Greetings. Welcome to ServisFirst Bancshares Q3 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Davis Manger, Investor Relations Director. Thank you. You may begin.
Good afternoon, and welcome to our Q3 earnings call. We'll have Tom Broughton, our CEO, Bud Foshee, our CFO, and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any 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, Davis, and good afternoon, and welcome to our Q3 conference call. I'm going to review a few highlights of the quarter before I turn it over to Bud Foshee to go over the numbers in a little bit more detail. Our loan growth was continuing to be very strong in the quarter, and the payoffs that we had expected were pushed back to later quarters. We are seeing lower pipelines in loans because we certainly can't keep growing at the torrid pace that we've been growing the last two quarters. We also have been more selective in what we're looking at in terms of the loan pipeline. We expect the loan growth to moderate in coming quarters more at our historical growth rates.
We did see some runoff in the deposits in correspondent area in the Q3, while the general bank was stable. Our correspondents are making loans again, they're buying securities, so that was to be expected to some extent, probably a little bit more than we thought. We do expect to get back to deposit growth in the general bank in the Q4. We have consistently grown deposits, and we are putting more focus on it as we did prior to the pandemic. Incentive plans had been heavily weighted to loan growth in 2021 and 2022, and we will put normal emphasis on deposit growth in 2023. Our general bank had year-over-year deposit growth, even though we did not focus on deposit growth until this past quarter.
On the loan quality side, Henry F. Abbott will certainly discuss it in more detail, but we continue to see strong credit metrics in our loan portfolio. You know, I think we had one credit that was a problem in this past quarter, and that was most of what we had on the charge-off list. We just recently completed a credit card conversion, and we're very pleased to get that done. One reason we're pleased is that we had a moratorium on adding new banks for over six months, so we can start adding agent banks again in the card area. That's certainly welcome news from a fee income standpoint. We did add 13 new bankers in the quarter, after 15 bankers last quarter.
With growth in the Piedmont, Northwest Florida and Nashville regions, we continue to see opportunities and are being very selective, but we are seeing better quality bankers than we've seen in a long time. In fact, we got a call this morning about a team of community bankers in a very nice market. We are seeing potential growth kind of still coming in the door. I'm gonna turn it over to Bud to go over the financials.
Thanks, Tom. Good afternoon. Liquidity. In mid-June, we decided to suspend investment purchases based on our strong loan growth. In the Q3, we were able to reinvest $76 million on maturities and mortgage-backed paydowns into higher yielding loans. Net interest margin, loan growth exclusive of PPP forgiveness was $677 million for the Q3. Average loans excluding PPP increased by $776 million in the Q3. Average PPP loans decreased by $45 million, so the net average growth was $731 million. PPP fees and interest income were $432,000 in the Q3 of 2022, compared to $6.4 million in the Q3 of 2021. Net loans grew by $75 million in the last three days of the quarter. This increased our loan loss provision.
We will not receive a positive net interest margin until the next quarter. Our margin continues to improve by quarter. In the Q4 of 2021, it was 2.71%. Q1 of this year, it was 2.89%. Q2, 3.26%. Q3, 3.64%. Deposits decreased by $719 million in the Q3. Most of the decrease related to correspondent banks. Fed funds purchased increased by $77 million in the Q3. The recent Fed rate increase in September will have minimal impact on our margin over a one-month period. Loan loss provision.
Our provision increased by $9.6 million in the Q3. a primary factor in the increase related to the national unemployment forecast increase from a range of 3.9%-4.3% at June 30, 2022 to a range of 4.4%-5.8% at September 30, 2022. Non-interest income. Credit card income continues to grow, $2.6 million in the Q3 of 2022 versus $2 million in the Q3 of 2021. Spend was $275 million in 2022 versus $216 million in 2021. Non-interest expenses. During the Q3, we had a preliminary settlement of litigation and write down of a private investment, resulting in charges of $2.4 million net of income taxes, or $0.05 per diluted share. Salaries and benefits.
