ServisFirst Bancshares, Inc. (NYSE:SFBS) Q3 2022 Earnings Conference Call October 17, 2022 5:15 PM ET
Company Participants
Davis Mange – Head, IR
Tom Broughton – CEO
Bud Foshee – CFO
Henry Abbott – Chief Credit Officer
Rodney Rushing – COO
Conference Call Participants
Brad Milsaps – Piper Sandler
Kevin Fitzsimmons – D.A. Davidson
David Bishop – Hovde Group
Operator
Greetings. Welcome to ServisFirst Bancshares Third Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to Davis Mange, Investor Relations Director. Thank you. You may begin.
Davis Mange
Good afternoon, and welcome to our third 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.
Tom Broughton
Thank you. Davis. and good afternoon, and welcome to our third quarter conference call. I am going to review a few highlights of the quarter, before I turn it over to Bud, to go over the numbers in a little bit more detail.
Our loan growth was — continue to be very strong in the quarter and the payoffs that we had expected were pushed back to later quarters. We are seeing lower pipelines in loans, because we certainly can’t keep growing at the torrid pace that we’ve been growing in the last two quarters. And we also have been more selective in the look — what we’re looking at in terms of the loan pipeline. So, we expect the loan growth to moderate in coming quarters.
More at our historical growth rates, we did see some run-off in the deposits in correspondent area in the third quarter, while the general bank was stable. Our correspondents are making loans again. They’re buying securities. So that was to be expected to some extent, probably a little bit more than we thought. We do expect to get back to deposit growth in the general bank in the fourth quarter.
We have consistently grown deposits and we are putting more focus on it as we did prior to the pandemic. Incentive plans had been heavily weighted to loan growth in 2021 and 2022 and we will put normal emphasis on deposit growth in 2023. Our general bank had year-over-year deposit growth, even though we did not focus on deposit growth until this past quarter.
On the loan quality side, Henry Abbott will certainly discuss it in more detail, but we continue to see strong credit metrics in our loan portfolio. And I think, we had one credit that was a problem in this past quarter that was most of what we had on the charge-off list.
We just recently completed a credit card conversion and we are very pleased to get that done. One reason we’re pleased is that we have a moratorium on adding new banks for over six months, so we can start adding agent banks again in the covered area. So that’s certainly welcome news from an income — fee income standpoint.
We did add 13 new bankers in the quarter after 15 bankers, last quarter with growth in Piedmont, Northwest Florida and Nashville regions. We continue to see opportunities and are being very selective but we are seeing better quality bankers than we’ve seen in a long time, in fact, we got a call this morning about a team of community bankers in a very nice market. So we are seeing potential growth still coming in the door.
So, I’m going to turn it over to Bud to go over the financials.
Bud Foshee
Thanks, Tom. Good afternoon.
Liquidity. In mid-June, we decided to spend investment purchases based on our strong loan growth. In the third quarter, we were able to reinvest $76 million on maturities and mortgage-backed paydowns into higher-yielding loans. Net interest margin — loan growth, exclusive of PPP forgiveness was $677 million for the third quarter. Average loans, excluding PPP, increased by $776 million in the third quarter.
Average PPP loans decreased by $45 million, so net average growth was $731 million. PPP fees and interest income were $432,000 in the third quarter of 2022 compared to $6.4 million in the third quarter of 2021. Net loans grew by $75 million in the last three days of the quarter. This increased our loan loss provision, we will not receive a positive net interest margin until the next quarter.
Our margin continues to improve by quarter. In the fourth quarter of ’21, it was 2.71%. First quarter of this year, it was 2.89%. Second quarter 3.26% and third quarter 3.64%. Deposits decreased by $719 million in the third quarter. Most of the decrease related to correspondent banks. Fed funds purchase increased by $77 million in the third quarter. The recent Fed rate increase in September will have minimal impact on our margin over a one-month period.
Loan loss provision. Our provision increased by $9.6 million in the third quarter. A primary factor in the increase related to the national forecast increase from a range of 3.9% to 4.3% at June 30, 2022, to a range of 4.4% to 5.8% at 9/30/2022.
Noninterest income. Credit card income continues to grow $2.6 million in the third quarter of 2022 versus $2 million in the third quarter of 2021. Spend was $275 million in 2022 versus $216 million in 2021.
Noninterest expenses. During the third quarter, we had a preliminary settlement of litigation and write-down of a private investment, resulting in charges of $2.4 million net of income taxes or $0.05 per diluted share.
