Good day, and welcome to the Service First Bancshares Incorporated Third Quarter Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Davis Mange, Director of Investor Relations.
Please go ahead, sir.
Good afternoon, and welcome to our Q3 earnings call. We'll have Tom Broughton, our CEO Bud Fochi, 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 ks 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, and good afternoon. Thank you for joining us on our call. I'll talk a few minutes about our loan growth for the quarter. We had $369,000,000 of net loan growth for the quarter, which is an annualized growth rate of 18%. Our goal It's been to have a monthly loan growth goal of $100,000,000 a month, and we've exceeded that goal over the last 2 quarters, we certainly were pleased to see.
We had thought that we would see line utilization improve in the second half of the year, But we saw no improvement in this past quarter. We do not know when we will see an improvement in Line utilization, given the continued low inventories at our customers and supply chain issues that continue, But we certainly expect it to be a tailwind for us at some point in the future. So that's certainly something to look forward to. We did see net pay downs in commercial and industrial loan balances in the quarter, excluding Triple P loans. Well, this is both the result of the 2nd round of Triple P stimulus as well as we're seeing very strong profitability and our customer base in commercial industrial companies.
Loan growth for the quarter was highest in the West Central Florida, Charleston, Dothan and Northwest Florida regions. And looking at our loan pipeline is about 10% above last quarter and is back at historically high levels. We've looked back at our pre pandemic pipelines and our pipelines today are roughly double where we were prior to the pandemic. On the deposit side, we do continue to see deposit growth, Though most of the growth was in our correspondent division this quarter, other regions are seeing a flattening in growth During the quarter, most of the correspondent division growth is attributed to new account growth in South Florida market with an addition of a key banker in South Florida. Our non interest bearing accounts doubled in the quarter In correspondent from $500,000,000 to $1,000,000,000 A few minutes to talk about capital.
We were When we started the pandemic 18 months ago, we were under $10,000,000,000 in assets. And I remember analysts and investors were asking us Our plans to do with all our excess capital, and our answer was it's nice to have excess capital on hand to fund future growth. 18 months later, we are all but at $15,000,000,000 in assets. So we're quite happy we had the capital to support a bigger The question now is how much of the deposit growth is transitory, a penny. I don't think any of us know the answer to that question.
But what certainly seems logical is that as the massive stimulus, Fiscal stimulus wears off. Our deposits will flatten or decline slightly over the next couple of years. As of this morning, we're Sitting on $4,600,000,000 in cash at the Fed, and we do have a negative carry on that $4,600,000,000 I did see an analyst report recently saying we're in the top 10 for cash as a percentage of assets. And Bud will go over our plans in a few minutes to invest those funds over time. So on the Hire in front, we continue to have many conversations more than in the past few years.
Again, it's More merger activities led to more discussions with more teams. Early in the pandemic, we took a very conservative approach and did not We really told everybody that we talked to that we really didn't want to hire anybody or do anything during the early part of the pandemic. We just talked the best thing to do was to be conservative. And that's usually the best thing to do in the banking business is almost always to be conservative. So That's something we're continuing to look at, and we see many opportunities.
And we're Our goal is to only bring in a small number of very high quality bankers. So now I'd like to turn it over to Henry Abbott, our Chief Credit Officer, to talk about our credit situation.
Thank you, Tom. I'm very pleased with the bank's performance in the 3rd quarter, and the loan portfolio continues to perform well in the current economic environment. I will give a brief overview of the key ratios for the quarter, but we and the vitality of the markets in our footprint. Nonperforming assets to total assets were down to 11 basis points versus 15 basis points last quarter and 29 basis points in the Q3 of 2020. For the quarter, NPAs were down to $16,500,000 This is a 15% reduction from the prior quarter and a 50% reduction from the Q3 of 2020.
This drop is attributed to OREO continuing to be at near record lows in line with prior quarter and a $2,700,000 reduction in non performing loans. Our past due to total loans were 8 basis points, dollars 6,800,000 on par with last quarter and a 27% reduction from the end of the Q3 in 2020. Charge offs in OREO expenses for the quarter were $1,800,000 an 85 percent reduction from the $11,500,000 in the Q3 of 2020. Our net credit expense annualized for the 3rd quarter would be 8 basis points, and I'm proud to say that year to date net credit expenses when annualized, would be 4 basis points versus credit expenses for 2020 for the whole year of 38 basis points. In the face of strong competition, loans grew by $370,000,000 excluding PPP payoffs.
