ServisFirst Bancshares, Inc. Q4 FY2022 Earnings Call

Good afternoon, and welcome to our fourth quarter earnings call. We will 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. 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.

Thank you, David. Good afternoon, and welcome to our fourth quarter conference call. I do want to make a few comments on the year, I think, in order before we move on to the 2023 outlook. We certainly are pleased with the results of the year. It's a second straight year that our earnings per share growth exceeded 20%. Also, our return on equity exceeded 21% and our efficiency ratio was 29%. And I must say this trifecta of 20s was due to the hard work of the best bankers in the industry. They actually do a pretty good job of making an average bank 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. However though, there is little time to celebrate success as our shareholders do want to know what we plan to do in 2023, so we'll move on and talk about a little bit about the year and going forward. And talking about liquidity, our bankers have focused on building deposits since the middle of 2022. We have seen a steady increase in the deposit pipeline over the last four months. We're certainly pleased with the process and we're consistently seeing the deposit pipeline at 150% of the loan pipeline, this Bud will cover, we did grow liquidity in the fourth quarter and we're very pleased with our progress there. Fortunately, we've built our bank with core deposits, 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. On the loan side, we did see good loan growth in the fourth quarter, we always see robust loan demand in the fourth quarter, there are some year-end draws for company balance sheet purposes that we see, so that's always strong. We did see some slowdown in our loan pipeline, it’s mostly due to our being more selective on rate terms and structure and focusing on our core customers. Banks are in a much better position than many years on the loan front. We are certainly in a stronger position, it will take time to see the improvement in loan yields, but it will come in the next couple of years. From a team standpoint, we brought in outstanding new bankers in the fourth quarter and we now have 154 producers. While we are focused on cost containment in 2023, the door is always open for outstanding bankers.

Thanks, Tom. Good afternoon. Liquidity, our liquid assets increased by $470 million from September 30 to December 31. We expect this positive trend to continue in 2023, as we anticipate low double-digit deposit growth versus high single-digit loan growth. Our net interest margin PPP fees and interest income were $103,000 in the fourth quarter of 2022, compared to $5.1 million in the fourth quarter of ‘21. Year-to-date PPP fees and interest income were $7.7 million in 2022. Alright, no PPP 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 of 2.89%, the second quarter 3.26%, third quarter 3.64%, and then the fourth quarter of ‘22 it was 3.52%. Our loan loss provision, our allowance for credit losses to total loans was 1.25% at December 31, ‘22 and that is unchanged from September 30 of 2022. Our net charge-offs 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 $7 million year-to-date. We anticipate the net income to be zero in 2023 as the cap matures in May of 2023. Our 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 extended 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 2022 year-to-date. Capital, the Bank’s Tier 1 capital leverage ratio has improved by 192 basis points since December 31, 2021. The ratio was 7.79% at 12/31/21, and improved to 9.71% on 12/31/22. Tax credits, we have taken steps to extend the benefit period of some of our proprietary tax credits.

Thank you, Bud. I'm pleased with the Bank's performance in 2022 and more specifically in the fourth quarter. During the past year, our borrowers had to stand on their own in this post COVID environment without major government stimulus that had occurred in the prior years and our customers have responded well even in the face of rising inflation. 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 NPAs total assets of roughly 12 basis points. Grew loans and we continue to be selective with new clients and we want to grow our bank with clients, who can fund both the asset size and liability type 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 we won't go into a ton of detail, but I'll be happy to cover specifics in the Q&A section of the call. As of loan growth, the Bank increased our loan loss reserve for the quarter by $5.3 million, which amounts to an ALLL to total loans of $1.25 million. The past due loans at year-end were $110 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. The OREO portfolio decreased by $5 million over the quarter, so it's now only $248,000. Charge-offs for the quarter were 6 basis points, when annualized net 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 performing banks in the country.

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. However, higher interest rates help, not hurt banks, and it seems like today banks are more attractive as an investment alternative than they have been in a decade. It's certainly interesting to me that some investors were selling bank stocks when rates were low. And now they're selling bank stocks when rates are high, so it was kind of hard to make some of them happy, it seems. 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 we do, we do better when we need deposits. It is certainly you have more discipline on the loan side, you can 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 are a good thing for banks. 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 this year. As you could see, we've had the last couple of years certainly been robust from a hiring standpoint. So we are very optimistic about the outlook for our footprint and particularly what our bank we think can produce as we go forward and we can 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 begin the question-and-answer session. Our first question comes from Brad Milsaps with Piper Sandler. Please go ahead with your question.

Hey, good afternoon.

Good afternoon, Brad.

Hi, Brad.

Tom or Bud, I was curious, you know, you did grow deposits by about $0.5 billion as you mentioned. I'm just curious what type of cost did those deposits have on average as you brought in, you know, I was looking at some of the supplemental data and noticed the spot rate on interest-bearing deposits was much higher than, kind of, where you were 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?

Yes. So, at quarter end, the cost of our total deposits was 1.66%. Cost of interest bearing DDAs was 2.39% and total cost of interest-bearing deposits was 2.32%.

