ServisFirst Bancshares, inc (SFBS) Q4 2021 Earnings Call Transcript

ServisFirst Bancshares, inc  (NASDAQ: SFBS) Q4 2021 earnings call dated Jan. 24, 2022

Corporate Participants:

Davis Mange — Senior Vice President and Director of Investor Relations and Assistant Controller

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Henry Abbott — Chief Credit Officer

Rodney Rushing — Executive Vice President and Chief Operating Officer

Analysts:

Graham Dick — Piper Sandler — Analyst

Kevin Fitzsimmons — D.A. Davidson — Analyst

David Bishop — Seaport Research Partners — Analyst

Presentation:

Operator

Greetings. Welcome to the ServisFirst Bancshares’ Fourth Quarter Earnings Call. [Operator Instructions]

I will now turn the conference over to your host, Davis Mange, Director of Investor Relations. Thank you. You may begin.

Davis Mange — Senior Vice President and Director of Investor Relations and Assistant Controller

Good afternoon, and welcome to our fourth 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. ServisFirst assumes no duty to update.

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

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Thank you, Davis. Good afternoon and thank you for joining us on our call, and I’ll give a few highlights before I turn it over to Bud Foshee. If you’re new to our call, you’ll notice that we don’t read to you from the press release in any way. So we assume everybody on the phone can read the press release without our reading it to you. So I’ll talk a little bit about loans. As you can imagine, we’re pretty well pleased with the quarter, if you perused our release already. We did have — loans grew $878 million in the quarter, which is well above our $100 million per month loan goal and is certainly a record for quarterly loan growth, and of course $878 million excludes PPP payoffs.

For the year, our West Central Florida region had the highest growth rate, followed by Birmingham, Dothan, Alabama, Columbus, Georgia, and Nashville. For the year, all of the growth came in the commercial real estate category and we actually had a decline in commercial and industrial loan balances. We did see some commercial and industrial line loan growth in the fourth quarter with a growth there of about $100 million. The C&I commitments did increase by $250 million in the fourth quarter, so that’s 30% annualized growth for the fourth quarter. That also had the effect of keeping the line utilization rate flat with the prior quarter. I mean, those marginally improved, but not enough to matter.

And talking about our loan pipeline, as you would expect after a quarter with such large loan growth, our pipeline was down from the last quarter. However, if you compare it to one year ago, our pipeline is 47% higher than one year ago. So we do — are pleased with the pipeline. We do see activity and we typically don’t see much — see very modest loan growth in the first quarter. I think we’ve had maybe one or two years out of ’16 [Phonetic], where we had pretty decent net loan growth in the first quarter. So we don’t usually see it, but we do expect we’ll make it up as the loan year goes on. We do expect some growth this year from construction line draws. That’ll certainly be a nice tailwind for loan growth. We did expect the C&I line utilization to improve in the back half of 2021, but it did not materialize as we expected. And hopefully, we’ll see some improvement in that utilization rate as 2022 moves along.

I will say this about our bankers’ execution on the triple — Paycheck Protection Program. The second round in 2021, our bankers did a excellent job of performing as they did in 2020 with the first round and that’s led to many new opportunities with commercial and small business customers, and I think it’s certainly enhanced our reputation for ServisFirst to our customers. We’re very pleased with where we are in the market and our — and certainly improved our brand recognition and enhanced our brand value, we think. On the deposit side, we continue to see growth in deposits, certainly at a more normalized level than we saw earlier in the pandemic. The growth rate was 12% annualized in the fourth quarter, which is more in line with normal annual growth rates. After the pandemic surge, our correspondent division did experience a decline in deposits in the fourth quarter as our correspondent banks began to deploy some of their excess liquidity in loans and securities.

We are — this is the time of year we start having sincere earnings conversations with different teams about joining the bank. They normally don’t move till after incentive payments during the first quarter, which is February, March, April period. We are having discussions with quite a few bankers in new geographic regions. We don’t have anything to add at this point in time. So again, we’re not trying to add large numbers of bankers, but trying to add, look for very small number of high-quality bankers to add to our bank. So that’s certainly — we are optimistic on that front for this year.

