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spk00: Greetings. Welcome to Service First Bank Share's third quarter earnings call. At this time, all participants are in the 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 Davis Maint, Investor Relations Director. Thank you. You may begin.
spk04: Good afternoon, and welcome to our third quarter earnings call. We'll 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 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 Service First assumes no duty to update them. With that, I'll turn the call over to Tom.
spk05: Thank you, Davis, and good afternoon, and welcome to our third quarter conference call. I'm going to review a few highlights of the quarter before I turn it over to Bud to go over the numbers in a little bit more detail. Our loan growth was continuing to be very strong in the quarter, and the payoffs that we had expected were pushed back to later quarters. We are seeing lower pipelines in loans because we certainly can't keep growing at the tarred pace that we've been growing the last two quarters. And we also have been more selective in what we're looking at in terms of the loan pipeline. So we expect the loan growth to moderate in coming quarters, more at our historical growth rates. We did see some runoff in the deposits and correspondent area in the third quarter while the general bank was stable. Our correspondents are making loans again. They're buying securities, so that was to be expected to some extent, probably a little bit more than we thought. We do expect to get back to deposit growth in the general bank in the fourth quarter. We have consistently grown deposits, and we are putting more focus on it as we did prior to the pandemic. Incentive plans have been heavily weighted to loan growth in 2021 and 2022, and we will put normal emphasis on deposit growth in 2023. Our general bank had year-over-year deposit growth, even though we did not focus on deposit growth until this past quarter. On the loan quality side, Henry Abbott will certainly discuss it in more detail, but we continue to seek strong credit metrics in our loan portfolio. I think we had one credit that was a problem in the past quarter, and that was most of what we had on the charge-off list. We just recently completed a credit card conversion, and we're very pleased to get that done. One reason we're pleased is that we have a moratorium on adding new banks for over six months, so we can start adding agents banks again in the card area, so that's certainly welcome news from an income, fee income standpoint. We did add 13 new bankers in the quarter. After 15 bankers last quarter, with growth in the Piedmont, Northwest Florida, and Nashville regions, we continue to see opportunities that are being very selective, but we are seeing better quality bankers than we've seen in a long time. In fact, we got a call from this morning about a team of community bankers in a very nice market. We are seeing potential growth still coming in the door. I'm going to turn it over to Bud to go over the financials.
spk06: Thank you, Tom. Good afternoon. Liquidity. In mid-June, we decided to suspend investment purchases, especially in our strong loan growth. In the third quarter, we were able to reinvest $76 million on maturities and mortgage-backed paydowns into higher-yielding loans. Net interest margin, loan growth exclusive of Triple P forgiveness was $677 million for the third quarter. Average loans excluding Triple P increased by $776 million in the third quarter. Average Triple P loans decreased by $45 million, so net average growth $731 million. Triple P fees and interest income were $432,000 in the third quarter of 2022 compared to $6.4 million in the third quarter of 2021. Net loans grew by $75 million in the last three days of the quarter. This increased our loan loss provision. We will not receive a positive net interest margin until the next quarter. Our margin continues to improve by quarter. In the fourth quarter of 21, it was 2.71. First quarter of this year, it was 2.89. Second quarter, 3.26. And third quarter, 3.64. High that's decreased by 719 million in the third quarter. Most of the decrease related to correspondent banks. Fed funds purchased increased by $77 million in the third quarter. The recent Fed rate increase in September will have minimal impact on our margin over a one-month period. Loan loss provision. Our provision increased by $9.6 million in the third quarter. A primary factor in the increase related to the national unemployment forecast increased from a range of $3.9 4.3% at June 30, 2022 to a range of 4.4% to 5.8% at 9.30, 2022. Non-interest income, credit card income continues to grow $2.6 million in the third quarter of 2022 versus $2 million in the third quarter of 2021. Spend was $275 million in 2022 versus $216 million in 2021. Non-interest expenses. During the third quarter, we had a preliminary settlement of litigation and write-down of a private investment resulting in charges of $2.4 million net of income taxes or $0.05 per diluted share. Salaries and benefits. As a result of our market expansions, Total salaries increased by $871,000 in the third quarter and by $3.7 million year over year. Third quarter of 2022 incentive expense was $4.3 million versus $6.2 million for the second quarter of 2022. Tax credits, the year-to-date investment write-down related to tax credits was $7.5 million in 2022. versus $3.1 million in 2021. This increase was more than offset by an income tax reduction of $6 million. Earnings credit rate on correspondent DDA balances increased from 0.4% at September 30th, 2021 to 3.25% at September 30th, 2022. Lower balances were required to be maintained to pay for account analysis expenses due to the steep rise in interest rates. That concludes my remarks, and I will turn it over to Henry.
