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spk00: Greetings and welcome to the Service First Bank Shares fourth quarter and full year earnings call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mage, the Director of Investor Relations. Thank you, Davis. You may begin.
spk05: Good afternoon and welcome to our fourth quarter earnings call. Today's speakers will cover some highlights from 2023 and then take questions. We'll have Tom Broughton, our CEO, Rodney Rushing, our Chief Operating Officer, Henry Abbott, our Chief Credit Officer, Bud Foshee, our CFO, and Kirk Presley, who will be taking over as CFO after Bud retires later this quarter. 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 file. 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. Thank you, Davis. Good afternoon, and thank you for joining our fourth quarter earnings call. Well, you know, 2023 was not what we expected it to be when the year began, but we are pleased with the results of the hard work by our bankers, who I think are the best in the industry, where we ended up the year. But we'll go into more detail on, but we certainly are pleased to see the net interest income not only stabilize, but to improve in the fourth quarter. And what we found over the years, and In banking, you can cut expenses to improve profitability, but you cannot reach prosperity without the net interest margin reaching acceptable levels. We do expect some tailwinds from the margin both this year and 2025. You'll hear more about that as we move through our speakers. We are pleased to announce that Joel Smith has joined us as president of Memphis, Tennessee Market, and we'll certainly provide more information on the team and our location there soon. It is a great market. Total deposits in Memphis are $41 billion, and we think we have a great opportunity there. As we've commented in prior calls, once we saw the run-up in treasury rates in mid-2022, we pivoted to deposit gathering, which proved to be great timing given the events of March of 2023. Our results in 2023 exceeded expectations with year-over-year deposit growth of 15%. New commercial accounts were up 15% over 2022, and total new accounts, including retail accounts, were up 12% year-over-year. We are one of the few banks our size who has no broker deposits or federal home loan advances. This will certainly serve us well if the regulators announce new liquidity standards as expected. Rodney Rushin will discuss a little bit more about the correspondent division after I finish my remarks. Loans grew slightly in the fourth quarter. We did have loan growth in five of the last seven months of the year. CNI line utilization has really not improved since it's been pretty flat since June 30, 2022, certainly with the after effects of the Triple P program. And then as rates moved higher, that also has reduced borrowings more than you would see otherwise. And of course, most of this reduction in The borrowers on the C&I side was funded with non-expiry deposits, so you really have the worst of both worlds there when you're taking money out of non-expiry accounts to pay down lines of credit. We do think most of that is in the rearview mirror at this point. The back story of the quarter is we had $178 million of loans that paid off early in the at an average rate of 4.3%. So getting those loan payoffs was a good thing and improved profitability. We are growing increasingly optimistic that as activity is picking up, we will see more normalized loan growth this year. Our loan pipeline has increased 50% since last quarter end, which has improved substantially from 2023 levels. We're certainly not at the blistering pace of 2022, but that year was certainly way above normal in loan activity and will not be a typical year. We think the pipeline is very robust at this point, and we do see loan activity picking up on a weekly basis. And certainly activity in a new market like Memphis will help carry us, give us some momentum later in the year. On the production side, we hired seven new producers in the fourth quarter, up a net of three. a total of 143. Even though we are adding a team in Memphis, we do expect to improve the efficiency of some of our other markets over time, and maybe our headcount will end up more balanced as we go through the end of the year. Credit quality does remain strong. I think most of us in the industry and all investors have been waiting for a recession since 2019. But we do not see any early signs of difficulties emerging, and Henry Abbott will discuss it in a few minutes in more detail. So in this time, I'm going to turn it over to Rodney to talk about the correspondent division.
spk09: Thank you, Tom. Correspondent banking had a strong second half of 2023 and fourth quarter, both deposit growth and new relationships. As I reported last quarter, that correspondent balance grew. They continued expanding with just over $280 million, or a 15% increase during the second half of the year. During the fourth quarter, we opened nine new correspondent banking relationships with a total of 28 for 2023. Three new agent bank credit card issuers, where we had 14 new issuers for the entire year. Eight new settlement banks during the fourth quarter, 15 for the year. Most new account activity came from our newly expanded Texas market, while new agent credit card issuers were spread across the U.S. As we look to continue this momentum into 2024, our focus has shifted some from deposit growth and toward improving liability costs. We are specifically optimistic about this outlook in correspondent banking. If interest rate futures markets are accurate, and we are in a declining rate environment. Correspondent banking should benefit from these falling rates. As rates decline, our correspondent liability costs will decline step for step with a beta of one. In addition, at the same time, funds will migrate from interest-bearing deposits to non-interest-bearing accounts. The only other topic I'd like to mention, Tom, is that we've completed the credit card system conversion. and we have worked through the changes and have the benefits and extra features it provides both us and our agent banks. Because of that, we are optimistic about credit card revenue contributions in 2024. With that, I'll turn it over to Henry Abbott for comments, who has a short report, I believe. Short usually means good news, coming from our chief credit officer. Henry.
