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spk00: Greetings and welcome to the Service First Bank Shares Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mange, IR Director. Thank you, David. You may begin.
spk07: Good afternoon, and welcome to our second quarter earnings call. We'll 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, to the factors described in the most recent 10-K and 10-Q filing. 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.
spk08: Thank you, Davis. Good afternoon. Thank you for joining us as we review the quarter. We really were generally very pleased with the quarterly results, and of course we have a saying that we're pleased but never satisfied. with the results of the year or the quarter, and that's always true. We're never satisfied, and we think we can do much better going forward. I'll give a few overview of a few of the things we're going to talk about. One of them is credit quality. Henry Abbott's going to give a review in a minute. We continue to have industry-leading credit quality, as he will discuss in a few minutes. We really don't see any Issues with all the commercial real estate that you read about in the headlines, we don't see any issues with our commercial real estate book at this point. Our strong balance sheet does provide us with a lot of opportunities, and we're seeing a lot of opportunities to grow relationships and core deposits. We don't have any broker deposits or federal home loan bank advances on our balance sheet. Very few banks can make that claim. If you include our correspondent Fed funds in our loan-to-deposit ratio, the adjusted loan-to-deposit ratio is 85% today, as the correspondent Fed funds flows back and forth between the nine-inch bearing and the Fed funds account based on the level of interest rates. So we're very pleased with a decline in our loan-to-deposit ratio to 85%. We did see very good deposit growth in the second quarter with good growth in core banking relationships. It was a good number. We are seeing the results of our deposit focused over the past year. Again, we focus on service and growing core deposits, not on the rate of which we pay as a primary driver. The deposit pipeline continues to be very robust today. We are pleased with where our liquidity ended up. We got our cash in short term. Treasury has now exceeded a billion dollars, which is a good level. We're proud of that. On the loan demand side, we are seeing some slowdown, I guess, over the last few months as bars assess the economy. And again, we've kind of been a little bit more cautious than normal as we assess the effect of recent events. on the economy, so I think the whole banking industry has been a little bit more cautious and the borrowers have been more cautious. But I think we're starting to see normalization and we'll see normalization in credit demand in the next few months. Our main focus has been on loan repricing efforts, as Bud Foshee will discuss in more detail in a few minutes. We are focused on addressing the efficiency of our banking team. We are proud of our efficiency ratio. industry-leading efficiency ratio, and we've reduced 11 producers on a year-to-date basis. Again, Buzz is going to talk more about loan repricing, but we'll see improvement in our margin over the next few quarters as the loan repricing continues. I'm going to turn it over to Rodney Rushing now to give a corresponding update.
spk05: Thank you, Tom. Basically, we're very happy with correspondent division results where we had both growth and stabilization during the quarter. Total active correspondent relationships increased to 360 banks during the quarter. Total fundings were at 1.84 billion with a slight increase in the DDA operating balances. Biggest news from correspondent is that balances remained stable during the last two months of the quarter. New relationships added during the quarter were 11, four from Texas and four from Kentucky, as we continue making progress in both of those markets. Credit card revenue increase for the quarter, which Bud will expand on here in a minute, but during the second quarter, we added six new correspondent agent banks to issue credit cards. Six additional banks are in the pipeline, which should close in the third and fourth quarters of 2023 plus five for the first half of 2024. The Oklahoma Bankers Association added Service First Bank to their list of endorsed vendors, bringing our state association endorsements to nine. New agent banks were added to the card programs in Oklahoma, Kansas, Vermont, Wisconsin, and Minnesota during the second quarter, just to show how broad and wide-ranging these state and American Bankers Association endorsements are for us. And with that, I'll turn it over to our Chief Credit Officer, Henry Abbott.