As a result of our market expansions, total salaries increased by $871,000 in the Q3 and by $3.7 million year-over-year. Q3 of 2022, incentive expense was $4.3 million versus $6.2 million for the Q2 of 2022. Tax credits, the year-to-date investment write-down related to tax credits was $7.5 million in 2022 versus $3.1 million in 2021. This increase was more than offset by an income tax reduction of $6 million. Correspondent. Earnings credit rate on correspondent DDA balances increased from 0.4% at September 30, 2021 to 3.25% at September 30, 2022. Lower balances were required to be maintained to pay for account analysis expenses due to the steep rise in interest rates.
That concludes my remarks, and I will turn it over to Henry.
Thank you, Bud. The bank continued the trend of very strong loan growth for the Q3. Loans grew by an annualized 25% for the quarter. We continue to want to help high quality commercial borrowers and prospects within the bank's footprint. At the same time, we continue to be conservative with our underwriting and interest rate sensitivity analysis, given the persistent inflation in the marketplace, as well as being more selective on new commercial real estate exposure, which is income producing versus our core bread and butter of owner-occupied real estate. Past due loans were a mere $10.8 million on par with the Q2, and that figure equates to past due to total loans of 10 basis points, which continue to be near historic lows.
We have sliced and diced our loan portfolio in southwest Florida and followed up with borrowers impacted by Hurricane Ian. While the long-term impacts to the region are unknown, we feel like our loan portfolio in that area fared very well. The bulk of our loans in the impacted area were more north of where the hurricane made landfall. To date, we've only uncovered three severely impacted commercial borrowers, and we believe they were appropriately insured. We grew our loan loss reserve for the quarter by $12.6 million, which amounts to an ALL to total loans of 1.25. This is an increase from 1.21 for the Q2 and slightly above the 1.24 for the same period prior year.
The increase in reserve is not associated with a specific credit or any deterioration, but rather the model is impacted by changes in economic outlook, as Bud previously mentioned. While we have not seen any major changes in the loan portfolio and our core key credit metrics continued to be near historic lows, we did feel it prudent to increase our reserve. Non-performing loans to total loans were a mere 16 basis points of our $19.5 million in NPAs. Over $5 million of that figure is under an LOI to be sold in the Q4 to a highly qualified buyer. Our loan portfolio continues to perform at an exceptional level. Charge-offs for the quarter were 11 basis points when annualized. Net charge-offs for the quarter were roughly $3 million on a loan portfolio of $11.3 billion.
Of the $3 million in charge-offs, roughly $2 million was related to one specific credit. We were proactive in addressing the issue, and the remaining exposure we do have to the borrower is less than $500,000 and is fully impaired. While charge-offs were slightly elevated, when annualized, our year-to-date charge-offs are a mere 7 basis points. As with all large financial institutions, we are in uncharted territory with the CECL model in the current dynamic environment and how it impacts our loan loss reserve. Changes to the reserve aside, I feel very good about how the bank's loan portfolio is positioned in the diversified markets we serve. With that, I'll hand it back to Tom.
Thank you, Henry. Yes, we're glad to get good news after Hurricane Ian down in Florida. That turned out to be not as bad as we thought it could possibly be. That's certainly welcome news. Just in general, I'd like to mention that I've always thought, and I think anybody thinks that core deposit is the key to building the value of a banking franchise. We've always focused on core building core deposits. We're certainly well positioned
Compared to many of our competitors in the industry is because our balance sheet, liability side is funded with core deposits, not Federal Home Loan advances and broker deposits. Our compound deposit growth rate in the past five years is 14%, and from the inception of the bank, it's 33% in 2005. We do believe we have the best bankers in the industry, which is the key to success we've enjoyed since 2005. We think we have the best platform for commercial bankers, which is one reason we've attracted a number of bankers in the last 17 years, and we think we have more opportunities for growth than any time in our history, as of today. We are pleased with the quarter with an outstanding return on equity, return on assets, and efficiency ratio.
We'll certainly be glad to answer any questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. Our first question comes from Bradley Miltaps with Piper Sandler. Please proceed.
Hey, guys.
Brad.
Tom, happy third Monday in October to you.
