ServisFirst Bancshares, Inc. (NYSE:SFBS) Q2 2023 Earnings Call Transcript

ServisFirst Bancshares, Inc. (NYSE:SFBS) Q2 2023 Earnings Call Transcript July 20, 2023

ServisFirst Bancshares, Inc. beats earnings expectations. Reported EPS is $1.14, expectations were $0.89.

Operator: Greetings, and welcome to the ServisFirst Bancshares Second Quarter Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mange, IR Director. Thank you, David. You may begin.

Davis Mange: Good afternoon, and welcome to our Second Quarter Earnings Call. We will have Tom Broughton, our CEO, and Rodney Rushing, our Chief Operating Officer; Henry Abbott, our Chief Credit Officer; and Bud Foshee, our CFO, 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 with the 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: Thank you, Davis. Good afternoon, and thank you for joining us as we review the quarter. We really were — really generally very pleased with the quarterly results. And of course, we have a saying that we’re pleased but never satisfied with the results of the year of the quarter, and that’s always true. We’re never satisfied, and we think we can do much better going forward. I’ll give a few overview of some — few of the things we’re going to talk about. One of them is credit quality. Henry Abbott is going to give a review in a minute. We continue to have industry-leading credit quality as we will discuss in a few minutes, and we really don’t see any issues with all the commercial real estate. If you read about in the headlines, we don’t see any issues with our March real estate book at this point.

Our strong balance sheet does provide us with a lot of opportunities, and we’re seeing a lot of opportunities to grow core relationships and core deposits. We don’t have any broker deposits or Federal Home Loan Bank advances on our balance sheet. Very few banks can make that claim. If you include our correspondent Fed funds in our loan-to-deposit ratio is — adjusted loan deposit ratio is 85% to date as the correspondent Fed funds flows back and forth between the noninteresting bearing and the Fed funds account based on the level of interest rates. So we’re very pleased with the decline in our loan deposit ratio at 85%. We did see very good deposit growth in the second quarter with good growth in core banking relationships. It was a good number.

We are seeing the results of our deposit focused over the past year. Again, we focus on service and growing core deposits, not on the rate which we pay as the primary driver. The deposit pipeline continues to be very robust to date. We are pleased with where our liquidity ended up. We’ve got our cash in short term treasuries and [indiscernible] $1 billion, which is a good level. We’re proud of that. On the loan demand side, we are seeing some slowdown, I guess, over the last few months as bars assess the economy and again, we’ve kind of been a little bit more cautious than normal as we assess the effect of recent events on the economy. So I think the whole banking industry is being a little bit more cautious and borrower is a bit more cautious.

But I think we’re starting to see normalization and we’ll see normalization and credit demand in the next few months. Our main focus has been on loan repricing efforts, as Bud Foshee will discuss in more detail in a few minutes. We are focused on addressing the efficiency of our banking team. We are proud of our efficiency ratio is one of the industry-leading efficiency ratio, and we’ve reduced 11 producers on a year-to-date basis. And again, we’ll talk more — Bud is going to talk about more about loan repricing, but we’ll see improvement in our margin over the next few quarters as with the loan rate pricing continue. So I’m going to turn it over to Rodney Rushing now to give a correspondent update.

Rodney Rushing: Thank you, Tom. Basically, we’re very happy with correspondent division results where we had both growth and stabilization during the quarter. Total active correspondent relationships increased to 360 banks during the quarter. Total fundings were at $1.84 billion, with a slight increase in the BDA operating balances. Biggest news from corresponding is that balances remained stable during the last 2 months of the quarter. New relationships added during the quarter were 11, 4 from Texas and 4 from Kentucky as we continue making progress in both of those markets. Credit card revenue increased for the quarter, which Bud will expand element here in a minute. But during the second quarter, we added 6 new correspondent agent banks that issue credit cards.

6 additional banks are in the pipeline, which should close in the third and fourth quarters of 2023, plus 5 for the first half of 2024. The Oklahoma Bankers Association added ServisFirst Bank to their list of endorse vendors bringing our state association endorsements to 9. New agent banks were added to the card programs in Oklahoma, Kansas, Vermont, Wisconsin and Minnesota. During the second quarter just to show how broad and wide ranging the state and American Bankers Association endorsements are for us. And with that, I’ll turn it over to our Chief Credit Officer, Henry Abbott.

Henry Abbott: Thank you, Rodney. I’m very pleased with the bank’s results and continued strong credit quality in the second quarter. The bank grew its ALLL to 1.31% of total loans in the second quarter versus 1.28% in the first quarter of 2023. This increase is not related to any specific credit but rather a continuation of our conservative outlook as we’ve had a very strong quarter. We continued the trend started in the first quarter where both AD&C and the entire CRE bucket decreased as a percent of capital for the second consecutive quarter. AD&C as a percent of risk-based capital dropped from 93% at the end of the first quarter to 86%. We continue to stress and look closely at our CRE portfolio to ensure we are appropriately managing the risk.

But year-to-date, we have not had any major shifts or deterioration. I can get into specifics in the Q&A section of the call, where we have no material office exposure. As I’ve mentioned in the past, we have been at record low NPAs for the past few years. Past dues to total loans were down to 15 basis points, a 3 basis point decrease from the first quarter. Net charge-offs for the quarter when annualized were 11 basis points and year-to-date annualized, that would be 8.5 basis points, which is on par with our charge-offs for 2022 near record lows for our bank. Over 90% of the charge-off figure for the second quarter was related to one specific C&I credit. If it were not for this one specific credit, given the recoveries in the quarter, we would have had 0 net charge-offs for the quarter.

