Q3 2022 ServisFirst Bancshares Inc Earnings Call
Beatings trucking to surface first bancshares third quarter earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal pizza in tuition.
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 Davis Mange Investor Relations Director. Thank you you may begin good afternoon, and welcome to our third quarter earnings call well have Tom Broughton our CEO .
But <unk>, 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.
Thank you Davis and good afternoon, and welcome to our third quarter Conference call.
I'm going to review a few highlights of the quarter before I turn it over to Bud to go over the numbers in a little bit more than sale.
Our loan growth was continued to be very strong in the quarter and the payoffs that we had expected were pushed back to later quarters.
We are seeing lower pipelines.
Loans, because we certainly can't.
Growing at a torrid pace that we've been growing the last two quarters and.
And we also have been more selective in the look what we're looking at in terms of the loan pipelines. So we.
We expect the loan growth to moderate in coming quarters.
More at our historical growth rates.
We did see some runoff in the deposits.
Correspondent area in the third quarter, while the general Bank was stable.
Our correspondent.
Making loans again, they're buying security so.
That's that was to be expected to some extent, probably a little bit more than we thought.
We do expect to get back to deposit growth and the general bank in the fourth quarter.
We have consistently grown deposits and we are putting more focus on it as we did prior to the pandemic.
Incentive plans had been heavily weighted loan growth in 2021 and 2022.
And we will put normal emphasis on deposit growth in 2023.
Our general bank it year over year deposit growth.
Even though we do not focus on deposit growth until this past quarter.
On the loan quality side, Henry Abbott will certainly discuss it more detail, but we continue to see strong credit metrics in our loan portfolio.
Yes.
We had one one credit there was a problem in the past quarter that was most of what we had.
The charge off list.
We just recently completed a credit card conversion.
And we are very pleased to get that done. One reason. We're pleased is that we have morten.
A moratorium on adding new bikes for over six months. So we can start adding agents by X again, and the card area. So Thats certainly welcome news from an income fee income standpoint.
We did add 13, new bankers in the quarter.
After 15 bankers last quarter.
With growth in the Piedmont Northwest, Florida, Nashville regions, we continue to see opportunities are being very selective, but we are seeing better quality.
And we've seen in a long time in fact, we got a call. This morning about a team of community bankers and a very nice.
Market.
We are seeing potential growth kind of still coming in the door. So I'm going to turn it over to Bud to go over the financials.
Thanks, Tom Good afternoon liquidity.
Mid June .
<unk> investment purchases meshed in our strong loan growth in the third quarter.
I want to reinvest $76 million of maturities and mortgage backed paydowns into higher yielding loans.
Net interest margin.
Loan growth exclusive of Triple pay forgiveness was $677 million from the third quarter average loans, excluding triple T increased by $776 million in third quarter.
Average triple pay loans decreased by 45 million. So net average growth was $731 million.
Triple pay fees and interest income were 432000 in the third quarter of 2022.
<unk> to $6 4 million in the third.
Third quarter of 2021.
Net loans grew about $75 million in the last three days of the quarter. This increased our loan loss provision we will not receive a positive net interest margin until the next quarter.
Our margin continues to improve by quarter.
The fourth quarter of 'twenty, one it was 271.
First quarter of this year it was 2.89.
Second quarter 3.26.
Third quarter 3.64.
Hi, this decreased by $719 million in the third quarter most of the decrease related to correspondent banks are fed funds purchased increased that we saw.
$7 million in the third quarter.
The recent fed rate decreases timber.
Have minimal impact on our margin over a one month period.
Loan loss provision.
Provision increased by $9 $6 million in third quarter, a primary factor in the increase related to the national unemployment for crash decrease from a range of $3 nine to four 3% at June 32022 to a range of $4 four to five 8% at 930.
<unk> 2022.
Noninterest income.
Credit card income continues to grow to $6 million in the third quarter of 2022 versus $2 million in the third quarter of 2021.
Spend was $275 million in 2022 versus $216 million in 2021.
Noninterest expenses during the third quarter, we had a preliminary settlement of litigation and write down of a private investment resulted in charges of $2 4 million.
Net of income taxes or five cents per diluted share.
