Q4 2021 ServisFirst Bancshares Inc Earnings Call

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Greetings and welcome to the service first Bancshares fourth quarter earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Please note. This conference is being recorded I will now turn the conference over to your host Davis Mange director of Investor Relations. Thank you you may begin.

Good afternoon, and welcome to our fourth quarter earnings call, we will 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 will 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.

We're looking statements speak only as of the date. They are made and service first assumes no duty to update with that.

I'll turn the call over to Tom.

Thank you Davis.

Afternoon, and thank you for joining us on our call and I'll.

Here are a few highlights before I turn it over to Bud Foshee.

If youre new to our call.

You'll notice that we don't retail you're from.

The press release in any way, so we assume everybody can read and react.

This release without our reading it to you.

I'll talk a little bit about loans as you can imagine, we're pretty well pleased with the quarter.

Produced our release.

Already we did have.

Loans grew $878 million in the quarter, which is well above our $100 million per month logo and it is certainly a record quarter.

Quarterly loan growth and of course $878 million excludes Triple T.

Yes.

For the year, our West Monroe, Florida region.

The highest growth rate followed by Birmingham.

Both in Alabama, Columbus, Georgia in Nashville.

For the year all of the growth came in the commercial real estate category and we actually had a decline in commercial and industrial loan balances.

We did see some commercial and industrial line loan growth in.

In the fourth quarter with growth there of about $100 million.

C&I commitments did increase by $250 million in the fourth quarter. So that's 30%.

Annualized growth for the fourth quarter that also had the effect of keeping the line utilization rate flat with the prior quarter.

I mean, those marginally improved but not enough to matter.

And talking about our loan pipeline.

As you would expect after a quarter with such large loan growth.

Pipeline was down.

From the last quarter.

However, if you compare it to one year ago, our pipeline is is 47% higher than one year ago.

We do.

Are pleased with the pipeline, we do see activity.

We typically don't see much.

See very modest loan growth in the first quarter I think we've had maybe one or two years out of 16, where we had.

<unk>.

Pretty decent net loan growth in the first quarter. So we don't usually see it but we do.

We do expect we will make it up as alone year goes we.

We do expect some growth this year from construction line draws that will certainly be a nice tailwind for loan growth.

We did expect C&I loan line utilization to improve in the back half of 2021.

But it did not materialize as we expected and.

Hopefully we will see some improvement.

Utilization.

Is 2022 moves along.

I will say this about our micro is execution on the <unk>.

Triple play.

Protection program the second round in 2021, our bankers did excellent job of performance.

It did in 2020 with the first round and that's led to many new opportunities.

With commercial and small business customers in it and I think it's certainly enhanced our reputation.

Our service to our customers.

But we're very pleased with where we are in the market and are certainly improved our our brand recognition and enhanced our brand value we think.

On the deposit side, we continue to see growth in deposits.

Certainly at a more normalized level than we saw earlier in the pandemic.

The growth rate was 12% annualized in the fourth quarter, which is more in line with normal.

Annual growth rates.

After the pandemic surge our correspondent division.

It experienced a decline in deposits in the fourth quarter as our correspondent banks began to deploy <unk>.

Some of their excess liquidity in loans and securities.

We are this is the time of year, we start havent sincere honest conversations with different teams about.

And the buying.

They normally don't move to laughter.

Incentive payments during the first quarter, which is.

February March April period.

We are having discussions with quite a few bankers in new geographic regions. We don't have anything to add at this point in time. So again, we're not trying to add large numbers of bankers, but trying to add.

Look we're very.

Small number of high quality bankers to add to our to our buy so that's certainly.

We are optimistic on that front for this year.

So that will conclude my initial.

And I'll turn.

Turning the program over to Bob <unk>, our Chief Financial Officer Budd. Thanks.

Thanks, Tom and good afternoon.

We have discussed the company's plan to purchase $100 million of 15 year mortgage backed securities and five and seven year treasuries on the third quarter call.

Our net investment security growth in the fourth quarter was $325 million.

Also decided to retain a portion of our mortgage originations for the fourth quarter, we sold $6 million to investors and retained $53 million.

For our margin loan growth exclusive of Triple pay forgiveness was 878 million for the fourth quarter.

Average loans exclusive of triple pay increased by $542 million in the fourth quarter the.

The average triple pay.

Loans decreased by $163 million for net average growth of $379 million.

