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spk00: Greetings. Welcome to the Service First Bank Share Second Quarter 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 your host, Davis Mange, Head of Investor Relations. Thank you. You may begin.
spk07: Good afternoon and welcome to our Second 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 projection shared today through the factors described in our most recent 10-K and 10-Q files. Forward-looking statements speak only as if the date they are made and Service First assumes no duty to update them. With that, I'll turn the call over to Tom.
spk08: Thank you, Davis, and good afternoon. Thank you for joining us on our second quarter call. I'm going to, before Bud talks about the numbers, I'm going to give a few highlights of the quarter. On the loan side, obviously the loan growth was extremely strong in the quarter, excluding Triple P loans. Loans grew $803 million in the quarter. One factor is there were really no payoffs in the quarter, and we expect those to accelerate in the third and fourth quarters, which will moderate the loan growth. We still see a strong pipeline of loans, but we do expect to be more offset with payoffs in the third and the fourth quarters. On the deposit side, we did see some runoff in the correspondent deposits that are making making loans and buying securities just like we are. And as well, they, you know, our customers are experiencing very strong profitability. So they are, um, uh, tax payments were up a good bit in March and April, uh, above normal. So that affected deposit levels as well. I think we'll probably be back to more typical patterns of deposits, uh, pre pandemic for, for most of the bank's history would see, you know, deposits decline in the first quarter, kind of be flat in the second quarter, and then grow in the third and the fourth quarter of the year. I was going to talk for a minute about loan quality. Obviously, that's on everybody's mind, and we talk about it at our board meetings and our management meetings often, of course. With the prospect of a possible recession ahead, we're often asked about what we're seeing. First, Henry Abbott will talk in a minute about our loan quality, but our loan quality metrics are the best we've ever had as far as I can remember. Hopefully, we've been very proactive in loss recognition. We certainly want to be proactive if we are facing a recession. We want to be proactive in loss recognition as quickly as possible. In terms of loan underwriting, I've had investors say, have you changed your underwriting? The answer is no. We want to be consistent year in and year out. Good banks are very consistent on underwriting. They don't change. They don't blow with the wind. When times are good and times are bad, they underwrite exactly the same way. Certainly, we stress test every loan that we make. We certainly do a stress test on it. I think we have a pretty good system and have a good track record. of performance over the years. We do say we're a disciplined growth company that sets high standards for performance. I can assure you our credit team is looking for cracks on the economy. Henry and his group are constantly looking. On the C&I side, any of the problems that we see are people that just aren't good business people. It's not really because of any meltdown in one economic area, one type of business or On the CRE side, the big question there is, will cap rates move up? As of now, they really haven't. The investors are looking for yield on high-quality reef-type products. I call it CD replacement investments in multifamily industrial and residential rental products. What really gives me the ability to sleep well at night to an extent, is that we see strong migration continue into the southeast, and I think it will offset some of the recessionary forces if we do experience a recession. Frankly, I don't think a little bit of a slowdown would be all that bad for the economy. I got kind of spoiled the last couple of years when we were traveling. All the nicer hotels were pretty inexpensive, and now that's not the case anymore. I'm back in the less expensive hotels, so I'm kind of missing that. We have a few hospitality operators that are customers, and they are reporting very strong occupancy and very high rates. So that wouldn't be all bad to have a little bit of a slowdown there. In terms of talent, we added the most new bankers in a quarter. We've ever added 15 in a quarter. We think we brought in some top talent into our company. If I had to say what I think is one of the strengths of our company is that we've not had any turnover in senior leadership in our banks, in our regions over the last 17 years. We've had a few retirements, but we've not had any turnover and we've had very loyal executive team in the bank. We do want to be the best place for a commercial banker to be. I think an absence of bureaucracy at our company is attractive to many bankers. So I'll stop there and let Bud cover some of the financial aspects, Bud.
