Q1 2022 ServisFirst Bancshares Inc Earnings Call
Greetings welcome to the service first Bancshares first 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 IR Director you may begin.
Good afternoon, and welcome to our first quarter earnings call, we will have Tom Broughton, our CEO Bud Bocce, our CFO and Henry Abbott, our Chief credit officer, covering some highlights from the quarter.
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 10-Q filings forward looking statements speak only as of the date. They are made and surface burst assumes no duty to update them.
With that I'll turn the call over to Tom.
Thank you Davis and good afternoon, and thank you for joining our call today.
Im going to cover a few highlights of the quarter.
And then I'll turn it over to Bud foshee for more detail financial forward.
Our report today is fairly it's always brief we don't read too.
But it'll be a little more brief than normal.
Because we don't really.
Primarily good news I don't have a lot of problems to explain away. So I'll first cover our loan growth we had.
Just under $500 million in loan growth for the quarter and that exceeded our goal of 100 million per month.
And net loan growth and of course this excludes triple P loans went up use that number.
The growth was very solid in all regions during the quarter.
There were really no.
All based growth in our southeastern footprint.
We were pleased to finally see some C&I loan growth during the quarter.
So this was our first quarterly improvement in C&I line utilization, albeit modest that we've had since the pandemic started.
Our loan pipeline is back up.
From year end.
Dropped a bit at year end is up 35% and is back at it.
<unk>.
What I would say we'd be record levels of the record high levels that we've had.
In the last fall. So we're pleased with our loan pipeline, we're seeing a lot of activity today, we're having a lot of.
Phone calls every day on credits and our loan growth for the quarter.
Really liked the way there were no we didn't have any like we didn't have the last two quarters, we've had no no payoffs.
So that's certainly been helpful. But it was not a lot of big loans. This quarter. It was all small broad based.
Loan growth, which is certainly our preference.
On the deposit side deposits were pretty flat for the quarter.
We did see a little decline in correspondent balances plus corporate tax payments.
Our correspondent banks are beginning to deploy their liquidity in both loans and securities just as we are.
And.
Really my guess is we will see modest deposit growth. This year as a result of the stimulus withdrawal and other factors such as the correspondence, making loans and buying securities.
We did add some new bankers in the quarter.
We've made some announcements we have more to make and we're very pleased with the.
Great. We picked up we have more than usual in the queue today in the hiring process and interviewing process. So.
We continue to have the same goal as always recruiting only the best bankers in having the best people and have the best efficiency ratio in the industry.
So we're very pleased with the upgrade in our team over the last two years, we've been very successful the pandemic.
He has had the effect of highlighting the best places for bankers.
Work and we think we are the best place to work. In addition, the merger activity continues to work in our favor consolidation certainly helps us so I'm going to turn it over to Bud Foshee now our chief financial officer to give a financial update for the quarter.
Tom Good afternoon liquidity as part of our strategy of deploying some of our excess liquidity.
Change our monthly investment purchase plan in the future we will purchase a combined total of $75 million of securities 25 million of that with a 10 year mortgage backs.
And $50 million will be two year treasuries net investment security growth in the first quarter was $311 million.
We also decided to retain a portion of our mortgage originations for the first quarter, we sold $4 6 million to investors and retained $41 8 million.
Margin.
Loan growth exclusive of Triple pay forgiveness was 4400 $99 million for the first quarter.
Average loans exclusive of triple pay increased by $731 million in the first quarter average triple paid loans decreased by $143 million. So the net average growth for the quarter was $588 million.
Triple pay fees and interest income or $4 9 million in the first quarter and that compares to $11 5 million and the.
First quarter of 2021.
The remaining triple pay fees at the end of March or three 1 million.
Net income impact from the March 'twenty, two fed rate increase from the asset side, we had excess funds of $3 4 billion that repriced.
Malone side, we had $717 million.
Right priced.
On the liability side correspondent.