spk01: Thank you, Bud. The bank continued to trend a very strong loan growth for the third quarter. Loans grew by an annualized 25% for the quarter. We continue to want to help high-quality commercial borrowers and prospects within the bank's footprints. At the same time, we continue to be conservative with our underwriting and interest rate sensitivity analysis, given the persistent inflation in the marketplace, as well as being more selective on new commercial real estate exposure, which is income producing, versus our core bread and butter of owner-occupied real estate. Past due loans were a mere $10.8 million, on par with the second quarter, and that figure equates to past dues to total loans of 10 basis points, which continues to be near historic lows. We have sliced and diced our loan portfolio in Southwest Florida and followed up with borrowers impacted by Hurricane Ian. While the long-term impacts to the region are unknown, we feel like our loan portfolio in that area fared very well. The bulk of our loans in the impacted area were more north of where the hurricane made landfall. To date, we've only uncovered three severely impacted commercial borrowers and we believe they were appropriately insured. We grew our loan loss reserve for the quarter by $12.6 million, which amounts to an ALLL to total loans of 1.25. This is an increase from 1.21 for the second quarter and slightly above the 1.24 for the same period prior year. The increase in reserve is not associated with a specific credit or any deterioration, but rather the model is impacted by changes in economic outlook, as Bud previously mentioned. While we have not seen any major changes in the loan portfolio and our core key credit metrics continue to be near historic lows, we did feel it prudent to increase our reserves. Non-performing loans to total loans were mere 16 basis points. Of our $19.5 million in NPAs, over $5 million of that figure is under an LOI to be sold in the fourth quarter to a highly qualified buyer. Our loan portfolio continues to perform at an exceptional level. Chargeoffs for the quarter were 11 basis points when annualized. Net chargeoffs for the quarter were roughly $3 million on a loan portfolio of $11.3 billion. Of the $3 million in chargeoffs, roughly $2 million was related to one specific credit. We were proactive in addressing the issue and the remaining exposure we do have to the borrower is less than $500,000 and is fully impaired. While charge-offs were slightly elevated, when annualized, our year-to-date charge-offs are a mere seven basis points. As with all large financial institutions, we are an uncharted territory with a CISO model in the current dynamic environment and how it impacts our loan loss reserve. Changes to the reserve aside, I feel very good about how the bank's loan portfolio is positioned, and the diversified markets we serve. With that, I'll hand it back to Tom.
spk05: Thank you, Henry. And yes, we're glad to get good news after Hurricane Ian down in Florida. So that turned out to be not as bad as we thought it could possibly be. So that's certainly welcome news. Just in general, I'd like to mention that I've always thought, and I think anybody who thinks that core deposits are the key to building the value of a banking franchise, and we've always focused on building core deposits. We're certainly well-positioned compared to many of our competitors in the industries because our balance sheet liability side is funded with core deposits, not federal home loan advances and broker deposits. Our compound deposit growth rate in the past five years is 14%. And from the section of the bank, it's 33% in 2005. We do believe we have the best bankers in the industry, which is the key to success we've enjoyed since 2005. We think we have the best platform for commercial bankers, which is one reason we've attracted a number of bankers in the last 17 years. And we think we have more opportunities for growth than any time in our history as of today. We are pleased with the quarter with an outstanding return on equity, return on assets, and efficiency ratio. We'll certainly be glad to answer any questions.
spk00: Thank you. 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. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. Our first question comes from Brad Millsap with Paper Sandler. Please proceed.
spk08: Hey, guys.
spk04: Brad.
spk08: Tom, happy third Monday in October to you.
spk04: Well, buddy, I'll tell you what.