spk02: Thank you, Rodney. I'm very pleased with the bank's results and continued strong credit quality in the second quarter. The bank grew its ALLL to 1.31 of total loans in the second quarter versus 1.28% in the first quarter of 2023. This increase is not related to any specific credit, but rather a continuation of our conservative outlook as we've had a very strong quarter. We continued the trend started in the first quarter where both AD&C and the entire CRE bucket decreased as a percent of capital for the second consecutive quarter. AD&C as a percent of risk-based capital dropped from 93% at the end of the first quarter to 86%. We continue to stress and look closely at our CRE portfolio to ensure we are appropriately managing the risk. The year to date, we have not had any major shifts or deterioration. I can get into specifics in the Q&A section of the call, but we have no material office exposure. As I've mentioned in the past, we have been at record low NPAs for the past few years. Past dues to total loans were down to 15 basis points, a three basis point decrease from the first quarter. Net charge-offs for the quarter when annualized were 11 basis points, and year-to-date annualized, that would be 8.5 basis points, which is on par with our charge-offs for 2022 and near record lows for our bank. Over 90% of the charge-off figure for the second quarter was related to one specific C&I credit. If it were not for this one specific credit, given the recoveries in the quarter, we would have had zero net charge-off for the quarter. I would also note the bank has no remaining exposure to this relationship. We've taken our lick and moved on. I continue to feel very good about the markets we serve and the diverse and granular lending relationships we have at Service First Bank. On the whole, I'm very pleased with the second quarter results and turn it over to Bud.
spk06: Thank you, Henry. Good afternoon. The bank made really good progress in deposit growth, liquidity, and capital growth in the quarter. Our non-interest-bearing deposits were stable in the second quarter, and we were pleased with deposit growth in the quarter. We had a goal of $1 billion in liquidity, and with growth of our cash and short-term treasury bills, we reached that goal. We're seeing great momentum in deposit growth. We did see some margin compression in the quarter from 3.15 to 2.93. We're assuming one more Fed rate increase for 2023. We expect the margin to stabilize and remain flat in the third quarter and begin to improve in the fourth quarter. Our loan repricing initiative is bearing fruit and will contribute to margin expansion later in the year. Examples of our repricing efforts, fixed rate loans that paid off early year to date are $174 million. Loans that are repriced are $155 million. And we have $173 million pending in loan repricing. We have $1.9 billion annually if you include normal cash flow from fixed rate loans on an annualized basis and repricing. we will improve the rate on these loans by about 300 basis points. And our loan portfolio has a short duration. 85% of new loans are floating rate, and about 40% of total loans are floating today. We think one Fed increase of 25 basis points, we're close to neutral today with an outlook for improvement going forward. Although loan growth is flat year-to-date, there are a lot of maturities that are being replaced at much better rates. We continue our growth in book value per share. Bank Tier 1 leverage ratio improved from 9.91% to 10.25%. Consolidated CET1 ratio improved from 10.01% to 10.37%. Our capital continues to be a strength. We saw improvement in non-interest income in the quarter with improvement in both credit card and mortgage, and we expect continued improvement over the balance of the year. In discussing non-interest expense, we made an effort to hold the line on expense growth in 2023. We have held the headcount flat on a year-to-date basis. While we have added a few employees in risk management, we have made reductions in other staffing. While we expect a possible FDIC special assessment at some point, we do not know today what to expect, but think it will be a modest impact on 2023 results. We have built our staffing in our new offices and do not expect additional headcount for any existing offices. Our teams are performing quite well and have grown new accounts 20% year over year. Our core expenses declined by $1.1 million in the second quarter, and we expect third quarter run rate to be in line with the first quarter. That concludes my remarks. I'll turn it back to Tom. Thank you, Bud.
spk08: As you can see from all these comments, we continue with business as usual at Service First. We did open our Virginia Beach office this quarter. I was up there last week. We've got a great team. They're on the ground. They're doing a fantastic job and look forward to great results from them as we go forward. So in any event, I am really proud of what our team has delivered this quarter, and they always produce what the shareholders need. So with that, I'll be happy to answer any questions you might have.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would 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. One moment please while we pull for questions. Thank you. And our first question will come from Graham Dick with Piper Sandler. Please proceed with your question.
spk01: Hey, guys. Good evening. Good afternoon. So I just wanted to kind of start on the balance sheet. Obviously, deposit growth was, you know, really strong this quarter. And, you know, you couple that with loans that are pretty much flat. You got a lot more breathing room on the loan and deposit front. Can you just talk a little bit about how you think the balance between loan growth and deposit growth will play out for the rest of the year? I know we talked about, you know, maybe a high single-digit number a few quarters ago, but any update you can provide on the loan growth front and then, you know, the level of deposit growth you guys are expecting to produce throughout the rest of the year would be very helpful.
