ServisFirst Bancshares, Inc.

Greetings and welcome to the Service First Bank Shares fourth quarter and full year earnings conference 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, please press star zero on your cell phone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mange. Thank you. You may begin.

Good afternoon. and welcome to our fourth quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We'll have Tom Broadman, our CEO, Henry Abbott, our Chief Credit Officer, and Ed Woody, our Interim CFO. 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 at the date they are made, and service first assumes no duty to update them. With that, I'll turn the call over to Tom. Thank you, Davis. Good afternoon, and thank you for joining our fourth quarter conference call. We were really pleased with the quarter, and all of our trends turned out to be positive. You know, if we recap the year, we ended with earnings per share, deleted earnings per share, up 10% over 2023. And our net interest margin did climb steadily from 2.57% in the fourth quarter of 2023 to 2.96% in the fourth quarter of 2024. And also our book value, more importantly, grew 12% year over year. So in any event, we're really happy how the year ended up and it got better as the year went on. And, you know, a year ago on the call, I said that loan losses were low and would probably normalized. And here we are a year later, and the loan losses are still low, and I'm still saying they're going to normalize. But we are, you know, Henry will talk about credit in a few minutes, but we don't really see any industries with problems. We just see weak companies that have problems and are used to the borrowers we see that we have to deal with. So on the loan front, we were concerned about We knew we had a pretty good loan pipeline for the fourth quarter, but we were concerned about payoffs in the fourth quarter. Now, loan payoffs turned out to be about 40% of our gross loan growth. So we had a net loan growth of $268 million for the quarter. And I will say, not all those payoffs were a bad thing. About half those Payoffs were low fixed rate loans, so we're glad to see those payoffs. But we will have some more payoffs in the first quarter, but at a much lower level than we saw in the fourth quarter, we believe. So from a C&I loan growth standpoint, we did see some. It was encouraging, and we saw the increase in loan line utilization from 36.7% to 38.4% quarter over quarter. Our loan pipeline increased $150 million after the election, which is very positive. We do expect loan growth to normalize more over the course of 2025. I will mention our two new markets, Memphis and Auburn, Memphis, Tennessee, and Auburn, Alabama, are making very good progress. And they've been working out of their cars until the last couple of months. So they've just now got an office. So we are proud of how they're doing and optimistic for their future. I think we'll do really well and have great leadership in both of those cities. We did add four new producers in the fourth quarter. It's not common to add many in the fourth quarter. You usually see them in the first half of the year. So in any event, we are pleased with those markets. From a deposit standpoint, we did see very nice deposit growth in the quarter, including our non-transparent deposits. We did see some good growth in our correspondent channel with year-over-year growth in 28% in funding. Now we have 378 banks in 30 states that are correspondent customers. We added 24 new banks in 2024. And 65% of the funding comes from banks that are settled with us or settlement banks. So that was very much a positive. So that's a quick overview and I'm going to turn it over to Henry now to discuss credit in more detail.

Thank you, Tom. I'm extremely pleased with the bank's performance in 2024 and more specifically in the fourth quarter. The bank's loan portfolio continued to perform at an exceptional level and our commercial-focused business model continues to outform our peers. As we exited the COVID stimulus era, our bank was at historical lows for most credit metrics a few years ago, and remarkably, we've been able to continue to stay at or near these historic low figures, punctuated by a very strong 2024. Annualized net charge-offs for the fourth quarter were nine basis points, and we had nine basis points in charge-off for the entire year. This is less than the 10 basis points we had in 2023. I'm very proud and pleased with these minimal charge-offs that we experienced in 2024. Our ALLL to total loans was stable throughout the course of 2024, and we ended the year with an allowance for loan loss reserve to total loans of 1.30. Non-performing assets to total assets or 26 basis points, which is generally in line with the results for the third quarter. We continue to proactively monitor the portfolio to ensure we appropriately understand the potential risk and act accordingly as well as conservatively. 2024 was a very strong and stable year from a credit perspective, and with the new administration in place in Washington, we look forward to growing and prospering in 2025 and beyond. Ed, I'll turn it over to you.

