Q2 2025 ServisFirst Bancshares Inc Earnings Call
Operator: second quarter earnings conference call and webcast. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad.
Greetings and welcome to the Service, First Bank, share second quarter earnings conference call on webcast.
At this time. All participants ready? Listen, only mode.
Operator: A question and answer session will follow the formal presentation. You can be placed into the question queue at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded.
If anyone should require operator assistance, please press star zero, enter telephone keypad.
A question and answer session will follow the formal presentation.
Davis Mange: It's now my pleasure to turn the call over to Davis Mange, Director of Investment Relations. Davis, please go ahead. Good afternoon, and welcome to our second quarter earnings call.
You will be placed in the question Queue at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded,
Speaker Change: This time, my pleasure to turn the call over to Davis Mains director of investor relations Davis. Please go ahead.
Davis Mange: Today's speakers will cover some highlights from the quarter, and then we'll take your questions.
Davis Mange: We'll have Tom Broughton, our CEO, Jim Harper, our chief credit officer, and David Sparacio, our CFO.
Davis Mange: Now I'll cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings.
Davis Mange: Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them.
Thomas Broughton: With that, I'll turn the call over to Thomas.
Thomas Broughton: Thank you, Davis, and thank you for joining our second quarter conference call. I'm going to give you a few highlights. And we'll follow that with a credit update from Jim Harper and then Davis Sparacio will give you a little bit more financial information on the quarter. From a loan standpoint, we did see solid loan growth in the quarter. Net-of-Pay offsite growth was 11% annualized. We do see. We continue to see the loan pipeline being very robust and staying at robust levels. I would say, you know, characterize the loan demand is good, not great. and of course, everybody, we're not immune from the payoffs that you're hearing from everybody.
Good afternoon and Welcome to our second quarter earnings. Call today's speakers will cover some highlights from the quarter and then we'll take your questions. We'll have Tom bralton, our CEO, Jim Harper, our chief credit officer and David spacio, our CFO. Now I'll 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 10K and team 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.
Speaker Change: Thank you Davis and thank you for joining our second quarter conference call. I'm gonna give you a few highlights.
Speaker Change: And we'll follow that with a credit update from Jim Harper. And then David espresso will give you a little bit more financial information on the quarter.
Speaker Change: Um from a loan standpoint, we did see solid long growth in the quarter.
Um, net of payoffs, our growth was 11% annualized.
Speaker Change: Um, we do see. Um,
Continue to See the Light low pipeline, being very robust and staying a robust levels. I will say, you know, characterize the loan demand is good, not great.
Thomas Broughton: So we do have elevated payoffs on the commercial real estate side. Luckily, we are known as a commercial and industrial lending bank. So those are certainly not, don't have the same level of payoffs that you see on the CRE side. So we are replacing on the CRE side, we are replacing the payoffs with new projects, but with a large equity requirement. that we have today, our funding will not begin until the projects are well underway. On the real estate projects, you know, a lot of projects still don't pencil out at today's higher interest rates. If we see a few cuts, we think the demand would be a good bit better.
Speaker Change: And of course everybody we're not immune from the payoffs that you hearing from everybody. So we, we do have elevated payoffs on the commercial real estate side.
uh, luckily we are uh
Known as a a commercial industrial lending bank. So those are are are certainly not not don't have the same level of payoffs that you see on the on the CRA side. So we are replacing them with CRA side. We are replacing the payoffs when you projects, but with a large Equity requirements that we have today, our funding will not begin until the projects are well underway.
Speaker Change: um,
Thomas Broughton: And I think a lot of projects we're seeing are tax credit oriented, low income housing type products that are government supported projects. So those are still have robust demand for those. Yeah, on the deposit side, we saw some normalization of some of our higher cost municipal and correspondent deposits in the quarter. We had one large municipal deposit. where the funds have been sitting for two years, while construction projects are beginning and those have begun so that those funds are running off as we expected in that large account. So really, we are focused on opening core deposit.
Speaker Change: On the real estate projects you know a lot of projects still don't pencil out. If today's higher interest rates, if we see a few Cuts, we think the demand would be a good bit better and I think a lot of the projects we're seeing, are are tax credit oriented low-income housing type products that are government supported projects. So, those are still have robust demand for those.
You know, on the deposit side we saw some normalization of some of our higher costs Municipal and correspondent deposits in the quarter. Uh we have had 1 large Municipal deposit,
Thomas Broughton: accounts with, you know, Treasury products. that go along with those. That is our focus of our bank and always has been and always will be.
Speaker Change: Where the funds have been sitting for 2 years. While a construction projects are are beginning and those are begun so that those funds are running off as we expected in that large account. So, really, we are focused on opening Court deposits, uh, accounts with you know, treasury products, uh, that go along with those that is our focus of our bank, and always has been and always will.
Thomas Broughton: in the new markets.
Thomas Broughton: area, we did hire 70 producers in the second quarter in our footprint. And also wanted to mention that we have ramped up in the last couple of quarters in the merchant area.
