ServisFirst Bancshares Inc. (NASDAQ: SFBS) Q1 2022 earnings call dated Apr. 28, 2022
Corporate Participants:
Davis S. Mange — Vice President in Investor Relations
Thomas Broughton — President, Chief Executive Officer and Director
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Henry F. Abbott — Regional Credit Officer
Rodney Rushing — Executive Vice President and Executive for Correspondent Banking of the Company
Analysts:
Brad Milsaps — Piper Sandler — Analyst
Kevin Fitzsimmons — D.A. Davidson — Analyst
David Bishop — Hovde Group — Analyst
Presentation:
Operator
Greetings. Welcome to the ServisFirst Bancshares First Quarter Earnings Call. [Operator Instructions]
I will now turn the conference over to your host, Davis Mange, IR Director. You may begin.
Davis S. Mange — Vice President in Investor Relations
Good afternoon, and welcome to our first 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.
Thomas Broughton — President, Chief Executive Officer and Director
Thank you, Davis, and good afternoon, and thank you for joining our call today. I’m going to cover a few highlights of the quarter, and then I’ll turn it over to Bud Foshee for a more detailed financial report. Our report today is fairly — it’s always brief. We don’t read to you. But it will be a little more brief than normal because we don’t really — it was primarily good news. I don’t have a lot of problems to explain away. So I’ll first cover our loan growth. We had just under $500 million of loan growth for the quarter, and that exceeded our goal of $100 million per month in net loan growth. And of course, this excludes PPP loans when I use that number. The growth was very solid in all regions during the quarter that we really know — it was broad-based growth in our Southeastern footprint.
We were pleased to finally see some C&I loan growth during the quarter. So this was a first quarterly improvement in C&I line utilization, albeit modest, that we’ve had since the pandemic started. And our loan pipeline is back up from year-end. It dropped a bit at year-end. It’s up 35% and is back at what I would say would be record levels — record-high levels that we’ve had in the last fall. So we’re pleased with our loan pipeline. We’re seeing a lot of activity to date. We’re having a lot of phone calls every day on credits. And our loan growth for the quarter, I really liked the way there were no — we didn’t have any — likely, we didn’t have no — the last two quarters, we’ve had no payoffs. So that’s certainly been helpful. But it was not a lot of big loans this quarter.
It was all small broad-based loan growth, which is certainly our preference. On the deposit side, they were — deposits were pretty flat for the quarter. We did see a little decline in correspondent balances plus corporate tax payments. Our correspondent banks are beginning to deploy their liquidity in both loans and securities just as we are. And really, my guess is we’ll see modest deposit growth this year as a result of the stimulus withdrawal and other factors such as the correspondents making loans and buying securities. We did add some new bankers in the quarter, and we’ve made some announcements. We have more to make, and we’re very pleased with the group we picked up.
We have more than usual in the queue today, in the hiring process and interviewing process. So we continue to have the same goal, as always, recruiting only the best bankers and having the best people and having the best efficiency ratio in the industry. So we’re very pleased with the upgrade in our team over the last two years. We’ve been very successful. The pandemic has had the effect of highlighting the best places for bankers to work, and we think we are the best place to work. In addition, the merger activity continues to work in our favor. Consolidation certainly helps us. So I’m going to turn it over to Bud Foshee now, our Chief Financial Officer, to give a financial update for the quarter.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Thank you, Tom. Good afternoon. Liquidity, as part of our strategy, deploying some of our excess liquidity, we’re changing our monthly investment purchase plan. In the future, we’ll purchase a combined total of $75 million in securities. $25 million of that will be 10-year mortgage backs, and $50 million will be 2-year treasuries. Net investment security growth in the first quarter was $311 million. We also decided to retain a portion of our mortgage originations. For the first quarter, we sold $4.6 million to investors and retained $41.8 million. Margin loan growth, exclusive of PPP forgiveness, was $489 million for the first quarter. Average loans, exclusive of PPP, increased by $731 million in the first quarter. Average PPP loans decreased by $143 million.
