ServisFirst Bancshares Q4 2023 Earnings Call Transcript

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January 29, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Service First Bancshares 4th Quarter and Full Year Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. At this reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mage, Director of Investor Relations.

Operator

Thank you, Davis. You may begin.

Speaker 1

Good afternoon and welcome to our Q4 earnings call. Today's speakers will cover some highlights in 2023 and then take your questions. We'll have Tom Broughton, our CEO Rodney Brushing, our Chief Operating Officer Henry Abbott, our Chief Credit Officer Bud Foshee, our CFO and Kirk Presley, who will be taking over as CFO after Bud retires later this quarter. I'll now cover our forward looking statements disclosure. Some of the discussion today's earnings call may include forward looking statements.

Speaker 1

Actual results may differ from any projections shared today due to factors described in our most recent 10 ks and 10 Q filing. Forward looking statements speak only as of the date they are made and Service First assumes no duty to update. With that, I'll turn the call over to Tom. Thank you, Davis. Good afternoon and thank you for joining our 4th quarter Earnings Call.

Speaker 1

2023 was not what we expected it to be when the year began, but we are pleased with the results of the hard work by our bankers, who I think are the best in the industry and where we ended up the year. Bud will go into more detail on, but we certainly are pleased to see the net interest income not only stabilize, but to improve in the 4th quarter. We found over the years in banking, you can cut expenses to improve profitability, but you cannot reach prosperity without The net interest margin reaching acceptable levels. We do expect some tailwinds from the margin in This year in 2025, you'll hear more about that as we move through our speakers. We are pleased to announce that Joel Smith has joined us as President of Tennessee market and we'll certainly provide more information on the team and our location there soon.

Speaker 1

So it is great market. Total deposits in Memphis $41,000,000,000 We think we have a great opportunity there. As we've commented in prior calls, Once we saw the run up in treasury rates in mid-twenty 2, we pivoted deposit gathering, which proved to be great timing given the events of March of 2023. Our results in 2023 exceeded expectations with year over year deposit growth of 15%. New commercial accounts were up 15% over 2022 and the total new accounts including retail accounts were up 12% year over year.

Speaker 1

We are one of the few banks our size who has no broker deposits or federal home loan advances. This will certainly serve us well as the regulators announced new liquidity standards as expected. Rodney Rushin will discuss a little bit more about the correspondent division after I finish Loans grew slightly in the 4th quarter. We did have loan growth in 5 of the last 7 months of the year. C and I line utilization has really not improved since it's been pretty flat since June 30, 2022.

Speaker 1

Certainly, with the after effects of the PPP program and then as rates moved higher that also has reduced borrowings more than you would see otherwise. Of course, most of this reduction in the borrowings on the C and I side was funded with non spare deposits. You really have the worst of both worlds there when you're taking money out of non transparent accounts to pay down lines of credit. So We do think most of that is in the rearview mirror at this point. The back story of the quarter is we had $178,000,000 of Loans that paid off early in the quarter at an average rate of 4.3%.

Speaker 1

So that getting those loan payoffs was good thing and improved profitability. We are growing increasingly optimistic that as activity It's picking up, we will see more normalized loan growth this year. Our loan pipeline has increased 50% since last quarter end, which has improved substantially from 2023 levels. We're certainly not at the blistering pace of 2022, but that year was Certainly way above normal and loan activity will not be a typical year. We think the pipeline is very robust at this point and We do see loan activity picking up on a weekly basis.

Speaker 1

And certainly activity in a new market like Memphis will help carry us give us some momentum later in the year. On production side, we hired 7 new producers in the 4th quarter, up a net of 3, a total of 143. Even though we are adding the team in Memphis, we do expect to improve the efficiency of some of our other markets over time and maybe our headcount will end up more balanced as we go through the end of the year. Credit quality does remain strong. I think most of us in the industry and all investors have been waiting for recession since 2019, But we do not see any early signs of difficulties emerging and Henry Abbott will discuss it in a few minutes in more detail.