Including PPP payoffs, our loan outstanding still grew by $163,000,000 Primarily due to loan growth, We grew our ALLL by $4,200,000 in the 3rd quarter versus roughly $9,700,000 last quarter. Our ALLL to loans, excluding PPP loans from total loans, is 1.29. Even as we put some of the more dramatic COVID economic impacts in the rearview mirror, given the bank's continued strong loan growth And the unprecedented government aid still helping borrowers, we felt it appropriate to continue to grow our loan loss reserve. 2021 continues to be a very strong year for the bank and our core key credit metrics continue to improve and charge offs continue to be near historic lows. With that, I'll hand it over to Bud.
Thank you, Henry. Good afternoon. Liquidity, Tom mentioned, we have a plan to invest a portion of our excess funds. Our initial goals are to purchase 15 year mortgage backs And 5 7 year treasuries. The net monthly investment security growth will be about 100,000,000 And we will increase these monthly purchases over time.
Current yield on mortgage backed is approximately 1.30%. Current yield on 5 year treasuries is approximately 1.081.38 for 7 year treasuries. We also decided to retain a portion of our mortgage originations. For the Q3, we sold 30 Exclusive of PPP increased by $424,000,000 in the 3rd quarter. Average PPP loans decreased by $387,000,000 for net average growth of $37,000,000 Triple P fees and interest income were $6,400,000 in the 3rd quarter compared to $10,200,000 in the 2nd quarter.
Also an increase of $971,000,000 in average excess funds decreased margin by 20 basis points in the 3rd quarter. Non interest expenses, salaries increased 852,000 compared to Q3 2021 to 2020. Majority of this increase was in West Central Florida As we added production staff and opened the Orlando office, West Central Florida had the highest year over year loan growth. We've also hired 15 new producers in 2021. We increased The incentive accrual in the 3rd quarter by $1,100,000 based on high dollar volume of loan production this year.
Also, we invested in a new market tax credit during the quarter. The investment write down Increased non interest expenses by $2,800,000 for the quarter, but was more than offset by income tax reduction of 3 point 3,000,000. Non interest income, credit card income continues to grow at 2,040,000 3rd quarter versus $1,800,000 in the Q3 2020 and 3rd quarter Then was $216,000,000 in 2021 versus $151,000,000 in 2020. And that concludes my remarks. I'll turn the program back over to Tom.
Thank you, Bud. We do continue to be optimistic about our future growth due to strong pipelines and conversations with clients regarding their future plans. So All in all, we were pleased with the quarter. We're pleased with the outlook, and we'll be more than happy to answer any questions you might have.
Thank you. Let's open the floor for questions.
We will now begin the question and answer session. And the first question will come from Brad Milsaps with Piper Sandler. Please go ahead.
Hey, good afternoon, guys.
Hey, Brett. Hey, Brett.
Tom, I was just curious, Obviously, another great quarter loan growth. If you could give us a sense of kind of where your new loans are coming on the books kind of relative to the
current book yield?
Yes. Brad, it's Budd. With the fees,
Okay, great. And Bud, based on your comments,
I wanted to make sure
I heard you correctly. You thought that the pace of securities purchases would be right around $100,000,000 a So about $300,000,000 a quarter, is that correct?
Right. Yes. We're just going to watch rates. I know 5 and 7 year treasuries have been trending up. So we'll just watch it, well, I'm sure we'll look at increasing that purchase amount over time, but That's $100,000,000 a month and $300,000,000 a quarter is our current goal.
Yes. So all else equal, you might get the securities Fully up to $2,000,000,000 or so by the end of next year?
Yes. Yes. Is that right? Yes.
