SFBS (2025 - Q1)

Greetings, and welcome to the ServisFirst Bancshares, Inc. First 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 you require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Davis Mange, Senior Vice President. Thank you, Davis. You may begin. Davis Ma

Good afternoon, and welcome to our first quarter earnings call. We will have Tom Broughton, our CEO, David Sparacio, our CFO, Henry Abbott, Chief Credit Officer, and Rodney Rushing, Chief Operating Officer, covering some highlights from the quarter and then we will take your questions. I will 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-Ks and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst Bancshares, Inc. assumes no duty to update them. With that, I will turn the call over to Tom.

Thank you, Davis. Good afternoon, and thank you for joining our first quarter conference call. We felt we had a great start to the year and I will give a few details followed by a credit update from Henry Abbott. After Henry, David Sparacio will give us a financial update and this will be David's first quarterly conference call since joining us several weeks ago. We are pleased to have David with us today. Ed Woodie, our Controller, acted as Interim CFO for the last several months and did a great job of getting us through year-end in the 10-K filing, and we appreciate Ed's hard work. On the loan side, we were pleased to see very solid growth net of payoffs for the first quarter of 9% annualized growth. As often the first quarter is down or flat in the loan book, so that was a very solid start to the year. The loan pipeline is up 10% from January. And we do still have some projected loan payoffs that are roughly the same as in the prior quarter. On the deposit side, we saw strong deposit growth in the first quarter, which is atypical of what we usually see in the first quarter. Most of the growth was in municipal and correspondent deposits. We still see COVID funds working their way through the government system, which has aided municipal deposit growth. We did exit most non-core deposit relationships in the first quarter of last year. On the new markets, we did add four new producers in the first quarter around different markets. We continue to be pleased with the progress of our newer markets and they are all hitting their goals. We are in discussions with several potential new markets that could happen later this year. So all in all, I would like to say that I think it is business as usual. So far, we see an improvement and things are going according to plan. So I will now turn it over to Henry Abbott for a credit update.

Thank you, Tom. The bank got off to a strong start with the loan growth Tom previously mentioned. We continue to see good loan opportunities for both new and core markets as businesses are looking to expand or in other cases, we see new opportunities due to changes with their current bank and pending mergers or other market disruption. There is plenty of uncertainty related to the economic environment, we want to continue to lend through this cycle to high-performing businesses and long-time established players in our markets. Charge-offs were slightly higher than we would have liked at an annualized rate of 19 basis points for the first quarter. This figure is higher than the prior few quarters but more in line with pre-COVID benchmarks. The overwhelming majority of the loans that were charged off were individually analyzed and impaired in prior quarters, so we charged off previous impairments based on updated information. While we did charge down some of these loans, I am pleased to say we did grow our HLL on a dollar amount for the quarter. But given the loan growth we previously discussed, A triple L's total loans did slightly decrease from 1.30 to 1.28 quarter over quarter. Our NPAs rose in the first quarter, but roughly 70% of the increase was related to two specific relationships. These relationships are in two different markets, and both are real estate secured, but neither is related to speculative, A D and C, or income-producing theory. We continue to try to work loans through the NPA cycle as quickly as we can. And I am pleased to say we even reduced our Oreo to under $1 million with a $1.75 million reduction from year-end. We took aggressive actions where needed in the first quarter on a handful of credits which slightly impacted our earnings, but hopefully set us up for success in the remaining quarters of 2025. We continue to be conservative in our underwriting and diligent in our credit servicing. With that, I will pass it over to David Sparacio.