Salaries and benefits as a result of our market expansions total salaries increased by 871000 in the third quarter and by $3 $7 million year over year.
Third quarter 2022 incentive expense was $4 3 million versus $6 2 million for the second quarter of 2022.
Tax credits.
Year to date investment write down related to tax credits with $75 million in 2022.
Versus $3 1 million in 2021.
This increase was more than offset by an income tax reduction of $6 million.
Correspondence earnings credit rate on corresponding DDA balances increased from 4% at September 32021% to $3 two 5%.
September 30 of 2022.
Lower balances were required to be maintained pay for account analysis expenses due to the steep rise in interest rates.
That concludes my remarks, and I'll turn it over to Henry hub.
You bet. Thank continued the trend of very strong loan growth for the third quarter.
Loans grew by an annualized 25% for the quarter, we continue to want to help high quality commercial borrowers and prospects within the banks footprint.
At the same time, we continue to be conservative with our underwriting and interest rate sensitivity analysis, given the persistent inflation in the marketplace as well as being more selective on new commercial real estate exposure, which is income producing versus our core bread and butter of owner occupied real estate.
Past due loans were near $10 8 million on par with the second quarter net figure equates capacities to code 110 basis points, which continues to be near historic lows.
We slice and dice, our loan portfolio in southwest, Florida, and followed up with borrowers impacted by Hurricane Dorian.
While the long term impact to the region are unknown, we feel like our loan portfolio in that area fared very well.
The bulk of our loan in the impacted area, where more north of where the hurricane made landfall.
Date, we've only uncovered three severely impacted commercial borrower.
And we believe they were appropriately insured.
We grew our loan loss reserve fourth quarter by $12 6 million, which amounts to an eight triple <unk> to total loans of one to five.
This is an increase from one point to one for the second quarter and slightly above the 124 for the same period prior year.
The increase in reserve not associated with a specific credit or any deterioration, but rather the model is impacted by changes in economic outlook as Bud previously mentioned.
Well, we have not seen any major changes in the loan portfolio.
Our four key credit metrics continued to be near historic lows, we did feel it prudent to increase our reserve.
Nonperforming loans to total loans were mere 16 basis points.
Of our $19 $5 million in NPA over $5 million of that figure is under an LOI to be sold in the fourth quarter to a highly qualified buyer our loan portfolio continues to perform at an exceptional level.
Charge offs for the quarter were 11 basis points when annualized net charge offs for the quarter were roughly $3 million on a loan portfolio of 11 3 billion.
The $3 million in charge offs, roughly $2 million was related to one specific credit.
We were proactive in addressing the issue and the remaining exposure. We do have to the bar is less than $500000 and is fully impaired while charge off were slightly elevated when annualized year to date charge off our EMEA or seven basis points.
As with all large financial institution, we are in uncharted territory with the CSO model in the current dynamic environment and how it impacts our loan loss reserve.
Changes to the reserve aside I feel very good that has the bank's loan portfolio is positioned in the diversified markets, we serve with that I'll hand, it back to Tom. Thank you Andrea and yes, we glad to get good news after hurricane Ian.
Then in Florida, So that was turned out to be.
Not as bad as we thought it could possibly be so that was certainly welcome news.
Just in general I mentioned that.
I've always thought I'll think anybody.
Thanks for that core deposits is the key to build on the value of our banking franchise and we've always focused.
Core to build a core deposits, we're certainly well positioned.
Compared to many of our competitors from the industries, because our balance sheet.
Liability side is funded with core deposits not federal home loan advances and broker deposits.
Our compound deposit growth rate in the past five years was 14%.
From the section of the bank is 33% in 2005.
We do believe we have the best bankers in the industry.
Which is the key to success we've enjoyed since 2005.
We think we have the best platform for commercial bankers, which is one reason we've attracted.
Number of bankers in the last 17 years, and we think we have more opportunities for growth in anytime in our history as of today we.
We're pleased with the quarter with an outstanding return on equity return on assets and efficiency ratio.
We'll certainly be glad to answer any questions.
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Our first question comes from Brad No SaaS with Piper Sandler. Please proceed.
Hey, guys.
