ServisFirst Bancshares, Inc. Q3 FY2025 earnings call

• Loan Growth: Loan growth was below expectation in Q3 due to loan paydowns, but October loan pipeline up over 10% vs September and 40% higher than a year ago. Every fourth quarter has had solid loan growth historically, and expectation is for good closing in Q4. Not all loan payoffs are bad as some low fixed rate loans pay off on asset sale.
• Deposit: Continued reduction in high-cost municipal deposits in Q3, offset by large corporate deposit inflows. Working to manage down total deposit costs as Fed reduces rates.
• New Markets: Hired 7 new producers, and all markets profitable for the first time since business start.
• Credit Update: Charge-offs totaled just over $9 million in Q3, annualized net charge-off to average loan percentage 27 basis points. Nonperforming assets increased by ~$96 million during the quarter due to a relationship with a multifamily property developer, but borrower is selling assets and pursuing actions to produce liquidity. ServisFirst expects resolutions on material credits in late Q4.
• Financial Performance: Net income grew over $9 million or 18% from same quarter last year. Had unique transactions like reversal of ~$4.4 million accrued interest, $7.8 million loss on bond sale, and $2.4 million benefit from solar tax credit. Normalized net income $73.8 million or $1.35 EPS. Net interest income reported $133.4 million, normalized $137.8 million. Allowance ratio held steady at 1.28%. Strategically sold $83.4 million of bonds at loss and reinvested proceeds, expected payback period ~3 years. Noninterest expense managed with improved efficiency ratio, adjusted efficiency ratio 33.31% better than same quarter last year.

Loan: Loan growth was below expectation in the third quarter with loan paydowns up $500 million over prior two quarters. October loan pipeline was up over 10% vs September and 40% higher than a year ago. Projected payoffs as a percent of loan pipeline slightly declined. Deposit: High-cost municipal deposits reduced in Q3, offset by large corporate deposit inflows. New Markets: Hired 7 new producers, and all markets are now profitable. Financial metrics: Net income for the quarter was $65.6 million, diluted EPS $1.20. Normalized net interest income was $137.8 million with a normalized net interest margin of 3.19%. Efficiency ratio improved from 36.90% in Q3 2024 to 35.22% in Q3 2025, adjusted efficiency ratio 33.31%.

• Expect good loan growth in the closing long quarter of the year. - Anticipate continued net interest margin expansion in the fourth quarter due to anticipated additional rate cuts by the Fed. - Goal is to constrain noninterest expense growth to a fraction of revenue growth.

• NDFI (nondepository financial institutional) lending category has fraud risk. ServisFirst's NDFI exposure is $71 million or less than 1% of loan portfolio. Some loans have become nonaccrual due to borrower not meeting payment expectations.

Q: Good afternoon, guys. Maybe just starting with the nonperformer here. Just curious, what was the dynamic, if you can give us any color that pushed the borrower over to nonperforming status -- and also, what's the loan-to-value on the loans?

A: Well, we took additional substantial additional collateral during the quarter and substantially he offered it. And we -- because he was expecting a large payment before quarter end, it did not come in. So we will have no choice other than -- move it to nonaccrual and we'll start -- like to think we will turn it to accrual status over the next 6 months. As [selling] these properties and many others. So it's workforce housing redeveloper, long-term customer. We have confidence in the this borrower. So we feel good about our exposure. We don't have a -- it's a good loan. Obviously, it's not a good loan in terms of -- it's not current at the current time. We feel comfortable where we are. So we think through the forbearance process and all the actions that we were able to execute toward the end of the quarter. We did think there was possibly a little bit of a collateral shortfall, and we were able to work with the borrower to obtain additional collateral across several different fronts, and we think we've shored that up. So our loan to value, while certainly elevated, we don't -- we certainly think that it's below 1:1 at this point, and we've got adequate security to cover the loans for sure right now.

Q: In terms of just thinking like when you guys just -- I hear you on the additional collateral kind of like just maybe just a little comfort in terms like what's the loan to cost or just kind of how you're thinking about how secure you are? I hear you're going to start to come back to accrual status just kind of -- you can [sit limit]1.

A: So we think through the forbearance process and all the actions that we were able to execute toward the end of the quarter. We did think there was possibly a little bit of a collateral shortfall, and we were able to work with the borrower to obtain additional collateral across several different fronts, and we think we've shored that up. So our loan to value, while certainly elevated, we don't -- we certainly think that it's below 1:1 at this point, and we've got adequate security to cover the loans for sure right now.

