Categories Earnings Call Transcripts, Finance

ServisFirst Bancshares Inc (SFBS) Q1 2023 Earnings Call Transcript

SFBS Earnings Call - Final Transcript

ServisFirst Bancshares Inc (NASDAQ: SFBS) Q1 2023 earnings call dated Apr. 17, 2023

Corporate Participants:

Davis Mange — Vice President, Investor Relations

Thomas Broughton — Chairman, President and Chief Executive Officer

Rodney Rushing — Executive Vice President and Chief Operating Officer

Henry Abbott — Chief Credit Officer

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Analysts:

Brad Milsaps — Piper Sandler — Analyst

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

Steve Moss — Raymond James — Analyst

David Bishop — Hovde Group — Analyst

Presentation:

Operator

Greetings, and welcome to the ServisFirst Bancshares First Quarter Earnings Call. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Davis Mange, Director of Investor Relations.

Davis Mange — Vice President, Investor Relations

Good afternoon, and welcome to our first quarter earnings call. We will have Tom Broughton, our CEO; Rodney Rushing, our Chief Operating Officer; Henry, Abbott, our Chief Credit Officer; and Bud Foshee, our CFO, covering some highlights from the quarter, and then we’ll take your questions.

I’ll now cover our forward-looking statements disclosure. Some of the discussion in today’s earnings call may include forward-looking statements. Actual results may differ from any projections shared today, 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.

Thomas Broughton — Chairman, President and Chief Executive Officer

Thank you, Davis, and good afternoon to everybody. Thank you for joining us on the call. The year is off to a great start with the first quarter, as we will review for you over the next few minutes. And we have various reports from our various management people.

We’ve always done well in times of stress in the banking industry, we did after the ’08-’09 recession, and we certainly did during the pandemic when the bank has experienced significant growth during those periods of time and we do expect significant opportunities again during this time, a little bit dislocation in the industry. So, if you’re asking of what we do well during times like this, one thing there are several reasons.

First, is our business model has changed in over 18 years since we opened, 18 years ago. We are well capitalized, we’re financially stable and we retain 75% of our net income to fund our growth and increasing capital. We do have an industry-leading efficiency ratio, and we’re highly profitable. We have very strong credit quality, Henry is going to talk about this in more detail in a few minutes. We don’t have any broker deposits for a Federal Home Loan Bank advances like many of our competitors. So in summary, our bank is built for times like this, and we’ll demonstrate that to you during the course of the call this afternoon.

I was going to talk a few minutes about our most recent expansions in our community banking offices, which are in — our newest ones were in Nashville, North Carolina, and Panama City and Tallahassee, Florida, all are doing quite well. They are off to a great start. We’re also in the process of opening a new office in the Lake Norman area, of the Piedmont in North Carolina, which should be another community bank in office and we are very pleased to start these are off to. We’re building them the right way, with core customers with our — that our bankers have had a relationship with for many years.

Rodney is going to talk in a few minutes about our new correspondent office in Houston, that we opened last month, so that’s certainly a plus. It became apparent to us in mid-2022 that the Fed tightened cycle would lead to a focus on deposit, rather than the lending side of the bank. We do anticipate some economic slowdown based on recent events, and Rodney Rushing is going to give a quick review of our deposit franchise. Rodney?

Rodney Rushing — Executive Vice President and Chief Operating Officer

Thank you, Tom. You noted, how we have had virtually no dependence on brokered or wholesale deposits for fundings and I wanted to provide some understanding and details of our deposit metrics and our bank’s deposit base.

From our beginnings, our model has always been to bank relationships, and not just book transactions. Excluding correspondent banks, 25% of our deposits have a credit relationship with ServisFirst. There are no industry concentrations outside of the private households and correspondent banks. For example, commercial banking, makes it, 4.7% of our deposit base; law firms were 3%; and real estate firms were 2%, and it goes down from there. As you can see we’re very granular with no concentrations.

When it comes to correspondent banking. We have 340 plus correspondent relationships in 28 states, and just over a 120 are settlement banks. Settlement banks are banks with downstream correspondent banks, whose daily cash letters are cleared with us or their Federal reserve account fees are settled through us, working much like a corporate cash management account. As rates have risen, you will see a shift from compensating DDA balances, which are non-interest bearing into interest-bearing, but because we pay for settlement expenses with the DDA earnings, there is no effect on profitability. Because of the settlement relationship, we keep the funding by sweeping into interest bearing accounts, making these deposits very sticky. In fact, 65% of total correspondent fundings are with these settlement customers. This past month proved how stable these deposits and relationships are.

