ServisFirst Bancshares, Inc. Q1 FY2024 Earnings Call

Greetings, and welcome to the ServisFirst Bancshares First Quarter Earnings Call. As a reminder, this conference is being recorded.

Good afternoon, and welcome to our first quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We'll have Tom Broughton, our CEO; Henry Abbott, our Chief Credit Officer; and Kirk Pressley, our CFO. 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, Davis. Good afternoon, and thank you for joining our first quarter earnings call. We think the first quarter is off to a good start this year, and we are optimistic we'll see improvement on a quarterly basis. Kirk Pressley is going to talk about our margin and deposit activity in a few minutes. In addition, our expenses are in line with expectations. Henry Abbott will talk about our continued strong credit quality shortly after that. Looking at loans, first thing I'd say is we had really good growth in the quarter with over $200 million in net loans. More importantly, our loan pipeline is back to normal levels today and has increased 63% since year-end. In recent weeks, our bankers have seen greater activity and some projects that were postponed are ramping up again. Our pipeline is very close to normal levels. On the production side, we were fortunate to add nine new bankers in the first quarter, up from seven in the fourth quarter of 2023. Six of these producers are in the Memphis market. We also expect to announce a new market within a few weeks. We are working to better measure the productivity of our commercial bankers as well as our support staff. Success is obvious for bankers; you know who's been productive and you know who has not, but we're working on other metrics to better gauge the required inputs to success. We are optimistic we can be successful in the coming quarters given the current economic environment. Now I'm going to turn it over to Henry Abbott first to make some comments on credit quality.

Thank you, Tom. The bank got off to a strong start in 2024 with the loan growth Tom previously mentioned. I'm pleased with our results and how the bank's loan portfolio has performed in the current interest rate environment. I'm also pleased to say that with our loan growth, we experienced the largest segment of growth in our owner-occupied real estate segment, which grew by $120 million. Charge-offs for the quarter were 6 basis points when annualized, which is less than the fourth quarter results of 9 basis points and generally in line with the first quarter of 2023. We ended the quarter with only $17 million in past due loans, which is a 35% decrease from year-end 2023 and down from the same time prior period. The allowance to total loans was 1.31%, which is basically flat compared to when it was 1.32% at year-end and generally consistent with the past few prior quarters. Nonperforming assets did increase for the quarter, and this was primarily related to one credit. This credit has been on our watch list for some time. While the customer is current on all loan payments with ServisFirst, we felt the conservative thing to do was move the loan to nonaccrual given recent changes with our borrower. We have significant collateral above and beyond the loan amount, and we're working with the borrower and other parties to find a smooth landing spot that is in the best interest of the bank. The bank has been at or near historic lows for the past few years concerning nonperforming assets. Even with this one additional credit at the end of the first quarter, NPAs to total assets still only account for 22 basis points, which is significantly below our peers and less than half of where we were at the end of 2019, which was closer to 50 basis points and generally in line with where we were at the end of 2020. These are both good pre-COVID benchmarks. I will also note that the allowance for credit losses, when compared to nonaccruals, was 452% at quarter-end, and this is significantly greater than our peer group. We continue to feel good about the bank's loan portfolio and credit quality. I'm pleased with how the bank ended 2023, and we continued that momentum in 2024, and now our loan growth is beginning to tick up as well at a better pace.

