Greetings and welcome to ServisFirst Bancshares First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, David Mange, Director of Investor Relations.

Good afternoon, and welcome to our first quarter earnings call. We will have Tom Broughton, our CEO; Rodney Rushing, our Chief Operating Officer; Henry Abbott, our Chief Credit Officer; and Bud Foshee, our CFO 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 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 ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom.

Thank you, David and good afternoon to everybody. Thank you for joining us on the call. The year is off to a great start with the first quarter, as we will review for you over the next few minutes and we have various reports from our various management people. We've always done well in times of stress in the banking industry. We did and after the 2008, 2009 recession and we certainly did during the pandemic, the bank has experienced significant growth during those periods of time. And we do expect significant opportunities again during this time of a little bit dislocation in the industry. So, you're asking why do we do well during times like this? One thing, there are several reasons. First is, our business model had changed in over 18 years since we opened 18 years ago. We are well capitalized. We're financially stable, and we retain 75% of our net income to fund our growth and increasing capital. We do have an industry leading efficiency ratio and we're highly profitable. We have very strong credit quality. Henry is going to talk about this in more detail in a few minutes. We don't have any broker deposits for Federal Home Loan Bank Advances like many of our competitors. So, in summary, our bank is built for times like this and we'll demonstrate that to you during the course of the call this afternoon. I was going to talk a few minutes about our most recent expansions in our community banking offices, which are in – [our newest ones] [ph] were in Asheville, North Carolina; and Panama City and Tallahassee, Florida, all are doing quite well. They're off to a great start. We're also in the process of opening a new office in the Lake Norman area of the Piedmont in North Carolina, which should be another [community banking office] [ph], and we are very pleased to the start these are off to. We're building them in the right way with core customers, with our bankers, have had a relationship with many years. Rodney is going to talk in a few minutes about our new correspondent office in Houston that we opened last month. So that's certainly a plus. It came in apparent to us in mid-2022 that the [indiscernible] cycle would lead to a focus on deposit running the lending side of the bank. We do anticipate some economic slowdown based on recent events. And Rodney Rushing is going to give a quick review of our deposit franchise. Rodney?

Thank you, Tom. You noted how we have had virtually no dependence on brokered or wholesale deposits for fundings, and I wanted to provide some understanding and details of our deposit metrics in our bank's deposit base. From our beginnings, our model has always been to bank relationships and not just book transactions. Excluding correspondent banks, 25% of our deposits have a credit relationship with ServisFirst. There are no industry concentrations outside of private households and correspondent banks. For example, commercial banking [makes a] [ph] 4.7% of our deposit base, law firms were 3%, and real estate firms were 2%, and it goes down from there. As you can see, we are very granular with no concentrations. When it comes to correspondent banking, we have 340 plus correspondent relationships in 28 states and just over 120 are settlement banks. Settlement banks are banks downstream correspondent banks whose daily cash letters are cleared with us or their Federal Reserve account fees are settled through us, working much like a corporate cash management account. As rates have risen, you will see a shift from compensating DDA balances, which are non-interest bearing into interest bearing. But because we pay for settlement expense with the DDA earnings, there is no effect on profitability. Because of the settlement relationship, we keep the fundings by sweeping into interest bearing accounts making these deposits very sticky. In fact, 65% of total correspondent fundings are with these settlement customers. This past month proved how stable these deposits and relationships are. As Tom mentioned, we opened our Texas correspondent office with the addition of Don Dickerson. Don and I worked together previously. And with over 40 years of experience in Texas banking, Don was the perfect choice to expand the Texas market with a large number of relationships developed over the last 40 years. We're looking forward to the growth that this market will provide, growth we should realize in the near future. I just wanted to highlight some of the details. More details are in the slide deck that we provided about our stable conservative deposit base, and where we have plans to grow. With that, I'll turn it over to our Chief Credit Officer, Henry Abbott.

Thank you, Rodney. Bank got off to a strong start in 2023 with continued strong credit quality. I'm pleased to say, we ended 2022 with NPAs total assets of 12 basis points and we're able to maintain that in the first quarter. With no major changes in NPAs that continue to be near historic lows. Annualized charge-offs were 5 basis points well below the same period prior year of 11 basis points and 6 basis points for the fourth quarter of 2022. At the end of the quarter, our ALLL to total loans was 1.28 versus 1.25 at the end of 2022. This was not associated with any one loan, but rather conservative steps the bank took in the first quarter. Won't go through each of the bullet points, but you should have access to some additional information in the slide deck about our CRE portfolio and I can go over any questions you have during the Q&A session. And in highlights, AD&C as a percent of total risk based capital dropped from 100% at year-end to 93% at the end of the first quarter. Total income producing commercial real estate also dropped for the quarter and is now 317% of risk based capital. The vast majority of our commercial real estate projects are in the [Sunbelt] [ph] as we have only had a handful of projects where we followed our customers outside of the Southeast. Office space makes up roughly 3.5% of our total loan portfolio. The average loan size within our income producing office bucket is $1.5 million. These loans are typically in suburban locations and are more traditional one or two-storey office lockups. We have very minimal CBD office exposure. Comparable to our office exposure, the bank has never been a big single family residential development lender…