Speaker Change: In the new markets.
Speaker Change: Um um area we we did hire 7 new producers in the second quarter in our footprint.
Thomas Broughton: We brought on a team of merchants. Group, and to increase our production on the merchant side, we think we have great potential to grow our merchant business. We don't count those people's revenues, as their producer count is only commercial bankers, but they are revenue generators, and we think they'll do a fantastic job growing.
Speaker Change: And also I wanted to mention that we have ramped up in the last couple of quarters in a merchant area. We brought on a team of merchants
Jim Harper: Merchant Revenue for us, so I'm going to now turn it over to Jim Harper for a credit update. Good afternoon. As Tom mentioned, we continue to see solid loan growth in the second quarter and through the year to date, 25, and they're appears to be continued solid demand into the third quarter and the second half of the year with active owner and non-owner occupied CRE and C&I pipelines. While total charges in the second quarter were just under $6.5 million, they were driven primarily by a charge of just over $5 million related to one loan, which was a situation in which the borrower's performance deteriorated quickly and unexpectedly.
Speaker Change: group and to increase our production on the merchant side. We think we have great potential to grow our merchant business. Uh, we don't count those people as revenues uh, as their producer, count is only commercial Bankers, but they are Revenue generators and we think they'll do a fantastic job. Uh growing uh Merchant revenue for us. So I've gone now. Turn it over to Jim Harper for a credit update.
Thanks Tom. Good afternoon, as Tom mentioned, we continue to see
Jim Harper: Solid loan growth in the second quarter and through year to date 2 5.
Jim Harper: There appears to be a continued solid demand into the third quarter and the second half of the year with active.
Owner and non-owner occupied CRA and cni and Pipelines.
Jim Harper: Were driven primarily by charge of just over 5 million dollars related to 1 loan.
Jim Harper: Our allowance relative to total loans, which did increase by almost $5 million compared to the first quarter, remained flat on a relative basis at 1.28% at quarter end. On the non-performing asset front, NPAs remain stable also on a quarter-over-quarter basis. moving from 40 basis points at 331 to 42 basis points at 630. And we continue to aggressively manage our NPAs. As evidence of those efforts, we achieved resolution on a couple of long-term problem credits in the second quarter and expect additional resolutions throughout the second half of this year.
Which was a situation in which the borrower's performance, deteriorated, quickly and unexpectedly.
Jim Harper: Uh, our allowance relative to Total loans which did increase by almost 5 million compared to the first quarter remained flat on a relative basis at, uh, 1.28% at quarter end.
Jim Harper: On the non-performing asset from NPA, agent remains stable. Also on a quarter over quarter basis.
Moving from 40 basis points, at 331 to 42 basis points at 6:30 and we continue to aggressively manage our npas.
Jim Harper: In summary, through our granular portfolio review that we execute on a quarterly basis, We haven't identified any systemic issues or concerns, whether by industry or borrower type, including within our income producing and AD&C portfolios. Of course, there continue to be isolated incidents of credit deterioration, but we're not seeing any broader negative trends from a credit quality perspective.
As evidence of those efforts reached resolution on a couple of long-term problem credits, in the second quarter and expect additional resolutions throughout the second half of this year.
Jim Harper: In summary through our granular portfolio review, that we execute on a quarterly basis.
Jim Harper: We have an identified any systemic issues or concerns whether by industry or borrower type including within our income producing and adnc portfolios.
Jim Harper: Of course, there continue to be isolated incidents and credit deterioration, but we're not.
David Sparacio: and I'll turn it over to David for his financial highlights. Thank you, Jim. Good afternoon, everybody. For the quarter, we reported net income of $61.4 million in delivered earnings per share of $1.12 in pre provisioned net revenue of a $7.9 million. This represented a return on average assets of 1.40% and a return on common equity of 14.56%. Net income grew more than $9 million, or 18% from second quarter 2024. Compared to the first quarter of 2025, net income was down slightly by about $1.8 million for three.
Seeing any broader negative Trends from a credit quality perspective. Um, and I'll turn it over to David for his financial
David Espresso: Thank you, Jim. Uh, good afternoon. Everybody for the quarter, we reported net, income of, 61.4 million, and delivered earnings per share of a dollar and 12 cents in pre-provision net revenue of 87.9 million.
David Espresso: This represented a return on average assets of 1.40% and a return on common Equity of 14.56%.
Net income grew more than 9 million dollars for 18% from second quarter. 20, uh, 2024
David Sparacio: During the quarter, we had two significant non-routine transactions. The first was an $8.6 million loss on the restructuring of our bond portfolio. During the quarter, we decided to strategically sell about $70 million of bonds that were yielding a 1.34% at a loss. And when we sold those, we reinvested $62 million of proceeds in new investment. with a yield of an average of 6.28%. The expected payback period on this transaction is 3.8 years. The restructuring will position us for stronger margin performance in future quarters. Secondly, we reversed an interest expense accrual of about $2.3 million that had been building for several quarters.