Salaries and benefits. As a result of our market expansions, total salaries increased by $871,000 in the third quarter and by $3.7 million year-over-year. Third quarter 2022 incentive expense was $4.3 million versus $6.2 million for the second quarter of 2022.
Tax credits. The year-to-date investment write-down related to tax credits was $7.5 million in 2022 versus $3.1 million in 2021. This increase was more than offset by an income tax reduction of $6 million.
Correspondence. Earnings credit rate on correspondent DDA balances increased from 0.4% at September 30, 2021, to 3.25% at September 30, 2022. Lower balances were required to be maintained to pay for account analysis expenses due to the steep rise in interest rates.
That concludes my remarks, and I’ll turn it over to Henry Abbott.
Henry Abbott
Thank you, Bud.
The bank continued the trend of very strong loan growth for the third quarter. Loans grew by an annualized 25% for the quarter. We continue to want to help high-quality commercial borrowers and prospects within the bank’s footprint.
At the same time, we continue to be conservative with our underwriting and interest rate sensitivity analysis, given the persistent inflation in the marketplace as well as being more selective on new commercial real estate exposure, which is income-producing versus our core bread and butter of owner-occupied real estate.
Past-due loans were mere $10.8 million on par with the second quarter, and that figure equates to past due to total loans of 10 basis points, which continues to be near historic lows. We have sliced and diced our loan portfolio in Southwest Florida followed up with borrowers impacted by Hurricane. While the long-term impact to the region are unknown, we feel like our loan portfolio in that area fared very well.
The bulk of our loans in the impacted area were more north to where the hurricane made landfall. To date, we’ve only uncovered three severely impacted commercial borrowers, and we believe they were appropriately insured. We grew our loan loss reserve for the quarter by $12.6 million, which amounts to an ALLL to total loans of 1.25. This is an increase from 1.21 for the second quarter to slightly above the 1.24 for the same period prior year.
The increase in reserve is not associated with a specific credit or any deterioration, but rather the model is impacted by changes in economic outlook as Bud previously mentioned. While we have not seen any major changes in the loan portfolio and our four key credit metrics continue to be near historic lows, we did feel it prudent to increase our reserves.
Nonperforming loans to total loans were mere 16 basis points of our $19.5 million in NPAs over $5 million of that figure is under an LOI to be sold in the fourth quarter to a highly qualified buyer. Our loan portfolio continues to perform at an exceptional level. Charge-offs for the quarter were 11 basis points when annualized. Net charge-offs for the quarter were roughly $3 million on a loan portfolio of $11.3 billion.
Of the $3 million in charge-offs, roughly $2 million was related to one specific credit. We were proactive in addressing the issue and the remaining exposure we do have to the borrower is less than $500,000 and is fully impaired, while charge-offs were slightly elevated. When annualized, our year-to-date charge-offs are a mere 7 basis points.
As with all large financial institutions, we are in uncharted territory with the CECL model in the current dynamic environment and how it impacts our loan loss reserve. Changes to the reserve aside, I feel very good about how the bank’s loan portfolio is positioned in the diversified markets we serve.
With that, I’ll hand it back to Tom.
Tom Broughton
Thank you, Henry.
And yes, we’re glad to get good news after Hurricane Ian down in Florida. So that was turned out to be not as bad as we thought it could possibly be. So that’s certainly welcome news.
Just in general, I mentioned that I’ve always thought, I think anybody thinks the core deposits, the key to building the value of a banking franchise. And we’ve always focused on building core deposits. We’re certainly well positioned compared to many of our competitors in the industries because our balance sheet liability side is funded with core deposits, not federal home loan advances and brokered deposits. Our compound deposit growth rate in the past five years is 14% and from the inception of the bank, it’s 33% in 2005.
We do believe we have the best bankers in the industry which is the key to success we’ve enjoyed since 2005. We think we have the best platform for commercial bankers, which is one reason we’ve attracted a number of bankers in the last 17 years. And we think we have more opportunities for growth than any time in our history as of today.
We are pleased with the quarter with an outstanding return on equity, return on assets and efficiency ratio. We’ll certainly be glad to answer any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Brad Milsaps with Piper Sandler. Please proceed.
Brad Milsaps
Hi guys.
Tom Broughton
Hi Brad.
Brad Milsaps
Tom, Happy third Monday and October to you.
