Q2 2023 ServisFirst Bancshares Inc Earnings Call
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It is now my pleasure to introduce your host, Davis Mange, IR Director.
Thank you, David. You may begin.
Good afternoon and welcome to our second quarter earnings call. We'll have Tom Broughton, our CEO , Rodney Rushing, our Chief Operating Officer, Henry Abbott, our Chief Credit Officer, and Bud Foshee, our CFO , 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 through the factors described in the 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.
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. Good afternoon and thank you for joining us as we review the quarter.
We really were generally very pleased with the quarterly results and of course we have a say in that we're pleased but never satisfied.
with the results of the year or the quarter, and that's always true. We're never satisfied and we think we can do much better going forward.
I'll give a few overview of some of the things we're going to talk about. One of them is...
overview of a few of the things we're going to talk about. One of them is credit quality.
Henry Abbott's going to give a review in a minute. We continue to have industry leading.
credit quality, as he will discuss in a few minutes. We really don't see any issues with all the commercial real estate. You read about it in the headlines, we don't see any issues with our commercial real estate book at this point.
Our strong balance sheet does provide us with a lot of opportunities, and we're seeing a lot of opportunities to grow relationships and core deposits.
We don't have any broker deposits or Federal Home Loan Bank advances on our balance sheet. Very few mines can make that claim.
If you include our correspondent Fed Funds
in our loan to deposit ratio is adjusted loan deposit ratio is 85 percent today as the correspondent fed funds flows back and forth between the nine mary
and the Fed Funds account based on the level of interest rates.
So we're very pleased with a decline in our loan deposit ratio to 85%.
We did see very good deposit growth in the second quarter, with good growth in core banking relationships it was a good number. We are seeing the results of our deposit focused over the past year. Again, we focus on...
service and growing core deposits not on the rate of which we pay.
as a primary driver.
The deposit pipeline continues to be very robust to date.
We are pleased with where our liquidity ended up. We've got our cash in short term.
treasuries and that exceed a billion dollars.
which is a good level, and we're proud of that.
On the loan demand side, we are seeing some slowdown, I guess over the last few months, as bars assess the economy.
And again, we've kind of been a little bit more cautious than normal as we assess the effect of recent events on the economy. So I think the whole banking industry is being a little bit more cautious and borrowers have been more cautious. I think we're starting to see normalization.
We'll see normalization and credit demand in the next few months.
Our main focus has been on loan re-pricing efforts, as Bud Fosche will discuss in more detail in a few minutes. We are focused on addressing the efficiency of our banking team. We are proud of our efficiency ratio.
industry-leading efficiency ratio and we've reduced eleven producers on a year-to-date basis.
Again, we'll talk more about loan repricing. We'll see improvement in our margin over the next few quarters as the loan repricing continues. I'm going to turn it over to Rodney Rushin now to give a correspondent update. Thank you, Tom. Basically, we're very happy with the correspondent division results. We had both growth and loss.
is that balances remain stable during the last two months of the quarter.
New relationships added during the quarter were 11-4 from Texas.
and four from Kentucky as we continue making progress in both of those markets.
which Bud will expand on it here in a minute.
During the second quarter, we added six new correspondent agent banks to issue credit cards.
Six additional banks are in the pipeline.
which should close in the third and fourth quarters.
of 2023 plus five for the first half of 2024.
The Oklahoma Bankers Association added ServiceFirst Bank to their list of endorsed vendors, bringing our state association endorsements to nine.
New agent banks were added to the card programs in Oklahoma, Kansas,
Vermont, Wisconsin, and Minnesota during the second quarter just to show how broad and wide ranging these state and American Bankers Association endorsements are for us.
And with that, I'll turn it over to our Chief Credit Officer, Henry Abbott. Thank you, Rodney. I'm very pleased with the bank's results and continued strong credit quality in the second quarter.
The bank grew its LLLL to 1.31 of total loans in the second quarter versus 1.28% in the first quarter of 2023.
This increase is not related to any specific credit, but rather a continuation of our conservative outlook as we have had a very strong quarter.
We continued the trend started in the first quarter where both AD&C and the entire CRE bucket decreased as a percent of capital for the second consecutive quarter.
AD&C as the percent of risk-based capital dropped from 93% at the end of the first quarter to 86%. We continue to stress and look closely at our CRE portfolio to ensure we are appropriately managing the risk. The year to date we have not had any major shifts or deterioration.
