ServisFirst Bancshares Q2 2023 Earnings Call Transcript

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July 20, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Service First Bancshares Second Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mange, IR Director.

Operator

Thank you, Davis. You may begin.

Speaker 1

Good afternoon and welcome to our Q2 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 due to factors described in our most recent 10 ks and 10 Q filings.

Speaker 1

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.

Speaker 2

Thank you, Davis. Good afternoon. Thank you for joining us as we review the quarter. We really were really generally very pleased with the quarterly results. Of course, we have a saying that we're pleased, but never satisfied with the results of the year or the quarter, and that's always We're never satisfied and we think we can do much better going forward.

Speaker 2

I'll give a few Overview of some few of the things we're going to talk about. One of them is credit quality. Henry Abbott is 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 See any issues with all the commercial real estate.

Speaker 2

You read about 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 core relationships Core deposits, we don't have any broker deposits or Federal Home Loan Bank advances on our balance sheet. Very few banks can make that claim. If you include our correspondent Fed funds in our loan to deposit ratio is adjusted loan deposit ratio was 85% today as the correspondent Fed funds flows back and forth between the non interest bearing And the Fed Funds account based on the level of interest rates. So we're very Pleased with the decline in our loan deposit ratio at 85%.

Speaker 2

We did see very good deposit growth in the 2nd 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.

Speaker 2

We've got our Cash and short term, treasuries have now exceeded $1,000,000,000 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 borrowers 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. But I think we're As Bud Fowchee will discuss in more detail in a few minutes.

Speaker 2

We are focused on addressing The efficiency of our banking team, we are proud of our efficiency ratio. It was one of the industry leading efficiency ratio and We produced 11 producers on a year to date basis. And again, we'll talk more Buzz is going to talk about More about loan repricing, but we'll see improvement in our margin over the next few quarters as with the loan repricing continues. So I'm going to turn it over to Rodney Rushen now to give a correspondent update.

Speaker 3

Thank you, Tom. Basically, we're very happy with Correspondent Division results We had both growth and stabilization during the quarter. Total active correspondent relationships increased to 360 banks during the quarter. Total fundings were at $1,840,000,000 with a slight increase in the DDA operating balances. Biggest news from correspondent is that balances remained stable during the last 2 months of the quarter.

Speaker 3

New relationships added during the quarter were 11, 4 from Texas and 4 from Kentucky as we continue making And 4 from Kentucky as we continue making progress in both of those markets. Credit card revenue increased for the quarter, which Bud will expand on it here in a minute. But during the Q2, we added 6 New correspondent agent banks issued credit cards. 6 additional banks are in the pipeline, We should close in the 3rd and 4th quarters of 2023 plus 5 for the first half of twenty twenty four. The Oklahoma Bankers Association added Service First Bank to their list of endorsed vendors, bringing our state association endorsements to 9.

Speaker 3

New agent banks were added to the card programs in Oklahoma, Kansas, Vermont, Wisconsin and Minnesota During the Q2, 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 Adams.

Speaker 4

Thank you, Rodney. I'm very pleased with the bank's results And continued strong credit quality in the 2nd quarter. The bank grew its ALLL to 1.31 of total loans in the 2nd quarter 1.28 percent in the Q1 of 2023. This increase is not related to any specific credit, but rather a continuation of our conservative outlook as we've had a very strong quarter. We continued the trend started in the Q1 where both AD and C And the entire CRE bucket decreased as a percent of capital for the 2nd consecutive quarter.

Speaker 4

AD and C as a percent of risk based capital dropped From 93% at the end of the Q1 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 and 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.

Speaker 4

Past dues to total loans were down to 15 basis points, 3 basis point decrease from the Q1. 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 2nd quarter was related to one specific C and I credit. If it were not for this one specific credit, given the recoveries in the quarter, we would have had 0 net charge offs for the quarter. I would also note The bank has no remaining exposure to this relationship.

Speaker 4

We've taken our We serve in the diverse and granular lending relationships we have at Service First Bank. On the whole, I'm very pleased with the 2nd quarter results And turn it over to Bud.

Speaker 5

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 We were pleased with the deposit growth in the quarter. We had a goal of $1,000,000,000 in liquidity And with growth of our cash and short term treasury bills, we reached that goal. We're seeing great momentum in deposit growth.

