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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 screen pad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Smith, Director of Investor Relations. Thank you, Davis. You may begin.
spk05: Good afternoon and welcome to our second quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We will have Tom Broughton, our CEO, Henry Abbott, our chief credit officer, and Kirk Presley, our CFO. 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, 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 Service First assumes no duty to update them. With that, I'll turn the call over to Tom.
spk06: Thank you, Davis, and good afternoon. Thank you for joining our second quarter earnings call. We think we'll have a really nice report that will please our investors today, and I'll start by discussing deposits. We did see A strong deposit growth of 16% annualized for the quarter. This is a bit unusual as we normally see flat deposits in the quarter due to April tax payments. We did see the usual decline in deposits in April due to tax payments, but we did see solid deposit growth in the last two months of the quarter. Our deposit pipeline is still really solid. Though many deposits never make it onto the pipeline, they just show up. So it's not as typically as accurate as a loan pipeline would be. So the growth is broad-based throughout our footprint. We also continue to add new correspondent banking relationships with 377 current correspondent bank relationships. The loan growth was very strong for the quarter at 15% annualized. We were pleased with both the level of loan demand and the profile of credit quality. We think many of our customers delayed projects last year after rates had risen a great deal in a short period of time, or they decided to make capital expenditures from cash. We are seeing them borrow again, which led to an increase in our C&I loans, and we still see the loan pipelines very strong. and it's increased 10% over last quarter. We added 14 new bankers in the quarter. We added five in Florida, four in the new Auburn Opelika market, and the rest spread throughout the footprint. We are pleased with a new team in Auburn Opelika. That is a $4.5 billion deposit market that's pretty well fagmented, so we think it's a great opportunity for us. The Memphis team in Tennessee is all in place. They were all there in the first quarter. They're all, you know, some of them at the end of the first quarter. They're all on board during the second quarter. They're beginning to show results, and we are optimistic for the balance of the year. With our strong liquidity, we are seeing opportunities to acquire new customers, and we are optimistic about the balance of the year. So with that, I will stop. I'm going to turn it over to Henry Abbott, our chief credit officer.
spk01: Thank you, Tom. The bank continued to show strong credit quality in the second quarter of 2024, and we did this while achieving solid loan growth of roughly $450 million, which is 15% when annualized. I would also note that while we experienced loan growth, our AD&C as a percent of capital continues to fall. At the end of the second quarter, AD&C as a percent of capital was 86%, which has continued our downward trajectory from a high of 100% at the end of 2022. I'm pleased that in the current environment, non-performing assets are stable quarter over quarter. We ended the quarter at NPA's total assets of 23 basis points, which is one basis point higher than the prior quarter end. We did grow our A triple L by roughly $2.2 million during the quarter. A triple L to total loans, you will see did decrease from 1.31% at March 31st, 2024 to 1.28. And this was driven primarily by improved collateral values on two of our substandard credits. When looking at the first six months of 2024, Annualized net charge-offs were only eight basis points, which is less than our annual results for 2023 of 10 basis points. Annualized net charge-offs were down from the same period prior year. We had 10 basis points in annual charge-offs for the quarter and had 11 basis points in the second quarter of last year. We have managed to sidestep some potholes, one being that we don't have any major metropolitan office exposure. We continue to have a disciplined approach to winning new relationships in our footprint that help provide the bank with both loans and deposits. Loan growth activity should continue its positive momentum given our recent entrance into new markets in 2024. The bank has a granular and diversified loan portfolio that continues to perform at a high level, and I'm very pleased with our second quarter results. With that, I'm going to hand it over to Kirk.