Thank you, Henry, and good afternoon, everyone. We are very pleased with our fourth quarter results and are upbeat about our earnings momentum heading into the new year. While we have experienced four straight quarters of net interest margin improvement, I'll focus my comments today on late quarter because recent trends are meaningful to our momentum. Net income was up $5.2 million over the third quarter, or 9%, and diluted EPS was up 8%. Net interest income increased 28% on an annualized basis and continues to be a growth leader for net income. Margin increased to 123.2 million in the fourth quarter compared to 115.1 million in the third quarter. We continue to benefit from the upward repricing of fixed-rate assets, and we have successfully managed the cost of liabilities. Earning asset yields decreased by 25 basis points while interest-bearing liability rates decreased by 46 basis points. The net interest margin increased 12 basis points over the prior quarter while holding an additional $370 million in cash, which negatively impacts the net interest margin percentage. We spoke at length last quarter about the interest rate position of our balance sheet being slightly liability sensitive, and that hasn't changed. I'd like to offer some more specific numbers that may help with everyone's analysis. Approximately $325 million of our securities are set to mature or pay down during 2025. and those currently yield 3.2%. We have $6.3 billion in fixed-rate loans, and they repriced up 10 basis points during the fourth quarter. We believe we have several more quarters of increasing yield in this portfolio. We have $6.1 billion in variable-rate loans currently yielding 7.3%. Most of these repriced within 30 days following a rate change. Rates for interest-bearing checking deposits dropped from 3.65% at the end of the third quarter to 3.32% at the end of the fourth quarter, indicating a beta of 66. Non-interest-bearing demand deposits increased to 20% of total average deposits, up from 19% in the third quarter. Please refer to our supplementary information attached to our press release for further details on our balance sheet structure. We had another good quarter of non-interest income. The public service charges increased, resulting from higher analysis charges, and mortgage income increased due to continued strong origination volumes. However, credit card net revenue declined slightly. We had another quarter of successful expense management. We recently directed to $44.8 million of core expenses per quarter. We believe this has increased modestly to $45.3 million currently. We are reporting $46.9 million for the quarter. However, that includes an adjustment to fully fund a shortfall in our health plan, one-time EDP costs related to upcoming systems enhancements, and the write-down of check fraud receivable from other banks. These are offset by a decrease in our annual incentive plan accrual. Our efficiency ratio improved each quarter during the past year. Our tax rate for the quarter was 17.9%, but benefited from a positive adjustment to a tax credit investment which had delays in construction. Excluding this adjustment, our tax rate was 18.8%, and we believe our prior guidance of a 19% tax rate is still correct. I'll now turn the call back over to Tom for his final thoughts.

Thank you, Ed, and we're thinking in the wake of the election, we do see We were optimistic before the election, and we're more optimistic after the election because we are a business bank, and the business community overall is very optimistic about the outlook for the future. And, of course, some of that's dependent on a continued downward trend and short-term rates. I think to make projects pencil out a little bit better, I think we're going to have to have some rate cuts over the next year or so. We do expect loan demand to continue to improve and our margins to improve a little bit. Our goal here is to make stock sellers and short sellers remorseful, and we hope they'll be more so in the course of the coming year. We're now opening up for questions.

Great, 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 1 on your telephone keypad. A confirmation column will indicate your line is in the question queue. You may press star 2 to remove yourself 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 pull for questions. Our first question is from Steven Scotton from Piper Sandler. Please go ahead.

Yeah, thanks. Good afternoon. I'm just kind of curious, first, If you were surprised to the upside at all about the deposit betas you were able to extract this quarter, that was really nice to see. And kind of how you think about that upside potential for the NEM, Tom, that you spoke to maybe in the current expectations where maybe there's not any additional cuts or maybe an environment where there are additional cuts, kind of how we can think about that trajectory.