As Tom mentioned, we opened our Texas correspondent office with the addition of Don Dickerson. Don and I worked together previously, and with over 40 years of experience in Texas Banking, Don was the perfect choice to expand the Texas market with a large number of relationships developed over the last 40 years. We are looking-forward to the growth that this market will provide, a growth we should realize in the near future. I just wanted to highlight some of the details, more details are in the slide deck that we provided, about our stable conservative deposit base, and we have — and where we have plans to grow.

With that, I’ll turn it over to our Chief Credit Officer, Henry Abbott.

Henry Abbott — Chief Credit Officer

Thank you, Rodney. The Bank got off to a strong start in 2023, with continued strong credit quality. I’m pleased to say we ended 2022 with NPAs to total assets of 12 basis points, and we’re able to maintain that in the first quarter. With no major changes in NPAs, they continue to be near-historic lows. Annualized charge-offs were five basis points, well below the same period prior-year of 11 basis points and 6 basis points for the fourth quarter of 2022. At the end of the quarter, our ALLL to total loans was 1.28 versus 1.25 at the end of 2022, this is not associated with any one loan, a rather conservative step the bank took in the first quarter.

I won’t go through each of the bullet points, but you should have access to some additional information in the slide deck about our CRE portfolio, and I can go over any questions you have during the Q&A session. Adding to [Phonetic] highlights, AD&C as a percent of total risk-based capital dropped from 100% at year-end to 93% at the end of the first quarter. Total income producing commercial real estate also dropped for the quarter, and is now 317% of risk-based capital. The vast majority of our commercial real estate projects are in the Sunbelt, as we have only had a handful of projects where we followed our customers outside of the Southeast.

Office space makes up roughly 3.5% of our total loan portfolio, the average loan size within our income producing office bucket is $1.5 million. These loans are typically in suburban locations and our more traditional one or two-storey office walk-ups. We have very minimal CBD office exposure, comparable to our office exposure of the bank has never been a big single-family residential development lender, and our raw land and lot exposure is minimal. We have stressed and continued= to look closely at our CRE portfolio to ensure we are appropriately managing the risks.

We continue to be best-in class within our peer group with our past due management. In the first quarter, ServisFirst switched to a new residential mortgage loan servicing company, because of client issues with our prior vendor. We did see an increase in past due loans for the quarter, but they are still near historic lows, and a major component of the increase in past due was related to operational changes that caused delays within our residential mortgage portfolio. The majority of mortgage loans that were showing as past due have now been caught up. A lot of the issues were related to getting ACH is set-up correctly and where and how to properly make the payments with the change in servicing companies.

Switching gears towards pricing of new loans that were originated in the first quarter, more than 80% were variable rate loans. We continue to push to increase yield on both new and existing loans. We’ve also begun various repricing efforts on existing loans prior to their maturity. Through these efforts, we were able to reprice roughly $130 million in existing debt by an average of 1.4% in the first quarter. We also had over $70 million in fixed rate debt paid down, early in the first quarter. These two items combined for roughly $200 million in positive movement within our fixed rate loan portfolio.

In summary, I’m very pleased with the results of the first quarter, and I’ll hand it over to Bud Foshee.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Thank you, Henry. Good afternoon. For earnings, we kicked-off 2023 with strong earnings in the first quarter, as we continue to build capital and liquidity. Diluted earnings per share increased 7%, compared to the first quarter of 2022, when adjusting for income on PPP loans. Our investment portfolio, the portfolio is a small component of our balance sheet, 11% of total assets. The portfolio is managed for liquidity. The components of the portfolio are 45% pass-through mortgage-backed securities, 30% U.S. treasury and agency, 1% municipal, and 24% bank and bank holding company’s sub-debt. We have never purchased a CMO. The average life of the total portfolio is 4.2 years. The average life for our peer group is 7.2 years, and that peer group is 33 banks with total assets greater than 10 billion.