spk08: Thank you, Henry. Good afternoon. We are very pleased with the progress the bank has made so far this year. I'm going to focus my comments today on Lynx Quarter because the trends are very meaningful and will highlight our momentum in both growing the balance sheet and earnings. Net income is up 17% annualized and margin is up 13%. Margin increased to $106.9 million in the second quarter versus $102.5 million in the first quarter. The margin is increasing from both the growth in the balance sheet and the repricing of our fixed rate loans and securities, along with maintaining the cost of liabilities. Both loans and deposits had strong growth during the second quarter, and the pipelines continue to grow. The net interest margin percentage is up 13 basis points from the first quarter to 2.79%. As the yield on interest earning assets is up a strong 16 basis points, while the rate paid on interest bearing liabilities grew modestly. As we noted in the last few quarters, we see margin increasing throughout the year. We don't anticipate a significant increase in the cost of funds going forward, while we expect the yield on interest earning assets to continue to increase as we grow loans and fixed rate loans and investments repriced. Opportunities to proactively reprice loans from covenant violations usually occur after taxes are filed, and financial statements are received. This started in Q2 but should pick up steam in the third quarter. During the first quarter, we had $139 million of low-rate securities mature at a rate of 2.2%. We had approximately $120 million of maturing securities yielding 2.62% during the second quarter, and we'll have another $25 million yielding 2.93% in the third quarter. Reinvesting these proceeds, and cash flows from mortgage-backed securities will improve the margin going forward. We did experience a minor increase in the cost of deposits. This was largely tied to the strong deposit growth. We do expect modest increases in the cost of funds as we grow deposits in the second part of the year. Core non-interest income expanded at a strong pace during the second quarter. When you exclude the infrequent BOLI death benefits of $1.2 million that we realized in Q1, Our core non-interest income was up annualized linked quarter by almost 70%, primarily due to strong mortgage fee income, but we also had nice growth in credit card income and deposit fees. Mortgage fee income had a nice combination of a seasonally strong quarter, more favorable market conditions, and increased staffing levels. Credit card spend was seasonally low in the first couple months of the year, but has grown nicely since then, and we expect a good second half of the year as credit card accounts continue to grow and new correspondent banks are being added at a nice pace. Non-interest expenses are a little more challenging to explain because of the implementation of Accounting Standards Update 2023-02. This changed the amortization method to the proportional amortization method for historical and new market tax credits and moved the amortization of the investments from other non-interest expense to tax expense. This new amortization method, which now matches the low-income housing tax credit accounting for qualifying investments, will reduce the volatility of our non-interest expenses going forward and better represent our operating and tax expenses by showing the cost of the tax credits along with the benefit in tax expense. We adopted the new accounting standard in the first quarter, but we did not complete the analysis until the second quarter. and therefore reflected this in the second quarter financial statements. The new accounting reduced the non-interest expenses by about $3.9 million in the second quarter from what they would have been under the previous accounting, but about one-half of which related to Q1. In discussing other components of non-interest expense, we continue to watch expenses closely, but our expenses have increased a little more than we expected at the beginning of the year, One, we continue to invest in producers and the staffing up of the new markets, along with the ancillary costs. Two, we have experienced a significant rise in healthcare costs based on poor performance of our plan. Three, we increased the reserve for unfunded commitments by about $340,000 due primarily to the growth in the balances of the unfunded commitments and a small decrease in the utilization rates. Four, we have continued to invest in our IT infrastructure. And five, we experienced higher commissions related to the strong mortgage activity discussed previously. We continue to invest for our long-term growth. As we discussed on previous calls, we opened a new location in Memphis earlier this year. That location was able to fully staff up quicker than we projected, which we are happy about, and it is fully operational. We have also been hiring for the new Auburn Opelika location that Tom discussed. Both of those locations come with compensation costs as well as other operational costs. As to the health plan, it is running about $500,000 more per quarter than we had projected, and we expect that to continue throughout the plan year. Our second quarter non-interest expenses would have been about $44.8 million if the new accounting had been adopted in the first quarter. Our current expectation is that non-interest expenses will grow at a much slower rate for the remainder of 2024. Income tax expenses under the new standard should be less volatile than in the past. The tax rate should be approximately 20% for the remainder of the year. We are pleased with the 13% leaked quarter annualized increase in our book value per share and our ability to maintain our strong capital ratios despite the annualized 15% loan growth. As to what we expect going forward, we continue to be optimistic about 2024. The yield on assets is expected to continue to grow, both dollar and percentage, and we think we can manage the increase in the cost of interest-bearing liabilities to a much slower rate than the asset yield growth. We feel very good about the loan growth we experienced during the first half of the year, as well as our pipeline for the second half of the year. Deposit growth lagged the loan growth during the first four months, but it is trending in the right direction. Our capital, liquidity, and contingent liquidity remain strong. In summary, we like how we're positioned. Let me turn it over to Davis.
spk05: Thanks, Kirk. Let's open the lines for questions.
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 your line is in the question queue. You may press star 2 if you would like to remove your question from the field. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star 2. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Stephen Moss with Raymond Dean. Please proceed with your question.
spk07: Good morning, or good afternoon, guys. Hey, after that. We'll just maybe start off on the loan pipeline here. You guys talking about it being up quarter over quarter. Just curious, is it broad-based, like the loan growth we saw this quarter, or is it more concentrated in any particular type of loan classification, and just kind of where you're seeing it geographically as well?
spk06: Yeah, Steve, it's broad-based and it's all types. Of course, we've been waiting for the C&I to come back, and we did see that this past quarter. For a long time, we had a double negative. We had people taking money out of their money market and checking accounts and making capital expenditures instead of borrowing from us. That's a double hit. Now they're back borrowing money again for CapFlips miniature projects. We feel good about organic loan demand picking up with our existing customer bases, which we've been needing. We still see, obviously, there's a lot of CRE projects are on permanent hold based on the higher interest rates. I think it's pretty obvious. We think it's broad-based and it's not just in any one state. It's in all of our markets. It's everything from maritime to almost everything except perhaps assisted living, I would say.
