Greetings. Welcome to the ServisFirst Bancshares second quarter earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Davis Mange, Head of Investor Relations. Thank you. You may begin.
Good afternoon, and welcome to our second quarter earnings call. We'll have Tom Broughton, our CEO, Bud Foshee, our CFO, and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections 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 ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom.
Thank you, Davis, and good afternoon, and thank you for joining us on our second quarter call. Before Bud talks about the numbers, I'm gonna give a few highlights of the quarter. On the loan side, obviously, the loan growth was extremely strong in the quarter. Excluding PPP loans grew $803 million in the quarter. One factor is there were really no payoffs in the quarter, and we expect those to accelerate in the third and fourth quarters, which will moderate the loan growth. We still see a strong pipeline of loans, but we do expect to be more offset with payoffs in the third and the fourth quarters.
On the deposit side, we did see some runoff in the correspondent deposits that are making loans and buying securities just like we are, and as well, you know, our customers are experiencing very strong profitability. Tax payments were up a good bit in March and April, above normal, so that affected deposit levels as well. I think we'll probably be back to more typical patterns of deposits pre-pandemic for most of the bank's history. We'd see, you know, deposits decline the first quarter, kind of be flat in the second quarter, and then grow in the third and the fourth quarter of the year. Just gonna talk for a minute about loan quality. Obviously, that's on everybody's mind.
We talk about it at our board meetings and our management meetings often, of course. You know, with the prospect of a possible recession ahead, you know, we're often asked about what we're seeing. First, Henry Abbott will talk in a minute about our loan quality, but you know, our loan quality metrics are the best we've ever had, as far as I can remember. We have been very, hopefully, we've been very proactive in loss recognition. We certainly wanna be proactive if we are facing a recession. We wanna be proactive in loan loss recognition as quickly as possible. You know, in terms of loan underwriting, I've had investors say, "Have you changed your underwriting?" You know, the answer is, you know, no. We wanna be consistent year in and year out.
Good banks are very consistent on underwriting. They don't change. They don't blow with the wind. When times are good and times are bad, they underwrite exactly the same way. Certainly, we stress test, you know, every loan that we make, we certainly do a stress test on it. I think we have a pretty good system and have a good track record of performance over the years. You know, we do say we're a disciplined growth company that sets high standards for performance. I can assure you our credit team is looking for cracks in the economy. Henry and his group are constantly looking. On the C&I side, you know, any of the problems that we see are people that just aren't good business people.
It's not really because of any meltdown in one economic area or one type of business or the other. On the CRE side, you know, the big questions there is will cap rates move up? You know, as of now, they really haven't. You know, the investors are looking for yield on high quality, you know, REIT-type products. I you know I call it CD replacement investments in, you know, multifamily, industrial, and residential rental products. You know, what really gives me the ability to sleep well at night, to an extent, is that we see strong migration continue into the Southeast, and I think it will offset some of the recessionary forces if we do experience a recession. You know, frankly, I don't think a little bit of a slowdown would be all that bad for the economy.
I've got kind of spoiled the last couple of years when we were traveling, all the, you know, nicer hotels were pretty inexpensive, and now that's not the case anymore. I'm back in the less expensive hotels, so I'm kinda missing that. You know, we have a few hospitality operators that they're customers, and they're very reporting very strong occupancy and very high rates. That wouldn't be all bad to have a little bit of a slowdown there. In terms of talent, we added, you know, the most new bankers in a quarter we've ever added, 15 in the quarter. We think we've brought in some top talent into our company.
If I had to, you know, say what I think is one of the strengths of our company is that we've not had any turnover in senior leadership in our banks in our regions over the last 17 years. We've had a few retirements, but we've not had any turnover, and we've had very loyal executive team in the bank. We do wanna be the best place for a commercial banker to be. I think an absence of bureaucracy at our company is attractive to many bankers. As well. I'll stop there and let Bud cover some of the financial aspects. Bud?
Thanks, Tom. Good afternoon. Liquidity. We continue to evaluate our monthly investment purchase plan banks based on the bank's excess funds. Net investment security growth in the second quarter was $172 million. In mid-June, we decided to suspend investment purchases based on our strong loan growth. Net interest margin, as Tom mentioned, loan growth exclusive of PPP forgiveness was $803 million for the second quarter. Average loans exclusive of PPP increased by $650 million. Average PPP loans decreased by $108 million, so we had net average loan growth of $542 million in the second quarter.