<unk> 2 billion in deposits and fed funds.
Re price so the net impact of that is $4.6 million on an annual basis or on a per share basis.
Per share.
Noninterest income credit card income continues to grow $2 4 million in the first quarter versus $1 2 million in the first quarter of 2021.
Spend was 226 4 million in 2022 versus $169 8 million in 2021.
We recorded a write up in value of $3 4 million for the quarter for LIBOR cap.
We purchased in 2020.
Offsetting most of this right. It was a loss of $3 3 million on the sale of $47 million of low yielding mortgage backed securities.
Noninterest expenses.
As a result of our market expansions total salaries and benefits increased by $2 8 million salaries increased 786000, comparing first quarter 2022 to 2021.
West Central Florida increase was 342000 as we added production staff and open the Orlando office.
We added two producers and the mortgage department from Pensacola, and Tampa Bay markets. We also hired an internal audit manager in the fourth quarter of 2021 to reduce our outsourced internal outage expense.
We also hired six new producers in the first quarter.
The 2022 incentive expense.
It was $4 5 million versus $3 7 billion for 2021 .
The investment write down related to tax credits was $2 5 million in 2022.
Versus 86000 and 2021.
This increase was more than offset by an income tax reduction.
A $3 million.
Correspondent Bank service charges increased by $1 4 million the.
The number of sediment banks increase from 18 in March of 2021% to 52 at March 2022.
We paid additional upfront core conversion expenses.
874000 in the first quarter.
The amount that will be paid to the current core vendor over the remaining contract term was reduced by over $2 million.
For 2023, we estimate that our annual <unk> expenses will decrease by about $2 4 million.
Funding commitment reserve of 300000.
The charge in the first quarter of 2020 to 600000 dollar charge first quarter 'twenty.
2021.
That concludes my remarks, and I'll turn it over to Henry Thank.
Thank you, but the bank got off to a strong start in the first quarter with a loan growth. Tom previously mentioned as discussed on this call in the past 2021 was a record year for our bank and for most of the financial sector in terms of strong credit quality given the influx of government stimulus.
It is my expectation 2022 will likely be a return to more normalized results from a credit perspective and more in line with historical performance that we saw pre pandemic.
We are well positioned with our loan loss reserve at the end of the quarter or a triple out total loans was one to.
Two one compared to $1 two two.
Fourth quarter 2021.
From a dollar perspective, we did grow our loan loss reserve by $2 8 million for the quarter, which was needed given our loan growth.
Past due loans were $9 $6 million on a total loan portfolio of roughly $10 billion.
Waiting to 10 basis points, which is three basis points over where we were at year end, but still lower than our peer group.
Nonperforming assets were $21 $4 million for the quarter and that equate to NPA to total assets of 20 basis points, which is a decrease from the first quarter of 2021.
We have two NPA is under agreement to be sold that are projected to result in roughly $4 million reduction in NPA in the near future. Both of these sales are scheduled to close in the next 30 days.
Annualized net charge off and Oreo expenses were 11 basis points during the quarter. While this is elevated from Q4 in the first quarter of 2021, 50% of the charge off credit expense was related to one specific credit that we have no remaining exposure to the owner of the business has helped.
Issues. The business has not closed we have liquidated the remaining asset have been aggressive in writing down the debt.
So for this one specific relationship our charge offs would have been closer to five basis points.
Overall, I'm very pleased with bank performance in the first quarter credit quality continues to be excellent and our diverse and granular loan portfolio continues to be one of our bank biggest strength.
With that I'll hand, it over to Tom.
Thank you Henry I know that I read a lot of as all of you do about expectations for.
Possible recession, and we just don't see at this point in time any I'll be happy to discuss it further if you have any specific questions, but we just don't see.
Our borrowers are in better shape than they've ever been in before on the C&I side, they are extremely strong and liquid.
Very low leveraged.
On the commercial real estate side.
