ServisFirst Bancshares, Inc.

Greetings and welcome to the Service First Bank Share second quarter earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Davis Mange, Director of Investor Relations. Davis, please go ahead.

Good afternoon, and welcome to our second quarter earnings call. Today's speakers will cover some highlights from the quarter, and then we'll take your questions. We'll have Tom Broughton, our CEO, Jim Harper, our Chief Credit Officer, and David Spracio, our CFO. Now I'll 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 violence. Forward-looking statements speak only as of 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, and thank you for joining our second quarter conference call. I'm going to give you a few highlights, and we'll follow that with a credit update from Jim Harper, and then Davis Brescia will give you a little bit more financial information on the quarter. From a loan standpoint, we did see solid loan growth in the quarter. Net of payoffs, our growth was 11% annualized. We do see, continue to see the loan pipeline being very robust and staying at robust levels. I would say, you know, characterize the loan demand as good, not great. And of course, everybody, we're not immune from the payoffs that you're hearing from everybody. So we do have elevated payoffs on the commercial real estate side. Luckily, we are known as a commercial industrial lending bank. So those are certainly don't have the same level of payoffs that you see on the CRE side. We are replacing, on the CRE side, we are replacing the payoffs with new projects, but with the large equity requirements that we have today, our funding will not begin until the projects are well underway. On the real estate projects, a lot of projects still don't pencil out at today's higher interest rates. If we see a few cuts, we think the demand would be a good bit better. And I think a lot of the projects we're seeing are tax credit oriented, low income housing type products that are government supported projects. So those are still have robust demand for those. On the deposit side, we saw some normalization of some of our higher cost municipal and correspondent deposits in the quarter. We had one large municipal deposit where the funds have been sitting for two years. while construction projects are beginning and those have begun so that those funds are running off as we expected in that large account. So really we are focused on opening core deposits accounts with, you know, treasury products that go along with those. That is our focus of our bank and always has been and always will be. In the new markets area, we did hire seven new producers in the second quarter in our footprint. And also I wanted to mention that we have ramped up in the last couple of quarters in a merchant area. We brought on a team of merchant group and to increase our production on the merchant side, we think we have great potential to grow our merchant business. We don't count those people as revenues as their producer count is only commercial bankers, but they are revenue generators and we think they'll do a fantastic job growing merchant revenue for us. So I'm going to now turn it over to Jim Harper for a credit update.

Thanks, Tom. Good afternoon. As Tom mentioned, we continue to see solid loan growth in the second quarter and through the year to date, 25, and there appears to be continued solid demand into the third quarter and the second half of the year with active owner and non-owner occupied CRE and C&I pipelines. While total charges in the second quarter were just under $6.5 million, they were driven primarily by a charge of just over $5 million related to one loan, which was a situation in which the borrower's performance deteriorated quickly and unexpectedly. Our allowance relative to total loans, which did increase by almost $5 million compared to the first quarter, remain flat on a relative basis at 1.28% at quarter end. On the non-performing asset front, NPAs remain stable also on a quarter over quarter basis, moving from 40 basis points at 331 to 42 basis points at 630. And we continue to aggressively manage our NPAs. As evidence of those efforts, We achieved resolution on a couple of long-term problem credits in the second quarter and expect additional resolutions throughout the second half of this year. In summary, through our granular portfolio review that we execute on a quarterly basis, we haven't identified any systemic issues or concerns, whether by industry or borrower type, including within our income producing and AD&C portfolios. Of course, There continue to be isolated incidents and credit deterioration, but we're not seeing any broader negative trends from a credit quality perspective. And I'll turn it over to David for his financial highlights.