Brad Brad.
Tom.
Third Monday in October to you.
Yeah.
What.
If we all went out it can be Henry Abbott, Georgia Bulldogs and we win rates actually will see unit Atlanta, They said for how about that.
That's right.
[laughter] I don't know about you.
We will see that.
I think this is the first time I've got to call on a winter so anyway I thought I'd take advantage. It's a good way about every 15 years I don't blame you without a Joe wave two.
The opening by a rocky top queued up for me no.
No.
I'll leave the Mic Sheila and my Big Love years at Alabama. So we've all we've taken our target in the box it looks like the Tennessee is back above that is for sure.
We will see we will see.
Wanted to ask Tom you talk obviously, another great quarter of loan growth.
You're on pace for where already have generated more than $2 billion of growth. This year can you maybe frame up for us a little bit more kind of what in your mind is sort of.
And maybe what a pullback in loan growth would be kind of.
Vis vis all the people you've hired and I guess the second part of that question is how much does the pressure on funding sort of impact how much you can grow next year I know youre focused on deposits, but thats obviously.
A big part of it with your loan deposit ratio now at 102%.
Yes, we're back to our normal.
Loan to deposit ratio was back where we've been for most of the last 17 years.
For periods of time, which where the pandemic in a later line recession. So we've been this is normal for US we're back to where we always have been.
I have complete confidence that our team can generate.
We've had.
We've attracted some outstanding bankers, we just actually had one don't want us in Tampa today as a matter of fact, so we've got some great bankers are joining us all the time.
I have confidence that we can grow it hit our.
Something hopefully at our historic growth rates that we've seen.
Brian I, just like a 25% annualized growth rates not clearly not sustainable so.
Something in the.
By quarter, you think 10% to 15% is sort of where we had our targeted growth in loans and deposits and we think we will get back to those levels over the next several quarters in fact, we're already seeing.
We see it.
The surge in deposits come in which the big we got big deposit pipeline and a bigger than life is bigger than it's been in the last two years, because we really didnt track it much for the last two years so.
I'll start with correspondents have some really nice wins in the last couple of weeks. So we are we.
We feel good about where we are.
I'd just be curious.
The pipeline on average where where are those deposits in terms of rates.
Coming on the books, what are you having to pay to bring in sort of the incremental.
The new dollar deposits.
Well our.
Our net interest margin as September was flipbook.
$3 72.
That was what in August .
Three $3 55, sorry, 55, yeah. So.
That gives you any idea we're still holding the.
We say we are a disciplined growth company and we mean that we're going to be disciplined on both.
Both sides of the balance sheet Brad.
And as you know we try to grow about Treasury management.
You know rates are not the answer to the building of bias.
Balance sheet.
It's not the answer.
No the answer is Treasury management services.
Sure. Thank you guys I appreciate the color I'll hop back in queue.
You all have had the orange glow all week I hope you have it always Brad.
Thanks, Tom I appreciate it.
Our next question is from Kevin Fitzsimmons with D. A Davidson. Please proceed.
Hey, good morning, everyone or.
Good evening everyone.
How are you all done.
Yes.
I just wanted to follow up on Brad's question, so but I.
I saw the comment in the page one of the release about the margin.
It should remain relatively stable going forward. So are you kind of referencing.
Quarterly margin, which.
It was.
364 ish I believe then or.
Are you because I thought I just heard you say the September margin was 372, so what.
If you could just dig a little deeper into that.
Outlook for the margin.
Your comments about it just being stable.
As an accelerating deposit beta.
Offsetting or more than offsetting impact from rising rates on the asset side. Thanks.
So.
The breakdown I guess, what we're talking about is really from one that increased in others.
What happens from a loan standpoint, we've got round.
$2 billion.
Rig prices whenever an index changes that re prices were about.
About equal to our correspondent has and money markets.
So those two are going to wash through.
At the same right now over the next month, you don't have about one 8 billion in loans that will reprice whenever the indexes.
You've got a different reset date.
During the months that you'll have another $1 8 billion.
We'll reprice.
And then you've got your money market.
It might be in money markets, what would change you'll have some of the money markets increasing over time, so loans that one 8 billion.