PPP fees and interest income were $2.9 million in the second quarter compared to $10.2 million in the second quarter of 2021, and the remaining PPP fees are $513 thousand. Net loans grew by $97 million the last two days of the quarter. This increased our loan loss provision, but we will not receive the positive net interest income impact until next quarter. Deposits decreased by $637 million in the second quarter, $532 million of this decrease related to correspondent banks. Fed funds purchase decreased by $250 million in the second quarter.
Our margin has gradually improved each month, starting in January, it was 2.84%, increased to 2.91%, increased to 2.97%, then 3.04%, 3.28% in May, and in June was 3.43%. The bank received a positive net interest margin impact from the Fed rate increases in May and June. For future Fed rate increases, correspondent interest-bearing accounts will have a 100% beta, which is just part of the business. For the remaining interest bearing DDAs, we anticipate a deposit beta of 30%-35%. Loan loss provision. Our provision increased by $4.2 million in the second quarter as our loan production, excluding PPP, increased by $314 million from first quarter. Non-interest income. Credit card income continues to grow.
It was $2.7 million in the second quarter versus $1.9 million in the second quarter of 2021. Spend was $264 million in 2022 versus $226 million in 2021. We recorded a write-up in value of $2.1 million for the quarter on a LIBOR cap we purchased in 2020. Non-interest expenses. First, salaries and benefits. As a result of our market expansions, total salaries increased by $732,000 in the second quarter and by $1.9 million year-over-year. Total salaries and benefits increased $2.4 million during the second quarter and by $6.6 million year-over-year. Second quarter 2022 incentive expense was $6.2 million versus $4.5 million for the first quarter of 2022.
The increase reflects loan growth, strong core relationship growth, and the entry into new markets. Tax credits. The year-to-date investment write-down related to tax credits was $5 million in 2022 versus $173,000 in 2021. This increase was more than offset by an income tax reduction of $6.6 million. Correspondent banks. The year-to-date correspondent bank service charges increased by $3 million. The number of settlement banks increased from 111 in June 2021 to 164 in June 2022. That concludes my remarks, and I'll turn it over to Henry.
Thank you, Bud. The bank saw record loan growth in the second quarter of 29% annualized, as Tom and Bud previously mentioned. The loan growth was strong in each of our regional banks, and the bulk of this growth was centered around commercial real estate. With this loan growth, our credit quality continues to be incredibly strong and in line with prior trends in the post-COVID PPP environment. I'm pleased to say that annualized net charge-offs and OREO expense for the quarter were only 2 basis points, which is down from the first quarter of 2022 at 11 basis points and the fourth quarter of 2021 at 3 basis points. Of the roughly $1.8 million in charge-offs, around 60% of the expense was related to one specific credit that we had previously impaired.
The net credit expense figure was aided by roughly $1.2 million in recoveries, which was primarily driven by one credit we aggressively wrote down last quarter, but had significantly better than expected results in liquidating the remaining assets of the operating company. We continue to be well-positioned with our loan loss reserve of $1.21, which is consistent with the prior quarter and slightly down from $1.22 that we had in the fourth quarter of 2021. From a dollar perspective, we did grow our loan loss reserve by $8.9 million in the second quarter. This increase was not related to a reserve on any one specific credit, but rather the growth of our loan portfolio as a whole.
Past due to total loans were 10 basis points, which is in line with the first quarter of 2022 and continues to be near record lows. I mentioned on the call last quarter, I don't expect ServisFirst or banks in general to be able to maintain the record-setting pristine credit quality we have seen over the past year forever, but we have yet to see a rise in key credit metrics. Past due loans are a very simple but good early warning indicator, and they continue to be very minimal. Non-performing assets were $16.7 million for the quarter versus $21.4 million for the prior quarter.
This figure equates to 15 basis points of NPLs to total loans, which is a 25% decrease from the prior quarter, as well as the same period a year ago when we had 20 basis points of NPLs to total loans for each of those quarters, respectively. In the face of rising interest rates, rising inflation, the loan portfolio continues to perform very well, and I'm pleased with the second quarter results. With that, I'll pass it back to Tom.
Thank you, Henry. You know, for the remainder of the year, we're gonna focus on growing core relationships in the bank. You know, in the past two years after the pandemic hit, we did, you know, we obviously experienced a large deposit surge and loan growth was pretty minimal during that period. We did book some transactional loans during the pandemic, just like we did in the 2009 to 2011 period when we had large deposit inflows and loan demand was very weak. We did some transactional loans that we probably won't do going forward. We will look for deposits where we have significant deposit relationships as well as loans for the remainder of the year.
With that, we'll be happy to answer any questions you might have about the quarter.