We're seeing much greater equity investment on the part of all of the projects, we're working on today compared to historical.
Times in the past certainly much greater equity than we saw prior to 2008 and 2009 recession. So we feel good about.
All of our credit exposure as well as Hugh you can field so.
We'd be happy to answer any questions you might have and I'll turn it over for.
For questions now.
Yes.
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One moment, please while we poll for questions.
Our first question is from Brad Milsap with Piper Sandler. Please proceed with your question.
Hey, good afternoon guys.
Good afternoon, Brad.
But just curious.
What made you guys change your I mean, I know, it's a subtle change, but but still a change even with rates up where they are what made you guys change the pace of deployment of liquidity in the bond portfolio.
Just kind of curious kind of how youre thinking about that.
Yes, I think mainly.
We're looking at.
Whatever four five or six.
To add rate increases and I guess try not to get too far out on them.
The purposes market value.
So we're just we're trying to pace our.
Purchases, a little bit a little bit different.
At some point.
We'll extend out I mean, we were stoned short now but just to.
Just a little change.
I just want to make sure what rates are going to do what we can.
<unk> alone.
With $100 million in purchases.
Plus loan to management, a strong branch, so we'd rather make loans and securities any day.
We are seeing.
Strong loan growth.
Right, absolutely and just just on that topic, Tom I mean, you guys had been targeting 300 million a quarter, but.
You've been easily exceeding that I think you said your pipeline was back at a record level.
I mean.
It's $300 million kind of a kind of a very very low bar at this point, how do you how should we kind of handicap that as we kind of move through the year based on kind of what you've done the last few quarters.
Okay.
Well, we've had not had any significant payoffs. This quarter. This last two quarters was put fourth quarter first quarter.
No significant pay off spread.
That could be a dynamic we have to face.
Certainly as we've done more commercial real estate and more real estate construction, we should see heightened payoffs in the future, but really no time soon probably but yes. It's a good question, we're just saying.
Obviously, we'd rather be on the conservative side.
Aggressive side in our forecast.
Sure and maybe just final question for me, but I was writing quickly. When you were discussing just a repricing of loans and deposits I think at one point you tell me variable rate loans were about 35% of total loans.
Don't have a ton of floors anymore, but can you just update us there.
I'm, sorry, if I missed that but was just writing too quickly in terms of.
Kind of how you view loan repricing as the fed does move higher.
Yes.
<unk> priced in March was $717 million.
We do have what we did we.
We did.
Static balance sheet Bradshaw based on March numbers.
We're fed would increase.
And there may through December Moody's, 50% deposit beta.
Except for the correspondent money market accounts, and we used 100% beta.
But I don't fed funds purchased.
So I think that.
That gives you a little bit better flavor of what would happen because first second and third quarter really arent impacted a small decrease.
And then you have a bigger decrease in the fourth quarter and the first quarter.
2023, so we go from.
So we had $717 million reprice in March.
By that last fed rate increase you would have over over $2 billion. So the floors gradually go away.
Eddie margin improves.
But it's just so.
So much each quarter is going on.
Goldbug flora.
It's really why we bought that LIBOR cap.
In 2020, Brad was to smooth out.
Any.
Earnings.
Gaps caused by.
Rate floors.
But what we didn't account for is even though those.
The LIBOR cap has not kicked in yet it will soon but the accounting treatment is to take an immediate gain on.
On the on the.
Instrument, which is not what we.
We're interested in the cash flow of it not a one time gain so the gains that we expect over the next year.
Pretty much have been accelerated into this quarter and Thats why we offset it with the sale of some some low rate mortgage backed securities.
Got it but just remind me I think you have $4 billion of correspondent bank deposits are all of those in the money market account or some of that encompassed in the fed funds purchase volume.
No.
Let's see.
Rodney you got yes. This is Ron brushing.
It's split about half just over $1 7 billion is in DDA.
So services is about $1 6 billion in debt.
Fed funds and another 400 million.