spk07: Okay. Appreciate that. In terms of just the margin here, I see you guys booking new loans just over 8% here. Obviously, Funding costs are relatively stable. A nice plus is assets repriced. Just curious how you guys are thinking about the cadence of that margin expansion after a pretty good step up two quarters in a row now.
spk08: We don't really want to forecast the NIM percentage, as you would, I'm sure, understand. But what we think is you've got a lot of information on what's going on with the growth of the assets. And you've got some information on quarter end, on where our cost of deposits are going. So they're moving up a little bit as we're growing at a really nice pace, but we expect this tailwind and margin to run for more than a few quarters.
spk07: Okay, fair enough. And then in terms of just the, you know, correspondent banking business, just kind of curious, you know, what are the business trends you guys are seeing there? Addition of customers and, you know, the associated income as well.
spk02: Yes, this is Rodney rushing it. We're seeing it mainly in some of our newer markets in Texas. We've got over 25 banks there now, and we've got a strong pipeline. We saw some change in correspondent providers in the state of Tennessee and Kentucky. We hired a new officer to help cover half that territory. We already had one in place. And so Tennessee, Kentucky, and Texas is where the majority of our our new relationships are coming from.
spk07: Okay, great. I appreciate the color there, and I'll step back in the queue.
spk06: Thank you, Steve.
spk00: Thank you. Our next question comes from the line of Steve Bishop with Hubby Group. Please proceed with your question.
spk03: Yeah, good evening, gentlemen.
spk06: Hey, Dave.
spk03: Tom, just curious, it looks like not only growth rebounded on the commercial side, but also on, I think it's the other commercial real estate, maybe non-owner occupied. Just curious maybe where you're seeing strength, what types of projects, are there pockets of growth and maybe new yields in that production? Just curious where you're seeing the resilience in the CRE market.
spk06: I'm going to let Henry Abbott answer the question, Dave, but I can say in general I think that a bank that has liquidity and deposit growth is attracting new customers these days because there are a lot of banks that, in some cases, an incumbent bank that doesn't have the liquidity that they've had in years past to make new loans. I think part of when people say we don't have any loan demand is because they can't perhaps fund loan demand. We're being real picky about the people we loan money to, the type of projects. Of course, our number one priority is taking care of our existing clients. That is always going to be our priority is our existing customers that have been with us a long time. Henry, can you add anything there?
spk01: Yeah, from a specific on the non-owner-occupied segment, where we saw some of the growth, as Tom mentioned, either for existing customers or new customers with significant equity to put into projects, whether that's acquiring an existing project or building one. But multifamily and then warehouse were kind of the primary drivers there.
spk00: Thank you. Our next question comes from the line of Stephen Skoudin with Piper Sandler. Please proceed with your question.
spk04: Hey, good afternoon, everyone. I appreciate the time here. I guess I did have one question, just maybe a clarifying question around some of the expense commentary. You gave that $44.8 million number, I guess, if that accounting change had been in effect. the previous quarter as well so is that 44.8 million number is that the better run rate moving forward as we think about the the go forward expense base start now exactly yes okay and so then it will grow at a slower pace off of that number that's correct and the tax rate should be around 20 going forward oh perfect very helpful thank you And then it looked like, if I'm looking at these numbers correctly, it looked like on an end of period basis, maybe you saw a little bit more pressure on non-interest bearing deposits this quarter. Was there anything, I guess, to speak of there? I mean, obviously it's pretty stable on an average basis, but I'm just wondering if that's a, you know, a trend we would likely see impact the average balances next quarter based on what you saw end of period.
spk06: Go ahead, Kurt. Yeah.
spk08: So you hit it on the head with the average balance was just about the same. It went down right at the end of the quarter. We think that's going to come back, but obviously we don't know for sure. It might be some house cleaning at the end of the quarter, but you would normally think that at the end of the first quarter too. But the average rate, the average balances are almost spot on. So we don't see anything that really is overly concerning to us at this point that it's a a new trend or anything like that, if that's what you're asking.
spk04: Yep. Yep. Okay. Very helpful. Very helpful. Um, and maybe just a couple other things for me. One from a, from a new hire perspective, um, what would you expect kind of the cadence of that to be moving forward? I think you said you had 14 new bankers in the quarter, 20 overall FTE ads. Um, you know, should we expect that similar cadence throughout the rest of the year or those opportunities? Um, maybe not as prevalent and, or is it, is it, is it not the time you want to be investing in those given the market opportunities?
spk06: You know, I'll answer it like this. We don't have any thing really, you know, today in the pipeline, but I've learned that can change, you know, in the morning. Right. I mean, so, and if we found the right team in the right market, we will hire them all as far as we can see. We think it's in the long-term best interest of the shareholders, not in the short-term best interest of the shareholders. So we're going to make a long-term decision with really good people that we can add. Our thought is that the team that has the best people usually wins. It's not the head coach's decision. putting in brilliant plays is just having the best players. So that's what we want is the best players.