Speaker 1

So At this time, I will turn it over to Rodney to talk about the correspondent division.

Speaker 2

Thank you, Tom. Correspondent banking had a strong second half of twenty twenty three and fourth quarter, both deposit growth and new relationships. As I reported last quarter, that correspondent balances grew. They continued expanding with just over $280,000,000 or a 15 increase during the second half of the year. During the Q4, we opened 9 new correspondent banking relationships with a total of 28 For 2023, 3 new agent bank credit card issuers, which where we had 14 new issuers Texas market, while new agent credit card issuers were spread across the U.

Speaker 2

S. As we look to continue this momentum into 2024, our focus has shifted some from deposit growth and toward improving liability costs. We are specifically optimistic about this outlook in correspondent banking. If interest rate futures markets are accurate and we are in a declining rate environment. Correspondent banking should benefit from these falling rates.

Speaker 2

As rates In addition, at the same time, funds will migrate from interest bearing deposits to non interest bearing accounts. The only other topic I'd like to mention Tom is that we've completed the credit card system conversion We have worked through the changes and have the benefits and extra features it provides both us and our agent banks. Because of that, we are optimistic about credit card's revenue contributions in 2024. And with that, I'll turn it over to Henry Abbott for comments who has a short report I believe. Short usually means good news coming from our Chief Credit Officer.

Speaker 2

Henry?

Speaker 3

Thank you, Rodney. I'm pleased with the bank's performance in 2023 and more specifically in the Q4. The bank's loan portfolio continued to At an exceptional level in a unique environment with rising interest rates that we experienced in 2023. Tom covered pipelines and loan outlook for 2024, but I will also add that we brought on some strong teams in North Carolina in Virginia in 2023. The bulk of the past year we had been focusing on deposits and not loans, So we are well positioned for loan growth in 2024 and beyond as we will have some good tailwinds in these new markets.

Speaker 3

These bankers are now focusing their efforts on lending. Some of these markets are having disruptions due to bank mergers and other changes to create an opportunity for service first to attract and high quality customers. Our asset quality continues to remain strong and our core key credit metrics were all generally stable or improving. Our charge offs for the quarter were only 9 basis points when annualized That is down from the annualized 15 basis points in the 3rd quarter which is roughly a 40% reduction quarter over quarter in charge offs. Our ALLL's total loans went from 1.31 to 1.32 for the quarter.

Speaker 3

Non performing assets decreased in dollars NPA's total assets from 15 basis points in the 3rd quarter to only 14 basis points in the 4th quarter. Our asset quality continues to remain strong. Also note, we started the year with AB and C loans as a percent of risk based capital being at 100%. Over the course of the year, that has come down to 90%. We don't see any issues within our portfolio on problematic asset classes such as office space.

Speaker 3

Our commercial real estate portfolio continues to perform at a very high level. We feel good about our loan portfolio and how it performed in 2023, how we are positioned for 2024 and beyond. With that, I'll hand it over to Bud.

Speaker 4

Thank you, Henry. Good afternoon. We are very pleased with the progress the Bank has made in the 4th quarter was liquidity, credit quality, capital, improving loan pipelines and net interest Margins stabilized. Our non interest bearing deposits were stable in the 4th quarter. Our total deposits grew by $132,000,000 As Tom mentioned, we saw net loan growth in 5 of the last 7 months of 2023.

Speaker 4

The key to improving earnings per share is loan growth and our team is focused on a more balanced approach to loan and deposit growth in 2024. Our 2023 focus on deposits worked as our liquidity remains strong at 2,100,000,000 Our adjusted loan to deposit ratio at year end was 80.2%. This ratio includes the correspondent Fed funds purchase. Our loan re pricing initiative will contribute to net income in 2024 as we don't anticipate increasing deposit costs. Examples of our repricing effort, dollars 525,000,000 year to date of loans where the rate has been restructured.

