Q4 2022 ServisFirst Bancshares Inc Earnings Call
Speaker 2: Greetings and welcome to the Service First Bank Share's fourth quarter earnings call. At this time, all participants are in a listen-only mode.
Speaker 3: A brief 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.
Speaker 4: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Malmesh, Director of Investor Relations. Thank you, David. Appreciate you being here.
Speaker 5: Good afternoon and welcome to our fourth 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 6: 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 through the factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made. Service First assumes no duty to update them.
Speaker 7: 23 outlook.
Speaker 8: We certainly are pleased with the results of the year. It's the second straight year that our earnest per share growth exceeded 20%.
Speaker 9: Also, our return on equity exceeded 21% and our efficiency ratio was 29%.
Speaker 10: And I must say this trifecta of 20s was due to the hard work of the best bankers in the industry.
Speaker 11: They actually do a pretty good job of making an average bank.
Speaker 12: CEO look better than average. So I appreciate what they do to make us successful and thank them for everything they've done for our company and for our shareholders.
Speaker 13: However, though, there's little time to celebrate success as our shareholders do want to know what we plan to do in 2023. So we'll move on to talking a little bit about the year and going forward.
Speaker 14: in talking about liquidity.
Speaker 15: Our bankers have focused on building deposits since the middle of 2022.
Speaker 16: We have seen a steady increase in the deposit pipeline over the last four months.
Speaker 17: We're certainly pleased with the process and we're consistently seeing the deposit pipeline at 150% of the loan pipeline.
Speaker 18: This is a buddle cover. We did grow liquidity in the fourth quarter and we're very pleased with our progress there.
Speaker 19: Fortunately, we built our bank with core deposits.
Speaker 20: which are primarily commercial, not any brokered CDs and federal home loan bank advances. Our clean balance sheet is a tremendous asset in the current environment.
Speaker 21: On the loan side, we did see good loan growth in the fourth quarter. We always see robust loan demand in the fourth quarter.
Speaker 22: year-end draws for company balance sheet purposes that we see.
Speaker 23: That's always strong.
Speaker 24: We do see some flow down in our long pipeline. It's mostly dewdrop being more selective on...
Speaker 25: right terms and structure.
Speaker 26: and focusing on our core customers.
Speaker 27: Banks are in a much better position than many years on the loan front.
Speaker 28: We are certainly...
Speaker 29: in a stronger position. It will take time to see the improvement.
Speaker 30: in loan yields, but it will come in the next couple of years.
Speaker 31: From a team standpoint, we brought in eight outstanding new bankers in the fourth quarter.
Speaker 32: We now have 154 producers.
While we are focused on cost containment in 2023, the door is always open for outstanding.
bankers. So I'm going to turn it over to Bud Foshee now.
Take your time, good afternoon. Liquidity, our liquid assets increased by 470 million from September 30th to December 31st.
We expect this positive trend to continue in 2023 as we anticipate low double-digit deposit growth versus high single-digit long growth.
Our net interest margin triple P fees and interest income were $102,000 in the fourth quarter of 2022 compared to $5.1 million in the fourth quarter of 2021.
Year to date triple P fees and interest income were 7.7 million in 2022. No triple fee fee income is anticipated for 2023.
Deposits increased by 500 million in the fourth quarter.
Our net interest margin by quarter, starting with the fourth quarter of 21, it was 2.71.
first quarter of 22, 2.89.
The second quarter, 3.26.
Third quarter.
3.64
And in the fourth quarter of 22 it was 3.52.
Our loan loss provision, our allowance for credit losses to total loans was 1.25%.
December 31st, 2022 and that is unchanged from September 30th of 2022.
Net charge-offs to average loans were 0.06%.
for the fourth quarter of 2022.
Non-interest income, credit card income was $2.3 million in the fourth quarter.
versus 2.2 million in the fourth quarter of 2021.