So that will conclude my initial remarks, and I’ll turn the program over to Bud Foshee, our Chief Financial Officer. Bud?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Thanks, Tom. Good afternoon. Liquidity, we had discussed the Company’s plan to purchase $100 million of 15-year mortgage-backed securities and five and seven-year treasuries on the third quarter call. Our net investment security growth in the fourth quarter was $325 million. We also decided to retain a portion of our mortgage originations. For the fourth quarter, we sold $6 million to investors and retained $53 million.

For our margin, loan growth, exclusive PPP forgiveness was $878 million for fourth quarter. Average loans exclusive of PPP increased by $542 million in the fourth quarter. The average PPP loans decreased by $163 million for net average growth of $379 million. PPP fees and interest income were $5.8 million in the fourth quarter compared to $6.4 million in the third quarter, also an increase of $831 million in average excess funds, decreased the margin by 15 basis points in the fourth quarter.

Non-interest expenses, salaries increased $698,000 comparing fourth quarter 2021 to 2020. Majority of this increase was in West Central Florida as we added production staff and opened the Orlando office. We hired 17 new producers in 2021. Also, we increased our incentive accrual by $700,000 in the fourth quarter. Year-to-date 2021 incentive expense was $17 million versus $12.3 million for year-to-date 2020. We also invested in a new market tax credit during the fourth quarter. The investment write-down increased non-interest expense by $3.1 million for the quarter, but was more than offset by income tax reduction of $4.1 million.

We accrued $3 million related to termination fees for the changing of our core vendor. This reduced the fourth quarter fully diluted EPS by $0.04 to $0.99. Unfunded commitment reserve, we had a $1.7 million credit in the fourth quarter of 2021 versus a charge of $1.2 million in the fourth quarter of 2020. Our LIBOR cap, which we purchased a few years ago, we wrote off the value by $839,000 in the fourth quarter of ’21 versus a write-down of $61,000 in the fourth quarter of 2020. Non-interest income, credit card income continues to grow, $2.2 million in the fourth quarter versus $913,000 in the fourth quarter of 2020. Our spend was $229 million in 2021 versus $168 million in 2020. And year-to-date 2021 spend was $850 [Phonetic] million versus $601 million year-to-date 2020.

That concludes my remarks, and I’ll turn it over to Henry.

Henry Abbott — Chief Credit Officer

Thank you, Bud. We ended 2021 on a very high note. I’m pleased with the bank’s performance in the fourth quarter and the loan portfolio continues to perform at an exceptional level. We are very proud of the loan growth we achieved in 2021, more specifically in the fourth quarter. Our bankers’ calling efforts paid off in both new and core markets, and our geographic footprint continues to be a strategic advantage for our bank.

Non-performing assets to total assets were down to 9 basis points versus 11 basis points last quarter and 21 basis points in the fourth quarter of 2020. NPAs continue to shrink and were down to $13.3 million. This is roughly a 20% reduction for the quarter and a 47% reduction from the fourth quarter of 2020, which should decrease the non-performing loans and OREO for the quarter and our OREO dropped to just $1.2 million on a total loan portfolio of $9.5 billion.

Our past due to total loans were 7 basis points, $6.9 million, on par with last quarter and 4 basis points less than the prior year-end. Net charge-offs and OREO expenses were less than $800,000 for the quarter. Net credit expense for the year was just 4 basis points versus 2020 credit expense of 38 basis points. I’m extremely proud to say this was a reduction of roughly 90% from the prior year. From a dollar perspective, we did grow our loan loss reserve by $8.5 million for the quarter. However, as you’ll know, as a percentage to total loans, the ALLL dropped from 1.24% to 1.22% for the quarter. The dollar rise is related to our strong loan growth, as mentioned by Tom, and the percentage decrease is correlated to the continued strong economic environment with which we are operating in. 2021 was a banner year for ServisFirst Bank, and we’re well positioned for 2022 and beyond with the exceptional credit quality we have and a strong credit culture.

