Q2 2022 ServisFirst Bancshares Inc Earnings Call
Speaker 1: The ST.
Speaker 2: Greetings. Welcome to the Service First Bank Share Second Quarter Earnings Call.
Speaker 2: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Speaker 2: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: Please note this conference is being recorded.
Speaker 2: I will now turn the conference over to your host, Davis Mange, head of investor relations. Thank you. You may begin. Thank you.
Speaker 3: Good afternoon and welcome to our second 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.
Speaker 3: I'll now cover our forward-looking statements disclosure.
Speaker 3: Some of the discussion in today's earnings call may include forward-looking statements.
Speaker 3: Actual results may differ from any projections shared today through the factors described in our most recent 10K and 10Q files.
Speaker 3: forward-looking statements speak only as if the date they are made in service first assumes no duty to update them.
Speaker 3: With that, I'll turn the call over to Tom.
Speaker 3: Thank you, Davis, and good afternoon. Thank you for joining us on our second quarter.
Speaker 3: call. I'm going to before Bud talks about the numbers I'm going to give a few.
Speaker 3: highlights of the quarter.
Speaker 3: On the loan side, obviously the loan growth was extremely strong in the quarter.
Speaker 3: including Triple P loans, loans grew by $803 million in the quarter.
Speaker 3: One factor is there were really no payoffs in the quarter.
Speaker 3: And we expect those to accelerate in the third and fourth quarters, which will moderate the loan growth. We do see a strong pipeline of loans, but we do expect to be more offset with payoffs.
Speaker 3: in the third and the fourth quarters.
Speaker 3: On the deposit side, we did see some runoff in the correspondent deposits that are making
Speaker 3: making loans and buying securities just like we are and as well they're you know our customers.
Speaker 3: are experiencing very strong profitability.
Speaker 3: So they are tax payments were up a good bit in March and April above normal so that affected deposit levels as well.
Speaker 3: I think we'll probably be back to more typical patterns of deposits pre-pandemic for most of the bank's history. We'd see deposits decline in the first quarter, kind of be flat in the second quarter, and then grow in the third and the fourth quarter of the year.
Speaker 3: Let's go talk for a minute about loan quality that seems to be on, so that's only everybody's mind.
Speaker 3: And we talk about it at our board meetings and our management meetings often, of course.
Speaker 3: You know, with the prospect of a possible recession ahead, you know, we're often asked about what we're seeing.
Speaker 3: First, Henry Abbott will talk in a minute about our loan quality, but our loan quality metrics are the best we've ever had as far as I can remember. So we have been very, hopefully we've been very proactive in loss recognition. We certainly won't be proactive if we are facing a recession. We want to be proactive in loss recognition as quickly as possible. So, keep an eye out for the
Speaker 3: In terms of loan underwriting, I've had investors say, if you change your underwriting, and the answer is no, we want to be consistent year in and year out.
Speaker 3: Good banks are very consistent on underwriting. They don't change. They don't blow with the wind. When times are good and times are bad, they underwrite exactly the same way. Certainly, we stress test every loan that we make. We certainly do a stress test on it. I think we have a pretty good system and have a good track record of performance over the years.
Speaker 3: We do say we're a discipline growth company that sets high standards for performance.
Speaker 3: I can assure you our credit team is looking for cracks on the economy.
Speaker 3: in his group are constantly looking.
Speaker 3: On the C&I side, any of the problems that we see are people that just aren't good business people. It's not really because of any meltdown in one economic area, one type of business or the other.
Speaker 3: On the CRE side, the big question there is will cap rates move up?
Speaker 3: As of now, they really haven't. The investors are looking for yield on high quality REIT type products. I call it CD replacement investments in multifamily industrial and residential rental products.
Speaker 3: You know what really gives me the ability to sleep well at night.
Speaker 3: to an extent, as we see strong migration continue.
Speaker 3: into the southeast and I think it will offset.
Speaker 3: some of the recessionary forces if we do experience recession.
Speaker 3: Frankly, I don't think a little bit of a slowdown would be all that bad for the economy. I got kind of spoiled the last couple of years when we were traveling and all the nicer hotels were pretty inexpensive and now that's not the case anymore and I'm back in the less expensive hotels so I'm kind of missing that. We have a few hospitality operators that are customers and they are reporting very strong occupancy and very high rates.
Speaker 3: So that wouldn't be all bad to have a little bit of a slow down there.
Speaker 3: In terms of talent, we added the most new bankers in a quarter. We've ever added 15 in a quarter. We think we brought in some top talent into our company.
Speaker 3: If I had to say what I think is one of the strengths of our company is that we've not had any turnover in senior leadership.
Speaker 3: in our banks, in our regions over the last 17 years. We've had a few retirements, but we've not had any turnover, and we've had very loyal executive team in the bank. We do want to be the best place for a commercial banker to be.
Speaker 3: I think an absence of bureaucracy at our company is attractive to many bankers.