David Espresso: Compared to the first quarter of 2025, net income was down slightly by about 1.8 million dollars for 3%.
David Espresso: During the quarter, we had 2 significant non-routine transactions.
The first was an 8.6 million dollar loss on the restructuring of our bond portfolio.
David Espresso: During the quarter, we decided to strategically sell about 70 million dollars of bonds that were yielding of 1.34% at a loss.
and when we uh sold those, we reinvested the 62 million of proceeds in new Investments with a yield of a average of 6.28%
The expected payback period on this transaction is 3.8 years. The restructuring will position us for stronger. Margin performance in future quarters.
David Sparacio: This accrual was related to a legal matter that has been resolved, so we have seen an artificial reduction of about 7 basis points in our deposit cost. The reported 3.50% of deposit costs will not sustain in future quarters. We expect it to be similar to first quarter at about 3.57%.
Secondly, we reverse an interest expense approval of about 2.3 million that had been building for several quarters. This, acral was related to Legal map to a legal matter that has been resolved. So we have seen an artificial reduction of about 7 basis points in our deposit cost.
David Sparacio: We continue to focus internally on growing our margin, emphasizing price discipline for both loans and deposits. Our adjusted margin is 3.05% for the quarter, which is up 13 basis points from linked quarter and 26 basis points from the same quarter last year. continue to have repricing opportunities and cash flow paydowns on our existing fixed rate book of loans. We have about $1 billion in valuable rate loans maturing in the next 12 Lastly, our tangible book value grew by an annualized 12.5% versus last quarter and by nearly 14% from the same quarter a year ago, ending at $31.27 per share.
The reported 3.500% of uh deposit costs will not sustain in future quarters. We expected to be similar to first quarter at about 3.57%.
We continue to focus internally on growing our margin emphasizing price discipline for both loans and deposits. Our adjusted margin is 3.05% for the quarter, which is up 13 basis points from length, quarter and 26 basis points from the same quarter last year.
We continue to have repricing opportunities and cash flow, pay Downs in our existing 6, brief book of loans, we have about 1 billion dollars in valuable rate loans, maturing in the next 12 months.
David Sparacio: We continue to be well capitalized with a common equity tier one capital ratio of 11.38% and risk based capital ratio of 12.81% for the quarter. Net interest income for the quarter was $131.7 million, as reported, and adjusted net interest income was $129.4 million. This adjusted net interest income is $5.9 million higher than first quarter 25, and more than $23 million higher than second quarter of 24. We are pleased in the margin improvement, which has increased from a normalized spot rate of 3.06 in March to 3.19% in June. If you recall, first quarter margin was weighed down by excess cash balance.
David Espresso: Lastly, our tangible Book value grew by an annualized, 12.5% versus last quarter. And by nearly 14% from the same quarter a year ago, ending at $31.27 per share,
We continue to be well, capitalized with a common Equity Tier 1, Capital ratio of 11.38% in risc-based capital ratio of 12.81%, for the quarter.
David Sparacio: Those balances have reduced as expected and are more stable. As a result, we expect our margin to continue to increase throughout the year and expect that to accelerate if the Fed decides to lower a benchmark.
If you recall, first quarter margin was way down by excess cash, balances those balances have reduced as expected in our more stable.
David Sparacio: This quarter saw a significant increase in our provision expense, which was necessary to maintain our allowance for credit losses given the loan growth and significant charge-off that Jim mentioned in the second part of his presentation. We had little change in our economic and credit indicators in our CECL model, and as a result, our allowance for credit losses ratio had held steady at 1.28%. We expect provision expense to normalize based on the current economic environment and the steady loan growth we have experienced year to date.
David Espresso: As a result, we expect our margin to continue to increase throughout the year and expect back to accelerate If the Fed decides to lower Benchmark rates.
David Sparacio: Non-interest income was down significantly due to the bond book restructure that I discussed earlier. Excluding that loss, adjusted net interest revenue for the quarter was just under $9 million, which is $706,000 better than first quarter of 2025 and about 1% higher than second quarter of 2024. We continue to focus on non-interest income growth through merchant services processing and treasury management services. Tom already spoke about the onboarding of the new merchant team and they continue to concentrate on cross selling out. We also increased service charges related to our treasury management services on July 1st, which is the first we've done in 20 years.
Speaker Change: This quarter saw significant increase in our provision expense which was necessary to maintain our allowance for credit losses. Given the loan growth and significant charge off that Jim mentioned in the second quarter. We had little change in our economic and credit indicators in our Cecil model. And as a result, our allowance for credit losses ratio, had held steady at 1.28%, we expect provision expense to normalize based on the current economic environment and the steady loan growth. We have experienced year to date.
On non-interest income uh, was down significantly due to the bond book. Restructure that I discussed earlier. Excluding that loss adjusted net interest revenue for the quarter was just under $9 million
Which is 706,000 better, uh, than first quarter 25 and about 1% higher than second quarter of 24. We continue to focus on non-existence income growth, through merchant services processing and treasury Management Services.
