ServisFirst Bancshares, Inc.

Greetings and welcome to the Service First Bank Shares third 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mage, Director of Investor Relations. Thank you, Davis. You may begin.

Good afternoon and welcome to our third quarter earnings call. Today's speakers will cover some highlights from the quarter and then take your questions. We'll have Tom Broughton, our CEO, Jim Harper, our chief credit officer, and David Sparacio, our 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 projection 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 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 third quarter conference call. I'll give you a few highlights, followed by a credit update from Jim Harper, and followed by Davis Bracio with some financial updates. Talk about loan growth. It was below our expectation for the third quarter. We went back and reviewed loans booked and draws versus pay downs over the three quarters of 2025. And loan pay downs were up $500 million over the prior two quarters in the third quarter. So this contributed to the lack of these real significant loan growth. We did see a nice increase of over 10% in our loan pipeline in October compared to September. In comparing our loan pipeline to one year ago, the pipeline is 40% higher today. In addition, the projected payoffs today are 30% of the projected pipeline versus one year ago, there were 41% of the projected new loans. So we do see that there is a slight decline in the pipeline as a percent of the loan, payoffs as a percent of the loan pipeline. So the pipeline is not scientific, though we do stress to our bankers we want to be as accurate as possible. Every fourth quarter that I can remember, we've had solid loan growth. So my expectation will be that we'll have a good closing loan quarter. And I'll say that not all loan payoffs are bad because some of them that are low fixed rates pay off when the assets sell. So we've had several this quarter. So we're glad to see those payoffs. So on the deposit side, we did see some continued reduction in our high-cost municipal deposits in the third quarter. They were offset by some large corporate deposit inflows. But as David will discuss in a few minutes, we're trying to manage down our total deposit cost as the Federal Reserve reduces the Fed funds rate. On the new markets, we did hire seven new producers in the quarter, spread throughout our footprint. And we're also proud that all of our markets are now profitable. I don't think we've ever achieved this before since our first year in business, so we're very proud of that. I'm going to turn it over now to Jim Harper for a credit update.

Thanks, Tom. As Tom noted, lending activity softened a bit during the third quarter, but activity as we moved into the fourth quarter has been robust with activity across our footprint. From a credit metric standpoint, charge-offs totaled just over $9 million in the third quarter, which results in an annualized net charge-off to average loan percentage of 27 basis points. While higher than recent historical periods, the charges were primarily taken on loans which had previously been impaired with one exception of a $3 million charge taken on a loan that had not previously been impaired. From an allowance perspective, the allowance to total loan percentage remained static compared to the second quarter at 1.28% at quarter end. Non-performing assets were notably higher at 930 increasing by approximately $96 million during the quarter with the increase driven by a relationship consisting of eight loans with a large merchant developer rehabilitator of multifamily properties. Properties associated with the loans are in Alabama, Louisiana, and Texas. Despite us placing these loans on non-approval during the quarter, the bank was able to successfully obtain additional collateral to bolster our position. Additionally, the borrower is actively selling assets as evidenced by purchase and sale agreements on five properties and eight letters of intent on others, as well as pursuing other corporate actions which are expected to produce meaningful liquidity in the coming quarters. Service First continues to aggressively manage our NPAs and we expect to have resolutions on several material credits as soon as late in the fourth quarter of this year. I will now turn it over to David to provide his comments on our third quarter financial performance.