The average life of our treasury portfolio is 2.8 years, and average life of the bank and bank holding company’s sub-debt is 2.4 years, and an average lives of the bank and bank holding company’s sub-debt is based on the call date. We have the expertise to analyze a bank and bank holding company’s sub-debt. Our liquidity, excess funds were $732 million as of March 2023, our goal is to increase this to a $1 billion range. Total balance sheet liquidity in March of 2023 was $1.5 billion, and total available liquidity was $8.4 billion. Margin, average loan growth was $166 million for the first quarter. PPP fees and interest income were $29,000 in the first quarter of 2023 versus $4.9 million in the first quarter of 2022.

Our NIM compression is a result of record rate increases. The Fed funds have increased by 475 basis points since December of 2021. We had four consecutive 75 basis point increases during the period from December ’21 to March of 2023. Second largest Fed rate increase over one-year timeframe was from February 1994 to February 1995, and that increase was 300 basis points, only one 75 [Phonetic] basis point increase occurred during that cycle. We see deposit rates stabilizing and NIM improving as loans are repriced. The average rate for new loans in first quarter was 7.71%, having a short maturity loan portfolio will improve the margin over time.

Our non-interest income, credit card income continues to be impacted by our conversion in September of 2022. Mortgage fee income has been impacted by decreased volume and rate increases, we expect improvement in both areas over the course of 2023. Non-interest expenses as a result of our market expansions, total salaries and benefits increased by $765,000, the investment write-down related to tax credits was $2.7 million in 2023 versus $2.5 million in 2022. Tax credits for $3.9 million in the first quarter of 2023 versus $3.3 million in the first quarter of 2022.

Capital Tier-1 leverage ratio was 9.91% at March of ’23 versus 7.79% at December of 2021. The ratio was 9.11%, after adjusting for the net unrealized losses, of both the available-for-sale and held-to-maturity securities.

That concludes my remarks. I will turn the program back to Tom.

Thomas Broughton — Chairman, President and Chief Executive Officer

Thank you, Bud. In summary, we’re seeing a record deposit pipeline. Slides deck that we’ve filed this afternoon should give you a lot more information about the bank, and we think it’s all very positive. One thing we’re excited about, we opened 23% more accounts in the first quarter, than we did in the first quarter of last year. So we’re very pleased with the improvement there.

We think, we’re close to the other side of this, Fed tightening cycle, we’re certainly going to be vigilant on credit quality, because we do expect of a slowdown, and we’ll certainly be watching to make sure, we’re doing everything correctly to manage our loan portfolio and manage our assets properly. So we are — in summary, we do like where we are today. Our simple business model is paying dividends and we’ll be happy to answer any questions you might have.

Questions and Answers:

Operator

Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed.

Brad Milsaps — Piper Sandler — Analyst

Hey, good afternoon.

Thomas Broughton — Chairman, President and Chief Executive Officer

Good afternoon, Brad.

Brad Milsaps — Piper Sandler — Analyst

Tom, maybe, I wanted to start on loan growth. I think, this is the first quarter, maybe outside of the pandemic where you didn’t you didn’t grow loans. I was just kind of curious, last quarter you talked about high-single digit loan growth and double-digit deposit growth. I know a lot has changed. Just kind of curious how you would sort of think about those numbers as we sit here today?

Thomas Broughton — Chairman, President and Chief Executive Officer

Oh, we think that we had a fair number of pay-offs that some of them were unexpected, Brad, but a lot of them were very pleasant surprises, because they were low fixed rates that paid-off during the quarter, so that was a win-win for us and our customers. And so we had a — I can detail [Phonetic] it for you, but it’s a pretty substantial amount of pay-offs, and we started trying to slow the loan trading [Phonetic] down in the middle of 2022, when we realized that Fed tightening was going to give the industry issues. Treasuries are leading the way on rates going up and they were going up and lockstep with Fed rate increases.

It was a concern to us and we started slowing it down a bit, and the result has showed up in this filing in this first quarter. So we feel like we will start growing loans, again probably in the back-half of the year, you’ll see some increased loan growth, Brad. But we’re sort of, part of it. It was unexpected with loan pay-downs on fixed rate loans, again not an unpleasant surprise, a very pleasant surprise. And a part of that was because we started slow things down the middle of last summer, so that’s a longer answer than you wanted, probably, Brad.

Brad Milsaps — Piper Sandler — Analyst

Yeah. I know, construction has been a big area of growth for you guys. Obviously, those tend to be some of the higher-yielding assets as well. Would you expect to see a kind of similar decline? I mean, obviously you want those loans to — those projects to finish up, and move off your books, but would that sort of downward trajectory kind of continue in your mind and you pick-up growth in other areas?