Speaker Change: Tom already spoke about the onboarding of the new Merchant team and they continue to concentrate on cross-selling opportunities.
David Sparacio: So although we haven't seen those results in the second quarter, we will see those in future quarters.
Speaker Change: We also increase service charges related to our treasury Management Services on July 1st, which is the first we've done in 20 years. So, although we haven't seen those results in the second quarter, we will see those uh, in future quarters.
David Sparacio: During the quarter, our non-interest expense was down $1.9 million versus first quarter, primarily due to the large operational loss recorded in first versus St. Porter last year, we experienced an increase of non-interest expense of about $1.4 million. This roughly 3% increase versus second quarter of 24 is a modest increase given the 18% increase we realized in net income. My goal is to constrain non-interest expense groups to a fraction of their revenue. We remain focused on expense control and continue to seek opportunities to reduce our operating costs.
During the quarter are 9-inch. Expense was down, 1.9 million versus first quarter, primarily due to the large operational loss recorded in first quarter.
Speaker Change: versus ST quarter last year, we experienced an increase of 9 interest expense of about 1.4 million
This roughly 3%, increase versus second quarter of 24, is a modest increase given to 18% increase. We realized in net income,
David Sparacio: The largest effort we had this quarter in back office operation was a conversion involving our core processing... Successfully unwound a configuration that involved a third party processing our transaction. switch to a direct relationship with Jack Henry. We will realize some cost savings in future quarters associated with this change, but we continue to expect our non-interest expense to be in the $46 to $46.5 million range per quarter. Our non-interest expense this quarter represents an efficiency ratio below 34%, and we do not expect drastic changes in our efficiency ratio going forward.
My goal is to constrain non-interest expense growth. To a fraction of the revenue growth. We remain focused on expense control and continue to seek opportunities to reduce our operating costs.
Speaker Change: The largest effort we had this quarter in back office operation. Was a conversion involving our core processing system. We successfully Unwound a configuration that involves the third-party processing. Our transactions,
David Sparacio: So all in, our second quarter of 2025 pre-tax net income was down about $2.5 billion compared to first quarter, and up over $10 million versus second quarter of 2024. Our adjusted pre-tax net income was up $3.8 million versus first quarter and up over $16 million versus second quarter of 2020. We remain focused on organic loan and deposit growth priced both competitively and profitably.
Speaker Change: And switch to a direct relationship with Jack. Henry, we will realize some cost Savings in. Future quarters associated with this change, but we continue to expect our non- expense to be in the 46 to 46.5 million range per quarter. Our non-interest expense, this quarter represents an efficiency ratio below 34% and we do not expect drastic changes in our efficiency ratio going forward.
So, all in our 2025, our second quarter of 2025 pre-tax, net income was down about 2.5 million dollars compared to first quarter and up over 10 million dollars. Versus second quarter of 24.
David Sparacio: And lastly, we continue to strategize on reducing our tax expense, and we were able to realize a slight decrease from first quarter to second quarter in our effective tax rate, which we will continue to focus on going.
Our adjusted pre-tax. Net income was up 3.8 million versus first quarter and October 16 million dollars versus the second quarter of 2024. We remain focused on organic loan and deposit growth price, both competitively and profitably.
Operator: That now concludes our prepared comments and we will turn it over to the operator for questions. Thank you.
Speaker Change: And lastly we continue to strategize and reducing our tax expense and we were able to realize a slight decrease from first quarter to second quarter uh in our effective tax rate which we will continue to focus on going forward.
Speaker Change: That now concludes our prepared comments and we will turn it over to the operator for questions.
Operator: We'll now be conducting a question and answer session.
Operator: If you'd like to be placed into question queue, please press star one on your telephone keypad.
Stephen Scouten: Our first question today is coming from Stephen Scouten, excuse me, from Piper Sandler. Your line is now live. Hey, good afternoon, everyone. Um, I guess maybe if I could start on just the net interest margin and kind of how I know you said you expect it to move higher from here. What's kind of the starting point x that interest reversal in your mind and kind of where that could potentially end the year from a trajectory standpoint x any set action?
Speaker Change: Thank you. And now the conducting a question and answer session. If you'd like, to be placed into question queue, please press star 1 on your telephone keypad,
Our first question today is coming from Steven Scout. Excuse me from Piper Sandler. Your line is now live.
Steven Scout: Hey, good afternoon everyone. Um, I guess maybe if
Start on just the net interest margin and kind of how I know you said you. You expect it to move.
Higher from here. What what's kind of the starting point x, that, um, interest reversal in your mind and kind of where that could potentially end the year from a trajectory standpoint X, any fed actions?
David Sparacio: Yeah, so Stephen, this is David Sparacio. You know, the starting point, our adjusted margin is 306 for the quarter, right, excluding the interest expense. item that we talked about. You know, we mentioned, we continue to focus on deposit and loan pricing across the footprints and, you know, absent any changes from the Fed, we expect it to continue to increase on a quarterly basis. We're seeing about. you know, anywhere from 10 to 14 basis points each quarter. So, you know, if you just interpolate that and think that we could get like 10 basis points in the third quarter, and then another 10 basis points in the fourth quarter, we should be ending the year somewhere near the 325 to, you know, 320 range is what we're anticipating.