Our net interest cap income was $162,000.
for the fourth quarter and seven million dollars year to date.
We anticipate the net income to be zero in 2023 as the cap matures in May of 2023.
non-interest expenses.
salaries and benefits.
As a result of our market expansions, total salaries increased by $572,000 in the fourth quarter and by $6 million year over year.
Fourth quarter 2022 incentive expense was $3.2 million.
versus 4.3 million for the third quarter of 2022.
We had net new ads to staff of 13 employees.
during the fourth quarter and 71 for 2023 year to date.
The banks tier one capital leverage ratio has improved by 192 basis points.
since December 31st, 2021.
The ratio was 7.79 at 12.3121 and it improved to 9.71 at 12.3121.
22
tax credits. We have taken steps to extend the benefit period of some of our proprietary tax credits.
I'll turn the program over now to Henry.
Thank you, bud.
I'm pleased with the bank's performance in 2022 and went typically in the fourth quarter.
During the past year, our borrowers have had to stand on their own in this post-COVID environment without major government stimulus.
that has occurred in prior years and our customers have responded well even in the face of rising inflation.
The bank's balance sheet is well positioned for any uncertainty in 2023 and beyond, with a record low amount of Oreo with less than $250,000 and NPA's total assets of roughly 12 basis points.
We continue to be selective with new clients and we want to grow our bank with clients who can fund both the asset side and liability side of our balance sheet.
I'm pleased to say the majority of our credit metrics were in line with the prior quarter and that is near historical lows. So I won't go into a ton of detail, but I'll be happy to cover specifics in the Q&A section of the call.
Because of loan growth, the bank increased our loan loss reserve for the quarter by $5.3 million. statistics from 2016 to 2018.
which amounts to an A L L total loans of 1.25
So past due loans at year end were under $10 million on a loan portfolio of roughly $11.7 billion. So we've not started to see weakening in the portfolio.
Past dues were roughly $1 million less than they were in the third quarter.
Oreo portfolio decreased by a million dollars.
So it's now only $248,000.
Charge offs for the quarter were 6 basis points when annualized and that's a decrease from 11 basis points for the prior quarter.
We are proactive as possible on handling problem loans so we don't carry a known issue into the following year.
Our overall credit metrics continue to be outstanding and continue to improve for the quarter.
2022 was a strong year for our bank and we head into 2023, well positioned to maintain our status as one of the top forming banks in the country.
That'll hand back over to Tom.
Thank you, Henry.
One point I want to make is when we talk about the discussion on higher interest rates,
and deposit betas and margin compression.
is that while we may have some quarter to quarter issues...
How are interest rates helped not hurt banks?
And it seems like.
You know, today banks are more attractive as an investment alternative than they have been in a decade. And so, I think that's a good thing.
It's certainly interesting to me that some investors, they were selling bank stocks when rates were low.
And now they're selling bank stocks when rates are high, so it's kind of hard to make some of them happy, it seems.
You know, my first partner in the banking business years ago...
After several years in business, he observed that we always do better when we need deposits.
And you know, we do better when we need deposits. It is, you know, certainly you have more discipline on the loan side.
can.
you know, be more selective.
And also it helps you focus on what you need to do. So certainly, needing deposits is a good thing. Higher rates is a good thing for banks.
You know, we're working on our 2023 budgets and
finalizing those in the next couple of weeks as we plan the year, but we have certainly made significant investments in new bankers in 2022 that we think will see the benefit of this year. As you can see, we've had a, you know, last couple of years certainly been robust from a hiring standpoint.
So, we are very optimistic about the outlook for our footprint, particularly what our bank we think can produce as we go forward and we continue to see robust economic activity in the southeast.
With that, we'll be happy to take any questions you might have.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participant season speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment please while we poll for questions.
while we poll for questions.