Well, buddy, I tell you what, if we all win out, you can beat Henry Abbott's Georgia Bulldogs, and we win the rest, I said, we'll see you in Atlanta December. How about that?
That's right. Well, I don't know if I do. We'll see, though. I think this is the first time I've got to call in a winner, so, anyway, thought I'd take advantage.
It's a good win, buddy. Every 15 years, I don't blame you. I would enjoy it, too.
I was hoping you might have Rocky Top queued up for me.
No, hey I lived through the Mike Shula and Mike DuBose years at Alabama. You know, we've all taken our turn in the box. Looks like that Tennessee is back, though, that is for sure.
We'll see. Wanted to ask, Tom, you talked obviously another great quarter of loan growth. You're on pace for, or already have generated more than $2 billion of growth this year. Can you maybe frame up for us a little bit more kind of what in your mind is sort of in dollars maybe what a pullback in loan growth would be kinda vis-à-vis all the people you've hired. I guess the second part of that question is how much does the pressure on funding sort of impact how much you can grow next year. I know you're focused on deposits, but that's obviously a big part of it with your loan deposit ratio now at 102%.
Yeah. We're back to our normal our loan to deposit ratio is back where we've been for most of the last 17 years, except for two periods of time, which were the pandemic and the 2008, 2009 recession. We've been. This is normal for us. We're back to where we always have been. You know, I have complete confidence that our team can generate. You know, we've attracted some outstanding bankers. We just actually had one join us in Tampa today, as a matter of fact. We've got some great bankers are joining us all the time. I have confidence that we can grow at our about something, hopefully, at our historic growth rates that we've seen.
You know, Brad, I just think a 25% annualized growth rate is not, clearly not sustainable. Something in the by quarter, you'd think 10%-15% is sort of where we've had our targeted growth in loans and deposits, and we think we'll get back to those levels over the next several quarters. In fact, we're already seeing a surge in deposits coming. We got a big deposit pipeline, at least bigger than it's been in the last two years because we really didn't track it much for the last two years. With correspondence had some really nice wins in the last couple of weeks. We feel good about where we are.
I'd just be curious that deposit pipeline, on average where are those deposits in terms of rates coming on the books? You know, what are you having to pay to bring in sort of the incremental new dollar deposits?
Well, our our net interest margin in September was what, Bud?
3.70.
It was what in August? It was a three-
3:55.
3:55.
Yeah.
If that gives you any idea. You know, we're still holding. You know, we say we're a disciplined growth company, and we mean that. We're gonna be disciplined on both sides of the balance sheet, Brad. it's we try to grow by treasury management. You know, rates are not the answer to building a bank's balance sheet. That's not the answer. You know, the answer is treasury management service.
Sure. Thank you, guys. I appreciate the color. I'll hop back in queue.
Y'all have the orange glow all week. I hope you have it all week, Brad.
Thanks, Tom. I appreciate it.
Our next question is from Kevin Fitzsimmons with D.A. Davidson. Please proceed.
Hey, good morning, everyone. Or good evening, everyone. How are you all doing?
Good. Yeah. Good evening.
I just wanted to follow up on Brad's question. I saw the comments on page one of the release about the margin should remain relatively stable going forward. Are you kind of referencing quarterly margin, which was 3.64-ish, I believe? Were you. Because I thought I just heard you say the September margin was 3.72. If you could just dig a little deeper into that outlook for the margin and is it your comments about it just being stable? Is an accelerating deposit beta kind of offsetting or more than offsetting impact from rising rates on the asset side? Thanks.
All right. To break it down, I guess what we're talking about is really from one Fed increase to another. What happens from a loan standpoint, we've got right at $2 billion that reprices. Whenever an index changes, that reprices. Well, that's about equal to what correspondent has in money markets and Fed funds. Those two are gonna wash. They're both going to go up at the same rate. Now, over the next month, you're gonna have about $1.8 billion in loans that will reprice. Whatever the index is, it. You've got a different reset dates during the month, but you'll have another $1.8 billion that will reprice. You've got your money markets. I guess, mainly money markets, what would change. You'll have some of the money markets increasing over time.