spk05: If we all win out, you can beat Henry Abbott's Georgia Bulldogs, and we win the rest of the season. We'll see you in Atlanta in December. How about that?
spk08: That's right. That's right. I don't know if I do. We'll see, though. I think this is the first time I've got to call in a winner. So, anyway, thought I'd take advantage.
spk05: It's a good win, buddy, every 15 years. I don't blame you. I would enjoy it, too.
spk08: I was hoping you might have Rocky Top queued up for me.
spk05: No, I live through the Mike Shula and Mike Dubow years in Alabama, so we've all taken our turn in the box. It looks like Tennessee is back, though. That is for sure.
spk08: We'll see. We'll see. I wanted to ask, Tom, you talked, obviously another great quarter of loan growth. You're on pace. We already have generated more than $2 billion of growth this year. Can you maybe frame up for us a little bit more kind of what in your mind is sort of in dollars maybe what a pullback in loan growth would be kind of vis-a-vis all the people you've hired? And I guess the second part of that question is how much does the pressure on funding sort of impact how much you can grow next year? I know you're focused on deposits, but that's obviously a big part of it with your loan deposit ratio now at 102%.
spk05: Yeah, and we're back to our normal, you know, our loan to deposit ratio is back where we've been for most of the last 17 years, except for, you know, two periods of time, which were the pandemic and the 08-09 recession. So we've been, this is normal for us. We're back to where we always have been. You know, I have complete confidence that our team can generate, you know, we've had, we've attracted some outstanding bankers. We just actually had one join us in Tampa today, as a matter of fact. So we've got some, Some great bankers are joining us all the time. So I have confidence that we can grow at our, you know, about something hopefully at our historic growth rates that we've seen. You know, Brad, I just think a 25% annualized growth rate is clearly not sustainable. So, you know, something in the, you know, by quarter, you'd think 10% to 15% is sort of where we had our targeted growth in loans and deposits, and we think we'll get back to those levels soon. over the next several quarters. In fact, we're already seeing, you know, we're seeing a surge in deposits coming. We've got a big deposit pipeline, at least it's bigger than it's been in the last two years because we really didn't track it much for the last two years. So Carwood Correspondence has some really nice wins in the last couple of weeks. So we feel good about where we are.
spk08: I'd just be curious, you know, that deposit pipeline, on average, you know, where are those deposits in terms of rates, you know, coming on the books? You know, what are you having to pay to bring in, you know, sort of the incremental, you know, new dollar deposits?
spk05: Well, our, you know, our net interest margin in September was what, Bud? That was what in August? 3.55? Yeah. So, if that gives you any idea of We say we're a disciplined growth company, and we mean that. We're going to be disciplined on both sides of the balance sheet, Brad. We try to grow by treasury management. Rates are not the answer to building a balance sheet. That's not the answer. The answer is treasury management service.
spk08: Thank you, guys. I appreciate the call. I'll hop back and cue.
spk05: Have the orange glow all week. I hope you have it all week, Brad.
spk08: Thanks, Tom. I appreciate it.
spk00: Our next question is from Kevin Fitzsimmons with DA Davidson. Please proceed.
spk07: Hey, good morning, everyone, or good evening, everyone. How are you all doing? Yeah, good evening. I just wanted to follow up on Brad's question. But I saw the comments on page one of the release about the margin should remain relatively stable going forward. So are you kind of referencing quarterly margin, which was 364-ish, I believe? Because I thought I just heard you say the September margin was 372. So what If you could just dig a little deeper into that outlook for the margin. Is it your comments about it just being stable? Is an accelerating deposit beta kind of offsetting or more than offsetting impact from rising rates on the asset side? Thanks.
spk06: To break it down, I guess what we're talking about is really from one Fed increase to another. What happens from a loan standpoint, we've got right at $2 billion that reprices. Whenever an index changes, that reprices. Well, that's about equal to what correspondent has in money markets and Fed funds. So those two are going to wash. They're going to both go up at the same rate. Now, over the next month, you're going to have about $1.8 billion in loans that will reprice. Whatever the index is, you've got a different reset date. during the month, but you'll have another $1.8 billion that will reprice, and then you've got your money markets. I guess mainly money markets is what we change. You'll have some of the money markets increasing over time. So loans, the $1.8 billion is going to go up at a faster rate than your deposit side that's going to reprice during that time period.
