ServisFirst Bancshares, Inc. (NYSE:SFBS) Q4 2022 Earnings Call Transcript

ServisFirst Bancshares, Inc. (NYSE:SFBS) Q4 2022 Earnings Call Transcript January 23, 2023

David Mange - Director of Investor Relations:

Tom Broughton - CEO:

Bud Foshee - CFO:

Henry Abbott - Chief Credit Officer:

Rodney Rushing - Executive VP & COO:

Brad Milsaps - Piper Sandler:

David Bishop - Hovde Group:

Operator: Greetings and welcome to ServisFirst Bancshares Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Mange, Director of Investor Relations. Thank you, David. You may begin.

David Mange: 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 and ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom.

Tom Broughton: Thank you, David. Good afternoon, and welcome to our fourth quarter conference call. I do want to make a few comments on the year, I think, in order before we move on to the 2023 outlook. We certainly are pleased with the results of the year. It's a second straight year that our earnings per share growth exceeded 20%. Also, our return on equity exceeded 21% and our efficiency ratio was 29%. And I must say this trifecta of 20s was due to the hard work of the best bankers in the industry. They actually do a pretty good job of making an average bank CEO look better than average, so I appreciate what they do to make us successful and thank them for everything they've done for our company and for our shareholders. However though, there is little time to celebrate success as our shareholders do want to know what we plan to do in 2023, so we'll move on and talking about -- little bit about the year and going forward.

And talking about liquidity, our bankers have focused on building deposits since the middle of 2022. We have seen a steady increase in the deposit pipeline over the last four months. We're certainly pleased with the process and we're consistently seeing the deposit pipeline at 150% of the loan pipeline, this Bud will cover, we did grow liquidity in the fourth quarter and we're very pleased with our progress there. Fortunately, we've built our bank with core deposits, which are primarily commercial, not any brokered CDs and Federal Home Loan Bank Advances, our clean balance sheet is a tremendous asset in the current environment. On the loan side, we did see good loan growth in the fourth quarter, we always see robust loan demand in the fourth quarter, there are some year-end draws for company balance sheet purposes that we see, so that's always strong.

We did see some slowdown in our loan pipeline, it's mostly due to our being more selective on rate terms and structure and focusing on our core customers. Banks are in a much better position than many years on the loan front. We are certainly in stronger position, it will take time to see the improvement in loan yields, but it will come in the next couple of years. From a team standpoint, we brought in outstanding new bikers in the fourth quarter and we now have 154 producers. While we are focused on cost containment in 2023, the door is always open for outstanding bankers. So I will turn it over to Bud Foshee now.

Bud Foshee: Thanks, Tom. Good afternoon. Liquidity, our liquid assets increased by $470 million from September 30 to December 31. We expect this positive trend to continue in 2023, as we anticipate low double-digit deposit growth versus high single-digit loan growth. Our net interest margin PPP fees and interest income were $103,000 in the fourth quarter of 2022, compared to $5.1 million in the fourth quarter of €˜21. Year-to-date PPP fees and interest income were $7.7 million in 2022. Alright, no PPP fee income is anticipated for 2023. Deposits increased by $500 million in the fourth quarter. Our net interest margin by quarter, starting with the fourth quarter of €˜21, it was 2.71%, first quarter of '22 of 2.89%, the second quarter 3.26%, third quarter 3.64%, and then the fourth quarter of €˜22 it was 3.52%.

Our loan loss provision, our allowance for credit losses to total loans was 1.25% at December 31, €˜22 and that is unchanged from September 30 of 2022. Our net charge offs average loans were 0.06% for the fourth quarter of 2022. Non-interest income, credit card income was $2.3 million in the fourth quarter, versus $2.2 million in the fourth quarter of 2021. Our net interest cap income was $162,000 for the fourth quarter and $7 million year-to-date. We anticipate the net income to be zero in 2023 as the cap matures in May of 2023. Our non-interest expenses, salaries and benefits as a result of our market expansions, total salaries increased by $572,000 in the fourth quarter and by $6 million year-over-year. Fourth quarter 2022 extended expense was $3.2 million versus $4.3 million for the third quarter of 20 22.

Research, Investment, Finance

We had net new ads to staff of 13 employees during the fourth quarter and 71 for 2022 year-to-date. Capital, the Bank's Tier 1 capital leverage ratio has improved by 192 basis points, since December 31, 2021. The ratio was 7.79% at 12/31/21, and improved to 9.71% to 12/31/22. Tax credits, we have taken steps to extend the benefit period of some of our proprietary tax credits. I'll turn the program over now to Henry.

Henry Abbott: Thank you, Bud. I'm pleased with the Bank's performance in 2022 and more specifically in the fourth quarter. During the past year, our borrowers had to stand on their own in this post COVID environment without major government stimulus that had occurred in the prior years and our customers have responded well even in the face of rising inflation. Bank's balance sheet is well positioned for any uncertainty in 2023 and beyond with a record low amount of OREO with less than $250,000 and NPAs total assets of roughly 12 basis points. Grew loans and we continue to be selective with new clients and we want to grow our bank with clients, who can fund both the asset size and liability type of our balance sheet. I'm pleased to say the majority of our credit metrics were in line with the prior quarter and that is near historical lows, so we won't go into a ton of detail, but I'll be happy to cover specifics in the Q&A section of the call.

As of loan growth, the Bank increased our loan loss reserve for the quarter by $5.3 million, which amounts to an ALLL to total loans of $1.25 million. The past due loans at year-end were $110 million on loan portfolio of roughly $11.7 billion, so we've not started to see weakening in the portfolio. were roughly $1 million less than they were in third quarter. The OREO portfolio decreased $5 million over the quarter, so it's now only $248,000. Charge-offs for the quarter were 6 basis points, when annualized net decrease from 11 basis points for the prior quarter. We are proactive as possible on handling problem loans, so we don't carry a known issue into the following year. Our overall credit metrics continue to be outstanding and continue to improve for the quarter.

2022 was a strong year for our Bank and we head into 2023 well positioned to maintain our status as one of the top performing banks in the country. With that will hand back over to Tom.

Tom Broughton: Thank you, Henry. One point I want to make is when we talk about the discussion on higher interest rates, and deposit betas and margin compression is that while we may have some quarter-to-quarter issues. However, higher interest rates help not hurt banks and it seems like today banks are more attractive as an investment alternative than they have been in a decade. It's certainly interesting to me that some investors they were selling bank stocks when rates were low. And now they're selling bank stocks when rates are high. So it was kind of hard to make some of them happy, it seems. My first partner in the banking business years ago after several years in business, he observed that we always do better when we need deposits.

And we do, we do better when we need deposits. It is certainly you have more discipline on the loan side, you can be more selective and also it helps you focus on what you need to do. So certainly, needing deposits is a good thing, higher rates is a good thing for banks. We're working on our 2023 budgets and finalizing those in the next couple of weeks as we plan the year, but we have certainly made significant investments in new bankers in 2022 that we think will see the benefit of this year. As you could see, we've had a last couple of years certainly been robust from a hiring standpoint. So we are very optimistic about the outlook for our footprint and particularly what our bank we think can produce as we go forward and we can continue to see robust economic activity in the Southeast.

With that, we'll be happy to take any questions you might have.

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