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spk00: Greetings and welcome to the Service First Bank Shares first quarter 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 you to your host, Davis Mains, Director of Investor Relations. Thank you, Davis. You may begin.
spk04: Good afternoon and welcome to our first quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We'll have Tom Broughton, our CEO, Henry Abbott, our Chief Credit Officer, and Kirk Presley, our CFO. I'll now cover our forward-looking statements disclosures. 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 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. Thank you, Davis. Good afternoon, and thank you for joining our first quarter earnings call. We do think the first quarter is off to a good start of the year. We are optimistic we'll see improvement on a quarterly basis. Kirk Presley is going to talk about our margin and deposit activity in a few minutes. In addition, our expenses are in line as expected. Henry Abbott will talk about our continued strong credit quality shortly after that. Looking at loans, first thing I'll say is we had really good growth in the quarter with over $200 million in net loans. More importantly, our lung pipeline is back to normal levels today and has increased 63% since year end. In recent weeks, our bankers are seeing greater activity and some projects that are postponed or are ramping up again. I'd say our pipeline is very close to normal levels. Production side, we were fortunate to add nine new bankers in the first quarter up from in the fourth quarter of 2023. Six of these producers are in the Memphis market. We also expect to announce a new market within a few weeks. We are working to better measure productivity of our commercial bankers as well as our support staff. Success is obvious for bankers. You know who's being productive and you know who's not, but we're working On other metrics to better gauge the required inputs to success. We are optimistic we've been successful in the coming quarters given the current economic environment. Now I'm going to turn it over to Henry Abbott first to make some comments on credit quality.
spk05: Thank you, Tom. The bank got off to a strong start in 2024 with the loan growth Tom previously mentioned. I'm pleased with our results and how the bank's loan portfolio has performed in the current interest rate environment. I'm also pleased to say with our loan growth, we experienced the largest segment of growth in our owner-occupied real estate segment, which grew by $120 million. Charge-offs for the quarter were six basis points when annualized, which is less than the fourth quarter results of nine basis points and generally in line with the first quarter of 2023. We ended the quarter with only $17 million in past due loans. which is a 35% decrease from year end 2023 and down from the same time prior period. The allowance to total loans was 1.31, which is basically flat compared to when it was 1.32 at year end and generally consistent with the past few prior quarters. Non-performing assets did increase for the quarter, and this was primarily related to one credit. credit has been on our watch list for some time, and while the customer is current on all loan payments with Service First, we felt a conservative thing to do with move loan to non-accrual given recent changes with our borrower. We have significant collateral above and beyond the loan amount, and we're working with the borrower and other parties to find a smooth landing spot that is in the best interest of the bank. The bank has been at or near historic lows for the past few years as it relates to non-performing assets. Even with this one additional credit, at the end of the first quarter, NPAs to total assets were still only 22 basis points, which is significantly below our peers and less than half of where we were at the end of 2019, which was closer to 50 basis points, and generally in line with where we were at the end of 2020 at 21 basis points. These are both good pre-COVID benchmarks. I will also note that the allowance for credit losses when compared to non-accruals was 452% at quarter end, and this is significantly greater than our peer group. We continue to feel good about the bank's loan portfolio and credit quality. I'm pleased with how the bank ended 2023, and we continued that momentum in 2024, and now our loan growth is beginning to tick up as well at a better pace. With that, I'll pass it to Kirk.
spk01: Thank you, Henry. Good afternoon. We are very pleased with the progress the bank has made in the first quarter. Liquidity and capital continue to remain strong. Both loan and deposit pipelines continue to grow and fund. The net interest margin has not only stabilized, but started to expand. Net interest income is at its highest level since the first quarter of 2023. Net interest margin percentage is up nine basis points to 2.66%. as the rate paid on interest-bearing liabilities was flat with last quarter. And the yield on the interest-earning assets is up eight basis points. Dollar margin is up modestly over the fourth quarter, despite there being one less day. Our non-interest-bearing deposits were stable in the first quarter and margin stabilized in Q4 2023 and improved in Q1 2024. Total deposits were down due to our deposit optimization actions during the quarter and seasonal deposit declines. We reduced more than 220 million of high-cost transactional deposits during the first quarter. As Tom mentioned last quarter, our incentives for 2024 are balanced for deposit and loan growth. However, the base for deposit growth was set at March 1st. We did not want to hurt employees' 2024 incentives for reducing high-cost transactional deposits as directed. The loan pipeline began to fund up during the first quarter, and we expect that to continue. The key to improving earnings per share is loan growth, repricing loans when possible, and maintaining our cost of funds. Net interest margin increased to $102.5 million in the first quarter versus $101.7 million in the fourth quarter of 2023. As I noted earlier, there was one less day in the first quarter of 2024. Approximately 70% of loan production in Q4 and Q1 was variable rate. 75% of variable rate loans have a floor. 