Yes, Brad, there isn't really a lot of consistency in that area. We're not focused on buying and depositing funds; we concentrate on developing relationships with our customers. Typically, during calls, the subject of deposit pricing doesn't arise because that's not our core business. We're not in the practice of purchasing money. So, it's challenging to provide you with a more comprehensive answer, Brad.

Got it. Got it. Maybe ask differently, Bud in the past you've been kind enough to give us sort of the most recent month's net interest margin, I might be curious if you do want to provide sort of most recent month's 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 given not only day count but kind of where some of those deposit spot rates are? Just kind of want to get a sense of, kind of, your momentum as you enter the first quarter as it relates to NII?

Yes. I don't have the specific data for December at the moment, but our quarterly analysis shows a margin of 3.52%. I believe a range of 3.50% to 3.60% is a reliable estimate. There are various factors at play, including the Fed's rate adjustments, and it's uncertain where we will land in terms of deposit costs. As Tom mentioned, while we do monitor deposits, our focus remains on growing the bottom line rather than solely on this month's margin.

Okay. And then maybe just final question for me, I guess in total your expenses were up high teens 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, kind of, where you would like to see that number maybe managed to in 2023, kind of maybe some different puts and takes you might have maybe given the more challenging net interest income line?

We don't anticipate that much really from a net staff additions in 2023, so that salary increases should be in the 3% to 4% range as you guys come up. We do anticipate with the conversion that will save money from an IT standpoint but I don't think anything else. We had some unusual expenses like in the third quarter, we had our lawsuits so much or some other expenses like that that will recur in 2023.

It seems that this quarter you may have benefited from a reversal of the provision for unfunded commitments. Am I understanding that correctly?

We did have a reversal in the fourth quarter, but it's hard to predict what that number will be each quarter.

Okay. Did your unfunded’s come down?

Our funded beat the three-year average, which then caused it to decrease the need for the accrual.

Okay. All right. Thank you, guys. I'll hop back in the queue.

Thanks, Brad.

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

Yes. Good evening, gentlemen.

Hey, Dave.

Hey, Bud, I think you said in the pre-envelope, I'm not sure I heard you right, but it felt pretty good about just maybe the outlook for at least the direction of loan yields over the next year or so? Did I hear you right? It looks like the loan rate was 5.41% at the end of the quarter, but just curious maybe as you look out in the quarter or two and assuming the Fed stops maybe in this quarter or next? I'm just curious what's the impact on loan yields in terms of the lagging 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 mix change?

Yes, new loans and how that may roll into the overall average loan yield over the next few quarters?

Our new loan should be priced at least at the prime rate of 7.5%. When the Fed increases rates over a one-month period, we have approximately $4.2 billion that will reprice. Specifically, around $2.1 million will reprice, and an additional $1 billion will adjust during the next 30 days.

Over the next 30 days, I think.

Just based on the new loan volume, I don't have that projection.

Got it. And then just curious, and I think I heard you right, you're expecting maybe low double-digit deposit growth. As part of that maybe just drilling down this quarter, what were some of the trends in the correspondent banking division of those balances and maybe a number of new relationships you're able to add this quarter?

Yes. This is Rodney Rushing. 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 probably all one or two that closed. And for the fourth quarter total fundings for correspondents grew by, I think, $140 million for the quarter. And for the year, correspondent balances were down mostly in the DDA balances because banks didn't have to keep near as much in their analysis account. Rates going up as fast as they did in ’22. We moved some of that into Fed funds and then some moved out. And as my correspondent banks, their liquidity has been put to work, and has declined just like I was getting 22%. The corresponding business continues to grow our relationships and we're looking at a couple of new markets in 2023 that we haven't finalized, which one we're going to go to yet. But still growing it and we anticipate it continuing to grow.

Do you have the dollar balance at year-end?

Just shy of $2.5 million, I think it's $2.468 million.

Got it. And then 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 an underwriting and credit perspective?

I think kind of across the board, and more specifically in commercial real estate sticking with core customers, who can have deposits and have loans with us and seeing our businesses where we're focused this year.

Yes. Dave, this is Tom. I want to emphasize that we can be more selective today than ever, making this an excellent time for that. My old partner used to say that things improve when we need deposits because it leads to better decision-making. We can be very selective on the loan side and much more proactive with pricing and rate structures than we have been in a long time. How does that sound?

Got it. Appreciate the color.

Thank you.

Well, if there are no more questions, sorry.

There are no further questions at this time. I'd just like to turn the floor to Tom Broughton for any closing comments.

Thank you, operator. I apologize for the interruption. Regarding our 2023 budgets, we are currently in the process of finalizing them and will provide more insight into our expense management once that's complete. We recently completed our first run about a week ago, marking our initial assessment of our starting point, and we recognize that we have a long way to go. We are being proactive with our expense management as we move forward. We consider ourselves a disciplined growth company that maintains high performance standards, and we view this year as an excellent opportunity to outperform the industry and prove our capabilities. It seems many banks are setting low goals based on analysts' projections, which presents a great opportunity for us. We appreciate everyone for joining the call and wish you all a pleasant evening. Thank you.

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