Good afternoon, and welcome to the ServisFirst Bancshares, Inc. Q1 Earnings Conference Call. All participants will be in 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. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Ed Woodie, Controller. Please go ahead. Good afternoon, welcome to our Q1 earnings call. We will have Tom Broughton, our CEO, Bud Foshee, our CFO, Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, then we will take your questions. Some of the discussions during our calls 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, ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom. Good afternoon. We're very pleased with our quarter, and we're glad you could join us on our call today. We do continue to see rapid improvement in the Southeastern U.S. economy. Supply chains are still not rebuilt, so line utilization has not improved during the Q1. I think we're seeing inflation, and a lot of our customers are reporting large inflation in their material costs, and so that should lead to line utilization improvement as the year goes on. I've talked to one diversified manufacturer wholesaler last week who said everyone is gouging everyone out there, and I know that there's a shortage of labor in most every industry today. The unemployment rates in our state are averaging 4.7% in February, and we are seeing improvement monthly in that number. I can only recall one Q1 of our 16 years where we had any reasonable loan growth in the Q1, and certainly this year it fits the normal pattern. We did have a little bit of growth in the quarter, but one of our largest clients had seasonal pay downs that offset the growth in the non-PPP loan balance. As I've mentioned before, we have not seen the line utilization rebound as of yet, but do expect improvement through the rest of the year. In talking about our loan pipeline, our loan pipeline hit record levels at the end of March, beginning of April. Our 90-day pipeline has doubled since January, and we do expect significant loan growth in the Q2. This includes expected fundings as well as draws on construction loans. While our pipeline is not exact and you do have unexpected payoffs, this is the highest pipeline in the last 12 quarters by over $300 million. Our goal for the year is to replace our PPP loans with other loans by year-end. Bud Foshee will give a PPP program update in a few minutes after Henry Abbott. I do feel confident we will see loan growth this year. We do continue to see more opportunity due to mergers, our performance with PPP, and attracting new clients, and incumbent banks poor performance with PPP. Based on pent-up demand, we do see continued improvement in our footprint. On the deposit side, we do continue to attract deposits, with annualized growth of 24% in the Q1. The growth has been very broad across the entire company. While the industry does have substantial liquidity today, as our bank does, we do feel confident core deposits will add value over time. New account openings have steadily improved over the past six months, and were very high in the month of March. Now I'm going to stop and turn it over to Henry Abbott to talk about credit quality. Thank you, Tom. I'm extremely pleased with our Q1 results and our bank's credit quality. Our numbers generally speak for themselves, so I'll give a few key metrics and hit the high points. Non-performing assets were down to under $20 million on a total loan portfolio of $8.5 billion. The $19.9 million in NPAs is a $5.5 million reduction from the Q4, and roughly a $21 million reduction from the Q1 of 2020. This results in NPAs to total assets of 16 basis points, which is a five basis point reduction from Q4, and a 28 basis point reduction from the same period in the prior year. A key driver in our reduction in NPAs was various sales from our OREO portfolio to bring it to its lowest level in more than 10 years. The now $2 million balance in our OREO is a 68% drop from year-end. Our core key credit metrics have not been this low since 2015. As referenced, our continued exceptional asset quality and strong balance sheet lead me to be optimistic about our bank's future. This NPA reduction was not achieved at the expense of the income statement, as we had extremely minimal charge-offs in the Q1. The $487,000 in net charge-offs to average loans for the Q1 on an annualized basis were two basis points versus 41 basis points in the Q4 and 26 basis points in the Q1 of 2020. On strictly a dollar amount, net charge-offs have not been that low since the Q1 of 2016, and at that time, the loan portfolio was only $4.3 billion, which is roughly half of where we are today. Our past due to total loans were seven basis points, $6 million, a 34% decrease from year-end. We grew our ALLL by $7 million in the Q1. Our ALLL to total loans was 1.12. However, excluding PPP from total loans, our ALLL to loans was 1.26. Government aid and stimulus, the primary example being PPP, have helped soften the blow from COVID. That said, our credit culture, geography, and diverse nature of our commercial loan portfolio should help us be well-positioned to grow and prosper as the economy fully opens up and expands. With that, I'll turn it over to Bud. Thank you, Henry. Good afternoon. Net interest margin for the Q1 was 3.20% versus 3.27% in the Q4 of 2020. The adjusted margin was 3.08%, excluding the average PPP loan balances of $956 million in PPP interest income and loan fees of $11.4 million. Adjusted margin for the Q4 was 3.23%, excluding the average PPP loan balances of $1.01 billion and PPP interest