Tom Broughton
Well, hi, look, if we all win, you can beat Henry Abbott, Georgia bold out and we win race as we will see in Atlanta. Decent, but how about that?
Brad Milsaps
That’s right, that’s right. Well, I don’t know if I do. We’ll see it though. I think this is the first time I’ve got to call on a winter. So anyway, I thought I take advantage.
Tom Broughton
It’s a good win but every 15 years, I don’t blame you. I would do it too.
Brad Milsaps
As opening, we have rocky top queued up for me.
Tom Broughton
I live through the Mike Sheila and Mike Deboer here in Alabama. So we’ve — we took enough taking our turn in the box. It looks like that Tennessee is back though. That is for sure.
Brad Milsaps
We’ll see. We’ll see. I wanted to ask, Tom, you talked obviously, another great quarter of loan growth. You’re on pace for we already have generated more than $2 billion of growth this year.
Can you maybe frame up for us a little bit more kind of what in your mind is sort of in dollars, maybe what a pullback in loan growth would be kind of vis-à-vis all the people you’ve hired.
And I guess the second part of that question is how much does the pressure on funding sort of impact how much you can grow next year? I know you’re focused on deposits, but that’s obviously a big part of it with your loan-to-deposit ratio now at 102%.
Tom Broughton
Yes. And we’re back to our normal. Our loan-to-deposit ratio was back where we’ve been for most of the last 17 years, except for two periods of time, which were the pandemic in the ’08, ’09 recession. So we’ve been — this is normal for us. We’re back to where we always have been. I have complete confidence that our team can generate we’ve had — we’ve tracked some outstanding bankers. We just actually had one to join us in day as a matter of fact. So we’ve got some great bankers that are joining us all the time. So I have confidence that we can grow at or about something hopefully at our historic growth rates that we’ve seen.
Brad, I just think a 25% annualized growth rate is not — clearly not sustainable. So something in the — by quarter, you think 10% to 15% is sort of where we had our targeted growth in loans and deposits and we think we’ll get back to those levels over the next several quarters.
In fact, we’re already seeing, we see surge in deposits coming. We got a big deposit pipeline bigger than leases bigger than it’s been in the last two years because we really didn’t track it much for the last two years. So cordwood correspondence has some really nice wins in the last couple of weeks. So we feel good about where we are.
Brad Milsaps
I’d just be curious, those — that deposit pipeline on average, where are those deposits in terms of rates coming on the books, what are you having to pay to bring in sort of the incremental new dollar of deposits?
Tom Broughton
Well, our net interest margin in September was what Bud?
BudFoshee
3.72%.
Tom Broughton
That was flat. In August it was…
BudFoshee
3.55%
Tom Broughton
Yes. So if that gives you any idea, we’re still holding the we say we’re a disciplined growth company and we mean that we’re going to be disciplined on both sides of the balance sheet, Brad. And we try to grow by treasury management rates are not the answer to building a bank balance sheet. That’s not the answer. The answer is treasury management service.
Brad Milsaps
Sure. Thank you, guys, I appreciate the color. I’ll hop back in queue.
Tom Broughton
You have the orange glow always. You have it always, Brad.
Brad Milsaps
Thanks, Tom. I appreciate it.
Operator
Our next question is from Kevin Fitzsimmons with D.A. Davidson. Please proceed.
Kevin Fitzsimmons
Hi, good evening, everyone, or good evening, everyone. How are you all doing?
Tom Broughton
Good evening.
Kevin Fitzsimmons
I just wanted to follow up on Brad’s question. So — Bud I saw the comment in the — on Page 1 of the release about the margin should remain relatively stable going forward. So are you kind of referencing quarterly margin, which was 3.64-ish, I believe? And — or were you — because I thought I just heard you say the September margin was 3.72%. So what if you could just dig a little deeper into that outlook for the margin. Is it — your comments about it just being stable is an accelerating deposit beta kind of offsetting or more than offsetting impact from rising rates on the asset side? Thanks.
Bud Foshee
Right. So to break it down, I guess what we’re talking about is really from one Fed increase to another. So what happens from a loan standpoint, we’ve got right at $2 billion debt reprices, whenever an index changes that reprices. Well, that’s about equal to what correspondent has in money markets and Fed funds. So those are going to watch. They’re going to both go up at the same rate. Now over the next month, you’re going to have about $1.8 billion in loans that will reprice.
