 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's capital to be had, whether, you know, weighing all those different variables about whether you should do it or wait. You know, that was my point. Okay. Thanks very much, guys.
spk01: Thank you. The next question will come from William Wallace with Raymond James. Please go ahead.
spk00: Hey, good afternoon, guys. So maybe just kind of following along with Kevin's kind of line of questioning, the liquidity from a capital perspective, you're saying it's a liquidity pressure, not a loan growth perspective, but Your liquidity has been building now since really pre-COVID, I think, and $4.6 billion 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 your correspondent channel balances have doubled. from 500 million to a billion. Did I get that correct, and is that year over year, or was that in the quarter?
spk07: Go ahead, Rodney. Yeah, this is Rodney Rushing, and you heard him correct. Since year end, our correspondent DDA balances went from just over 400 million to over a billion. Total correspondent balances were just shy of $2 billion at the beginning of the year, and they're at $3.6. So what makes that up are the DDA balances, where our downstream correspondent banks keep money in the DDA to pay their compensating balances, where we're the settlement point at the Fed for them for their cash letter. We then, anything over that, we sweep into Fed funds or a money market account. So right now our largest category is by far our DDA balances, but that growth has come from new correspondent relationships, mainly in Florida. Last month alone we opened over 20-something correspondent accounts in the state of Florida. This month we opened another six correspondent accounts. In addition to those new accounts, our downstream correspondence liquidity is higher than it's ever been. they have a lot more cash, just like we did. We're 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.
spk10: We're seeing a flattening, as I mentioned. We're seeing a flattening, Wally, in all the other regions, for the most part, in deposit growth. I don't know where your question is leading, but do you do a capital raise to support cash at the Federal Reserve where you have a negative carry? I don't think so. You figure out some other solution to the problem. There are solutions to the problem. 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 may not be going there, though.
spk00: 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 a leverage ratio sub 8%, et cetera?
spk07: Are you there? This is Rodney again. 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've just chosen not to do that up until now. We're buying it all as principal, and we'll see if we can put it to work.
spk00: 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're going to start putting $100 million 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?
spk07: 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.
spk10: You know, we want the correspondents channel to grow because there are other aspects. There are loan participations that we purchase. We make them direct loans. Also, we're growing our credit card outstandings through the credit card agent program. There are a lot of other things other than just deposits that lead to profits through our correspondent relationships. We have a pretty good chance to be a reasonably profitable good market share in the Southeast United States. And as well, we're seeing a national credit card program today.
spk00: Okay, thank you. And then, Bud, it looks like you moved about $260 million into health and maturity this quarter. Can you just give us a kind of brief overview of the nature of those securities?
spk08: Yeah, that was all mortgage-backed securities that we moved. net realized, unrealized gain was about 5.6 million, and that'll just be amortized over the remaining life. So we get to keep that 5.6 million in our unrealized gain total. Really, that's to, I think a lot of banks are looking at doing this. It really, it, you don't have a negative impact from that 253 million down the road if rates go up 300 basis points, I guess. So that's, it helps your book value by moving that to help the maturity.
spk00: Yeah, exactly. And what's the, what's the duration on those average?
spk08: About five years.
spk00: Okay. And then on credit, you know, 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 PPPI 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 You're where you need to be.
spk10: I guess we, you know, this is Tom. While we look at it on a quarterly basis, I mean, you know, two basis points of charge-offs on a year-to-date basis is not reality. You and I both know that. I mean, there's a loss somewhere in our portfolio. We just don't know where it is. And, you know, I've been, you know, president of a bank for 36 years now. I've never seen losses this low in my career other than on a one-off basis, but never as low as two. So good banks, you and I both know, good commercial bank, during good times, charge off for 10 to 15 basis points. And during bad times, they're probably 25 to 30 and a little bit higher if your credit quality is not where it should be. So we just want to be prepared for when that happens, while we think that we'll see some charge-offs. We're in the banking business. There are going to be charge-offs. We'd rather be prepared than unprepared for that.
spk00: I appreciate that. My last question, you've got your $100 million monthly loan production target that you have been exceeding. Has production itself been accelerating, or or are payoffs also declining? So you're kind of getting a double benefit.
spk10: You know, we didn't have a, payoffs are so lumpy, I can't even answer the question, but there were no significant, you know, the production was lower in the third quarter than the second quarter, but we didn't have any significant, you know, payoffs. I think a lot of the people that wanted to sell their properties or companies and worried about You know, increase in potential capital gains taxes and other taxes have already done so. You know, people started doing it last year. We had customers selling assets last year to be prepared for higher tax rates. So it's just hard. It's very hard to predict, Wally. But, you know, usually fourth quarter is a good production, you know, time for us. We usually, it's the highest of the year typically.
spk00: Yeah, okay. Thank you very much for answering my question. I appreciate it, guys.
spk01: Thank you, Wally. The next question will come from Dave Bishop with Seaport Global Securities. Please go ahead.
spk06: Yeah, good evening, gentlemen. How are you?
spk01: Hi, Dave.
spk06: Hey, 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 rates are remaining around that 18% moving forward with the tax credit investments.
spk08: Yeah, maybe a little bit higher, but somewhere in the 19% to 20% range. Yeah, and the new markets, you know, the tax credits, all of them you have to look at at the end of the period, you have a... a capital gain or capital loss, and the new market that we purchased in the third quarter was there to offset it. It'll have a capital loss. It'll offset a capital gain. 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 and losses. But that definitely impacted our non-interest expenses for the quarter. Got it.
spk06: So it seems like that could be a little bit of a give back moving forward here, probably maybe $1 or $2 million or so heading into fourth quarter.
spk08: I'm sorry. The write-down will still be there. So it's about $900 and, well, whatever, $2.8 million each quarter that we'll have in write-down. But you'll have the $3.3 million in tax reductions. Is that what you mean?
spk06: Okay. Yeah, so that's a good run rate moving forward. Yeah, yeah. Got it. Okay, great. That's all I had. Thank you.
spk01: 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.
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