Money market so for a total of.
Quarter end was $3 7 billion.
I believe today is slightly up from that but.
That gives you a breakdown.
Where the balances are in process.
Only like $157 million decline.
In.
In correspondent balances is like 4%.
Three 9 billion.
We started with.
Does that answer your question.
Yes, so someone's in DDA offsetting charges.
So that could move up unless you move your charges up that could start to cost a little bit more.
That's right and we have.
We have raised our rates.
A slight premium over what the feds buying.
Actually the last two increases we hit <unk>.
Sure.
The margin slightly.
Great. Thank you I'll hop back in queue.
Okay.
Thank you.
Our next question is from Kevin Fitzsimmons with D. A Davidson. Please proceed with your question.
Hey, good evening guys.
Good evening.
I'm going to try asking from more of a top level I know you gave a lot of great.
The detail on the margin Budd.
But.
I guess a lot of moving parts we have.
Remaining PPP fees, although damsel, we've had in prior quarters likely we have rates going up and you talked about the.
The assets repricing in the funding repricing and.
But excess liquidity is being put to work as well and loan growth is strong so all kind of buttoning all of that up.
With future rate increases likely.
How should we think about the margin trajectory I mean, we basically.
<unk> hundred 89 Ifs.
Effectively at the bottom and we should be thinking of the NIM.
Bob.
Going up to what kind of level.
With the current curve.
Maybe from just a very top level.
What you would be thinking.
Yeah.
I don't really.
A number of non I guess, what we're looking at is more.
From the deposit side because.
If you were looking at what works.
We're planning for deposit rates versus competitors.
And no matter what fed is in May we're just going to wait and see.
See what we have to do from a REIT standpoint, so it's hard to tell you that because it's kind of an unknown from the deposit side.
Here with over $3 billion in excess funds it won't hurt for some of those deposits to roll off if they're higher right.
So it's really driven more because like Tom said, we still have a strong loan pipeline.
It's all going to depend on what we have to do down the road from a deposit standpoint.
Right well assuming.
Assuming it's only modest growth is that in deposits. It seems like as the message and now more of that liquidity is being put to work, but there's still a lot of it.
It seems reasonable to assume youre going to be able to lag on taking deposit prices does that.
Fair.
Yes, that's always standard ratio will always lag.
Yes.
<unk> got 22% of our assets are in cash still so.
That's a real opportunity for us.
All of that cash and Workover.
However, many quarters it takes too.
But at work and reduced liquidity.
Understood.
I think we're all think of this especially in these early stages.
The rate cycle being positive for banks, but we're trying to at.
At least I'm trying to factor in all.
Factors and not get too aggressive on.
What that margin may do and maybe it's more modest steady expansion.
Versus.
Something that's dramatic.
I guess is what I'm getting at.
Okay.
A steady versus dramatic yet, but that excess liquidity is certainly weighed on our margin heavily.
Right.
Same thing like the levels of excess liquidity, we've had since the pandemic started so.
Okay.
<unk>.
<unk> talking about the margin as we did traditionally because we always add up one.
100% loan to deposit ratio.
Not 70, so I mean, the margins kind of become.
Not a meaningful number.
Our typical typically how we think we think about it Kevin that makes any sense.
Right right.
I understand that.
And that's another factor.
You have plenty of room to take that loan to deposit ratio up.
Back to where it had been historically.
Tom maybe you referenced at the beginning the.
Entry into Charlotte and maybe if you can just give us some kind of.
How to think of that in terms of how big you see the team how big you see that market being for you over time and I think you referenced a lot about our hiring.
Or some hiring that could happen does that entail additional new markets that you're not in right now, yes, we will have an announcement on that.
Within the next two weeks.
Evan will have some forthcoming informational the team we're assembling Bayer so youll have more more data and we're also have.
We will have an announcement on another team.
Joan on the bi.
Today.
So we're.
We're excited about that so we think that will be.
