ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Greetings. Welcome to the ServisFirst Bancshares Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to your host, Davis Mange, Director of Investor Relations. Thank you. You may begin.
Good afternoon, And welcome to our fourth quarter earnings call. We will have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions.
I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections here 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 ServisFirst assumes no duty to update them.
With that, I'll turn the call over to Tom.
Thank you, Davis. And good afternoon, and thank you for joining us on our call. And I'll give a few highlights before I turn it over to Bud Foshee. If you're new to our call, you'll notice that we don't read to you from the press release in any way. So we assume everybody on the phone can read the press release without our reading it to you.
So I'll talk a little bit about loans. As you can imagine, we're pretty well pleased with the quarter, if you perused our release already. We did have -- loans grew $878 million in the quarter, which is well above our $100 million per month loan goal and is certainly a record for quarterly loan growth. And of course, $878 million excludes PPP payoffs.
For the year, our West Central Florida region had the highest growth rate, followed by Birmingham, North Alabama, Columbus, Georgia and Nashville. For the year, all of the growth came in the commercial real estate category. And we actually had a decline in commercial and industrial loan balances. We did see some commercial and industrial line loan growth in the fourth quarter with growth there of about $100 million.
The C&I commitments did increase by $250 million in the fourth quarter. So that's 30% annualized growth for the fourth quarter. That also had the effect of keeping the line utilization rate flat with the prior quarter. I mean it was marginally improved, but not enough to matter.
And talking about our loan pipeline, as you would expect after a quarter with such large loan growth, our pipeline was down from the last quarter. However, if you compare it to 1 year ago, our pipeline is 47% higher than 1 year ago. So we do are pleased with the pipeline. We do see activity, and we typically don't see much -- see very modest loan growth in the first quarter. I think we've had maybe 1 or 2 years out of 16 where we had pretty decent net loan growth in the first quarter. So we don't usually see it, but we do expect we'll make it up as the loan year goes on.
We do expect some growth this year from construction line draws that will certainly be a nice tailwind for loan growth. We did expect the C&I line utilization to improve in the back half of 2021, but it did not materialize as we expected. And hopefully, we'll see some improvement in that utilization rate as 2022 moves along.
I will say this about our banker's execution on the triple Paycheck Protection Program, the second round in 2021. Our bankers did an excellent job of performing as they did in 2020 with the first round. And that's led to many new opportunities with commercial and small business customers. And I think it's certainly enhanced our reputation for ServisFirst to our customers. So we're very pleased with where we are in the market and it certainly improved our brand recognition and enhanced our brand value, we think.
On the deposit side, we continue to see growth in deposits. Certainly, at a more normalized level than we saw earlier in the pandemic, the growth rate was 12% annualized in the fourth quarter, which is more in line with normal annual growth rates. After the pandemic surge, our correspondent division did experience a decline in deposits in the fourth quarter as our correspondent banks began to deploy some of their excess liquidity in loans and securities.
This is the time of the year, we start having sincere earnest conversations with different teams about joining the bank. They normally don't move to after incentive payments during the first quarter, which is February, March, April period. We are having discussions with quite a few bankers in new geographic regions. We don't have anything to add at this point in time. So again, we're not trying to add large numbers of bankers but trying to add -- look for a very small number of high-quality bankers add to our bank. So that's certainly -- we are optimistic on that front for this year.
So that will conclude my initial remarks, and I'll turn the program over to Bud Foshee, our Chief Financial Officer. Bud?
Thanks, Tom. Good afternoon. Liquidity. We had discussed the company's plan to purchase $100 million of 15-year mortgage-backed securities and 5 and 7-year treasuries on the third quarter call. Our net investment security growth, in the fourth quarter was $325 million. We also decided to retain a portion of our mortgage originations for the fourth quarter. We sold $6 million to investors and retained $53 million.
For our margin, loan growth, exclusive of PPP forgiveness was $878 million for fourth quarter. Average loans exclusive of PPP increased by $542 million in the fourth quarter. The average PPP loans decreased by $163 million for net average growth of $379 million. PPP fees and interest income were $5.8 million in the fourth quarter, compared to $6.4 million in the third quarter. Also an increase of $831 million and average excess funds decreased the margin by 15 basis points in the fourth quarter.