Speaker 3: as well. So I'll stop there and let Bud cover some of the financial aspects. Bud. Thanks, Tom. Good afternoon. liquidity, we continue to evaluate our monthly investment purchase plan based on the bank's excess funds, net investment security growth in the second quarter was 172 million.
Speaker 3: and mid-June would decide to suspend investment versus based on our strong long growth.
Speaker 3: Net interest margin, as Tom mentioned, loan growth exclusive of Triple P forgiveness was $803 million for the second quarter.
Speaker 3: Average loans is good, so a triple pay increased by 650 million.
Speaker 3: Average PPP loans decreased by $108 million, so had net average loan growth of $542 million in the second quarter.
Speaker 3: Triple pay fees and interest income.
Speaker 3: were $2.9 million in the second quarter.
Speaker 3: compared to 10.2 million in the second quarter of 2021.
Speaker 3: and the remaining triple CPs are 500 and 13,000.
Speaker 3: Net loans grew by $97 million the last two days of the quarter.
Speaker 3: This increased our loan loss provision, but we will not receive a positive
Speaker 3: net interest income impact until next quarter.
Speaker 3: Deposits decreased by $637 billion.
Speaker 3: the second quarter 532 million of this decrease related to correspondent banks.
Speaker 4: Fed funds purchase.
Speaker 4: decreased by 250 million.
Speaker 4: in the second quarter. Our margin has gradually improved each month.
Speaker 4: Starting in January it was 2.84.
Speaker 4: Increase to 2.91.
Speaker 4: increase to 2.97.
Speaker 4: then 3.04
Speaker 4: 3.28 in May and in June was 3.43.
Speaker 4: The bank received a positive net interest margin impact from the Fed rate increases in May and June .
Speaker 4: For future Fed rate increases, correspondent interest bearing accounts will have a 100%.
Speaker 4: beta which is part of the business.
Speaker 4: For the remaining interest bearing DDA's we anticipate a deposit data of 30 to 35 percent.
Speaker 4: Law loss provision, our provision increased by 4.2 million.
Speaker 4: In the second quarter, there's our loan production, excluding Triple P increased by $314 million from the first quarter.
Speaker 4: Non-interest income, credit card income continues to grow. There's $2.7 million in the second quarter versus $1.9 million in the second quarter of 2021.
Speaker 4: Spend was $264 million in 2022 versus $226 million in 2021.
Speaker 4: We recorded a write-up in value of $2.1 million.
Speaker 4: for a quarter on a live war cap we purchased.
Speaker 4: cap we purchased in 2020.
Speaker 4: Non-interest expenses for salaries and benefits.
Speaker 4: As a result of our market expansions, total salaries increased by $732,000 in the second quarter and by $1.9 million year-over-year.
Speaker 4: Total salary to benefit increased 2.4 million.
Speaker 4: during the second quarter and by 6.6 million year-over-year.
Speaker 4: Second quarter 2022 incentive expense was $6.2 million.
Speaker 4: versus 4.5 million for the first quarter of 2022.
Speaker 4: the increase for flexible loan growth, strong core relationship growth, and the entry into new markets.
Speaker 4: Tax credits, the year-to-date investment write-down related to tax credits was $5 million in 2022 versus $173,000 in 2021.
Speaker 4: This increase was more than offset by an income tax reduction of 6.6 million.
Speaker 4: Carst on a bank, the year-to-date Carst on a bank service charges increased by $3 million. The number of settlement banks increased from 111 in June of 21 to 164.
Speaker 4: Seeing that 20 20 bombs...
Speaker 4: That concludes my remarks. I'll turn it over to Henry.
Speaker 5: Thank you, Bud.
Speaker 5: The bank saw record loan growth in the second quarter of 29% annualized, as Tom and Bud previously mentioned.
Speaker 5: The loan growth was strong in each of our regional banks and the bulk of this growth was centered around commercial real estate.
Speaker 5: With this loan growth, our credit quality continues to be incredibly strong and in line with prior trends in the post-COVID PPP environment.
Speaker 5: I'm pleased to say that annualized net charge-offs and Oreo expense for the quarter were only two basis points, which is down from the first quarter of 2022 at 11 basis points and the fourth quarter of 2021 at three basis points.
Speaker 5: Of the roughly $1.8 million in charge-offs, around 60% of the expense was related to one specific credit that we had previously impaired.
Speaker 5: The net credit expense figure was aided by roughly $1.2 million in recoveries, which was primarily driven by one credit we aggressively wrote down last quarter, but had significantly better than expected results in liquidating the remaining assets of the operating company.
Speaker 5: We continue to be well positioned with our loan loss reserve of 1.21, which is consistent with the prior quarter and slightly down from 1.22 that we had in the fourth quarter of 2021.
Speaker 5: From a dollar perspective, we did grow our loan loss reserve by $8.9 million in the second quarter. This increase was not related to reserve on any one specific credit, but rather the growth of our loan portfolio as a whole.