spk08: Well, you know, again, we've been cautious, and I just said that, that obviously we've been cautious to this date, but We're getting more confidence every day and every week that goes by. We feel better about where we are, where the economy is. We're pretty much, as I said, business as usual, so we'll resume making loans again. There is always loan demand in places like Nashville, Tennessee, Charlotte, North Carolina, Florida. The whole state, there's always tremendous loan demand in Florida. So we can find the loans to make. So we feel good about our deposit pipeline, and we're going to start resuming business as usual. It's kind of hard to give you a number, but our team has always produced. Whatever we need to produce, they produce. So, again, we feel a lot better about where we are than we did before. you know, at the end of the last quarter. And we feel a lot better about where the industry is today than in the last quarter, Graham.
spk01: Oh, yeah, I can imagine. I guess just framing it a different way, do you think, I mean, would it be safe to assume loan growth matches deposit growth for the rest of the year, or is there any color there you can provide?
spk08: Yeah, I think that, you know, I guess I didn't do a good job of answering your question, obviously, if you're having to re-ask that. I think Yeah, if we bring in a dollar of deposits, we'll probably make a dollar of loans. That's a fair statement.
spk01: Okay, great. That's helpful. Now, you did a fine job. I probably asked the question bad. All right, so then I guess just on non-interest bearing, those were – I mean, they held in a lot better than what we've seen from other banks this quarter. Any color on what you guys are doing that's driving that versus some of your all's peers and then – On the correspondent front, I think I might have heard that those balances were actually up quarter-by-quarter, the noninterest-bearing balances. I just wanted to get a sense for if you think that trend might be able to continue in that division.
spk05: This is Rodney Rushing, Graham. Yes, noninterest-bearing correspondent was up for the quarter slightly. Total fundings for the correspondent from quarter-end to quarter-end were down about The good news in correspondent is the last two months of the quarter, for May and June, the total funding in correspondent banking was leveled off. And so, you know, all of my community banks, I think in my comments, the number was 360 total banks that we have now. Their liquidity runoff has seemed to stop. And so their balances with us has been stable for the last two months. So if we can maintain that for the third and fourth quarter with the new accounts that we're opening in Texas and Kentucky and other markets, hopefully that will grow.
spk08: You know, it's for the general bank, Graham, on Niners Barron, I think, you know, We are a business bank, and so we have, you know, significant size accounts. So we could have one that goes up or down, you know, 50 million in a quarter, and it might be at the quarter end. So we could, you know, we might, you know, we've held in steady, but next quarter we might be down 100 million or might be up 200 million the end of the next quarter. So I can't, you know, I can't represent because we are a business bank, and we do have significant size customers. So it can vary, you know, a bit, but, you know, we don't, We had less far to fall than a lot of the older banks. I remember years ago, Harry Brock, who was the chairman and CEO of Compass Bank. He was the founder of the bank. I was working for what is now Regents Bank. It was Amself Bank. He said, y'all got a lot of lazy money at your bank, Tom. I didn't quite understand what he meant, but over time I learned what Harry meant about the lazy money. I think the Well, you've got a 100-year-old bank charter. They've got a lot higher non-interest-bearing deposits, and they've got farther to fall than we do. So, in any event, it's probably good news for us.
spk01: Yeah, definitely. And the last question for me is just, it looks like you guys added to the bond portfolio this quarter. I just wanted to get a little color on your all's decision and thought process behind that, and then And maybe what rates you bought those bonds at and the duration of them or anything like that would be great.
spk06: Yeah, Graham, it's fine. Really, a lot of that had to do with pledging.
spk08: We didn't need to pledge anything, but we did. We just got in case we needed for collateral. But we added what? What did we add?
spk06: $350 million in six months and less in treasuries? Yeah, and the yields. 535, 540, and it reduced our average life to 3.2 years also on the entire portfolio. A little better yield than you get at the Fed.
spk08: So, yeah, that's the logic behind it. We don't need it for pledging.
spk01: Okay, great. All right, that's it for me. Thank you, guys.
spk09: Thank you. Thanks, Graham.
spk00: Thank you. Our next question is from David Bishop with Hovde Group. Please proceed with your question.