Thomas Broughton — Chairman, President and Chief Executive Officer

Brad, we have a pretty good fairly robust pipeline of construction loans, so they’re probably, there is still a positive increase in construction loans on a monthly basis of around $20 million a month. I think, Henry has the last number we computed. I think, that I’m roughly correct?

Henry Abbott — Chief Credit Officer

I think more than that, I think, maybe closer to $70 million a month, maybe $200 million a quarter in new funded construction loans.

Thomas Broughton — Chairman, President and Chief Executive Officer

But net of payoffs is about $20 million a month or so.

Henry Abbott — Chief Credit Officer

Yeah.

Thomas Broughton — Chairman, President and Chief Executive Officer

Yeah, it’s still positive there, and we like those projects. Brad, we’re not concerned about any of those projects in any way. But I’ll stop there and see what your other questions are.

Brad Milsaps — Piper Sandler — Analyst

No, that’s helpful. Maybe just kind of switching gears a second to, Bud. I think, I heard your comments that you expect the NIM to improve from here as loans repriced. Are you expecting improvement as soon as the second quarter? It just seems like, that could be a challenge. If the Feds continus to move rates up, you guys are sitting right around 100% loan deposit ratio, also wanted to kind of square that with your comments around building that liquidity book back up to a $1 billion or just trying to understand all the moving parts on how you get there, and kind of how you think about the NIM?

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Sure, yeah. If, and it looks like, if Fed is going to increase rates at the May meeting, that’s definitely going to impact us from the second quarter. So if that happens, I think it would, it might take into the third quarter before you start seeing some gradual improvement. We’re just, you just got — you got about $9 billion, in either a total floating-rate deposits in Fed funds purchased on the asset side between loans and Fed funds, you’re looking at about $5 billion.

So we’re just — Fed keeps increasing, it’s going to hard for a while. You’ll have some compression put it that way. Fed stock for what you can really say it’s going to.

Brad Milsaps — Piper Sandler — Analyst

Right, right. And maybe a final question to me, it looked like your first quarter expenses were up about 10% year-over-year. I know, there is a few adjustments in there. Is that kind of how we should think about a growth rate in ’23? Or I know, your incentives are tied to typically loan growth. I know more so deposit growth this year, but just kind of wanted to think about — kind of how to think about expense growth, it did look like professional fees were maybe a little heavier this quarter, anything to back out of there that you think is worth noting?

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Let me think, on professional. I don’t remember anything unusual. Let me, I’ll look at it and email you after the call. I email everybody, I’ll go back and look at it. I don’t have anything highlighted, but let me go back and look at it. And you just [Speech Overlap] comparative quarter?

Brad Milsaps — Piper Sandler — Analyst

Both. But then, I was just looking at the total expenses in totality, up about 10%.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Fourth quarter it was down because we had a credit, we ran commitments, but I’ll look at everything, just to make sure there is nothing.

Brad Milsaps — Piper Sandler — Analyst

Yeah. I was more looking at 1Q ’23 versus 1Q ’22, up about 10% year-over-year, that — is that kind of the growth rate to kind of think about as you think about ’23 versus ’22.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

I wish, I had more detail in front of me, because I know we’ve had the market expansion and different markets. Let me look at it, and I’ll send something out on that just to make sure, I get you a good answer.

Brad Milsaps — Piper Sandler — Analyst

Okay. Okay. Thanks. I’ll hop back in queue.

Operator

Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Please proceed.

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

Hey. Good afternoon, guys.

Thomas Broughton — Chairman, President and Chief Executive Officer

Good afternoon, Kevin.

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

I appreciate the detail on the correspondent deposits. And maybe, I want to ask this in maybe a very top-level sort of way, like it’s obviously a good business to be in. You guys wouldn’t be in it if it wasn’t, but what — with what is going on right now in terms of the pressure on deposits and the mix-shift within deposits that’s going on? Is the correspondent network helping you in this near-term? Or is it really exacerbate this pressure and make it more challenging for you? Just that — and that your client banks are probably dealing with the same thing and maybe therefore you guys reflect some of that on your balance sheet? Just trying to get [Speech Overlap]

Thomas Broughton — Chairman, President and Chief Executive Officer

Do you mean the deposit beta, Kevin or from what respect interest-rate sensitivity? I mean, what do you mean?

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

I guess, just the pressure on mix-shift that’s going on and at mainly on that, mix-shift and the pressure to grow deposits in general, I guess.

