ServisFirst Bancshares, Inc. Q4 FY2024 Earnings Call

Greetings, and welcome to the ServisFirst Bancshares Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Davis Mange. Thank you. You may begin.

Good afternoon, and welcome to our fourth 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 Ed Woodie, our Interim 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 fourth quarter conference call. We were pleased with the quarter and all of our trends were positive. If we recap the year, we ended with diluted earnings per share up 10% over 2023, and our net interest margin climbed steadily from 2.57% in the fourth quarter of 2023 to 2.96% in the fourth quarter of 2024. More importantly, our book value grew 12% year-over-year. We're happy with how the year ended and it improved as the year went on. A year ago, I mentioned that loan losses were low and would probably normalize. Now, a year later, loan losses are still low, and I still anticipate they will normalize. Henry will discuss credit shortly, but we don't see problems in any industries—only weak companies or issues with certain borrowers. Regarding loans, we had concerns about payoffs in the fourth quarter, but they accounted for about 40% of our gross loan growth, resulting in a net loan growth of $268 million for the quarter. Not all these payoffs were negative; about half were low fixed-rate loans, and we're pleased to see those payoff. We expect some more payoffs in the first quarter, but at a significantly lower level than in the fourth quarter. From a C&I loan growth perspective, we did see some encouraging increases and a rise in line utilization from 36.7% to 38.4% quarter-over-quarter. Our loan pipeline increased by $150 million after the election, which is very positive, and we expect loan growth to normalize more throughout 2025. I'd like to mention our two new markets, Memphis and Auburn. They are making excellent progress, having worked remotely until recently when they finally got an office. We are proud of their achievements and optimistic about their future. I believe we will excel with strong leadership in both cities. We added four new producers in the fourth quarter, which is not typical as most additions occur in the first half of the year. Nevertheless, we are pleased with those markets. Regarding deposits, we experienced significant growth, including in our non-interest bearing deposits. Our correspondent channel saw 28% year-over-year growth, and we now have 378 banks in 30 states as correspondent customers. In 2024, we added 24 new banks, with 65% of the funding originating from banks that are settled with us, which is a positive outcome. That’s a quick overview, and I will now turn it over to Henry to discuss credit in more detail.

Thank you, Tom. I'm extremely pleased with the bank's performance in 2024 and more specifically in the fourth quarter. The bank's loan portfolio continued to perform at an exceptional level and our commercial-focused business model continues to outperform our peers. As we exited the COVID stimulus era, our bank was at historical lows for most credit metrics a few years ago and remarkably we've been able to continue to stay at or near these historic low figures punctuated by a very strong 2024. Annualized net charge-offs for the fourth quarter were 9 basis points and we had 9 basis points in charge-offs for the entire year. This is less than the 10 basis points we had in 2023. I'm very proud and pleased with these minimal charge-offs that we experienced in 2024. Our ALLL to total loans was stable throughout the course of 2024 and we ended the year with an allowance for loan loss reserve to total loans of 1.30%. Non-performing assets to total assets were 26 basis points, which is generally in line with the results for the third quarter. We continue to proactively monitor the portfolio to ensure we appropriately understand the potential risk and act accordingly as well as conservatively. 2024 was a very strong and stable year from a credit perspective and with the new administration in place in Washington, we look forward to growing and prospering in 2025 and beyond. Ed, I'll turn it over to you.