Thank you, Jim. Good afternoon, everybody. For the quarter, we reported net income of $65.6 million and diluted earnings per share of $1.20 and pre-provisioned net revenue of $88.3 million. This represented a return on average assets of 1.47%. and a return on common equity of 14.9%. Net income grew more than $9 million or 18% from same quarter last year. During this quarter, we had a few unique transactions. The first was the reversal of about $4.4 million of accrued interest on the credit that Jim spoke of. Secondly, we recognized a loss of $7.8 million on the sale of bonds And thirdly, we invested in a solar tax credit, which gave us a benefit of about $2.4 million in tax provision. When we take these three transactions into account, we view our normalized net income for the quarter to be $73.8 million or $1.35 earnings per common share. I will talk more about these three transactions later on. And lastly, our book value grew by an annualized 14% versus last quarter and by more than 13% from the same quarter a year ago, ending at $32.37 per share. We continue to be well capitalized with common equity tier one capital ratio of 11.5% and risk-based capital ratio of 12.8% for the quarter. Of course, these are preliminary numbers. In net interest income, our amount for the quarter was $133.4 million as reported, and normalized net interest income was $137.8 million. This equates to a net interest margin of 3.09% as reported, and more importantly, 3.19% when normalized for the interest income reversal previously mentioned. This normalized net interest income is $8.4 million higher than the normalized number for second quarter of 25 and more than $22.7 million higher than third quarter of 24. We are pleased with the continued margin expansion. We certainly benefited from the Fed's rate reduction in September and are expecting continued margin expansion in fourth quarter due to anticipated additional rate cuts. On the provision side, we had single-digit loan growth, which equated to a reduction of about $1.8 million in provision expense for the second quarter. I'm sorry, versus second quarter. We had little change in our economic and credit indicators in our CECL model, and as a result, our allowance ratio held steady at 1.28%. During the quarter, we recognized, as I mentioned, $7.8 million loss on the restructuring of our bond portfolio. As we did in the second quarter, we strategically sold $83.4 million of bonds with a weighted average yield of 1.66% at a loss. We took advantage of the opportunistic market and reinvested the proceeds in new investment purchases yielding an average of 6.14%. The expected payback period on this transaction is about three years. This restructuring will position us for stronger margin performance in future quarters. This transaction has significantly reduced our low-yielding bonds, as well as our accumulated other comprehensive losses, and we do not anticipate continued restructuring of our bond portfolio. Excluding these bond losses, our net interest revenue increased by more than $1.6 million from the second quarter of 2025 to the third quarter. This positive increase is primarily driven by our increased service charges, which were implemented on July 1st and on stronger mortgage production. We continue to focus on non-interest income growth, especially through our credit cards, merchant services, and treasury management products. As our revenue is growing, we are managing our non-interest expense, which resulted in an improved efficiency ratio. Our best-in-class efficiency improved from 36.90 in third quarter of 24 to 35.22% in third quarter of 25. Our adjusted efficiency ratio for this quarter is 33.31%, which is dramatically improved from same quarter last year. During this quarter, our non-interest expense was up versus second quarter of 25 due primarily to the right sizing of our incentive accrual in the second quarter. Versus the same quarter last year, we experienced an increase in non-interest expense of about $2.4 million, which is more than outsized by the $12.6 million increase in revenue. My goal remains to constrain non-interest expense growth to a fraction of our revenue growth. We remain focused on expense control and continue to seek opportunities to reduce our operating costs. So all in, for third quarter of 25, our pre-tax net income was up about $2.2 million compared to the second quarter of 25 and up over $6.4 million versus third quarter of 24. We remain focused on organic loan and deposit growth, priced both competitively and profitably, and we are concentrated on continuing the expansion of our margins. As I previously mentioned, we also invested in a solar tax project, which essentially lowered our effective average tax rate for the year to 18.9%. The solar investment was our first, and we will continue to evaluate other tax improvement opportunities as they arise. This concludes my remarks, and I will now turn it back over to Tom for additional comments.

Thank you, David. The last thing I'd like to cover is there's been recent Attention in the media in recent days on the increase of fraud at a few regional banks. Much of this is related to a category of lending called NDFI, which stands for non-depository financial institutional lending. We have avoided any significant exposure in most of the categories that fall within the NDFI category for one main reason, and that's because fraud is more common in NDFI loans, and it's hard to foolproof your process. Warehouse lending, ABL lending, and floor plans historically have had a greater incidence of fraud than any other types of loans. To cover, our total NDFI exposure is $71 million, or less than 1% of our loan portfolio. I think everybody knows that our correspondent division does business with community correspondent banks. Most of our exposure is to holding company lines of credit to community banks, holding companies. So we certainly are comfortable with our exposure in this category. You know, I would differentiate a fraud issue from a credit issue. You know, it's not that the credit deteriorated where there's fraud. There's fraud. It's just a fraud, and it typically, you know, it's fairly common. You see it all the time. in some sort of a Ponzi scheme type situation until they are found out by their lender and they have to come clean on it. So we avoid most of these categories like this. We avoid shared national credits. We try to lend to borrowers we think we know well. Owner managed companies and real estate developers are the best examples. As lenders, we all make mistakes from time to time, but because we have a record of lending to people we know, our loan losses have been much lower and our credit quality has been much better at Service First Bank. We consider ourselves a community bank. We have 11 community banks plus our correspondent division, so we are proud of what we have built here over the last 20 years and certainly stood the test of time and will continue to do so. So this will conclude our prepared remarks, and now I'll turn it over to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 Steve Moss with Raymond James. Please proceed.