Thank you. At this time, we will be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you 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. Our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Afternoon, Brad.
Tom, maybe I wanted to start with loan growth. Obviously another really strong quarter. Sounds like, you know, 15 new lending hires, which is certainly a plus. Maybe on the negative side, you've got some, you know, you talked about some paydowns that you expect to come. I think at the beginning of the year, you set out a goal of growing about $1.2 billion. If you're already there, can you just kinda talk a little bit more about, you know, sort of what a pullback, you know, looks like in your eyes? I mean, you've got some of the best growth metrics out there.
Just kinda wanted to understand, you know, if we could frame that a little bit better, sort of, you know, kinda what, you know, a pullback in growth for you guys might mean.
It's sort of hard to give it a good answer, you know, a very accurate answer, Brad, other than we are going to be, you know, very selective in what we book. Obviously 150 a month is probably, you know, we're probably looking at something north of 150 a month on average, in terms of where we're going net growth. I wouldn't change that estimate yet. The 150 a month, I think is a good number net of paydowns. We still, like I said, we do have some construction paydowns that we know are coming over the next two quarters. You know, I can't really get a whole lot more accurate than that, I don't think, Brad.
Sure. No, that's helpful. Maybe just kind of as a follow-up to Bud, as you kinda think about the size of the balance sheet, I know you talked about stopping, you know, the securities purchases. I know it's tough to gauge, but do you have a sense where, you know, your deposit balances might, you know, sort of floor out? Just wanted to kinda think about or how to think better about the liquidity that you have, you know, remaining, and how best to think about, you know, that, how that might be deployed as you move through the back half of the year.
You're asking what you think will grow deposits by each month? Is that right, the first part of it?
Just, you know, if you're thinking about the correspondent book, you know, you had some runoff this quarter. You know, I think you know, average liquidity was down about $1.2 billion or so. You know, just kinda thinking about where, you know, kinda where that number is headed, as you move through the year. You know, it sounds like you stopped buying bonds. Tom's talked about the loan growth. Just kinda curious if you could think about a floor for the liquidity.
Well, from a regulatory standpoint, the excess funds has to be above 5% of total assets, so that's about $750 million now. We're not gonna get to that point, but that's kinda what we look at, what we have to shoot for to be well above that. We're about $1.4 billion today. Just with the big drop over the second quarter, we just decided we wouldn't buy any more securities. You'll have the paydowns that you'll have as liquidity during the month.
Correspondent. I don't know. Rodney, you got anything on that?
Yeah. Brad, this is Rodney Rushing. You know, in the second and third quarters of last year, we had just unbelievable growth. I mean, there was a balloon of new correspondent deposits. Just their liquidity was coming in like ours. When you have over 300 community banks that have accounts with you, we were taking that liquidity. The end of the second quarter of 2021, total correspondent balances, that's all Fed funds, DDA, everything, was $2.4 billion. In one quarter, we went to $3.6 billion. Then by year-end, it grew another $300 million to $3.9 billion. We've seen that run down about $800 million this year. That has slowed tremendously.
In that same period of time, we grew the number of correspondent banks from 316 to just shy of 350. I think it was 344. If you look back a year, the end of the second quarter of 2021 to today, correspondent balances are up $580 million. If you look at the past year, balance is up on, you know, almost $600 million in correspondent banking. That shows how much that ballooned and that liquidity from all the banks provided. You know, and that was from the stimulus money, and some of it was from us adding settlement banks. You know, we do a lot of things with correspondent banks, credit products, Agent Credit Card Program.
We consider if a community bank, if we're their settlement point, if they're settling their cash letter through us at the Fed, we're helping with their cash position, and we consider them we're their primary correspondent then. We grew settlement banks for the year, it was over 50. I think it was 53 banks. Those provided, you know, some increased deposits in the DDA account of using compensating balance to pay their Fed bill. I hope that answers your question. If I confused you, I'll try to correct that. Did that help?
No. Yeah, no, that's very helpful. Thank you, guys, very much. I'll hop back in the queue.
Thank you, Brad.
Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Please proceed with your question.
Hey, good afternoon, guys. How are you?
Hey, Kevin.
Maybe we could shift gears and talk about expenses. A lot of moving parts in there. Thank you for all the detail. That's very helpful. When we maybe like a very top level way of asking it is, like, if we look at a run rate of, you know, I think it's like $39.8 million this quarter, how to think of that going forward. Now, I recognize that we have new markets going into and all the new lenders and all the expenses come day one with that and the resulting revenues will come over time. You also talked about the processing revenues. I just wanna.