Thank you, Henry. Good afternoon. For earnings, we kicked off 2023 with strong earnings in the first quarter as we continued to build capital and liquidity. Diluted earnings per share increased 7%, compared to the first quarter of 2022 when adjusting for income on PPP loans. Our investment portfolio, the portfolio is a small component of our balance sheet, 11% of total assets. The portfolio is managed for liquidity. The components of the portfolio were 45% pass-through mortgage-backed securities, 30% U.S. treasury and agency, 1% municipal, and 24% bank and bank holding company subject. We have never purchased a CMO. The average life of the total portfolio is 4.2 years. The average life for our peer group is 7.2 years and that peer group is 33 banks with total assets greater than [10 billion] [ph]. The average life of our treasury portfolio is 2.8 years and the average life of the bank and bank holding company sub debt is 2.4 years, and the average life of the bank and bank holding company's sub debt is based on the call date. We have the expertise to analyze bank and bank holding company sub debt. Liquidity, excess funds were 732 million, March 2023. Our goal is to increase this a $1 billion range. Total balance sheet liquidity, March of 2023 was 1.5 billion, and total available liquidity was 8.4 billion. Margin average loan growth was 166 million for the first quarter. PPP fees and interest income were 29,000 in the first quarter of 2023 versus 4.9 million in first quarter of 2022. NIM compression is a result of record rate increases. The Fed funds have increased by 475 basis points since December of 2021. We had four consecutive 75 basis point increases during the period from December 2021 to March of 2023.…

Thank you, Bud. In summary, we’re seeing a record deposit pipeline. The slide deck that we filed this afternoon should give you a lot more information about the bank and we think it's all very positive. One thing we're excited about, we opened 23% more accounts in the first quarter than we did in the first quarter of last year. So, we're very pleased with the improvement there. We think we're close to the other side of this [fair tightening] [ph] cycle. We're certainly going to be vigilant on credit quality because we do expect a slowdown and we'll certainly be watching to make sure we're doing everything correctly to manage our loan portfolio and manage our assets properly. So in summary, we do like where we are today. Our simple business model is paying dividends and we'll be happy to answer any questions you might have.

[Operator Instructions] And our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed.

Hey, good afternoon.

Hey, good afternoon, Brad.

Tom, maybe wanted to start on loan growth, I think this is the first quarter maybe outside of the pandemic where you didn't grow loans. Just kind of curious, last quarter you talked about high-single-digit loan growth and double-digit deposit growth. I know a lot has changed. Just kind of curious how you would, sort of think about those numbers as we sit here today?

We think, you know, we had a fair number of payoffs that some of them are unexpected, Brad, but a lot of them were very pleasant surprises because they low fixed rates that paid off during the quarter. So that was a win-win for us and our customers. So, we had, you know I can detail it for you, but it's pretty substantial amount of payoffs. And we started trying to slow the loan trend down in the middle of 2022 when we realized that Fed tightening was going to give the industry issues, treasuries are leading the way on rates going up and they were going up in lockstep with fair rate increases. It was a concern to us, and we started slowing it down a bit, and the result has showed up in this – finally in this first quarter. So, we feel like we'll start growing loans again, probably in the back half of the year, you'll see some increased loan growth Brad, but it was sort of – part of it was unexpected with loan paydowns on fixed rate loans. Again, not an unpleasant surprise, a very pleasant surprise. And part of that was because we started to slower things down in the middle of last summer. [Indiscernible] than you won't have probably Brad.

Yes. I know construction has been a big area of growth for you guys. Obviously, those tend to be some of the higher yielding assets as well. Would you expect to see a, kind of similar decline? I mean, obviously, you want those loans, you know those projects to finish up and move off your books, but would that, sort of downward trajectory, kind of continue in your mind and you pick up growth in other areas?

We have a pretty good, you know fairly robust pipeline of construction loans. So, they're probably – they're still a positive increase in construction loans on a monthly basis of around $20 million a month. I think Henry has the last number we computed. Would that be roughly correct?

