ServisFirst Bancshares (SFBS) Q4 2021 Earnings Call Transcript

ServisFirst Bancshares (SFBS -0.46%)
Q4 2021 Earnings Call
Jan 24, 2022, 5:15 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the ServisFirst Bancshares' fourth quarter earnings call. [Operator instructions] A question-and-answer session will follow the formal presentation. [Operator instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Davis Mange, director of investor relations. Thank you. You may begin.

Davis Mange -- Director of Investor Relations

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 discussions in today's earnings call may include forward-looking statements. Actual results may differ from any projections here 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.

Tom Broughton -- 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 has 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 industrial loan balances. We did see some commercial industrial line loan growth in the fourth quarter, with 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, it has marginally improved, but not enough to matter. And talking about our loan pipeline, as you would expect after a quarter of a such large loan growth, our pipeline was down from the last quarter. You know, 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 where we had, you know, 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 year goes on.

We do expect some growth this year from construction line withdrawals. They'll certainly be a nice tailwind for loan growth. We did expect to see our 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 an 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 certainly enhanced our reputation for ServisFirst to our customers. So, we're very pleased with where we are in the market and are -- it 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, they had experienced 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, you know, having sincere and earnest conversations with different teams about joining the bank.

They normally don't move until after incentive payments during the first quarter, which is, you know, 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.

We're trying to add -- look for a very small number of high-quality bankers to add to our banks. 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.

Bud Foshee -- Chief Financial Officer

Thanks, Tom. Good afternoon. Liquidity, we're discussing the company's plan to purchase 100 million of a 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 retain 53 million. For our margin loan growth exclusive of PPP forgiveness was 878 million for the 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, and average excess funds decreased the margin by 15 basis points in the fourth quarter. Noninterest expenses, salaries increased 698,000 compared in the fourth quarter of 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 brought down increased noninterest expense by 3.1 million for the quarter, but was more than offset by an income tax reduction of 4.1 million. We accrued 3 million related to termination fees for the change in 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 '21, 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 up the value of about 839,000 in the fourth quarter of '21, versus a write-down of 61,000 in the fourth quarter of 2020. Noninterest 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 815 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're very proud of the loan growth we achieved in 2021, more specifically, in the fourth quarter.

Our bankers' calling effort paid off in both new and core markets, and our geographic footprint continues to be a strategic advantage for our bank. Nonperforming 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 continued 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.

We should decrease in nonperforming 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 dues 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 note, as a percentage of 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.

Tom Broughton -- 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 & Answers:

Operator

[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, I just wanted to start up on growth year. Obviously, a banner quarter, if you will, way ahead of that $300 million target. I just want to know how much of this quarter's, I guess, 900 million in end-to-end growth came from the new hires you all made last year in Florida?

Tom Broughton -- Chief Executive Officer

I don't know exactly the answer to your question, Graham, but it was -- you know, it's a substantial number, you know, in the course of the year. I think we had 1.7 billion in loan growth for the year, net loan growth. And by the way, I mentioned, you know, I said our C&I -- this is not -- 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 PPP.

If you exclude PPP, you know, our C&I loan did grow 350 million or so. I've said that earlier when -- in my remarks. But -- so -- but it's not what we're used to. But I -- you know, I'd say close to -- you know, 25% probably came from, you know, our new hires down in Florida in 2021, Graham.

I don't know about a 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's any more upside to come from that group in '22 in terms of incremental growth. And I guess kind of if you look back at the $300 million target. I'm just trying to get a feel for what you all might be expecting, you know, on a quarterly basis in '22.

Obviously, first quarter could be a little slower. But, you know, 300 million, to me, maybe just seems like there could be maybe upside to that.

Tom Broughton -- Chief Executive Officer

Yes. I mean, of course, they've got a really nice pipeline right now down in -- you know, the economy 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, you know, outsized compared to the average, you know, region in our footprint.

Graham Dick -- Piper Sandler -- Analyst

OK, great. So, I guess you all, you know, sticking to $300 million a quarter in terms of -- in loan growth, you think that's still about right?