Thank you. Our first question is from Brad Millsaps with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Dan
Tom or Bud, I was curious, you did grow deposits by about half a billion dollars as you mentioned. I'm just curious, what type of cost did those deposits have on average as you brought in? I was looking at some of the supplemental data and noticed the spot rate on interest and I was wondering, what type of cost did those deposits have on average as you brought in?
deposits much higher than kind of where you are on average for the quarter. So just kind of wanted to get a sense of kind of the pricing on some of that deposit pipeline that you guys talked about.
Yeah, let me get so quarter and the cost of our total deposits was
1.66
cost of interest bearing.
and
DDA was 2.39
total cost of interest bear deposits was $2.32
Yeah, you know Brad, there's not a...
There's probably not a lot of uniformity there.
We're not in the buying deposits business. We're in the business of developing relationships with customers.
most of the time when we go on a
you know, a call.
Most of the time I'd say that the price of deposits never comes up.
That's not the sort of business we're in. We're not the fine money.
standpoint of business. So it's kind of hard to give you a good answer, Brad.
any better than that.
Got it, got it. Maybe asked differently, you know, but in the past you've been, you know, kind enough to give us sort of the most recent month, you know, net interest margin. I might be curious if you'd be willing to provide sort of, you know, most recent months net interest income. It would just seem that you've got
Quite a bit of a headwind as we kind of enter the first quarter, you know given, you know, not only day count but You know kind of where some of those deposit spot rates are just kind of want to get a sense of you know Kind of your momentum as you enter, you know, the first quarter as it relates to NII.
I think you really looked at what we've got a quarterly analysis of our margin and our rates like we're at 352 and the margin is a quarter.
I think $3.50 to $3.60 is a good gauge for that. What is the, I mean, you know, they're talking about the Fed slowing down, rate increases. I mean, it's still a guessing game as to where we're going to be from a deposit cost standpoint.
Like Tom said, I mean that's not...
That's not the major thing we do when we call deposits or we don't manage margin either. We continue to grow the bottom line and don't really look at just the bottom line.
the margin of H4. Okay, and then maybe just, you know, final question for me. I guess in total your expenses were up, you know.
high teams in 2022.
I know there's a lot of incentive comp in there for the year that you had.
Can you talk a little bit about where you'd like to see that number maybe managed to in 2023? Maybe some different puts and takes you might have maybe given the more...
challenging net interest income line.
and we don't anticipate
We don't anticipate that much really from a net.
staff additions and
2023.
So that salary increase should be in the 3 to 4 percent range as review days come up.
We do anticipate with the conversion that we'll save money from an IT standpoint.
I'm trying to think of anything else. We had some unusual, like in the third quarter we had our lawsuit settlement.
or some other expenses like that.
that won't reoccur in 2023.
All right, tell me. It also looked like this quarter you might have benefited from a, or no, maybe that's your, kind of a reversal of the provision for unfunded commitments, am I reading that correctly?
We did. Yeah, that one, you just, you never really know what that number is going to be each quarter. We did have a reversal in the fourth quarter.
Okay, did your unfunded come down?
our funded beat the three-year average which then caused it to decrease the need for the cruel.
Okay.
All right, thank you guys. I'll hop back in queue.
Thank you Brad.
Thank you. Our next question is from David Bishop with the HOVD Group. Please proceed with your question.
Yeah, good evening, gentlemen. Hey, Dave.
Hey, but I think you said in the pre and gold. I'm not sure I heard you right, but it felt pretty good about just maybe the outlook for at least the.
the direction of loan yields over the next year or so. Did I hear you right? It looks like the loan rate was 541 at the end of the quarter, but just curious, maybe you should look out at a quarter or two, and assuming the Fed stops maybe in this quarter or next.
I'm just curious, what's the impact on mon yields in terms of the lag and catch up in terms of what you're booking right now at market?
You're talking about new loans or just what will reprice from the Fed?
exchange. Yeah, new loans and how they roll into the overall average loan yield over the next few quarters.