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

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Thank you, Henry. We’re certainly optimistic about the outlook for 2022. And we’ll be happy to answer any questions you might have.

Questions and Answers:

Operator

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Graham Dick of Piper Sandler. Please proceed with your question.

Graham Dick — Piper Sandler — Analyst

Hey, good evening, guys. So just wanted to start up on growth here. Obviously, a banner quarter for you all, way ahead of that $300 million target. I just want to know how much of this quarter is — I guess, $900 million in end-to-end growth came from the new hires you all made last year in Florida?

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

I don’t know exactly to answer your question, Graham. But it’s a substantial number in the course of the year. I think we had a $1.7 billion in loan growth for the year — net loan growth. And by the way, I mentioned our — I said our C&I — this is not — now, you didn’t ask this question, Graham, but I said our C&I loan balances were down $300 million for the year. That’s inclusive of PPPs. If you exclude PPP, our C&I loans did grow $350 million or so. I should have said that earlier in my remarks, but so — but it’s not what we’re used to, but I’d say, close to 25% probably came from our new hires down in Florida in 2021, Graham. I don’t know about particular quarter, but just for the whole year.

Graham Dick — Piper Sandler — Analyst

No, right, that’s helpful anyway. I’m just trying to get a feel for maybe if there is any more upside to come from that group in 2022 in terms of incremental growth. And I guess, kind of as you look back at the $300 million target, just trying to get a feel for what you all might be expecting on a quarterly basis in 2022. Obviously, first quarter could be a little slower, but $300 million to me maybe just seems — it seems like there could be maybe upside to that.

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Yes. I mean, in course of debt, they’ve got a really nice pipeline right now down in — the community is really strong in Florida as you certainly well know, it’s strong for everybody. So we’re seeing opportunities down there that are certainly outsized compared to the average region in our footprint.

Graham Dick — Piper Sandler — Analyst

Okay, great. So I guess, you all are sticking to $300 million a quarter in terms of — in loan growth. You think that’s still about right?

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Well, the first quarter, again, as I mentioned, we don’t typically — I think we’ve had one or two years that we’ve had net loan growth in the first quarter. This might be a year we’ll have some growth, we just don’t — our goal is to say, okay, we’re going to book $1.2 billion for the year and it will probably come in the back three quarters of the year. And of course, you know, you can get impacted from quarter-to-quarter by payoffs. As you know, payoffs are very lumpy, Graham. So there’s really no judging when are we going to get a payoff.

Graham Dick — Piper Sandler — Analyst

Right. I think — I guess, just shifting over to expenses real quick, you guys obviously have a great history of expense control, but just wanted to hear a little bit about what you’re seeing on the ground in terms of wage and cost inflation and how this is — this might impact the overall level of expense growth you’re modeling for the next 12 months or so.

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Yeah. Hi, Graham, this is Bud. Yeah, we haven’t really made any major adjustments from that end. I think we factored in 3% increase — salary increase in the budget. So we’re able to hire employees and we’ve added people in new regions. So far, that hasn’t been an issue.

Graham Dick — Piper Sandler — Analyst

Okay, great. That’s really all for me, guys. Congrats on a really solid quarter.

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Thank you, Graham.

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Thank you.

Operator

Our next question is from Kevin Fitzsimmons of D.A. Davidson. Please proceed with your question.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Hey, good evening, guys. How are you?

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Great.

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Good. Thank you.