Got it. And obviously, Budd, no one has a crystal ball, but just kind of curious if we got 50 basis points or 75 starting late next year, aside from the obvious your cash Balances would get a higher rate. What do you think the impact would be for you guys, however you want to express it in terms of NIM? Just kind of curious What the impact could be on loan yields with higher Fed funds and taking into account anything you might have sitting at floors, etcetera?
I don't know if I have a good answer just rough time ahead, especially when you go into The loan side? I really have to look at that.
How much cash are we going to have on deposit to the Fed again? Yes. Yes. That's a lot of $1,000,000,000 or $3,000,000,000
A lot of yes on that one.
Yes. Well, maybe ask differently. Can you just remind us of your kind of split between sort of prime or your LIBOR based loans versus fixed rate?
What now, the mix? Yes, between floating and
Yes.
Let me tell you, we're at 60 something percent on fixed? Let me look that one, I think we're probably 60% to 5% fixed. I know that's been shrinking, but I just don't have it right here and I didn't bring that up. I didn't have that in my notes, I don't think. So sorry.
I can email it to you then.
Okay. No problem. All right, great. Well, I'll hop back in queue and let some other folks hop in. Thank you, guys.
All the cash is floating rate. The offer of $4,600,000,000 is in a floating rate, Brad.
Sure. Absolutely. Yes. Got it.
That's the
biggest floating rate asset we have.
The next question will come from Kevin Fitzsimmons with D. A. Davidson. Please go ahead.
Hey, good afternoon, guys.
Hi, Jeff. Good afternoon. Good afternoon.
Just digging into the loan growth a little bit, Tom, you mentioned In the release about the economy, the economic recovery, you also had cited just a few minutes ago that line utilization really hasn't picked up like you would have hoped. But where if you would really attribute this growth to just pure economic Expansion versus the effect of your hiring efforts and bringing folks over And that probably dovetails with the deals that are going on. So maybe it's not just from hiring, but You're getting some loan opportunities because of some of the consolidation that's going on in your markets. If you can just sort of
point to what are
the main driving forces for that loan growth?
I don't really know the I'm giving you a guess, But I think it's probably half and half, probably half in new hires and half is projects from existing customers that People put projects on hold, obviously, during the pandemic, and they're we didn't want them to do anything, and they didn't want to do anything. So now they're moving forward with New projects, a lot of commercial real estate. I mean, the loan demand is not that good in the commercial and industrial sector. I mean, our loans Decline in the last quarter in the C and I book just because of strong profitability and Continued stimulus, unprecedented stimulus and strong corporate profitability. So And supply chain woes and hiring issues.
So but I've just given you a guess, Kevin. I haven't broken we haven't broken it down.
Yes. What's your you've mentioned that a few times and obviously that's a big issue for everyone, the supply chain disruption, the employee shortages that are out affecting different companies. Is that when you're looking at that, is that something that in your mind is just preventing A more healthy pace of C and I growth or and or is it something that is starting to get on your radar in terms of credit, in terms of getting concerned and getting watching things like that more carefully? Thanks.
Yes, we don't have any credit concerns, but yes, we think that Supply chain is getting if they ever do get fixed, which we don't think is going to be anytime soon, that certainly will see More inventory, higher inventories. There is a tremendous lack of supply and there's I'm trusting in demand that we've seen today. So we hear from every customer that we have. The only place we're getting a little pickup in demand is steel prices And our customers into the for example, in the steel fabrication business, they've had increased inventories and some of our scrap dealers are borrowing a little bit more money today, but it's not been an overwhelming change in the numbers there.
Okay. Okay, great. And one last one for me is just that you've mentioned capital, how you went from this Position of having a lot of excess capital and it's a good thing to have and put it to use. And where you sit now though, There's a lot of uncertainty in terms of what happens to this excess funds, but how do you feel about your capital levels now? And if you have this kind of loan growth still going forward and we don't have a major change in the balance sheet?
Is it something that you might look at to getting more capital. Thanks.
Yes. Jeff, we've talked to our regulators where our Tier 1 leverage was 8.25 at the end of the quarter, we'll just reassess it in the 4th quarter and see, but I think that 8% is the magical number, but I think we would have Leeway in that and it will be monitored. The thing that really has driven it down like We grew over $1,000,000,000 in deposits in the 3rd quarter. It spikes like that, that really caused issues and I think the regulators Understand that. So I think we could probably get by without doing a capital raise or Sub debt or something like that, as long as that's a short term issue.