Be nice and additive to our team so.
There's never been a better time to be organic and inorganic growth strategy that when everybody around you just havent merger activity. So we are we're more optimistic today than we've.
Ever been.
Great. Okay. Thanks, Thanks, guys. Appreciate it thank you Kevin Thank you.
Our next question excuse me as a reminder, if you'd 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.
Our next question is from David Bishop with Hovde Group. Please proceed with your question.
Yes. Thank you good morning good.
Good evening gentlemen, how are you.
Great.
Hey, maybe sticking along that topic in terms of what Kevin just at.
Obviously, you've got some <unk>.
Some teams and hires and lift outs in your back pocket there as we think about maybe some of the inflation inflationary pressure from those ads.
The outlook for operating expenses I think in my model I had them up about 17% last year year over year.
Or are you thinking.
At this point maybe.
Mid teens mid to high teens.
Right way to think about operating expense growth.
We enter 2022.
I don't.
Not knowing total I'd be guessing on that because I'm not sure how many employees were going to add total and in those markets.
<unk>.
I guess.
The expansion would kind of factor out and just look at what we can what we're controlling.
And we don't I mean, we see that the 3% increase for our other noninterest expenses, it's all salary and benefits metal.
That just depends on how many people it takes too.
To grow those two markets I, just don't I don't have a Greg.
Some detail out on this.
All of those numbers are highly misleading.
That percentage is Dave Wilson, and all of the analyst group, some informational while thats highly misleading.
Getting in the weeds on this call, but we did salary deferrals last year for a substantial amount of money.
Because.
The Triple T program and that sort of thing so I don't think that the trial.
The year over year increase in costs is anything like that.
Got it now that's a good point and then.
I know in the preamble you noted that you had seen I think you said the first time since the pandemic.
Some level of uptick in C&I line utilization just curious if you have that number and maybe remind us if we were to see a normalization of those.
Line utilization back to pre pandemic levels, what would that imply from loan balances being translated on balance sheet.
Well I didn't quite hear did you say what is normal and what are where are we now and what's normal.
Correct from a percentage of maybe from an applied balanced perspective, and fewer I guess almost Asia.
Pre pandemic, we would say 47% 48%.
One reason our number has not gone up because the denominator has increased a good bit over the course of the pandemic, primarily because success we had in the Triple T program.
Our pandemic denominator went up so what that has suppressed our outstandings are bit Dave if that makes any sense. So.
We got as low as 38.
We're about 41 now.
41, and a half so 47%, 48% would be normal so we expect.
We just don't know.
Originally.
You haven't been covering us that law and I originally thought we would get.
All of that back in the second half of last year and I was wrong on that.
That would recover because the stimulus.
One is I'll say at our corporate borrowers are better shape to withstand a recession than they've ever been because their liquidity is.
Very strong today.
Yes, probably it's my final question in terms of that liquidity I think.
You or someone else on the call I made a comment that.
I think cash and liquidity is about 22% ending assets.
Curious, maybe where you see that is there a target level to have that settled into as you use that excess liquidity for loans and securities. Just curious where you see that may be penciling out by the by the end of 2022.
Yes.
In a perfect world it would be about 500 million getting cash Dave.
Dave.
Thank you.
As tempted to go in and.
You look at what you can do above what.
What you're earning at the fed today, an attempted it won't go buy some securities.
Lately.
Withheld.
That temptation and just decided that over a course of the next.
The two year period, beginning last fall that we would incrementally put the money into the into the securities.
And how old some single family mortgages.
Over that two year period of time, so we think over.
Two year period of time will sort of average the market right because we're certainly not smart enough to find the big yields we're not we're not nobody is it tomorrow or at least we're not that smart. So that's sort of our theory of what we're trying to do is just sort of try to average the market over the next.
Over two year period of time, if that makes any sense today.
Got it appreciate that color.
Yes, Sir what's concludes.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
[music].
Yes.