ServisFirst Bancshares, Inc.

Greetings and welcome to Service First Bank Shares fourth quarter and year end 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. I would now like to turn the call over to Jim Harper. Thank you. You may begin.

Good afternoon and welcome to our year-end 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 projections shared today due to factors described in the most recent 10-K and 10-Q file. Forward-looking statements speak only as of the date they are made. Service first assumes no duty to update. With that, I'll turn the call over to Tom.

Thank you very much, Dose, and good afternoon, and thank you for joining our fourth quarter earnings call. I'll give you a few highlights, and then Jim Harper will give a credit update, and then David Sprescia will give a financial update. So let's start with loans in the quarter. Loan growth was really in line with our pipeline projection with annualized growth of 12% for the quarter. Our pipeline quarter over quarter increased by 11%, but net of projected payoffs had increased by 80%. I believe that projected payoffs are most likely understated, but it does appear that payoff headwind is diminishing to some extent. A loan pipeline is inexact, but we have found it's indicative of a trend over several quarters. We're pleased with the quarterly loan growth and a little bit optimistic that things will improve a bit as we go forward. On the deposit side, we did continue to manage down our high-cost deposits, primarily municipal deposits, for both the quarter and the year. Given that if we have some robust loan demand, we'll find that we can attract some of those type deposits back if they are needed. In talking about new markets, we are excited, very excited about our new Texas banking team based in Houston. They joined us in early December and some during the course of December as we went on. They're in the process of opening an office, though they have been productive in temporary office space already. This group has worked together in the past, so they have hit the ground running. So we have nine members on the Houston team today and anticipate hiring more in the first and second quarters of the year. This is a much larger team than we have hired in the recent past since opening the bank in 2005. In addition, the Texas team, our correspondent Texas Correspondent Division has 35 active correspondent banking relationships and two correspondent bankers based in Texas. Speaking of correspondent banks, we do have 388 correspondent banks today, including 145 for which we settle at the Federal Reserve Bank. Our Asian Credit Card Program is also not only endorsed by the American Bankers Association, but by 12 state banking associations. We have 150 agent credit card banks and a robust pipeline of new clients and banks in 27 states. In the past year, we added Ohio and Maryland state banking associations that endorse our agent program. So we're very pleased with the correspondent growth and outlook. I'll now turn it over to Jim Harper for a credit update.

Thanks, Tom. As Tom noted, loan growth for the year was solid, highlighted by a very busy fourth quarter of loan activity that produced an annualized growth rate of 12%. While loan growth was not centered in any particular geography or industry, I'd like to draw particular attention to the nearly 10% growth in our C&I book during the year, which reflects the highest growth rate in that portion of our portfolio in the past several years. From a credit metric standpoint, net charge-offs for the fourth quarter were approximately $6.7 million, with the majority being related to one credit, and charge-offs for the full year of 2025 coming in at 21 basis points. Our allowance to total loans remained relatively stable throughout the course of the year, ending the year with an allowance to loan loss reserve to total loans of 1.25%. Non-performing assets to total assets at the end of the year were 97 basis points, which was higher compared to 26 basis points at the end of fiscal year 24, but largely consistent with the 96 basis points we ended at third quarter, with the driver of that notable increase being a year-over-year change associated with exposure to a single merchant developer, which we've gone into detail about previously. We continue to proactively manage our loan portfolio, achieving a number of successful outcomes within our problem loan book during the fourth quarter, and as always, we'll continue to actively manage this portion of our portfolio throughout the year. As Tom noted, we're really excited about the addition of our Texas team, and based off early activity, they've really hit the ground running. I'll turn it over to David for our discussion of financial performance.

