Servisfirst Bancshares Q2 2026 Earnings Call Transcript

On Monday, Servisfirst Bancshares (NYSE:SFBS) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/.

Access the full call at https://event.choruscall.com/mediaframe/webcast.html?webcastid=jziE0VWW

Summary

Servisfirst Bancshares reported strong financial performance with net income of $85.8 million, up 3.4% quarter-over-quarter and 40% year-over-year.

Loan growth was robust with an annualized rate of over 15%, supported by broad-based demand across regions, particularly in Florida and Tennessee.

Net interest margin expanded to 3.63%, with future margin expansion expected to slow slightly due to narrowing yield gaps.

Noninterest income increased significantly, driven by service charges, mortgage banking, and bank-owned life insurance income.

The company added nine bankers, focused on expanding in key regions like Houston, while maintaining a strong emphasis on customer service.

Expense management remained disciplined, with a 29.65% efficiency ratio, while capital levels continued to build, supporting organic growth.

Management expressed optimism about the economic and regulatory environment, with a cautious outlook on geopolitical risks impacting loan demand.

Full Transcript

OPERATOR

Greetings and 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-0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Davis Maines, Director of Investor Relations.

Thank you. Davis, you may begin.

Davis Maines, Director of Investor Relations

Good afternoon and welcome to our second quarter earnings call. We will have Tom Broughton, our CEO; Jim Harper, our Chief Credit Officer; and David Sporacio, 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.

Tom Broughton, CEO

Thank you, Davis. Good afternoon. Thank you for joining our second quarter earnings conference call. We are generally pleased with the results, and I want to give you a few highlights of the quarter, and I'll be followed by Jim Harper, our Chief Credit Officer, and Dave Espressio, our Chief Financial Officer. On the loan side, we saw improved loan demand with annualized loan growth of over 15%. Almost all of our 13 regions or segments had really solid loan growth.

The best growth was in our two Florida regions and Tennessee, though really no region contributed more than 15% of the total growth, and almost none of them were less than 10% of the total growth. So it really was very granular and was not due to several large credits, which was really good. And we also saw some improvement in our C&I line utilization in the quarter, and that was encouraging as well. Our loan pipeline did grow quarter over quarter and is now at a record level.

Projected payoffs this quarter are 17%, which is roughly the same as last quarter and is down from around 33% over the last two years, in rough numbers. So we are seeing payoffs diminish and return closer to historical levels of typical payoffs. You know, you tend not to notice payoffs when you have robust loan demand. So hopefully we're seeing loan demand rebuild and begin to normalize a bit on that side. Our Houston pipeline is beginning to build, and we are seeing increased activity in Texas.

On the deposit side, our growth rate was constrained by some large income tax payments due to the sale of some properties and companies by our clients. Our noninterest-bearing deposits grew 20% annualized in the quarter and 14% year over year, as we continue to emphasize our treasury management services, and we benefit from the continued trend of bank mergers, as none of these bank mergers are done to improve customer service. On the new employee front, we added nine bankers in the quarter.

We added two in the Piedmont region, three in Northwest Florida, and three in Houston, including a new Market President under the Regional CEO in Houston. Our goal is never to set a numerical goal for new bankers, but we try to make our bankers more productive and successful and grow their loan and deposit portfolios and be very responsive to our customers' needs. With a name like ServisFirst, customer service is our primary goal, and we want bankers who embrace the culture of ServisFirst.

I'll now turn it over to Jim Harper for a credit update.

Jim Harper, Chief Credit Officer

Thanks, Tom. As mentioned, lending activity definitely picked up as we progressed through the quarter, as we experienced solid loan growth across most markets. While growth was granular, it was driven by CRE activity. As a result, we experienced an uptick in our CRE outstandings relative to capital, moving from 298% of capital at 3/31 to 307% at 6/30/26. That lending momentum and activity has continued into the early third quarter across our footprint and including Texas, where the team continues to grow and source new opportunities.