spk07: Okay. There's still – I mean, I guess just to clarify, so there's still upside to the margin from the level you hit for third quarter 22, based on what you just said, unless I'm not hearing it correctly.
spk06: Yeah. Oh, you're right. Yeah, it can.
spk07: Oh, definitely. Okay. So your comment in the release is more about just, like, we're not going to see the kind of link quarter change you saw this quarter.
spk06: Yeah, I was trying to address –
spk07: Right. Got it. In the comment about earlier, I think, Bud, in your comments, you talked about the outlook for general bank deposits is to grow. But do you expect total deposits to grow, or is there still going to be some hangover from correspondent deposits running off So what's that kind of next quarter or two outlook for total deposits, would you say?
spk05: Yeah, we feel like Correspondent is going back the other way now. They've had some really nice wins in the last few weeks. Some major new customers have joined us. So we feel like we're back to the core and are headed in the correct direction, Kevin. And also, I mean, you know, we've got... We layered in an incentive for year-end for all of our commercial bankers. We didn't have much of a component for deposit growth when we started the year, and so we've added that in. So they are focused on improving deposits and adding it the right way, not adding high-rate deposits. That's not the answer. Rate is never the answer to building a bank.
spk07: Got it. Okay. And, Tom, I think early in your comments, you mentioned about getting a call just today from a new team, you know, what might prove to be a new team of bankers. Is that – I know you can't get too detailed, but is that a market you're currently in or not in?
spk05: Not in. It's a community bank, you know, community banking team. which we've added a number of those in the last few months. Besides the Piedmont region, we've added some nice community teams in Tallahassee, Panama City, Asheville, just to name a few. So we feel like they're deposit generators as well as loan generators. So they understand that they've got to fund their own loan growth. They get it.
spk07: Right. Okay. Okay. I'll hop back in the queue. Thanks very much. Thank you.
spk00: Our next question is from Dave Bishop with Hubby Group. Please proceed.
spk03: Hey, good evening, gentlemen. As a Maryland Terrapins college football fan, I'm very jealous of you all down there in the south. That can produce some good football on Saturdays. I look at you with envy, that's for sure. Maybe someday it will change up.
spk05: We hope Leo Tangliavola is okay. I saw he took a lick at this game Saturday. He's a transfer from Alabama, so we certainly are interested in seeing him do well.
spk03: Yeah, as are we. Hey, notice another 13 bankers out of this quarter on top of the 15. Despite that, you guys are continuing to do a young'uns job in terms of holding the lines on salaries and employee benefits. Just curious, I saw that decline, 5% linked quarter. Was there anything unusual in the second quarter, remind us, that maybe inflated that, or were you doing anything special to really sort of hold the line in terms of inflation on the compensation line?
spk06: Dave, the only thing in the second, from a total salary benefit, we had... extra incentive accrual. We upped our incentive accrual in the second quarter. So that's the biggest thing I remember in our salaries and benefit totals.
spk05: It became obvious to us that all of our micros were going to exceed their loan goals for the year today. So we put an extra accrual in. It was about $2 million.
spk03: In the second quarter?
spk05: Yes, sir.
spk03: Got it. And then the bankers you're talking to, just curious, you know, the conversation that, you know, sort of compels them to jump to service first. Just curious at the stage in their career, you know, how that conversation goes. Is there a commonality in terms of a theme where they choose you over the current bank or another suitor out there? Because obviously there's a lot of chairs moving around down there. Just curious what sort of compels them to Let's use you all over some of the other growth year competitors down there.