Triple pay fees and interest income were $5 8 million in the fourth quarter compared to $6 4 million in the third quarter.

Also an increase of $831 million and average excess funds decreased the margin by 15 basis points in the fourth quarter.

Noninterest expenses.

Salaries increased 698000, compared with fourth quarter 2021 to 2020.

Majority of this increase was in west Central Florida.

We added production staff and opened the Orlando office.

We hired 17, new producers in 2021 .

Also we increased our incentive accrual by 700000.

In the fourth quarter year to date 2021 incentive expense was $17 million.

<unk> was $12 3 million for year to date 2020.

We also invested in a new market tax credits.

During the fourth quarter.

Investment.

Right down increased noninterest expense by $3 1 million for the quarter.

It's more than offset by an income tax reduction of $4 1 million.

We accrued $3 million related to termination fees.

The change in our core vendor.

This reduced the fourth quarter fully diluted.

Yes.

<unk> 299 cents.

Unfunded commitment reserve.

One $7 million credit.

In the fourth quarter of 'twenty, one versus a charge of $1 2 million in the fourth quarter.

2020.

A LIBOR cap, which we purchase a few years ago, we wrote up the value.

839000 and the.

The fourth quarter of 'twenty one.

Versus a write down of 61000 in the fourth quarter of 2020.

Noninterest income credit card income continues to grow to $2 million in the fourth quarter versus 913000 in the fourth quarter of 2020.

Spend was $229 million in 2021 versus $168 million in 2020 and.

And year to date 2021 spend.

It was $815 million.

Versus $601 million year to date 2020.

That concludes my remarks, and I'll turn it over to hammer.

You bet.

We ended 2021 on a very high note I am pleased with the bank performance in the fourth quarter and our loan portfolio continues to perform at an exceptional level.

We're very proud of the loan growth we achieved in 2021 more typically in the fourth quarter.

Bankers, calling effort paid off in both new and core markets and our geographic footprint continues to be a strategic advantage for our bank.

Nonperforming asset total asset, we're down to nine basis points versus 11 basis points last quarter, and 21 basis points in the fourth quarter of 2020.

NPA has continued to shrink and we're down to $13 $3 million. This is roughly a 20% reduction.

For the quarter and a 47% reduction from the fourth quarter of 2020.

We should decrease in nonperforming loans and Oreo for the quarter and our Oreo dropped to just $1 $2 million on a total loan portfolio of $9 5 billion.

Our past due total loans were seven basis points $6 9 million on par with last quarter and four basis points less than the prior year end.

Net charge offs and Oreo expenses were less than $800000 for the quarter net credit extent for the year was just four basis points versus 2020 credit expense of 38 basis points I'm extremely proud to say this was a reduction of roughly 90% from the prior year.

From a dollar perspective, we did grow our loan loss reserve by $8 $5 million per quarter. However, as Youll note as a percentage of total loans the <unk> dropped from $1, two 4% for 1% to 2% for the quarter.

The dollar rise is related to our strong loan growth as mentioned by Tom and the percentage decrease is correlated to the continued strong economic environment with which we are operating in.

2021 was a banner year for service first bank, and we're well positioned for 2022 and beyond.

With the exceptional credit quality, we have in our strong credit culture with that I'll turn it back over to Tom. Thank.

Thank you Henry.

We're certainly optimistic about the outlook for 2022 will be happy to answer any questions you might have.

At this time, we'll be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

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Please while we poll for questions.

Our first question is from Graham <expletive> of Piper Sandler. Please proceed with your question.

Hey, good evening guys.

Okay.

So just wanted to start off on growth year, obviously, a banner quarter for you all way ahead of that.

$9 million target.

I just I just wanted to know how much of this quarters, I guess $900 million and end to end growth came from the new hires you all made last year in Florida.

I don't know exactly the answer to your question ground, but it's.

It's a substantial.

Number.

The course of the year.

I think we had a billion seven in <unk>.

And loan growth.

For the year net loan growth and by the way I've mentioned.

I've said are saying that this is not.

You didn't ask this question ground, but I've said, our C&I loan balances were down.

300 million for the year, that's inclusive of Triple peaks, if you exclude tripled.

Our C&I loans did grow $350 million or so I should've said that earlier in my remarks, but so.

But it's not what we're used to.

I would say close to.

25% probably came from R&D hires down in Florida.

In 2021 Graham.

I don't know about particular quarter, but just for the whole year.

No right.