Thank you, Henry. Good afternoon. We are very pleased with the progress the bank has made in the first quarter. Liquidity and capital continue to remain strong. Both loan and deposit pipelines continue to grow and fund. The net interest margin has not only stabilized but started to expand. Net interest income is at its highest level since the first quarter of 2023. The net interest margin percentage is up 9 basis points to 2.66% as the rate paid on interest-bearing liabilities was flat with last quarter, and the yield on the interest-earning assets is up 8 basis points. Dollar margin is up modestly over the fourth quarter despite there being one less day. Our noninterest-bearing deposits were stable in the first quarter, and margins stabilized in Q4 2023 and improved in Q1 2024. Total deposits were down due to our deposit optimization actions during the quarter and seasonal deposit declines. We reduced more than $220 million of high-cost transactional deposits during the first quarter. As Tom mentioned last quarter, our incentives for 2024 are balanced for deposit and loan growth. However, the base for deposit growth was set at March 1. We did not want to hurt employees' 2024 incentives for reducing high-cost transactional deposits as directed. The loan pipeline began to fund during the first quarter, and we expect that to continue. The key to improving earnings per share is loan growth, repricing loans when possible, and maintaining our cost of funds. The net interest margin increased to $102.5 million in the first quarter versus $101.7 million in the fourth quarter of 2023. As I noted earlier, there was one less day in the first quarter of 2024. Approximately 70% of loan production in Q4 and Q1 was variable rate. 75% of variable rate loans have a floor. 43% of total loans are floating rate today. The average rate on loan production for the first quarter was just above 8%. As we noted last quarter, we see margin increasing throughout the year. We don't anticipate a significant increase in the cost of funds going forward, especially as compared to our peer banks, while we expect the yield on interest-earning assets to continue to increase as fixed-rate loans and investments continue to mature and reprice. The first quarter is typically slow for repricing. For example, covenant violations usually occur after taxes are filed and financial statements are received. Examples of our repricing efforts during the quarter include approximately $120 million of loans having their rate restructured. This quarter, the primary reason was due to advancing additional funds and repricing the new loan. These repricing activities increased the yield of those loans by 2.56%. The cumulative effect of this repricing will improve margin and earnings per share going forward. During the first quarter, we had $139 million of low-rate securities mature at a rate of 2.2%. We have approximately $120 million of maturing securities yielding 2.62% during the second quarter and another $25 million yielding 2.93% in the third quarter. Reinvesting these proceeds will improve the margin going forward. Deposit costs stabilized during the fourth quarter. We began our deposit optimization review focused on higher-rate transactional deposits during the quarter. We reduced more than $220 million of high-cost deposits, which resulted in a small reduction in deposit costs. Total deposits declined due to this effort and seasonal declines in the first quarter. During the first quarter of 2024, we realized a $1.2 million debt benefit on one of our bank-owned life insurance policies. Our noninterest income was up modestly from Q4, excluding this extra BOLI income. Credit card income was a little low due to seasonally lower spending in the first quarter. We feel good about the rest of the year, as we have seen spending increase in March. Accounts are increasing, and new correspondent banks are being added at a nice pace. In discussing noninterest expense, we're watching expenses closely. As usual for us, I said in the fourth-quarter call that our normalized Q4 expense run rate was around $44 million. During Q1, the FDIC updated their estimate for the special assessment, which resulted in an additional $1.8 million of FDIC expense. Excluding this special assessment, our noninterest expense for the fourth quarter was $44.5 million. Expenses were up modestly for the Q4 run rate due to expenses for the Memphis office and some lingering costs related to the EDP contract that was terminated in Q4. We continue to grow book value per share. Our capital ratios all improved during the quarter. At quarter-end, our CET1 ratio increased to 11.07%. Our Tier 1 capital-to-average assets ratio increased to 9.44%. I'll give some additional color now on what we expect this year. We are optimistic about 2024. As a reminder, like most other banks, Q1 2024 was significantly different than Q1 2023. The increase in the bank's funding costs outstripped the increase in yield on assets during 2023. This compression looks like it might continue for a while for many other banks. As I said in the fourth-quarter call, we think our increase in funding cost has largely been realized and the increases in the yield on assets are expected to grow both the dollar and percentage margin from December 31. The good news is our deposit costs seem to have stabilized as we expected, and the yield on assets should naturally grow from here as lower fixed-rate loans and securities reprice. We feel good about the loan growth during the first quarter and expect it to continue. Although deposits were treated a little in the first quarter, we are still in a strong liquidity position. We frankly had more than we wanted. We expect to grow deposits throughout this year. We think our dollar margin bottomed out in the third quarter of 2023 and expect it to continue to grow from here.

With that, let's open up the floor for questions.

Our first question comes from Stephen Moss with Raymond James.

Maybe just starting here, Tom, with the uptick in the loan pipeline after a good quarter of production. Just curious how you're thinking about total loan growth for 2024?

The pipeline is really promising. It just never seems to close when you think it will; it always takes longer than you expect. If I look at our pipeline, I'd say it should close at around $150 million a month. However, I know things can go wrong, and it drags out, taking weeks and even months longer than anticipated. If you had asked me what was going to close in the first quarter, I would have projected gross loan production of $150 million a month. Well, it turned out to be $200 million. So it’s quite a bit more than we would have anticipated. I will emphasize that our pipeline is approaching normalized levels, meaning prior to the pandemic, incredible run rate that we had, and the last significant year for loan production. It's strong. We're seeing increased activity. And of course, we are focusing on both loan and deposit growth this year, as Kirk mentioned. We see a lot of loan growth opportunities this year.