I can get into specifics in the Q&A section of the call, but we have no material office exposure.
As I've mentioned in the past, we have been at record low NPAs for the past few years.
Past dues to total loans were down to 15 basis points, a three-basis point decrease from the first quarter. Net charge-offs for the quarter when annualized were 11 basis points. And year-to-date annualized, that would be 8.5 basis points, which is on par with our charge-offs for 2022.
and near record lows for our bank. Over 90% of the charge-off figure for the second quarter was related to one specific C&I credit.
If it were not for this one specific credit, given the recoveries in the quarter, we would have had zero net charge-offs for the quarter. I would also note the bank has no remaining exposure to this relationship.
We've taken our lick and moved on. I continue to feel very good about the markets we serve and the diverse and granular lending relationships we have at Service First Bank. On the whole, I'm very pleased with the second quarter results.
and moved on. I continue to feel very good about the markets we serve and the diverse and granular lending relationships we have at Service First Bank. On the whole, I'm very pleased with the second quarter results and turn it over to Bud.
Thank you, Henry. Good afternoon. The bank made really good progress in deposit growth, liquidity, and capital growth in the quarter.
Our non-interest bearing deposits were stable in the second quarter and we were pleased with the deposit growth in the quarter.
We had a go of 1 billion in liquidity and with growth of our cash and short-term treasury bills we reached that goal.
We're seeing great momentum in the positive growth.
We are assuming one more Fed rate increase for 2023.
We expect the margin to stabilize and remain flat in the third quarter and begin to improve in the fourth quarter.
Our loan re-pricing initiative is very improved and will contribute to margin expansion later in the year. Examples of our re-pricing efforts, fixed rate loans that paid off earlier to $1974 million and 2020-2021 and 2017-1921 revenue Yeah, are we
Loans that are pre-priced are $155 million.
And we have 173 million pending in loan repricing.
We have $1.9 billion annually if you include normal cash flow from fixed rate loans on annualized basis and repricing.
we will improve the rate on these loans by about 300 basis points.
And our loan portfolio has a short duration.
85% of new loans are floating rate and about 40% are floating rate.
total allowance or floaty today.
We think one Fed increase of 25 basis points were close to neutral today with an outlook for improvement going forward. Although long growth is flat year to date, there are a lot of maturities that are being replaced at much better rates.
We continue our growth and book value per share.
bank tier 1 leverage ratio improved from 9.91 percent.
to 10.25.
Consolidated CET1 ratio improved from 10.01 to 10.01.
to 10.37. Our capital continues to build strength.
We saw improvement in non-interest income in the quarter with improvement in both credit card and mortgage, and we expect continued improvement over the balance of the year. In discussing non-interest expense, we made an effort to hold the line on expense growth in 2023. We have held the
headcount flat on a year-to-date basis. While we have added a few employees in risk management, we have made reductions in other staffing.
While we expect a possible FDIC special assessment at some point,
We do not know today what to expect but think it will be a modest impact on 2023 results. We have built our staffing and our new offices and do not expect additional headcount for any existing offices.
Our teams are performing quite well and have grown to account 20% year over year.
Our core expenses declined by 1.1 billion in the second quarter.
and we expect third quarter run rate to be in line with the first quarter.
Harry Brock who was the Chairman and CEO of Compass Bank, he was the founder of the bank.
And I was working for what is now Regent's Bank, it was Amself Bank, and he said, y'all got a lot of lazy money at your bank, Tom.
I didn't quite understand what he meant, but over time I learned what Harry meant about the lazy money. I think you've got a 100-year-old bank charter that's just got a lot higher non-insubstantial deposits and they've got farther to fall than we do. So in any event, it's probably good news for us.
Yeah, definitely. And the last question for me is just, looks like you guys added to the bond portfolio this quarter. I just wanted to get a little color on your all's decision and thought process behind that and then maybe what rates you bought those bonds at and the duration of them or anything like that would be great.
Yeah, Graham, but really a lot of that had to do with pledging.
We didn't need to pledge anything, but we did. We just got in case we needed for collateral. We added what? What did we add? 350 million? Very short.
Six months and less in treasuries? Yeah, and the yield is $535, $540, and it reduced our average life to 3.2 years also.