And we think we will. I mean, Buzz Dunn's projections, And we think we're fine there from we think we have more than adequate capital, Kevin. And also, again, when The risk weighting on the $4,600,000,000 of the Fed is 0, right? So we don't have a risk weighted capital issue With that much cash on the Fed Reserve. So we think we're just absolutely No problems at all.
But we're glad we have that extra capital.
Yes. No, and definitely, and I guess part of the The question is you're also sitting with a very strong currency. So I guess that's a variable too, to look at where you're at in the market and your willingness to If there's capital to be had, whether weighing all those different variables about whether you should do it or wait. That was my point. Okay.
Thanks very much, guys.
Thank you.
Thank you. Thank you.
The next question will come from William Wallace with Raymond James. Please go ahead.
Hey, good afternoon, guys. So maybe just kind of following along with Kevin's kind of line of questioning, I mean, the liquidity from a capital perspective, you're saying It's a liquidity pressure, not a loan growth perspective, but your liquidity has been building now for Since really pre COVID, I think. And $4,600,000,000 is Massive liquidity. One, Tom, I guess during your prepared remarks, So I might have missed if you gave the timeframe, but I believe you said your correspondent channel balances have doubled from $500,000,000 to $1,000,000,000 Did I get that correct? And is that year over year?
Or was that in the quarter?
Go ahead, Rodney. Yes. This is Rodney Rushing, and you heard him correct. Since year end, our correspondent DDA balances went from Just over $400,000,000 to over $1,000,000,000 Total Correspondent balances were just shy of $2,000,000,000 at the beginning of the year and they're at $3,600,000 So what makes that up are the DDA balances where our downstream correspondent banks keep money in the DDA to pay their compensating balances, where we're the Settlement point at the Fed form for the cash letter. We then anything over that, We sweep into Fed funds or a money market account.
So right now, our largest category is by far DDA balances, but That growth has come from new correspondent relationships, mainly in Florida. Last This month alone, we opened over 20 something correspondent accounts in the state of Florida. This month, we opened another 6 correspondent accounts. In addition to those new accounts, our downstream correspondence liquidity is higher than it's ever been. They have a lot more cash Just like we did.
And it's
we're
Taking this year like a spike, I didn't predict and I don't think it will continue, but that's where it came from.
Yes, because we think we're seeing a flattening, as I mentioned, we're seeing a flattening, Wally, In all the other regions, for the most part, in deposit growth. And I I don't know where your question is leading, but do you do a capital raise to support cash on the Federal Reserve where you have a negative carry? I don't think You figure out some other solution to the problem, we could there are solutions to the problem that we have a way to Offload some deposits in a 3rd party arrangement if we need to. So that would probably be the solution rather than a capital raise, Wally. You may not be going there though.
No, that's precisely where I was going We've seen the channel grow. You've added a few $1,000,000,000 of liquidity from that channel alone over the past couple of years. And I'm just wondering, at what point do you start to maybe try to figure out ways to sweep
Are you there? Well, this is Rodney again. And what Tom alluded to was we do have that ability. Right now, we're buying all these funds. Obviously, what goes into DDA is a deposit.
What we purchase as Fed funds, We are purchasing as principal. If we want to, we can sell that money off To another bank or we can actually place it at the Fed, we would have to do that in an agent relationship, which we have the capability. We've just chosen not to do that. Up until now, we brag at all as principal, and We'll see if we can put it to work.
Okay. So are we, I guess, are we at the point where you are starting to make those decisions. I'm assuming the answer is yes, if you're going to start putting $100,000,000 to work a month in securities and trying to figure out other ways to turn it into a positive carry. That's where we are today?
Well, that's more of a question for Bud and Tom. This Rodney again, but I'll let them chime in.