spk05: Well, I think, you know, the banks don't have consistent incentive plans. They change the plans. In fact, we've had a number of bankers that joined us that found out that right at the end of the calendar year, their incentive plan was changed, and they didn't like that for that current year. There are a lot of reasons, but I think, you know, a lot of people have found that we're a good platform for you know, to work from, and we, you know, we support them in every way, and it's not about, you know, the magic team in Birmingham. It's about the operating people out in the regions, and we do everything we can to empower them. Henry Abbott tries to turn around credit requests as quickly as he can. We don't spend weeks, you know, putting people through the wringer on either, you know, if we're going to turn it down, we turn it down quickly, and that's how you That's what customers want to hear. So really, we're just focused on good customer service. It's not sales, it's service. Service is what wins us customers, and we feel like we're offering the best service in the industry. Our compliance person was telling me how few complaints we get this morning because we try to work with customers and try to resolve complaints. We don't have the kind of problems a lot of banks have. Somebody walks into branches, I got a problem, we try to fix it. So we think that's the differentiator, Dave, and has been for 17 years, you know, for us compared to most commercial mines. So there are a lot of different reasons people, you know, leave. You know, it could be as simple as personality conflicts, but it's not usually because people have personality conflicts. Usually they have a bad personality, if you know what I mean. So it's not that. So we feel like it's an opportunity. We always have an opportunity. We have a great treasure management platform. We support them with great cash management, treasure management, personnel, you know, P-card, credit card programs. So we have some ancillary things they can do and they can get additional compensation. But it's just, you know, they just, you know, the old saying, you know, A players don't want to be with B players and B players don't want to be with A players. So You know, if there's some A players in an organization and B players, they usually want to leave.
spk03: Understood. Understood. And then a continued nice growth or stability in the credit card income. You mentioned some new agent relationships. Do you think this is sort of a new good run rate in this $2.6 million for credit card income?
spk02: This is Rodney Rushing. Probably. We have gone through a conversion, and in fact, besides our customers, we issue credit cards for 140 other banks. We call that our agent credit card program, and for the last six months, that has been put on hold as far as onboarding any new agent banks because we were going through this conversion. So for the fourth quarter, we'll be ramping back up, adding agent banks. And we have somewhere around six or seven in the queue right now. So I hope that answers your question. We expect that growth to continue. All right.
spk03: And then maybe a housekeeping question. Notice the continued decline in the effective tax rate. Is this a 17% a good number to assume into 2023?
spk06: No, it'll be, I'd say 19.5% to 20%. We had some adjustments that we take annually, some of our proprietary tax credits, and that was an adjustment we make in the third quarter this year.
spk03: Got it. Thanks. I'll hop off and get back to you.
spk00: Our next question is a follow-up from Brad Millsap with Piper Sandler. Please proceed.
spk08: Hey, thanks for taking a follow-up. But you mentioned last quarter that you thought, you know, I think $750 million was kind of a floor for liquidity or Fed funds. It looks like you've pierced through that. Have you guys changed sort of your internal policy on how much cash you'd be willing to hold? And if so, how much or what is that level now going forward?
spk06: Yeah, we did change the policy, Brad. I believe we're 1.5% of assets is what we can go down to before we need to take some action.
spk08: Okay. And just on loan repricing, go ahead, I'm sorry.
spk06: No, I was making sure. It is 1.5% of assets.
spk08: Okay. And just on loan repricing, you know, we've seen, you know, 200 or so basis points change in the Fed funds rate over the last year. Your loan yields are up maybe 40 basis points, excluding PPP. Is that the right relationship going forward? I was thinking you had about 35% of your loans that kind of repriced immediately with Fed funds, but that beta is closer to 20. Is there a bigger lag in there? I assume any floors you had, you're probably through, just trying to get a sense of how to think about the loan book continuing to reprice?
spk06: Yeah. I like to go back to memory bank. I think the first time the Fed increased, we only had like $700 million in loans that repriced because you had so many below floors. It took a while for the actual rate to get above the floor rate. So we had a lag there. at the very beginning of the Fed right increases.
spk08: Do you happen to have maybe kind of where the loan yield was in September?
spk06: Just the month of September?
spk05: Yeah, sure.
spk06: No, but I'll email it to you. I don't have to bring a lot of monthly data, I guess, on that side. No, I can email it to you.
spk08: Okay. Sounds good. Thank you, guys.
spk06: I appreciate it. I'll go back and look at that number of loans that repriced our quarters, but I think we had very low numbers for that increase.
spk08: Okay. All right. Great. Thank you.
spk05: Well, thank you, everybody. I'm sorry. Thank you, everybody, for being on the call today. We're excited about the outlook in the future. I think we're position for future growth, and we're excited about all the new people that have joined our company. So without anything else anybody want to say or close out, we'll close it out.
spk00: Thank you. That will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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