43% of total loans are floating rate today. The average rate on loan production for the first quarter was just above 8%. As we noted last quarter, we see margin increasing throughout the year. We don't anticipate a significant increase in the cost of funds going forward, especially as compared to our peer banks. while we expect the yield on interest-earning assets to continue to increase as fixed-rate loans and investments continue to mature and reprice. The first quarter is typically slow for repricing. For example, covenant violations usually occur after taxes are filed and financial statements are received. Examples of our repricing efforts during the quarter are that approximately $120 million of loans had the rate restructured This quarter, the primary reason was due to advancing additional funds and repricing the new loan. These repricing activities increased the yield of those loans by 2.56%. The cumulative effect of this repricing will improve margin and earnings per share going forward. During the first quarter, we had $139 million of low-rate securities mature at a rate of 2.2%. We have approximately 120 million of maturing securities yielding 2.62% during the second quarter and another 25 million yielding 2.93% in the third quarter. Reinvesting these proceeds will improve the margin going forward. Deposit costs stabilized during the fourth quarter. We began our deposit optimization review focused on higher rate transactional deposits during the quarter. We reduced more than $220 million of high cost deposits, which resulted in a small reduction in deposit costs. Total deposits declined due to this effort and seasonal declines in the first quarter. During the first quarter of 2024, we realized a $1.2 million death benefit on one of our bank owned life insurance policies. Our non-interest income was up modestly from Q4, excluding this extra BOLI income. Credit card income was a little low due to seasonally lower spend in the first quarter. We do feel good about the rest of the year as we have seen spend increase in March. Accounts are increasing and new correspondent banks are being added at a nice pace. In discussing non-interest expense, we're watching expenses closely. As usual for us, I said in the fourth quarter call that our normalized Q4 expense run rate was around $44 million. During Q1, the FDIC updated their estimate for the special assessment, which resulted in an additional $1.8 million of FDIC expense. Excluding this special assessment, our non-interest expense for the fourth quarter was $44.5 million. Expenses were up modestly for Q4 run rate due to the expenses for the Memphis office and some lingering costs related to the EDP contract that was terminated in Q4. We continue to grow book value per share. Our capital ratios all improved during the quarter. At quarter end, our CET1 ratio increased to 11.07%. Our tier one capital to average assets ratio increased to 9.44%. I'll give some additional color now on what we expect this year. We are optimistic about 2024. As a reminder, like most other banks, Q1 2024 was significantly different than Q1 2023. The increase in the bank's funding costs outstripped the increase yield on assets during 2023. This compression looks like it might continue for a while for many other banks. As I said in the fourth quarter call, we think our increase in funding costs has largely been realized and the increases in the yield on assets is expected to grow both the dollar and percentage margin from December 31. The good news is our deposit costs seem to have stabilized as we expected. And the yield on assets should naturally grow from here as lower fixed rate loans and securities reprice. We feel good about the loan growth during the first quarter and expect it to continue. Although deposits retreated a little in the first quarter, we are still in a strong liquidity position. We frankly had more than we wanted. We expect to grow deposits throughout this year. We think our dollar margin bottomed out in the third quarter of 2023 and expect it to continue to grow from here.
spk04: Davis, with that, let's open up the floor for questions.
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 to 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. Thank you. Our first question comes from the line of Steven Moss with Raymond James. Please proceed with your question.
spk06: Good afternoon. Maybe just starting here, Tom, with the uptick in the loan pipeline after a good quarter of production. Just curious, how are you thinking about total loan growth for 2024?
spk04: The pipeline is awfully good. It's just that it never seems to close when you think it's going to. It always takes longer than you think it's going to. If I looked at our pipeline, I'd say, you know, it's going to close, you know, $150 million a month. But I know things can go wrong with that, and it drags out, and, you know, it takes weeks and months longer than you think it's going to because, you know, if you'd asked me what was going to close in the first quarter, I would have told you, you know, gross loan production of $150 million a month. Well, you know, you saw it's $200. So it's, you know, it's a good bit less than I... would have anticipated. But I will say that it is, you know, when I say it's approaching normalized levels, I mean, you know, prior to, you know, the pandemic, you know, huge run rate that we had in, you know, in the last big year loan production. But it's strong. It's, you know, we're seeing increased activity. And, of course, we focused on this year, as Kirk said, we're evenly focused on loans and deposit growth. And so we see a lot of opportunity, you know, loan growth opportunity this year. We really do.
spk06: Okay. In terms of just the, you know, the business mix of the pipeline, just curious as to, you know, what types of opportunities you're seeing and geographically if there's any concentration.
spk04: Well, you know, if you had to pick one area that's strongest, you'd say Florida, obviously, you know. With the population boom they're having down there, they need to build everything except assisted living facilities. Those are overbuilt everywhere, including Florida, but it's strong. But it's not, you know, I'd say it's pretty localized, I mean, not localized at all in terms of we're seeing, you know, increased activity in most of our markets. And I don't know, Rodney, could you add anything to?