Oh, that's kind of a tough question. I guess When you have the luxury of having a fair amount of excess cash, you can be pretty disciplined about your interest rate expense management, Steven. And when you're in a position where you're not, you cannot be. So we have that luxury of having excess cash, and we can be pretty disciplined about it. But I'll just say that we haven't had any pushback, and we've been fair and reasonable with our clients. And I'm very surprised at how little pushback, you know, because we deal with business clients, you know, our, you know, our cost of funds is higher than the average bank to begin with. So we're already paying them, you know, market rate. So I think they're, they're fully expected. If we see any more cuts, they're fully expecting to see, you know, some more, of course, you know, at some point there, there's a, Law of diminishing returns here is rates go lower and lower and lower. How low we can cut rates, and you know that. We try to have really nice floors, nice for us on our loans compared to, I think, what you used to see in floors a few years ago is much higher today than what we have. looked for in earlier years. So I think that'll help us down the road, is the loan pricing on the floors on the loans will help us, Steve. I think we'll flop from saving on the expense side to the floors on the loan side will help us, if I answered your question.

STEVE VILLACHICA- Yeah. No, that's really helpful, Peller, Tom. Appreciate that. And then maybe you said you hired, I think, four people here this quarter. Can you talk about how you're thinking about hiring into the new year if you expect that to be kind of business as usual and continue to hire good people as they come about? And kind of along those lines, if we see more M&A, which everyone seems to be expecting, would you potentially be more aggressive with dislocation in and around your existing markets?

We've always said we're not going to let our budget our budgeted goals that we that we certainly we don't disclose those but we have those internally we're not going to let that dictate you know our strategy we're going to always be opportunistic about hiring the very best people um we you know we're we have a couple irons in the fire um you know one kind of small and one kind of large uh in terms of potential I don't know, you know, we're not anywhere close to a maybe on those yet, so we don't know. But, you know, yes, if we see, you know, merger activity has always helped us because there's always people that fall out of it that are unhappy in terms of, you know, the musical chairs. The chairs are arranged differently after the music stops. So we see that as a huge potential upside given the brighter environment for banks, the brighter merger activity. And of course, you know, if I was a bank looking to sell, I mean, you certainly think they would get in line in the next four years or certainly before that while, you know, we have a, you know, bank friendly, at least seemingly bank friendly administration just came into office.

Yeah, I think you're right about that. And how do you guys, just from a strategic perspective, how do you think about that? Do you have a list of, I don't know, four or five markets that you think about, hey, if the opportunity arose, here's a market we really want to be in? Or how do you think about that potential for expansion?

Yeah, you know, I've got a list in my drawer. I've got a file on, you know, probably 20 different markets. And I've got a list of everybody we've ever talked to, you know, over the last, you know, 19 and a half years in that file of each one or each of those markets. So we dust it off and when, you know, a merger is announced, we think, oh, okay, who was in that market that we're interested in? So, you know, and luckily we do know, have pretty good connectivity in the southeast to the point to where we think we'll get a call. You know, we have a lot of correspondent bank network that are, you know, that Rodney's put together and a lot of friends in the correspondent world that, you know, we could try to spot opportunity and they'll spot opportunity for, for people they're interested in hiring as well. So we tend to work together with other, other friends in the industry.

Got it. Really helpful. Congrats on a, on a great year. Appreciate all the color.

Thank you, Steve.

Our next question is from Steve Moss from Raymond James. Please go ahead. Good afternoon.

Hey, Steve. Hey, Tom. Hey, Tom. With your upbeat comments here on the loan pipeline here, just kind of curious how you're thinking about loan growth for the upcoming year. You know, you did about 8% or so for the 2024, you know, maybe low double digits or, you know, could it be a little bit more prepaid temper in that?

You know, I hesitate to give any you know, because in 2024, you know, you go back through it. The first quarter was, was zero. Second quarter was really good. Third quarter, I think was pretty close to nothing. And then fourth quarter was, was pretty good. So it's not, it's been inconsistent. I don't know that. I don't know what, I don't know what you analysts think that we'll see the organic growth rate at for, for, for loans. And, We still have a problem where rates are too high. The 10-year is too high for people to start new projects in many cases. They don't like the 10-year today, and the short-term borrowing cost is really higher than... We talk to a lot of our commercial real estate customers, and they all say that it's a little bit of an issue. I think our merchant developers are moving ahead pretty well, but you know, the multifamily world still, you know, and construction costs is obviously a big issue. And it's not like they can just force down the cost of steel and concrete and lumber with a new administration in place. That's not going to happen. So, you know, I'm optimistic, but I'm not counting on anything, you know, any substantial improvement. I don't think, Steve, from what we saw in 2024, we You know, we had to fight and scrap to put together what we did in 2024, and I don't think outside of, I see, you know, obviously there's a lot of potential in Florida. We see, you know, anytime you've got net in-migration like the state of Florida has, that's going to lead to increased opportunity. You know, they'll even have to build more senior housing or active living, I think they call it these days. They're going to have to build more of that eventually in Florida. They'll run out of, you know, you know, bedrooms down there for the active living components. So we're optimistic that, that Florida will be a help, but certainly we don't have, you know, we have a pretty, pretty well-rounded loan portfolio throughout the Southeast. Got it.