spk09: Yeah, good evening, gentlemen. Good evening. I thought about that question, and I couldn't help but notice that the end-of-period balances on investment and even deposits was much higher than the average balance. Was that a function, Bud or Rodney, of some of those correspondent relationships sort of coming online later in the quarter? Just curious. if there was any sort of timing around the – was it sort of a late-quarter surge in funding growth?
spk05: It was not a late-quarter surge in correspondent balances.
spk08: I know we had a large municipal deposit that came in right at the end of the – I don't know exactly when in the quarter. Do you remember, Bud, exactly? It was 20th or so, would you?
spk06: Yeah, pretty late in the quarter.
spk08: It'll be here a while, and it's a municipal – A lot of the COVID money, federal stimulus money is starting to make its way down to state, local, you know, municipalities. So that's what that affected today.
spk09: Okay, got it. Then, you know, Rodney's staying sensitive. I know you guys always don't like to give away the plumbing in terms of the inner workings of the correspondent division. You know, I know we had you on the road last month. You said it. tends to remain relatively profitable despite what rates are doing. But notice the decline in third-party service charges. Is that a function of you handling more accounts, sweeping more into the Fed service here? Maybe what's driving that down on a quarter-to-quarter basis, the third-party processing fees?
spk05: I don't think it was a fluctuation or a Correspondent banks, did you know if that had anything to do with conversion? We'll have to get back to you on that. I did not see the big decline in correspondent service charges, but we'll have to look into that and just get back to you.
spk09: Okay. We can do that maybe offline. Sure. Just if you have it, just curious, maybe an update. I know you provided last quarter on the commercial real estate book, the office book, any change there? I know it's a small part of the puzzle here, but I know the investor public is focused on it. Just any sort of inter-quarter details you can update us on.
spk02: This is Henry Abbott. Yeah, no material change, as I kind of mentioned in my comments. AD&C is down. Overall, CRE, income producing, is down. Specific to office, that's still around, you know, and this is non-owner-occupied offices, you know, only 3.5% of our total loan portfolio. So it's not a material amount. And as I mentioned, kind of theory as a whole was down for the core. Got it. Thanks.
spk00: Thank you. Our next question is from Kevin Fitzsimmons with DA Davidson. Please proceed with your question.
spk04: Hey, good afternoon, guys.
spk06: Yeah, good afternoon.
spk04: Just want to circle back on the margin again. So if I heard you right, what you said is you expected, you know, it was down 22 bits this quarter, but you expect it stabilize in third and then begin to expand in fourth. And I just want to make sure I heard that right. It seems like with one more Fed rate hike, what we're hearing from a number of banks is there'll be more margin pressure in third quarter, but probably a little less than what we saw in second and then beginning to stabilize in the fourth. So I'm just wondering whether maybe the loan repricing coupled with maybe a little more steady balance in the non-interest bearing and the overall deposit growth is just maybe stabilizing your margin a little earlier than others. So I just wanted to dig into that, if that's right.
spk06: Yeah, Kevin, that's fine. You're right. You're right on.
spk04: Okay. Okay. So, okay.
spk08: Do you want more than affirmation? I mean, if the NIV is stable... And we're repricing loans. You know, our projection shows that we can keep the margin steady at this point and that it'll start to expand, you know, in the next couple of three months, not a whole lot, but then it'll get into the fourth quarter. I mean, it'll start going up a couple of bips a month and, you know, it starts getting up to, you know, it starts clawing its way back, you know. We think the Chinese water torture is over. which it has been, Chinese water torture. So we think it's over, and we're headed in the right direction, and there's light at the end of the tunnel.
spk04: That's good to hear. Good to hear. And maybe if I could just ask about expenses. Bud, if I heard you right, did you say third quarter is going to be like the first quarter run rate, not the second quarter? I just want to make sure I heard that right.
spk06: That's correct. That's correct. Yeah, we'll have to increase incentives some, so it'll be aligned with first quarter.
spk04: Okay. And just more, I think you mentioned in the expense discussion comments that it was pretty limited number of new headcount, that if you're hiring in one area, you're looking to reduce revenue producers, you're looking to reduce staff in others. And as always, the efficiency ratio is best in class. But trying to connect the dots, Tom, to your point about feeling better about loan growth and about the economy and the industry, and given that there's disruption out there, do you foresee opportunities to hire away folks? And if you're feeling better about the backdrop of the economy, might you do that sooner? rather than later.