Speaker 5

We did see some margin compression in the quarter from 3.15 to 2.93. We are assuming one more Fed rate increase for 2023. We expect to stabilize and remain flat in the 3rd quarter and begin to improve in the 4th quarter. Our loan repricing initiative is bearing fruit and will contribute to margin expansion later in the year. Examples of our repricing efforts, fixed rate loans that paid off earlier to date are 170 $4,000,000 loans that are repriced are $155,000,000 and we have $173,000,000 Pending and loan repricing.

Speaker 5

We have $1,900,000,000 annually if you include normal Cash flow from fixed rate loans on an 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% of total loans are floating today. We think one Fed increase of 25 basis points were close Neutral today with an outlook for improvement going forward. Although loan growth is flat year to date, There are a lot of maturities that are being replaced at much better rates.

Speaker 5

We continue our growth in 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 10.37. Our capital continues to be its strength. We saw improvement in non interest income in the quarter In discussing non interest expense, we've made an effort to hold the line on expense growth in 2023.

Speaker 5

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 I think it will be a modest impact on 2023 results. We have built our staffing in our new offices and do not expect additional headcount Our teams are performing quite well and have grown new accounts 20% year over year. Our core expenses declined by $1,100,000 in the 2nd quarter and we expect 3rd quarter run rate To be in line with the Q1.

Speaker 5

That concludes my remarks. I'll turn it back to Tom. Thank you, Bud.

Speaker 2

As you can see from all these comments, we continue with business as usual at Service First. We did open our Virginia Beach office this quarter. I was up there last week. We've got a great team there on the ground. They're doing a fantastic job and look forward to great results from them as we go forward.

Speaker 2

So in any event, I am really proud of what our team has delivered this quarter and they always produce what the shareholders need. So with that, I'll be happy to answer any questions you might have.

Operator

Thank you. We will now be conducting a question and answer session. And our first question will come from Graham Dyck with

Speaker 6

So I

Speaker 7

just wanted to kind of start on the balance sheet. Obviously, deposit growth was really strong this quarter and you couple that with loans that are pretty much flat. You got a lot more breathing room on the loan and deposit front. Can you just talk a little bit about how you think the balance between loan growth and deposit growth will play out for the I know we talked about maybe a high single digit number a few quarters ago, but any update you can provide The loan growth front and the level of deposit growth you guys are expecting to produce throughout the rest of the year would be very helpful.

Speaker 2

Well, again, we've been cautious and I just said that, that obviously we've been cautious to this date, but we're getting More confidence and every day and every week that goes by, we feel better about where we are, where the economy is. We're pretty much, as I said, business as usual. So we'll resume Making loans again. There is always loan demand in places like Nashville, Tennessee, Charlotte, North Carolina, Florida, the whole state, there's always tremendous loan demand in Florida. We can find the loans to make.

Speaker 2

So we feel good about our deposit pipeline, and we can we're going to start resuming Business as usual. I don't I can't it's kind of hard to give you a number, but we've always our team has always produced. Whatever we need to produce, they produce. So again, we feel a lot better about where we are than we did at the end of the last quarter. And we feel a lot better about where the industry is today than in the last quarter, Graham.

Speaker 7

Oh, yes, I can imagine. I guess just In a different way, do you think I mean, would it be safe to assume loan growth matches deposit growth for the rest of the year? Or is there any color there you can provide?

Speaker 2

Yes. I think that I guess I didn't do a good job answering your question, obviously, if you're having to re ask that. But I think, yes, if we bring in A dollar of deposits will probably make a dollar of loans, if that's a fair statement.

Speaker 7

Okay, great. That's helpful. You did a fine job. I probably asked the question bad. All right.

Speaker 7

So then I guess just on non interest bearing, those were It held in a lot better than what we've seen from other banks this quarter. Any color on what you guys are doing that's driving that Up quarter over quarter, the non interest bearing balances, just wanted to get a sense for if you think that trend might be able to continue in that division?

Speaker 3

This is Rodney Rushing, Graham. Yes, non interest bearing correspondent was up for the quarter slightly. Total fundings for the correspondent for the from quarter end to quarter end were down. The good news in correspondent is The last 2 months for the quarter for May June, the total funding in correspondent banking was Level off. And so all of my community banks, I think in my comments, the number was 360 total banks that we have now.