So the net average growth for the quarter was $588 million. PPP fees and interest income were $4.9 million in the first quarter, and that compares to $11.5 million in the first quarter of 2021. The remaining PPP fees at the end of March were $3.1 million. The net income impact from the March ’22 Fed rate increased. From the asset side, we had excess funds of $3.4 billion that repriced. From the loan side, we had $717 million that repriced. On the liability side, correspondent had $2 billion in deposits and Fed fines that repriced. So the net impact of that is $4.6 million on an annual basis, or on a per share basis, that’s $0.08 per share. Noninterest income, credit card income continues to grow $2.4 million in the first quarter versus $1.2 million in the first quarter of 2021. The spend was $226.4 million in 2022 versus $169.8 million in 2021.
We recorded a write-up in value of $3.4 million for the quarter for LIBOR cap that we purchased in 2020. Offsetting most of this write-up was a loss of $3.3 million on the sale of $47 million of low-yielding mortgage-backed securities. And noninterest expenses as a result of our market expansions, total salaries and benefits, increased by $2.8 million. Salaries increased $786,000 comparing first quarter of 2022 to 2021. West Central Florida’s increase was $342,000 as we added production staff and opened the Orlando office. We added two producers in the mortgage department for Pensacola and Tampa Bay markets. We also hired an internal audit manager in the fourth quarter of 2021 to reduce our outsourced internal audit expense. We also hired six new producers in the first quarter.
The 2022 incentive expense was $4.5 million versus $3.7 million for 2021. The investment write-down related to tax credits was $2.5 million in 2022 versus $86,000 in 2021. This increase was more than offset by an income tax reduction of $3 million. Correspondent bank service charges increased by $1.4 million. The number of settlement banks increased from 18 in March of 2021 to 52 at March 2022. We paid additional upfront core conversion expenses of $874,000 in the first quarter. The total amount that will be paid to the current core vendor over the remaining contract term was reduced by over $2 million. For 2023, we estimate that our annual IT expenses will decrease by about $2.4 million. Unfunded commitment reserve, $300,000 charge in the first quarter of 2022, $600,000 charge first quarter of 2021. That concludes my remarks, and I’ll turn it over to Henry.
Henry F. Abbott — Regional Credit Officer
Thank you, Bud. The bank got off to a strong start in the first quarter with the loan growth Tom previously mentioned. As discussed on this call in the past, 2021 was a record year for our bank and for most of the financial sector in terms of strong credit quality given the influx of government stimulus. It is my expectation 2022 will likely be a return to more normalized results from a credit perspective and more in line with historical performance that we saw pre-pandemic. We are well positioned with our loan loss reserves. At the end of the quarter, our ALLL to total loans was to 1.21 compared to 1.22 for the first — fourth quarter of 2021. From a dollar perspective, we did grow our loan loss reserve by $2.8 million for the quarter, which was needed given our loan growth.
Past due loans were $9.6 million on a total loan portfolio of roughly $10 billion, equating to 10 basis points, which is three basis points over where we were at year-end but still lower than our peer group. Nonperforming assets were $21.4 million for the quarter, and that equates to NPA to total assets of 20 basis points, which is a decrease from the first quarter of 2021. We have two NPAs under agreement to be sold that are projected to result in roughly a $4 million reduction in NPAs in the near future. Both of these sales are scheduled to close in the next 30 days. Annualized net charge-offs and OREO expenses were 11 basis points for the quarter.
While this is elevated from Q4 and the first quarter of 2021, 50% of the charge-off credit expense was related to one specific credit that we have no remaining exposure to. The owner of the business had health issues. The business is now closed, and we have liquidated the remaining assets and been aggressive in writing down the debt. So for this one specific relationship, our charge-off would have been closer to five basis points. Overall, I’m very pleased with the bank’s performance in the first quarter. Credit quality continues to be excellent, and our diverse, granular loan portfolio continues to be one of our bank’s biggest strengths. With that, I’ll hand it over to Tom.
Thomas Broughton — President, Chief Executive Officer and Director
Thank you, Henry. I know that I read a lot, as all of you do, about expectations for possible recession, and we just don’t see at this point in time any. I’d be happy to discuss it further if you have any specific questions, but we just don’t see — our borrowers are in better shape than they’ve ever been in before. On the C&I side, they’re extremely strong and liquid, very low leveraged. On the commercial real estate side, we’re seeing much greater equity investment on the part of all the projects we’re working on today compared to historical times in the past, certainly much greater equity than we saw prior to 2008 and 2009 recession. So we feel good about all of our credit exposure, as well as you can feel. So we’d be happy to answer any questions you might have, and I’ll turn it over for questions now.
