ServisFirst Bancshares Inc (SFBS) 2022 Q4 法說會逐字稿

Greetings, and welcome to the ServisFirst Bancshares Fourth Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Davis Mange, Director of Investor Relations. Thank you, Davis. You may begin.

Good afternoon, and welcome to our fourth quarter earnings call. We'll have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some final lights 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, ServisFirst assumes no movie to update them.

With that, I'll turn the call over to Tom.

Thank you, Davis. Good afternoon, and welcome to our fourth quarter conference call. I do want to make a few comments on the year, I think, they are in order before we move on to the 2023 outlook. We certainly are pleased with the results of the year.

It's the 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 a 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 talking about -- a little bit about the year and going forward.

In 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 4 months. We're certainly pleased with the process, and we're consistently seeing the deposit pipeline at 150% of a loan pipeline. As Bud will cover, we did grow liquidity in the fourth quarter, and we're very pleased with our progress there.

Fortunately, we 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 as there are some year-end draws for company balance sheet purposes that we see. So that's always strong. We do 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 8 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. So I'm going to turn it over to Bud Foshee now.

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 $102,000 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. 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, 2.89%; the second quarter, 3.26%; third quarter 3.64%; and in 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 to average loans were 0.06% for the fourth quarter of 2022.

Noninterest 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 0 in 2023 as the cap matures in May of 2023.

Noninterest 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 incentive expense was $3.2 million versus $4.3 million for the third quarter of 2022. We had net new adds 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 improved to 9.71% to 12/31/22. Tax credits, we have taken steps to extend the benefit period of some of our proprietary tax credits.

I'll turn the program over now to Henry.

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 stayed on their own in the post-COVID environment without major government stimulus that has 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. Through loan, and we continue to be selective with new clients, and we want to grow our bank with clients, who can fund both the asset side and liability side of our balance sheet.

I'm pleased to say the majority of our credit metrics were in line with prior quarter and that is near historical lows. So I 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 on 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%. So past due loans at year-end were under $10 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. OREO portfolio decreased by $1 million for the quarter, so it's now only $248,000. Charge-offs for the quarter were 6 basis points when annualized, and that's decreased from 11 basis points for the prior quarter.

We are proactive as possible on handling problem loans so we don't carry no issue into the 5 year. Our overall credit metrics continue to be outstanding and continued 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.

With that, I'll hand it back over to Tom.

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, 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, they were selling bank stocks when rates were low, and now they're selling bank stocks when rates are high. So it's 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, we always do better when we need deposits, and we do. We do better when we need deposits. And 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 is 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 we'll see the benefit of this year. As you can see, we've had a 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 continue to see robust economic activity in the Southeast.

With that, we'll be happy to take any questions you might have.

(Operator Instructions) Our first question is from Brad Milsaps with Piper Sandler.

Tom or Bud, I was curious, you did grow deposits by about $0.5 billion you mentioned. I'm just curious what type of cost than those deposits have on average that you brought in? I was looking at some of the supplemental data and noticed the spot rate on interest-bearing deposits 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%] in and total cost of interest-bearing deposits was [2.32%].

Brad, it's just -- there's not -- there's probably not a lot of uniformity there. That's not -- we're not in the buying deposits business, and we're in the business of developing relationships with customers. And most of the time, when we go on a call, most of the time, I'd say that the price and deposits never comes up. That's not the sort of business we're in. We're not the buying money standpoint business. So it's kind of hard to give you a good answer, Brad, any better than that.

Got it. Got it. Maybe asked differently, Bud in the past, you've been kind enough to give us sort of the most recent month net interest margin. I might be curious if you'd be willing to provide sort of most recent months 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 -- in front of me, I don't have just the month of December. I think you really look at what we've got a quarterly analysis of our margin rate, like we're at 3.52% in margin for the quarter. I think, 3.50% to 3.60% a good gauge for that. We (inaudible) how much the Fed slowing down, the rate increases. I mean it's still a gifting game as to where we're going to be from deposit cost standpoint.

Like Tom said, I mean that's not the major thing we do when we call on deposits or we don't manage margin either. We continue to grow the bottom line and don't really look at just the margin each quarter.

Okay. And then maybe just a 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 manage 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 increase should be in the 3% to 4% range as review days come up. We do anticipate with the conversion that we'll save money from an IT standpoint. Trying to think of anything else. We had some unusual -- we had like in the third quarter, we had our lawsuit settlement or some other expenses like that, that won't reoccur in 2023.

It also looked like this quarter you might have benefited from a -- or no, maybe that's year-over-year kind of a reversal of the provision for unfunded commitments. Was that -- am I reading that correctly?

We did. Yes. That one, you just -- you never really know what that number is going to be each quarter. We did have a reversal in the fourth quarter.

Okay. Did your unfundeds come down?

Our funded beat the 3-year average, which then caused it to decrease the need for the accrual.

Our next question is from David Bishop with the Hovde Group.

Bud, I think you said in the preamble, I'm not sure I heard you right, but you 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 a quarter or 2 and assuming the Fed stops maybe in this quarter or next. I'm just curious sort of what's the impact on loan yields in terms of the lag and 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 next change?

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

Yes. Well, a new loan should go on at least at prime at [$7.5 billion] from that standpoint. And when Fed raises rates over a 1-month period, we have about $4.2 billion that reprices that will reprice. It -- you have about $2.1 million of either reprices and $2.1 billion the reprices during the next 30-day period.

For the next 30 days, I think...

(inaudible) or just based on the move on 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 corresponding banking division, 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 7 for the quarter. our total number of the existing correspondent relationships is right at 340, probably all 1 or 2 that closed. And for the fourth quarter, total fundings for correspondent 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 bank, their liquidity has been put to work and has declined just like I did in '22. The correspondent division has continued to grow our relationships, and we're looking at a couple of new markets in '23 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 billion. I think it's $2.468 billion.

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 a 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 C&I businesses where we're focused this year.

Yes, Dave, this is Tom. Just to jump in, it's -- we could be more selective today than ever. So it's really an outstanding time. I mean that's why my own partner said things are better when we need deposits because you make better decisions, and we certainly can be very selective on the loan side, and we can be much more proactive in pricing rate structure today than -- we try not to ever give on structure, but we can certainly be more proactive than we've been in a long time. How about that?

(Operator Instructions)

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

Thank you, sorry for interrupting. Brad earlier, we're working on 2023 budgets. And we give you a little bit better idea on expense management after we finish them, but we just started. We got our first run about a week ago. So that's the first time we saw anything or a beginning point, we're not even close to the finish line yet. So we are much -- very proactive in expense management for the year as we go forward. So that's certainly something we're going to work on.

And I think it's -- we always say we're a disciplined growth company that sets high standards for performance. And this was a great year for us to outperform the industry and show that we are what we say we are. And I think probably a lot of banks are going to probably set very low goals based on what I see you analysts throwing out there. So any event, it was a great year for do it. And we appreciate everybody joining us on the call. Hope everybody has a good evening. Thank you.

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