spk07: Thank you, Rodney. I'm pleased with the bank's performance in 2023, more specifically in the fourth quarter. The bank's loan portfolio continued to perform at an exceptional level in a unique environment with rising interest rates than we experienced in 2023. Newcom covered pipelines and loan outlooks for 2024, but I will also add that we brought on some strong teams in North Carolina and Virginia in 2023. The bulk of the past year, we had them focusing on deposits and not loans, so we are well positioned for loan growth in 2024 and beyond as we will have some good tailwinds in these new markets. These bankers are now focusing their efforts on lending. Some of these markets are having disruptions due to bank mergers and other changes create an opportunity for Serviceverse to attract and retain high-quality customers. Our asset quality continues to remain strong and our core key credit metrics were all generally stable or improving. Our charge-offs for the quarter were only nine basis points when annualized and that is down from the annualized 15 basis points in the third quarter, which is roughly a 40% reduction quarter over quarter in charge-off. Our A-triple-L's total loans went from 1.31 to 1.32 for the quarter. Non-performing assets decreased in dollars and NPAs to total assets from 15 basis points in the third quarter to only 14 basis points in the fourth quarter. Our asset quality continues to remain strong. Also note, we started the year with AD&C loans as a percent of risk-based capital being at 100%. And over the course of the year, that has come down to 90%. We don't see any issues within our portfolio and problematic asset classes such as office space. Our commercial real estate portfolio continues to perform at a very high level. We feel good about our loan portfolio and how it performed in 2023, how we're positioned for 2024 and beyond. With that, I'll hand it over to Bud.
spk04: Thank you, Henry. Good afternoon. We are very pleased with the progress the bank has made in the fourth quarter with liquidity, credit quality, capital, improving loan pipelines, and net interest margin stabilized. Our non-interest-bearing deposits were stable in the fourth quarter. Our total deposits grew by $132 million. As Tom mentioned, we saw net loan growth in five of the last seven months of 2023. The key to improving earnings per share is loan growth, and our team has focused on a more balanced approach to loan and deposit growth in 2024. Our 2023 focus on deposits worked as our liquidity remains strong at $2.1 billion. Our adjusted loan to deposit ratio at year end was 80.2%. This ratio includes the correspondent Fed Funds purchase. Our loan repricing initiative will contribute to net income in 2024 as we don't anticipate increasing deposit costs. Examples of our repricing effort. 525 million year-to-date of loans where the rate has been restructured Loans paid off early were $185 million. We have $154 million pending in loan repricing. Loan repricing is the best opportunity to improve profitability combined with loan growth. Loans that repriced or paid off in the fourth quarter were $212 million, which combined with loan paydowns on fixed-rate loans totals to $2 billion. on an annualized run rate. The cumulative effects of this repricing will improve margin and earnings per share over time. We have low-rate investment securities of $347 million maturing in 2024. We would improve the margin by $8 million on an annualized basis by reinvesting in short-term treasuries or overnight funds. Net interest margin increase in the quarter, $102 million in the fourth quarter versus $100 million in the third quarter. Variable rate loan originations made up 69% of the total production in the fourth quarter at a rate of 8.3%. 82% of these loans have a full rate. 36% of the production had a full rate of 5%. and 18% had a full rate of 5.5%. About 42% of total loans are floating rate today. Deposit costs stabilized in December. We have begun rationalizing higher deposit costs in the first quarter, so we expect higher cost excess funds to decline in addition to normal seasonal declines in first quarter excess cash. Credit card income in the fourth quarter was impacted by a billing issue with one vendor that was not timely passing through certain expenses. We anticipate this income returning to normalized levels in 2024. In discussing non-interest expense, we made an effort to hold the line on expense growth in 2023. The incentive payouts for 2023 were more than we anticipated as we focused on deposit growth for the entire year. The focus on 2024 incentive plans is to enhance earnings per share. We anticipate new additions for the Memphis market will be offset by production officer attrition in 2024. We have several non-recurring expenses in the fourth quarter, which are detailed in the earnings relief. Our teams are performing quite well and have grown new accounts 12% year-over-year. We've continued our growth in book value per share. Our CET1 ratio was 10.91%, and our TN1 capital leverage ratio was 9.12%. Our capital continues to be a strength. I'm retiring next month, so I'll not be here for the first quarter of 2024. Kirk Presley will be the next CFO, and I will turn the program over to him and comment on 2024.