Loans, the $1.8 billion is gonna go up at a faster rate than your deposit side is gonna reprice during that time period.
Okay. There's still, I mean, I guess, just to clarify. There's still upside to the margin from the level you hit for Q3 2022 based on what you just said, unless I'm not hearing it correctly.
Yeah. Oh, you're right. Yeah, it can. Oh, definitely.
Okay. Your comment in the release is more about just like, we're not gonna see the kind of linked quarter change you saw this quarter.
Yeah. I was trying to address just from a Fed increase standpoint with-
Right. Got it.
Yeah.
Got it. In the comments earlier, I think, Bud, in your comments, you talked about the outlook for general bank deposits is to grow. Do you expect total deposits to grow, or is there still gonna be some hangover from correspondent deposits running off? So, what's that kind of next quarter or two outlook for total deposits, would you say?
Yeah. We feel like correspondent is going back the other way now. They've had some really nice wins in the last few weeks. Some major new customers have joined us. We feel like we're back to the core and are headed in the correct direction, Kevin, from a. Also, I mean we've layered in an incentive for year-end for all of our commercial bankers. We didn't have much of a component for deposit growth when we started the year, so we've added that in. They are focused on improving deposits and add it the right way, you know. Not adding high-rate deposits. That's not the answer.
Rate is never the answer to building a bank.
Got it. Okay. Tom, I think early in your comments, you mentioned about getting a call just today from a new team of what might prove to be a new team of bankers. Is that I know you can't get too detailed, but is that a market you're currently in or not in?
Not in. It's a community bank community banking team, which we've added a number of those in the last few months. Besides the Piedmont region, we've added some some nice community teams in Tallahassee, Panama City, Asheville, just to name a few. We feel like they're they're deposit generators as well as loan generators. You know, they understand that they gotta fund their own loan growth. They get it.
Right. Okay. I'll hop back in the queue. Thanks very much.
Thank you.
Our next question is from David Bishop with Hovde Group. Please proceed.
Hey, good evening, gentlemen. As a Maryland Terrapins college football fan, I'm very jealous of y'all down there in the South that can produce some good football on Saturdays. Like, I look at you with envy, that's for sure. Maybe someday it'll change up here. We'll see.
We hope Taulia Tagovailoa is okay. I saw he took a lick at this game series. He's a transfer from Alabama, so we certainly are interested in seeing him do well.
Yeah. As are we. Hey, notice another 13 bankers added this quarter on top of the 15. You know, despite that, you guys are continuing to do a yeoman's job in terms of holding the lines on salaries and employee benefits. Just curious, I saw that decline, 5% linked quarter. Was there anything unusual in the Q2, remind us, that maybe inflated that? Or were you doing anything special to really sort of hold the line in terms of inflation on the compensation line?
Hey, Dave, the only thing from a total salary benefit, we had extra incentive accrual. We upped our incentive accrual in the Q2, so that's the biggest thing I remember in our salaries and benefit totals. Yeah. It became obvious to us that all of our bankers were going to exceed their loan goals for the year, Dave. So we put an extra accrual in. It was about $2 million.
In the Q2?
Yes.
Got it. The bankers you're talking to, just curious the conversation that compels them to jump to ServisFirst. Just curious at the stage in their career how that conversation goes. Is there a commonality in terms of a theme where they choose you over the current bank or another suitor out there? Because obviously, there's a lot of chairs moving around down there. Just curious how what sort of compels them to choose you all over some of the other growing competitors down there.
Well, I think the banks don't have consistent incentive plans. They change the plans. In fact, we've had a number of bankers that join us that we've found out that right at the end of the calendar year, their incentive plan was changed, and they didn't like that for that current year. There are a lot of reasons, but I think a lot of people have found that we're a good platform to work from. we support them in every way. It's not about the magic team in Birmingham, it's about the operating people out in the regions, and we do everything we can to empower them. Henry F. Abbott prompts to turn around credit requests as quickly as he can.