Thank you, Jim. Good afternoon, everybody. For the quarter, we reported net income of $61.4 million. and delivered earnings per share of $1.12 in pre-provisioned net revenue of $87.9 million. This represented a return on average assets of 1.40% and a return on common equity of 14.56%. Net income grew more than $9 million, or 18%, from second quarter 2024. Compared to the first quarter of 2025, net income was down slightly by about $1.8 million or 3%. During the quarter, we had two significant non-routine transactions. The first was an $8.6 million loss on the restructuring of our bond portfolio. During the quarter, we decided to strategically sell about $70 million of bonds that were yielding a 1.34% at a loss. And when we sold those, we reinvested the $62 million of proceeds in new investments with a yield average of 6.28%. The expected payback period on this transaction is 3.8 years. The restructuring will position us for stronger margin performance in future quarters. Secondly, we reversed an interest expense accrual of about $2.3 million that had been building for several quarters. This accrual was related to a legal matter that has been resolved So we have seen an artificial reduction of about seven basis points in our deposit costs. The reported 3.50% of deposit costs will not sustain in future quarters. We expect it to be similar to first quarter at about 3.57%. We continue to focus internally on growing our margin, emphasizing price discipline for both loans and deposits. Our adjusted margin is 3.05% for the quarter, which is up 13 basis points from linked quarter and 26 basis points from the same quarter last year. We continue to have repricing opportunities and cash flow paydowns in our existing fixed rate book of loans. We have about $1 billion in valuable rate loans maturing in the next 12 months. Lastly, our tangible book value grew by an annualized 12.5%. versus last quarter and by nearly 14% from the same quarter a year ago, ending at $31.27 per share. We continue to be well capitalized with a common equity tier one capital ratio of 11.38% and risk-based capital ratio of 12.81% for the quarter. Net interest income for the quarter was $131.7 million as reported and adjusted net interest income was $129.4 million. This adjusted net interest income is $5.9 million higher than first quarter 25, and more than $23 million higher than second quarter of 24. We are pleased in the margin improvement, which has increased from a normalized spot rate of 3.06 in March to 3.19% in June, If you recall, first quarter margin was weighed down by excess cash balances. Those balances have reduced as expected and are more stable. As a result, we expect our margin to continue to increase throughout the year and expect that to accelerate if the Fed decides to lower benchmark rates. This quarter saw a significant increase in our provision expense, which was necessary to maintain our allowance for credit losses given the loan growth and significant charge-off that Jim mentioned in the second quarter. We had little change in our economic and credit indicators in our CECL model, and as a result, our allowance for credit losses ratio held steady at 1.28%. We expect provision expense to normalize based on the current economic environment and the steady loan growth we have experienced year-to-date. Non-interest income was down significantly due to the bond book restructure that I discussed earlier. Excluding that loss, adjusted net interest revenue for the quarter was just under $9 million, which is $706,000 better than first quarter of 25 and about 1% higher than second quarter of 24. We continue to focus on non-interest income growth through merchant services processing and treasury management services. Tom already spoke about the onboarding of the new merchant team, and they continue to concentrate on cross-selling opportunities. We also increased service charges related to our treasury management services on July 1st, which is the first we've done in 20 years. So although we haven't seen those results in the second quarter, we will see those in future quarters. During the quarter, our non-interest expense was down $1.9 million versus first quarter, primarily due to the large operational loss recorded in first quarter. versus same quarter of last year, we experienced an increase of non-interest expense of about $1.4 million. This roughly 3% increase versus second quarter of 24 is a modest increase given the 18% increase we realized in net income. My goal is to constrain non-interest expense growth to a fraction of the revenue growth. We remain focused on expense control and continue to seek opportunities to reduce our operating costs. The largest effort we had this quarter in back office operation was a conversion involving our core processing system. We successfully unwound a configuration that involved the third party processing our transactions and switched to a direct relationship with Jack Henry. We will realize some cost savings in future quarters associated with this change, but we continue to expect our non-interest expense to be in the 46 to 46 and a half million dollar range per quarter. Our non-interest expense this quarter represents an efficiency ratio below 34%, and we do not expect drastic changes in our efficiency ratio going forward. So all in, our second quarter of 2025, pre-tax net income was down about $2.5 billion compared to first quarter and up over $10 million versus second quarter of 24. Our adjusted pre-tax net income was up $3.8 million versus first quarter, and up over $16 million versus second quarter of 2024. We remain focused on organic loan and deposit growth priced both competitively and profitably. And lastly, we continue to strategize on reducing our tax expense, and we were able to realize a slight decrease from first quarter to second quarter in our effective tax rate, which we will continue to focus on going forward. That now concludes our prepared comments, and we will turn it over to the operator for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. Our first question today is coming from Steven Scout, excuse me, from Piper Sandler. Your line is now live.

Hey, good afternoon, everyone. I guess maybe if I could start on just the net interest margin and kind of how, I know you said you expected to move higher from here. What's kind of the starting point X that you're interest reversal in your mind and kind of where that could potentially end the year from a trajectory standpoint, X, any Fed actions?