spk02: Thank you, bud. Tom's given some good color on the business. I'll give some color on the earnings side. I'm optimistic about 2024. As a reminder, like most other banks, Q4 2023 was significantly different than Q1 2023. So I'll focus my comments on the run rates from the fourth quarter versus year over year. The good news is that we feel good about where we're going. We expect the margin to grow from here, not only due to loan growth, but also from the repricing of fixed rate loans and securities as Bud discussed. We think our deposits repriced quicker than most of our peer banks. So we're probably a little farther along on overcoming increases in funding costs. We think our dollar margin bottomed out in the third quarter of 2023, and it'll continue to grow from here. We expect Q1 2024 to be higher than Q4 2023, despite there being one less day. We think the margin expansion will accelerate from there due to both the fixed rate loans and security cash flows and growth in the loan book. Non-interest income should do well this year, but as you know, that is a smaller part of our business. We do expect growth in low double digits. Non-interest expense is a little more of a challenge to explain, But as you all know, we keep a firm grip on expenses. The fourth quarter had a lot of noise, primarily due to the non-GAAP adjusting items noted in the press release, which are the FDIC special assessment, duplicate privilege tax expense, and the termination of our EDP contract. In addition to those items, we also had elevated expenses related to historic tax credits. If you strip out the unusual or infrequent items, we think our fourth quarter core non-interest expense run rate was closer to $44 million. We expect expenses to grow slowly from here. Year over year, we expect expenses to grow mid-single digits from the 2023 reported numbers. This would be closer to 10% after taking out the infrequent and unusual items from Q4. The increases are due to normalized incentives for the full year, the investments in the Memphis team and their facilities, merit increases, and continued investments in technology and back office. We expect nice progression in the income statement in the first quarter, as well as loan growth. We expect EPS for the quarter to be up modestly when compared to the adjusted fourth quarter of 91 cents. However, the funding of the allowance for credit losses for loan growth is expected to limit the growth in the net income in EPS. The good news is the extra margin from the loan growth will go to the bottom line in subsequent quarters. Let me turn it over to Tom for some final thoughts.
spk05: Thank you, Kirk. We had previously announced that Bud's going to retire after a year in, so this will be his last earnings call. Bud was here for the formation of the bank in 2005. He handled all back office functions, cash management, HR, in addition to his finance duties. So when Bud came on board, I said, Bud, two things. I said, I've hired a head of deposit operations. She's great. And I said, I bought funds this And he didn't think the deposit ops person was really all that good, and sure enough, she resigned two weeks before we opened the bank. And he threw the phone system in the trash and got a new one. So after that, I didn't tell Bud how to do anything in the back office anymore. I let him handle that, and he's done a great job. He's obviously, you know, the stock price is still depressed at current levels, but, you know, We started, it was $1.66 a share in 2005, and it's in the 60s today. So, Bud has clearly done an outstanding job. And, Bud, thank you for all you've done for the company. So, with that, we'll turn it, open it up for questions now.
spk00: Thank you. We will now 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 key. One moment please while we poll for questions. Thank you. Our first question comes from the line of Graham Dick with Piper Sandler. Please proceed with your question.
spk01: Hey, good evening, everyone. How's it going?
spk05: Great. Hi.
spk01: I just wanted to start on the loan side of things. I know we talked a little last quarter. You talked about it just a bit just now, but I think things are a little slower than I expected this quarter on the loan growth side, and I had some payoffs. but we had talked about that, you know, the one and a half billion of liquidity you wanted to deploy. Just trying to get a sense for, I guess, a better sense for how much loan growth you expect in 2023, whether that be a dollar amount or a percentage growth number, something to just, you know, set the bar at going forward. And then I guess also in tandem with that is this, you think you'll just have this elevated liquidity position for a bit longer than you thought last quarter or Basically, how are things looking on that front, I'd say, relative to where you were three months ago?
spk05: Ray, this is Tom. We're quite optimistic. As I said in the prepared comments, in terms of loan demand has picked up markedly. The pipeline's doubled where it was, and we expect those loans. That's a 90-day pipeline, so we kind of know what the next 90 looks like. There could be a little drag on that. It could take you know, 120 days to close the amount in that pipeline. But, you know, that kind of funding will give us a nice number at the end of the year. And, you know, we don't, you know, I'm participating high single digits for the year is kind of what we're in our internal budget. So we're budgeting. So, you know, we think that the loan demand is clearly coming back in terms of, and maybe we're doing a better job of getting out and marketing, you know, we were marketing deposits for the last 18 months and we obviously flipped and we're actually marketing both loans and deposits, but we're certainly got a real key on loans right now compared to where we were before.