Questions and Answers:
Operator
[Operator Instructions] Our first question is from Brad Milsaps with Piper Sandler. Please proceed with your question.
Brad Milsaps — Piper Sandler — Analyst
Hi. Good afternoon guys.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Good afternoon Brad.
Thomas Broughton — President, Chief Executive Officer and Director
Good afternoon Brad.
Brad Milsaps — Piper Sandler — Analyst
Bud, just curious, what made you guys change your — I mean, I know it’s a subtle change but still a change even with rates up where they are. What made you guys change the pace of deployment of liquidity in the bond portfolio? Just kind of curious kind of how you’re thinking about that.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Yes. I think mainly we’re looking at whatever, 4, five or six Fed rate increases and I guess trying not to get too far out on the purchase market value, just — we’re just — we’re trying to pace our purchases a little bit different. At some point, we’ll extend out. I mean we’re staying short now, but just a lot of change. I think we just want to make sure what rates are going to do before we just keep along with $100 million in purchases.
Thomas Broughton — President, Chief Executive Officer and Director
Plus loan demand has been strong, Brad. So we’d rather make loans than buy securities any day. We’re seeing strong loan growth.
Brad Milsaps — Piper Sandler — Analyst
Right. Absolutely. And just on that topic, Tom, I mean, you guys have been targeting $300 million a quarter, but you’ve been easily exceeding that. I think you said your pipeline was back at a record level. I mean is $300 million kind of a very, very low bar at this point? How do you — how should we kind of handicap that as we kind of move through the year based on kind of what you’ve done in the last few quarters?
Thomas Broughton — President, Chief Executive Officer and Director
Well, we’ve had not had any significant payoffs this quarter — this last two quarters, let’s put it, fourth quarter or first quarter, no significant payoff, Brad. So that could be a dynamic we have to face. And certainly, as we’ve done more commercial real estate and more real estate construction, we should see heightened payoffs in the future, but really no time soon, probably. But yes, it’s a good question. We just think — obviously, we’d rather be on the conservative side than the aggressive side in our forecast.
Brad Milsaps — Piper Sandler — Analyst
Sure. Maybe just a final question for me. But I was writing quickly when you were discussing just the repricing of loans and deposits. I think at one point, you told me variable rate loans were about 35% of total loans, don’t have a ton of floors anymore. But can you just update us there kind of — I’m sorry if I missed all that, but I was just writing too quickly, in terms of kind of how you view loan repricing as the Fed does move higher.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Yes. What repriced in March was $717 million. We do have a lot — what we did, we did a static balance sheet break shock based on March numbers, where Fed would increase in their May through December medians 50% deposit beta except for the correspondent money market accounts, and we used 100% beta and 100% beta on Fed funds purchased. So I think that gives you a little bit better flavor of what happened because first — second and third quarter really aren’t impacted, a small decrease. Then you have a bigger decrease in the fourth quarter and the first quarter of 2023. So we go from — let’s say, we had $717 million repriced in March. By that last Fed rate increase, you would have over $2 billion. So the floors gradually go away and your margin improves. But it’s just so much each quarter, it’s going to go above the floor rate.
Thomas Broughton — President, Chief Executive Officer and Director
That’s really why we bought that LIBOR cap in 2020, Brad, was to smooth out any earnings gaps caused by rate floors. But what we didn’t account for is even though those — the LIBOR cap has not kicked in yet, it will soon, but the accounting treatment has to take an immediate gain on the instrument, which is not what we — we’re interested in the cash flow of it, not in a onetime gain. So the gains that we expect over the next year pretty much have been accelerated into this quarter, and that’s why we offset it with the sale of some low rate mortgage-backed securities.
Brad Milsaps — Piper Sandler — Analyst
Got it. And Bud, just remind me. I think you have $4 billion of correspondent bank deposits. Are all those in the money market account? Or is some of that encompassed in the Fed funds purchase line?
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Let’s see. Rodney, have you got it yet?
Rodney Rushing — Executive Vice President and Executive for Correspondent Banking of the Company
This is Rodney Rushing. It’s split about half. Like just over $1.7 billion is in DDA paper settlement services. There’s about $1.6 billion in Fed funds and another $400 million in money market. So for a total of — at quarter end, it was $3.7 billion. I believe today, it’s slightly up from that. But that gives you a breakdown of where the balances are. And from here, it was only like a $157 million decline in correspondent balances. That’s like 4% of the $3.9 billion that we started with. Does that answer your question?