Don't go up there faster right.
Positive side, it's been repriced during the time period.
Okay. So there's still I mean, I guess just to clarify so there's still upside.
So the margin from that the level you hit.
Third quarter 'twenty two based on what you what you just had unless I'm not.
Not hearing it correctly.
Yes.
Oh definitely.
Okay. So your comment in the release is more about just like we're not going to see the kind of linked quarter change yes.
Scott just dress just from a fed increase standpoint.
Right got it yes.
Got it okay.
And the comment about earlier I think in your comments you talked about.
The outlook for general bank deposits to grow.
But do you expect total deposits to grow or is there still going to be some hanger.
Hangover from.
Correspondent deposits.
Running off.
So what what's that kind of next quarter or two outlook for total deposits would you say.
Yeah, we feel like correspondent is going back the other way now where they've had some really nice lands in the last few weeks.
Some major new customers have joined us.
So we feel like we are.
Back to the core and are headed in the correct direction.
Kevin.
And also I mean, you know we've got.
We layered in and saying it for year end for for all of our commercial acres.
We didn't have much of a component for deposit growth.
We started the year end.
So that we've added that and so they are laser focused on.
Improving deposit at <unk>.
<unk> added the right way not adding.
Not adding high rate deposits, that's not the answer right.
Our rate is never the answer to build on a bike.
Got it.
Okay.
Yeah.
Tom I think early.
Your comments you mentioned about getting a call just today from a.
New team.
<unk> proved to be a new team of bankers is that.
I know you can't get too detailed but is that a market you are.
Currently in or not it.
And as a community bank.
Community by contain which we've added a number of those in the last few months. Besides Piedmont region. We've added some.
Some nice community teams.
Tallahassee, Panama City Nashville, just to name a few so we feel like in there.
They are deposit generators as well as loan generators, so they understand that.
They've got to fund their own they've got funds around loan growth I get it.
Right Okay.
Okay.
I'll hop back in the queue, thanks very much.
Thank you.
Our next question is from Dave Bishop with <unk>. Please proceed.
Hey, good evening gentlemen.
Our Maryland, Terrapins College football fandom, I'm very jealous of you all down there in the south.
That could produce some.
Good football on Saturdays.
<unk> with MD that's for sure.
Maybe someday.
Change that we have.
Hopefully you will have all of those okay I saw he had.
It took a lick.
James There yourself since week.
He's a transfer from Alabama. So we certainly are interested in seeing them do well.
Yeah.
Asked another way.
Hey, Douglas.
Another 13 bankers added this quarter on top of the 15.
Right that you guys are continuing to doing a yeoman's job in terms of holding the line on salaries and employee benefits just curious.
I saw that declined 5% linked quarter was there anything unusual in the second quarter remind us maybe in play to that or are you doing anything.
No special to really sort of hold the line in terms of.
Inflation on the compensation line.
Diagnosing thing and the second from a total salary benefit we've had.
Extra incentive accruals, we upped our incentive accrual in the second quarter.
That's the biggest thing I remember higher salaries and benefits.
Yes, it became obvious to us at all of our Microsoft we're going to exceed their long ago.
Here, Dave so.
We put an extra accrual in it was about $2 million.
For the second quarter.
Yes.
Got it.
And then the bankers who are talking to just curious you know the the.
A conversation that.
Sort of compels them to that.
To jump to service versus just curious at this stage in their career.
How that conversation goes is there a commonality in terms of a theme where where they.
They choose you over the current bank or another.
Peter out there because obviously, there's a lot of.
A lot of chairs movie ground down there just curious what sort of a compels them to choose you all over some of the other growth your competitors down there.
I think you know that.
<unk> don't have consistent incentive plans they change the plans that we've had a number of bankers that joined us that found out that.
Right at the end of the calendar year, the incentive plan was changed.
They didn't like that for that current year.
There are a lot of reasons, but I think a lot of people.
They found that we're a good platform.
To work from and we.
We support them in every way.
And it's not about the management team environment Ham is about the operating people out in the regions and we do everything we can to two two.
To empower them Henry Abbott.
Perhaps the turnaround credit requests as quickly as he can spend weeks.