Thank you, Henry, and good afternoon, everyone. We are very pleased with our fourth quarter results and our update about our earnings momentum heading into the new year. While we have experienced four straight quarters of net interest margin improvement, I'll focus my comments today on linked quarter because recent trends are meaningful to our momentum. Net income was up $5.2 million over the third quarter or 9% and diluted EPS was up 8%. Net interest income increased 28% on an annualized basis and continues to be a growth leader for net income. Margin increased to $123.2 million in the fourth quarter compared to $115.1 million in the third quarter. We continue to benefit from the upward repricing of fixed-rate assets and we have successfully managed the cost of liabilities. Earning asset yields decreased by 25 basis points, while interest bearing liability rates decreased by 46 basis points. Net interest margin increased 12 basis points over the prior quarter while holding an additional $370 million in cash, which negatively impacts the net interest margin percentage. We spoke at length last quarter about the interest rate position of our balance sheet being slightly liability-sensitive and that hasn't changed. I'd like to offer some more specific numbers that may help with everyone's analysis. Approximately $325 million of our securities are set to mature or paydown during 2025 and those currently yield 3.2%. We have $6.3 billion in fixed-rate loans and they repriced up 10 basis points during the fourth quarter. We believe we have several more quarters of increasing yield in this portfolio. We have $6.1 billion in variable rate loans currently yielding 7.3%, most of these reprice within 30 days following a rate change. Rates for interest-bearing checking deposits dropped from 3.65% at the end of the third quarter to 3.32% at the end of the fourth quarter, indicating a beta of 66. Non-interest-bearing demand deposits increased to 20% of total average deposits, up from 19% in the third quarter. Please refer to our supplementary information attached to our press release for further details on our balance sheet structure. We had another good quarter of non-interest income, deposit service charges increased resulting from higher analysis charges and mortgage income increased due to continued strong origination volumes, however, credit card net revenue declined slightly. We had another quarter of successful expense management. We recently directed to $44.8 million of core expenses per quarter. We believe this has increased modestly to $45.3 million currently. We are reporting $46.9 million for the quarter. However, that includes an adjustment to fully fund a shortfall in our health plan, one-time EDP costs related to upcoming systems enhancements, and the write-down of check fraud receivable from other banks. These are offset by a decrease in our annual incentive plan accrual. Our efficiency ratio improved each quarter during the past year. Our tax rate for the quarter was 17.9%, but benefited from a positive adjustment to a tax credit investment, which had delays in construction. Excluding this adjustment, our tax rate was 18.8%, and we believe our prior guidance of a 19% tax rate is still correct. Now, I'll turn the call back over to Tom for his final thoughts.

Thank you, Ed. In light of the election, we are feeling more optimistic about our prospects, as the business community is generally positive about the future. This optimism relies on a continued decrease in short-term interest rates, which will help improve project viability. We anticipate that loan demand will keep increasing and our margins will also see some improvement. Our aim is to create a sense of regret among stock sellers and short sellers, and we hope to see more of that in the coming year. We will now open the floor for questions.

Our first question is from Stephen Scouten from Piper Sandler. Please go ahead.

Yeah, thanks. Good afternoon. Just kind of curious, first, if you were surprised to the upside at all about the deposit betas you were able to extract this quarter, that was really nice to see, and kind of how you think about that upside potential for the NIM, Tom, that you spoke to maybe in the current expectations, where maybe there's not any additional cuts or maybe an environment where there are additional cuts, kind of how we can think about that trajectory?

That's a challenging question. When you have a significant amount of excess cash, it allows for disciplined management of interest rate expenses. In our case, we do have that luxury, and we can maintain discipline. However, we haven't experienced much pushback from our clients, which is surprising given that we primarily deal with business clients. Our cost of funds is higher than the average bank, meaning we are already paying them above-market rates. Clients seem to expect this. If there are further cuts, they anticipate more adjustments, but there is a limit to how low we can go with rates. We aim to maintain advantageous floors on our loans, which are significantly higher than what we used to see in earlier years. This will benefit us going forward, as the pricing on loans and the set floors will help us transition from savings in expenses to gains on the loan side. I hope that answers your question.

Yeah. That's really helpful color, Tom, appreciate that. And then maybe you said you hired, I think, four people here this quarter. Can you talk about how you're thinking about hiring into the new year, if you expect that to be kind of business-as-usual and continue to hire good people as they come about? And kind of along those lines, if we see more M&A, which everyone seems to be expecting, would you potentially be more aggressive with dislocation in and around your existing markets?

We have always maintained that our budgeted goals will not dictate our strategy. While we do not disclose those goals publicly, they exist internally. Our focus will always be on opportunistically hiring the best talent available. We have a few potential expansion opportunities, one small and one large, but we are not at the stage of making decisions on those yet. However, we believe that merger activity presents a significant opportunity for us, as there are typically individuals who may become available during such transitions. With the current favorable conditions for banks and increased merger activity, it seems reasonable to expect that banks looking to sell will emerge in the next few years, particularly with a seemingly supportive administration now in office.

