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spk01: Greetings. Welcome to the Service First Bank Shares first 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, IR Director. You may begin.
spk05: Good afternoon, and welcome to our first 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 projection shared today through 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 Service First assumes no duty to update them. With that, I'll turn the call over to Tom.
spk06: Thank you, Davis, and good afternoon, and thank you for joining our call today. I'm going to cover a few highlights of the quarter, and then I'll turn it over to Bud Foshew for a more detailed financial report. Our report today is fairly, it's always brief. We don't read to you, but it'll be a little more brief than normal because we don't really It was primarily good news. I don't have a lot of problems to explain away, so I'll first cover our loan growth. We had just under $500 million in loan growth for the quarter, and that exceeded our goal of $100 million per month in net loan growth. Of course, this excludes Triple P loans when I use that number. The growth was very solid in all regions during the quarter. that we really know it was broad-based growth in our southeastern footprint. We were pleased to finally see some CNI loan growth during the quarter. So this was a first quarterly improvement in CNI line utilization, albeit modest, that we've had since the pandemic started. On our loan pipeline, it's back up. from year end. It dropped a bit at year end. It's up 35% and it's back at what I would say would be record high levels that we've had in the last fall. We're pleased with our loan pipeline. We're seeing a lot of activity today. We're having a lot of phone calls every day on credits. Our loan growth for the quarter, I really like the way we didn't have any Luckily, the last two quarters we've had no payoffs, so that's certainly been helpful. But it was not a lot of big loans this quarter. It was all small, broad-based loan growth, which is certainly our preference. On the deposit side, deposits were pretty flat for the quarter. We did see a little decline in correspondent balances plus corporate tax payments. Our correspondent banks are beginning to deploy their liquidity in both loans and securities just as we are. Really, my guess is we'll see modest deposit growth this year as a result of the stimulus withdrawal and other factors such as the correspondence making loans and buying securities. We did add some new bankers in the quarter and we've made some announcements. We have more to make and we're very pleased with the the group we picked up. We have more than usual in the queue today in the hiring process and interviewing process. So we continue to have the same goal as always, recruiting only the best bankers and having the best people and have the best efficiency ratio in the industry. So we're very pleased with the upgrade in our team over the last two years. We've been very successful. The pandemic has has had the effect of highlighting the best places for bankers to work, and we think we are the best place to work. In addition, the merger activity continues to work in our favor. Consolidation certainly helps us. So I'm going to turn it over to Bud Fossey now, our Chief Financial Officer, to give a financial update for the quarter.
spk04: Thank you, Tom. Good afternoon. Liquidity is part of our strategy, deploying some of our excess liquidity assets We're changing our monthly investment purchase plan. In the future, we'll purchase a combined total of 75 million in securities. 25 million of that will be 10-year mortgage backs, and 50 million will be two-year treasuries. Net investment security growth in the first quarter was 311 million. We also decided to retain a portion of our mortgage originations for the first quarter we sold 4.6 million to investors and retained 41.8 million. Margin loan growth exclusive of Triple P forgiveness was $489 million for the first quarter. Average loans exclusive of Triple P increased by $731 million in the first quarter. Average Triple P loans decreased by $143 million. So the net average growth per quarter was $588 million. Triple P fees and interest income were $4.9 million in the first quarter, and that compares to $11.5 million in the first quarter of 2021. The remaining Triple P fees at the end of March were $3.1 million. The net income impact from the March 22 Fed rate increase From the asset side, we had excess funds of 3.4 billion that repriced. From the loan side, we had 717 million that repriced. On the liability side, correspondent had 2 billion in deposits and fed funds that repriced. So the net impact of that is 4.6 million on an annual basis. or on a per share basis, that's $0.08 per share. Non-interest income, credit card income continues to grow, $2.4 million in the first quarter versus $1.2 million in the first quarter of 2021. The span was $226.4 million in 2022 versus $169.8 million in 2021. We recorded a write-up in value of $3.4 million for the quarter for LIBOR cap that we purchased in 2020. Offsetting most of this write-up was a loss of $3.3 million on the sale of $47 million of low-yielding mortgage-backed securities. Non-interest expenses. As a result of our market expansions, total salaries and benefits increased by $2.8 million. Salaries increased $786,000 comparing first quarter 2022 to 2021. West Central Florida's increase was $342,000 as we added production staff and opened the Orlando office. We added two producers in the mortgage department for Pensacola and Tampa Bay markets. We also hired an internal audit manager in the fourth quarter of 2021 to reduce our outsourced internal audit expense. We also hired six new producers in the first quarter. The 2022 incentive expense was 4.5 million versus 3.7 million for 2021. The investment write-down related to tax credits was $2.5 million in 2022 versus $86,000 in 2021. This increase was more than offset by an income tax reduction of $3 million. Correspondent bank service charges increased by $1.4 million. The number of settlement banks increased from 18 in March of 2021 to 52 at March 2022. We paid additional upfront core conversion expenses of $874,000 in the first quarter. The total amount that will be paid to the current core vendor over the remaining contract term was reduced by over $2 million. For 2023, we estimate that our annual IT expenses will decrease by about $2.4 million. Unfunded commitment reserve, $300,000. charged in the first quarter of 2022, $600,000 charged first quarter of 2021. That concludes my remarks, and I'll turn it over to Henry. Thank you, Bud.