Speaker 4

Loans paid off early were $185,000,000 We have $154,000,000 pending in loan repricing. Loan repricing is best opportunity to improve profitability combined with loan growth. Loans that repriced or paid off in the 4th quarter were $212,000,000 which combined with loan pay downs on fixed rate loans totals to $2,000,000,000 on an annualized run rate. The cumulative effects of this repricing will improve margin and earnings per share over time. We have low rate investment securities of $347,000,000 maturing in 2024.

Speaker 4

We would improve the margin by $8,000,000 on an annualized basis by reinvesting short term treasuries or overnight funds. Net interest margin increased in the quarter, dollars 102,000,000 in the 4th quarter versus $100,000,000 in the 3rd quarter. Variable rate loan originations made up 69% of the total production in the 4th quarter at a rate of 8.3%. 80 2 percent of these loans have a full rate, 36% of the production had a full rate of 5% and 18% had a full rate of 5.5%. About 42% of total loans are floating rate today.

Speaker 4

Deposit costs stabilized in December. We have begun rationalizing higher deposit costs in the Q1, so we expect higher cost excess funds to decline in addition to normal seasonal declines in 1st quarter excess cash. Credit card income in the 4th quarter was impacted by billing issue with 1 vendor that was not timely passing through certain expenses. We anticipate this income returning to normalized levels in 2024. In discussing non interest expense, we made an effort to hold the line on expense growth in 2023.

Speaker 4

The incentive payouts for 2023 were more than we anticipated as we focused on growth for the entire year. The focus on 2024 incentive plans is to enhance earnings per share. We anticipate new additions for the Memphis market will be offset by production officer attrition in 2024. We have several non recurring expenses in the 4th quarter, which are detailed in the earnings release. Our teams are performing quite well and have grown new accounts 12% year over year.

Speaker 4

We continued our growth in book value per share. Our CET1 ratio was 10.91 percent and our Tier 1 capital leverage ratio was 9.12%. Our capital continues to be a strength. I'm retiring next month, so I'll not be here for the Q1 of 2024. Kirk Presley will be the next CFO and I will turn the program over to him and comment on 2024.

Speaker 5

Thank you, Bud. Tom's given some good color on the business. I'll give some color on the earnings side. I'm optimistic about 2024. As a reminder, like most other banks, Q4 2023 was significantly different than Q1 2023.

Speaker 5

So I'll focus my comments on the run rates from the Q4 versus year over year. The good news is that we feel good about where we're going. We expect margin to grow from here, not only due to loan growth, but also from the repricing of fixed rate loans and securities as Bud discussed. We think our deposits repriced quicker than most of our peer banks, so we're probably a little farther along on overcoming increases in funding costs. We think our dollar margin bottomed out in the Q3 of 2023 and it will continue to grow from here.

Speaker 5

We expect Q1 2024 to be higher than Q4 2023, despite there being one less day. We think the margin expansion will accelerate from there, due to both the fixed rate loans and security cash flows and growth in the loan book. Non interest income should do well this year, But as you know, that is a smaller part of our business. We do expect growth in low double digits. Non interest expense is a little more of a challenge to explain, But as you all know, we keep a firm grip on expenses.

Speaker 5

The 4th quarter had a lot of noise, primarily due to the non GAAP adjusting items noted in the press release, which are the FDIC special assessment, duplicate privilege tax expense and the termination of our EDP contract. In addition to those items, we also had elevated expenses related to historic tax credits. If you strip out the unusual or infrequent items, We think our 4th quarter core non interest expense run rate was closer to $44,000,000 We expect expenses to grow slowly from here. Year over year, we expect expenses to grow mid single digits from the 2023 reported numbers. This would be closer to 10% after taking out the infrequent and unusual items from Q4.

Speaker 5

The increases are due to normalized incentives for the full year, the investments in the Memphis team and their facilities, merit increases and continued investments in technology and back office. We expect nice progression in the income statement in the Q1 as well as loan growth. We expect EPS the quarter to be up modestly when compared to the adjusted 4th quarter of $0.91 However, the funding of the allowance for credit losses for loan growth is expected to limit the growth in the net income and EPS. The good news is the extra margin from the loan growth will go to the bottom line in subsequent quarters. Let me turn it over to Tom for some final thoughts.