Q: In terms of the loan pipeline here picking up, just curious where are you seeing the growth and kind of what you're seeing the demand for loans [indiscernible]?

A: I can't give you a good answer, Steve. It's all over the [bollard]. That's what it it, we obviously would like to see more C&I than we spend more commercial real estate oriented. But our AD&C is the lowest it's been in. In years and years -- from a percentage. The CRE is below 300% of capital -- so it's by region, it's hit or miss, it's here or there in younger. I mean, Atlanta has been really strong, and we've had pockets of places that some of our markets are doing quite well. Some of our near markets, obviously, you would think they would do well, right? And they are. The new markets are Memphis and Auburn and Piedmont region have had good loan growth this year, and that you would expect that and they are doing that. So I mean, I'd still say loan demand is okay. I saw a banker, Saturday and he said, "I was loan demand. He said Okay. I said, yes, I know it's okay. It's not great. So we need a few more rate cuts to hopefully help out loan demand overall.

Q: On the expense side, Tom and Dave came in a little bit, I think, above expectations. Sounds like there was some shoring up on the incentive accruals. Is that correct? And maybe you can sort of ring fence that about maybe expectations where you see that compensation, salaries and benefits maybe settling into the final quarter of the year?

A: Yes, Dave, the true-up really happened in second quarter. So when you compare second quarter to the third quarter, it's really second quarter that was lower because of the true-up. We did an incentive true-up, it's all in incentive comp. And so it's going to depend a lot on loan production. We went back to accruing our normal incentive rate for the third quarter. And so fourth quarter, at this point in time, given the the uptick in the pipeline, we expect fourth quarter to be very similar to third quarter from an incentive standpoint. And so I would expect the noninterest expense to come in at the same level as well. So roughly $48 million. I know it's higher than expected. But I would just guide you back to our efficiency ratio. Our efficiency ratio is still best-in-class in the [130] we're not -- the expense increase is a fraction of what our revenue increase is. And as long as we continue on that trajectory.

Q: The tax rate, I know with the solar tax credit investment bounced around a little bit. Maybe a good expectation for the effective tax rate going forward?

A: Yes. I think the 18.9%, Dave was going to stick for the year, at least for 2025. As Tom mentioned, this deal that we did, it kind of opened our eyes a bit on what's available and what's out there in the market. And so we have some good contacts. We have some good relationships. And so we're going to continue to develop those opportunities and take advantage of them. And so the goal -- you saw our tax rate jumped up a little bit in second quarter. And so the goal is to keep it certainly below 20% for sure. And so for 2026, we don't have anything that's planned right now, but we continue to have discussions with folks that have opportunities for us to take advantage of. So I would expect it to be in the 18%, 19% for the foreseeable future.

Q: I want to reconcile one number real quick. I think you said maybe a [328] margin for the month of September ex the reversal -- is that interest reversal, the main difference versus the [$297 million] listed in the supplemental information?

A: Yes, that is correct. Yes. It was -- it's about 31 basis points on that interest reversal.

Q: And so you would expect to kind of see that 7 to 10 basis points, the way you would think about it in the fourth quarter would be 7 to 10 bps potential roughly off of the [319] all-in number. Is that the right way to think about it?

A: Yes, that is correct.

Q: Maybe kind of following up on that question around dislocation. I like how you said that kind of offering stability in the market and being there for your customers. Are there any kind of new markets maybe on the horizon for you guys, where that level of business quality and stability you don't see being offered today that you'd be interested in, whether that's opened up via M&A or otherwise?

A: Yes. I think certainly, we've always had an interest in finding the right people in Texas, and that's something we're very interested in -- it's not easy. Texas is not an easy -- I'm not suggesting it's an easy market. I'm suggesting that there are -- if you have the right group of people with a bank base like ours, I think it could be a really good place to do business. And I think we could -- Texas is a very Texas-centric place. You can't send people there. The Texas people like to do business with Texas. And not people from Alabama or New York or anywhere else. So I get that, and I'm aware of it. So that's something we are certainly keenly interested in that market. And I'm not -- not to change the subject, but doubling back on what, David, to my interest rates, as the Fed cuts rate -- that rates -- that is our opportunity to say, okay, we need to try to manage down our deposit costs at least more than the Fed cut. So if the pay cut is 25, our goal is to manage down more than that, more than that 25 bps. So I think that's it's an opportunity. It's when we see the Fed cutting rates. That's our opportunity, Stephen. And I wouldn't avoid any further questions.