spk00: The bank got off to a strong start in the first quarter with the loan growth time previously mentioned. As discussed on this call in the past, 2021 was a record year for our bank and for most of the financial sector in terms of strong credit quality given the influx of government stimulus. It is my expectation 2022 will likely be a return to more normalized results from a credit perspective and more in line with historical performance that we saw pre-pandemic. We are well positioned with our loan loss reserve. At the end of the quarter, our ALLL total loans was 1.21 compared to 1.22 for the first fourth quarter of 2021. From a dollar perspective, we did grow our loan loss reserve by $2.8 million for the quarter, which was needed given our loan growth. Past due loans were $9.6 million on a total loan portfolio of roughly $10 billion, equating to 10 basis points, which is three basis points over where we were at year end, but still lower than our peer group. Non-performing assets were $21.4 million for the quarter, and that equates to NPA's total assets of 20 basis points, which is a decrease from the first quarter of 2021. We have two NPAs under agreement to be sold that are projected to result in roughly a $4 million reduction in NPAs in the near future. Both of these sales are scheduled to close in the next 30 days. Annualized net charge-offs and Oreo expenses were 11 basis points for the quarter, While this is elevated from Q4 and the first quarter of 2021, 50% of the charge-off credit expense was related to one specific credit that we have no remaining exposure to. The owner of the business had health issues. The business is now closed and we have liquidated the remaining assets and been aggressive in writing down the debt. If it weren't for this one specific relationship, our charge-off would have been closer to five basis points. Overall, I'm very pleased with the bank's performance in the first quarter. Credit quality continues to be excellent, and our diverse, granular loan portfolio continues to be one of our bank's biggest strengths. With that, I'll hand it over to Tom.
spk06: Thank you, Henry. I know that I read a lot, as all of you do, about expectations for possible recession, and we just don't see, at this point in time, any... I'd be happy to discuss it further if you have any specific questions, but we just don't see... Our borrowers are in better shape than they've ever been in before. On the C&I side, they're extremely strong and liquid, very low leveraged. On the commercial real estate side, we're seeing much greater equity investment on the part of all the projects we're working on today compared to historical times in the past, certainly much greater equity than we saw previously. prior to 2008 and 2009 recession. So we feel good about all of our credit exposure, or as well as you can feel. So we'd be happy to answer any questions you might have, and I'll turn it over for questions now.
spk01: At this time, we will be conducting a question and answer session. If you'd like to ask your question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 Brad Millsatz with Piper Sandler. Please proceed with your question.
spk08: Hey, good afternoon, guys.
spk01: Good afternoon, Brad. Hi, Brad.
spk08: Bud, just curious, what made you guys change your, I mean, I know it's a subtle change, but still a change, even with rates up where they are. What made you guys change the pace of deployment of liquidity in the bond portfolio? I'm just kind of curious kind of how you're thinking about that.
spk04: Yeah, I think mainly, you know, we're looking at whatever, four or five or six Fed rate increases, and I guess try not to get too far out on them. Uh, the purses market value, just something, you know, we're just, we're trying to pace our, uh, purses a little bit, a little bit different at some point. Uh, you know, we'll extend out. I mean, we're staying short now, but just, uh, just a little, little change. I think we just want to make sure what rates are going to do before we just keep along, um, with a hundred million in purses.
spk06: Plus loan demand has been strong, Brad. So, you know, we'd rather make loans and buy securities any day. We're seeing, you know, strong loan growth.
spk08: Right. Absolutely. And just, just on that topic, Tom, I mean, you guys have been targeting 300 million a quarter, but you know, you've, you've been easily exceeding that. I think you said your, your pipeline was back at a record level. I mean, is, You know, is $300 million kind of a very, very low bar at this point? How should we kind of handicap that as we kind of move through the year based on, you know, kind of what you've done the last few quarters?
spk06: Well, we've not had any significant payoffs this quarter, this last two quarters. Let's put it fourth quarter or first quarter. No significant payoff, Fred. So, you know, that could be a dynamic we have to face, and certainly as we've done more commercial real estate and more real estate construction, we should see heightened payoffs in the future, but really no time soon probably. It's a good question. We just think obviously we'd rather be on the conservative side than the aggressive side in our forecast.