I would also note the bank has no remaining exposure to this relationship, we’ve taken our lick and moved on. I continue to feel very good about the markets we serve and the diverse and granular lending relationships we have at ServisFirst Bank. On the whole, I’m very pleased with the second quarter results and turn it over to Bud.

William Foshee: Thank you, Henry. Good afternoon. The bank made really good progress in deposit growth, liquidity and capital growth in the quarter. Our noninterest-bearing deposits were stable in the second quarter, and we were pleased with the deposit growth in the quarter. We had a goal of $1 billion in liquidity and with growth of our cash and short-term treasury bills, we reached that goal. We’re seeing great momentum in deposit growth. We did see some margin compression in the quarter from 3.15% to 2.93%. We are assuming one more Fed rate increase for 2023. We expect the margin to stabilize and remain flat in the third quarter and begin to improve in the fourth quarter. Our loan repricing initiative is bearing fruit and will contribute to margin expansion later in the year.

Examples of our repricing efforts, fixed rate loans that paid off early year-to-date are $174 million. Loans that are repriced are $155 million, and we have $173 million pending in loan repricing. We have $1.9 billion annually if you include normal cash flow from fixed rate loans on an annualized basis and repricing we will improve the rate of these loans by about 300 basis points, and our loan portfolio has a short duration. 85% of new loans are floating rate and about 40% total loans are floating today. We think one Fed increase of 25 basis points were close to neutral today with an outlook for improvement going forward. Although loan growth is flat year-to-date, there are a lot of maturities that are being replaced at much better rates. We continue our growth in book value per share, bank Tier 1 leverage ratio improved from 9.91% to 10.25%.

Consolidated CET1 ratio improved from 10.01% to 10.37%. Our capital continues to be a strength. We saw improvement in noninterest income in the quarter with improvement in both credit card and mortgage and we expect continued improvement over the balance of the year. In discussing noninterest expense, we’ve made an effort to hold the line on expense growth in 2023. We have held head count flat on a year-to-date basis. While we have added a few employees in risk management, we have made reductions in other staffing. While we expect a possible FDIC special assessment at some point, we do not know today what to expect, but I think it will be a modest impact on 2023 results. We have built our staffing and our new offices and do not expect additional head count for any existing offices.

Our teams are performing quite well and have grown new accounts 20% year-over-year. Our core expenses declined by $1.1 million in the second quarter, and we expect third quarter run rate to be in line with the first quarter. That concludes my remarks. I’ll turn it back to Tom.

Thomas Broughton: Thank you, Bud. As you can see from all these comments, we continue with business as usual at ServisFirst. We did open our Virginia Beach office this quarter. I was up there last week. We’ve got a great team there on the ground. They’re doing a fantastic job and look forward to great results from them as we go forward. So in any event, I am really proud of what our team has delivered this quarter, and they always produce what the shareholders need. So with that, I’ll be happy to answer any questions you might have.

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Q&A Session

Operator: [Operator Instructions]. And our first question will come from Graham Dick with Piper Sandler.

Graham Dick: So I just wanted to kind of start on the balance sheet. Obviously, deposit growth was really strong this quarter, and you couple that with loans that are pretty much flat. You got a lot more breathing room on the loan to deposit front. Can you just talk a little bit about how you think the balance between loan growth and deposit growth will play out for the rest of the year? I know you talked about maybe a high single-digit number a few quarters ago, but any update you can provide on the loan growth front and then the level of deposit growth you guys are expecting to produce throughout the rest of the year would be very helpful.

Thomas Broughton: Graham, we — again, we’ve been cautious, and I just said that, that obviously, we’ve been cautious to this date, but we’re getting more confidence in every day and every week that goes by, we feel better about where we are, where the economy is. We’re pretty much, as I said, business as usual. So we’ll resume making loans again. There is always loan demand in places like Nashville, Tennessee; Charlotte, North Carolina, Florida, the whole state, there’s always tremendous loan demand in Florida. So we can we can find the loans to make. So we feel good about our deposit pipeline and we can — we’re going to start resuming business as usual. I don’t — I can’t — it’s kind of hard to give you a number, but we’ve always — our team has always produced.

Whatever we need to produce, they produce. So again, we feel a lot better about where we are than we did at the end of the last quarter. And we feel a lot better about where the industry is today than in the last quarter, Graham.

Graham Dick: Yes, I can imagine. I guess just framing it a different way, do you think — I mean, would it be safe to assume loan growth matches deposit growth for the rest of the year? Or is there any color there you can provide?

Thomas Broughton: Yes. I think that — I guess I didn’t do a good job answer your question, obviously, if you’re having to re-ask that. I think, yes, if we bring in $1 of deposits, we’ll probably make $1 of loans. That’s a fair statement.

Graham Dick: Okay. Great. That’s helpful. No, you did a fine job. I probably asked the question bad. All right. So then I guess just on noninterest-bearing, those were — I mean, they held in a lot better than what we’ve seen from other banks this quarter. Any color on what you guys are doing that’s driving that versus some of your else peers? And then on the correspondent front, I think I might have heard that those balances were actually up quarter-over-quarter, the noninterest-bearing balances. Just wanted to get a sense for if you think that trend might be able to continue in that division.

Rodney Rushing: This is Rodney Rushing, Graham. Yes, noninterest-bearing correspondent was up for the quarter, slightly. Total fundings for the correspondent for the — from quarter into quarter in, we’re down. The good news and correspondent is the last two months of the quarter for May and June, the total funding and correspondent banking was leveled off. And so all of my community banks, I think in my comments of the number of 360 total banks that we have now, their liquidity runoff has seemed to stop. And so their balances with us has been stable for the last 2 months. So if that — if we can maintain that for the third and fourth quarter with the new accounts that we’re opening in Texas and Kentucky and other markets, hopefully, that will grow.