We don't spend weeks putting people through the wringer on either. You know, if we're gonna turn it down, we turn it down quickly, and that's what customers want to hear. Really, we're just focused on good customer service. It's not sales, it's service. Service is what wins us customers, and we feel like we're offering the best service in the industry. that our compliance person was telling me how few complaints we get this morning because we try to work with customers and try to resolve complaints, and we don't have the kind of problems a lot of banks have. Somebody walks in the branches, they got a problem, we try to fix it.
We think that's the differentiator, Dave, and has been for 17 years for us compared to most commercial banks. There are a lot of different reasons people leave. You know, it could be as simple as personality conflicts, but it's not usually because people have personality conflicts, usually or have a bad personality, if you know what I mean.
Right.
It's not that. We feel like it's an opportunity. We always have an opportunity. We have a great treasury management platform. We support them with great cash management, treasury management personnel credit card program. We have some ancillary things they can do, and they can get additional compensation. It's not. You know, they just they'll say, and you know, A players don't wanna be with B players, and B players don't wanna be with A players. You know, if some A players in an organization of B players, they usually wanna leave.
Understood. A continued nice growth or stability in the credit card income. You mentioned some new agent relationships. Do you think this was sort of a new good run rate in this $2.6 million dollars of credit card income?
Yeah. This is Rodney Rushing. I probably. We have gone through a conversion, and in fact, besides our customers, we issue credit cards for 140 other banks. Call that our agent credit card program. For the last six months, that is, that has been put on hold as far as onboarding any new agent banks because we were going through this conversion. For the Q4, we'll be ramping back up, adding agent banks, and we have somewhere around six or seven in the queue right now. Yeah, I hope that answers your question. We expect that to, that growth to continue.
All right. Maybe a housekeeping question. Notice the continued decline in the effective tax rate. Is the 17% a good number to assume into 2023?
No, it'll be, I would say 19.5%-20%. We had some adjustments in Q3 that we take annually some of our proprietary tax credits, and that was an adjustment we make in the Q3 of this year.
Got it. Thanks. I'll hop off and get back in queue.
Our next question is a follow-up from Brad Milsaps with Piper Sandler. Please proceed.
Hey, thanks for taking a follow-up. You mentioned last quarter that you thought I think $750 million was kind of a floor for liquidity or Fed funds. It looks like you've pierced through that. Have you guys changed sort of your internal policy on how much cash you'd be willing to hold, and if so, how much? Or what is that level now going forward?
Yeah, we did change the policy, Brad. I believe we're 1.5% of assets is what we can go down to before we need to take some action.
Okay. Go ahead, I'm sorry.
No, I have to make sure. It is 1.5% of assets.
Okay. Just on loan repricing we've seen 200 or so basis points change in the Fed funds rate over the last year. You know, your loan yields are up maybe 40 basis points excluding PPP. Is that the right relationship going forward? I was thinking you had about 35% of your loans that kinda repriced immediately with Fed funds, but that beta is closer to 20%. Is there a bigger lag in there? Or I assume any floors you had, you're probably through. Just trying to get a sense of how to think about the loan book continuing to reprice.
Yeah. I'll have to go back to memory bank. I think the first time the Fed increased, we only had, like, $700 million in loans that repriced because you had so many below floors. It took a while for the actual rate to get above the floor rate. We had a lag at the very beginning of the Fed rate increases.
Do you happen to have maybe kind of where the loan yield was in September?
Just the month of September?
Yeah, sure.
No. Let's see. Well, let's total limit. No, but I can. I'll email it to you. That I don't have here.
Okay.
I didn't bring a lot of monthly data, I guess, on this. No, I can email it to you.
Okay, sounds good. Thank you, guys. I appreciate it.
Yeah. I'll go back and look at that number of loans that repriced this quarter, but I think we had very low numbers for Fed increase.
Okay. All right, great. Thank you.
Thank you, everybody, for being on the call today. We're excited about the outlook in the future. I think we're positioned for future growth, and we're excited about all the new people that have joined our company. With that, anything else anybody want to say or close out? We'll close it out.
Thank you. That will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.