Yeah, so, Stephen, this is David Sparacio. You know, the starting point, our adjusted margin is 306 for the quarter, right, excluding the interest expense item that we talked about. You know, we I mentioned we continue to focus on deposit and loan pricing across the footprints. And, you know, absent any changes from the Fed, we expect it to continue to increase on a quarterly basis. We're seeing about, you know, anywhere from 10 to 14 basis points each quarter. So, you know, if you just interpolate that and think that we could get like 10 basis points in the third quarter and then the other 10 basis points in the fourth quarter, we should be ending the year somewhere near the 325 to, you know, 320 range is what we're anticipating.

Okay, fantastic. Very helpful. And then in terms of deposit growth, I know you mentioned some kind of outflows, expected outflows on the municipal side. But how do you think about, I guess, the ability to drive deposit growth in line with the nice loan growth you've had?

Yeah. So, again, it's David. And if you recall back in the first quarter, we had hefty deposits. We had some excess fundings. That really hurt our margin, and so we knew some of those municipal deposits were going to run off, and we were okay with that. Some of them were high-yielding. I mean, we fortunately have the ability. I mean, if we pay the right price, we could bring in deposits, so we have the ability to onboard some deposits. Right now, we're just trying to manage through what we need to fund our loan growth and not have that excess funding in position.

Okay, great.

And then just kind of last thing for me, I think you guys noted maybe 23 new FTEs this quarter. I think Tom said seven of those were new lenders potentially. Can you give us a feel maybe what markets those new lenders are coming from? If there's any, you know, potential new markets that you guys are thinking about, new MSAs moving into, and then maybe any color, any additional color on that merchant banking initiative, just kind of what the focus is there, whether it's certain dollar revenue companies or kind of how we should think about that opportunity?

You know, our HR is very literal in their headcount. 14 of them are former employees. So you can X out 14 off that list. They don't count for anything.

Yeah, there are interns. And if you look at the supplemental schedule we shared, we were up 23 and 14 of those, as Tom said, are interns. So we don't consider those full, you know, long-time employees. They're temporary employees. There are new markets, so it's just adding to the staff that we already had in place predominantly.

Okay. If they're not, you know, production people and they're support for production people, you know, Hire a new teller in Auburn, Alabama or Memphis, Tennessee or something like that so that they're not very expensive people.

And then just maybe thinking about that opportunity set in that merchant banking area that you spoke of.

It's not in merchant. It's merchant card.

It's card processing. And so the thinking there is what the merchant processing we do for our existing customer base is a very low penetration rate. And so the theory there is that we're going to be able to increase our penetration rate amongst our existing customers.

And it's not, you know, it's pretty good profitability on, it's not big dollars, Stephen, but it's, you know, we have like a 1% penetration and the new team says we should have 8% penetration. So, you know, we can go up as fairly substantial, nice little kick to the non-interest income.

Got it.

Okay.

Thanks for all the color there. I appreciate the time.

Thank you. Thank you. Next question today is coming from Steve Moss from Raymond James. Your line is now live.

Hey, good afternoon. This is Thomas on for Steve. Thank you for taking my question. Sure, Thomas. Another strong quarter of loan growth from you guys. Appreciate, you know, the commentary you provided. But, you know, maybe just want to see – What are some of the broad trends that you're seeing out there today in terms of, you know, the demand for commercial credit? I know, you know, a lot of people were uncertain and pulling back with, you know, the tariff uncertainty that was going on. So just maybe any anecdotal things that you've heard?

You know, I think tariffs is a good excuse if you're not executing. I think it's a great excuse to not be executing because we just don't see that much, you know, impact from the tariffs now you know our construction loan bucket went up in the quarter and because of our cecil model we have to keep a lot more money in reserve for construction loans our construction loan you know we had to increase our what five million dollars jim in our construction loan loan loss reserve um So, you know, that's costly to add to the construction loans. But, you know, it's not one area. You know, I can say, well, it's a lot in Florida. It's really broad-based. It's a lot of markets. You know, some of our new markets like Memphis and Auburn, Alabama, doing real well in Atlanta. We're doing, of course, well in Florida, Montgomery, Alabama, you know, through the Auburn area. expansion. North Carolina, the Piedmont area has grown, so I'm leaving some out. It's pretty broad-based, Thomas, is what I'm trying to say. It's not in one asset class exactly.

