ServisFirst Bancshares [SFBS] Conference call transcript for 2024 q1
2023-04-17 19:40:05
Fiscal: 2023 q1
Operator: Greetings and welcome to ServisFirst 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, David Mange, Director of Investor Relations.
David Mange: Good afternoon, and welcome to our first quarter earnings call. We will 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 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 ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom.
Tom Broughton: Thank you, David and good afternoon to everybody. Thank you for joining us on the call. The year is off to a great start with the first quarter, as we will review for you over the next few minutes and we have various reports from our various management people. We've always done well in times of stress in the banking industry. We did and after the 2008, 2009 recession and we certainly did during the pandemic, the bank has experienced significant growth during those periods of time. And we do expect significant opportunities again during this time of a little bit dislocation in the industry. So, you're asking why do we do well during times like this? One thing, there are several reasons. First is, our business model had changed in over 18 years since we opened 18 years ago. We are well capitalized. We're financially stable, and we retain 75% of our net income to fund our growth and increasing capital. We do have an industry leading efficiency ratio and we're highly profitable. We have very strong credit quality. Henry is going to talk about this in more detail in a few minutes. We don't have any broker deposits for Federal Home Loan Bank Advances like many of our competitors. So, in summary, our bank is built for times like this and we'll demonstrate that to you during the course of the call this afternoon. I was going to talk a few minutes about our most recent expansions in our community banking offices, which are in – [our newest ones] [ph] were in Asheville, North Carolina; and Panama City and Tallahassee, Florida, all are doing quite well. They're off to a great start. We're also in the process of opening a new office in the Lake Norman area of the Piedmont in North Carolina, which should be another [community banking office] [ph], and we are very pleased to the start these are off to. We're building them in the right way with core customers, with our bankers, have had a relationship with many years. Rodney is going to talk in a few minutes about our new correspondent office in Houston that we opened last month. So that's certainly a plus. It came in apparent to us in mid-2022 that the [indiscernible] cycle would lead to a focus on deposit running the lending side of the bank. We do anticipate some economic slowdown based on recent events. And Rodney Rushing is going to give a quick review of our deposit franchise. Rodney?
Rodney Rushing: Thank you, Tom. You noted how we have had virtually no dependence on brokered or wholesale deposits for fundings, and I wanted to provide some understanding and details of our deposit metrics in our bank's deposit base. From our beginnings, our model has always been to bank relationships and not just book transactions. Excluding correspondent banks, 25% of our deposits have a credit relationship with ServisFirst. There are no industry concentrations outside of private households and correspondent banks. For example, commercial banking [makes a] [ph] 4.7% of our deposit base, law firms were 3%, and real estate firms were 2%, and it goes down from there. As you can see, we are very granular with no concentrations. When it comes to correspondent banking, we have 340 plus correspondent relationships in 28 states and just over 120 are settlement banks. Settlement banks are banks downstream correspondent banks whose daily cash letters are cleared with us or their Federal Reserve account fees are settled through us, working much like a corporate cash management account. As rates have risen, you will see a shift from compensating DDA balances, which are non-interest bearing into interest bearing. But because we pay for settlement expense with the DDA earnings, there is no effect on profitability. Because of the settlement relationship, we keep the fundings by sweeping into interest bearing accounts making these deposits very sticky. In fact, 65% of total correspondent fundings are with these settlement customers. This past month proved how stable these deposits and relationships are. As Tom mentioned, we opened our Texas correspondent office with the addition of Don Dickerson. Don and I worked together previously. And with over 40 years of experience in Texas banking, Don was the perfect choice to expand the Texas market with a large number of relationships developed over the last 40 years. We're looking forward to the growth that this market will provide, growth we should realize in the near future. I just wanted to highlight some of the details. More details are in the slide deck that we provided about our stable conservative deposit base, and where we have plans to grow. With that, I'll turn it over to our Chief Credit Officer, Henry Abbott.