Yeah, so, uh, Stephen, this is David sparacio, you know, the the starting point our our adjusted margin is, um, is 306 for the quarter, right? Uh, excluding the, the interest expense, um,
Steven Scout: Item that we talked about.
increase on the quarterly basis, we we're seeing about
You know, anywhere from 10 to 14 basis Points each quarter. So um, you know, if if you, if you just interpolate that and and, uh, and think that we could get like 10 basis points in the third quarter, and then the other 10 basis points to the fourth quarter, we should be ending in the year, uh, somewhere near the 325 to, you know, 320 range is what we're anticipating.
Stephen Scouten: Okay, fantastic. Very helpful.
David Sparacio: And then in terms of deposit growth, I know you mentioned some kind of outflows, expected outflows on the municipal side, but how do you think about, I guess, the ability to drive deposit growth in line with the with the nice long growth you've had? Yeah, so again, it's David. And if you recall, back in the first quarter, we had hefty deposits, we had some excess funding that really hurt our margin. And so we knew some of those municipal deposits were going to run off and we were okay with that. Some of them were high yielding.
Speaker Change: Okay, fantastic, very helpful. And then, in terms of, um, deposit growth, I know you mentioned. Some kind of outflows expected, outflows in the municipal side, but how do you think about? Um, I guess the ability to, to drive, um, deposit growth in line with the, with the nice long road to that.
David Sparacio: I mean, we fortunately have the ability, I mean, if we pay the right price, we could bring in deposits. So we have the ability to onboard some deposits. Right now, we're just trying to manage through, you know, what we need to fund our loan growth, and not have that excess funding position. Okay, great.
Speaker Change: Yeah. So um, again, it's David and, and if you recall back in the first quarter, we, we had, uh, Hefty deposits. We had some, some excess funding that really hurt our margin. And so we knew some of those Municipal deposits were going to run off and, and we were okay with that. Some of them were high yielding. I mean, we, we, fortunately have the ability. I mean, if we pay the right price, we could bring in deposits. So we have the ability to, uh, onboard, some deposits. Right now, we're just trying to manage through, you know, uh, what we need to fund our loan growth and not have that excess funding in position.
Stephen Scouten: And then just kind of last thing for me, I think you guys noted maybe 23 new FTEs this quarter. I think Tom said seven of those were new lenders potentially. Can you give us a feel maybe what markets those new lenders are coming from? If there's any, you know, potential new markets that you guys are thinking about new MSAs moving into?
Okay, great. And then just kind of last thing for me. I think you guys noted maybe 23 new FTE this quarter. I think Tom said, 7 of those were new lenders. Potentially. Um, can you give us a feel, maybe What markets those new lenders are coming from, um, if there's any, you know, potential?
David Sparacio: And then maybe any color, any additional color on that merchant banking initiative, just kind of what the focus is there, whether it's certain dollar revenue companies or kind of how we should think about that opportunity? You know, our HR is very literal in their headcount, 14 of them are former employees. So you can X out 14 off that list. I don't count for anything. Yeah, they're our interns. And if you look at the supplemental schedule we shared, we were up 23 and 14 of those, as Tom said, are interns. So we don't consider those full.
new markets that you guys are thinking about new msas, moving into and then maybe any color or any additional color on that Merchant banking initiative, just kind of what what the focus is there or whether it's
Speaker Change: Certain dollar Revenue companies or kind of how we should think about that opportunity.
Speaker Change: Uh,
You know, our HR is very literal in their um head count. 14 of them are plumber and employees,
Speaker Change: So, you can X Out 14 and off that list.
They don't count for anything.
David Sparacio: Long-Term Employees, they're temporary employees.
David Sparacio: There are new markets. just adding to the stack that we already added once predominately. Okay, if they're not, you know, production people and their support for production people, you know, we hire a new teller in Auburn, Alabama, or Memphis, Tennessee, or something like that. So they're, you know, they're not, they're not very expensive people.
Yeah there there are interns and and if you look at the supplemental schedule we shared that we were up 23 and 14 of those as Tom said are interns. So we don't consider those full um, you know, uh, long time employees. So they're they're temporary employees.
Speaker Change: Um, there are new new markets. So it's it's just adding to the staff that we already had in place.
Speaker Change: Predominantly.
Speaker Change: That if somebody, if they're not, you know, production people in their support for production people, you know?
We hire new teller and Auburn Alabama, or Memphis Tennessee or something like that. So they, you know, they're not.
David Sparacio: And then just maybe thinking about that opportunity set in that merchant banking area that you spoke of. It's not in March. It's Marchant. Merchant Card. It's card processing. And so the thinking there is, you know, that what the merchant processing we do for our existing customer base is a very low penetration rate. And so the theory there is that we're going to be able to increase our penetration rate amongst our existing customers. And it's not, you know, it's pretty good profitability on it's not big dollars, Stephen, but it's, you know, we have like a 1% penetration and the new team says we should have 8% penetration.