spk02: Well, what you named, Florida obviously has been at the front for several quarters. But we're seeing a lot of opportunities with owner-occupied. I think Henry made comments of our $220 million growth, 120-odd was owner-occupied stuff. So it's quality stuff that we're seeing pretty evenly spread.
spk05: And I think some of our newer markets, it's just a longer sales cycle to bring on C&I customers in certain instances. So Charlotte's coming on board. Some of our Florida markets are coming on board. It's just, you know, it's a longer sales cycle on some of these businesses and they seem to be, you know, maturing.
spk06: Okay, great. Really appreciate that color. And then in terms of just the margin here, I mean, it seems pretty straightforward that, you know, your funding costs have stabilized and you get the asset price benefit here going forward. Just curious as to, you know, if you could give us an update as to what level of fixed assets you expect to reprice in 2024.
spk01: On the loans and on the securities, the low rate securities, Um, you know, the more longterm ones that are maturing this year, I think you're going to be around similar to what we talked about in the fourth quarter, which is about $2 billion a year. Okay.
spk06: Okay. That's helpful. And just one last one for me on the non-performer this quarter, just curious as to what industry, uh, that is, uh, tied to.
spk05: Yeah. Um, and this is Henry, by the way. And like I said, I mean, they are current on their loans, um, but the business is closing. We're well collateralized. This is owner-occupied real estate.
spk02: Okay, great. Thank you.
spk00: Thank you. Our next question comes from the line of David Bishop with Hovde Group. Please proceed with your question.
spk03: Good evening, gentlemen. Hey, Dave. Hello.
spk02: Hey.
spk03: Tom, gentlemen, just curious, you said you're obviously keeping a close eye on expenses in this environment. You held in pretty closely at $44 million, but you've been adding bankers, commercial bankers, being opportunistic. Just curious where maybe you see operating expenses trending over the near to intermediate term, maybe from a growth rate or dollar basis.
spk01: I think what we were saying last quarter is probably still holding true, that we expect the full year to be probably within the $180 to $185 million. It's really hard to dial it in closer than that, but a little bit higher than the current run rate as compensation increases happen throughout the year, but not a whole lot more than where we're running.
spk03: Got it. And then, turning back to the DIM discussion, Just curious, you know, obviously from the numbers, looks like the funding cost side is stabilizing. Just curious, if you look at the earning assets side, maybe where you see the yields on earning assets maybe trending to, and is there sort of a terminal peak that maybe hit this year or next? Just curious where you see those trending to over the near intermediate term as well.
spk01: I'm not going to give you a whole lot of detail on that, but it's next year that it'll peak. It's not this year, but we'll have really nice growth this year. I mean, if you think about around $2 billion is rolling to more current rates, we should have a nice lift this year, and it'll continue into next year. So holding these funding costs in this relevant range is really important, and we've got a nice tailwind. We just have to see it through.
spk04: I guess we didn't have really any securities maturities last year at all. And the low rate security repricing is substantial this year. It's going to turn into real money, Dave, over the course of the year.
spk03: And was that the $2 billion, was that inclusive of loans maturing or repricing, or was that solely the total sort of combination of securities?
spk01: No, that's the total. That's the total. Low rate securities are probably like 280 million in the year. A lot of it was during the first quarter. I think Davis helped me 130 or so. I think it was in my script for the first quarter. So we've seen some of it already. There's more to go. But all of the fixed rate loans and low rate securities for the year are probably going to be around 2 billion.
spk03: Great. Thank you.
spk01: You're welcome.
spk04: We'll have a better feel. For the loan repricing, I think last year the loan repricing was about a billion eight total. We'll have a better feel once we get into covenant season when we get financial statements. That'll be a little bit better. There's nothing mature as much in the first quarter as Kurt mentioned. Dave, when we get into the second and third quarter, we're going to have a pretty good feel of what what potentially will reprise there.
spk03: And Tom, does that, you know, the visibility or the optimism of the pipeline, you said things are improving from maybe a customer basis. Just curious, what do you think is driving that as you get financials? Or, you know, are the borrowers just maybe in better shape than they realize from a liquidity and cash flow perspective? And that's giving them optimism to think about M&A or new business line investments. Just curious what you think is driving that across your markets.
spk04: I think the recession fears are receding. I think it's the number one thing. People that have shelved projects for up to a year are looking at moving forward with projects whether it's C&I or commercial real estate. One problem we've had with C&I loan demand, their profits have been so strong. With C&I and ag borrowers for the last couple of years, They've had a lot of drought powder, so they haven't had to borrow money. Profits have been too good. We're happy for them, of course, but we don't wish them to make any less. Overall, we're just seeing a more optimistic attitude out there among the customer base in many regards.
spk05: Great. Appreciate the color.
spk04: Thank you. Thank you. Go ahead. I'm sorry.
spk00: Oh, I'm sorry. I was just going to say there are no further questions at this time.
spk04: Thank everybody for joining our call and appreciate your interest.
spk00: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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