Rodney Rushing — Executive Vice President and Chief Operating Officer

Well, this is Rodney Rushing. Let me answer it this way. And then, you can see if I’ve answered your question. It has been business as usual on the deposit side, we — what I tried to explain in my comments was, we are in the correspondent banking business and the relationship and we find the — clearing the settlement relationship, what is beneficial to us in the downstream bank. We act as an intermediary between the small community bank and the Fed [Phonetic], and because of that we get their settlement account and then — and they keep compensating balance there, it sweeps in the Fed funds. And that makes those relationships very sticky. Out of. 340 plus relationships, this past month, we may have had it was less than 10 that moved any material amount of money from us. It was just a small amount. So those relationships are very sticky.

We have looked to, the best place to grow that. In Alabama, Georgia, and Tennessee, we have probably all the — the vast majority of correspondent relationships, we’re going to get. In Alabama, we have 90 something [Phonetic] banks, we have 60 plus correspondent accounts in the State of Alabama. That same ratio was true in Georgia, and Tennessee. So that’s why we look to grow in Texas. Texas was a big correspondent market for me when I was at Compass. And we expect, with Don Dickerson, it’s going to be a an area of growth for the correspondent division of — through the rest of this year and next year.

Thomas Broughton — Chairman, President and Chief Executive Officer

Now as Rodney said on the call, as money shift from non-interest bearing DDA to interest-bearing deposits or the Fed funds purchased, there is no effect on profitability of the bank whatsoever. There is no deterioration in our profitability, so if it moves — as rates start falling, it moves back to the documented DDA accounts, it will not improve our profitability. It will be the same. It just will show more money in non-interest bearing DDA.

Rodney Rushing — Executive Vice President and Chief Operating Officer

That’s right. And the simple fact that we pay their Fed deals with those DDA earnings. So you’ll see, of course, when expenses go up, when we bring on more settlement accounts. And if, in rising rates, if they have to keep less money with us, then that money, as Tom said shifts into interest-bearing accounts, but it doesn’t affect profitability. What the settlement relationship does for us is it makes it a true relationship between us and bounce rate [Phonetic] banks, that instead of a relationship, it is a transaction where we’re just buying liquidity from them.

Thomas Broughton — Chairman, President and Chief Executive Officer

Just, enough to, I know, I’m not answering to your question, Kevin, but Rodney, why don’t you mention that during the time a couple of weeks when there is a little stress in the industry that when corresponds wanted to test — wanted to borrow money, some of our competitors didn’t take care of.

Rodney Rushing — Executive Vice President and Chief Operating Officer

We had a number of banks that called and wanted to test their line with us, and they did it. David Jordan is here in the room, who manages our correspondent operation. And during that we learned that they tried to test their loans or draw on their other upstream loans from other correspondents and they were not able to do so. And that’s — yeah Kevin.

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

Yeah. I guess, one follow-up on that, I was going to ask was just this — what’s going on in the environment and the focus on deposits and particularly on insured deposits? Does it make it — is it a better, like not better, but I guess is it an easier service to sell in an environment like this, for them to have you as your correspondent network as a resource?

Rodney Rushing — Executive Vice President and Chief Operating Officer

I don’t know if it’s easier. To my knowledge, a bank has not lost money to another bank in Fed funds. So in that counter-party relationship where one bank is selling another bank, overnight funds, I don’t know, maybe somebody could correct me, but I don’t know of a case where a bank has lost money.

Now with that, there is prudency. And the only deposits we lost over that couple of weeks where some downstream community banks, who we’re their primary correspondent, it may be a small $200 million bank, and probably a bank [Phonetic] that has $20 million in capital. And they look up and they’ve got $15 million sold to us. They called Mr. Rodney, we looked at our amount of funds we’re selling you. We’re going to move some of that to the Fed. So I’m going to leave eight with you and another seven to the Fed. Sure, go ahead. And that happened less than 10 or 12 times in that two-week period, and that was the only stress we saw on that deposit base. The rest of it was business as usual, and I don’t — it’s all about the relationships, and that’s why hiring Don in Texas is so important to us. I hope, that answered your question.