I think you're correct about that. From a strategic perspective, how do you view the situation? Do you have a handful of markets in mind where you believe, if the opportunity arises, you'd really like to enter? How do you approach the potential for expansion?

Yes, I have a list of around 20 different markets in my file, which includes everyone we've ever communicated with over the last 19.5 years in those markets. When a merger is announced, we consider who is in the market that interests us. Fortunately, we have strong connections in the Southeast, so we expect to receive calls. We have a solid network of correspondent banks that Rodney has established, along with many acquaintances in the correspondent space. We collaborate with others in the industry to identify opportunities and they also help us find potential candidates they are interested in hiring.

Got it. Really helpful. Congrats on a great year. Appreciate all the color.

Thank you, Steve.

Our next question is from Steve Moss from Raymond James. Please go ahead.

Hi, good afternoon.

Hey, Steve.

Hey, Tom. With your comments on the loan pipeline, I'm curious how you're viewing loan growth for the upcoming year. You achieved about 8% for 2024, maybe low double-digits, or could there be a bit more prepaid temper in that?

I’m hesitant to provide specific figures because 2024 has been inconsistent. The first quarter was stagnant, the second quarter performed well, the third quarter was close to nothing, and the fourth quarter was decent. I’m unsure what the organic growth rate for loans will be, especially since we’re still facing high rates. The lengthy tenure necessary for many new projects is discouraging, and the high short-term borrowing costs are an issue according to our commercial real estate clients. While our merchant developers are progressing, the multi-family sector and construction costs remain significant challenges. Reducing costs for materials like steel, concrete, and lumber is not feasible with the current administration. I remain optimistic, but I don’t expect substantial improvements from what we saw in 2024. We had to overcome numerous obstacles to achieve our 2024 results, and while there’s potential in Florida due to net in-migration, which creates opportunities, we still maintain a diversified loan portfolio across the Southeast.

Got it. Okay. And then in terms of the producers hire, I'm just curious about whether it's more focused on commercial and industrial or commercial real estate, and how we should think about that. Also, was it in the new markets or the previous markets like Memphis and Auburn compared to elsewhere?

In the fourth quarter, we added several locations, including Memphis, Auburn, and possibly one in Nashville. In the first quarter, we've already brought on four new bankers in the West Central Florida area. All of them are part of our company, but we only have one dedicated commercial real estate lender based in Nashville, who originally hails from Texas and serves a clientele split between Texas and other locations, including Tennessee. Is that accurate, Henry? Everyone else has at least a commercial and industrial focus and they also handle some commercial real estate.

Okay. Got it. And then in terms of just on the margin here, I heard I mentioned the cash flows from the securities portfolio, just curious, updated thoughts on fixed rate asset repricing for the loan portfolio here, what cash flows for the upcoming year? If there have been any change in this?

Yeah, we talked about it last quarter, and I think it's little changed this quarter, we're still looking at about $1.5 billion of fixed rate loans that are repricing in the first year and then you add to it the $300 million that we talked about in securities and that gets us back up to that $1.8 billion I think we talked about last quarter. And so that $1.5 billion of fixed rate loans are coming off in the half holds, in fact, they're coming back on in the high 6s.

Okay. Regarding the margin trends, I assume the margin has been increasing each quarter. Is it reasonable to think that the December margin was above 3% at this point? I'm also curious about your outlook on this for the near term.

Yeah, it is right around that 3% except for if we're holding excess on balance sheet liquidity on our books, that tends to impact that net interest margin percentage. So, you're probably seeing in the mid-2.90%s as opposed to 3% but for that item. Yeah. If we had $2 billion in excess funds, our margin would be in that 3% range.

I wonder if they anticipate a peak in deposit balances during the fourth quarter.

They do, and that happened this quarter as in previous years, up for the fourth quarter. Our existing customers will be flat usually through the first and halfway through the second quarter.

I appreciate the information you've provided. Just one more question regarding the non-performer that was supposed to be sold but the deal fell through. Do you have any updates on the timing for a potential resolution?

Don't have any immediate update. It's still one we're working on, a lot of attention, but there's nothing that's definitive at this time.

It's under a contract, but any sale is going to be at a multiple of our debt amount, so we're fine. However, there are other creditors involved, which makes it a bit challenging to ensure everyone gets paid in full. We have a backup buyer potential as well, so we don't perceive any risk of loss associated with that asset.