Speaker 1

Thank you, Kirk. We previously announced that Buzz is going to retire After year end, so this will be his last earnings call. Bud was here for the formation of the bank in 2,005. He handled all back office functions, cash management, HR, in addition to his finance duties. So when Bud came on board, I said, Bud, two things.

Speaker 1

I said, I've hired a Head of Deposit Operations. She's great. And I said, I bought homes this. And they didn't think the Deposit ops person was really all that good and sure enough she resigned 2 weeks before we opened the bank. And he threw the phone system in the trash He got a new one.

Speaker 1

So after that, I didn't tell Budd how to do anything in the back office anymore. I'll let him handle that. He's done a great job. Obviously, the stock price is still depressed at current levels, but we started, it was 1 point $6 a share in 2,005 and it's in the 60s today. So Budd has clearly done an outstanding job.

Speaker 1

But thank you for all you've done for the company. So With that, we'll turn and open it up for questions now.

Operator

Thank you. We will now be Our first question comes from the line of Graham Dick with Piper Sandler. Please proceed with your question.

Speaker 6

Hey, good evening everyone. How is it going?

Speaker 1

Great. Thank

Speaker 6

you, Brent. Just wanted to Start on the loan side of things. I know we talked a little last quarter, you talked about it just a bit just now. But I think things were a little slower than I expected this quarter on the loan growth side and I had some payoffs, but we had talked about that $1,500,000,000 of you wanted to deploy. Just trying to get a sense for I guess a better sense for how much loan growth you expect in 2023, whether that would be a dollar amount or a percentage growth number, something to just set the bar at going forward?

Speaker 6

And then I guess also in tandem with that, is this you think you'll just have this elevated liquidity position for a bit longer than you thought last quarter? Basically, how are things looking on that front, I'd say, relative to where you were 3 months ago?

Speaker 1

Graham, this is Tom. We're quite optimistic. As I just said in the prepared comments, In terms of loan demand has picked up markedly, the pipeline is double where it was and we expect those loans and that's 90 day pipeline. So we kind of know what the next 90 looks like and there could be a little drag on that. It could take 120 days to close The amount in that pipeline, but that kind of funding will give us a nice number at the end of the year.

Speaker 1

And we don't I'm participating high single digits for the year is kind of what we're in our internal budget, so we're budgeting. We think that the loan demand is clearly coming back in terms of and maybe we're doing a better job Getting out and marketing, we were marketing deposits for the last 18 months and we obviously And we're obviously marketing both loans and deposits, but we're certainly got a real key on loans right now compared to where we were before, Brent.

Speaker 6

Okay, that's helpful. And I guess as you look at loan growth, it sounded like C and I lines are pretty much just staying where they are, I guess at a percentage basis, where do you think the growth is going to come from your customer base? Like what segment? Are we talking CRE here or Construction, what are the main areas that you're seeing demand pick up in, I guess?

Speaker 1

Obviously, already, but in a lot of There's a lot of different things. I mean, whether it's a marina or in Florida or whatever else, we're seeing there's some construction Out there, obviously, Florida is continuing to see very nice growth with the population inflows that we have there. So and Certainly, we hope that C and I is going to pick up compared to where it's been. And I think if we get some lower rates Towards the back half of the year, hopefully we can see some C and I growth, but we our pipeline today includes some C and I. We're optimistic that we'll grow everything.

Speaker 1

But we don't we've got room certainly we've got room to grow CRE and we've got some room to grow Construction as well. We've got room in our bucket. So we feel good about we're not having we don't feel like we'll have to constrict Any one segment during the year, Brian.