spk08: Maybe just a final question for me, but I was writing quickly when you were discussing just the repricing of loans and deposits. I think At one point you told me variable rate loans were about 35% of total loans. Don't have a ton of floors anymore, but can you just update us there? I'm sorry if I missed all that, but I was just writing too quickly in terms of how you view loan repricing as the Fed does move higher.
spk04: Yeah. What repriced in March was $717 million of We do have a lot. What we did, we did a static balance sheet, based on March numbers, where Fed would increase in their May through December meetings, 50% deposit beta, except for correspondent money market accounts, and we used 100% beta, and 100% beta on Fed funds purchased. So I think that that gives you a little bit better flavor of what would happen because first the second and third quarter really aren't impacted a small decrease then you have a bigger decrease in the fourth quarter in the first quarter of 2023 so we go from uh so we had 717 million reprice in march uh by that last fed rate increase you would have over over $2 billion. So the floors gradually go away and the margin improves. But it's just so much each quarter is going to go above the floor rate.
spk06: That's really why we bought that LIBOR cap. In 2020, Brad was to smooth out any earnings gaps caused by rate floors, but what we didn't account for is even though the LIBOR cap has not kicked in yet, it will soon, but the accounting treatment is to take an immediate gain on the instrument, which is not what we... We're interested in the cash flow of it, not in a one-time gain. The gains that we expect over the next year pretty much have been accelerated into this quarter, and that's why we offset it with the sale of some low-rate mortgage-backed securities.
spk08: Got it. And, Bud, just remind me that I think you have $4 billion of correspondent bank deposits. Are all those in the money market account, or is some of that encompassed in the Fed Funds purchase line?
spk04: Now, let's see.
spk02: Rodney, you got it? This is Rodney Brushing. It's split about half, like just over $1.7 billion is in DDA, paper settlement services. There's about $1.6 billion in Fed funds and another $400 million in money market. So for a total of quarter end, it was $3.7 billion. I believe today it's slightly up from that. But that gives you a breakdown of where the balances are. And from year end, it was only like a $157 million decline in correspondent balances. That's like 4% of the $3.9 billion that we started with. Does that answer your question?
spk08: Yeah, so some of it's in DDA offsetting charges. So that could move up. Unless you move your charges up, that could start to cost a little bit more.
spk02: That's right. And we have... We have raised our rates. We pay a slight premium over what the Fed's paying. And actually, the last two increases, we have shrunk that margin slightly.
spk08: Great. Thank you. I'll hop back into you.
spk01: Thank you. Our next question is from Kevin Fitzsimmons with D.A. Davidson. Please proceed with your question.
spk03: Hey, good evening, guys. Hey, Ken. Good evening. I'm going to try asking from more of a top level. I know you gave a lot of great detail on the margin, but I guess a lot of moving parts, we have, you know, remaining PPP fees, although down from what we've had in prior quarters likely. We have rates going up, and you talked about the – the assets repricing and the funding repricing, but excess liquidity is being put to work as well and loan growth is strong. So kind of buttoning all that up and with future rate increases likely, how should we think about the margin trajectory? I mean, are we basically at 289? Are we effectively at the bottom and we should be thinking of the NIMS going up to what kind of level with the current curve? You know, maybe from just the very top level what you would be thinking.
spk04: Yeah, I don't really have a number in mind. I guess what we're looking at is more from the deposit side because if you, you know, we're looking at what we're paying for deposit rates versus competitors and And no matter what Fed does in May, we're just going to wait and see what we have to do from a rate standpoint. So it's hard to tell you that because it's kind of an unknown from the deposit side. I mean, we're sitting here with over $3 billion in excess funds. It won't hurt for some of those deposits to roll off if they're high-rate deposits. So it's really driven more because, like Tom said, we still have a strong loan pipeline. It's all going to depend on the what we have to do down the road from a deposit standpoint.
spk03: Right. Well, assuming, you know, assuming it's only modest growth, if that, in deposits, it seems like is the message. And now more of that liquidity is being put to work, but there's still a lot of it. It seems reasonable to assume you're going to be able to lag on taking deposit prices up. Is that fair? Yeah.
spk04: Yeah. That's always standard when rates go up. We always lag.
spk06: We've got 22% of our assets are in cash still. That's a real opportunity for us to put a lot of that cash to work over however many quarters it takes to put it to work.
spk03: Understood. I think we all think of this, especially in these early stages, as The rate cycle being positive for banks, but we're trying to, at least I'm trying to factor in all factors and not get too aggressive on what that margin may do. And maybe it's more modest, steady expansion than versus something that's dramatic. I guess is what I'm getting at. Okay. I would say steady versus dramatic, yeah.
spk06: But that excess liquidity has certainly weighed on our margin heavily. Right. We've never experienced anything like the levels of excess liquidity we've had since the pandemic started. Okay. We've even really stopped talking about the margin as we did traditionally because we always had a, you know, 100% loan to deposit ratio, you know, not 70. So, I mean, the margin has kind of become not a meaningful number of our typical, typically how we think, we think about it, Kevin, if that makes any sense.