Brad Milsaps — Piper Sandler — Analyst
Yes. So some of it’s in DDA offsetting charges, so that could — rates move up. Unless you move your charges up, that could start to cost a little bit more?
Rodney Rushing — Executive Vice President and Executive for Correspondent Banking of the Company
That’s right. And we have raised our rates. We pay a slight premium over what the Fed is paying. And actually, the last two increases we have declined — short that margin slightly.
Brad Milsaps — Piper Sandler — Analyst
Great thank you. Operator back to you.
Operator
Our next question is from Kevin Fitzsimmons with D.A. Davidson. Please proceed with you question.
Kevin Fitzsimmons — D.A. Davidson — Analyst
Hi good evening guys.. I’m going to try asking for more of a top level. I know you gave a lot of great detail on the margin, Bud, but I guess a lot of moving parts. We have remaining PPP fees, although down from what we’ve had in prior quarters, likely. We have rates going up, and you talked about the assets repricing and the funding repricing. But excess liquidity is being put to work as well, and loan growth is strong. So kind of buttoning all that up and with future rate increases likely, how should we think about the margin trajectory? I mean are we — basically at 2.89%, are we effectively at the bottom, and we should be thinking of the NIM going up to what kind of level with the current curve? Maybe from just a very top level, what you would be thinking.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Yes. I don’t really have a number in mind. I guess what we’re looking at is more from the deposit side because if you — we’re looking at what — we’re planning for deposit rates versus competitors. And no matter what Fed does in May, we’re just going to wait and see and see what we have to do from a rate standpoint. So it’s hard to tell you that because it’s kind of an unknown from the deposit side. I mean we’re sitting here with over $3 billion in excess funds. It won’t hurt for some of those deposits to roll off if they’re higher rate deposits. So it’s really driven more — because like Tom said, we still have a strong loan pipeline. It’s all going to depend on the — what we have to do down the road from a deposit standpoint.
Kevin Fitzsimmons — D.A. Davidson — Analyst
Right. Well, assuming it’s only modest growth if that in deposits, it seems like is the message, and now more of that liquidity is being put to work but there’s still a lot of it, it seems reasonable to assume you’re going to be able to lag on taking deposit prices up. Is that fair?
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Yes. That’s always standard when rates go up. We always lag.
Thomas Broughton — President, Chief Executive Officer and Director
And I guess — and we’ve got — 22% of our assets are in cash still. So that’s a real opportunity for us to put a lot of that cash to work over however many quarters it takes to get up — to put it to work and reduce excess liquidity.
Kevin Fitzsimmons — D.A. Davidson — Analyst
Understood. And we’re — I think we’re all thinking of this, especially in these early stages, as the rate cycle being positive for banks, but we’re trying to — at least I’m trying to factor in all factors and not get too aggressive on what that margin may do. And maybe it’s more modest, steady expansion than — versus something that’s dramatic, I guess, is what I’m getting at.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Yes. I would say steady versus dramatic, yes.
Thomas Broughton — President, Chief Executive Officer and Director
But that excess liquidity has certainly weighed on our margin heavily. We haven’t seen anything like the levels of excess liquidity we’ve had since the pandemic started. So we even really stopped talking about the margin as we did traditionally because we always had a 100% loan-to-deposit ratio, not 70%. So I mean the margins kind of become not a meaningful number of our typical — typically how we think about it, Kevin, if that makes any sense.
Kevin Fitzsimmons — D.A. Davidson — Analyst
Right. Right. No, I understand that. And that’s another factor just with — you have plenty of room to take that loan-to-deposit ratio up back to where it had been historically. Tom, maybe you referenced at the beginning the entry into Charlotte. And maybe if you can just give us some kind of how to think of that in terms of how big you see the team, how big you see that market being for you over time. And I think you referenced a lot of other hiring or some hiring that could happen. Does that entail additional new markets that you’re not in right now? Thanks.