Yeah, well, a new line should go on at least at this point.
prime at seven and a half from that standpoint.
And when Fed rises right,
Over a one month period we have about $4.2 billion that re-prices.
that will reprice. You have about 2.1 million that immediately re-prices and 2.1 billion that re-prices during the next 30-day period.
for the next 30 days.
based on the new long volume. I don't have that projection.
Got it.
And then just curious,
I think I heard you right. You're expecting maybe low double digits of PASAGRUG. As part of that, maybe...
just drilling down this quarter, what were some of the trends in the correspondent banking division, those balances and maybe a number of new relationships you're able to add this quarter?
Yeah, this is Rodney Rashing.
We grew the correspondent relationships throughout the year. In the fourth quarter, I think our total number of new banks we added was seven.
for the quarter.
Our total number of existing correspondent relationships is right at 340. I'll be off one or two if it's that close.
And for the fourth quarter, total funding for correspondence grew by, I think, 140 million for the quarter.
For the year, correspondence balances were down.
mostly in the DDA balances because banks didn't have to keep near as much in their
their analysis account rates going up as fast as they did in 2022.
We moved some of that into fed funds and then some moved out. Their liquidity has been put to work and has declined just like ours did in 22.
The course line division has continued to grow our relationships.
to grow our relationships.
And we're looking at a couple of new markets in 23 that we've...
we haven't finalized which one we're going to go to yet.
We're still growing it and we anticipate it continuing to grow.
Do you have the dollar balance that you're in?
Just a shot of 2.5 billion, 2.468. Got it. On the credit front, just curious within the outlook for high single digit loan growth, any areas where you're being more conservative, more cautious, pulling the reins back from that.
and underwriting and credit perspective? You know, I think kind of across the board, and more specifically in commercial real estate, you know, sticking with core customers who can have deposits and have loans with us and seeing how businesses, where we're focused this year. Yeah, Dave, this is Tom, you know, just to jump in, this is a...
We could be more selective today than ever. So it's really an outstanding time. I mean, that's why my whole partner said.
be more selective today than ever. So it's really an outstanding time. I mean that's why my old partner said things are better when we need deposits.
because you make better decisions and we certainly can be very selective on the loan side and we can be much more proactive in pricing.
rate structure today, then we try not to ever give on structure, but we can certainly be more proactive than we've ever been in a long time. How about that?
I appreciate the color. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
Well, if there are no more questions, I'm sorry. There are no further questions at this time. I'd just like to turn the floor back to Tom Broughton for any closing comments. Thank you. Sorry for interrupting. Well, I'm just having to take a little break and know that I have another question in the first slide, which will give me one more minute of difficulty to.
Brad, earlier we were working on 2023 budgets and
We give you a little bit better idea on expense management after we finish them, but we just started.
You know, we got our first run.
you know about.
Saturday a week ago.
That's the first time we saw anything, a beginning point. We're not even close to the finish line yet. We are very proactive in expense management.
for the year as we go forward. So that's certainly something we're going to work on and I think.
We always say we're a disciplined growth company that sets high standards for performance.
And this is a great year for us to outperform the industry and show that we are what we say we are. I think probably a lot of banks are going to probably set up.
very low goals based on what I see you analysts...
throwing out there. So, in any event, it was a great year for DO-IT, and we appreciate everybody joining us on the call. Hope everybody has a good evening. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
We saw anything to our beginning point. We're not even close to the finish line yet. So we are very proactive in expense management for the year as we go forward. So that's certainly something we're gonna work on. And I think we always say we're a disciplined growth company that sets high standards for performance. And this is a great year for us to outperform the industry and show that we are what we say we are. And I think probably a lot of banks are gonna probably set very low goals based on what I see you analysts throwing out there. So in any event, it is a great year for DO-IT. And we appreciate everybody joining us on the call. Hope everybody has a good evening. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Thank you. This concludes today's conference.