I'm not entirely a little better yield than you get it though So that's the logic behind it. We don't need it for...
I don't need it for pledging. Okay, great. All right, that's it for me. Thank you guys.
pledge. Okay, great. All right. That's it for me. Thank you, guys. Thank you.
Thank you. Our next question is from David Bishop with HOVD Group. Please proceed with your question.
Good evening, gentlemen.
I couldn't help but notice that the end of period balances on investment and even deposits was much higher than the average balance. Was that a function, Bud or Rodney, of some of those corresponding relationships that are coming online later in the quarter? Just curious.
if there was any sort of timing around the, was it sort of a late quarter surge in funding growth? It was not a late quarter surge in correspondent balances. I know we had a large municipal deposit that came in right at the end of the, I don't know exactly when in the quarter. You remember, but exactly it was.
Yeah, pretty late in the quarter. It'll be here a while.
and it's a municipal. A lot of the COVID money, federal stimulus money is starting to make its way down to state, local.
municipalities. That's what that affected it, right? Okay, got it. Rodney's staying sensitive. I know you guys always don't like to give a shout out to the plumbing in terms of the inner workings of the correspondence vision.
I know we had you on the road last month, but it tends to remain relatively profitable despite what rates are doing. Notice the decline in third-party service charges. Is that a function of you handling more accounts, sweeping more into the...
The Fed service here, maybe what's driving that down on the quarter-to-quarter basis, the third-party processing going to be?
I don't think it was a fluctuation or a correspond at banks. Did you know if that had anything to do with conversion?
...
What if are we several charges? Yeah.
We'll have to get back to you on that. I did not see a big decline in correspondence service charges, but we'll have to look into that and just get back to you.
Okay, you can do that maybe offline.
Just if you have it, just curious, maybe an update, I know you provided last quarter on the Commercial Real Estate book, the office book, and any change there. I know it's a small part of the puzzle here, but I know...
the investor public focused on it. Just any sort of inter-border details you can update us on. This is Henry Abbott. Yes, no material change. As I kind of mentioned in my comments, AD&C is down, overall CRE income producing is down.
specific to office that's still around, and this is not an occupied office, is only 3.5% of our total loan portfolio. So it's not a material amount. And as I mentioned, kind of theory as a whole was down for the quarter.
Good afternoon.
Just want to circle back on the margin again. So if.
If I heard you right, what you said is you expected, you know, it was down 22 bits this quarter, but you expected.
to stabilize in third and then begin to expand in fourth. And I just want to make sure I've heard that right. It seems like with one more Fed rate hike, what we're hearing from a number of banks is there'll be more margin pressure in third quarter, but probably a little less than what we saw in second and then beginning to stabilize in the fourth. So I'm just wondering whether maybe
The loan repricing coupled with maybe a little more steady balance in the non-interest bearing.
and the overall deposit growth is just maybe
is maybe stabilizing your margin a little earlier than others. So I just wanted to dig into that if that's right.
Yeah, Kevin, you're right. You're right on. Okay, okay. More than affirmation? If the NIV is stable and we're re-pricing loans, our projection shows
that we can keep the margin steady at this point and that it will start to expand, you know.
in the next couple, three months, not a whole lot, but then it get into the fourth quarter, I mean, it'll start going up a couple of bips a month and something, you know, it starts getting up to, you know, it starts clawing its way back, you know, so we think that, we think the Chinese water torture is over, you know, which it has been, Chinese water torture, so we think it's over.
and they were headed in the right direction and there's light at the end of the tunnel.
That's good to hear. Good to hear. And maybe if I could just ask about expenses. But if I heard you right, did you say third quarter is going to be like the first quarter run rate, not the second quarter? I just want to make sure I heard that. Right. That's correct. That's correct. Yeah, we'll have to increase it.
some. So it'll be it'll be in line with first quarter. Okay and
Just more, I think you mentioned in the expense discussion comments that it was pretty limited number of new headcount, that if you're hiring in one area, you're looking to produce revenue producers, you're looking to produce staff in others. As always, the efficiency ratio is...
best in class, but trying to connect the dots, Tom, to your point about feeling better about loan growth and about the economy and the industry. And given that there's disruption out there, do you foresee opportunities to hire away folks?
And if you're feeling better about the backdrop of the economy, might you do that sooner rather than later?