spk08: Yeah, we are always constantly talking to people. Again, we've been fortunate enough to be able to hold the headcount pretty much flat on a year-to-date basis. Maybe we're up 1% annualized or something like that. And you've got to hire the risk management people. The regulators never sleep. So we always have to be adding to staff in that area That's just part of life. We have to try to look for other efficiencies. Again, as I've said, this is a year to get the right people on the bus and get the right people off the bus, perhaps. We're trying to find ways to be more efficient because we're going to have to continue to add risk management people. That is something we've worked hard at. We are talking, always constantly talking to people, but we have filled out our staffing on all our existing offices. As I said, we feel good about, as Bud said, about where we are with the staffing in our existing offices. We hired somebody last week. We hire somebody just about every week that's a production person, the right person, the right team. We'll hire them tomorrow.
spk02: We're not
spk08: We're not in a turtle mode, obviously, in our turtle shell. We're always looking and we're always talking. The right group, they're welcome aboard tomorrow.
spk04: Got it. One last one for me. Capital is obviously strong. You mentioned that you added to security this quarter. Some banks have indicated they're evaluating potential bond transactions where they clear the decks a little bit, be able to put money to work at higher rates, maybe alleviate the AOCI issue. Is that something that is on the radar for you or not necessarily?
spk06: No, Kevin. We did some of that cleanup last year. I don't remember how much now, but we did pretty a bit of that. So, yeah, we don't have any plans to do that for this year.
spk08: We just think our bond portfolio is so short, we think they're just going to mature at par. They are going to mature at par. So I realize that some people have a much more difficult, we have a very modest losses in our portfolio, and we don't have a long duration, so we don't feel the need to do anything. We think if you did something, even as modest as ours is, and you'd book to a $50 million loss, and then interest rates fell 100 basis points in six months, I'd feel a little bit foolish, you know, when we could have just waited until those bonds. I mean, I realize you're putting on securities at a higher yield, but I still think the preference is to let bonds mature at par.
spk04: Now, fair point, Tom, fair point. Okay, thank you very much, guys. Thank you.
spk00: Thank you. Our next question is from Steve Moss with Raymond James. Please proceed with your question.
spk03: Good afternoon, guys. Maybe just circling back on the margin here, just curious, where are you seeing loan pricing these days for new production?
spk06: Yeah, new loans for June went on at 8%. Okay. So that's, yeah, that's a good starting point.
spk03: Okay, that's helpful.
spk06: That's a blended rate, but 85% of that is favorable rate.
spk03: Okay, got you. And then in terms of just, you know, as we think about, you know, the loan, you guys are a little more constructive on loan growth going forward here. You've run down your construction portfolio a bit. I'm curious, is that an area you expect to grow here in the next couple quarters, or, you know, should we be thinking about more CNI or CRE weightings? Just kind of curious as to how do we think about that dynamic?
spk02: We still do have some in our construction bucket that might fund up here in the coming quarter or two. It just happened to be down, and we moved some of it to the permanent bucket, and some of it then paid off. I mean, so we've still got some room to grow. go up in our construction bucket here. And, you know, I think we're focused on C&I customers that have strong deposits with us personally and corporate. But at the same time, you know, if there's a good CRE project out there, it's got, you know, good loan to value, good pricing, we're taking a look at it. But we need deposits to come with our relationship.
spk08: You know, Steve, one thing I like on the construction loans, if it's a multifamily deal and they're in lease up and, Energy says, well, they may want to stay with us a long time so they can borrow more eventually from Fannie, you know, when they go permanent. But, you know, I keep thinking if they can borrow money from Fannie at five and a half and they're paying us eight and a quarter, how much longer are they going to want to pay us eight and a quarter? That would, you know, but we'll see. So that's something we can't predict is the variability on the payoffs on the And of course, there's still plenty of demand in the southeast United States for new CRE projects.
spk03: Right. Okay, great. Well, I really appreciate all the callers. The rest of my questions have been asked and answered here, so thank you very much.
spk08: Thank you. We really appreciate everybody joining us on the call today and appreciate your support.
spk00: and look forward to the future we're very excited about the balance of the year thank you very much thank you this concludes today's teleconference you may disconnect your lines at this time thank you for your participation
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