Good afternoon, guys. Hey, Steve. Hey, Tom. Maybe just starting with the non-performer here, just curious, what was the dynamic, if you can give us any color, that pushed the borrower over to non-performing status? And also, what's the loan-to-value on the loans?

Well, as Jim said, we took substantial additional collateral during the quarter and substantially he offered it and we because he was expecting a large payment before quarter end that did not come in so we were left no choice other than to move it to non-accrual and we'll start you know we'll like to think we will turn it to accrual status over the next six months as he's selling these properties and many others so it's a It's workforce housing redeveloper, long-term customer. We have confidence in this borrower, so we feel good about our exposure. It's a good loan. Obviously, it's not a good loan in terms of he's not current at the current time, but we feel comfortable where we are.

Okay. Yeah, and And just 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 of like what's the loan to cost or, you know, 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 side note a little bit.

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 certainly think that it's below one-to-one at this point, and we've got adequate security to cover the loans for sure right now.

Okay. Got you. Appreciate that. And then in terms of just kind of on the margin front, I hear you guys about the amount of the reversal of accrued interest. Just curious, you know, probably getting a Fed cut next week, you know, underlying margin was 319. You know, just kind of curious on the cadence of margin, are you guys still thinking, you know, something close to high single digits to 10 digits given rate cuts? And also just curious on loan yields, where loan pricing is these days.

Yeah, so Steve, this is David. Yes, we're still confident with, you know, I call it 7 to 10 basis points improvement in margin each quarter as we've been seeing. You know, for reference, our, I don't want to call it adjusted, but our normalized spot rate for September was was $3.28 for the month, excluding that interest accrual reversal. So we're in good shape on margin. The Fed cut happened September 17th, so we only experienced about two weeks of benefit from that. So we'll see that throughout the fourth quarter, as well as we anticipate additional cuts in the October and December meetings the Fed's going to have So, you know, we're going to continue to see improvement in margin. As far as loan yields, the going on rate dropped a bit. Last quarter, we were at 707. This quarter, we're at 687 for loans going on. But, you know, we're continuing to manage through the process. We continue to have, you know, healthy repricings and cash flows. We're still sitting at about 1.7 billion in the next 12 months. in cash flows, and then on top of that, as Tom alluded to in earlier conference calls, we have another roughly $300 million a year in covenant busts that get repriced, and so we're sitting at about $2 billion worth of opportunity of repricing on loans. So we feel really good about the margin expansion, and we think that's going to continue at least for the foreseeable future, as long as there's nothing drastic done by the Fed.

Guy, and just in terms of the cash flows for the next 12 months, it's still in the high fours in terms of fixed rate loans, cash flow?

Yes, it's still in the high fours. 487 was the number for second quarter. We don't have an updated number from our external ALM consultant yet for third quarter, but we can get that to you. But it's still in the high fours. High fours.

Okay. And if And Tom, in terms of the loan pipeline here picking up, you know, just curious, where are you seeing the growth and kind of, you know, where you're seeing the demand for loans these days?

I can't give you a good answer, Steve. It's all over the board. You know, we obviously would like to see more C&I than, you know, it's been more, you know, commercial real estate oriented, but our, you know, our Our AD&C is the lowest it's been in years. From a percentile. The CRE is below 300% of capital. So by region, it's hit or miss. It's here, there, and yonder. I mean, Atlanta's 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, you know, the newer markets are, you know, Memphis and Auburn and Piedmont region. I've had good loan growth this year. And that's, you would expect that. And they are doing that. So, you know, I mean, I'd still say loan demand is okay. I saw a banker Saturday and he said, I said, how's loan demand? He said, okay. I said, yeah, I know it's okay. It's not great. So, you know, we need a few more rate cuts to, to, to hopefully help out, uh, you know, loan demand overall.

Oh, got you. All right. Well, that's a good call on everything here. I'll step back into here. Thank you very much, guys.

Thank you, Steve.

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

Thank you. Hey, good evening, gentlemen. Hey, I'm curious. Hey, Tom, on the expense side, Tom and Dave, came in a little bit, I think, above expectations. Sound like there was some shoring up on the incentive accruals. Is that correct? Maybe you can sort of ring sense that about maybe expectations where you see that compensation salaries and benefits maybe settling into the final quarter of the year.