Okay. And then in terms of the producers, how are just kind of curious, you know, is it more CNI, CRE, just kind of, how do we think about that? And, you know, was it in the, the new markets or, uh, new markets or previous markets? Memphis, Auburn versus elsewhere.

Yeah. In the fourth quarter, it was a lot of additional Memphis, Auburn, I think maybe one Nashville. In the first quarter, we've already added Ford, Florida in terms of the West Central Florida region. We've already added four new bankers down there. So And they all are, really, other than our company, we only have one dedicated commercial real estate lender. And he is in Nashville, and he is from Texas, and he has probably half his customers are in Texas, and half are in other places, if that would be fair to say, including Tennessee. But everybody else is sort of a, at least has a C&I bent, and they do some commercial real estate as well.

Okay. Yeah. Yeah. And then in terms of just, you know, on the margin here, you know, I heard, I mentioned the cash flows from the securities portfolio, just curious, you know, updated thoughts on, you know, fixed rate asset repricing for the loan portfolio here, you know, what cash flows for the upcoming year. There's any been any changes.

Yeah. We talked about it last quarter. I think it's a little changed this quarter. We're still looking at about a bait and a half of fixed rate loans that are repricing in the first year. And then you add to it the $300 million we talked about in securities, and that gets us back up to that $1.8 billion I think we talked about last quarter. And so that $1.5 billion of fixed rate loans are coming off in the high fours. In fact, they're coming back on in the high sixes.

Okay. And in terms of just the margin trends, I assume the margin was expanding every quarter. You know, was the December margin, you know, fair to assume was above 3% at this point? I'm just kind of curious how you guys would think about that over the near term.

Yeah, it is right around that 3%, except for if we're holding excess on-balance sheet liquidity on our books, that tends to impact that net interest margin percentage. So you're probably seeing in the mid-290s as opposed to 3%. but for that item. Okay. Yeah, if we're running more like, say, about $2 billion in excess bonds, our margin would be in that 3% range.

I guess we tend to correspondents, Rodney and Rustin sitting here, they tend to, when they see a peak in the fourth quarter in terms of deposit balances, they do, and that happened this quarter as it has in previous years, up for the fourth quarter, and if

our existing customers will be flat usually through the first and halfway through the second quarter.

Okay. Got you. Appreciate all that color. And then just one last one for me in terms of the non-performer that, you know, I know was under contract to be sold and then it fell through. Just kind of curious if you have any update on timing of potential resolutions.

Don't have any immediate updates. Still one we're working on, a lot of attention, but there's nothing that's definitive at this time.

It's under a contract, but, you know, they haven't, you know, let's put it this way. Any sale is going to be at a multiple of our debt amount. You know, so we're fine, but there are other creditors out there, and that's why they're trying to, you know, get everybody, you know, paid in full. which may be a little bit difficult to do. So there's always, we have a, there's a backup buyer, you know, potentially as well. So we don't feel like there's any risk of loss there with that asset.

Yeah, I think that's a good statement of risk of loss, but yet it's just going to take time.

Great. Okay. Well, really appreciate the call here and nice quarter, guys. Thank you very much.

Thank you, Steve.

Our next question is from Dave Bishop from Huffy Group. Please go ahead.

Hey, good evening, gentlemen. Dave, how are you doing? I'm good, Tom. How are you doing? Good, bud. Hope the snow didn't bury you too much. I have a quick question for you. I appreciate the supplemental disclosures in terms of the loan origination pullback a little bit, I think right on top of 7%, 7.10% end of the quarter. Just curious how they've trended. Post quarter, any sort of material movement in those origination yields? No.