On this issue, I just wanna distinguish the additional processing expenses you're referring to as really just because you're getting ready for the conversion, so you kinda have kinda dual or duplicate kind of expenses. At some point, maybe remind us when some of that will go away. I wanna distinguish that from, I believe last quarter you talked about like $874 thousand in expenses, which I treated as like kinda one-timer, 'cause that seemed like it was, you know, not core, but related to the actual deconversion, I believe is what you used. That's a lot of different details, but all related to expenses. Take it however you'd like to, Tom and Bud. Thanks.
Hey, Kevin. One, we made the additional incentive accrual of $1.8 million in the second quarter. Right now, we wouldn't anticipate doing anything additional in the third quarter, and we'll see how that shakes out in the fourth quarter. Right, you could really take the $1.8 million out. That was an adjustment in the second quarter. For the core conversion, that'll take place in February of 2023. TSYS, except for Purchase Cards, will convert in September?
September.
Of this year. The remainder will be in 2023. We might have some smaller deconversion expenses. I don't see anything major that would really impact the quarter going forward. I guess the biggest thing is taking out that additional incentive accrual in the second quarter numbers. Hopefully that helps. I think I had all four.
Yeah, that's very helpful. Tom, maybe we can talk about new markets. Just in the last number of months, you guys have entered Metro Charlotte, Tallahassee, and now most recently Nashville got announced. Wondering if you can just give us a sense on what innings you're in on those. Obviously, Asheville would be very early, but with like, what inning in the expansion you are? What are the prospects of new markets? Do you look at that number of markets and say, all right, that's good for a while, let's let those season? Or is it totally based on availability of folks? Thanks.
Yeah. Yeah. A lot of it's availability, but, you know, we'll go three years without adding a new region. You know, we've done that before because we just can't find good people. It's rare to find this many good people at one time, you know. It's very unusual to find, you know. I would think that Tallahassee is fairly well staffed. That's a pretty good sized group there. Asheville, you know, is not gonna be a huge. It's not gonna be a huge group. We're still staffing in the Piedmont region, the Greater Charlotte area. We call it the Piedmont region. We're gonna be selective in the people we look for everywhere.
It's hard to give you a good answer, but just all these mergers have led to an unusual supply of people looking for a new home, and that is a good thing. The more mergers there are, you know, I think mergers, we all know, kind of slowed down this year, right? Things have slowed down a bit, perhaps, going forward. I would anticipate it would tail off, you know, for a while, Kevin. We're always looking for the right people that have core relationships and are not transactional lenders and have, you know, deposit customers as well as loan customers.
Okay, great. Thanks very much.
Thank you.
Our next question comes from the line of David Bishop with Hovde Group. Please proceed with your question.
Yeah. Good evening, gentlemen. Hope you're well.
Hey, David.
Good evening.
Hey, Tom, just curious, noted the nice margin expansion. You obviously loans as a percent of earning assets to creep up. But I'm curious with the Fed aggressively raising rates here, are you able to pass, what's your success rate, I guess, in terms of, you know, how much of that climb in interest rates are you able to pass on to the borrower? Are you seeing risk premiums adjust? I guess, you know, are you getting paid for potentially higher risk within the market, if we do enter a recession, be it mild or strong? Just curious what you're seeing in terms of loan pricing across your markets.
I think we have seen up until the last 60 days, perhaps, Dave, we've seen some irrational loan pricing out in the market. I think that's much more rational today in terms of what we're seeing from our competitors, you know, that they're doing a little bit better in terms of what they're doing. We, you know, we have to do what we have to do, and we try not to pay attention to what our competitors are doing in terms. Certainly, you know, when you have strong loan growth, we're a lot much better positioned to pick and choose sort of our, you know, the customers we choose to do business with today. We'd rather be in a position where we have stronger loan demand than deposit demand, right?
It's the best position for a bank to be in. It's the best position to increase margin and improve profitability. I don't know, David. Go ahead, Bud. Bud, do you wanna. Were you asking about interest rate sensitivity, David? Was that part of the question or no?
Yeah, just curious. I mean, in terms of what you've seen, just in terms of spread, and then maybe an additional question. I think I heard in the preamble you do expect some second half deposit growth. It sounded like there could have been some seasonality, but you do expect some back half to funding growth on the deposit side.
Yeah, we do. We'll focus more on the second half of the year. We haven't been focused on it for two and a quarter years. We'll focus on it now.
Got it. Appreciate the color.
Thank you, David.
Thank you, ladies and gentlemen. We have reached the end of the question and answer session. This does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.