Speaker 6

Okay, that's helpful. And then Bud or Kirk, whoever wants to take this, on expenses. And I think you've said that there is some obviously there's some one timers called out in the release Then a higher write down of tax credit investment, but I guess just in specifically in that accrual that was booked this quarter. So at the end of the day, was that a $1,900,000 net benefit to the bottom line? Because in the release, it looked like there was a tax benefit directly tied to that accrual of What was it, dollars 4,100,000 Is that the right way to think about that?

Speaker 6

That it was at the end of the day, even though it hurt expenses by Little bit. It was actually $1,900,000 benefit to the bottom line.

Speaker 4

Well, you had $4,100,000 in tax credit and then the tax expense Related to that was $3,300,000 So are you looking at something else

Speaker 6

No, no, that makes sense. I thought that $2,150,000 that was called out in the non GAAP was

Speaker 4

Oh, no, that's privilege. That's totally different. Yes, that's

Speaker 6

Okay. And so but the run rate essentially at the end of the day was $44,000,000 like you said and mid single digit from here?

Speaker 5

Yes.

Speaker 6

Yes. All right. That makes sense. And I guess just the last one for me would be on the margin, specifically just deposit cost. Sounds like the end of quarter cost of interest bearing deposits was actually lower than the average rate.

Speaker 6

If the average was 406 into period 404, are you starting to see some actual relief in the cost deposits move lower on the interest bearing side or is that just more stabilization at this point than anything?

Speaker 1

We're working at it, Graham. I guess it takes effort. It doesn't happen without effort on our part, obviously, but We're trying to rationalize the higher cost deposits as we said. So we're trying to reduce We're reducing certain deposit rates. We obviously have a we're in a good position from a liquidity standpoint and We need to improve margins.

Speaker 1

So we're working hard at that. None of us are Naive enough to think our charge offs are going to stay at 10 basis points for the rest of my career. There are going to be There are going to be times that are going to be higher than 10 basis points a year. So we need to have higher margins in order to absorb the loan losses from that as well. So We've got to improve margins.

Speaker 1

That's certainly a focus that we have for the whole year and there's only one way to do it, raise loan rates and lower deposit costs. So that's what certainly we're not forecasting in our internal budgets any rate cuts or rate increases for that matter. We always Forecast flat rates and I think we're going to have to make it based on what we have. With the cards we're dealt, we don't count on getting a We're shuffling to get better cards in the deck. So does that answer your question, Greg?

Speaker 6

Definitely. Definitely. That's all for me guys. And Budd, congratulations and good luck.

Speaker 1

Thank you. Thanks, Graham.

Operator

Thank you. Our next question comes from the line of Steve Moss with Raymond James. Please proceed with your question.

Speaker 7

Good afternoon.

Speaker 5

Maybe just starting off on just circling back

Speaker 7

to loan growth here. The was driven with a tilt towards resi. Just curious, do you expect this will continue here For another quarter or 2, are you looking to maybe just trying to get a sense for increase your asset sensitivity, the dynamics there, what kind of product you put on as well?

Speaker 1

First of all, Yes, we didn't really have any loan growth in the quarter. And I don't think we've got on the residential side, I don't think we don't have much there, Steve. I don't what do you see there that

Speaker 6

I had

Speaker 7

a 6.8 percent quarter over quarter growth for 1 to 4 family.

Speaker 3

Yes. I mean, 1 to 4 family was certainly kind of Part of the driver of the growth in the Q3, but that's an anomaly. I mean, we're more focused on commercial clients. That's where we're going to see our growth within Commercial C and I, CRE, that's our bread and butter.

Speaker 1

Does that include rent to own? I mean, excuse me, rent to rent?

Speaker 3

No, that's just

Speaker 1

Okay. It's not still not a big and the rest of your question, I'm sorry, I focused on that, Steve. Give me the second half of the question. Sure.

Speaker 7

Yes, just thinking around asset sensitivity, maybe just make it into A more broader question, obviously, rate cuts should help you guys here. Just curious what you're doing either on the balance sheet to benefit potential rate cuts and today where you're positioned, what a move of 25 basis points of your margin?