With regard to NPAs, as noted following the first quarter, we did have successful resolution of several credits early in the second quarter. For the quarter, we saw a net decrease of NPAs of just under $7 million on a net basis, and we don't see any systemic weakening in any particular sector of lending, and our credit quality continues to be strong. On a related note, charge-offs for the quarter and year-to-date continue to be modest, totaling approximately $3.7 million for the quarter and totaled just over $12 million, or 9 basis points, for the first half of the year.

Lastly, the allowance for loan losses ended the quarter at 126 basis points versus 125 basis points at the end of the first quarter, with increases occurring both within the pooled portfolio and our loans assessed for individual impairment. David will now provide a summary of our financial performance for the second quarter.

David Sporacio, CFO

Thank you, Jim, and good afternoon, everyone. I'll walk you through the financial details of our second quarter, and I'm pleased to report that the momentum we described in the first quarter continued into this quarter. Net interest margin expanded again, loan growth reached its fastest pace in several quarters, credit metrics improved meaningfully, and capital continued to build. Taken together, this was solid financial performance for us. For the second quarter of 2026, we reported net income of $85.8 million, or $1.57 per diluted share.

That compares to $1.52 per share in the first quarter, up 3.4% on a linked-quarter basis, and compared to $1.12 per diluted share in the second quarter of last year, an increase of 40% year over year. On an adjusted basis, which excludes a legal matter accrual reversal and a loss on marketable securities that affected last year's results, diluted earnings per share grew 30% from $1.21 a year ago. For the first six months of 2026, net income was $168.8 million, or $3.09 per diluted share, up 35% from $124.6 million, or $2.28 per diluted share, in the same period last year.

Return on average assets was 1.91%, up from 1.89% in the first quarter and well above the 1.40% we delivered a year ago. Return on average common equity was 17.71%, compared to 17.91% last quarter and 15.68% on an adjusted basis in the same quarter of last year. These returns continue to reflect the operating leverage in our model—margin expansion, strong loan growth, and expense discipline all moving in the right direction together. Net interest income for the second quarter was $155.6 million, up from $148.1 million in the first quarter and from $131.7 million a year ago.

Net interest margin expanded to 3.63%, up 10 basis points on a linked-quarter basis and up 53 basis points year over year. I would note that during the quarter we were fully paid out of a large credit relationship that had previously been on nonaccrual status, and we recovered $1.9 million of interest income as a result. That recovery accounted for 5 basis points of the improvement in loan yields and in total net interest margin. On the funding side, average interest-bearing deposit cost was 2.80%, essentially flat to the 2.79% we reported last quarter, but down 53 basis points from a year ago as last year's rate cuts worked through the deposit portfolio. On the asset side, loan yields were 6.23%, up 5 basis points linked quarter but 6.18% on a normalized basis. Investment yields were 3.81%, up modestly from 3.78% last quarter. Our average rate on Federal funds purchased was 3.74%, unchanged from a linked-quarter perspective and down from 4.49% a year ago, which is a direct correlation to Fed funds rates. In total, our net interest margin continues to expand, although we are seeing some slowdown in the pace.

We expect to continue aggressive repricing on fixed-rate loans as they mature and disciplined pricing on deposits, which will continue our margin expansion. Noninterest income was $12.9 million for the quarter, up from $10.8 million in the first quarter and up 43.5% from $9 million a year ago. On an adjusted basis, growth was broad based. Service charges on deposit accounts were $3.3 million, up 25% year over year, reflecting the treasury management pricing changes we implemented last July, and roughly flat linked quarter.

Mortgage banking revenue was $2.2 million, up 68% year over year and 17% linked quarter, driven by higher secondary market loan sales and the per-loan administrative fee increase we put in place earlier this year. Credit card income grew 18% year over year to $2.5 million, and bank-owned life insurance income was $4.1 million, up 94% year over year and 47% linked quarter, reflecting the $25 million of new BOLI contracts we purchased this quarter on top of the $150 million we added in the third quarter of last year.