Yeah, Dave. You know, the true-up really happened in second quarter. So when you compare second quarter to third quarter, it's really second quarter that was lower because of the true-up. You know, we did an incentive true-up. It's all an incentive comp. And so it's going to depend a lot on loan production. You know, we went back to accruing our normal incentive rate for the third quarter. And so fourth quarter, at this point in time, given the – you know, the uptick in the pipeline. We expect fourth quarter to be very similar to third quarter from an incentive standpoint. And so, you know, I would expect the non-interest expense to come in at the same level as well. So, you know, roughly, you know, $48 million. I know it's higher than expected, you know, but I would just guide you back to our efficiency ratio. Our efficiency ratio is still best in class in the low 30s. You know, we're not the highest expense increase is a fraction of what our revenue increase is. And as long as we continue on that trajectory, that's what I'm pleased with from a results standpoint.

Got it. Appreciate that, Keller. Then, Tom, you know, I think when we had you on the virtual road last month or so, you know, still sort of, you know, fresh on the news, you know, the opportunities from the MOE in your backyard. Any early signs of success there? Are you pretty active in terms of recruiting efforts? Any commentary you can provide there in terms of maybe early reads of relationship wins or banker hires?

I'll just broaden it. It's not only mergers that create opportunity. We're looking at obviously there are other mergers announced or going on and we look for opportunities in many fronts and you know, feel good about our ability to, you know, at least attract customers and offer them a more stable, you know, base than they've seen in some cases out there in the market. So we feel confident about where we are and opportunities. You know, again, though, you've got to be out seeing people. And again, most of our opportunities come from existing customers or about 80% of our new business comes from referrals from existing clients. So that is something that we emphasize in trying to do a good job of taking care of our clients. So they'll send us their friends and colleagues that they do business with and know well. So we think that's the very best thing we can do is take care of our clients and take care of their needs and we'll get more just like them.

Got it. Then one final maybe housekeeping question. But 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.

Thanks. Yeah, I think the 18.9%, Dave, is 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, you know, the goal, you know, 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, you know, 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, you know, I would expect it to be in the 18, 19% for the foreseeable future.

Perfect. Thanks for the color.

You're welcome.

Thank you, Dick.

Thank you. Our next question comes from the line of Steven Scowden with Piper Sandler. Please proceed.

Yeah, thanks. Good afternoon. David, I want to reconcile one number real quick. I think you said maybe a 328 margin for the month of September X, the reversal. Is that interest reversal the main difference versus the 297 listed in the supplemental information?

Yes, that is correct. Yes, it was about 31 basis points on that interest reversal.

Okay, great. 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 BIPs potential roughly off of the 319 all-in number. Is that the right way to think about it?

Yes, that is correct.

Okay, great. And then, Tom, maybe, you know, kind of following up on that question around, you know, dislocation. I like how you said that, you know, 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?

Yeah, 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 place. 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, you know, Texas is a very Texas-centric place. You can't send people there. You know, Texas people like to do business with Texans 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, you know, are certainly keenly interested in that market. And not to change the subject, but doubling back on what David told my interest rates, as the Fed cuts rate, that is our opportunity to say, okay, we need to try to manage down our deposit costs, you know, at least more than the Fed cut. So if the Fed cuts 25%, Our goal is to manage down more than that, more than that 25 BIP. So I think it's an opportunity. When we see the Fed cutting rates, that's our opportunity, Stephen. And I wasn't avoiding any further questions.

Oh, yeah, that makes sense. No, I appreciate that. That's a good reminder. And along with that, kind of maybe bouncing back to the NIM a little bit, I guess, is when was that security sale completed this quarter? And is there any sort of incremental benefit to the run rate of securities yields in the NIM in the fourth quarter from that trade?

Yeah, the security sale was done in late in third quarter, maybe the third week of September. And so you're not going to see much of a benefit at all in third quarter as a result of that. You'll see the full benefit of it in the fourth quarter. And I don't have a number off the top of my head exactly what that is, but it's going to be, you know, 500 basis points, 450 basis points on $80 million. Or I'm sorry, $70 million. Yep.

Do that math for sure. Good. That's great. Okay. I think that's all I had, guys. Great. Appreciate all the time.

Thank you, Steven.

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