And in terms of just the business mix of the pipeline. Just curious as to what types of opportunities you're seeing and geographically if there's any concentration?

If I had to pick, one area that's performing well is Florida. With the population boom they are experiencing, they need to build everything — assisted living facilities. Those are overbuilt everywhere, including Florida, but it's still strong. It’s not localized at all; we see increased activity in most of our markets. Rodney, could you add anything?

Well, Florida has been strong for several quarters. But we’re also seeing a lot of opportunities with owner-occupied loans. I think Henry made comments about our $220 million growth, with $120 million being owner-occupied loans. So it's quality stuff that we're seeing pretty evenly spread.

Yes. And I think in some of our newer markets, it's just a longer sales cycle to bring on commercial and industrial customers in certain cases. So Charlotte is coming online and some of our Florida markets are coming online, but the sales cycles for some of these businesses seem to be maturing.

Okay. Great. I really appreciate that color. And then in terms of just the margin here, I mean, it seems pretty straightforward that your funding costs have stabilized and you’re getting the asset price benefit here going forward. Just curious if you could give us an update as to what level of fixed assets do you expect to reprice in 2024?

On the loans and on the securities, the low-rate securities and the longer-term ones maturing this year, I think we're just going to be around similar to what we talked about in the fourth quarter, which is about $2 billion a year.

Our next question comes from the line of David Bishop with Hovde Group.

Tom, and gentlemen, just curious, you said you're obviously keeping a close eye on expenses in this environment. You all held in pretty closely at $44 million, but you've been adding bankers, commercial bankers, being opportunistic. Just curious where maybe you see operating expenses trending over the near to intermediate term, maybe from a growth rate or dollar basis?

I think what we were saying last quarter is probably still holding true that we expect the full year to be probably within the $180 million to $185 million range. It's hard to be more specific than that, but a little bit higher than the current run rate as compensation increases happen throughout the year, but not a whole lot more than where we're running.

Got it. Turning back to the net interest margin discussion, I'm curious about the funding cost side, which appears to be stabilizing. On the earning asset side, where do you see the yields trending, and is there a peak you anticipate this year or next? I'm interested in your outlook for that in the near and medium term as well.

I'm not going to give you a whole lot of detail on that, but it's next year that it will peak. It's not this year. However, we'll see really nice growth this year. If you think about around $2 billion rolling to more current rates, we should see a nice lift this year, and it will continue into next year. So holding these funding costs in this relevant range is quite important. We've got a nice tailwind. We just need to see it through.

We didn't have any securities maturities last year at all, and the low-rate security repricing is substantial this year. This will turn into real money over the course of the year.

And was that, the $2 billion, inclusive of loans maturing, repricing? Or is that solely the total combination of securities?

No, that's the total. That's the total low-rate securities. There are probably about $280 million in the year. A lot of it was during the first quarter. I think, Davis help me, $130 million or so. I think it was in my script for the first quarter. So we've seen some of it already, but there is more to go. But all of the fixed-rate loans and low-rate securities for the year are probably going to be around $2 billion.

We'll have a better feel for the loan repricing. Last year, the loan repricing was about $1.8 billion total. We'll have a better feel once we get into covenant season when we get financial statements. That will provide us with better clarity. Nothing matures much in the first quarter, as Kirk mentioned. So Dave, once we get into the second and third quarters, we will have a pretty good feel regarding what potentially will reprice there.

And Tom, does the visibility or optimism on the pipeline indicate that things are improving from a customer perspective? I'm curious about what you think is driving that as you receive financials. Are the borrowers possibly in better shape than they realize in terms of liquidity and cash flow, which is making them optimistic about considering mergers and acquisitions or new business line investments? I'm interested in your thoughts on what might be driving that in your markets.

I think the recession fears are receding, which is the number one factor. People are looking at moving forward with projects that were shelved for up to a year, whether it's commercial and industrial or commercial real estate. One issue we've had is that C&I loan demand has seen strong profits, meaning many borrowers haven’t felt the need to borrow money because they've been doing so well. But overall, we're just seeing a more optimistic attitude out there among the customer base in many regards.

Sorry, I was just going to say there are no further questions at this time.

Thank you, everybody, for joining our call, and we appreciate your interest.

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