Speaker 5: Past dues to total loans were 10 basis points, which is in line with the first quarter of 2022.
Speaker 5: and continues to be near record lows.
Speaker 5: As mentioned on the call last quarter, I don't expect ServiceFirst or banks in general to be able to maintain the record-setting, pristine credit quality we have seen over the past year forever.
Speaker 5: but we have yet to see a rise in key credit metrics.
Speaker 5: Past due loans are a very simple but good early warning indicator and they continue to be very minimal.
Speaker 5: Non-performing assets were $16.7 million for the quarter.
Speaker 5: versus $21.4 million for the prior quarter.
Speaker 5: This figure equates to 15 basis points of NPLs to total loans.
Speaker 5: which is a 25% decrease from the prior quarter as well as the same period a year ago when we had 20 basis points of NPLs to total loans for each of those quarters respectively.
Speaker 5: In the face of rising interest rates, rising inflation, the loan portfolio continues to perform very well, and I'm pleased with the second quarter results.
Speaker 5: rising inflation, the loan portfolio continues to perform very well, and I'm pleased with the second quarter results. With that,
Speaker 5: I'll pass it back to Tom. Thank you, Henry.
Speaker 3: You know, for the remainder of the year, we're going to focus on growing core relationships in the bank. We're going to focus on growing our relationships in the bank.
Speaker 3: You know, in the past two years after the pandemic hit, we did, you know, we obviously experienced large deposit surge and lung growth was pretty minimal during that period.
Speaker 3: we did book some transactional loans.
Speaker 3: during the pandemic, just like we did in the 2009 to 2011 period when we had large, back then we had large deposit inflows and loan demand was very weak. So we did some transactional loans that we probably won't do going forward. So we will look for deposits where we have significant deposit relationships as well as loans for the remainder of the year. So good morning. Thank you so much.
Speaker 3: With that, we'll be happy to answer any questions you might have about the quarter.
Speaker 6: Thank you.
Speaker 2: At this time, we will be conducting a question and answer session.
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Speaker 2: Our first question comes from the line of Brad Millshops with Piper Sandler. Please proceed with your question.
Speaker 7: Hey, good afternoon.
Speaker 8: Peace
Speaker 9: Tom, maybe I want to start with loan growth. Obviously another really strong quarter. Sounds like, you know, 15 new lending hires, which is certainly a plus. Maybe on the negative side, you've got some, you know, you talked about some paydowns that you expect to come. I think at the beginning of the year, you set out a goal of growing about a billion too. You're already there.
Speaker 9: Can you just kind of talk a little bit more about you know sort of what a pullback you know looks like in your eyes I mean you you've got some of the best growth metrics out there Just kind of wanted to understand you know if we could if we could frame that a little bit better sort of you know Kind of what you know a pullback in growth for you guys might might mean
Speaker 3: It's sort of hard to give a good answer, a good, you know, a very accurate answer rather than a question.
Speaker 3: we are going to be very selective in what we book, but obviously 150 a month is probably, you know.
Speaker 3: We'll probably look at it something.
Speaker 3: north of 150 a month on average.
Speaker 3: in terms of where we're going to net growth.
Speaker 3: I wouldn't change that estimate yet. At $150 a month, I think is a good...
Speaker 3: a good number net of paydowns. We still, like I said, we do have some
Speaker 3: construction pay downs that we know are coming over the next two quarters.
Speaker 10: you know.
Speaker 3: I can't really get a whole lot more accurate than that. I don't think so.
Speaker 9: Sure, no, that's helpful. Maybe just as a follow-up to Bud,
Speaker 9: As you kind of think about the size of the balance sheet, I know you talked about stopping the securities purchases.
Speaker 9: I know it's tough to gauge, but do you have a sense where your deposit balances might sort of floor out? Just wanted to kind of think about, or how to think better about the liquidity that you have remaining and how best to think about how that might be deployed as you move through the back half of the year.
Speaker 4: So you're asking what you think will grow deposits by next month? Is that right, the first part of it?
Speaker 9: Yeah, or just if you're thinking about the correspondent book, you had some runoff this quarter. I think average liquidity was down about a billion or so.
Speaker 9: you know, just kind of thinking about where, you know, kind of where that number is headed as you move through the year. You know, it sounds like you stopped buying bonds. Tom's talked about the loan growth. Just kind of curious if you could think about what that would look like before for the liquidity.
Speaker 4: Well, from a regulatory standpoint, we have the excess funds has to be about 5% of total assets. So that's about 750 million now. We're not going to get to that point, but that's kind of what we look at, what we have to...
Speaker 4: what we have to shoot for to be well above that. We're about 1.4 billion.
Speaker 4: today, so just with the big drop over the second quarter, we just decided we wouldn't buy any more securities. You'll have the pay downs that you'll have as liquidity during the month.