spk01: Okay. That's helpful. And I guess as you look at loan growth, it sounded like CNI lines are, you know, pretty much just staying where they are, you know, I guess at a percentage basis. Where do you think the growth is going to come from from your customer base? Like what segment? Are we talking CRE here or construction? What are the main areas that you're seeing demand, you know, pick up in, I guess?
spk05: You know, a lot of CRE, but, you know, and a lot of, you know, it's a lot of different things. I mean, whether it's a marina in Florida or whatever else, we're seeing there's some construction out there. Obviously, Florida is continuing to see, you know, very nice growth. with the population inflows that we have there. Certainly, we hope that C&I is going to pick up compared to where it's been, and I think if we get some lower rates towards the back half of the year, hopefully we can see some C&I growth. Our pipeline today includes some C&I. We're optimistic that we'll grow everything, but we've got room. Certainly, we've got room to grow CRE, and we've got some room to grow construction as well. We've got room in our bucket, so we feel good about it. We don't feel like we'll have to constrict any one segment during the year for anything.
spk01: Okay. That's helpful. And then Bud or Kirk, whoever wants to take this on expenses, I think you said that there's obviously some one-timers called out in the release and then a higher write-down of the tax credit investment But I guess just specifically in that accrual that was booked this quarter, so at the end of the day, was that a $1.9 million net benefit to the bottom line? Because in the release, it looked like there was a tax benefit directly tied to that accrual of, what was it, $4.1 million. Is that the right way to think about that, that it was at the end of the day, even though it hurt expenses by a little bit, it was actually $1.9 million benefit to the bottom line?
spk04: Well, you had $4.1 million in tax benefits. credit, and then the tax expense related to that was $3.3 million. Are you looking at something else?
spk01: No, no, that makes sense. I thought that $2.15 million that was called out in the non-GAAP was... Oh, no, that's privileged.
spk04: That's totally different. Yeah, that's privileged tax.
spk01: Okay. But the run rate, essentially, at the end of the day was $44 million, like you said, and mid-single digit from here.
spk03: Yes.
spk01: All right, that makes sense. And I guess just the last one for me would be on the margin, specifically just deposit costs. Sounds like the end of quarter cost of interest-bearing deposits was actually lower than the average rate. If the average was 406 and the period 404, are you starting to see some actual relief in the cost of deposits move lower on the interest-bearing side? Or is that just more stabilization at this point than anything?
spk05: we're working at it, Graham, I guess, you know, it takes effort, you know, it doesn't happen, it doesn't happen without effort on our part, obviously, but, you know, we're trying to rationalize the higher cost deposits that we see, so, you know, we're trying to reduce, you know, we're reducing certain deposit rates, we obviously have a, you know, we're in a good position from an liquidity standpoint, and, you know, we've We need to improve margins. We're working hard at that. None of us are naive enough to think our charge-offs are going to stay at 10 basis points for the rest of my career. There are going to be times they're going to be higher than 10 basis points a year. We need to have higher margins in order to absorb the loan losses from that as well. We've got to improve margins. That's certainly a focus that we have for the whole year. You know, there's only one way to do it, and that's, you know, raise loan rates and lower deposit costs. So that's what certainly we're not, you know, forecasting in our internal budgets any rate cuts or rate increases for that matter. We always forecast flat rates and think we're going to have to make it based on what we have. You know, with the cards we're dealt, we don't count on getting a shuffle and getting better cards in the deck. So does that answer your question, Greg?
spk01: Definitely, definitely. Okay, that's all from me, guys. And, Bud, congratulations and good luck.
spk05: Thank you.
spk00: Thank you. Our next question comes from the line of Steve Moss with Raymond James. Please proceed with your question.
spk03: Good afternoon. Maybe just starting off on, just circling back to loan growth here, you know, the quarter was driven with a tilt towards resi. Just curious, you know, Do you expect this will continue here for another quarter or two? Are you looking to maybe just try to get a sense for increase your asset sensitivity, just the dynamics there, what kind of product you put on as well?
spk05: First of all, yeah, we didn't really have any loan growth in the quarter, and I don't think we've got
spk08: on the residential side i don't think we don't have much there steve i don't what what what do you see there that i've had uh six uh six point eight percent quarter recorded risk for uh one to four family yeah i mean that one to four family was was certainly kind of part of the driver of the growth and for the quarter um but you know that an anomaly. I mean, we're focused on commercial clients. That's where we're going to see our growth is in commercial T&I and commercial CRA, and that's our bread and butter. Does that include rent to own? I mean, excuse me, rent to rent?