Are we thinking maybe low double digits is still on the table potentially?

Again, if we had great loan demand, it would certainly be more than a Because we are fighting the, you know, everybody's fighting the payoff headwinds, and it could, you know, we could be less than double digits this quarter. I can't, you know, hard to project every quarter, because if you look back over the last six quarters or so, it'll be pretty good. It will, you know, be double digit, and then it'll be 7% or 8% or something like that. So I can't give you a really solid answer other than a pipeline's good, and a pipeline of payoffs is pretty good, too.

Okay, no, great. That's fair. And I'm sorry if I missed this in the prepared remarks, but what do you have in terms of fixed rate loans repricing over the next 12 months?

We have about a billion dollars, right, about a billion dollars in the next 12 months.

I'm sorry. Counting, you know, repricing investment securities is right at $2 billion a year for 12 months, between a billion and a little over a billion and a half. Cash flow on fixed rate loans and everything else.

Okay. Where are those loans? Do you happen to have a yield that they're coming off at? Or a pickup that you're getting?

If you give us a minute, we can get it for you. Yeah, so we have a weighted average yield of $487 right now for the next 12 months on $1.5 billion of loans. It's great.

Okay, great. I appreciate it. That's all for me. Thank you so much.

Thank you, Tom. Thank you. Our next question is coming from Dave Bishop from Hovda Group. Your line is now live.

Yeah, good evening, gentlemen. Good evening. Dave, maybe during the preamble, I think you spoke about maybe some of the trends you're seeing in the cost of deposits. I know there was some noise this quarter. I was wondering if you could go over what our expectations should be just in deposit cost trends.

Yeah, I think it's going to normalize more like the first quarter. We have an anomaly this quarter in the adjustment that we took. So if you look at our Adjusted cost of deposits, we're at 357 as opposed to 350, which is reported. And so I think that's what it's going to be going forward. You know, we are slightly liability sensitive. So that's assuming a Fed rate cut comes in, we will accelerate that. But without any Fed cut rates right now, we're going to hold probably around, you know, 350, 357 range.

Got it. And I think Tom or Dave, you noted a change, a late quarter change, I think maybe the first of the month, and the treasury management fees you're charging on the services. Just curious how we should think about that just from a dollar perspective. Would that be a meaningful bump in that run rate moving forward?

Yeah, I mean, you know, you guys know we're not a big non-interest revenue bank, right? And so we did increase our charging management fees. They went into effect July 1st, so there's no impact at all in the second quarter. We do expect a pickup in the third quarter.

Hopefully they'll increase their non-interest-bearing deposits. You know, you won't see a revenue increase that you'll see an increase in NIVs.

And then their earnings credit will account for the increased fees. Yeah, right, right. But we haven't increased our fees in 20 years, so we thought it was prudent in giving some of our new fees.

Got it. Got it. And then, Tom, it sounded like the loan pipeline continues to hold in strong. You noted the increase in the construction loans outstanding. Just curious if there was any sort of commonality in terms of the types of projects were funded. Were these relatively newer credits or were these Like you said, some projects where there was a lot of equity behind it just took a while to sort of fund up. Just curious some color behind that group.

Jim, do you want to comment? I'd say both, actually. I think it was a mix of projects that had a lot of equity that finally got to the point where they were drawn on lines. But I think there was certainly an aspect where it was new production also. I'd say both, for sure.

Got it. And then one final question that, you know, with the funding noise here, guess low to deposit ratio at that mid-90% range, is there a comfort level to allow that to continue to creep up to the basically a par? Do you think that sort of comes back down to the lower 90s over time this year? Thanks.

Well, of course, we include Fed Funds Purchase as a So if you look at our adjusted loan and deposit ratio, I don't know exactly what it is today, but it's closer to 80% than it is to 90. Would that be correct, David? Yeah, it's in the 80s, mid-80s. Mid-80s. So, yeah, we're in good shape from a liquidity and funding standpoint. We want to be in a position to need to generate deposits. rather than needing to generate loans. We've been needing to generate loans for the last couple of years. We want it to be a problem of needing deposits, not needing loans. So we'd like to swap the problems. You either need one or the other all the time. They're never balanced. So we'd much rather be in the need for deposits than a need for loans.

I'm just, thanks for taking my question.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

There are no further comments. That concludes our call. Thank you all for joining.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.