Speaker Change: they're not very dismissive people, so
Speaker Change: and then just maybe thinking about that opportunity setting that Merchant banking area that you spoke of
Speaker Change: It's not in March, it's it's Merchant. It's it's
Speaker Change: Merchant card. It's it's card processing. And so the the the thinking there is, you know, the what the the merchant processing we do for our existing customer base is a very low penetration rate and so the theory there is that we're going to be able to increase our penetration rate, amongst our existing customers and that's not, you know it's it's pretty good profitability on. It's not big dollars even but it's you know, we have like a
Stephen Scouten: So. You know, we can go up as some fairly substantial nice little. kid to the non-English speaker. Got it. Okay. Thanks for all the code there. I appreciate the time. Thank you.
Speaker Change: 1%, penetration and the new team says we should have 8% penetration. So
Speaker Change: you know, we can go up as some fairly substantial nice little
Speaker Change: Kick to the non-interest income.
Speaker Change: Got it. Okay, thanks for all the color there. I appreciate the time.
Speaker Change: Thank you.
Steve Moss: Next question today is coming from Steve Moss from Raymond James. Your line is now live. Hey, good afternoon.
Speaker Change: Thank you. Next question. Today, is coming from Steve Moss from Raymond. James, your line is now live.
Steve Moss: This is Thomas on for Steve. Thank you for taking my question. Another strong quarter of loan growth from you guys. Appreciate, you know, the commentary you provided. But, you know, maybe just want to see what are some of the broad trends that you're seeing out there today in terms of, you know, the demand for commercial credit? I know, you know, a lot of people were uncertain and pulling back with, you know, the tariff uncertainty that was going on. So just maybe any anecdotal things that you've heard. You know, I think tariffs is a good excuse.
Hey, good afternoon. This is Thomas on for Steve. Thank you for taking my question.
Speaker Change: Another another strong quarter of loan growth from you guys, appreciate, you know, the commentary you provided but you know, maybe just want to see or what are some of the broad trends that you're you're seeing out there today? In terms of, you know, the demand for commercial credit. I know, you know, a lot of people were uncertain and pulling back with, you know, the Tariff on certainty that was going on. So just maybe any anecdotal things that you've heard,
Speaker Change: You know what?
Thomas Broughton: If you're not executing, I think it's a great excuse to not be executing because we just don't see that much. you know, impact from the tariffs now. You know, our construction loan bucket went up in the quarter. Because of our CECL model, we have to keep a lot more money in reserve for construction loans. Our construction loan You know, we had to increase our, what, $5 billion, Jim, in our construction loan, loan loss reserve. So, you know, that's costly to add to the construction loans. But, you know, it's not one area, you know, I can say, well, it's a lot of broad, it's really broad based.
Speaker Change: Sheriffs is a good excuse.
Speaker Change: If you're not executing, I think it's a great excuse to to not be executing and and because we just don't see that much.
Speaker Change: you know, impact from the tariffs now
Speaker Change: you know, our our construction loan bucket, went up in the quarter and
Because of our seasonal model, we have to keep a lot more money in reserve for construction loans. So our construction loan,
Ion dollars Jim in our construction loan. Yeah. Um loan loss Reserve. Um
Thomas Broughton: It's a lot of markets, it's, you know, some of our new markets like Memphis and Auburn, Alabama, doing real well in Atlanta. We're doing, of course, well in Florida, Montgomery, Alabama, you know, through the Auburn. Expansion, North Carolina, the Piedmont area has grown, so I'm leaving some out, but it's pretty broad-based, Thomas, is what I'm trying to say, and it's not in one asset class, exactly.
Thomas Broughton: Okay, so are we thinking maybe low double digits is still on the table potentially? Yeah, I mean, you know, again, if we had great loan demand, it would certainly be more than because we are fighting the, you know, everybody's fighting the payoff headwinds and it could, you know, we could be less than double digits this quarter. I can't, I can't, you know, hard to project every quarter because if you look back over the last. Six quarters or so, it'll be pretty good. It will, you know, be double digit and then it'll be seven or 8% or something like that.
Speaker Change: So, you know, that's that, that's costly to add to the construction loans. But you know, we it's not 1 area, you know, I can say, well, it's a lot in for August. It's really broad-based. It's a lot of, it's a lot of markets. It's, you know, some of our new markets like Memphis and and Auburn Alabama uh we're doing real well in Atlanta, we're doing, of course, well in Florida, uh, Montgomery Alabama, you know, through the Auburn um expansion. So it's and I don't believe in Ash North Carolina, the pedmont area has grown. So I'm leaving some out but it's pretty broad-based. Thomas is what I'm trying to say. It's not you know it's not a 1 assembly. So
Speaker Change: Okay, pretty good. Okay, so we can give you, are we thinking maybe low double digits? It's it's still on the table. Potentially
Speaker Change: yeah, I mean you know again I I if we had great loan demand it would certainly be more than a
Speaker Change: Because we are fighting the the, you know, everybody's fighting the payoff headwinds and it could, you know, we could be less than double digits this quarter. I can't, I can't, you know, hard to project every quarter because if you look back over the last
Thomas Broughton: So I can't give you a really. solid amps or other than a pipeline is good and a pipeline of payoffs is pretty good too. Okay. Great. That's fair.