It's helpful anyway, I'm, just trying to get a feel for maybe if theres any more upside to come from that group in.

And 'twenty two in terms of incremental growth.

And I guess kind of as you look back at that $300 million target I'm, just trying to get a feel for.

What you all might be expecting on a quarterly basis in 'twenty. Two obviously first quarter can be a little slower but $300 million.

I mean, maybe just seems.

It seems like there could be maybe upside to that.

Yes, I mean and of course, they've got a really nice pipeline right now down.

The economy is really strong in Florida as you shortly well know is strong for everybody. So.

We're seeing opportunities down there that are certainly.

Outsized compared to the average.

Region in our footprint.

Okay great.

Yes, you all sticking to $300 million a quarter in terms of in loan growth you think that's still about right.

Well the first quarter again as I mentioned, we don't typically I think we've had one or two years. So we've had net loan growth in the first quarter.

This might be a year, we'll have some some growth we just felt.

<unk>.

Our goal is to say, okay, we're going to book a bid to for the year due to product come in the back three quarters of the year.

And of course, you know.

You can get impacted from quarter to quarter about payoffs as you know payoffs were very lofty Graham So theres really no.

No no judging when do we get a payoff.

Yeah.

Alright, thank you.

I guess just shifting over to expenses real quick.

You guys, obviously had a great history of expense control, but just wanted to hear a little bit about what youre seeing on the ground in terms of wage and cost inflation and how this may impact overall level of expense growth year Youre modeling for over the next 12 months or so.

Yes, hi granted but.

We haven't really made any.

Major adjustments.

From that end.

I think we factored in 3%.

Increased salary increase in the budget so.

We're able to.

We're able to hire employees and Vienna, we've added.

People in new regions, so so far that hasn't been an issue.

Okay, Great. That's all for me guys congrats on a really solid quarter.

Thank you Greg.

Our next question is from Kevin Fitzsimmons from D. A.

Please proceed with your question.

Hey, good evening guys how are you.

Great. Good thank you Kevin.

Hey, just a follow up on expenses.

A lot of moving parts, but.

If we adjust for obviously the conversion expenses and then if we adjust for the.

The write down of the tax credits and then also the.

The unfunded.

Reserve.

Lending not come down I'm getting penciling in somewhere around a 34.

$1 million run rate does that sound right Budd.

<unk>.

Something that we should use with some kind of.

Modest growth per quarter going.

Into 'twenty two.

Yes.

The only thing I know you did that only the unfunded the well.

So have the LIBOR cap.

Those <unk>.

You're probably right in a base number it's hard to project.

What youre going down the unfunded or the LIBOR cap.

Let me.

Don't have that right in front of me, let me, let me look at that and I'll email it to everybody to say what normal is without.

And a lot of LIBOR.

A LIBOR cap within fee revenues or am I looking at the wrong time is that something.

The LIBOR cap, we had we actually wrote.

Let's say 839000 in the fourth quarter, yes.

Yes.

That's b revenues right now.

That's right, yes, I'm, sorry, yes, I was thinking that yes, yes.

So I'll leave that one out but the unfunded kits.

Could slip.

Dollars or so either way each quarter, so probably need to leave that one out for what we're trying to do from just a standard noninterest expense totaled.

Okay, and but could you just.

I'm just trying to keep up with you can you just.

<unk>.

When you talked about the securities than what you guys said in the third quarter call and then what you actually did can you kind of repeat that but then also look forward and what you guys think you might.

Do with securities in the first quarter, given give us still have excess liquidity on the balance sheet.

Yes sure.

So each month, we'll buy.

50 million.

Total of five and seven year treasuries.

And probably $65 million to $70 million of 15 year mortgage backs because youll have paydowns. So we're trying to come out with a net increase of 100 $100 million each month and the net investment security growth for the fourth quarter was $325 million.

And we will continue with.

Five year seven year purchases.

Probably still stick with 15 year mortgage backs.

Probably some seasoned paper, we're looking at probably a little better.

AG and where you can really tell what your yield is on those.

Okay. So another.

Roughly another 100 amongst our cri.

We're planning at this point.

Got it got it.

Just one last one from me Tom can you not.

Not surprisingly capital ratios came in I mean, they still look fine given the kind of growth you all have seen I know I recognize that it won't be as explosive in the first quarter, but given that kind of growth and maybe the E.

Expectation that line utilization will improve.