I think it's more than that. I think maybe closer to $70 million a month, maybe $200 million a quarter in new funded construction loans.

But net of payoffs is about 20 million a month or so. Yes, it's still positive there and we like those projects, Brad. We're not concerned about any of those projects in any way, but I'll stop there to see what your other questions are.

No, that's helpful. Maybe just, kind of switching gears a second to Bud. I think I heard your comments that you expect the NIM to improve from here as loans reprice, are you expecting improvement as soon as the second quarter? It just seems like that could be a challenge with – if the Feds continue to move rates up, you guys are sitting right around 100% loan deposit ratio? Also wanted to kind of square that with your comments around building that liquidity book back up to $1 billion, or just trying to understand all the moving parts on how you get there and, kind of how you think about the NIM?

Sure. Yes. It looks like if Fed’s going to increase rate at the May meeting that's definitely going to impact us for the second quarter. So, if that happens, I think it would – it might take into the third quarter before you start seeing some gradual improvement. We're just – you just got – you got about 9 billion and either a total of floating rate deposits in Fed funds purchased. On the asset side, between loans and Fed funds, you’re looking at about 5 billion. So, when that keeps increasing, it's going to hurt for a while or you'll have some compression, put it that way. Fed needs to stock for what you really say, it's coming [indiscernible].

Right, right. And maybe final question to me. It looked like your first quarter expenses were up about 10% year-over-year. I know there's a few adjustments in there. Is that kind of how we should think about a growth rate in 2023 or I know your incentives are tied to typically loan growth. I know more so deposit growth this year, but just kind of wanted to think about – kind of how to think about expense growth. It did look like professional fees or maybe a little heavier this quarter. Anything to back out of there that you think is worth noting?

Let me think, on professional, I don't remember anything unusual. Let me – I'll look at it and email you after the call. I email everybody. I'll go back and look at it. I don't have anything highlighted, but let me go back and look at it. Are you comparing to the quarter?

Both. But then I was just looking at the total expenses in totality up about 10%...

Fourth quarter, it was down because we had a [Technical Difficulty] commitments, but I'll look at everything just to make sure there's nothing.

Yes, I was more looking at 1Q 2023 versus 1Q 2022, up about 10% year-over-year. Is that kind of the growth rate to, kind of think about as you think about 2023 versus 2022?

I wish I had more detail in front of me, because I know we've had market expansion in different markets. Let me look at it and I'll sense something out on that just to make sure I give you a good answer.

Okay. Thanks. I'll hop back in queue.

Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Please proceed.

Hey, good afternoon guys.

Good afternoon, Kevin.

I appreciate the detail on the correspondent deposits and maybe I want to ask this in maybe a very top level sort of way, like it's obviously a good business to be in. You guys wouldn't be in it if it wasn't, but with what is going on right now in terms of the pressure on deposits and the mix shift within deposits that's going on, is the correspondent network helping you in this near-term or is it really exacerbate this pressure and make it more challenging for you just in that your client banks are probably dealing with the same thing and maybe therefore you guys reflect some of that on your balance sheet? Just trying to [Multiple Speakers]

Deposit, [beta] [ph], Kevin, from what perspective, interest rate sensitivity? I mean, what do you mean…?

I guess just the pressure on mix shift that's going on and mainly on that on mix shift and the pressure to grow deposits in general, I guess.

Well, this is Rodney Rushing. Let me answer it this way and then you can see if I've answered your question. It has been business as usual with positive signs. What I tried to explain in my comments was, we are in the correspondent banking business for the relationship. And we find clearing the settlement relationship what is beneficial to us in the downstream bank. We act as an intermediary between the small community bank and the Fed. And because of that, we get their settlement account and then they keep compensating balance there, it sweeps in the Fed funds. And that makes those relationships very sticky. Out of 340 plus relationships, this past month we may have had – it was less than 10 that moved any material amount of money from us that was, it was just a small amount. So, those relationships are very sticky. We have looked, a best place to grow that. In Alabama, Georgia, Tennessee, we have probably all the vast majority of the correspondent relationships we're going to get. In Alabama, we had 90 something banks and we had 60% corresponding accounts in State of Alabama. That same ratio is true in Georgia, Tennessee. So that's why we look to grow in Texas. Texas was a big correspondent market for me when I was at Compass. And we expect with Don Dickerson, it's going to be an area of growth for the corresponded division through the rest of this year and next year.

As Rodney said on the call, as money shift from non-interest bearing and DDA to interest bearing deposits or the fed funds purchased there's no effect on profitability of the bank whatsoever. There's no deterioration in our profitability. So if it moves, it rates start falling, it moves back to the DDA accounts. It will not improve our profitability. It'll be the same. It'll just show more money in non-interest bearing and DDA.