Speaker 3

Their liquidity Run off has seemed to stop. And so their balances with us has been stable for the last 2 months. So we expect that we can maintain that for the 3rd Q4 with the new accounts that we're opening in Texas and Kentucky and other markets hopefully that will grow.

Speaker 2

It's for the general bank, Graham, on Snyder's, Barron. I think You know, we are a business bank and so we have significant size accounts. So we could have one that goes up or down, you know, dollars 50,000,000 in Quarter and it might be at the quarter end. So we could we might we held in steady, but next quarter, we might be down $100,000,000 or might be up $200,000,000 at the end of the next quarter. I can't represent because we are a business bank and we do have significant sized customers.

Speaker 2

So it can vary a bit, but we don't We had less far to fall than a lot of the older banks. I remember years ago, Harry Brock, who was the Chairman and CEO of Compass Bank, he's the founder of the bank. And I was working for what is now Regions Bank. It was AmSouth Bank. And he said, Y'all got a lot of lazy money at your bank, Tom.

Speaker 2

And 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 just They've got a lot higher non interest bearing deposits, and they've got farther to fall than we do. So in any event, it's probably good news for us.

Speaker 7

Yes, definitely. And the last question for me is just, it 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 in Duration of them or anything like that would be great.

Speaker 5

Yes, Graham, it's Budd. Really a lot of that had to do with Pledging.

Speaker 2

We didn't need to pledge anything, but we did. We just got we've got in case we need it for collateral. We added what what did we add, $350,000,000 in 6 months and less in treasuries.

Speaker 5

Yes. And the yields 5.35, 5.40 and it reduced our average life to 3.2 years also On the entire portfolio.

Speaker 2

A little better yield than you get at the Fed. So, yes, that's the logic behind it. We don't need it for Don't need it for pledging.

Speaker 7

Okay, great. All right. That's it for me. Thank you, guys.

Operator

Our next question is from David Bishop with Hovde Group. Please proceed with your question.

Speaker 8

Yes. Good evening, gentlemen.

Speaker 3

Thanks. Good evening.

Speaker 8

I think a follow-up on that question and 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, Budd or Rodney, of some of those corresponding relationships that are coming online later in the quarter? Just curious If there is any sort of timing around the was it sort of a late quarter surge in funding growth?

Speaker 3

It was not a late quarter surge in correspondent balances.

Speaker 2

I know we had a large municipal deposit that came in deposit that came in right at the end of the I don't know exactly when in the quarter. Do you remember, Buck, exactly it was

Speaker 5

20th or so, Yes,

Speaker 2

pretty late in the quarter. It will be here a while and it's a municipal. A lot of the COVID money federally stimulus federal stimulus money is starting to make its way down to state, local, Municipalities, so that's what that affected today.

Speaker 8

Okay, got it. And then, Rodney is staying sensitive. I know you guys always don't like to give away the plumbing in terms of the inner workings of the correspondent division. I know we had you on the road last month. You said it tends to remain relatively profitable despite What rates are doing, but notice that the decline in 3rd party service charges, is that a function of Are you handling more accounts, sweeping more into the Fed service here?

Speaker 8

Maybe what's driving that down on a quarter to quarter basis, The 3rd party processing no fees?

Speaker 3

It wasn't I don't think it was a fluctuation of Correspondent Banks, do you know if that was anything to do with conversion?

Speaker 2

We'll have to get back to you on that. I

Speaker 3

did not see the big decline in correspondent service charges, but we'll have to look into that and just get back to you.

Speaker 8

Okay. You can do that maybe offline. And then just if you have it, just curious maybe an update. I know you provided last On the commercial real estate book, the office book, any change there? I know it's a small part of the puzzle here, but I know The investor public is focused on it.

Speaker 8

Just any sort of inter quarter details you can update us on?

Speaker 4

This is Henry Abbott. Yes, no material change. As I kind of mentioned in my comments, AD and C is down. Overall, CRE income producing is down. Specific to office, that's still around, and this is non owner occupied offices, only 3 5% of our total loan portfolio, so it's not a material amount.

Speaker 4

And as I mentioned, kind of theory as a whole was down for the quarter.

Operator

Our next question is from Kevin Fitzsimons with D. A. Davidson. Please proceed with your question.

Speaker 9

Hey, good afternoon, guys.

Speaker 2

Yes, good afternoon.