Thomas Broughton — President, Chief Executive Officer and Director
Yes. We will have an announcement on that within the next two weeks, Kevin. We’ll have some forthcoming information on the team we’re assembling there. So you’ll have more data. And we also have — we’ll have an announcement on another team that’s joining the bank today. So we’re excited about that. So we think that will be nice and additive to our team. So we — there’s never been a better time to be an organic — have an organic growth strategy that when everybody around you is having merger activity. So we’re more optimistic today than we’ve ever been.
Kevin Fitzsimmons — D.A. Davidson — Analyst
Okay. Great. Thanks guys. Appreciate it.
Operator
[Operator Instructions] Our next question is from David Bishop with Hovde Group. Please proceed with your question.
David Bishop — Hovde Group — Analyst
Yes. Thank you. Good evening gentlemen. Maybe sticking along that topic in terms of what Kevin just asked. Obviously, you’ve got some teams and hires and lift-outs in your back pocket there. As we think about maybe some of the inflationary pressure from those adds vis-a-vis the outlook for operating expenses, I think in my model I had them up about 17% last year, year-over-year, are you thinking at this point, maybe mid-teens, mid to high teens is the right way to think about operating expense growth into 2022?
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
I don’t — not knowing total — I’d be guessing on that, but I’m not sure how many employees we’re going to add total in those markets. I guess the expansion would kind of factor out and just look at what we can — what we’re controlling. And we don’t — I mean, we see that being like a 3% increase for other noninterest expenses. It’s all salary and benefits, and that just depends on how many people it takes to grow those two markets. I just — I don’t have a great…
Thomas Broughton — President, Chief Executive Officer and Director
Bud will send some detail out on this because all those numbers are highly misleading. That percentages, Dave, we’ll send to all the analyst group some information on why that’s highly misleading without getting in the weeds on this call. But we did salary deferrals last year for a substantial amount of money because of the PPP program and that sort of thing. So I don’t think the true year-over-year increase in cost is anything like that.
David Bishop — Hovde Group — Analyst
Got it. No, that’s a good point. And then I know in the preamble, you noted that you had seen, I think you said the first time since the pandemic, some level of uptick in C&I line utilization. Just curious if you have that number. And maybe remind us if we were to see a normalization of those line utilizations back to pre-pandemic levels, what will that imply from loan balances being translated on balance sheet.
Thomas Broughton — President, Chief Executive Officer and Director
I didn’t quite — you said what is normal and what — where are we now and what’s normal, Dave?
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Correct. From a percentage and maybe from an implied balance perspective, if you were to proceed with normalization.
Thomas Broughton — President, Chief Executive Officer and Director
Pre-pandemic, we would see 47% to 48%. One reason our number has not gone up is because the denominator has increased a good bit over the course of the pandemic, primarily because of the success we had in the PPP program, our pandemic denominator went up. So that has suppressed our outstandings a bit, Dave, if that makes any sense. So we got as low as 38%. We’re about 41% now, 41.5%. So 47% to 48% would be normal. So we expect — we just don’t know. Originally — you haven’t been covering us that long. I originally thought we would get all that back in the second half of last year, and I was way wrong on that, when that would recover, because the stimulus — again, one of the reasons I said, our corporate borrowers are in better shape to withstand a recession than they’ve ever been because their liquidity is very strong today.
David Bishop — Hovde Group — Analyst
Yes. That probably is my final question in terms of that liquidity. I think you or someone else on the call made a comment that I think cash and liquidity is about 22% of ending assets. Just curious maybe where you see that. Is there a target level to have that settled into as you use that excess liquidity for loans and securities? Just curious of where you see that maybe penciling out by the end of 2022.
William Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Yes. In a perfect world, it would be about $500 million in cash, Dave, I think. And it’s tempting to go in and you look at what you can do above what you’re earning at the Fed today, and it’s tempting to go buy some securities immediately. And we withheld that temptation and just decided that over a course of the next — the 2-year period beginning last fall that we would incrementally put the money into the securities and hold some single-family mortgages over that 2-year period of time. So we think over a 2-year period of time, we’ll sort of average the market rate because we’re certainly not smart enough to find the peak yields. We’re not — nobody is that smart or at least we’re not that smart. So that’s sort of our theory of what we’re trying to do, is just sort of try to average the market over the next — over a 2-year period of time, if that makes any sense, Dave.
David Bishop — Hovde Group — Analyst
Got it. I appreciate that color.
Operator
[Operator Closing Remarks]