Noninterest expense was $50 million for the quarter, up 5.4% linked quarter and 13% year over year. The linked-quarter increase is primarily due to a negative adjustment recorded in the FDIC special assessment in the first quarter. Despite that growth, our efficiency ratio came in at 29.65%, the third consecutive quarter below 30% and a meaningful improvement from 33.46% a year ago. Salary and benefit expense was $26.3 million, up 16.4% year over year, primarily reflecting the full run-rate impact of our Houston market expansion.

Full-time equivalent headcount was 663 at quarter end, up 22 from a year ago and up 3 from the first quarter—very modest growth relative to the balance sheet expansion we're generating. Our effective tax rate was 19.94% for the second quarter compared to 17.82% last quarter and 19.82% a year ago. The linked-quarter increase reflects timing of investment tax credit purchases. We continue to actively pursue federal credits with carryback provisions and expect to realize more tax savings in the future.

We expect to continue evaluating similar tax-advantaged investment opportunities as part of our current-year tax plan. Turning to the balance sheet, as Tom mentioned, this was a standout quarter for loan growth. Ending loans were $14.48 billion, up $533 million from the first quarter, or 15.3% annualized—our fastest quarterly growth rate in some time. On an average basis, loans grew $440 million, or 12.8% annualized on a linked-quarter basis. Year over year, loans are up $1.25 billion, or 9.4%, with our pipeline remaining at record levels and growth broad based across markets, including a contribution from our Texas market.

Deposit growth was more measured this quarter due to the competitive landscape, but remains healthy on a year-over-year basis. Ending deposits were $14.55 billion, up $62 million on a linked-quarter basis and up $686 million, or 5%, from a year ago. Importantly, noninterest-bearing demand deposits, our low-cost, most durable funding source, grew to $3 billion, up 5.6% linked quarter and 13.8% year over year, which tells us our bankers continue to win core operating account relationships even as overall deposit growth moderated this quarter relative to loan growth.

As Jim mentioned, net charge-offs were low at just 11 basis points annualized for the quarter, down sharply from 25 basis points last quarter and 20 basis points a year ago. With these low charge-offs and our healthy loan growth, we recognized our quarterly provision for loan loss expense of $11.4 million versus $10.6 million from the first quarter of 2026 and $11.3 million in the second quarter of 2025. Our allowance for credit losses stood at 1.26% of total loans, essentially stable versus 1.25% last quarter.

We remain comfortable with our reserve coverage given the current portfolio performance. Capital continued to build meaningfully in the second quarter. Common equity Tier 1 capital to risk-weighted assets reached 11.83% on a preliminary basis, relatively flat from 11.86% last quarter and up 45 basis points from a year ago. Total capital to risk-weighted assets was 13.09%. Our Tier 1 leverage ratio was 10.93%. Tangible common equity to tangible total assets was 10.72%.

We're generating capital organically at a pace that comfortably funds the loan growth we're seeing while still building cushion. Our book value per share was $36.19 at quarter end, up from $34.99 last quarter and up nearly 15% from $31.52 a year ago. Tangible book value per share was $35.94. On liquidity, we ended the quarter with $1.46 billion in cash and cash equivalents, or about 8% of our total assets. We have no FHLB advances and no brokered deposits.

Our funding remains entirely core and relationship driven. I'll now turn it back over to Tom for his closing comments.

Tom Broughton, CEO

Thank you, David. We certainly were pleased with the quarter, but not satisfied. I really know how much we can improve from where we are today, so I think we can do much better than what we are doing today. We aren't hitting on all eight cylinders yet, to equate it to an automobile, but I feel like we are getting closer to all eight cylinders than we have been in the last two years. While we're in the middle of our largest regional startup in our history in Houston, we still earned a 1.9% return on assets.

I know reaching a 2% return on assets may be tough for the last 10 basis points, but it sure does seem like a worthy goal for us to strive for. Even though our primary goal will always be to grow earnings per share, having more of our regions and markets perform at a higher level can get us to a consistently higher level of financial performance. On an industry level, we are seeing generally good bank earnings and improvement, modest loan losses, controlled expenses, and a decent growth outlook, coupled with a backdrop of a good economic outlook.