6 quarters or so it'll be pretty good. It will you know, be double digit and then it'll be 7 or 8% or something like that. So
Speaker Change: I can't give you a really.
Speaker Change: Solid answer other than a pipeline's. Good. And
Speaker Change: the pipeline of payoffs is pretty good too, so
Thomas Broughton: And I'm sorry if I missed this in the prepared remarks, but what do you have in terms of fixed rate loans repricing over the next 12 months? We have about a billion dollars right about a billion dollars in the next 12 months. I'm sorry, counting, you know, repricing investment securities is right at two billion a year for 12 months. between a B and I, a little over a B and I. Caps Cash Flow. on FixRight Loans and everything else. Okay.
Okay, no great, that's fair. And um, I'm sorry if I missed this in the prepared remarks, but what do you have? Um, in terms of fixed rate loans repricing over the next 12 months.
We have about a billion dollars, right? About a billion dollars in the next 12 months. Okay, counting, you know, repricing. It investment Securities is is right at 2 billion a year for 12 months.
Speaker Change: Between a billion 9, a little over a billion 9.
Speaker Change: Yeah, cash flow.
On fixed rate loans and everything else.
Thomas Broughton: What are those loans? Do you happen to have a yield that they're coming off at? or pick up what you're getting. If you give us a minute, we can get it for you. Yeah, so we have a weighted average yield of 487 right now on the for the next 12 months on $1.5 billion of loans. Fixed rate. Okay, great. I appreciate it. That's all for me. Thank you so much. Thank you, Tom.
Speaker Change: Okay. Last quarter. What are those loans? Do you happen to have a yield that they're coming off at?
Speaker Change: Or a pickup that you're getting.
Uh, if you give us a minute, we can get it for you.
Speaker Change: Yeah. So um we have a weighted average yield of 487 right now on the uh for the next 12 months on uh 1.5 billion dollars of loans.
Speaker Change: Sure.
Speaker Change: Thanks great.
Speaker Change: Okay, great. I appreciate that's all for me. Thank you so much.
Speaker Change: Thank you, Tom.
Dave Bishop: Our next question is coming from Dave Bishop from Hope the Group. Your line is now live. Yeah, good evening, gentlemen.
Thank you. Our next question is coming from Dave, Bishop from hope the group your line is now live.
Dave Bishop: Yeah, good evening, gentlemen.
Dave Bishop: Dave, maybe during the preamble, I think you spoke about maybe some of the trends you're seeing in the cost of deposits. I know there was some noise this quarter. I was wondering if you could go over what our expectations should be just in deposit cost trends. Yeah, I think it's gonna normalize more like the first quarter. You know, we have an anomaly this quarter in the adjustment that we took. So if you look at our, at our Adjusted Cost of Deposits were at $357,000 as opposed to $350,000, which is reported. And so I think that's what it's going to be going forward.
Speaker Change: uh, Dave maybe during the Preamble, I think you spoke about
Speaker Change: Maybe some of the trends you're seeing in the cost of deposits. I know there was some noise this quarter, I was wondering if you could go over what uh, what what our expectation should be just a deposit cost trends.
Yeah, I I think it's, you know, normalized more like the first quarter. Um, you know, we we have an anomaly this quarter in the adjustment that we took. So if you look at our uh, at our
David Sparacio: We are slightly liability sensitive, so that's. Assuming a Fed rate cut comes in, we will accelerate that, but without any Fed cut rates right now, we're going to hold probably around 350, 357 right now.
Adjusted cost of deposits. We're at 3:57 as opposed to 350, which is reported. And so I think that's what it's going to be going forward. Um, you know, we we we are wiped slightly liability sensitive. So that's
Speaker Change: Uh, assuming a a Fed rate cut comes in, We Will We Will accelerate that. But, uh, without any fed cut rates right now, we're going to hold probably around, you know, 350 357 range.
David Sparacio: Got it.
David Sparacio: And I think, Tom or Dave, you noted a change, a late quarter change, I think maybe the first of the month, and the Treasury management fees you're charging on the on the services. Just curious how we should think about that just from a dollar perspective. Would that be a meaningful bump in that run rate moving forward? Yeah, I mean, you know, you guys know, we're not a big non interest revenue bank, right. And so we did increase our treasury management fees that they went into effect July 1, so there's no impact at all in the second quarter.
Speaker Change: Got it and I think uh Tom or Dave you noted um a change, a late quarter change I think maybe the first of the month and the treasury management fees. Uh you're you're charging on the on the services just curious how we should think about that. Just from a a dollar perspective would that be a a meaningful bump uh in that run rate? Moving forward?
