ServisFirst Bancshares, Inc. (NYSE:SFBS) Q2 2023 Earnings Conference Call July 20, 2023 5:15 PM ET
Company Participants
Davis Mange – VP, IR Accounting Manager
Thomas Broughton – Chairman, President & CEO
Rodney Rushing – EVP & COO
Henry Abbott – SVP & Chief Credit Officer
William Foshee – EVP, CFO, Treasurer & Secretary
Conference Call Participants
Graham Dick – Piper Sandler & Co.
David Bishop – Hovde Group
Kevin Fitzsimmons – D.A. Davidson & Co.
Stephen Moss – Raymond James & Associates
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.
Question-and-Answer 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.
Thomas Broughton
It’s for the General Bank, Graham, on noninterest-bearing, I think. We are a business bank. And so we have significant size accounts. So we could have one that goes up or down $50 million in a quarter and it might be at the quarter end. So we could — we might — we held in steady, but next quarter, we might be down $100 million or might be up $200 million at the end of the next quarter. So I can’t represent because we are a business bank and we do have significant sized customers. So it can vary a bit. But we don’t — we had less far to fall than a lot of the older banks.
I remember years ago, Harry Brock, who was Chairman and CEO of Compass Bank, he is the founder of the bank. And he — I was working for what is now Regions Bank. It was AmSouth Bank, and he’ll say, I got a lot of lazy money at your bank, Tom, and I didn’t quite understand what he meant, but over time, I learned what Harry meant about the lazy money. And I think when you’ve got a 100-year-old bank charter that’s just — they’ve got a lot higher noninterest-bearing deposits, and they’ve got further to fall than we do. So it’s probably good news for us.
Graham Dick
Yes, definitely. And the last question for me is just — it looks like you guys added to the bond portfolio this quarter. I just wanted to get a little color on your decision and thought process behind that. And then maybe what rates you bought those bonds at and the duration of them or anything like that would be great.
William Foshee
Yes, Graham, it’s Bud. Really, a lot of that had to do with pledging.
Thomas Broughton
We didn’t need to pledge anything, but we did. We just got — we’ve got it in case we needed for collateral. We add what do we add $350 million in 6 months and less in treasuries?
William Foshee
Yes. And the yield 5.35%, 5.40%, and it reduced our average life to 3.2 years also on the entire portfolio.
Thomas Broughton
Little better yield than you get at the Fed. So that’s the logic behind it. We don’t need it for pledging.
Operator
Our next question is from David Bishop with Hovde Group.
David Bishop
Follow up on that question, and I couldn’t help but notice that the end of period balances on investment and even deposits was much higher than the average balance. Is that a function [indiscernible] some of those correspondent relationships sort of coming online later in the quarter. Just curious if there was any sort of timing around the — was it sort of a late quarter surge in funding growth?
Thomas Broughton
It was not a late quarter surge in correspondent balances. I know we had a large municipal deposit that came in right at the end of the — I don’t know exactly when in the quarter. You remember Bud, exactly was….
William Foshee
[Indiscernible].
Thomas Broughton
Pretty late in the quarter. It will be here a while, and it’s a municipal. A lot of the COVID-money federally stimulus — federal stimulus money is starting to make its way down to state local municipalities. So that’s what — that affected it to date.
David Bishop
Okay. Got it. Then Rodney staying sensitive, I know you guys always don’t like to give away the plumbing in terms of the interworking. So the correspondent division I know we had you on the road last month. Tends to remain relatively profitable despite what rates are doing. But I noticed that the decline in third-party service charges, is that a function of you handling more accounts, sweeping more into the Fed service here or maybe what’s driving that down on a quarter-to-quarter basis, the third-party processing no fees.
Rodney Rushing
It wasn’t — I don’t think it was a fluctuation of correspondent banks. As you know if that was — had anything to do with the conversion. We’ll have to get back to you on that. I did not see the big decline in correspondent service charges, but we’ll have to look into that and just get back to you.
David Bishop
Okay. You can do that maybe offline. And then just — if you have it, just curious, maybe an update, I know you provided last quarter on the commercial real estate book, the office book, any change there? I know it’s a small part of the puzzle here, but I know the investor public is focused on it, just any sort of inter-quarter details you can update us on.
Henry Abbott
This is Henry Abbott. Yes, no material change. As I kind of mentioned in my comments, AT&T is down overall CRE income producing is down. Specific to office that’s still around. And this is nonowner-occupied office is only 3.5% of our total loan portfolio. So it’s not a material amount. And as I mentioned, kind of theory as a whole was down for the quarter.
Operator
Our next question is from Kevin Fitzsimmons with D.A. Davidson.
Kevin Fitzsimmons
Just want to circle back on the margin again. So if I heard you right, what you said is you expected it was down 22 bps this quarter, but you expect it to stabilize in third and then begin to expand in fourth. And I just want to make sure I heard that right. It seems like with one more Fed rate hike, what we’re hearing from a number of banks is there’ll be more margin pressure in third quarter, but probably a little less than what we saw in second and then beginning to stabilize in the fourth.
So I’m just wondering whether maybe the loan repricing, coupled with maybe a little more steady balance in the noninterest-bearing and the overall deposit growth is just maybe — is maybe stabilizing your margin a little earlier than others. So I just wanted to dig into that, if that’s right.
William Foshee
Yes. Kevin, this is Bud. you’re right. you’re right on.
