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spk00: Greetings. Welcome to the Service First Bank Shares fourth quarter earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
spk07: 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 files. Forward-looking statements speak only as of the date they are made, and service first assumes no duty to update. that, I'll turn the call over to Tom. Thank you, Davis, and good afternoon, and thank you for joining us on our call, and I'll give a few highlights before I turn it over to Toshi. 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. I'll talk a little bit about loans. As you can imagine, we're pretty well pleased with a 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. Of course, $878 million excludes triple P payoffs. For the year, our West Central Florida region had 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 was marginally improved, but not enough to matter. And talking about our loan pipeline, As you would expect after a quarter with such large loan growth, our pipeline was down from the last quarter. However, if you compare it to one year ago, our pipeline is 47% higher than one year ago. So we are pleased with the pipeline. We do see activity. And we typically don't 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 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 loan year goes on. We do expect some growth this year from construction line draws. That'll certainly be a nice tailwind for loan growth. We did expect to see an idle line utilization soon. improved in the back half of 2021, but it did not materialize as we expected. 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's certainly enhanced our reputation for service first to our customers. So we're very pleased with where we are in the market, and it's 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 did experience a decline in deposits in the fourth quarter as our correspondent banks began to deploy some of their excess liquidity in loans and securities. This is the time of year we start having sincere, earnest conversations with different teams about joining the bank. They normally don't move until after incentive payments during the first quarter, which is 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. Again, we're not trying to add large numbers of bankers, but trying to add look for a very small number of high-quality bankers to add to our bank. 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?
spk03: Thank you, Tom. Good afternoon. Liquidity, we discussed the company's plan to purchase $100 million of 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 retained $53 million. For our margin, loan growth exclusive of Triple P forgiveness was $878 million for the fourth quarter. Average loans exclusive of Triple P increased by $542 million in the fourth quarter. The average Triple P loans decreased by $163 million for net average growth of 379 million. Triple P 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 in average excess funds decreased the margin by 15 basis points in the fourth quarter. Non-interest expenses Salaries increased 698,000 compared fourth quarter 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 write-down increased non-interest 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 Our LIBOR cap, which we purchased a few years ago, we rode up the value by $839,000 in the fourth quarter of 21 versus a write-down of $61,000 in the fourth quarter of 2020. Non-interest income, credit card income continues to grow, $2.2 million in the fourth quarter. versus $913,000 in the fourth quarter of 2020. 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.
spk04: 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 efforts paid off in both new and core markets, and our geographic footprint continues to be a strategic advantage for our bank. Non-performing assets, total assets, we're down to nine basis points versus 11 basis points last quarter and 21 basis points in the fourth quarter of 2020. NPAs continue to shrink and we're 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 showed a decrease in non-performing 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 seven basis points, $6.9 million on par with last quarter, and four 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 four basis points versus 2020 credits 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 to total loans, the ARLL 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 Service First 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.
spk07: Thank you, Henry. We're certainly optimistic about the outlook for 2022, and we'll be happy to answer any questions you might have.
spk00: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Graham Dick of Piper Sandler. Please proceed with your question.
spk01: Hey, good evening, guys. So just wanted to start up on growth here. Obviously, a banner quarter for you all, 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? Yeah.
spk07: I don't know exactly the answer to your question, Graham, but it's a substantial number in the course of the year. I think we had a billion seven in loan growth for the year, net loan growth. And by the way, I mentioned I said our C&I, this is not that 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 triple P's. If you exclude triple P, you know, our C&I loans did grow 350 million or so. I should have said that earlier in my remarks, but it's not what we're used to. But, 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 particular quarter, but just for the whole year.
spk01: 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 as you look back at the $300 million target, I'm just trying to get a feel for what you all might be expecting on a quarterly basis in 22. Obviously, first quarter could be a little slower, but $300 million to me maybe just seems like there could be maybe upside to that.
spk07: Yes. Of course, they've got a really nice pipeline right now. The economy is really strong in Florida, as you certainly well know. It's strong for everybody. We're seeing opportunities down there that are certainly outsized compared to the average region in our footprint.
spk01: Okay, great. I guess you all It's sticking to $300 million a quarter in terms of in-loan growth. You think that's still about right?
spk07: 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, okay, we're going to book a billion-two for the year, and it'll probably come You can get impacted from quarter to quarter by payoffs. As you know, payoffs are very lumpy, Graham, so there's really no judging when we're going to get a payoff.
spk01: Right. All right. Thank you. I guess just shifting over to expenses real quick. 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 might impact overall level of expense growth you're modeling for, you know, over the next 12 months or so?
spk03: Yeah, hi, Grant. 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 far that hasn't been an issue.
