ServisFirst Bancshares Inc

NYSE:SFBS

Earnings Call Transcript 2024-Q1

[Operator]

Greetings, and welcome to the ServisFirst Bancshares First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

[Davis Mange, executive]

Good afternoon, and welcome to our first quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We'll have Tom Broughton, our CEO; Henry Abbott, our Chief Credit Officer; and Kirk Pressley, our CFO.

I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update them.

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

[Thomas Broughton, executive]

Thank you, Davis. Good afternoon, and thank you for joining our first quarter earnings call. We do think the first quarter is off to a good start of the year, and we are optimistic we'll see improvement on a quarterly basis.

Kirk Pressley is going to talk about our margin and deposit activity in a few minutes. In addition, our expenses are in line as expected. Henry Abbott will talk about our continued strong credit quality shortly after that.

Looking at loans, first thing I'd say is we had really good growth in the quarter with over $200 million in net loans. And more importantly, our loan pipeline is back to normal levels today and has increased 63% since year-end. In recent weeks, our bankers are seeing greater activity and some projects that are postponed or ramping up again. And I'd say our pipeline is very close to normal levels.

Production side, we were fortunate to add 9 new bankers in the first quarter, up from 7 in the fourth quarter of 2023. 6 of these producers are in the Memphis market. We also expect to announce a new market within a few weeks.

We are working to better measure productivity of our commercial bankers as well as our support staff. Success is obvious for bankers. You know who's been productive and you know who's not, but we're working on other metrics to better gauge the required inputs to success. We are optimistic we can be successful in the coming quarters given the current economic environment.

Now I'm going to turn it over to Henry Abbott first to make some comments on credit quality.

[Henry Abbott, executive]

Thank you, Tom. The bank got off to a strong start in 2024 with the loan growth Tom previously mentioned. I'm pleased with our results and how the bank's loan portfolio has performed in the current interest rate environment. I'm also pleased to say, with our loan growth, we experienced the largest segment of growth our owner-occupied real estate segment, which grew by $120 million.

Charge-offs for the quarter were 6 basis points when annualized which is less than the fourth quarter results of 9 basis points and generally in line with the first quarter of 2023. We ended the quarter with only $17 million in past due loans, which is a 35% decrease from year-end 2023 and down from the same time prior period.

The allowance to total loans was 1.31%, which is basically flat compared to when it was 1.32% at year-end and generally consistent with the past few prior quarters.

Nonperforming assets did increase for the quarter, and this was primarily related to one credit. This credit has been on our watch list for some time. And while the customer is current on all loan payments with ServisFirst, we felt the conservative thing to do was move the loan to nonaccrual given recent changes with our borrower. We had significant collateral above and beyond the loan amount, and we're working with the borrower and other parties to find a smooth landing spot that is in the best interest of the bank.

Bank has been at or near historic lows for the past few years as it relates to nonperforming assets. Even with this one additional credit at the end of the first quarter, NPAs to total assets still only 22 basis points, which is significantly below our peers and less than half of where we were at the end of 2019, which was closer to 50 basis points and generally in line with where we were at the end of 2020 at 21 basis points. These are both good pre-COVID benchmarks.

I will also note that the allowance for credit losses when compared to nonaccruals was 452% at quarter end, and this is significantly greater than our peer group.

We continue to feel good about the bank's loan portfolio and credit quality. I'm pleased with how the bank ended 2023, and we continued that momentum in 2024 and now our loan growth is beginning to tick up as well at a better pace.

With that, I'll pass it to Kirk.

[Kirk Pressley, executive]

Thank you, Henry. Good afternoon. We are very pleased with the progress the bank has made in the first quarter. Liquidity and capital continue to remain strong. Both loan and deposit pipelines continue to grow and fund. The net interest margin has not only stabilized but started to expand.

Net interest income is at its highest level since the first quarter of 2023. Net interest margin percentage is up 9 basis points to 2.66% as the rate paid on interest-bearing liabilities was flat with last quarter. And the yield on the interest-earning assets is up 8 basis points. Dollar margin is up modestly over the fourth quarter despite there being one less day. Our noninterest-bearing deposits were stable in the first quarter and margins stabilized in Q4 2023 and improved in Q1 2024.

Total deposits were down due to our deposit optimization actions during the quarter and seasonal deposit declines. We reduced more than $220 million of high-cost transactional deposits during the first quarter. As Tom mentioned last quarter, our incentives for 2024 are balanced for deposit and loan growth. However, the base for deposit growth was set at March 1. We did not want to hurt employees' 2024 incentives for reducing high-cost transactional deposits as directed.

The loan pipeline began to fund up during the first quarter, and we expect that to continue. The key to improving earnings per share is loan growth, repricing loans when possible and maintaining our cost of funds.

Net interest margin increased to $102.5 million in the first quarter versus $101.7 million in the fourth quarter of 2023. As I noted earlier, there was one less day in the first quarter of 2024. Approximately 70% of loan production in Q4 and Q1 was variable rate. 75% of variable rate loans have a floor. 43% of total loans are floating rate today. The average rate on loan production for the first quarter was just above 8%.