David Sparacio: We do expect a pickup in the third quarter. Hopefully, they'll increase their non-extra bearing deposits. You won't see a revenue increase, but you'll see an increase in NIB. and their earnings credit will account for the increased fees. You're right, you're right.
Speaker Change: Yeah, I mean, you know, you guys know we we're not a big, non-interest Revenue bank, right? And so, um, we did increase our charging management fees that they went into effect July 1st. So there's no impact at all on the second quarter.
Speaker Change: We do expect a pickup in, um, in the third quarter. Um, you know, hopefully they'll increase their non-interest bearing deposits. You know, that's you won't see a revenue increase that you'll see an increase in nibs.
David Sparacio: But we haven't increased our fees in 20 years. We thought it was prudent in giving some of our DPs. God.
And then, their earnings credit Will Will account for the increased fees. Yeah. Right. Right. Right. But we have an increased our fees at 20 years, so,
Speaker Change: I was prudent and gives some of our duties.
Jim Harper: And then, Tom, it sounded like the loan pipeline continues holding strong. You noted the increase in the construction loans outstanding. Just curious if there was any sort of commonality in terms of the types of projects were funded. Were these relatively newer credits or were these, like you said, some projects where there was a lot of equity behind it, just took a while to sort of fund up? Just curious some color behind that group.
Got it, got it.
Jim Harper: Jim you want to comment? I'd say both actually. I think it was a mix of Projects have had a lot of equity that finally got to the point where they were drawn on lines, but I think there was certainly an aspect where it was new production also. I say both for sure. Got it. Then.
And then, uh, Tom, it, sounded like the loan pipeline continues holding strong, the you noted, the, uh, the increase in the, uh, the construction loans outstanding. Just curious if there was any sort of commonality, uh, in terms of the, the types of projects were funded. Were these relatively newer credits or were these like you said some, some projects where there was a lot of equity behind it, just took a while to sort of fund up, just curious some color behind that that growth
Jim, you want to comment? I I'd say both actually. Um I think it was a mix of
Speaker Change: Projects that had a lot of equity, that, finally got to the point where they were drawn on on lines. Um, but I, I think there were certainly an aspect where it was a new production. Also, I say both for sure.
Thomas Broughton: One final question that, you know, with the funding noise here, guess loan to deposit ratio at that mid 90% range, is there a comfort level to allow that to continue to creep up to the basically a par? Do you think that that sort of comes back down to the lower 90s over time this year? Thanks. Well, of course, we include. So if you look at our adjusted loan and deposit ratio, I don't know exactly what it is today. Closer to 80% than it is to 90, would that be correct? Yeah, it's in the 80s, mid-80s, mid-80s.
Speaker Change: Got it. And then, um,
Speaker Change: 1 final question that, you know, with the the the funding noise here, just loaded a deposit ratio at that. Uh mid 90% range, is there a comfort level to allow that to continue to creep up to the basically a part. Do you think that that sort of comes back down to the lower 90s over time this year? Thanks.
Speaker Change: well, of course we include
Speaker Change: Uh, fed funds purchased as a. So if you look at our adjusted loan and deposit ratio, I don't know exactly what it is today, but it's closer to 80% than it is to to 90. Would that be correct?
Thomas Broughton: So yeah, we're in good shape from a liquidity and funding standpoint, that's, we can. We want to be in a position to need to generate deposit. rather than needing to generate loans. We've been needing to generate loans for the last couple of years. We want it to be a problem of needing deposits, not needing loans, so we'd like to swap the problems. You either need one or the other all the time. They're never balanced, so I'd much rather be in the need for deposits than in the need for loans. Got it.
Speaker Change: David. Yeah. It's it's just it's in the 80s. Mid 80s, mid 80s.
Speaker Change: So, yeah, we're we're in good shape from liquidity and funding standpoint. That's we we can
Speaker Change: We want to be in a position to need to generate the deposits.
Speaker Change: Right, rather than needing to generate loans, we've been needing to strike loans for the last couple of years. We want we want it to be a problem but of of needing deposits, not not needing loans. Uh, so we'd like to swap that the problems
You, you either need 1 or the other all the time. They're never. They're never balanced. So we I we had a lot much rather be in the need for deposits than than a need for loan.
Dave Bishop: I'm just, thanks for taking my question.
Speaker Change: Yeah, I'm just saying thanks for taking my question.
Operator: Thank you.
Operator: We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments. There are no further comments. That concludes our call. Thank you all for joining. Thank you. That does conclude today's teleconference webcast.
Speaker Change: Thank you. We've reached end of our question and answer session. Should I like to turn the floor back over to any further? Closing comments.
Operator: You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Speaker Change: There. No further comments that concludes our call. Thank you all for joining. Thank you. That does conclude today's teleconference. Webcasting me. Disconnect your line at this time and have a wonderful day. We thank you for your participation today.