Whatever the index is, you’ve got a different reset date during the month, but you’ll have another $1.8 billion that will raise price and then you’ve got your money market, I guess, in money market is what we can, you’ll have some of the money markets increasing over time. So loans — the $1.8 billion is going to go a little less or right, then your deposit side, it’s going to reprice during the time period.
Kevin Fitzsimmons
Okay. So there’s still — I mean, I guess, just to clarify, so there’s still upside to the margin from the level you hit for third quarter ’22 based on what you just said, unless I’m not hearing it correctly?
BudFoshee
Yes. Yes, definitely.
Kevin Fitzsimmons
Okay. So your comment in the release is more about just like we’re not going to see the kind of linked quarter change you saw this quarter.
Bud Foshee
To stress just from a Fed increase standpoint with…
Kevin Fitzsimmons
Right. Got it. And the comment about earlier, I think Bud in your comments, you talked about the outlook for general bank deposits to grow. But do you expect total deposits to grow? Or is there still going to be some hangover from correspondent deposits running off. And so what’s that kind of next quarter or two outlook for total deposits, would you say?
Tom Broughton
Yes. We feel like correspondent is going back the other way now. They’ve had some really nice wins in the last few weeks, some major new customers have joined us. So we feel like we’re back to the core and are headed in the correct direction, Kevin, from. And also, I mean, we’ve got we layer in incentive for year-end for all of our commercial bankers to — we didn’t have much of a component for deposit growth when we started the year and so that we’ve added that in. So they are focused on improving deposits and adding the right way, not adding high-rate deposits. That’s not the answer — rate is never the answer to building a bank.
Kevin Fitzsimmons
Got it. Okay. And Tom, I think early in your comments, you mentioned about getting a call just today from a new team, what might prove to be a new team of bankers — is that — I know you can’t get too detailed, but is that a market you’re currently in or not in.
Tom Broughton
No. In is a community bank — community banking team, which we’ve added a number of those in the last few months. Besides the Piedmont region, we’ve added some nice community teams in Tallahassee, Panama City, Ashville, just to name a few. So we feel like — and they’re deposit generators as well as loan generators. So they understand that they got to fund their own loan growth. They get it.
Kevin Fitzsimmons
All right. Okay. Okay. I’ll hop back in the queue. Thanks very much.
Tom Broughton
Thank you.
Operator
Our next question is from Dave Bishop with Hovde Group. Please proceed.
David Bishop
Hi. Good evening, gentlemen. I’m Maryland Terrapins college football fan and I’m very jealous of you all down there in the South, that could produce some good football on Saturday. Look at you on with NBA, that’s for sure. Maybe someday, that will change.
Tom Broughton
We thankfully [indiscernible]. I saw Seattle. It took a lick, it was game since we leave the transfer from Alabama. So we certainly are interested in seeing him do well.
David Bishop
Yes, has to reach. Has to do it. Noticed another 13 bankers added this quarter on top of the 15. Despite that, you guys are continuing to do a yeoman’s job in terms of holding the line on salaries and employee benefits. Just curious, I saw that decline 5% linked quarter. Was there anything unusual in the second quarter? Remind us that maybe inflated that? Or are you doing anything special to really sort of hold the line in terms of inflation on the compensation line.
BudFoshee
Dave, the only thing in the — from a total salary benefit. We had extra incentive accrual we have our incentive accrual in the second quarter. So that’s the biggest thing I remember our salaries and benefit totals.
Tom Broughton
Yes. It became obvious to us that all of our banks were going to exceed their loan goals for the year, Dave. So we put an extra accrual in. It was about $2 million.
David Bishop
In the second quarter?
Tom Broughton
Yes.
David Bishop
Got it. And then the bankers you’re talking to, just curious the conversation that sort of compels them to jump to ServisFirst. Just curious at the stage in their career, how that conversation goes. Is there a commonality in terms of a theme where they choose you over the current bank or another suitor out there because, obviously, there’s a lot of shares moving around down there. Just curious what sort of compels them to use you over some of the other growth your competitors down there?
Tom Broughton
Well, I think the banks don’t have consistent incentive plans. They changed the plans. In fact, we’ve had a number of bankers that joined us that found out that right at the end of the calendar year, the incentive plan was changed and they didn’t like that for that current year. There are a lot of reasons, but I think a lot of people have found that we’re a good platform to work from. And we support them in every way, and it’s not about the management team in Birmingham is about the operating people out in the regions, and we do everything we can to empower them.