Do you how do you feel about those capital levels now do you feel you might need to do something later in the year to bolster them or do you think you are fine for the year.

Well you know from a lot of the utilization standpoint.

We'd love to see a pickup in that and.

We've got still have a fair amount of money in cash sitting on the balance sheet at all how much was at year end I'll now much today was that only talk about today, but.

At year end it was substantial.

A substantial amount of several obviously several billion dollars of cash, but we feel most of that a lot of projections, we feel confident based on all of our projections that.

Given any kind of normalize.

Don't think we will have a huge surge in pandemic deposits that we had over the last year and a half going forward, we think we'll see more normalized.

Level of deposit at <unk>.

Our core profitability is strong enough and we're retaining.

Almost 80% of the Orange.

Kevin to support the balance sheet drugs. So we feel confident that we will.

It will be in good shape by year end, all the capital ratios.

Okay, great. That's it from me thanks, guys.

Thank you.

As a reminder, if he would like to ask a question. Please press star one on your telephone keypad, a confirmation Hello Annotate. Your line is in the question queue.

It may be necessary to pick up your handset before pressing the star <unk>.

Our next question is from David Bishop of Seaport Research Partners. Please proceed with your question.

Yes, good morning, gentlemen, how are you.

Hey, Doug.

Hey, a quick question on the on the credit front obviously.

Looking across the credit metrics, there things look very benign a little bit of pop in provisioning this quarter, which I assume due to growth as you read the economic Tvs and look at the credit metrics out there from a level of provisioning do you think it's relatively similar overall in 2022 to 2021.

Do you have to take a little bit more in there for growth just curious how we should think about the provision.

Provisioning from a holistic basis into 2022.

This is Henry Yes, I mean, I think I think ultimately the driver for us in the fourth quarter was was the loan growth as a percentage.

Our <unk> did go down because of the positive economic environment, but.

We as we grow.

Kind of hand grenade close we're reserving 125, or so on new loans generally with models coming up with.

As we grow the bank's balance sheet.

I'm, sorry that was two 5% you said of new growth.

Generally, yes, it depends on loans and on the maturity but.

Got it.

And then.

More of a housekeeping item a good tax rate to use for next year I know there's.

Investment tax credits, but how should we think about.

But yes, 20% should.

It should be good right.

Got it.

And then obviously.

A lot of talk about that turning hawkish here I don't know if you have updated numbers there, but just curious.

From an interest rate risk sensitivity.

Any sense of what the margin could react for in terms of a 25 basis point movement in fed interest rate.

Well Darling consulting does our <unk> modeling and they did this one's up a 100 year one it would be six 2% in second year by 9%.

I guess like everybody, we're not expecting to really have to do anything.

Very little on the deposit side, right wise, especially with the first increase so.

Part of that.

That's what Darling is taken into effect when theyre showing these numbers.

So I think thats from what I've read another press releases that seems to be what others are thinking also when rates go up.

That was six 2% budget I think you said, probably 100 basis point, yes, that's up 100 right.

Up 100 got it.

Okay and then one final question I think you mentioned there was a little bit.

Movement on the correspondent deposit balances yourself that Apple is there just curious.

What those trends were in the fourth quarter and maybe expectations.

Enter 2022.

Yes. This is rodney rushing in.

We had.

Tremendous growth in correspondent balances during the year. We started the year just shy of 2 billion, one point something and we ended the year $2 billion higher just in correspondent banking right at $3 9 billion.

And the fourth quarter right at year end, we always have some banks move some money out.

Just from some some of their balance sheet.

Vanished.

Maybe move it to the fed or wherever where they have zero risk weighting. So.

So we had a very small decline.

$200 million.

Out of our $4 billion.

<unk>.

Yes.

We are anticipating that those corresponding balances are going to remain flat for the year.

Don't see tremendous growth, that's where we.

Tom I think as confident about our capital ratios.

Okay. So you don't anticipate anticipating correspondent growing another 2 billion.

Okay I didn't know if there'd be an outflow just in terms of as you noted with rates, maybe ticking up some some movement to other asset classes, but it doesn't sound like you anticipate that that type of balance sheet actions.

We haven't seen that at this point.

Okay, great. Thank you for the color.

Sure.

Well, thank you and I.

I don't think we have any more questions doing here.

No. We don't have we have no further questions at this time.

Greg It looks like we have reached the end of our question and answer session.

This concludes today's conference.

You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Thank you.

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