spk06: Thanks, Tom. Good afternoon. Liquidity, we continue to evaluate our monthly investment purchase plan based on the bank's excess funds. Net investment security growth in the second quarter was $172 million. In mid-June, we decided to suspend investment purchases based on our strong loan growth. Net interest margin, as Tom mentioned, loan growth exclusive of PPP forgiveness was $803 million for the second quarter. Average loans exclusive of PPP increased by $650 million. Average PPP loans decreased by $108 million, so we had net average loan growth of $542 million in the second quarter. PPP fees and interest income were $2.9 million. in the second quarter compared to $10.2 million in the second quarter of 2021. And the remaining triple fee fees are $513,000. Net loans grew by $97 million the last two days of the quarter. This increased our loan loss provision, but we will not receive the positive net interest income impact until next quarter. Deposits decreased by $637 million in the second quarter, $532 million of this decrease related to correspondent banks. Fed funds purchase decreased by $250 million in the second quarter. Our margin has gradually improved each month. Starting in January, it was 2.84. increased to 2.91, increased to 2.97, then 3.04, 3.28 in May, and in June was 3.43. The bank received a positive net interest margin impact from the Fed rate increases in May and June. For future Fed rate increases, beta, which is just part of the business. For the remaining interest-bearing DDAs, we anticipate a deposit beta of 30 to 35%. Loan loss provision, our provision increased by $4.2 million in the second quarter as our loan production, excluding Triple P, increased by $314 million from the first quarter. Non-interest income, credit card income continues to grow. It was $2.7 million in the second quarter versus $1.9 million in the second quarter of 2021. Spend was $264 million in 2022 versus $226 million in 2021. We recorded a write-up in value of $2.1 million per quarter on a LIBOR cap we purchased in 2020. Non-interest expenses, first salaries and benefits. As a result of our market expansions, total salaries increased by $732,000 in the second quarter and by $1.9 million year over year. Total salaries and benefits increased $2.4 million during the second quarter and by $6.6 million year over year. Second quarter 2022 incentive expense was $6.2 million. versus 4.5 million for the first quarter of 2022. The increase reflects loan growth, strong core relationship growth, and the entry into new markets. Tax credits, the year-to-date investment write-down related to tax credits was 5 million in 2022 versus 173,000 in 2021. This increase was more than offset by an income tax reduction of $6.6 million. Correspondent banks, the year-to-date correspondent bank service charges increased by $3 million. The number of settlement banks increased from 111 in June of 21 to 164 June of 2022. That concludes my remarks. I'll turn it over to Henry. Thank you, Bud.
spk01: The bank saw record loan growth in the second quarter of 29% annualized, as Tom and Bud previously mentioned. The loan growth was strong in each of our regional banks, and the bulk of this growth was centered around commercial real estate. With this loan growth, our credit quality continues to be incredibly strong and in line with the prior trends in the post-COVID PPP environment. I'm pleased to say that annualized net charge-offs and Oreo expense for the quarter were only two basis points, which is down from the first quarter of 2022 at 11 basis points and the fourth quarter of 2021 at three basis points. Of the roughly $1.8 million in charge-offs, around 60% of the expense was related to one specific credit that we had previously impaired. The net credit expense figure was aided by roughly $1.2 million in recoveries which was primarily driven by one credit we aggressively wrote down last quarter, but had significantly better than expected results in liquidating the remaining assets of the operating company. We continue to be well positioned with our loan loss reserve of 1.21, which is consistent with the prior quarter and slightly down from 1.22 that we had in the fourth quarter of 2021. From a dollar perspective, we did grow our loan loss reserve by $8.9 million in the second quarter. This increase was not related to a reserve on any one specific credit, but rather the growth of our loan portfolio as a whole. Past dues to total loans were 10 basis points, which is in line with the first quarter of 2022 and continues to be near record lows. As I mentioned on the call last quarter, I don't expect Service First or banks in general to be able to maintain the record-setting pristine credit quality we have seen over the past year forever. But we have yet to see a rise in key credit metrics. Past due loans are a very simple but good early warning indicator and they continue to be very minimal. Non-performing assets were $16.7 million for the quarter versus $21.4 million for the prior quarter. This figure equates to 15 basis points of NPLs to total loans, which is a 25% decrease from the prior quarter, as well as the same period a year ago when we had 20 basis points of NPLs to total loans for each of those quarters, respectively. In the face of rising interest rates, rising inflation, the loan portfolio continues to perform very well, and I'm pleased with the second quarter results. With that, I'll pass it back to Tom.
spk08: Thank you, Henry. For the remainder of the year, we're going to focus on growing core relationships in the bank. In the past two years after the pandemic hit, we obviously experienced a large deposit surge, and loan growth was pretty minimal during that period. We did book some transactional loans during the pandemic, just like we did in the 2009 to 2011 period when we had large deposits. Back then we had large deposit inflows and loan demand was very weak. So we did some transactional loans that we probably won't do going forward. So we will look for deposits where we have significant deposit relationships as well as loans for the remainder of the year. So with that, we'll be happy to answer any questions you might have about the quarter.
spk00: Thank you. At this time, we will be conducting a question and answer session. If you'd 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Brad Milchaps with Piper Sandler. Please proceed with your question.