Non-interest expenses, salaries increased $698,000 comparing fourth quarter 2021 to 2020. Majority of this increase was in West Central Florida as we added production staff and opened the Orlando office. We hired 17 new producers in 2021.
Also, we increased our incentive accrual by $700,000 in the fourth quarter. Year-to-date 2021 incentive expense was $17 million versus $12.3 million for year-to-date 2020. We also invested in a new market tax credit during the fourth quarter, the investment write down increased noninterest expense by $3.1 million for the quarter but was more than offset by an income tax reduction of $4.1 million. We accrued $3 million related to termination fees for the change in our core vendor. This reduced the fourth quarter fully diluted EPS by $0.04 to $0.99.
Unfunded commitment reserve, we had a $1.7 million credit in the fourth quarter of '21 versus a charge of $1.2 million in the fourth quarter of 2020. Our LIBOR cap, which we purchased a few years ago, we wrote up the value by $839,000 in the fourth quarter of '21 versus a write down of $61,000 in the fourth quarter of 2020.
Non-interest income. Credit card income continues to grow $2.2 million in the fourth quarter versus $913,000 in the fourth quarter of 2020.Our spend was $229 million in 2021 versus $168 million in 2020. And year-to-date 2021 spend was $815 million versus $601 million year-to-date 2020.
That concludes my remarks, and I'll turn it over to Henry.
Thank you, Bud. We ended 2021 on a very high note. I'm pleased with the bank's performance in the fourth quarter, and the loan portfolio continued to perform at an exceptional level. We're very proud of the loan growth we achieved in 2021, more specifically in the fourth quarter. Our bankers calling efforts paid off in both new and core markets and our geographic footprint continues to be a strategic advantage for our bank.
Non-performing assets to total assets were down to 9 basis points versus 11 basis points last quarter and 21 basis points in the fourth quarter of 2020. NPAs continued to shrink. And we're down to $13.3 million. This is roughly a 20% reduction for the quarter and a 47% reduction from the fourth quarter of 2020. We showed a decrease in non-performing loans and OREO for the quarter, and our OREO dropped to just $1.2 million on a total loan portfolio of $9.5 billion.
Our past due to total loans were 7 basis points, $6.9 million on par with last quarter and 4 basis points less than the prior year-end. Net charge offs and OREO expenses were less than $800,000 for the quarter. Net credit expense for the year was just 4 basis points versus 2020 credit expense of 38 basis points. I'm extremely proud to say this was a reduction of roughly 90% from the prior year.
From a dollar perspective, we did grow our loan loss reserve by $8.5 million for the quarter. However as you'll note, as a percentage to total loans, the ALLL dropped from 1.24% to 1.22% for the quarter. The dollar rise is related to our strong loan growth, as mentioned by Tom. And the percentage decrease is correlated to the continued strong economic environment with which we are operating in.
2021 was a banner year for ServisFirst Bank, and we're well positioned for 2022 and beyond with the exceptional credit quality we have and a strong credit culture.
With that, I'll hand it back over to Tom.
Thank you, Henry. We're certainly optimistic about the outlook for 2022. And we'll be happy to answer any questions you might have.
At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Graham Dick of Piper Sandler. Please proceed with your question.
Hey. Good evening, guys. So just wanted to start off on growth here. Obviously, a banner quarter if you all, way ahead of that $300 million target. I just want to know how much of this quarter is, I guess, $900 million in end-to-end growth came from the new hires you all made last year in Florida.
I don't know exactly to answer your question, Graham. But it's a substantial number in the course of the year. I think we had $1.7 billion in loan growth for the year, net loan growth.
And by the way, I mentioned -- I said our C&I, this is not -- that you didn't asked this question, Graham. But I said our C&I loan balances were down $300 million for the year. And that's inclusive of PPP. If you exclude PPP, our C&I loans did grow $350 million or so. I should have said that earlier in my remarks. But it's not what we're used to. But I'd say close to 25% probably came from our new hires down in Florida in 2021, Graham. I don't know about a particular quarter, but just for the whole year.