Go ahead, Ed.

No, Dave. I think that's about right.

We're looking at a better, a little bit of a more of a balance between fixed and floating rate loans where we're doing some more fixed rate than we were when we were doing practically none, let's say, a year ago that we're now as we approach being asset neutral, well, I mean liability sensitive neutral and asset sensitive neutral, we're looking at a little bit better mix of some fixed and floating rate loans.

And in terms of the pipeline composition, I know the percentage of commercial industrial loans has sort of declined over the years as commercial real estate construction picked up. I'm just curious if there's more of a, a CNI component that might bring over operating accounts with them moving forward?

Well, the interesting thing is a lot of the CNI, you know, like our, you know, I looked at our service charges December over December, and then they're up 20% year over year, which says we've got a lot more accounts on the books and a lot more activity. And many of those accounts are non-borrowing accounts today. Many of the, you know, the, the, The good C&I accounts don't borrow, or they may have a line that's inactive and no usage in it. So it's sort of an interesting thing. A lot of the C&I we bring in either has no deposits or is 100% deposits. So it's sort of an interesting phenomenon out there on the C&I side.

Got it. And as you sort of look at the... the crystal ball from a credit perspective, you noted in the preamble, obviously net charge offs are very well behaved here. You know, what would it take to, you know, maybe say, you know, move that from like say the 10 basis points, 20 basis point level will be a collapse and unemployment. Just curious of, you know, what, what would have to happen to really have a draconian impact to that loss rate?

You know, it, If it goes to 30 basis points one quarter, don't be surprised, Dave. I mean, don't get used to the 10 is not reality over a long period of time. And that's why we need the margin expansion to, you know, very few commercial banks can sustain a 10 to 15 basis point charge-off rate over a long period of time. And I've always said that on average, good banks are 25 basis points or less on average. And so, but that means we might have a year when we spike to 35 or we might, you know, so if we got back to 25, don't, you know, I don't, the wheels have come off. That's just sort of back to, back to a normal level. But like, again, we, I said in my script, we don't see weaknesses in any particular industry. I mean, there, there's some industries, obviously, you know, senior housing has been, everybody knows, has had some issues. Trucking has had issues as well. And the weak borrowers have long since filed bankruptcy in both those industries. We've got a few that might be struggling a bit, but they're going to make it to the other side. But outside of that, they're randomly just companies that are just poorly operated in whatever industry they're in. Why add anything to that? I mean,

No, I agree. I don't think there's, as you asked, one specific thing, whether it's unemployment or otherwise, that's going to drive it up. It's just going to be, you know, a deterioration in certain borrowers. Nothing, you know, nothing specific to industries or asset classes. It's just weaker projects or weaker players.

I would think, you know, I would speculate, and it's speculation, speculation, Dave, that The only thing unemployment will have anything to do with is residential AD&C. I think there's probably a pretty high correlation between we could see some, and we just don't have the kind of exposure. We kind of learned our lesson after 08-09. 08-09, things have gone well for 15 years, and you tend to get loyal to thinking a lot of inventories are never going to become worthless, though it did. So I think outside of that, on the commercial side, I just don't see losses being affected by an increase in unemployment. I could be wrong. But my experience over the years has been that I think residential AD&C is tied to unemployment.

Got it. And then maybe a question for Rodney. I know the puts and takes of the correspondent banking group can be cyclical, the increase in end-of-period barrings, you know, period-to-period, does that reflect timing of fund flows or funding of loan growth? Just curious if that's related to the corresponding banking group.

Thanks. It's both. You know, you have the fourth quarter that where liquidity builds with our customers, and, you know, we have 374 correspondent banks now, thereabouts, and The other thing is we added 24 relationships during the year. The largest market in growth was Texas, followed by which we hired some new producers there almost two years ago, and then followed by Tennessee. We added some producers in Tennessee who are doing well. It's new accounts and, in addition, that fourth quarter liquidity growth.

Got it. Appreciate the color.

Thank you. This concludes the question and answer session. I'd like to turn the floor back to management for any closing comments.

Thank you, everybody, for joining us on the call. Appreciate your investment in our company.

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