income and loan fees of $10.1 million. The adjusted margin was 3.27%, excluding the increase in excess funds of $411 million. Q4 adjusted margin was 3.36%, excluding the increase in excess funds of $311 million. The remaining net PPP deferred fees at 03/31/2021 are $20.4 million, $9 million relates to Round 1 and $11.4 million to Round 2. CD maturities for the remainder of 2021 are $452 million, $171 million for the Q2. The average rate is 1.11 for the year and 1.08 for the Q2 maturities. We expect the majority of these CDs to reprice at 0.40 or below. The repricing will result in a $1.3 million annual expense reduction, or $717,000 for the Q2 maturities. The quarter- to- date cost of interest-bearing deposits has decreased to 0.38 in the Q1 versus 0.44 in the Q4 of 2020. Our quarter-end deposit costs, total deposits was 0.25, total interest-bearing DDAs 0.25, and our total interest-bearing deposits 0.36. A reminder, we have no accretion income-related acquisitions. For our PPP recap, Round 1, 4,962 approved loans. The total loan amount was $1.09 billion. Total fees, $34.4 million. ServisFirst ranked 89th out of 4,839 participating banks. The balance of loans at the end of 2020 was $900 million. Round 2,287 approved loans. Total loan amount of $407 million. Total fees of $16.7 million. ServisFirst ranked 87th out of 4,628 participating banks in Round 2. PPP balance at the end of March 2021 was $968 million. 2021 Round 1 loan forgiveness is $334 million. 43 loans, $2 million and above have been submitted for forgiveness. Only one for $2.2 million has been forgiven, and the dollar amount of loans awaiting forgiveness is $130 million. Monthly yield, including PPP fee accretion on Round 2 loans, will be about 45 basis points lower, the loan term being five years versus two years for Round 1. Liquidity excess funds were $600 million when we started funding PPP loans in April 2020. Excess funds were $2.7 billion at 3/31/2021. Non-interest income, credit card spend amount, $169.8 million in the Q1. It was $168.4 million in the Q4 of 2020. The Q1 of 2020, the spend amount was $146.1 million. Credit card net income, Q1 was $1.2 million, which included an accrual adjustment of $290,000. Q1 net would've been $1.5 without the accrual adjustment. Q4 of 2020, the actual was $913,000. That included a rebate accrual adjustment of $870,000. Q1 of 2020, net income was $1.8 million. Merchant services fees year- to- date 2021 is $191,000 versus $100,000 for year-to-date 2020. We have two officers dedicated to selling this service. Mortgage banking income is $2.7 million in the Q1 versus $3.1 million in Q4. Q1 2020 was $1.1 million. A reminder, we do not sell any government-guaranteed loans to generate non-interest income. Non-interest expense, total producers at the end of 2020 were 133. At March 31st, 2021, 131. Total employees at the end of 2020 were 499, and same number at the end of March of this year. Total non-interest expenses in the Q1 of 2020 were $27.9 million. Q1 of 2021, $28.9 million. For the increases, Q1 expense for incentives was $3.7 million versus $2.7 million for 2020, and the increase is primarily based on projected production from new producers. Our unfunded commitment reserve for the Q1 was $600,000. Mortgage commissions increased by $308,000, and FDIC insurance increased by $224,000. For decreases, the net ORE expenses were $157,000. The PPP FASB 91 deferral was $1.1 million in the Q1 for Round 2 loans. Just note that our salary increase year-over-year was only $11,300. Capital, despite a $2.8 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 79%. Tax update, Q1, the rate was 20.18%. For 2020, that number was 18.76%, and the projected rate for 2021 is 22%. That concludes our presentation. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today comes from Graham Dick with Piper Sandler. Hey, guys. Good afternoon. Hi, Graham. Good afternoon. JUst starting on credit, just wanted to ask what might have caused the CECL model to require you guys to build the reserve further this quarter. I was just kind of surprised to see this, considering credit quality metrics improved, and seems like the economy has done the same since 4Q. Well, Graham, that's a reasonable question. A very reasonable question, I would say. I think that we do feel really good about where we are, but it's just we've been through the worst pandemic that I've ever experienced, and you've ever experienced, we just want to be a little bit cautious in terms of doing anything in the way of a loan loss reserve release at this point in time. It's nice just to have a little bit more dry powder there, in the event of something unexpected. We don't know of anything and feel good about it, but we're just a little bit gun-shy because of where we've been for the last year. Definitely fair. I guess just kind of going forward, do you expect any more reserve build, or are you pretty comfortable with this like 126 level of reserves ex-PPP? Well, I think because of our projected loan growth in the Q2, we will have reserve build, but not as percentage, it will not increase. It certainly will decrease as we go forward. We'll add dollars to the loan loss reserve in the Q2 because of the projected higher loan volumes. If that makes any sense. Did I answer your question, Graham? Yeah, absolutely. It's perfect. I guess turning to loan growth, with you guys sitting on that record loan pipeline, and a load of excess liquidity, how strong do you think loan growth can be this year, I guess over the next couple quarters specifically? Well, we said that