Henry Abbott: Thank you, Rodney. Bank got off to a strong start in 2023 with continued strong credit quality. I'm pleased to say, we ended 2022 with NPAs total assets of 12 basis points and we're able to maintain that in the first quarter. With no major changes in NPAs that continue to be near historic lows. Annualized charge-offs were 5 basis points well below the same period prior year of 11 basis points and 6 basis points for the fourth quarter of 2022. At the end of the quarter, our ALLL to total loans was 1.28 versus 1.25 at the end of 2022. This was not associated with any one loan, but rather conservative steps the bank took in the first quarter. Won't go through each of the bullet points, but you should have access to some additional information in the slide deck about our CRE portfolio and I can go over any questions you have during the Q&A session. And in highlights, AD&C as a percent of total risk based capital dropped from 100% at year-end to 93% at the end of the first quarter. Total income producing commercial real estate also dropped for the quarter and is now 317% of risk based capital. The vast majority of our commercial real estate projects are in the [Sunbelt] [ph] as we have only had a handful of projects where we followed our customers outside of the Southeast. Office space makes up roughly 3.5% of our total loan portfolio. The average loan size within our income producing office bucket is $1.5 million. These loans are typically in suburban locations and are more traditional one or two-storey office lockups. We have very minimal CBD office exposure. Comparable to our office exposure, the bank has never been a big single family residential development lender and our [raw land and lot exposure] [ph] is minimal. We have stressed and continued to look closely at our CRE portfolio to ensure we are appropriately managing the risks. We continue to be best-in-class within our peer group with our past due management. In the first quarter ServisFirst switched to a new residential mortgage loan servicing company, because of client issues with our prior vendor. We did see an increase in past due loans for the quarter, but they are still near historic lows and a major component of the increase in past dues was related to operational changes that caused delays within our residential mortgage portfolio. The majority of mortgage loans that were showing this past due have now been caught up. A lot of the issues were related to getting [ACH's] [ph] set up correctly and where and how to properly make payments with this change in servicing companies. Switching gears towards pricing, of new loans that were originated in the first quarter more than 80% were variable rate loans. We continue to push to increased yield on both new and existing loans. We've also begun various repricing efforts on existing loans prior to their maturity, and through those efforts, we were able to reprice roughly $130 million in existing debt by an average of 1.4% in the first quarter. We also had over $70 million in fixed rate debt pay down early in the first quarter. These two items combined for roughly $200 million in positive movement within our fixed rate loan portfolio. In summary, very pleased with the results in the first quarter and I’ll hand it over to Bud Foshee.
Bud Foshee: Thank you, Henry. Good afternoon. For earnings, we kicked off 2023 with strong earnings in the first quarter as we continued to build capital and liquidity. Diluted earnings per share increased 7%, compared to the first quarter of 2022 when adjusting for income on PPP loans. Our investment portfolio, the portfolio is a small component of our balance sheet, 11% of total assets. The portfolio is managed for liquidity. The components of the portfolio were 45% pass-through mortgage-backed securities, 30% U.S. treasury and agency, 1% municipal, and 24% bank and bank holding company subject. We have never purchased a CMO. The average life of the total portfolio is 4.2 years. The average life for our peer group is 7.2 years and that peer group is 33 banks with total assets greater than [10 billion] [ph]. The average life of our treasury portfolio is 2.8 years and the average life of the bank and bank holding company sub debt is 2.4 years, and the average life of the bank and bank holding company's sub debt is based on the call date. We have the expertise to analyze bank and bank holding company sub debt. Liquidity, excess funds were 732 million, March 2023. Our goal is to increase this a $1 billion range. Total balance sheet liquidity, March of 2023 was 1.5 billion, and total available liquidity was 8.4 billion. Margin average loan growth was 166 million for the first quarter. PPP fees and interest income were 29,000 in the first quarter of 2023 versus 4.9 million in first quarter of 2022. NIM compression is a result of record rate increases. The Fed funds have increased by 475 basis points since December of 2021. We had four consecutive 75 basis point increases during the period from December 2021 to March of 2023. The second largest Fed rate increase over a one-year time frame was from February 1994 to February 1995 and that increase was 300 basis points, only 175 basis point increase occurred during that cycle. We see deposit rates stabilizing and NIM improving as loans are repriced. The average rate for new loans in first quarter was 7.71%. Having a short maturity loan portfolio will improve the margin over time. Our non-interest income, credit card income continues to be impacted by our conversion in September of 2022. Mortgage fee income has been impacted by decreased volume and rate increases. We expect improvement in both areas over the course of 2023. Our non-interest expenses, as a result of our market expansions, total salaries and benefits increased by 765,000. The investment write-down related to tax credits was 2.7 million in 2023 versus 2.5 million in 2022. Tax credits were 3.9 million in the first quarter of 2023 versus 3.3 million in the first quarter of 2022. Capital Tier 1 leverage ratio was 9.91% at March of 2023 versus 7.79% at December 2021. The ratio was 9.11% after adjusting for the net unrealized losses above the available for sale and held to maturity securities. That concludes my remarks. I will turn the program back to Tom.
Tom Broughton: Thank you, Bud. In summary, we’re seeing a record deposit pipeline. The slide deck that we filed this afternoon should give you a lot more information about the bank and we think it's all very positive. One thing we're excited about, we opened 23% more accounts in the first quarter than we did in the first quarter of last year. So, we're very pleased with the improvement there. We think we're close to the other side of this [fair tightening] [ph] cycle. We're certainly going to be vigilant on credit quality because we do expect a slowdown and we'll certainly be watching to make sure we're doing everything correctly to manage our loan portfolio and manage our assets properly. So in summary, we do like where we are today. Our simple business model is paying dividends and we'll be happy to answer any questions you might have.
Operator: [Operator Instructions] And our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed.
Operator: Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Please proceed.
Operator: Our next question comes from the line of Steve Moss with Raymond James. Please proceed.
Operator: Our next question comes from the line of David Bishop with Hovde Group. Please proceed.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