Yeah, we are always constantly talking to people, but again, we've been fortunate enough to be able to hold the headcount pretty much flat on a year-to-date basis. Maybe we're up. I think we're going to be able to hold the headcount pretty much flat on a year-to-date basis.
1% annualized or something like that and we
You've got to hire the risk management people. The regulators never sleep. So, we always have to be adding to staff in that area. So that's just part of life. And so we have to try to look for other efficiencies. And we, you know, again, as
As I said, this is a year to kind of get the right people on the bus and get the right people off the bus, perhaps. We're trying to find ways to be more efficient because we're going to have to continue to add risk management people.
That is something we worked hard at. We are talking, always constantly talking to people, but we have filled out our staffing on all our existing offices. As I said, we feel good about, and Bud said, about where we are with the staffing in our existing offices. But we hired somebody last week. I mean, we hire somebody just about every week.
the right person, the right team, we'll hire them tomorrow. So we're not in a turtle mode, obviously, in our turtle shell. But we're always.
We're always looking and we're always talking and you know the right group they're welcome aboard tomorrow. Got it and one last one for me so you meant you know capital is obviously strong you mentioned that you added to security this quarter some banks have indicated they're evaluating potential
bond transactions where they clear the decks a little bit, be able to put money to work at higher rates, maybe alleviate the AOCI issue. Is that something that is on the radar for you or not necessarily?
No, Kevin, we did some of that cleanup last year.
I don't remember how much now, but we did pretty good bit of that. So yeah, we don't have any plans to do that for this year.ese
We just think, you know, our bond portfolio is so short, we think they're just gonna mature it far. They are going to mature it far.
So, you know, I realize that some people have a much more difficult...
We have a very modest losses in our portfolio, so we don't feel like we have a, and we don't have a long duration, so we don't feel the need to.
to do anything, we think, you know, if you did something, even as modest as ours is, and you'd booked to a $50 million loss, and then interest rates fell 100 basis points and
six months I'd feel a little bit foolish, you know, when we could have just waited until those bonds, I mean I realize you're putting on securities at a higher yield, but I still think the preference is to let bonds mature at par.
Fair point, Tom. Thank you very much. Thank you. Our next question is from Steve Moss with Raymond James. Our next question is from Steve Moss with Raymond James.
Fair point. Okay. Thank you very much. Thank you Thank you. Our next question is from Steve Moss with Raymond James. Please proceed with your question.
Good afternoon, guys.
Maybe just circling back on the margin here, just curious, where are you seeing loan pricing these days for new production?
Yeah, new loans for June went on at 8%.
That's a good starting point. That's helpful. That's a blended rate, but 85% of that is variable rate.
Okay, got you. And then in terms of just, you know, as we think about, you know, the loan, you guys have a little more constructive on loan growth going forward here. You've run down your construction portfolio a bit. Curious, is that an area you expect to grow here in the next couple of quarters or, you know, should we be thinking about more CNI or CRE weightings?
I'm just kind of curious as to how do we think about its dynamic? We still do have some in our construction bucket that might fund up here in the coming quarter or two. It just happened to be down, and we moved some of it to the permanent bucket, and some of it then paid off. I mean, so we've got... Next
We've still got some room to go up in our construction bucket here. I think we're focused on C&I customers that have strong deposits with us personally and corporate, but at the same time, if there's a good CRE project out there, it's got good loan to value, good pricing, we're taking a look at it, but we need deposits to come with our relationship. And while we're out there we need to look at multiple stocks and look to see if we're
Steve, one thing I like on the construction loans is that it's a multi-family deal and they're in lease up. Henry says, well they may want to stay with us a long time so they can borrow more eventually from Fannie.
you know when they go permanent but you know I keep thinking if they can borrow money from Fannie at five and a half and they're paying us eight and a quarter, how much longer are they going to want to pay us eight and a quarter? That would you know, but we'll see.
That's something we can't predict is the variability on the payoffs on the...
And of course there's still plenty of demand in the Southeast United States for new
Of course, there's still plenty of demand in the Southeast United States for new CRE projects.
Great. Well, I really appreciate all the color. The rest of my questions have been asked and answered here. Thank you very much. Thank you. Thank you.
We really appreciate everybody joining us on the call today and appreciate your support and look forward to the future. We're very excited about the balance of the year. Thank you very much.
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