In addition, we see what appears to be a more favorable, or at least not as hostile, regulatory environment for banks overall. Most banks have a favorable outlook for the industry, but bank stocks continue to be priced well below historical benchmarks over the last decade. I guess only time can make the cloud dissipate over the banks while we continue to perform at a high level every day. We'd be happy to answer any questions you might have.

OPERATOR

Thank you. We will now be conducting a question-and-answer session. If you would 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. One moment, please, while we poll for questions.

Thank you. Our first question comes from the line of David Bishop with Hovde Group. Please proceed.

David Bishop, Analyst at Hovde Group

Hey, good evening, Tom. Hey, Doug. Appreciate all the commentary and the preamble there. Just curious, in terms of the lending environment—obviously you said in-market consolidation is usually beneficial to you all—just curious what the hiring pipeline looks like at this point, or is there line of sight into additional banker hires into the second half of the year?

Tom Broughton, CEO

I really can't give you a very good answer, Dave. We talk to people all the time, and we're talking to a lot of different people from a lot of different banks. And there are mergers going on that you don't see because they're private banks merging, or a private bank selling to a public bank, and you don't notice that. So there's constantly—especially in Texas, I'd say—there's a lot of movement in the Texas market in terms of mergers and integration.

So I think it's a more active network in terms of mergers than we've seen in a long time from that standpoint. So we're optimistic we'll continue to get looks. And of course, in many cases people have, you know, they have stay pay, and certainly for a year after a merger is typically sort of a point before they even think about making a change. So we're constantly looking and talking to people. But I don't have a really good answer for you, I don't think.

I know there's been some changes in the Nashville market—didn't affect us—but in any event, I'm sorry I can't give you a better answer.

David Bishop, Analyst at Hovde Group

Yeah, understood. And maybe talk about the state of loan demand. I think in the past maybe it was A minus, B plus. It sounds like the pipeline continues to hit record levels. Just curious, how would you characterize the loan demand environment at this point?

Tom Broughton, CEO

I guess I have to call it an A because it's broad-based, it was granular. You know, it's a lot of, you know, smaller loans. It's just things were in this. Almost every region of our bank and segment had, you know, really good loan demand. So I've got to think it's getting much better. And of course we are. We all know Florida is strong and has been compared to the average. We've just had a lot of payoffs in Florida, especially in our west central Florida regions, have more payoffs than.

Because of the heavy real estate concentration down there than normal. But I'd say I give it an A now.

David Bishop, Analyst at Hovde Group

Got it. One final question I'll pop off and get back on. But the commercial real estate concentration ratio, it took above 300%. Still comfortable with the ratio at this level of capacity to continue to grow that product?

David Sporacio, CFO

Yeah. Hey, David, absolutely. So we have a ratio we're managing to. We've got lots of headroom before we get close to the ratio that would put us in territory we don't really want to be in. And I think we saw lots of really good opportunity even within the CRE asset class. It wasn't a particular, you know, it wasn't retail or office or one-to-four family. It was broad-based even within real estate. So we saw a little bit of everything in real estate.

So, but yeah, I don't think we have any concerns about where we are from a concentration standpoint, Dave.

Tom Broughton, CEO

We never want to get to the point where we have to tell a good customer that we cannot take care of their needs. So we always make sure that we have some dry powder for our good customers no matter what sort of loan request it is. I mean, even a—well, I mean a car wash wouldn't be a good answer because we're not looking for car wash loans. But if a really good customer wants to do a car wash, we're going to do a car wash. How about that?

David Bishop, Analyst at Hovde Group

Sounds great. Appreciate the color. Thank you.

OPERATOR

Thank you. Our next question comes to the line of Steven Scouten with Piper Sandler, please proceed.