spk04: Yep, I totally agree. I totally agree. Okay, and then just last thing for me, from a loan-to-deposit perspective, I mean, you've made a lot of progress year over year there. Is this kind of where we should expect you to try to run the bank moving forward in this kind of, I don't know, mid-90s loan-to-deposit ratio percentage?
spk08: Yeah, I think that's probably right. And as you know from past conversations, we view a lot of the correspondent almost like deposits that aren't showing up in deposits, especially the settlement accounts. So we feel pretty comfortable running in the mid-90s.
spk04: Got it. Makes sense. Super helpful, guys. Appreciate it. And congrats on a really good quarter.
spk01: Thank you. Thank you.
spk00: Our next question comes from Dave Bishop with Hubby Group. Please proceed with your question.
spk03: Yeah, thanks, guys. Just had a couple quick follow-ups. Appreciate the color in terms of the CDs rolling off. Next quarter, just curious what you're seeing, maybe the blended rate or new offering rates on CDs or new CD money coming into the door, how that compares to maybe the average cost?
spk08: I'd like to give you a really firm answer long term, but we really play with that a lot based on the need and the markets and what they're asking for and what the competition is doing. I can't give you a firm answer of where that's going to be six weeks from now.
spk06: I would say that we've seen CD rate pressures moderate over the last More than several weeks, I would say, has been the last couple of months. We've seen less active people. We look at the different markets, what the CD offerings are. In many cases, this is a defensive product for us, not an offensive product. Again, we've never advertised a rate since we were founded 19 years ago. Not in emails, not in print, not in any form. We've never advertised. rates at all because that's not how you win the game. I just think we have a defensive product out there. Price, I think, is moderating down. I'll be surprised if we don't see continued price moderation in the market day.
spk08: As a reminder, that's less than 10% of our interest-bearing liabilities.
spk03: Yes. Just curious in terms of maybe the markets where you're seeing, you know, rate pressures moderate. Are you seeing sort of these CD specials or offerings, you know, dip below the 5% range, you know, broach the 4.5, the high 4% range? Just curious.
spk06: More like the 4.5, something like that.
spk03: Got it. And then one final question, just curious on loan repricings over the rest of the year. Just curious. how much of the loan portfolio we should expect to maybe return or reprice over the second half of the year. Thanks.
spk08: Well, when you're talking about repricings, you know, we usually define repricings as opportunities to reprice a loan that hasn't matured. Is that what you're asking, or are you talking about total maturities and fixed rate?
spk03: Probably total maturities, including the fixed rate, correct.
spk08: Okay. We think we run around $2 billion a year, so about $1 billion. Now, some of that is dependent on what we call repricings, which are also the opportunity to go in. And when we get the financials, if there's some footfalls on the loan covenant, we get to readdress the rate on the loan. And that picks up really in earnest in the third quarter. We've had about 190 million of those through the first half of the year. And really, it starts in earnest in the third quarter, but in general, probably in that billion range.
spk03: And then when you say starts in earnest, are those loans with covenant defaults? Just curious. I'm not sure if I understood it.
spk08: Yeah, it could be a covenant default. It could be, and usually they're small ones, so we don't view these as indications of real credit deterioration. But usually there's something when you get the financials and the tax returns, which started in the second quarter and picks up in the third quarter, where we're going to dig through all of them. And if we get an opportunity to reprice a low-rate, fixed-rate loan, we'll take that opportunity in most cases, depending, of course, on the client.
spk06: Henry, how many – How many different ways are there to have a loan repricing opportunity? Is it 20 or 30? It's a big number.
spk01: It's a big number, and part of it might be the lack of collection of financials. You were supposed to get them in May, and you still haven't gotten them, so now we use that as a repricing event.
spk06: If they were past due, that's an opportunity. It's just a lot of things. If they didn't pay their real estate taxes in a timely manner, that could be an opportunity. I've really been amazed at all the different ways that people have a contract violation. In many cases, they say they have a draw period on a loan and they don't do it in time. They have to come back in to us and we can agree with them. Certainly, we work with our borrowers. We're going to work with them all the time. There's a lot of opportunities that more so than I ever dreamed possible when We saw rates go up, you know, start going up over the last 18 months or so.
spk03: With that, and I know it's not disclosed as of yet, but any materials change in the classified criticized trends quarter over quarter?
spk06: No major changes. We've seen more positive results than negative results. I mean, on balance.
spk01: Yes, generally, you know, kind of stable across those categories. Great. Thank you. Thanks.
spk06: Thank you, Doug.
spk00: Thank you. There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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