at year-end, our goal was to replace all the PPP loans that were outstanding at year-end with other loans, obviously non-PPP loans. That's some $900 million. That's our goal of what we'd like to replace for the year. I feel better about that goal today than I did when we said that three months ago, right? just because we see pretty clear l oan growth. Actually, we've already had some pretty good loan growth this quarter, in the first two-thirds of the quarter here. We feel good about the rest of the quarter in terms of some substantial loan production. We're not yet seeing the line utilization improve, Graham. The real question to me is, we have had some customers come in and increase their lines just because they said the cost of steel is going up, the cost of lumber is going up or whatever else they keep in inventory. That should lead to improvement in line utilization in time. Just the good old fashioned, the $300 million we lost last year, I don't know when we're going to get that back, and I can only hope that we get some of that. That's just a natural lift you get without having to do a whole lot of hard work, right? I'm looking for that, and hopefully some of that'll happen in the second half of the year, Graham. Okay, great. That's helpful. I guess just lastly, just a quick one here. Do you guys have the loan yield excluding PPP loans? The release just shows the total loan yield. I'm just trying to get a sense for how much more pressure there may be on core loan yields, if any at all. Yeah. For the Q1, so the margin was 320, excluding PPP, it was 308. No, he's asking loan yields. Oh, loan yield. Just new production? More particularly on just the average loan yield ex PPP. Like I see here that the taxable loan yield is up. Oh Four basis points quarter-over-quarter. Just trying to get what the core loan yield was there. I don't have that one. No. Okay. I can email it to you. Yeah, I just told the margin. I don't remember the actual loan yield. Okay. Yeah, no problem. Thank you, guys. Congrats on a good quarter. Thanks, Graham. Thank you. Our next question comes from Will Curtiss with Hovde Group. Hey, good afternoon, everyone. Good afternoon, Will. Afternoon. I appreciate the details on kind of what you have coming up from a deposit repricing. I'm just curious if you can kind of size up what the expectations are for the margin when you back out all the noise from PPP that maybe over the next couple of quarters and you kind of manage through the liquidity headwinds. Just curious how you're thinking about the trajectory of the margin from here. Yeah. Well, like Tom was talking about, if we can replace the $900 million we had in PPP by the end of the year, it definitely has a positive impact because new loans are going on around the 425 yield level. The key to the whole margin improvement is having that much in new loan production this year. If we have that, margin kind of takes care of itself as these PPP loans fail or get forgiven. Got it. Okay. I think, Bud, I may have missed this, you may have provided it, but the average balance of PPP for the Q1, did you give that number? Yeah, $956 million. Okay. Got it. All right. Then, just the last one here. I think last time you guys talked about expense growth for this year being sort of similar to kind of what we saw last year. I'm just curious if that was still kind of a fair expectation as we think about the 2021 expense base. Yeah, I think so. Like we talked about, the biggest increase will be our core conversion. We budgeted a $2 million increase related to that, so we still think excluding that, we can definitely keep our expenses under control. I think we talked about in the Q4 call that if we're adding people, it's mainly production people. They've got to come in and produce pretty quickly to pay for themselves. Got it. All right. I appreciate the color. Thank you. Thank you, Will. Again, if you have a question, you can press star then one. Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Hey, good afternoon, everyone. Hey, Kevin. Good afternoon. We've talked about loan growth, and we've talked about margin. Maybe just if we can simplify it and talk about dollars of NII, because a lot of times we're dealing this quarter with growth in the balance sheet, but the margin gets hit. What's your outlook for dollars of NII going forward? Do you think it stays soft or relatively soft to positive, but then picks up over the course of the year as you get more production in loans? Let me think on that. Even though we're going to replace. I guess. You kind of want to know. Yeah, I guess there's a. I mean, of what we're going to add on new loans versus what's rolling off, forgiven? I mean, it's a lot of moving parts, obviously, with you guys are trying to replace PPP with new loans. The elevated liquidity, that's uncertain, right, as far as when and how that rolls off. Yeah. How smooth of a trajectory that would be. Yeah. What also complicates it, you have $9 million in fees relating to Round 1. If Round 1 loans are forgiven by the end of the year, you've got $9 million in additional accretion that will come in. That definitely impacts how you're looking at the margins there. Yeah. Right. You heard us say all the loans except one over $2 million, the PPP from Round 1 are hung up. They have been zero forgiveness. Actually, there was one forgiven on the first day that the portal opened. I think that was forgiven by mistake. All the other 43 out of 44 are still. There's no word at all. Nor did I think any of our competitors have had any forgiveness