Steven Scouten, Analyst at Piper Sandler

Yeah, good afternoon everyone. Great quarter here. Obviously the NIM expansion in particular was really impressive. I know you noted there was a bit of a recovery there, maybe contributed 5 bps to the loan yield. So just kind of want to level set a little bit. And when you talk about expecting the margin to continue to expand from here, would that be off of this 363 NIM or would that—should we use maybe the June NIM of the 359 more as a starting point for continued expansion from here?

David Sporacio, CFO

Yeah, Stephen, this is David. Yes, when talking about it I would refer to the adjusted number which is the 358 to your point. 359 was our spot rate for the month of June and we still have over $2 billion of opportunity between scheduled maturities on loans, cash flows as well as covenant violations and loan modifications. You know, if you look at our total yield on the loan portfolio adjusted for the quarter it's coming in at 618. Our going-on rate is at 632, so we still have some room to grow that, to expand that, but that gap is starting to narrow.

So, you know, we still expect to see expansion in the margin, but as I said, I think it's just going to slow because that gap of going-on versus total portfolio is starting to narrow.

Steven Scouten, Analyst at Piper Sandler

Yeah, that makes sense. Okay. Yeah, because I think previously you kind of thought, hey, seven to nine basis points in NIM expansion quarterly, but maybe that's, you know, four to six or something in this sort of—as we move further down the path. Is that a decent way to think about it?

David Sporacio, CFO

Yeah, you know, we may get one more quarter of the seven to nine range. But I would start to think about the five, you know, four to six kind of range of expansion as we get towards the end of the year.

Steven Scouten, Analyst at Piper Sandler

Yeah, still something a lot of folks don't have directionally. So that's fantastic. In terms of kind of balance sheet migrations and ability to fund loan growth, I mean, the loan-to-deposit ratio's obviously, you know, ticked up here on the really strong growth. Could we expect to see maybe securities balances decrease further? Or how do you think about, you know, Tom, you said, look, if a good customer wants to make a loan, we're gonna make the loan.

How do you make sure you have the funding to be able to do that? And does that potentially put pressure on deposit costs moving forward to make sure you can do that?

Tom Broughton, CEO

Well, we always want to be in a position where we need deposits. So, you know, that's the first thing is if we generate the loan demand, then we'll work hard to generate the deposits to fulfill the loan demand. So that's the preferred position for the bank is to need deposits rather than trying to find loans to make. So that's the second part of the leg, and we feel confident we can do that. And the second half is typically, you know, we typically see nice deposit growth in the second half of the year.

I did see a lot—we saw a large number of tax payments, you know, some major large tax payments by individuals, you know, well over several—well over $100 million each, you know, in April 15th filing cycle or at least paying estimates. So the second half of the year is when we always generate deposits, so we feel good about it.

David Sporacio, CFO

And Stephen, I will add, when Tom talks about a healthy pipeline, we're talking about loans and deposits at the same time, not just the loan side. We're seeing opportunities in deposits, especially out of Texas. We're having some opportunities in Texas.

Steven Scouten, Analyst at Piper Sandler

Got it, got it. And just with that securities book I think maybe you showed in the supplement, 260 million or so of unpledged securities remaining. Is that kind of the magnitude of what it could potentially run down if needed, to kind of remix the balance sheet away from securities, maybe into loans given the demand?

David Sporacio, CFO

Yeah, I don't think our first priority is going to be to run down the securities book because we use that for collateralization because we do a fair amount of business for municipal deposits. Right. And we have to collateralize those. I think we have some mortgage repos, which is a short-term investment we have, and we can unwind some of those if we need the liquidity. So I think that's what we would look to. But yeah, that's what we're going to do.

Steven Scouten, Analyst at Piper Sandler

Okay, great. And then just last thing for me, maybe a very high class—I don't want to call it a problem, but high class issue to think through. It's just, I mean, you're growing capital even with this rapid loan growth, given the strength of the profitability. So how do you think about what to do with this building excess capital and what the best uses are for it above and beyond organic growth? And would a share repurchase, you know, at any point be on the table?