Putting people through the through the ringer on either forgot.
Turn it down we turned it down quickly and that's how you that's what customers want to hear so really we're just focused on good customer service is not sales as surface.
Service is what wins wins us customers and we feel like we are.
Offer the best service in the industry.
Our robots.
Carson was telling me how few complaints we get.
This morning calls.
We try to work with customers and try to resolve complaints. We don't don't have the kind of problems a lot of <unk>.
My Washington branches I got a problem, we try to fix it so.
We think that's the differentiator.
David has been for 17 years.
For us compared to most commercial lives. So there are a lot of different reasons people.
No.
It could be as simple as personality conflicts, but it's not usually because people have personality conflicts easily or have a path personality.
So right that so we feel like this opportunity and we always have an opportunity and we have a great Treasury management platform.
We support them with great cash management Treasury management.
Personnel.
D card credit card program. So we have we have some ancillary things they can do and they can get additional compensation, but it's done.
Just you know.
<unk>.
Players don't want to be with big players and big players don't want debate with I players. So.
If the semi players an organization of bass players they easily remotely.
Understood understood.
And then.
Continued nice.
Or stability in our credit card income you mentioned some new agent relationships do you think this is sort of a new good run rate and a $2 six.
$6 billion per credit is credit card income.
This is rodney rushing.
Robert Blum.
We have gone through a conversion and fat.
Besides our customers we issue credit cards for 140 other months.
So at our agent credit card program for the last six months that is that has been put on hold as far as onboarding any new agent bank, because we were going through this conversion.
So for the fourth quarter, we'll be ramping back up adding agent banks.
We have somewhere around six or seven in the queue right now.
So I hope that answers your question, we expect that to.
That growth to continue.
Alright.
And then maybe a housekeeping question.
Noticed that continue to decline in the effective tax rate.
The 17% a good number to assume about 2023.
No it would be.
I'd say not to have to 20%.
Uh huh.
We had some adjustments and third we take annually from some of our proprietary tax credits and that that was an adjustment we make in the third quarter of this year.
Got it thanks, I'll hop off and get back in queue.
Our next question is a follow up from Brad Milsap with Piper Sandler. Please proceed.
Hey, Thanks for taking the follow up.
But as mentioned last quarter that you thought.
$750 million was kind of a floor for sort of liquidity or fed funds. It looks like your peers through that so have you guys changed.
Sorry, your internal policy on how much cash you'd be willing to hold and if so how much what is that level now going forward.
Yes, we did change the policy.
Hey, Brett.
We were one 5% of assets is what.
We can go down to before we need to.
Some action.
Okay.
Just on laundry.
Go ahead, I'm, sorry got make sure it is one 5% of assets.
Okay.
And just on loan re pricing we've seen.
200, or so basis points change in the fed fund rate fed funds rate over the last year. Your loan yields are up maybe 40 basis points excluding TPP.
Is that is that the right relationship going forward.
I was thinking you had about 35% of your loans.
That kind of reprice immediately with fed funds, but that beta it's closer to 20.
Is there a is there a bigger lag in there.
I assume any floors, you had you're probably through just trying to get a sense of.
How to think about the loan book continuing to reprice.
Yeah.
I like to go back to memory.
The first time the fed increase.
Only had.
700 million in loans.
That rig price because you had so many below floors. It took a while for that.
For the actual rate to get above the floor right. So we had a lag.
Beginning of the of the fed rate increases.
Do you happen to have maybe kind of where the loan yield was in September .
Oh, just the month of September .
Yes sure.
[noise], that's kind of a test.
No, but I guess I'll email it to you.
Okay bring a lot of months ago, I guess and if I could.
Getting better too.
Okay sounds good. Thank you guys I appreciate it.
I'll go back and look at that number of loans that repriced by quarter, but I think we had a very low number.
Fed increase.
Okay, Alright, great. Thank you.
Well, thank you everybody.
I'm sorry, thank you by being on the call today, we are excited about the outlook in the future.
Physician for.
Future growth and we are excited about all the new people that have joined our company. So without anything else you can but I won't say a closeout.
We'll close it out.
Thank you that will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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