Henry Abbott — Chief Credit Officer

Hey, Kevin.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Hey, just to follow-up on expenses, a lot of moving parts. But if we adjust for obviously the conversion expenses and then if we adjust for the write-down, the tax credits, and then also the unfunded reserve, lending not come down, I’m getting — I’m penciling in somewhere around a $34.1 million run rate. Does that sound right, Bud, and is that something that we should use with some kind of modest growth per quarter going into ’22?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Yeah. The only thing — I know you did that only the unfunded, but we also have the LIBOR cap. Those — you’re probably right in a base number. It’s hard to project what you’re going to do with the unfunded or the LIBOR cap. Let me — I don’t have that run rate in front of me. Let me look at that and I’ll email it to everybody to see what a normal is without the unfunded and LIBOR [Technical Issues].

Kevin Fitzsimmons — D.A. Davidson — Analyst

Is the LIBOR cap within fee revenues or am I looking at the wrong term? Is that something…

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

The LIBOR cap we had — we actually wrote, let’s see, $839,000 in the fourth quarter.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Yeah, that’s — but that’s fee revenues, right, not within expense?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

That’s right. Yeah, I’m sorry. Yeah, I was thinking that was…

Kevin Fitzsimmons — D.A. Davidson — Analyst

Yeah.

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Yeah, I’m sorry. Yeah, leave that one out. But the unfunded could flip $1 million or so either way each quarter, so probably need to leave that one out for what we’re trying to do from just a standard non-interest expense total.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Okay. And Bud, could you just — I was trying to keep up with you. Can you just — when you talked about the securities and what you guys said in the third quarter call and then what you actually did, can you kind of repeat that, but then also look forward and what you guys think you might do with securities in the first quarter, given you would still have excess liquidity on the balance sheet?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Sure. Yeah, so each month we’ll buy $50 million total of five and seven-year treasuries, and probably $65 million to $70 million of 15-year mortgage-backs, because you will have paydowns. So we’re trying to come out with a net increase of $100 million each month. And the net investment security growth for the fourth quarter was $325 million. And we’ll continue with the five-year, seven year purchases and probably still stick with 15-year mortgage-backs, probably some seasoned paper we’re looking at, probably a little better aging where you can really tell what your yield is on those.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Okay, so another — roughly another $100 million a month or so?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Right, yeah, it’s still our plan at this point.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Got it, got it. Just one last one from me. Tom, can you — cap — not surprisingly, capital ratios came in. I mean, they still look fine. But given the kind of growth you all have seen, I know — I recognize that it won’t be as explosive in the first quarter, but given that kind of growth and maybe the expectation that line utilization will improve, do you — how do you feel about those capital levels now? Do you feel you might need to do something later in the year to bolster, or do you think you’re fine for the year?

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Well, you know from a line utilization standpoint, we’d love to see a pickup in that and we’ve got — still have a fair amount of money in cash sitting on the balance sheet, I don’t know how much was at year end, I know how much today was, I only talk about today. But at year end, it was a substantial amount of several — obviously several billion dollars of cash, but we feel — based on our projections — we feel confident based on all of our projections that given any kind of normalize — we don’t think we’ll have a huge surge in pandemic deposits that we had over the last year and a half going forward. We think we’ll see more normalized levels of deposits and we are — our core profitability is strong enough and we’re retaining almost 80% of the earnings, Kevin, to support the balance sheet growth. So we feel confident that we’ll be in good shape by year end on the capital ratios.

Kevin Fitzsimmons — D.A. Davidson — Analyst

Okay, great. That’s it from me. Thanks, guys.

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Thank you.

Henry Abbott — Chief Credit Officer

Thank you.

Operator

[Operator Instructions] Our next question is from David Bishop of Seaport Research Partners. Please proceed with your question.

David Bishop — Seaport Research Partners — Analyst

Yeah, good morning, gentlemen. How are you?

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Hey, Dave.

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Hey, Dave.

David Bishop — Seaport Research Partners — Analyst

Hey, a quick question on the credit front. Obviously, looking across the credit metrics there, things look very benign. A little bit of pop in provisioning this quarter, which I assume due to growth. As you read the economic tea leaves and look at the credit metrics out there from a level of provisioning, do you think it’s relatively similar overall in 2022 to 2021, or do you have to bake a little bit more in there for growth? Just curious how we should think about provisioning from a holistic basis into 2022.