Speaker 5

This is Kirk. We are liability sensitive, but it is not massively. We're pretty close to neutral at this point. And that's where Tom's always tried to direct this bank. I think we are a lot more neutral than we were or Even liability sensitive compared to where we were a year ago.

Speaker 5

So I think at this point, if there was a nominal increase in rates or a decrease in rates as we're talking about. We don't think it's going to have a major more than like 2%, 3% And that's at a 1% rate change over a year. So it's pretty nominal. So we're playing the hand that we're dealt right now. We think the repricing story is something that really is going to help us a lot over the next year and we like what's happening with the securities too.

Speaker 5

So we like where we are today.

Speaker 7

Okay, great. I appreciate all that color. And just one more thing, I apologize if I missed it. On the credit card income, I know there's I heard the issue with the vendor you guys mentioned. Just Curious how you guys are thinking about the growth for that business in the upcoming year, just how much it could pick up?

Speaker 2

This is Rodney Rushing. Yes, we had a vendor billing where we actually had double expenses for the 4th quarter, Which caused the revenue hurt credit card income for the 4th quarter a bit. We also went through a conversion, which I noted during the year. All of that's behind us now. Besides our growth with our own commercial customers with P cards and credit cards, we're adding agent Banks.

Speaker 2

In 'twenty three, we added 14 other banks, correspondent banks are issuing credit cards. We share that revenue with them through the American Bankers Association endorsed program. But through all these new issuers that we're adding and our pipeline of new banks is Stronger for 2024 than it was for 2023.

Speaker 7

Okay, great. Appreciate all the color guys and bud, best of luck on your retirement.

Speaker 1

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Dave Bishop with Hovde Group. Please proceed with your question.

Speaker 8

Yes. Good evening, gentlemen.

Speaker 1

Okay.

Speaker 8

I think in the prepared remarks, you said the outlook for it will be a balanced approach between loan and deposit growth, I think, for the year. How should we think about the funding of loan growth? The High single digit is going to be purely deposits or is going to be a combination of runoff from cash and securities? Just curious How should we think about that?

Speaker 5

It's going to be deposits. We're trying to be balanced this year on dollars. So a little bit different obviously in percentage, but we're trying balanced on dollars.

Speaker 8

And remind me the cash flow from the securities portfolio, what you're expecting this year?

Speaker 5

About $2,000,000,000

Speaker 1

2,000,000,000 Okay.

Speaker 5

On loans. Sorry, loans.

Speaker 8

And the securities?

Speaker 4

It's about $7,000,000 a month in paydown.

Speaker 8

$7,000,000 Okay.

Speaker 5

And another $350,000,000 or so in maturities.

Speaker 8

Got it. And originations this quarter, I missed it during the preamble. What was the new origination yields on loans?

Speaker 4

Origination rate, yes, was 8.34 for the quarter.

Speaker 8

Got it. And then more of a housekeeping item. I know there's a lot of noise in the tax number this quarter. Just curious what we should Model for a good tax rate moving forward?

Speaker 5

Yes, about 17.5.

Speaker 8

Perfect. And then Tom, you mentioned the new hire in Memphis, obviously a Good start there. Just curious, if you sort of had some numbers in the mind, how big you think that market could go to either on The loan deposit side or both?

Speaker 1

We don't really go into any market if we don't think you can achieve $300,000,000 minimum in a 3 year period of time in loans and deposits. So that this would certainly fit in that as well. And these are Joel's team, they're going to be relationship bankers, they're not going to be transactional bankers, and that's what we Prefer to build on is relationship bankers there. So we've already bankers Coming from a number of different banks, so we get a little cross pollination there of people. So We're optimistic that we can be successful in Memphis.

Speaker 8

Got it. Thanks. And yes, Budd, congratulations on the retirement.

Speaker 1

All right. Thank you. Thank you, Dave. Thank you everybody for listening on the call. I don't think there are any other questions, but appreciate you guys tuning in today.

Speaker 1

Have a great evening.

Operator

This concludes today's teleconference.

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