Henry Abbott turn around credit requests as quickly as we can. We don’t spend weeks putting people through the ringer on either — if we’re going to turn it down, we turn it down quickly, and that’s how you — that’s what customers want to hear. So really, we’re just focused on good customer service. It’s not sales is service. Services what wins us customers and we feel like we’re offering the best service in the industry, our compliance person was telling me how a few complaints we get this morning because we try to work with customers and try to resolve complaints.
We don’t have the kind of problems. A lot of banks have as my watching the branches, I got a problem, we try to fix it. So — we think that’s the differentiator. David has been for 17 years for us compared to most commercial banks. So there are a lot of different reasons people leave. It could be as simple as personality complete, but it’s not usually because people have personality completes usually have a bad personality, you know what I mean? So that — so we feel like it’s an opportunity. We always have an opportunity. We have a great treasury management platform. We support them with a great cash management, treasury management personnel P card, credit card program.
So we have some ancillary things they can do and they can get additional compensation. But it’s not — they just they’ll say A players don’t want to be with B players and B players don’t want to be with A players. So if some players in an organization of B players, they usually want to leave.
David Bishop
Understood. Understood. And then a continued nice growth or stability in the credit card income, you mentioned the new agent relationships. Do you think this is sort of a new good run rate in this $2.6 million for credit-card income?
Rodney Rushing
This is Rodney Rushing. Probably. We have gone through a conversion. And in fact, besides our customers, we issue credit cards for 140 other banks, call it our agent credit card program. For the last six months, that is — that has been put on hold as far as onboarding any new agent banks because we were going through this conversion. So for the fourth quarter, we’ll be ramping back up, adding agent banks and we have somewhere around 6 or 7 in the queue right now. So I hope that answers your question. We expect that growth to continue.
David Bishop
Right. And then maybe a housekeeping question. I noticed that the continued decline in the effective tax rate is the 17% a good number to assume into 2023?
Bud Foshee
No. It would be — I’d say 19.5% to 20%. We had some adjustments in the third quarter — that would take annually at some of our proprietary tax credits, and that was an adjustment we make in the third quarter of this year.
David Bishop
Got it, thanks. I’ll hop off and get back in queue.
Operator
Our next question is a follow-up from Brad Milsaps with Paper Sandler. Please proceed.
Brad Milsaps
Hi, thanks for taking the follow-up. Bud, you mentioned last quarter that you thought, I think $750 million was kind of a floor for liquidity or Fed funds. It looks like you’ve pierced through that. Have you got changed sort of your internal policy on how much cash you’d be willing to hold and if so, how much — what is that level now going forward?
Bud Foshee
Yes. We did change the policy. Brad, I believe we’re 1.5% of assets is what we can go down to before we need to take some action.
Brad Milsaps
Okay. And just on loan repo — go ahead, I’m sorry.
Bud Foshee
Make sure it is 1.5% of assets.
Brad Milsaps
Okay. And just on loan repricing, we’ve seen 200 or so basis points change in the Fed funds rate over the last year. Your loan yields are up maybe 40 basis points, excluding PPP. Is that the right relationship going forward? I was thinking you had about 35% of your loans that kind of repriced immediately with Fed funds, but that beta is closer to 20. Is there a bigger lag in there? I assume any floors you had, you’re probably through? Just trying to get a sense of how to think about the loan book continuing to reprice.
Bud Foshee
Yes. I’ll let go back to the memory bank. I think the first time the Fed increased, we only had like $700 million in loans that the reprice because you had so many below floors. It took a while for the actual rate get by the flow rate. So we had a lag at the very beginning of the Fed rate increases.
Brad Milsaps
Do you happen to have maybe kind of where the loan yield was in September?
Bud Foshee
Just the month of September?
Brad Milsaps
Yes, sure.
Bud Foshee
No, but I can — I’ll e-mail it to, Brad I don’t have to bring a lot of months before, I guess, on that side. No, I can e-mail that to you.
Brad Milsaps
Okay, sounds good. Thank you, guys. I appreciate it.
Bud Foshee
I’ll go back and look at that number of loans that repriced our quarters, but I think we had a very long numbers first Fed increase.
Brad Milsaps
Okay, all right, great. Thank you.
Tom Broughton
Well, thank you everybody. I’m sorry. Thank you everybody for being on the call today. We are excited about the outlook in the future. I think we’re position for future growth, and we’re excited about all the new people that have joined our company. So without anything else anybody wants to say or close out, we’ll close it out.
Operator
Thank you. That will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.
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