spk02: Hey, good afternoon.
spk08: Afternoon, Brett.
spk02: Tom, maybe I wanted to start with loan growth. Obviously another really strong quarter. Sounds like, you know, 15 new lending hires, which is certainly a plus. Maybe on the negative side, you've got some, you know, you talked about some pay downs that you expect to come. I think at the beginning of the year, you set out a goal of growing about a billion two. You're already there. Can you just kind of talk a little bit more about sort of what a pullback looks like in your eyes? I mean, you've got some of the best growth metrics out there. Just kind of wanted to understand if we could frame that a little bit better, sort of kind of what a pullback in growth for you guys might mean.
spk08: It's sort of hard to give a good answer, a very accurate answer, rather, other than We are going to be very selective in what we book, but obviously 150 a month is probably looking at something north of 150 a month on average in terms of net growth. I wouldn't change that estimate yet. 150 a month I think is a good number net of paydowns. Like I said, we do have some construction pay downs that we know are coming over the next two quarters. I can't really get a whole lot more accurate than that, I don't think, Brad.
spk02: Sure, no, that's helpful. And maybe just kind of as a follow-up to Bud, as you kind of think about the size of the balance sheet, I know you talked about stopping the securities purchases I know it's tough to gauge, but do you have a sense where, you know, your deposit balances might, you know, sort of floor out? Just wanted to kind of think about or how to think better about the liquidity that you have, you know, remaining and how best to think about, you know, how that might be deployed as you move through the back half of the year.
spk06: So you're asking what you think will grow deposits by each month? Is that right, the first part of it?
spk02: Yeah, or just, you know, if you're thinking about the correspondent book, you know, you had some runoff this quarter. You know, I think, you know, average liquidity was down, oh, about a billion two or so. You know, just kind of thinking about, you know, kind of where that number is headed as you move through the year. You know, it sounds like you stopped buying bonds. Tom's talking about the loan growth. Just kind of curious if you could think about a floor for the liquidity.
spk06: Well, from a regulatory standpoint, the excess funds has to be above 5% of total assets. So that's about $750 million now. We're not going to get to that point, but that's kind of what we look at, what we have to shoot for to be well above that. We're about $1.4 billion today. So just with a big drop over the second quarter, we just decided we wouldn't buy any more securities. You'll have the the paydowns that you'll have as liquidity during the month. Correspondent, I don't know, that's a, Rod, do you got anything on that?
spk04: Yeah, Brad, this is Rodney Rushing. And, you know, in the second and third quarters of last year, we had just unbelievable growth. I mean, there was a balloon of new correspondent deposits. Their liquidity was coming in like ours. And when you have over 300 community banks that have accounts with you, we were taking that liquidity. End of the second quarter of 21, total correspondent balances, that's all Fed funds, DDA, everything, was 2.4 billion. In one quarter, we went to 3.6. And then by year end, it grew another 300 million to 3.9. And we've seen that run down about $800 million this year. And that has slowed tremendously. In that same period of time, we grew the number of correspondent banks from 316 to just shy of 350. I think it was 344. And if you look back a year, the end of the second quarter of 21 to today, correspondent balances are up 580 million. So if you look at the past year, balances up almost 600 million in correspondent banking. That shows how much that ballooned in that liquidity from all the banks provided. And that was from the from the stimulus money and some of it was from us adding settlement banks. We do a lot of things with correspondent banks, credit products, agent credit card program, but we consider if a community bank, if we're their settlement point, if they're settling their cash ladder through us at the Fed, we're helping with their cash position and we consider them We're their primary correspondent then. We grew settlement banks so far. Well, for the year, it was over 50. I think it was 53 banks. So those provided some increased deposits in the DDA account using compensating balance to pay their Fed bill. So I hope that answers your question if I confused you all. try to correct that.
spk02: Did that help? No, that's very helpful. Thank you guys very much. I'll hop back into queue.
spk08: Thank you, Brad.
spk00: Our next question comes from the line of Kevin Fitzsimmons with DA Davidson. Please proceed with your question.
spk03: Hey, good afternoon, guys. How are you? Hey, Kev. Maybe we could shift gears and talk about expenses. A lot of moving parts in there and, and thank you for all the detail that that's very helpful. So when we maybe like a very top level way of asking it is like, if we look at a run rate of, you know, I think it's like 39.8 million this quarter, how to think of that going forward. Now I recognize that, um, that we have new markets going into and all the new, um, the new lenders and the expenses come day one with that, and the resulting revenues will come over time. You also talked about the processing revenues, and I just want to, on this issue, I just want to distinguish the additional processing expenses you're referring to as really just because you're getting ready for the conversion, so you're kind of having kind of dual or duplicate kind of expenses and maybe remind us when some of that will go away. But I want to distinguish that from, I believe last quarter you talked about like $874,000 in expenses, which I treated as like kind of one-timer because that seemed like it was, you know, not core but related to the actual deconversion, I believe is what you used. So that's a lot.