Thank you, Jim. Good afternoon, everyone. As you have seen from our press release, we recorded $1.58 of earnings per diluted share for the fourth quarter, which is a 32% increase from the third quarter of 2025 and a 33% increase from the fourth quarter of 2024. Full year earnings per share was $5.25 on an operating basis and $5.06 on a GAAP basis. Net income available to common shareholders was $86.4 million for the quarter, and $276.5 million for the year. Our adjusted net income generated a return on average assets of 1.62% for the year and a return on common equity of nearly 17%. During the quarter, our tangible book value grew 4% to $33.62 per share. Our net interest margin experienced healthy growth throughout 2025. rising from 2.92% in the first quarter to 3.38% in the fourth quarter. This expansion was driven by disciplined loan pricing, including a 40% increase in loan fee collection and boosted by deposit rate reductions in the fourth quarter. We continue to experience tailwinds from our repricing opportunities on low fixed rate assets. Our efficiency ratio dipped below 30% for the quarter and as we maintain our cost control and increase our operating leverage. For the full year, the adjusted efficiency ratio stood near 32%, which is a 14% improvement over 2024. Looking deeper into our income statement, we will start with our net interest income. Our asset yields remain strong at 5.79% for the quarter, which is down three basis points from the third quarter of 2025, and up 10 basis points from the first quarter of 2025. Loan yields dropped slightly during the quarter to 6.30%, which was pleasing given the 75 basis point reduction in benchmark interest rates during the quarter. We are confident about our asset yields as we continue to be disciplined on our loan repricing efforts as we enter 2026 and are armed with a steady pipeline. During the quarter, we aggressively reacted to the rate cuts and customers responded favorably. This allowed us to reduce our cost of interest, fair, and liabilities by 40 basis points versus linked quarters and by 65 basis points versus the same quarter last year. During this 2025 declining rate cycle, we experienced a strong deposit beta of 83. As Jim mentioned, our credit metrics remained normalized, and as a result, our CECL model, we recorded $7.9 million of provision expense for the quarter and ended the year with an allowance for credit losses ratio of 1.25%. On the non-interest revenue front, we continue to experience lift in service charges driven by our fee increases implemented on July 1st, which are reflected in our 26% growth from full year 2024 to full year 2025. We also experienced an 11% annual increase in mortgage banking fee income driven by increased mortgage volume. Excluding our adjustments during the year, our operating non-interest revenue is up 12% for the full year. From an expense standpoint, our non-interest expense compared to the same quarter last year is flat and down about 3% versus linked quarters. For the full year, our non-interest expense is up only 2%. As we enter 2026 and continue to build the Texas franchise, we expect to see growth in our expense base. However, this should be neutral to our efficiency ratio as their book of business grows and generates revenue. In regards to our balance sheet, our loan growth was equally split between our C&I and real estate portfolios with about 10% annual growth in each. As you will recall, We recorded securities losses in both the second and third quarters of this year in relation to a conscious decision to restructure our bond portfolio. The remaining portfolio value has little in regards to embedded losses as evidenced by our small, unrealized loss in accumulated other comprehensive income. From a liabilities perspective, year over year, deposits grew by 5%, and our Fed funds purchase dropped by 26%. which was driven by our downstream correspondent banks positioning for year-end. Additionally, during the quarter, we paid down $30 million of sub-debt at the holding company level at a cost of 4.5%. Our dividend was recently increased in keeping with our longstanding policy of returning capital to our shareholders. We continue to make investments in our organic growth as highlighted by our Texas expansion. Our liquidity levels remain strong, and we continue to operate without brokered deposits or FHLB debt. From a financial standpoint, we are pleased with the company's performance in 2025, and we are in a solid position entering 2026. Now, I will turn it back over to Tom for closing comments.

Thank you, David, and we appreciate you joining us. We'll take your questions in a minute, but we are pleased we wrapped up 2025. With a good ending, and all of our markets are profitable, except our newest market, Texas, of course. So we do continue to have best-in-class efficiency ratio. We're excited about 2026 and the outlook for banking, and we'll take your questions now.

Thank you. And with that, we will 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 that 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 the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of David Bishop with Hobbsy Group. Please proceed with your question.

Hey, good evening, gentlemen.

Hey, Dave. Hey, Tom, I think last quarter you mentioned that for every dollar of, like, new loans, you were seeing maybe half of that go out the back door in terms of payoffs, I think it was 50 set of payoffs. Just maybe curious how you're seeing payoffs trend this quarter, you know, from maybe a a dollar perspective and maybe expectations in terms of, you know, low growth as you head into the early part of this year. Thanks.

Yeah, our net pipeline is way up this quarter over last quarter. And it all has to do with the projected payoffs are much lower this quarter. And I don't completely believe that's true. But, you know, the payoff, projected payoffs have dropped, you know, substantially. quarter over quarter. So, again, it's an inexact science, and there are probably payoffs we don't know about that are coming, though based on the 10-year treasury yields today, it may be hot anytime soon based on the Greenland change in treasury yields today, whatever Greenland's got to do with it. But nevertheless, we are pleased to see a You know, at least it's trending in the right direction today that payoffs will be declining.

And I think when we last spoke, I think on the call you were saying, I guess, loan demand was okay, not great. Just curious, you know, with that in mind in terms of what's happening from an economic backdrop, you know, 10-year rising, just curious what you're seeing in terms of, you know, commercial borrow, loan demand on both the C&I and CRE fronts.