Tom Broughton -- Chief Executive Officer

Well, you know, the first quarter, you know, 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, you know -- you know, our goal is to say, OK, we're going to book 1.2 billion for the year, and it'll probably come in the back three quarters of the year. And, of course, you know, you can get impacted from quarter to quarter by payoff.

As you know, payoffs are very lumpy, Graham. So, there's really no judging when we're going to get a payoff.

Graham Dick -- Piper Sandler -- Analyst

Right. All right, thank you. And I guess just shifting over to expenses real quick. You know, 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 -- you know, this may impact the overall level of expense growth you're modeling for, you know, the next 12 months or so?

Bud Foshee -- Chief Financial Officer

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, you know, we're able to hire employees, and, you know, we've added people in new regions. So, so far, there hasn't been an issue.

Graham Dick -- Piper Sandler -- Analyst

OK, great. That's really all for me, guys. Congrats on a really solid quarter.

Tom Broughton -- Chief Executive Officer

Thank you, Graham.

Bud Foshee -- Chief Financial Officer

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?

Tom Broughton -- Chief Executive Officer

Great.

Henry Abbott -- Chief Credit Officer

Good.

Tom Broughton -- Chief Executive Officer

Thank you.

Henry Abbott -- Chief Credit Officer

Hey, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey, just to follow up on expenses. You know, a lot of moving parts. But if we adjust for, you know, obviously, the conversion expenses and then if we adjust for the write-down, the tax credits, and then also the unfunded reserve, letting that 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, you know, something that we should use with some kind of modest growth per quarter going, you know, into '22?

Bud Foshee -- Chief Financial Officer

Yeah, yeah. But the only thing -- I know you did that on the unfunded, but we also have --

Tom Broughton -- Chief Executive Officer

We have the LIBOR cap. 

Bud Foshee -- Chief Financial Officer

You, those -- you're probably right on a base number. It's hard to project, you know, what you're going to do with the unfunded or LIBOR cap. Let me -- I don't have that right 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 the LIBOR.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Is the -- the LIBOR cap was in fee revenues, or am I looking at the wrong time? Is that something --

Bud Foshee -- Chief Financial Officer

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?

Bud Foshee -- Chief Financial Officer

That's right. Yeah, I'm sorry. Yeah, I was thinking that was -- I'm sorry. Yeah, leave that one out.

But the unfunded could flip, you know, a $1 million or so with the way each quarter. So, probably need to leave that one out for what we're trying to do from just a standard noninterest expense total.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK. And -- but could you just -- I was trying to keep up with you, can you just -- you -- 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 in what you guys think you might do with securities in the first quarter given you don't have excess liquidity on the balance sheet?

Bud Foshee -- Chief Financial Officer

Sure. Yeah, so what we'll -- 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'll 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 and seven-year purses 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

OK, so another -- you know, roughly another 100 a month or so.

Bud Foshee -- Chief Financial Officer

Right, yeah.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK. 

Bud Foshee -- Chief Financial Officer

[Inaudible] at this point.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Got it. Got it. Just one last one for me. Tom, can you -- you know, not surprisingly, capital ratios came in.

I mean, they still look fine 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 them, or do you think you're fine for the year?

Tom Broughton -- Chief Executive Officer

Well, you know, from a line utilization standpoint, you know, we -- we'd love to see a pickup in that. And, you know, 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 don't need to talk about today. But I think at year-end, it was, you know, substantial amount of several -- obviously, several billion dollars of cash. But we feel -- based on a lot of projections, we feel confident, you know, based on all of our projections that, you know, given any kind of normalized -- you know, 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, you know, levels of deposit.

And we're -- you know, our core profitability is strong enough, and we're retaining, you know, almost 80% of the earnings given to support the balance sheet growth. So, we feel confident that we'll, you know, be in a good shape by year-end on the capital ratios.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK, great. That's it for me. Thanks, guys.

Tom Broughton -- 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.