Speaker 9

Just want to circle back on the margin again. So if I heard you right, What you said is you expected it was down 22 bps this quarter, but you expect it to stabilize in 3rd and then begin to And I just want to make sure I heard that right. It seems like with one more Fed rate hike, what we're hearing from a lot number of banks is there'll be More margin pressure in Q3, but probably a little less than what we saw in the second and then beginning to stabilize In the 4th. 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 It's maybe stabilizing your margin a little earlier than others. So I just wanted to dig into that if that's right.

Speaker 5

Yes. Kevin, this is Budd. You're out on.

Speaker 6

Okay. Okay.

Speaker 2

So Affirmation more than affirmation, because I mean, if the NIB 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 In the next couple of 3 months, not a whole lot, but then get into the Q4, I mean, it will start going up a couple of bps a month and something it starts Getting up to it starts clawing its way back. So we think that Chinese water torture is over, Which has been Chinese water torture. So we think it's over, and we're headed in the right direction and there's

Speaker 9

Bud, if I heard you right, did you say Q3 is going to be like the Q1 run rate, not the Q2? I just want to make sure I heard that Right.

Speaker 5

That's correct. That's correct. Yes, we'll have to increase incentive sum, so It will be in line with Q1.

Speaker 9

Okay.

Speaker 2

And

Speaker 9

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. And 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?

Speaker 2

Yes. 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 1% annualized or something like that. And we you got to hire the risk management The regulators never sleep. So we always have to be adding to staff in that area. So that's just part of life.

Speaker 2

And so we have to try to look for other efficiencies. And we again, 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. And we're trying to find ways to be more efficient Because we're going to have to continue to add risk management people. So that is something we've worked hard at. We are talking always constantly Talking to people, but we have filled out our staffing on all our existing offices.

Speaker 2

As I said, we feel good about And Bud said about where we are with the staffing and our existing officers, but we hired somebody last week. We hire somebody just about every week. There's a production person, the right person, the right team will hire them tomorrow. We're not in a turtle mode, obviously, in our turtle shell. So we're always looking We're always talking and the right group, they're welcome aboard tomorrow.

Speaker 9

Got it. And one last one for me. So you meant capital is obviously strong. You mentioned that you added to securities 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.

Speaker 9

Is that something that is on the radar for you

Speaker 5

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 yes, we don't have any plans to do

Speaker 2

that for this year. We just think our bond portfolio is so short, we think they're just going to mature at par. They are going to mature at par. So 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 and we don't have a long duration.

Speaker 2

So we don't feel the need to do anything. We think If you did something, even as modest as ours is, and you'd book to a $50,000,000 loss and then interest rates fell 100 basis points In 6 months, I feel a little bit foolish when we could have just waited to 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.

Speaker 9

No. Fair point, Tom. Fair point. Okay. Thank you very much, guys.

Speaker 4

Thank

Speaker 9

you.

Operator

Thank you. Our next question is from Steve Moss with Raymond James. Please proceed with your question.

Speaker 7

Good afternoon, guys.

Speaker 6

Maybe just starting on the Maybe just circling back on the margin here, just curious, like where are you seeing loan pricing these days for new production?

Speaker 5

Yes. New loans for June went on at 8%.

Speaker 6

Okay.

Speaker 2

So that's a Okay. That's helpful.

Speaker 5

That's a blended rate, but 85% of that is favorable rate.

Speaker 6

Okay, got you. And then in terms of just as we think about The loan you guys are 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 should we be thinking about more C and I or CRE weightings?

Speaker 6

Just kind of curious as to How do I think about that dynamic?

Speaker 4

We still do have some in our construction bucket that might fund up Here in the coming quarter or 2, 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 We still got some room to go up in our construction bucket here, and I think we're focused on C customers that have strong deposits with us personally in 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.

Speaker 2

Steve, one thing I'd like on the construction loans, if there is a multifamily deal and they're in lease up and Well, they may want to stay with us a long time so they can borrow more eventually from Fannie When they go permanent, but I keep thinking if they can borrow money from Fannie at 5.5, they're paying us 8.25, how much longer are they going to want to pay us 8.25 percent? That would but we'll see. So that's something we can't predict is the variability on The payoffs on that side and of course, there's still plenty of demand in the Southeast United States for New CRE projects.

Speaker 6

Right. Okay, great. Well, really appreciate all the color. Rest of my questions have been Asked and answered here. So thank you very much.

Speaker 2

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.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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