spk05: No, this is just single family, one to four. Okay. It's still not a big... Yeah, and the rest of your question, I'm sorry, I focused on that, Steve. Give me the second half.
spk03: Yeah, I was just thinking... Yeah, I was just thinking around asset sensitivity and maybe just make it into a more broader question. Obviously, rate cuts should help you guys here. Just curious what you're doing either on the balance sheet to benefit from potential rate cuts and today where you're positioned, what a move of 25 base points will do to your margin.
spk02: This is Kirk. We are liability sensitive, but it is not massively. We're pretty close to neutral at this point. And that's where Tom's always tried to direct this bank. I think we are a lot more neutral than we were or even liability sensitive compared to where we were a year ago. So I think at this point, if there was a nominal increase in rates or a decrease in rates, as we're talking about, we don't think it's going to have a major more than like 2%, 3%, and that's at a 1% rate change over a year. So it's pretty nominal. So we're playing the hand that we're dealt right now. We think the repricing story is something that really is going to help us a lot over the next year, and we like what's happening with the securities too. So we like where we are today.
spk03: Okay, great. I appreciate all that color. And just One more thing. I apologize if I missed it. On the credit card income, I heard the issue with the vendor you guys mentioned. Just curious how you guys are thinking about the growth for that business in the upcoming year, how much you can pick up.
spk09: It's Rodney Rushing. Yes, we had a vendor billing where we actually had double expenses for the fourth quarter, which caused the revenue to hurt the credit card income for the fourth quarter a bit. We also went through a conversion, which I noted, during the year. All of that's behind us now. Besides our growth, you know, with our own commercial customers with P cards and credit cards, we're adding agent banks. In 23, we added 14 other banks, correspondent banks that are issuing credit cards. You know, we share that revenue with them through the American Bankers Association endorsed program. But through all these new issuers that we're adding and our pipeline of new banks is stronger for 2024 than it was for 2030.
spk03: Okay. Great. Appreciate all the color guys and, Bud, best of luck on your retirement.
spk04: All right. Thank you.
spk00: Thank you. Our next question comes from the line of Dave Bishop with Hovde Group. Please proceed with your question.
spk06: Yeah, good evening, gentlemen. Dave? I think in the prepared remarks you said the outlook for it'll be a balanced approach between loan and deposit growth, I think, for the year. How should we think about the funding of loan growth? My single digit is going to be Purely CAT deposits, or is it going to be a combination of runoff from CATs and securities? Just curious how we should be thinking about that.
spk02: It's going to be deposits. We're trying to be balanced this year on dollars, so a little bit different, obviously, in percentage, but we're trying to be balanced on dollars.
spk06: Remind me of the cash flow from the securities portfolio, what you're expecting this year.
spk02: About $2 billion. $2 billion.
spk06: Two billion?
spk02: Okay. On loans. Sorry. Loans.
spk06: And the securities?
spk04: It's about $7 million a month in payday.
spk06: $7 million. Okay.
spk02: And we have the maturity. Yeah. And another $350 million or so in maturities.
spk06: Got it. And originations this quarter, I missed it during the preamble. What was the new origination yields on loans?
spk04: Origination rate was 8.34 for the quarter.
spk06: Got it. And then more of a housekeeping item. I know there's a lot of noise on the tax number this quarter. Just curious what we should model for a good tax rate moving forward.
spk02: About 17.5.
spk06: Perfect. And then, Tom, you mentioned the The new hire in Memphis, obviously a good start there. Just curious if you sort of had some numbers in the mind, how big you think that market could go to either on the loan deposit side or both.
spk05: We don't really go into any market if we don't think you can achieve $300 million minimum in a three-year period of time in loans and deposits. So this would certainly fit in that as well. Joel's team, they're going to be relationship bankers. They're not going to be transactional bankers, and that's what we prefer to build on is relationship bankers there. So we've already, you know, our bankers are coming from a number of different banks, so we get a little cross-pollination there of people. So we're optimistic that we can be successful in Memphis. Okay.
spk06: Got it. Thanks. And, yep, Buck, congratulations on the retirement.
spk05: All right. Thank you. Thank you, Dave. Thank you, everybody, for listening on the call. I don't think there are any other questions, but I appreciate everybody tuning in today. Have a great evening.
spk00: This concludes today's CALA conference. You may disconnect your lines at this time. Thank you for your participation.
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