spk01: Okay, great. That's really all for me, guys. Congrats on a really solid quarter. Thank you.
spk00: Our next question is from Kevin Fitzsimmons of D.A. Davidson. Please proceed with your question.
spk02: Hey, good evening, guys. How are you? Great, good. Thank you. 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 of the tax credits and then also the unfunded reserve, letting that come down, I'm getting, I'm penciling in somewhere around a $34,000 $0.1 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?
spk03: Yeah, you know, the only thing, I know you did that on the unfunded, but we also have the Y4 cap. You know, those, you're probably writing a base number. It's hard to project what you're going to do on the unfunded or the LIBOR cap. 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 cap.
spk02: Is the LIBOR cap within fee revenues, or am I looking at the wrong thing? Is that something?
spk03: The LIBOR cap, we actually wrote, let's see, $839,000 in the fourth quarter.
spk02: Yeah, but that's the revenues, right? That's right.
spk03: 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 million dollars or so either way each quarter. So probably need to leave that one out for what we're trying to do from just a standard non-interest expense total.
spk02: Okay. And, Bud, could you just – I was trying to keep up with you. Can you just – 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 and what you guys think you might do with securities in the first quarter given they don't have access to liquidity on the balance sheet?
spk03: Sure. So each month we'll buy $50 million total of five and seven-year treasuries in And probably 65 to 70 million of 15-year mortgage backs because you'll have pay downs. So we're trying to come up 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, seven-year purchases 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.
spk02: Okay. So another, you know, roughly another hundred a month or so. Right. Okay. Still our plan at this point. 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, but 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, 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?
spk07: Well, you know, from the line utilization standpoint, you know, we've 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 it was a year in. I know how much today was. I don't need to talk about today. But a year in, it was, you know, a substantial amount of several, obviously several billion dollars of cash. But we feel, busted a lot of projections. We feel confident, you know, based on all 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 deposits and we're, you know, our core profitability is strong enough and we're retaining, you know, almost 80% of the earnings, Kevin, to support the balance sheet growth. So we feel confident that we'll, you know, be in good shape by year end on the capital ratios.
spk02: Okay, great. That's it for me. Thanks, guys. Thank you. Thank you.
spk00: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question is from David Bishop of Seaport Research Partners. Please proceed with your question.
spk06: Yeah, good morning, gentlemen. How are you? Hey, Doug. Hey, Doug. Hey, a quick question on the credit front, obviously. You know, looking across the credit metrics there, things look very benign. A little bit of pop in provisioning this quarter, which I assume due to growth. As you read the economic TVs and look at the credit metrics out there from a level of 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 provisioning from a holistic basis into 2022.
spk04: This is Henry. Yeah, I mean, I think ultimately the driver for us in the fourth quarter was the loan growth as a percentage. Our A-triple-L did go down because of the positive economic environment, but you know, as we grow, I mean, you know, kind of hand grenade close, we're reserving 1.25 or so on new loans is generally what the model's coming up with, you know, as we grow the bank's down sheet. I'm sorry, is that 1.25% you said of new growth? Generally, yes. Depends on the loan, depends on the maturity, but that's... Got it.
spk06: And then... Jim, more of a housekeeping item. A good tax rate to use for next year? I know there's some investment in tax credits, but how should we think about that?
spk03: Yeah, 20% should be a good rate.
spk06: 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 perspective. Any sense of what the margin could react for in terms of a 25 basis point move in Fed's interest rate?
spk03: Well, Darling Consulting does our AL modeling, and they did this one's up 100 year one. 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 on very little on the deposit side or rate-wise, especially with the first increase. So, you know, part of that's what Garland has taken 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 rates go up.
spk06: That was 6.2% budget. I think you said 100 pieces.
spk03: Yeah, and that's up 100, right.
spk06: That's up 100, got it. Okay, and then one final question. I think you mentioned there was a little bit of movement on the correspondent deposit balances. You saw some outflows there. Just curious what those trends were in the fourth quarter, maybe expectations into 2022.
spk05: 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 odd. And the fourth quarter, right at year end, we always have some banks move some money out, you know, just from 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 Tom, I think, is confident about our capital ratios. Okay, so you don't anticipate.
spk06: We're not anticipating correspondent growth in another $2 billion. Okay. I didn't know if there would be an outflow just in terms of, as you noted, with REITs maybe taking up some movement to other asset classes, but it doesn't sound like you anticipate that type of balance sheet action.
spk05: We haven't seen that at this point.
spk06: Okay, great. Thank you for the color.
spk05: Sure.
spk07: Well, thank you, and I don't think we have any more questions, do we?
spk00: No, we have no further questions at this time. Looks like we have reached the end of the question and answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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