there either, so. Yeah, I've certainly talked to peers, and nobody is getting forgiveness on $2 million or greater loans. They all seem to be held up at this time. Your guess is as good as mine on that. We're earning 1% on those loans instead of 10 basis points at the Fed. I'm not completely unhappy about it. I like it. It suits me fine. At least I know our customers want forgiveness, and they want to get it off their plate now. I don't blame them a bit. In the meantime, it's okay. How about if we're expecting the economy to continue to reopen and growth to materialize, can you talk about new market expansions? I know you opened an office in Florida fairly recently, just the state of are there any new markets on the docket as you look forward? Are there new teams that you would like to go out and hire? Do you have the team in place right now for everything you see coming? Yeah, we will have some announcements in the next week, 10 days, Kevin, on that. We just can't do it just yet. We actually have some people in hand, and we're working on a press release on a new market that's imminent. Actually, they're on board. They started today. We just can't talk about it yet. We will have them, and we also have a group coming in Friday from another state to visit. We have some potential to onboard. This is moving time of year, as you know. For people that were an asset for us, have become a liability, it's time for them to leave, and it's time for new people to join us. It's moving time right now, so we feel pretty good about where we are. Okay. Just one last one, Tom. We always ask from time to time about M&A, and that's never really been your focus. You guys really focus exclusively on organic growth and bringing in teams or producers. There's been a lot of merger activity we've seen recently and with larger banks, and now you guys have even more of a commanding multiple that you could use if you chose to use it. Do you feel any differently on that front, or are you just consistent with how you've looked at it over the years? Yeah, I think we would certainly. Obviously, our multiple is a little bit higher than the industry as a whole, and the right opportunity, we're always interested and we're always willing to talk. It's just finding something that's branch light and is a good cultural fit, there just aren't many of those out there, as you well know. We're more than willing to talk, and we understand the potential synergies of the right group at the right time, in the right place. It would make a lot of sense for us and for the group that we merge with. We certainly are interested in it at the right opportunity. You mentioned that you'd want a target to be branch light. Is it possible to get a target that's not branch light, but you make it branch light over time? Is that too much of a hurdle with regulators, or how do you look at that? Yeah, I think it's a hurdle. I think there are a lot of people who would like to lighten their branch load right now, and they can't. There are a lot of reasons they can't do it. We've got a couple offices we need to close, and we can't get our own people on board to close them, right? You think? We're only a 16-year-old bank, so a lot of our internal people, oh, that's the branch where I go cash my checks. I don't want to close that branch. It gets down to things like that, Kevin. You'd think it wouldn't, but it does. In a bank that's been around 30, 40 years, and they've had these branches, and you've certainly got key issues, regulators, and closing branches, and it just feels like the bank has failed in some fashion when you start closing branches. That's the biggest problem in closing branches is like, well, what's wrong? Why is my bank having to close these offices? Is my bank in trouble? What's the problem? You try to explain it to people, and there's just not a good explanation out there. It's just not a whole lot of fun for anybody. Certainly, I think the pandemic, we'll see, but I don't think branch traffic is going to pick up in the industry post-pandemic. Did people quit coming because of the pandemic? They might have initially, but now I think they found additional channels. I don't think it's a secular trend that's going to continue for branches to continue to wither away. They're not going to die a quick death. They're going to die a slow death, and it's going to be a drip, drip of losses in the retail branch front for years there. Yeah. All great points. Thanks, Tom. Thank you, Kevin. Our next question comes from William Wallace with Raymond James. Thanks. Good evening, guys. Hey, Wally. Good evening. Hey. Tom, your answer to the question just now actually to me was a little bit surprising. I kind of felt after your last acquisition that you weren't really that interested in mergers. Are there partners that fit what you just sort of described as a potential kind of attractive partnership that exists out there, and are you having conversations, or if the right thing just happens to fall in your lap, you'd take a look? Yeah. I won't say they're unicorns, Wally, but most of the people that would fit it are doing quite well on their own, so why would they want to do anything short of age issues? That's what we see sometimes. I had a friend actually in Texas said, hey, there's a bank. You need to buy it. I said, well, the CEO is 76. Who's his backup management? He said, he doesn't have any. You'd have to send somebody, and I said, well, you don't send people to Texas. They're not accepted. I don't care if we're from Georgia or Alabama or Mississippi, they're