But as Tom said, it's leveled off. We want the correspondent Channel to grow because there are other aspects, either loan participations that we purchase, we make them direct loans, And also we're growing our credit card outstanding through the correspondent credit card agent program. So there are a lot of other things other than just deposits that lead to profits through our correspondent relationships. And we think we Have a pretty good chance to be a reasonably good market share in the Southeast United States, and as well, we're seeing a national Credit card program today.
Okay. Thank you. And then, Budd, it looks like you moved about 2 $1,000,000 into health and maturity this quarter. Can you just give us a kind of brief overview of the nature of those securities?
Yes, that was all mortgage bank securities that we moved. Net realized Unrealized gain was about $5,600,000 and that will just be amortized over the remaining life. So we get to keep that $5,600,000 in our unrealized gain total. Really that's to I think a lot of banks are looking at doing this.
Really,
you don't have a negative impact from that $253,000,000 down the road if rates go up 300 basis Points, I guess. So that's it helps your book value by moving that to held to maturity.
Yes, exactly. And what's the duration on those
About 5 years.
Okay. And then on credit, You highlighted in the prepared remarks really just how strong credit is overall, yet you decided to increase the reserves and the reserves to loans. I guess if you take PPP out of the equation, it's really just kind of holding flat on a reserve to loan basis. At what point do you in your models make the qualitative adjustments that would Bring the reserves back down or do you think you're where you need to be?
I guess we this is Tom. We look at it On a quarterly basis, I mean that 2 basis points of charge offs on year to date basis is not reality. You and I both know that. I mean, There's a loss somewhere in our portfolio. We just don't know where it is.
I've been a You know, President of the Bank for 36 years, I've never seen losses as low in my career than in a one off Basis, but never as low as 2. So, good banks, you and I both know that good commercial bank During good times, charge offs are 10 to 15 basis points. And during bad times, they're probably 25 to 30 And a little bit higher if you're not your credit quality is not where it should be. So we just want to be prepared When that happens, Waleed, we think that there we'll see some charge offs. We're in the banking business.
There are going to be charge offs. That's we'd rather be prepared than unprepared for that.
Okay. I appreciate that. And then my last question, just you've got your $100,000,000 monthly loan production target that you have been Has production itself been accelerating or are payoffs also declining? So you're kind of getting a double
We didn't have a payoffs are so lumpy, I can't even answer the question, but there were no significant The production was lower in the 3rd quarter than the 2nd quarter, and but we didn't have any significant payoffs. I think a lot of the people that wanted to sell their properties or companies and worried about increase in potential capital gains And other taxes have already done so. People started doing it last year. We had customers selling assets last year to We're prepared for higher tax rates. So it's just hard it's very hard to predict, Wally.
But usually, 4th quarter is a good production Time for us. We usually it's the highest of the year, typically.
Yes. Okay. Thank you very much for answering my question. I appreciate it guys.
Thank you, Wally.
The next question will come from Dave Bishop with Seaport Global Securities. Please go ahead.
Most of my questions have been asked and answered, but how should we think about operating expenses here? You mentioned the new market tax initiative.
Should we think about this as sort of
a good run rate? Conversely, the tax rates are remaining around that 18% moving forward with The tax credit investments.
Yes, maybe a little bit higher, but somewhere in the 19% to 20% range. Yes. And the new markets, the tax credits, all I mean, you have to look at at the end of the period, you have A capital gain or capital loss in the new market that we purchased in the 3rd quarter was
there to offset it. It will have
a capital loss, it's offsetting capital gains. So that's really where some of these Tax credit deals come into play, because you want to make sure that you're matched off as well as you can on the capital gains But that definitely impacted our non interest expense for the quarter.
Got it. So it seems like that could be a little bit of a give Moving forward here, probably maybe $1,000,000 or $2,000,000 or so heading into 3rd or Q4, I'm sorry.
Don, you still have the write down will still be there. So that's it's about 900 and Well, whatever, dollars 2,800,000 each quarter that we'll have in write down, but you'll have the $3,300,000 in tax reductions.
Is that
what you mean?
Okay.
Yes. So that's a good run rate moving forward.
Yes.
Got it. Okay, great. That's all I had. Thank you.
This concludes our question and answer session as well as our conference call today. Thank you for attending today's presentation. You may now disconnect.