As we noted last quarter, we see margin increasing throughout the year. We don't anticipate a significant increase in the cost of funds going forward, especially as compared to our peer banks. While we expect the yield on interest-earning assets to continue to increase as fixed rate loans and investments continue to mature and reprice.

The first quarter is typically slow for repricing. For example, covenant violations usually occur after taxes are filed and financial statements are received.

Examples of our repricing efforts during the quarter are that approximately $120 million of loans had the rate restructured. This quarter, the primary reason was due to advancing additional funds and repricing the new loan. These repricing activities increased the yield of those loans by 2.56%. The cumulative effect of this repricing will improve margin and earnings per share going forward.

During the first quarter, we had $139 million of low rate securities mature at a rate of 2.2%. We have approximately $120 million of maturing securities yielding 2.62% during the second quarter and another $25 million year yielding 2.93% in the third quarter. Reinvesting these proceeds will improve the margin going forward.

Deposit costs stabilized during the fourth quarter. We began our deposit optimization review focused on higher rate transactional deposits during the quarter. We reduced more than $220 million of high-cost deposits, which resulted in a small reduction in deposit costs. Total deposits declined due to this effort and seasonal declines in the first quarter.

During the first quarter of 2024, we realized a $1.2 million debt benefit on one of our bank-owned life insurance policies. Our noninterest income was up modestly from Q4, excluding this extra BOLI income.

Credit card income was a little low due to seasonally lower spend in the first quarter. We do feel good about the rest of the year as we have seen spend increase in March. Accounts are increasing and new correspondent banks are being added at a nice pace.

In discussing noninterest expense, we're watching expenses closely. As usual for us, I said in the fourth quarter call that our normalized Q4 expense run rate was around $44 million. During Q1, the FDIC updated their estimate for the special assessment, which resulted in an additional $1.8 million of FDIC expense.

Excluding this special assessment, our noninterest expense for the fourth quarter was $44.5 million. Expenses were up modestly for Q4 run rate due to the expenses for the Memphis office and some lingering costs related to the EDP contract that was terminated in Q4. We continue to grow book value per share. Our capital ratios all improved during the quarter. At quarter end, our CET1 ratio increased to 11.07%. Our Tier 1 capital-to-average assets ratio increased to 9.44%. I'll give some additional color now on what we expect this year. We are optimistic about 2024. As a reminder, like most other banks, Q1 2024 was significantly different than Q1 2023. The increase in the bank's funding costs outstrip the increase yield on assets during 2023. This compression looks like it might continue for a while for many other banks. As I said in the fourth quarter call, we think our increase in funding cost has largely been realized and the increases in the yield on assets is expected to grow both the dollar and percentage margin from December 31. The good news is our deposit costs seem to have stabilized as we expected, and the yield on assets should naturally grow from here as lower fixed-rate loans and securities reprice. We feel good about the loan growth during the first quarter and expect it to continue. Although deposits were treated a little in the first quarter, we are still in a strong liquidity position. We frankly had more than we wanted. We expect to grow deposits throughout this year. We think our dollar margin bottomed out in the third quarter of 2023 and expect it to continue to grow from here. Davis?

[Davis Mange, executive]

With that, let's open up the floor for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Stephen Moss with Raymond James.

[Stephen Moss, analyst]

Maybe just starting here, Tom, with the uptick in the loan pipeline after a good quarter of production. Just curious how you're thinking about total loan growth for 2024?

[Thomas Broughton, executive]

The pipeline is awfully good. It's just that it never seems to close when you think it's -- it always takes longer than you think it's going to. So if I look at our pipeline, I'd say it's going to close $150 million a month. But I know things can go wrong with that and it drags out, and it takes weeks and months longer than you think it's going to because if you'd asked me what was going to close in the first quarter? I would have told you gross loan production of $150 million a month. Well, you saw it's $200 million. So it's a good bit less than we would have anticipated. But I will say that it is -- when I say it's approaching normalized levels, I mean, prior to the pandemic, huge run rate that we had and the last big year loan production, but it's strong. It's -- we're seeing increased activity. And of course, we focused on this year, as Kirk said, we're evenly focused on loans and deposit growth. And so we see a lot of opportunity -- loan growth opportunity this year. We really do.

[Stephen Moss, analyst]

Okay. And in terms of just the business mix of the pipeline. Just curious as to what types of opportunities you're seeing and geographically if there's any concentration?

[Thomas Broughton, executive]

Well, if you have to pick. One area that's strong is, you say Florida, obviously. With the population boom, they're having down there, they need to build everything -- assisted living facilities. Those are overbuilt everywhere, including Florida, but it's strong. But well it's not -- I'd say it's in pretty localized -- I mean not localized at all in terms of we see in increased activity in most of our markets. And I don't know, Rodney, could you add anything to...