not accepted in Texas. We certainly weren't interested in buying that bank. It makes it hard to find a fit where there are reasons for the bank to sell and reasons for us to want to buy it, and they all match up. They're not unicorns, Wally, but they are not numerous, let's put it that way. I think we have some friends in the Midwest that buy banks, and they told us how many potential bank targets they had, and it was in the hundreds. Ours are certainly not in the hundreds. It's more like in the tens than hundreds. Okay. All right. Thanks. That's helpful. I apologize if you gave this in the very beginning. I believe last quarter you were talking about utilization rates down in the kind of 38%-38.5% range. Are they still down there? Have you seen some usage increase? I didn't give it, Wally. At 12/31. Let me go back. The end of 2019, it was 48.1%, the end of 2020, 39.5%, and it's even lower today at 37.7% because of the PPP Round 2 decreased line utilizations again. We got to get all the government cheese spent and out of the way so we can start getting some draws back on these lines. Okay. All right. Yeah. Wow. Then another follow-up on the net interest margin conversation. If you look at new loan production, are the yields on those loans, are you seeing competitive pressures or are they holding in, or are you actually seeing relief? It's competitive, I won't say that, but we try to be disciplined, Wally. We think the banks that are disciplined are going to be the winners. We think we'll get to the finish line. I see some people that aren't disciplined, but I think they're living for today. They maybe want to show an analyst some growth today, and they're not worried about tomorrow because they're planning on being retired to their beach house in Florida tomorrow at some point, right? We want to be in this long term and for the long game, so we are certainly trying to be as disciplined as we possibly can from a pricing standpoint. We see some pretty good opportunities right now. We've been impressed with how things have opened up month by month each of the last three months, and we're thrilled to be in the Southeast United States. Again, I say that every quarter, and we're thrilled not to be in the retail banking business. Right. I like our space of where we have the bank is positioned, and I like our markets, I like our asset diversity, and feel good about where we are, if I left anything out. Okay. All right. Generally speaking, absent a couple of maybe irrational players here and there, the pricing pressures have stabilized. Is that a fair characterization? Yeah, I think it is. I think there are a lot of people that don't think we're ever going to have any inflation, obviously. I'm not one of those. We're certainly going to have some kind of wage inflation because nobody can hire anybody today in certain industries. Right Everywhere we go, our customers tell us that. Especially the restaurant workers, they're getting more than they were working, so they have no incentive to go back to work. Yeah. Okay. On the expense question, was there any deferred comp related to the PPP Round 2 that will be bouncing back into the run rate, or does that get offset by a reduction in the incentive accruals? Just kind of want to make sure we don't get surprised by anything. It was $1.1 million in the Q1, Wally, but it was part of that net number that I gave. Net fees and FASB deferral was $11.4 million at the end of March for Round 2. We give a net number. Yeah, to answer the question. Okay. It was factored in over the life of the loan, yes. Yeah. There's going to be $1.1 million that comes back into the run rate in the Q2, is that correct? Well, the loans are over five years. Round 2 is five years, so it just factors in over the life of the loan. Right. Yeah. Right. If we get forgiveness, they come in more quickly. Yeah. Right. Good question, Wally. The deferrals are a little bit misleading. PPP has been a wonderful narcotic for all the banks. The problem is we're just going to have to live without it in 2022. Right. We won't be prepared to live without it and be successful without it, and continue to grow earnings. Okay, and then just one last question. I, too, was kind of curious to see your reserves increase just one quarter after you took them down when you adopted CECL. I'm curious if you adjusted your two factors to be more aggressive? Or if there was some risk rating migration or something in the model that caused the reserve requirement to increase.? I'm just kind of curious. It just seems like a pretty quick shift one quarter after adopting it. There wasn't any risk grade migration to necessarily drive that. Rather just kind of what the model dictated in general. No major shift. There were some small changes in certain key factors in certain industries, but nothing wholesale changed in our model. Our unfunded loan commitment expense went up, right? Which is not in the loan loss reserve, but it should be. To me, I don't know why that's a separate line item on the expense factors. It doesn't make any sense. We just feel like losses were extraordinarily low in the Q1. Don't count on that run rate for very long, Wally. A two basis point for per annum. I have not been associated with a bank that had two basis points of losses in the history of my career. I think, typically I've had banks that operated between five and 10 basis points a year charge-offs, but usually around 10. Not that low. Right. Yep. Okay. It's just a little common sense. We're factoring a little bit of common sense there, Wally.