spk06: lot of different details but all related to expenses and take it however you'd like to uh tom and bud thanks yeah hey uh kevin so one we made the additional incentive accrual of 1.8 million in the second quarter uh right now we wouldn't anticipate doing anything additional in the third quarter and what is We'll see how that shakes out in the fourth quarter. So right, you could really take the $1.8 million out. That was an adjustment in the second quarter. For the core conversion, that'll take place in February of 23. except for purchase cards, will convert in September of this year. And the remainder will be in 2023. We might have some smaller deconversion expenses. I don't see anything major that would really impact the quarter going forward. But I guess the biggest thing is taking out that additional incentive accrual in the second quarter numbers. Hopefully that helps. I think I had all the points.
spk03: Yeah, that's very helpful. And then, Tom, maybe we could talk about new markets. So just in the last number of months, you guys have entered Metro Charlotte, Tallahassee, and now most recently Nashville got announced. And wondering if you can just Give us a sense on what inning you're in on those. Obviously, Asheville would be very, very, very early, but what inning in the expansion you are, and then what are the prospects of new markets? Do you look at that number of markets and say, all right, that's good for a while. Let's let those season, or is it totally based on availability of folks? Thanks.
spk08: Yeah, a lot of it's availability, but we'll go three years without adding a new region. We've done that before because we just can't find good people. And so it's rare to find this many good people at one time. It's very, very unusual to find. So I would think that Tallahassee is fairly well staffed. That's a pretty good-sized group there. Asheville, it's not going to be huge. It's not going to be a huge We're still staffing in the Piedmont region, the greater Charlotte area. We call it the Piedmont region. But we're going to be selective in the people we look for everywhere. So it's hard to give you a good answer, but just all these mergers have led to an unusual supply of people looking for a new home. And that is a good thing. And so the more mergers there are, I think mergers, we all know, kind of slowed down this year, right? So things have slowed down a bit, perhaps, going forward. So I would anticipate it would tail off for a while, Kevin. But we're always looking for the right people that have core relationships and are not transactional lenders and have deposit customers as well as loan customers.
spk03: Okay, great. Thanks very much. Thank you.
spk00: Our next question comes from the line of David Bishop with Hovday Group. Please proceed with your question.
spk05: Yeah, good evening, gentlemen. Hope you're well. Hey, Dave. Good evening. Hey, Tom, just curious. You noted the nice margin expansion. Obviously, loans as a percent of earning assets to creep up. But I'm curious with the Fed aggressively raising rates here, are you able to pass, what's your success rate, I guess, in terms of how much of that climb in interest rates are you able to pass on to the bar? Are you seeing risk premiums adjust? I guess, are you getting paid for potentially higher risk within the market if we do enter a recession, be it mild or strong? Just curious what you're seeing in terms of loan pricing across your markets.
spk08: I think we have seen Up until the last 60 days, perhaps, we've seen some irrational loan pricing out in the market. I think that's much more rational today in terms of what we're seeing from our competitors. They're doing a little bit better in terms of what they're doing, but we have to do what we have to do, and we don't try not to pay attention to what our competitors are doing in terms of... Certainly, when you have strong loan growth, we're in a much better position to pick and choose the customers we choose to do business with today. We'd rather be in a position where we have stronger loan demand than deposit demand. It's the best position for a bank to be in. It's the best position to increase margin and improve profitability. So I don't know about you. Go ahead, Bud. Bud, were you asking about interest rate sensitivity, Dave? Was that part of the question or no?
spk05: Yeah, just curious, I mean, in terms of what you see, just in terms of spread, and maybe an additional question. I think I heard in the preamble you do expect some second-half deposit growth. It sounds like there could have been some seasonality, but you do expect some back-half funding growth on the deposit side?
spk08: Yeah, we do. We'll focus more on the second half of the year. We haven't been focused on it for two and a quarter years. We'll focus on it now. I appreciate the color. Thank you, Dave.
spk00: Thank you, ladies and gentlemen. We have reached the end of the question and answer session. This does conclude today's conference and you may disconnect your lines at this time. We thank you for your participation.
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