[Rodney Rushing, executive]

Well, what you named, the Florida is obviously has been for several quarters. But we're seeing a lot of opportunities with owner-occupied. I think Henry made comments of our $220 million growth, $120 million odd was owner-occupied stuff. So it's quality stuff that we're seeing pretty evenly spread.

[Henry Abbott, executive]

Yes. And I think in some of our newer markets, it's just a longer sales cycle to bring on C&I customers in certain instances. So Charlotte is coming on board, some of our Florida markets are coming on board. It's just -- it's a longer sales cycle on some of these businesses, and they seem to be maturing.

[Stephen Moss, analyst]

Okay. Great. Really appreciate that color. And then in terms of just the margin here, I mean it seems pretty straightforward that your funding costs have stabilized and you get the asset price benefit here going forward. Just curious as to if you could give us an update as to what level of fixed assets do you expect to reprice in 2024?

[Kirk Pressley, executive]

On the loans and on the securities, the low rate securities, the more long-term ones that are maturing this year, I think you're just going to be around similar to what we talked about in the fourth quarter, which is about $2 billion a year.

[Stephen Moss, analyst]

Okay. That's helpful. And just one last one for me. On the nonperformer this quarter. Just curious as to what industry that is tied to?

[Henry Abbott, executive]

Yes. This is Henry, by the way. And like I said, I mean, they are current on their loans, but the business is closing. We're well collateralized. This is owner-occupied real estate.

[Operator]

Our next question comes from the line of David Bishop with Hovde Group.

[David Bishop, analyst]

Tom, and gentlemen, just curious, you said you're obviously keeping a close eye on expenses in this environment. You all held in pretty closely at $44 million, but you've been adding bankers, commercial bankers, being opportunistic. Just curious where maybe you see operating expenses trending over the near to intermediate term, maybe from a growth rate or dollar basis?

[Kirk Pressley, executive]

I think what we were saying last quarter is probably still holding true that we expect the full year to be probably within the $180 million to $185 million. It's really hard to dial it in closer than that, but a little bit higher than the current run rate as compensation increases happen throughout the year, but not a whole lot more than where we're running.

[David Bishop, analyst]

Got it. And then from a -- turning back to the NIM discussion. Just curious, obviously, from the numbers, it looks like the funding cost side is stabilizing. Just curious, if you look at the earning asset side, maybe where you see the yields on earning assets may be trending to and is there sort of a terminal peak that maybe hit this year or next? Just curious where you see those trending to over the near and the medium term as well?

[Kirk Pressley, executive]

I'm not going to give you a whole lot of detail on that, but it's next year that it will peak. It's not this year. But we'll have really nice growth this year. I mean if you think about around $2 billion is rolling to more current rates, we should have a nice lift this year and it will continue into next year. So holding these funding costs in this relevant range is really important. And we've got a nice tailwind. We just have to see it through.

[Thomas Broughton, executive]

I guess we didn't have really any securities maturities last year at all and we're -- the low rate security repricing is substantial this year. This turns going to turn into real money, Dave, over the course of the year.

[David Bishop, analyst]

And was that, the $2 billion, was that inclusive of loans maturing, repricing? Or is that solely the -- that was the total sort of combination of securities of that?

[Kirk Pressley, executive]

No, that's the total. That's the total low rate securities are probably like $280 million in the year. A lot of it was during the first quarter. I think, Davis help me, $130 million or so. I think it was in my script for the first quarter. So we've seen some of it already. There's more to go. But all of the fixed rate loans and low rate securities for the year are probably going to be around $2 billion.

[Thomas Broughton, executive]

We'll have a better feel for the loan repricing. Yes, I think last year, the loan repricing was about $1.8 billion total. We'll have a better feel once we get into covenant season when we get financial statements. That will be a little bit better. Nothing matures much in the first quarter as Kirk mentioned. So Dave, when we get into the second and the third quarter, we're going to have a pretty good feel of what potentially will reprise there.

[David Bishop, analyst]

And Tom, does that -- the visibility or the optimism on the pipeline, you said things are improving from a maybe a customer basis. Just curious what do you think is driving that as you get financials? Are the borrowers just maybe in better shape than they realize from a liquidity and cash flow perspective and that's giving them optimism to think about M&A or new business line investments. Just curious what you think is driving that across your markets?

[Thomas Broughton, executive]

I think the recession fears are [ receding, ] I think, is the #1 thing, and people are -- that [ at shelf ] projects for up to a year are looking at moving forward with projects, whether it's C&I or commercial real estate. And we -- one problem we've had -- C&I loan demand, their profits have been so strong with C&I and ag borrowers for the last couple of years, they've had a lot of dropout or so they haven't had to borrow money. They've almost been too profit has been too good. We're happy for them, of course, but they don't wish them to make any less. But overall, we're just seeing a more optimistic attitude out there among the customer base in most every -- in many regards.

[Operator]

Sorry, I was just going to say there are no further questions at this time.

[Thomas Broughton, executive]

Thank you, everybody, for joining our call and appreciate your interest.

[Operator]

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