Kevin Fitzsimmons
Okay. Okay. So…
Thomas Broughton
More than affirmation, I mean the NIB stable, and we’re repricing loans, our projection shows that we can keep the margin steady at this point and then it will start to expand in the next couple or 3 months, not a whole lot, but then get into the fourth quarter, I mean, it will start going up a couple of bps a month and something — it starts getting up to it starts clawing its way back.
So we think the Chinese water torture is over, which has been Chinese water torture. So we think it’s over. And that we’re head in the right direction and there’s light at the end of the tunnel.
Kevin Fitzsimmons
That’s good to hear. Good to hear. And maybe if I could just ask about expenses. Bud, if I heard you right, did you say third quarter is going to be like the first quarter run rate, not the second quarter? I just want to make sure I heard that right.
William Foshee
That’s correct. That’s correct. Yes, we’ll have to increase some. So it will be in line with first quarter.
Kevin Fitzsimmons
Okay. And just more — I think you mentioned in the expense discussion comments that it was pretty limited number of new headcount that if you’re hiring in one area, you’re looking to produce — revenue producers, you’re looking to reduce staff in others. And as always, the efficiency ratio is best-in-class. But trying to connect the dots, Tom, to your point about feeling better about loan growth and about the economy and the industry. And given that there’s disruption out there, do you foresee opportunities to hire away folks? And if you’re feeling better about the backdrop of the economy, might you do that sooner rather than later?
Thomas Broughton
Yes. We are always constantly talking to people. And we — again, we’ve been fortunate enough to be able to hold the headcount pretty much flat on a year-to-date basis. Maybe we’re up 1% annualized or something like that. And we — you got to hire the risk management people, the regulators never sleep. So we always have to be adding to staff in that area. So that’s just part of life. And so we have to try to look for other efficiencies. And we — again, as I’ve said, this is a year to kind of get the right people on the bus and get the right people off the bus perhaps. And we’re trying to find ways to be more efficient because we’re going to have to continue to add risk management people. So that is something we’ve worked hard at.
We are talking, always constantly talking to people, but we have filled out our staffing on all our existing offices, as I said, that we feel good about. And Bud said about where we are with the staffing in our existing officers, but we hired somebody last week. I mean we hire somebody just about every week. There’s production person, the right person, the right team will hire them tomorrow. So we’re not in a turtle mode, obviously, in our turtle shell. So we’re always looking and we’re always talking and the right group, they’re welcome aboard tomorrow. So…
Kevin Fitzsimmons
Got it. And Bud, one last one for me. So you — capital is obviously strong. You mentioned that you added to securities this quarter. Some banks have indicated they’re evaluating potential bond transactions where they clear the decks a little bit, be able to put money to work at higher rates, maybe alleviate the AOCI issue. Is that something that is on the radar for you or not necessarily?
William Foshee
No, Kevin. We did some of that cleanup last year. I don’t remember how much now, but we did free a bit of that. So yes, we don’t have any plans to do that for this year.
Thomas Broughton
We just think our bond portfolio is so short. We think they’re just going mature at par. They are going to mature at par. So I realize that some people have a much more difficult. We have a very modest losses in our portfolio. So we don’t feel like we have — and we don’t have a long duration. So we don’t feel the need to do anything. We think if you did something even as modest as ours is, and you booked to a $50 million off and then interest rates fell 100 basis points in 6 months, I’ll feel a little bit foolish when we could have just waited to those bonds. I mean I realize you’re putting on securities at a higher yield, but I still think the preference is to let bonds mature at par.
Operator
Our next question is from Steve Moss with Raymond James.
Stephen Moss
Maybe just starting on the — maybe just circling back on the margin here. Just curious like where are you seeing loan pricing these days for new production?
William Foshee
Yes. New loans for June went on at 8%. So that’s — yes, that’s a good starting point. That’s a blended rate, but 85% of that is favorable rate.
Stephen Moss
Okay. Got you. And then in terms of just as we think about the loan. You guys are a little more constructive on loan growth going forward here. You’ve run down your construction portfolio a bit Curious, is that an area you expect to grow here in the next couple of quarters? Or should we be thinking about more C&I or CRE weightings? Just kind of curious as to how do we think about that dynamic?
Henry Abbott
We still do have some in our construction bucket that might fund up here in the coming quarter or 2, it just happened to be down, and we moved some of it to the permanent bucket and some of it then paid off. I mean, so we’ve got — we still got some room to go up in our construction bucket here. And I think we’re focused on C&I customers that have strong deposits with us personally and corporate. But at the same time, if there’s a good CRE project out there, it’s got good loan to value, good pricing. We’re taking a look at it, but we need deposits to come with our relationship.
Thomas Broughton
Steve, one thing I’d like on the construction loans, if they’re — if it’s a multifamily deal and they’re lease-up and interest as well, they may want to stay with us a long time so they can borrow more eventually from Fannie when they go permanent. But I keep thinking if they can borrow money from Fannie at 5.5%, and they’re paying us 8.25%,how much longer are they going to want to pay us 8.25%. That would — but we’ll see.
So that’s something we can’t predict is the variability on the payoffs on the — on that side. And of course, there’s still plenty of demand in the Southeast United States for new CRE projects.
Thomas Broughton
We really appreciate everybody joining us on the call today and appreciate your support and look forward to the future. We’re very excited about the balance of the year. Thank you very much.
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