spk03: Right. Right. No, I, I, I understand that. And that's another factor just with, you have plenty of room to take that loan deposit ratio up, you know, back to where it had been historically. Hey, Tom, maybe you, you, you referenced at the beginning, the, entry into Charlotte and maybe if you can just give us some kind of, um, you know, how to think of that in terms of how big you see the team, how big you see that market being for you over time. And I think you referenced, uh, you know, a lot of other hiring or, or, or some, some hiring that could happen. Uh, does that entail additional new markets that you're not in right now? Thanks. Yeah.
spk06: We're going to have an announcement on that, uh, Within the next two weeks, Kevin, we'll have some forthcoming information on the team we're assembling there. So you'll have more data. And we'll have an announcement on another team that's joining the bank today. So we're excited about that. So we think that'll be nice and additive to our team. You know, there's never been a better time to have an organic growth strategy than when everybody around you is having merger activity. So we're more optimistic today than we've, you know, ever been.
spk03: Great. Okay. Thanks, guys.
spk05: Appreciate it. Thank you, Kevin.
spk01: Thank you. Our next question, excuse me, as a reminder, if you'd 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. Our next question is from David Bishop with Hoved Group. Please proceed with your question.
spk07: Yeah, thank you. Good morning. Good evening, gentlemen. How are you? Hey, Doug. Hey, maybe sticking along that topic in terms of what Kevin just asked, obviously you've got some teams in hires and lift outs in your back pocket there. As we think about maybe some of the inflationary pressure from those ads, vis-a-vis the outlook for operating expenses, I think in my model I had them up about 17% last year, year over year. Are you thinking at this point maybe mid-teens, mid to high teens is the right way to think about operating expense growth into 2022? I don't know.
spk04: Not knowing total, I'd be guessing on that because I'm not sure how many employees we're going to add total in those markets. I guess the expansion would kind of factor out and just look at what we can, what we're controlling. And we don't, I mean, we see that being, you know, like a 3% increase for other non-interest expenses. It's all salary and benefits and that'll, that just depends on how many people it takes to grow those two markets. I don't have a great number.
spk06: Why don't you send them some detail out on this? Because all those numbers are highly misleading. That percentage is Dave. We'll send all the analyst group some information on why that's highly misleading without getting in the weeds on this call. But we did salary deferrals last year for a substantial amount of money. I don't think the true year-over-year increase in costs is anything like that.
spk07: Got it. Now that's a good point. And then I know in the preamble you noted that you had seen, I think you said the first time since the pandemic, some level of uptick in C&I line utilization. Just curious if you have that number and maybe remind us if we were to see a normalization of those line utilizations back to pre-pandemic levels, what would that imply from from loan balances being translated on balance sheet?
spk06: I didn't quite hear. You say, what is normal and where are we now? What's normal, Dave?
spk07: Correct, from a percentage and maybe from an applied balance perspective, if you were doing normalization.
spk06: Pre-pandemic, we would see 47% to 48%. One reason our number has not gone up is because the denominator has increased a good bit over the course of the pandemic. primarily because of success we had in the Triple P program, our pandemic denominator went up. So that has suppressed our outstandings a bit, Dave, if that makes any sense. So, you know, we got as low as 38. We're about 41 now, you know, or 41 and a half. So 47 to 48% would be normal. So we expect, we just don't know, you know, originally, you haven't been covering us that long, and I originally thought we would get all that back in the second half of last year, and I was way wrong on that when that would recover because the stimulus, you know, again, one reason I said our corporate bars are in better shape to withstand a recession than they've ever been because their liquidity is very strong today.
spk07: Yeah, that probably is my final question in terms of that liquidity. I think you or someone else on the call made a comment that I think cash and liquidity is about 22% of ending assets. Just curious maybe where you see that. Is there a target level to have that settled into as you use that excess liquidity for loans and securities? Just curious where you see that maybe penciling out by the end of 2022. Thanks.
spk06: In a perfect world, it would be about $500 million in cash, Dave. I think, and, you know, it's tempting to go in and, you know, you look at what you can do above what you're earning at the Fed today, and it's tempting to go buy some securities, you know, immediately. And we've withheld that temptation and just decided that over a course of the next, you know, two-year period beginning last fall that we would incrementally put the money into the securities business and hold some single-family mortgages over that two-year period of time. So we think over a two-year period of time, we'll sort of average the market rate because we're certainly not smart enough to find the peak yields. Nobody's that smart, or at least we're not that smart. So that's sort of our theory of what we're trying to do is just sort of try to average the market over the next, you know, over a two-year period of time, if that makes any sense, Dave.
spk07: Yeah, I appreciate that, Collin.
spk01: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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