Dave Bishop -- Seaport Research Partners -- Analyst

Yeah. Good morning, gentlemen. How are you?

Tom Broughton -- Chief Executive Officer

How are you, Dave? 

Bud Foshee -- Chief Financial Officer

Hey, Dave.

Dave Bishop -- Seaport Research Partners -- Analyst

Hey, quick question on the credit front obviously. You know, looking across the credit metrics there, things look very benign. A little bit of pop and provisioning this quarter, which I assume due to growth. As you're reading the economic tea leaves and look at the credit metrics out there from a level provisioning, do you think it's relatively similar overall in 2022 to 2021? Do you have to bake a little bit more in there for growth? Just curious how we should think about the 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. You know, our ALLL did go down because of, you know, the positive economic environment. But, you know, as we grow, I mean that, you know, kind of hand grenade close where we're reserving at 1.25 or so on new loans is generally what the model is coming up with, you know, as we grow the bank's balance sheet.

Dave 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, depending on the maturity, but that --

Dave 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 this -- that investing in the tax credits, but how should we think about that?

Bud Foshee -- Chief Financial Officer

Yeah, Dave. It's about, yeah, 20% should be a good rate.

Dave 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?

Bud Foshee -- Chief Financial Officer

Well, Darling Consulting does our AL modeling, and they did -- this one's up a 100. Year 1, it'd 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 -- very little on the deposit side or rate-wise, especially with the first increase.

So, you know, part of that -- that's what Darling is taking 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 the rates go up.

Dave Bishop -- Seaport Research Partners -- Analyst

That was 6.2%, Bud? I think you said --

Bud Foshee -- Chief Financial Officer

Right.

Dave Bishop -- Seaport Research Partners -- Analyst

One hundred basis points?

Bud Foshee -- Chief Financial Officer

Yeah, and that's up 100, right?

Dave Bishop -- Seaport Research Partners -- Analyst

That's up 100. Got it. OK. And then one final question.

I think you mentioned there was a little bit of a movement on the corresponding deposit balances you saw in the outflows there. Just curious what those trends were in the fourth quarter, 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 something, and we ended the year 2 billion higher just in correspondent banking, right, at 3.9 billion. And the fourth quarter, right at year-end, we always have some banks move some money out, you know, just from a -- some of their balance sheet management, you know, 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, you know, we're anticipating that those correspondent balances are going to remain flat for the year. We don't see tremendous growth. That's why we -- that's why Tom, I think, is confident about our capital ratios.

Dave Bishop -- Seaport Research Partners -- Analyst

OK. So, you don't anticipate --

Rodney Rushing -- Executive Vice President and Chief Operating Officer

I'm not anticipating correspondent growing another 2 billion.

Dave Bishop -- Seaport Research Partners -- Analyst

OK. I didn't know if there'd be an outflow just in terms of, as you noted, with rates maybe taking up some movement to other asset classes, but doesn't sound like you anticipate that type of balance sheet action.

Rodney Rushing -- Executive Vice President and Chief Operating Officer

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

Dave Bishop -- Seaport Research Partners -- Analyst

OK, great. Thank you for the color.

Rodney Rushing -- Executive Vice President and Chief Operating Officer

Sure.

Tom Broughton -- Chief Executive Officer

Thank you, and I don't think we have more questions, do we or --

Operator

No, we don't have -- we have no further questions at this time.

Tom Broughton -- Chief Executive Officer

Right, well --

Operator

So, looks like we have reached the end of the question-and-answer session. [Operator signoff] 

Tom Broughton -- Chief Executive Officer

Thank you.

Duration: 35 minutes

Call participants:

Davis Mange -- Director of Investor Relations

Tom Broughton -- Chief Executive Officer

Bud Foshee -- Chief Financial Officer

Henry Abbott -- Chief Credit Officer

Graham Dick -- Piper Sandler -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Dave Bishop -- Seaport Research Partners -- Analyst

Rodney Rushing -- Executive Vice President and Chief Operating Officer

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