That's helpful anyway. I'm just trying to get a feel for maybe if there's any more upside to come from that group in '22 in terms of incremental growth. And I guess kind of as you look back at the $300 million target, I'm just trying to get a feel for what you all might be expecting on a quarterly basis in '22? Obviously, first quarter could be a little slower. But $300 million to me, maybe it just seems -- it seems like there could be maybe upside to that.
Yeah. I mean of course, they've got a really nice pipeline right now down in the economy is really strong in Florida, as you certainly well know is strong for everybody. So we're seeing opportunities down there that are certainly outsized compared to the average region in our footprint.
Okay. Great. So I guess you all -- you're sticking to $300 million a quarter in terms of loan growth. Do you think that's still about right?
Well, the first quarter -- again, as I mentioned, we don't typically -- I think we've had 1 or 2 years that we've had net loan growth in the first quarter. This might be a year. We'll have some growth. Our goal is to say, okay, we're going to book $1.2 billion for the year, and it will probably come in the back 3 quarters of the year. And of course, you can get impact to it from quarter-to-quarter by payoffs. As you know, payoffs are very lumpy, Graham. So there's really no judging when we're going to get a payoff.
Right. I guess just shifting over to expenses real quick. You guys obviously have a great history of expense control, but just wanted to hear a little bit about what you're seeing on the ground in terms of wage and cost inflation? And how this is -- this might impact the overall level of expense growth you're modeling for over the next 12 months or so?
Hi, Graham. This is Bud. Yeah, we haven't really made any major adjustments from that end. I think we factored in 3% salary increase in the budget. So we're able to hire employees, and we only added people in new regions. So far, that hasn't been an issue.
Okay. Great. That’s really all for me guys. Congrats on a really solid quarter.
Thank you, Graham.
Our next question is from Kevin Fitzsimmons of D.A. Davidson. Please proceed with your question.
Hey. Good evening guys. How are you?
Great.
Just a follow-up on expenses. A lot of moving parts, but if we adjust for obviously, the conversion expenses and then if we adjust for the write-down of the tax credits and then also the unfunded reserve letting that come down. I'm getting, I’m penciling in somewhere around a $34.1 million run-rate. Does that sound right Bud? And is that something that we should use with some kind of modest growth per quarter going into '22.
Yeah. The only thing -- I know you did that on the unfunded, but we also have the LIBOR cap. You're probably right in a base number. It's hard to project what you're going to do in unfunded or the LIBOR cap.
I don't have that right in front of me. Let me look at that and I'll email it to everybody to see what a normal is with the unfunded and is the LIBOR cap.
Is the LIBOR cap within fee revenues? Or am I looking at the wrong time? Is that something --
The LIBOR cap, we had -- we actually wrote, let's say, $839,000 in the fourth quarter.
Yeah. But that's fee revenues, right? Not within expense.
That's right. Yeah, I'm sorry. Yes, I was thinking that -- I'm sorry, I'll leave that one out. But the unfunded could flip $1 million or so either way each quarter. So we probably need to leave that one out for what we're trying to do from just a standard non-interest expense total.
Okay. And Bud, could you just -- I was trying to keep up with you. Can you just -- when you talked about the securities and what you guys said in the third quarter call and then what you actually did. Can you kind of repeat that, but then also look forward and what you guys think you might do with securities in the first quarter, given still have excess liquidity on the balance sheet?
Sure. Yeah. So -- so each month, we'll buy $50 million total of 5 and 7-year treasuries and probably $65 million to $70 million of 15-year mortgage backs because you'll have paydowns. So we're trying to come up with a net increase of $100 million each month. And the net investment security growth for the fourth quarter was $325 million. And we'll continue with the 5-year, 7-year purchases and probably still stick with 15-year mortgage-backs, probably some seasoned paper we're looking at probably a little better aging where you can really tell what your yield is on those.
Okay. So another roughly another 100 a month or so?
Right. Yeah. So is our plan at this point.
Got it. Just 1 last one for me. Tom, can you not surprisingly, capital ratios came in. I mean they still look fine. But given the kind of growth you all have seen. I know -- I recognize that it won't be as explosive in the first quarter. But given that kind of growth and maybe the expectation that line utilization will improve? How do you feel about those capital levels now? Do you feel you might need to do something later in the year to bolster them? Or you think you're fine for the year?