Tom Broughton, CEO

It is a champagne problem. I would agree. And, you know, the last time we had this issue was right before COVID hit and then we had extremely rapid growth during the COVID period and all of those questions went away because we grew into our capital pretty quickly there for a period of time. So we don't take anything off the table, whether it's, you know, be an acquisition or whether it would be stock repurchase. We're going to do the best thing for our shareholders, whatever we think that is.

Steven Scouten, Analyst at Piper Sandler

Got it. Okay. Makes sense. I appreciate you guys' time and all the color. Congrats again on a great quarter.

Tom Broughton, CEO

Thank you.

David Sporacio, CFO

Hey, Steven, I will add also just a side note, when you're asking about the securities, the $260 million in securities on our supplemental data, you know, we are applying a haircut to that. We worked with regulators and, you know, we are highlighting our available liquidity in that supplement. And so we agreed with the regulators that we would haircut our securities in the event of a liquidity crisis. So that's why you've seen a decrease on that so much in the second quarter.

Steven Scouten, Analyst at Piper Sandler

Got it. Very helpful. Thanks, Dave.

David Sporacio, CFO

You're welcome.

OPERATOR

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

Steve Moss, Analyst at Raymond James

Good afternoon, guys. Thanks, Jay. Hey, Tom. Maybe just circling back here to loan demand and, you know, the pipeline being at record highs and given that paydowns have slowed, you think, you know, for the remainder of the year you're thinking a mid-teens type growth rate is a fair assumption?

Tom Broughton, CEO

It's hard to say. I, you know, I don't like to give a forecast because we really don't know. We had a pretty good-size payoff this month that we, you know, knew was coming. It was also a watch list loan. So that's not all bad to get a watch list paydown. But, you know, if loan demand holds up, we think we can end up with a pretty decent year, Steve. But it's kind of hard to say. You know, for right now it looks pretty good, but you know, you get rates going up, we get some kind of geopolitical event.

You know, it's funny how the, you know, when this little thing in Iran—the thing in Iran started, that kind of beat everything back for a few weeks and things slowed down. And I mean, Jim Harper's sitting here, he sits there at his desk and has the, you know, the deal flow come in and it'll drop and then it'll come back and it has not been consistent all year. I actually even thought early May was really slow and you look up at the end of June and this is what we've done.

Right. So it lasted a couple weeks and rebounded really quickly. Yeah, yeah. So, you know, barring any geopolitical event, certainly, or, you know, and rate increases, we think we're positioned for rates to go up or down. We think we're going to be fine. We think it'll work out. But I guess I don't have a very good answer for your question, Steve.

Steve Moss, Analyst at Raymond James

No worries. I figured I'd ask and see what you'd say. Tom, and then I guess the color was helpful. I will say that the other thing here in terms of sticking with loans for a moment, with the large, nearly $100 million relationship that you guys have on nonaccrual, just kind of wondering what's the update on that process of that relationship these days?

Jim Harper, Chief Credit Officer

Yeah, all those properties are being listed for sale and expect those to be disposed of. And like all of our nonaccrual loans, are properly reserved and we feel good about where we are on that relationship and that we have proper reserves in place as needed.

Steve Moss, Analyst at Raymond James

Okay, great. And then last one for me here just on the sub-30% efficiency ratio subject. Curious how you guys are thinking about expenses, you know, for the upcoming quarter. Obviously, you know, you had both fair amount of investment in Houston, but just kind of curious as to how you guys are thinking about total expenses here.

David Sporacio, CFO

So Steve, this is David. You know, I think our $50 million run rate is a good run rate right now. You know, I think we have fully baked in there. The Houston team. Right. Houston team is going to continue to expand, although not as quickly as it has the last couple of quarters, I don't think. And so what we're seeing right now is it's, Houston is sort of a drag on the efficiency ratio. Right. And so because they're not, you know, their loans and their business or deposits are not ramping up as quickly as their expenses are, it's just a natural evolution of, of building out franchise.