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

Yeah. No, that’s great. Thank you. Thanks, Rodney. And one, just I guess, a follow-on to Brad’s question. So Trend Bridge, they comment about things stabilizing and getting better. But then is it — I guess, the way I would want to ask you whether the Fed moves or not, when we look at the linked quarter decline in the margin. And more importantly, decline in dollars of NII, is it fair to say maybe we’re not at the bottom because there could be some incremental pressure, but the size of the pressure of linked quarter is not going to be — this is probably the high point. Is that fair to say?

Thomas Broughton — Chairman, President and Chief Executive Officer

We think we’re close to the bottom. And with our short loan and securities portfolio, we’re going — our margin will start moving up. It will take a couple or three quarters, but we’ll start seeing some pretty good improvement once the Fed achieves their peak rate. I don’t know, Bud, I don’t know if you can answer any — add anything to that?

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

No, I think that’s just — yeah, we’re just, it’s kind of wait and see on the Fed side, so.

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

Great. And one last housekeeping thing more from me. I noticed the restructuring in the TDR section seemed like it was blanked out for the first quarter of ’23. Is that due to that? Is that just an omission? Or was that due to that change in serve-to-serve [Phonetic] that you referenced? I was just confused about that.

Henry Abbott — Chief Credit Officer

That was due to an accounting change, and that is something that we no longer have a report, there were no material changes within that category. It was just something we don’t have to report any more under new guidance.

Kevin Fitzsimmons — D.A. Davidson Companies — Analyst

Okay, okay. All right. Thank you very much guys.

Thomas Broughton — Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Steve Moss with Raymond James. Please proceed.

Steve Moss — Raymond James — Analyst

Hi. Good afternoon.

Thomas Broughton — Chairman, President and Chief Executive Officer

Hi, Steve.

Steve Moss — Raymond James — Analyst

Maybe just following up on the margin here. Curious to see where are loans pricing these days? And any color you can give on that front as we think about the repricing aspect of your loan portfolio, going forward here?

Thomas Broughton — Chairman, President and Chief Executive Officer

Sorry, Bud, tell them what the price was in the first quarter?

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

For the first quarter, new loan production was at 7.71%.

Thomas Broughton — Chairman, President and Chief Executive Officer

80% floating, 20% [Phonetic] fixed.

Steve Moss — Raymond James — Analyst

Okay.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Yeah. We were at, I think, 78% variable rate in the first quarter, so that’s definitely improving. We’re definitely putting more variable rate loans. It’s just a slow process.

Steve Moss — Raymond James — Analyst

Okay.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Yeah, I mean, that just — that’s going to take a while to improve the margin over time just.

Thomas Broughton — Chairman, President and Chief Executive Officer

What surprised me is how quickly we’re seeing the payoffs and pay downs on floating rate loans. I mean, Henry mentioned some $200 million in the first quarter. Already in the second quarter, through what, and what’s already closed this quarter in processes like $85 million in fixed rate loans, either paying off or paying down. So it’s moving much more quickly. You don’t notice it when rates are flat. You certainly notice it when rates have gone up as much as they have. We see the potential improvement in margin that really is very hard for you to quantify in your model. But you know, and of course, the natural cash flow on fixed rate loans is substantial as well, over $1 billion a year, natural paydown

Steve Moss — Raymond James — Analyst

Right. That’s helpful. And then, in terms of just — on the deposit side, just curious on your interest-bearing deposits. If by any chance, you have a spot rate at quarter end, just kind of get a feel for where things shook out.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Yeah. Let’s see. The cost of total deposits at the end of the quarter was 2.31%, interest-bearing DDAs was 3.12% and total interest-bearing deposits is 3.08%.

Thomas Broughton — Chairman, President and Chief Executive Officer

Get all that?

Steve Moss — Raymond James — Analyst

Great. I got all that. And then, in terms of just going back to — or just thinking about credit overall still remains pristine. Kind of, just any updated thoughts as to how you’re thinking about the reserve ratio and credit costs, going forward here?

Thomas Broughton — Chairman, President and Chief Executive Officer

We keep as much in the reserve as we can keep in the reserve. You know, the accounts will let us keep, Steve,. And that’s 1.28%, it’s the most we’ve ever had in our reserves. Going into the ’08-’09 recession, we had 1.05% or so in the loan loss reserve. So we feel like we’re in much better shape on loan loss reserve today than we were at that time. So CECL obviously helps a little bit, but we feel good about where we are. And we feel really good, we filed that deck that you probably hadn’t had time to look at, but it details our office building exposure and AD&C exposure. You know that, remember, when pandemic hit everybody’s word of death about bank’s — the industry’s retail exposure and how much retail — the banks were going to lose on retail and that turned into a non-event. I mean, yeah, some banks lost some money on big malls, but they had earnings and it just sort of got handled.