Well, from the line utilization standpoint, we'd love to see a pickup in that. And we've got -- still have a fair amount of money and cash sitting on the balance sheet, how much was at year-end, I know it today was, I don't want to talk about today. But at year-end, it was a substantial amount of -- obviously several billion dollars of cash, that we feel bust a lot of projections, we feel confident based on all our projections that given any kind of normalized, we don't think we'll have a huge surge in pandemic deposits that we had over the last 1.5 years going forward.
We think we'll see more normalized levels of deposits. And our core profitability is strong enough. And we're retaining almost 80% of the earnings, Kevin, to support the balance sheet growth. So we feel confident that we'll be in good shape by year-end on the capital ratios.
Okay, great. That’s it from me. Thanks, guys.
Thank you.
[Operator Instructions] Our next question is from David Bishop of Seaport Research Partners. Please proceed with your question.
Yeah, good morning, gentlemen. How are you?
How are you doing?
Hey, a quick question on the credit front. Obviously, looking across the credit metrics there, things look very benign, a little bit of pop in provisioning this quarter, which I assume due to growth. As you read the economic leaves and look at the credit metrics out there from a level of provisioning. Do you think it's relatively similar overall in 2022 to 2021? You have to make a little bit more in there for growth. Just curious how we should think about provisioning from a holistic basis into 2022?
This is Henry. Yeah. I mean, I think, ultimately, the driver for us in the fourth quarter was the loan growth as a percentage, our ALLL did go down because of the positive economic environment. But as we grow, I mean, kind of hand grenade close, we're reserving 1.25% or so on new loans is generally what the model is coming up with as we grow the bank's balance sheet.
I'm sorry. Is that 1.25% you said of new growth?
Generally, yes. It depends on the loan and on the maturity but debt.
Got it. And then more of a housekeeping item, a good tax rate to use for next year? I know there's the investment in tax credits, but how should we think about that?
Yeah, Dave, it's -- Bud. Yeah, 20% should be a good rate.
Got it. And then obviously, a lot of talk about the Fed turning hawkish here. I don't know if you have updated numbers there, but just curious from an interest rate risk sensitivity. Any sense of what the margin could react for in terms of a 25 basis point move in Fed interest rates?
Well, Darling Consulting does our AL modelling. And they did -- this one's up a 100, year 1 to be 6.2% and second year be 9%. I think it's like everybody, we're not expecting to really have to do anything on -- very little on the deposit side or rate-wise, especially with the first increase. So part of that -- that's what Darling's taken into effect when they're showing these numbers. So I think that's from what I read in other press releases. That seems to be what others are thinking also when rates go up.
That was 6.2%, Bud? I think you said up 100 basis points.
Yeah. And that's up 100, right?
That's up a 100. Got it. Okay. And then one final question. I think you mentioned there was a little bit of movement on the correspondent deposit balances, you sell outflows there. Just curious what those trends were in the fourth quarter and maybe expectations into 2022?
Yeah. This is Rodney Rushing. We had tremendous growth in correspondent balances during the year. We started the year just shy of $2 billion, $1.9 billion something. And we ended the year $2 billion higher just in correspondent banking, right, at $3.9 billion odd.
And the fourth quarter right at year-end, we always have some banks move some money out just from some of their balance sheet management, maybe move it to the Fed or wherever where they have zero risk weighting. So we had a very small decline is like $200 million, out of our $4 billion.
And we're anticipating that those correspondent balances are going to remain flat for the year. We don't see tremendous growth. That's why we -- that's why Tom, I think is confident about our capital ratios.
Okay. So you don't anticipate --
I'm not anticipating corresponding quarter another $2 billion
Okay. I didn't know if there'd be an outflow just in terms of, as you noted, with REITs maybe ticking up some movement to other asset classes. But it doesn't sound like you anticipate type of balance sheet action.
We haven't seen that at this point.
Okay. Great. Thank you for the color.
Sure.
Thank you. And I don't think we have any more questions. Do we or?
No, we have further questions at this time. It looks like we have reached the end of the question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Thank you.