You know, it's a little bit better than I'm, you know, I'd give it an A-minus, something like that right now. It's certainly not an A-plus. It's probably not an A. I'd give it an A-minus today, which, you know, better than it has been, so it's certainly headed in the right direction. And, of course, you could, you know, there are certain asset classes we could, you know, book, you know, 100% of our loans and, you know, hospitality. There are a lot of hospitality loans out there in the market, and We are pleased – we were very pleased to see C&I demand pick up during the quarter, and that was the best C&I growth we've had in, you know, a good while. So we're pleased with that.

Got it. I'll stop there and get back into the queue. Thank you.

Thank you. And our next question comes from the line of Steve Moss with Raymond James. Please receive with your question.

Good afternoon.

Hey, guys. How are you doing, Steve?

I'm doing great. Yourself?

Good. Good, bud.

Maybe just starting on the margin here, David, I heard your comment about there was more fee collection in the margin. Just wondering, you know, if that juiced up the margin a little bit more than expected, or should we use this, you know, December margin of 350 as a good run rate for you guys into 2026?

Yeah, Steve, I think using the December, you know, spot margin as a good starting point for 2026, You know, what we did on loan collection fees, the reason it's up was we added a metric in our bankers' incentives to pay them for fees that they collected. And so, you know, believe it or not, people do what you incent them to do. And so we realized some of the loan fees coming through in our income statement. I haven't quantified it in regards to, you know, how much it is in margin, how many basis points it is in margin. I mean, I can tell you our margin, we expect to continue to expand. We talked about, you know, how our loan rates, the loan yields are remaining steady in a declining rate environment, or at least they're not as declining as fast as index rates or even the deposit costs are dropping. So, you know, we've talked about in the past our repricing opportunities on low fixed rate loans, and we continue to see those throughout 2026. So we expect continued margin expansion throughout 2026.

Did you size up the repricing opportunity for 2026, David?

Yeah. I mean, on the fixed rate loans, low fixed rate loans, we have right around a billion dollars throughout 2026 that's going to reprice. And the weighted average yield on those is 518. So, you know, if you look at that compared to our going on rate, of about 647, then, you know, we got an opportunity to pick up, you know, 130 basis points or so on the loan side. And so, that's kind of, that offsets any rate reductions we're seeing on variable rate loans. And, of course, we have the floors in as well. We've talked about that in the past. We have floors on about 86% of our variable rate loans. And the weighted average rate on those floors is 474. So, You know, I think we're in a good position given this rate environment. We remain slightly liability sensitive. And, you know, I talked about our beta. We were aggressive in reducing deposit costs. So, you know, we were able to take advantage of rate reductions late in the year. And we're going to get benefit of that going into 2026. As far as expectations of rate cuts in 2026, I mean, you guys know how crazy the market is right now. We don't know what's going to happen with Powell, if he's going to be removed early or not, but there's pressure on him to reduce rates. You know, if you look at the economic projections that the Fed put out at their December 10th meeting, their projection is only, you know, 25 basis point reduction in Fed funds rate for all of 2026. So it's not exactly science right now on what we expect the Fed rates to do.

And the billion dollars repricing you mentioned, that does not include cash flow from loans?

It does not include cash flow. We have an additional $700 million roughly in cash flows. And then we also talk about covenant violations and loan modifications. We see about, at least in 2025, we saw about $300 million in repricing as a result of covenant violations and loan modifications. So all in, it's about a $2 billion opportunity we have going forward in the next 12 months, Steve.

Appreciate all that color there. And then the other question I have here, just kind of curious in terms of the $5 million charge off in the quarter, just wondering which NCLA came from and just curious as to how you guys are feeling about the multifamily workforce housing non-performer from last quarter.

So the charge was related to the healthcare asset This was not surprising in any way. And we were largely reserved for the charge before this happened. So this was not a surprise. Largely has been put behind us now that we're through the fourth quarter. With regards to the multifamily asset that we discussed several times last quarter, I think Tom can weigh in here. I just say we're continuing to work with the borrower to try to manage those assets and find an orderly way to produce the best outcome we can across the portfolio of eight loans.

Their process of trying to sell Most all of this portfolio.

Yeah. Slow process over the course of this year.

Yeah. Okay. Great. Appreciate that, Chloe, there. I guess just one last one for me. Just curious as to what you guys are thinking about for the tax rate for 2026.