So I think, it will this time, too. We don’t have any of that exposure, but I think it’s just — some of it’s just CNBC headlines they like to put out different loan exposures out there, but I just — I don’t know any banks have a lot of office building exposure, but maybe there are some that are.

Steve Moss — Raymond James — Analyst

Right. And I appreciate that color. That’s pretty much everything for me. So, thanks for all the color here today.

Thomas Broughton — Chairman, President and Chief Executive Officer

Thank you, Steve.

William Foshee — Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of David Bishop with Hovde Group. Please proceed.

David Bishop — Hovde Group — Analyst

Yeah, hi. Good. Good evening, gentlemen.

Thomas Broughton — Chairman, President and Chief Executive Officer

Hi, David.

David Bishop — Hovde Group — Analyst

Hey, quick question. Most of my questions have been answered. I think of the preamble, I think it was maybe Rodney or Bud, you mentioned that you’ve been able to be opportunistic and maybe repricing or refinancing certain, I think it was variable rate loans. Is that done with a view of getting ahead of potential cash flow pressures on these loans repricing? Or just curious what the impetus was for some of the repricing there? Maybe the nature of the loans repriced? And was that sort of a credit-driven decision?

Thomas Broughton — Chairman, President and Chief Executive Officer

No, no. No, these were — those were all fixed rate loans. And we’re talking about an average rate of — Henry, would it be 4%, something like that.

Henry Abbott — Chief Credit Officer

Yeah.

Thomas Broughton — Chairman, President and Chief Executive Officer

So those are the loans, and it’s just surprising to us often somebody will need something to redo them. And it’s not necessarily a credit issue or a default issue. They might need to borrow some more money. They might not finish the construction on time of a loan that has a fixed rate on it, so we’re seeing repricing opportunities. And again, you can’t capture it in your model, except for — when we have a commercial loan portfolio that has an average maturity of 3.5 years, we’re going to have a lot of repricing opportunities on fixed rate loans.

Yeah, well, we have a few more fixed rate loans than we would like to have today in this environment. But one thing when rates start coming down, those fixed rate loans might not be look as bad as they do today. But in anyway, we are seeing repricing opportunities on a lot of loans. Again, like I said, just what, 17 days of this quarter, we over $80 million is in the process of being repriced or paid-off. We’ve had a couple of companies are always constantly selling or the people are selling assets. They might have a mini firm on a multi-family project that’s going to, anybody with any sense is going to any of our developers in any sense or going to the Fannie and Freddie and doing permanent financing as quickly as they can, paying us off, so that’s certainly in their best interest.

David Bishop — Hovde Group — Analyst

Got it. And then as we think about the Texas expansion into Houston, I assume you expect to see some of that flow into the balance sheet this year. Just curious if any of that shows up on the current deposit pipeline you mentioned in the slide deck?

Thomas Broughton — Chairman, President and Chief Executive Officer

It’s not in that. We don’t have any of that. No, we don’t have anything in this pipeline yet, right?.

Rodney Rushing — Executive Vice President and Chief Operating Officer

No, we don’t. It’s not in the pipeline, and we anticipate our growth coming. He has already opened two or three accounts with new banks. We probably had 10 total Texas accounts before Don came onboard. So he’s out meeting those current customers, so I would expect in the third and fourth quarter looking for growth from that Texas market.

David Bishop — Hovde Group — Analyst

How many banks are in Texas, 400?

Rodney Rushing — Executive Vice President and Chief Operating Officer

It’s over 400 community banks in Texas. The numbers, a lot of charters in Houston, Dallas markets, San Antonio, Austin. And again, in the State of Alabama, we’re down to 90-something from bank charters.

Thomas Broughton — Chairman, President and Chief Executive Officer

They say everything is bigger in Texas, and that’s true. More banks, bigger banks, bigger deposits.

David Bishop — Hovde Group — Analyst

Got it. I appreciate the color.

Thomas Broughton — Chairman, President and Chief Executive Officer

Thank you, Dave. Well, I think we have no more questions in the queue. If you all need any further information, I know, Bud is going to get out some expense management answers to you and look forward. If you all have any further questions, please let us know. Thanks for joining us today.

Operator

[Operator Closing Remarks]

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