Right. And so I think from here, you know, Houston is only going to improve in regards to the efficiency ratio. They're going to grow their income. Right? Well, more loans are going to come on the book. So, you know, is the efficiency ratio going to stay below 30%? I mean that's going to be a challenge. I mean, you know, we are going to, you know, we're not adding a ton of headcount. You can see what we, what we've put on in the quarter. And Tom talked about it, we had nine bankers that were added in the quarter.

Most of what we add from an FTE perspective are customer facing. We're not adding back office cost. We don't have additional technology that we're spending money on. And so I think the, the noninterest expense run rate is pretty stable at the $50 million rate right now.

Steve Moss, Analyst at Raymond James

Okay, great. I appreciate all that color there. Thanks very much guys.

David Sporacio, CFO

Thank you.

OPERATOR

Thank you. Our next question comes to the line of David Bishop with Hovde Group. Please proceed.

David Bishop, Analyst at Hovde Group

Yeah, just a quick follow up maybe for David, just David, just curious. You know, it sounds like maybe the Fed's next move is up maybe rather than down or stable as we thought maybe last quarter. Just curious if the interest rate risk profile, how that shapes out for a more hawkish Fed rather than dovish here at this point.

David Sporacio, CFO

Yeah, I mean, Dave, I mean if I could predict what the Fed was going to be doing, I would be in a different business. Right. I'd probably be making more money betting on the market. We have asked our asset liability management consultant to run a couple of different scenarios for us. And so as we stand right now, I mean we are, we're pretty neutral in regards to interest rate sensitivity. We still slightly liability sensitive but just barely. You know, since we looked at two scenarios, we looked at increasing 25 basis points, which if that happens, you know, we lose about $240,000 in the first year of net interest income, not a big amount at all.

It's a nominal impact. If rates decrease 25 basis points, we're looking at gaining $105,000 in net interest income. So, you know, I point those out to show you that that's, that's the band. I mean, we have like a $300,000 swing either way. And so, you know, to Tom's point, what's going on in Iran, there's just a lot of unknowns in the economy right now. And I think the Fed, as much as they want to decrease interest rates, there's going to be pressure, continued pressure from an inflationary standpoint to increase rates.

And so I think we're just going to get a stagnant environment, at least for the remainder of this year. I don't see any rate movement this year, barring any. Tom's point, any geopolitical event that's going to change that. But I think as we stand right now, we're going to. We're going to be at a neutral rate environment.

David Bishop, Analyst at Hovde Group

Okay, great. Appreciate that. And then, David, maybe a good effective tax rate to use. I know it's bounced around a little bit here, but just curious, any color you can give there.

David Sporacio, CFO

Yeah, Dave, that's, you know, I talked about it. I mean, we're trying, we have some carryback capacity on tax credits, and we continue to work on that front to maximize those. I expect to see some benefit from those in the future in the second half of the year. You know, I. My target is to stay below 20% on an effective tax rate. And so we're doing things where we try to look at tax investments for the current year and then purchasing credits for a carryback perspective. And so I guess for your benefit, I would try to target below 20% is what I would hope for.

David Bishop, Analyst at Hovde Group

Okay, got it, got it. And then one final question, Tom, just curious, in terms of the Houston expansion, if you're at a point where you can maybe give outstanding balances, just curious if those offices started funding up from a loan and deposit basis. Thanks.

Tom Broughton, CEO

Yeah, I mean, we funded, you know, they funded, you know, $50 million or so in the quarter in loans and, you know, maybe $25, $30 million in deposits in the quarter. So, you know, but it's building. It is starting to ramp up, Dave, in terms of both loans and deposits.

David Bishop, Analyst at Hovde Group

Got it. Thank you, sir.

OPERATOR

Thank you. There are no further questions at this time. I'd like to pass it back over to Tom for any closing remarks.

Tom Broughton, CEO

Have none. Thank you, everybody, for joining us. Have a great evening.

OPERATOR

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.