Yeah, I think that's good statement number of loss, but yet it's just going to take time.

Great. Okay. Well, really appreciate all the color here and nice quarter, guys. Thank you very much.

Thanks, Steve.

Our next question is from Dave Bishop from Hovde Group. Please go ahead.

Hey, good evening, gentlemen.

Dave, how are you doing?

I'm good, Tom, how are you doing?

Good.

Hope the snow didn't bury you too much. I have a quick question. I appreciate the supplemental disclosures regarding the loan originations, but I believe they pulled back a little to around 7.10% at the end of the quarter. I'm curious about how they've trended since then and if there has been any significant movement in those origination yields.

No.

Go ahead, Ed.

No, Dave, I think that's about right.

We are aiming for a better balance between fixed and floating-rate loans, with an increase in fixed-rate loans compared to almost none a year ago. As we work towards being neutral in terms of assets and liabilities, we are achieving a more favorable mix of fixed and floating-rate loans.

And in terms of the pipeline composition, I know the percentage of commercial industrial loans has sort of declined over the years as commercial real-estate construction picked up, I'm just curious if there's more of a C&I component that might bring over operating accounts moving forward.

Well, the interesting thing is, a lot of the commercial and industrial service charges have increased by 20% year-over-year, indicating that we have many more accounts and a lot more activity. Many of these accounts don't borrow, or they might have an inactive line with no usage. It's intriguing that a lot of the commercial and industrial accounts we acquire either have no deposits or are fully funded with deposits. So, there's an interesting phenomenon on the commercial and industrial side.

Got it. And as you sort of look at the crystal ball from a credit perspective, you noted in the preamble, obviously, net charge-offs are very well-behaved here, what would it take to maybe, say, move that from like say the 10 basis point to 20 basis point level will be a collapse in unemployment, just curious of what would have to happen to really have a draconian impact to that loss rate?

If it reaches 30 basis points in a quarter, don't be surprised, Dave. It's important not to get too accustomed to 10 basis points, as that's not sustainable over the long term. We need margin expansion because very few commercial banks can maintain a charge-off rate of 10 to 15 basis points for an extended period. Generally, good banks average 25 basis points or less, but it's possible we might experience a year where it spikes to 35 basis points. If we return to 25 basis points, it doesn't mean we've hit a crisis; it's just a return to a normal level. As I mentioned earlier, we don't see weakness in any specific industry. There are some sectors, like senior housing, that have faced challenges. Trucking has also encountered issues, and weaker borrowers in both industries have already filed for bankruptcy. We have a few that might struggle, but they will likely make it through. Outside of these, there are just random companies that are poorly managed, regardless of their industry. Henry, do you want to add anything?

No, I agree. I don't think there's, as you asked, one specific thing, whether it's unemployment or otherwise that's going to drive it up, it's just going to be a deterioration in certain borrowers. It’s nothing specific to industries or asset classes, it's just weaker projects or weaker players.

I would speculate that the only aspect of unemployment that will have an impact is on residential AD&C. There seems to be a strong correlation that we might observe, but we have learned our lesson from the experiences of '08 and '09. During that time, the market had been stable for 15 years, leading to a belief that inventory would never lose its value, which it ultimately did. Aside from that, I don't expect losses in the commercial sector to be influenced by rising unemployment. While I could be mistaken, my experience suggests that residential AD&C is linked to unemployment.

Got it. And then maybe a question for Rodney. I know the puts and takes of the correspondent banking group can be cyclical, the increase in end of period borrowings, period-to-period, does that reflect the timing of fund flows or funding of loan growth, just curious if that's related to the corresponding banking group. Thanks.

It's both. You have the fourth quarter that where liquidity builds with our customers and we got 374 correspondent banks now, thereabouts. And the other thing is we added 24 relationships during the year. The largest market in growth was Texas, followed by which we hired some new producers there almost two years ago and then followed by Tennessee. And we added some producers in Tennessee who are doing well. So, it's new accounts and in addition that fourth quarter liquidity growth.

Got it. Appreciate the color.

Thank you.

This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Thank you, everybody, for joining us on the call. Appreciate your investment in our company.

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