That's right. And the simple fact that we pay their Fed bills with those DDA earnings. So, you'll see corresponding expenses go up when we bring on more settlement accounts. And if, in rising rates, if they have to keep less money with us, then that money as Tom said, shifts into interest bank accounts, but it doesn't affect profitability. What the settlement relationship does for us is, it makes it a true relationship between us and [indiscernible] instead of a relationship, it is a transaction where we're just buying liquidity from it.

Just and not to, I know I'm not asking a question, Kevin, but once you mention that during the time that couple of weeks when there's a little stress in the industry that when corresponds wanted to test, wanted to borrow money, some of our competitors didn't take care of them.

We had a number of banks that called and wanted to test their line with us and they did. David Jordan is here in the room with this, he manages our correspondent operation. And during that, we learned that they tried to test their lines or draw on their other upstream lines from other correspondents and they were not able to do so. And that was [telling] [ph].

Yeah, I guess one follow-up on that, what I was going to ask was this, what's going on in the environment and the, you know, the focus on deposits and particularly on uninsured deposits? Does it make it, is it a better, like, not better. But I guess is it, is it an easier service to sell in an environment like this to – for them to have you as a, your correspondent network as a resource?

I don't know if it's easier, you know, to my knowledge, a bank has not lost money to another bank in fed funds. So, in that counter party relationship where one bank is selling another bank overnight funds, I don't know, you know, maybe somebody could correct me, but I don't know of a case where a bank has lost money. Now, you know, with that there is prudency and the only deposits we lost over that couple of weeks were some downstream community banks who look, you know, we're their primary correspondent. It may be a small $200 million bank in [Technical Difficulty] Alabama that has $20 million in capital and they look up and they've got $15 million sold to us in Fed funds. They called and said Rodney, we, you know, we looked at our amount of funds we're selling you, we're going to move some of that to the Fed. So, I'm going to leave eight with you and move seven to the fed. Sure, go ahead. And that happened less than 10x or 12x in that two-week period. And that was the only stress we saw on that deposit base. The rest of it was business as usual and I don't, you know, it's all about, the relationships and that's why hiring Don in Texas is so important to us. I hope that answers your question.

Yeah. No, that's great. Thank you. Thanks Rodney. And one, just, I guess a follow on to Brad's question. So, trying to bridge, the comment about things stabilizing and getting better, but then, you know, is it, I guess the way I would want to ask it whether the fed moves or not? When we look at the linked quarter decline in the margin and more importantly, decline in dollars of NII,, is it fair to say, you know, maybe we're not at the bottom because there could be some incremental pressure, but the size of the pressure linked quarter is not going to be – this is probably the high point. Is that fair to say?

We think we're close to the bottom. And with our short loan and securities portfolio, we're going – our margin will start moving up. It’ll take a couple of three quarters, but we'll start seeing some pretty good improvement once the Fed achieves their peak rate. Bud, I don't know if you can answer any – add anything to that?

No, I think that's – yes, we're just, it's kind of what you see on the Fed side.

And one last house-keeping thing more for me. I noticed the restructuring in the TDR section seemed like it was blanked out for the first quarter of 2023, is that due to that – is that just an omission or was that due to that change in servicer that you referenced? I was just was confused about that.

That was due to an accounting change and that is something that we no longer have to report, but there were no material changes within those categories. It was just something we don't have to report any more under new guidance.

Okay. Okay. All right. Thanks for having us guys.

Thank you.

Our next question comes from the line of Steve Moss with Raymond James. Please proceed.

Good afternoon.

Hi, Steve.

Maybe just following up on the margin here. Curious to see where are loans pricing these days? And any color you can give on that front as we think about the repricing aspect of your loan portfolio going forward here?

Bud, [tell them what] [ph] the price was in the first quarter.

For the first quarter, new loan production was at 7.71.

80% floating.

Yes, we're at, I think, 78% variable rate in the first quarter. So, that's definitely improving. We're definitely putting on more variable rate loans. It's just a slow progress. Yes. I mean, that's going to take a while to improve margin over time. Just…

What surprised me is, how quickly we're seeing payoffs and paydowns on floating rate loans. I mean, Henry mentioned 200 million in the first quarter, already in the second quarter and what's already closed this quarter and in process is like $85 million in fixed rate loans either paying off or paying down. So, it's moving much more quickly. You don't notice it when rates are flat, you certainly notice it when rates are – have gone up as much as they have. We see the potential improvement in margin that really is very hard for you to quantify in your model, but of course, the natural cash flow on fixed rate loans is substantial as well. You know it is like over $1 billion a year, natural pay down.