Henry Abbott — Chief Credit Officer

This is Henry. Yeah, I mean, I think ultimately that the driver for us in the fourth quarter was the loan growth. As a percentage, our ALLL did go down because of the positive economic environment. But as we grow — I mean, kind of hand grenade close, we’re reserving 1.25% or so on new loans is generally what the model’s coming up with as we grow the bank’s balance sheet.

David Bishop — Seaport Research Partners — Analyst

I’m sorry. Is that 1.25%, you said, of new growth?

Henry Abbott — Chief Credit Officer

Generally, yes. Depends on the loan, depends on the maturity, but that’s…

David Bishop — Seaport Research Partners — Analyst

Got it. And then just more of a housekeeping item, a good tax rate to use for next year? I know there’s some investment and tax credits, but how should we think about?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Yeah, Dave. This is Bud. Yeah, 20% should be a good rate.

David Bishop — Seaport Research Partners — Analyst

Got it. And then, obviously, a lot of talk about the Fed turning hawkish here. I don’t know if you have updated numbers there, but just curious from an interest rate risk sensitivity, any sense of what the margin could react for in terms of a 25 basis point move in Fed interest rate?

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Well, Darling Consulting does our ALLL modeling, and they did — this one’s up a 100 basis point year one to be 6.2%, and second year would be 9%. I think it’s like everybody. We’re not expecting to really have to do anything on — very little on the deposit side rate wise, especially with the first increase. So part of that — that’s what Darling has taken into effect when they’re showing these numbers. So I think that’s — from what I’ve read in other press releases, that seems to be what others are thinking also when rates go up.

David Bishop — Seaport Research Partners — Analyst

That was 6.2%, Bud? I think you said 100 basis point.

William M. Foshee — Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Yeah. And that’s up 100 basis point, right.

David Bishop — Seaport Research Partners — Analyst

That’s up 100 basis point, got it, okay. And then one final question. I think you mentioned there was a little bit of a movement on the correspondent deposit balances, you saw some outflows there. Just curious what those trends were in the fourth quarter and maybe expectations into 2022.

Rodney Rushing — Executive Vice President and Chief Operating Officer

Yeah, this is Rodney Rushing. And we had tremendous growth in correspondent balances during the year. We started the year just shy of $2 billion, $1.9 billion something, and we ended the year $2 billion higher just in correspondent banking, right at $3.9 billion odd. And the fourth quarter, right at year end, we always have some banks move some money out just from some of their balance sheet management, maybe move it to the Fed or wherever where they have zero risk weighting. So we had a very small decline. It was like $200 million out of our $4 billion, and we are anticipating that those correspondent balances are going to remain flat for the year. We don’t see tremendous growth. That’s why we — so Tom, I think, is confident about our capital ratios.

David Bishop — Seaport Research Partners — Analyst

Okay, so you don’t anticipate [Speech Overlap]

Rodney Rushing — Executive Vice President and Chief Operating Officer

We’re not anticipating correspondent growing another $2 billion.

David Bishop — Seaport Research Partners — Analyst

Okay. I didn’t know if there’d be an outflow just in terms of — as you noted, with rates, maybe ticking up some movement to other asset classes, but doesn’t sound like you anticipate that sort of [Indecipherable].

Rodney Rushing — Executive Vice President and Chief Operating Officer

Yeah, we haven’t seen that this at this point.

David Bishop — Seaport Research Partners — Analyst

Okay, great. Thank you for the color.

Rodney Rushing — Executive Vice President and Chief Operating Officer

Sure.

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Thank you. And I don’t think we have any more questions, do we or?

Operator

No, we don’t have — we have no further questions at this time.

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Great.

Operator

[Operator Closing Remarks]

Thomas Ashford Broughton — Chairman, President and Chief Executive Officer

Thank you.