Yeah. Tax rate, you know, we're going to continue to take advantage of any kind of tax credits we can. You know, we did it, of course, in the third quarter. We saw that come through, and, you know, we saw really our state rates jump up, our state apportionments in fourth quarter sort of bounce up a little bit from that. I mean, we're going to continue to evaluate, Steve, any opportunities we have, particularly around solar credits. That's what we got introduced to, and that's what we like. You know, so we're going to continue to try to manage that down going forward.

Okay, great. Appreciate it, Carl. Step back here.

Thank you, Steve.

Thank you. And looks like we do have a follow-up from David Bishop with the Howdy Group. Please proceed with your question.

Great. Hey, thank you. You know, Tom, maybe you noted in the preamble about the Texas, you know, lift out that you got going there. I assume probably too early to talk about, you know, balances, anything they've booked here. But, you know, curious as we think about 2026, Any thoughts in terms of, you know, how big that group can get from a size perspective in terms of loan balances and deposits?

Thanks. Yeah, we've got, you know, their budgeted growth for 2026 is higher than any other region, to give you an answer. So we have great expectations from Texas, Dave. So we're optimistic. And again, it's they're primarily CNI lenders. They're not, you know, they're not, they're not commercial real estate, you know, lenders. And our commercial real estate is, it's been, you know, we've got an under 300% of capital right now. And our AD&C is down to 71% of capital. So we feel really good about, you know, the reduction in our CRE exposure and where we are. So, but we're optimistic. Yeah, we think, and they're optimistic. They're, they're, you know, pretty active in the market, feel good about the opportunities.

Got it. And it sounded like from an expense drag perspective, any additional expenses there you expect to offset on a top-line basis. So, it sounds like you're expecting the efficiency ratio to hold in fairly steady, it sounds like.

Yeah. I mean, we're not going to remain below 30%. You know, especially with bringing Texas on, I mean, right now they don't have a book of business, but they do have expenses, right? We're paying salary benefits and, you know, releasing space. So they're going to be a drag, not a significant drag, but they'll be a drag, albeit on the efficiency ratio for the short term until they build their book of business and start to generate some revenue. You know, but I think, you know, I think an expectation is in the low 30s for our efficiency ratio to, you know, closer to, you know, somewhere probably between, 30 and 33% is where we expect to see it shake out for 2026. Got it.

Thank you. Thank you, Dave.

Thank you. And it looks like we do have a follow-up from Steve Moss with Raymond James. Please receive his question.

David, to just partially answer my question there, in terms of, Just thinking about overall expense growth for 2026, it sounds like you're kind of thinking like high single-digit expenses for the upcoming year?

Yeah, we're thinking high single-digit, Steve. I mean, you know, we have – we actually just went through the budget process for 2026, right? And so we built in there some additional hires. But, you know, there's no back office hires that are going to be dragged. drags on the efficiency. I mean, what we have plugged in are producers who are going to generate a book of business and generate revenue for us as well as expenses. So, but, you know, a good expectation is high single digits for expense growth, yes.

Okay, great. And then maybe just along those lines, just in terms of the investment thought process here, and obviously a healthy group of hires in Texas, just curious, you know, what you guys think will be the opportunity for the upcoming year? Obviously, we've had a lot of M&A, whether it's Pinnacle or Cadence. Do you think there could be additional large team hires that maybe push you guys above that number? Just kind of curious what your guys' thoughts are around the M&A disruption and your ability to hire here.

Yeah, as you're obviously well aware, there are a number of mergers going on both in the southeast and the southwest. I don't know what you include in the southeast, so I'll add to the southwest there as well. So we think there will be significant, you know, people to talk to. But, you know, again, everybody wants to hire the same people, I think, right? There's not that many good bankers out in the market. And, you know, you read people say they're going to hire 200 new bankers this year. Like, from where? You know, they're not... I don't think there's 200 good ones in the southeast. If I had to put my money on the line, I'd say there's not 200 good ones in the southeast. But certainly we're going to hire everybody we can hire. One of our directors asked us today, if you have a choice between meeting the earnings, our earnings budget or hiring people, which are you going to do? And my answer is we're going to hire the people. We'll let the, you know, the budget take care of itself next year instead of this year if we need to. So we're going to hire as many good people as we can find.

Guy, appreciate that. And then one other cleanup question for me here, just in terms of the bully, I think 4.3 million was a death benefit. So the run rate here going forward is about 4 million a quarter.

Yes, that's correct. We had a $4.3 million death benefit. So, yes, if you back that out, that would be our run rate going forward.

Okay. Great. Those are all my questions for now. I appreciate all the call here. Thanks.

Thank you. Thank you.

Thank you. And with that, this does conclude today's question and answer session as well as today's teleconference. We'd like to thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.