Right. That's helpful. And then in terms of just, you know on the deposit side, just curious on your interest bearing deposits if by any chance you have a spot rate at quarter-end, just kind of get a feel for where things shook out?

Yes, let's see. The cost of total deposits at the end of the quarter was 2.31, interest bearing DDAs was 3.12, and total interest bearing deposits 3.08.

Get all that.

Great. I got all that. And then in terms of just going back to – or just thinking about credit overall, it still remains pristine, kind of just any updated thoughts as to how you're thinking about the reserve ratio and credit costs going forward here?

We keep as much in the reserve as we can keep in the reserve. You know there’s accounts that will let us keep, Steve. That's – and the 1.28% is the most we've ever had in our reserve going into the 2008, 2009 recession, we have 1.05% or so in the loan loss reserve. So, we feel like we're in much better shape than loan loss reserve today than we were at that time. So, CECL obviously helps a little bit, but you know, we feel good about where we are and we feel really good, you know, we filed that debt that you probably hadn't had time to look at. But you know, it details our office building exposure and you know, AD&C exposure, you know what, remember, you know, when the pandemic hit, everybody's worried to death about banks, the industry's retail exposure and how much retail – the banks were going to lose on retail and, you know, that turned into a non-event. I mean, yeah, some banks lost some money on big malls, but you know, they had earnings and it just sort of got handled. So, I think it will this time too. We don't have any of that exposure, but I think it's just, you know, some of this is just CNBC headlines. They like to put out on different loan exposures out there. But I just – I don't know any banks that have a lot of office building exposure, but maybe there are some that are.

Right. And I appreciate that color. That's pretty much everything for me. So, thanks for all the call here today.

Thank you, Steve.

Our next question comes from the line of David Bishop with Hovde Group. Please proceed.

Yeah, good. Good evening, gentlemen. Hey, quick question. Most of my questions have been answered, but I think in the preamble, I think it was maybe, Rodney or Bud you mentioned that you know, you've been able to be opportunistic and maybe repricing or refinancing certain, I think it was variable rate loans. Was that done with a view of, you know, getting ahead of potential cash flow pressures on these loans repricing or just curious what the impetus was for some of the repricing there, maybe the nature of the loans repriced, and was that sort of a credit driven decision?

No, no, these were – those were all fixed rate loans and, you know, we're talking about an average rate of, Henry, would it be 4% something like that, you know, so those are the loans and it's just surprising to us how often somebody will need something to redo them. And it's not necessarily a credit issue or default issue. They might need to borrow some more money. They might not finish the construction on time of a loan that has a fixed rate on it. So, you know, we're seeing repricing opportunities and again, you can't capture it in your model except, you know, for, you know, when we have a commercial loan portfolio that has the average maturity of 3.5 years, we're going to have a lot of repricing opportunities on fixed rate loans. Yeah, we have a few more fixed rate loans than we'd like to have today in this environment, but, you know, for one thing when rates start coming down, those fixed rate loans might not be, look as bad as they do today. But anyway, we are seeing repricing opportunities on a lot of loans again, like I say, just what, 17 days of this quarter, we – over $80 million is in the process of being reprised or paid-off. We’ve had a couple of – companies are always constantly selling or they – people are selling assets, they might have a, you know, a mini firm on a multifamily project that's going to anybody with any sense is going to – any of our developers [indiscernible] sense who are going to the Fannie and Freddie and doing permanent financing, as quickly as they can paying us off. So that's certainly in their best interest.

Got it. And then, as we think about the Texas expansion into Houston, I assume, you expect to see some of that flow into the balance sheet this year. Just curious if any of that shows up in the current deposit pipeline you mentioned in the slide deck?

It's not in there. We don't have any of that. No, we don't have anything in this pipeline yet, right?

No, we don't. It's not in the pipeline and we, you know, we anticipate our growth coming. He’s already opened two or three accounts with new banks, we probably had 10 total Texas accounts before Don came on board. So, he's out meeting those current customers. So, I would expect in the third and fourth quarter looking for growth from that Texas market.

How many banks are in Texas?

There’s over 400 community banks in Texas. And you know, the numbers, a lot of charters in Houston and Dallas markets, San Antonio, Austin. And you know, again, the State of Alabama, we're down to 90 something home bank charters.

They say everything's bigger in Texas and that's true. More banks, bigger banks, bigger deposits.

Got it. Appreciate the color.

Thank you, Dave. I think we have no more questions in the queue. If you all need any further information, I know Bud is going to get out some expense management answers to you and look forward. If you all have any further questions, please let us know. Thanks for joining us today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.