Thank you, Henry. Good afternoon. I will echo the comments that we feel the quarter was a solid start to 2025. We have reported net income of $63.2 million, diluted earnings per share of $1.16, and pre-provisioned net revenue of $85.7 million. This represented a return on average assets of 1.45% and a return on common equity of 15.63%. Net income grew more than $13 million or 26% from the first quarter of 2024. Compared to the fourth quarter of 2024, net income was down slightly by about $2 million or 3%, mostly driven by a reduction in day count and changes in our effective tax rate. In line with the loan growth referenced by both Tom and Henry, we grew our total assets by nearly $1.3 billion from December 31st and ended the quarter at $18.6 billion. This is a 7% growth from December 31st and a 19% growth from March 31st of 2024. Period-end cash balances at the Fed grew by about $959 million and ending loan balances grew about $281 million. This loan growth was spread evenly throughout our portfolio with new loan yields of 6.81% and about an even split between variable and fixed rates. We ended the quarter with just slightly less than 49% of our loan book being variable rate-based. We continue to see core deposit growth and our room to deposit ratio stands at 89%, Fed funds purchased, of 77%. I mentioned, our Fed balances increased significantly during the quarter about $380 million on average balances versus the fourth quarter. Which certainly helps our liquidity but hurts our percentage margin calculation. Additionally, we grew our tangible book value by 3.13% from the same quarter a year ago, ending at $30.31 per share. We continue to be well-capitalized with a common equity Tier 1 capital ratio of 11.4% and a risk-based capital ratio of 12.9% for the quarter. On net interest income for the quarter, it was $220 million in 2024, and just slightly higher than the fourth quarter of 2024. I will remind you that in the first quarter of 2024, we had one extra day due to a leap year and in the fourth quarter of 2024, we had two extra days when compared to the first quarter of 2025. We feel good about our dollar margin given the reduction in day count. The margin percentage was diluted this quarter by our higher-than-normal cash balances at the Fed. This excess cash diluted our margin by six basis points this quarter. Over the next twelve months, we will have $1.5 billion of projected cash flow from fixed-rate loans at a rate of 4.76% and projected paydowns of mortgage-backed securities of $100 million at a rate of 2.5%. In addition, with tax and audited statements due soon, we anticipate loan repricing opportunities. In 2024, total repricing was $357 million. Year to date for 2025, total loans repriced for $60 million and $95 million are pending. Thus, we anticipate over $1.9 billion in asset repricing over the next twelve months. Our provision expense was down this quarter due to the release of the reserve previously marked for hurricane losses. We have not seen any hurricane loss materialize. The result was a provision expense of $6.6 million. So when we unwound that and updated our CECL model, which is up $2.1 million from the first quarter of 2024 and $900,000 from the fourth quarter. The allowance for credit losses ended the quarter just over $106.65 million, which is an increase of about $576,000 from the fourth and primarily due to the growth in the loan balances. As Henry mentioned, our allowance ratio dropped from 1.30% of total loans in the fourth quarter to 1.28% in the first quarter of 2025. I will point out that we were at 1.28% in the second quarter of 2024 before the general hurricane reserve was established. So this is just a normalization of our allowance level. On noninterest income, in the first quarter of 2025, we were down about 7% versus the first quarter of 2024, but this decline was driven by a one-time Ollie death benefit recorded in 2024. From a normalized rate, we saw an increase of about 7% in noninterest income versus the first quarter of 2024, primarily driven by higher service charges on deposit accounts. Versus the fourth quarter of 2024, noninterest income was down $526,000 due to a lower day count and seasonal declines in credit card and mortgage activity. We expect noninterest income to pick back up in the second quarter of 2025. During the quarter, our noninterest expense was down $789,000 versus the fourth quarter of 2024, and flat versus the first quarter of 2024. This is a testament to our expense discipline as we have experienced proof of 5% in our number of employees since the first quarter of 2024 and the first quarter always sees a seasonal spike in payroll taxes versus the fourth quarter. Payroll expense was down about 5% versus the fourth quarter due to the true-up of 2024 incentive plan payouts. This incentive reduction was offset by a one-time operational loss we experienced in the first quarter. This resulted in an efficiency ratio below 35%, which we are very proud of. For the remainder of the year, we expect our noninterest expense to be in the $46 million to $46.5 million range, obviously fluctuating based on our expansion efforts that Tom mentioned earlier. For the first quarter, our pretax net income was relatively flat compared to the fourth quarter of 2024, which we view as a win considering the fewer dates. Versus the same quarter last year, our pretax net income is up over $18 million or 30%. We continue to focus on organic loan and deposit growth, priced both competitively and profitably. On our income tax provision, we saw an increase driven by fewer credits. Our 2024 effective tax rate, which was about 18%, increased in the first quarter to about 20%, which is the expected run rate for the remainder of 2025. Now, I will turn it back over to Tom for additional comments.

Thank you, David, and I am sure you have all seen the 8-Ks we filed a little bit ago after the market closed regarding Henry's career change, and I would like to thank Henry Abbott for all his contributions to our strong credit culture. And we wish him well in his next chapter of his business career. And I know Rodney wants to make a few comments as well about Henry.

Yep. Thanks, Tom. Also, I would like to thank Henry for the hard work you and all your team put in and accomplished over the last few years. As you make this transition to your next business endeavor, I want to especially thank you for making the transition a smooth, seamless one. Agreeing to work over the next few weeks full-time and then in a consulting role with Jim has made this much easier for all of us and thank you again, and good luck. With your work ethic, I am sure you will be successful in whatever you do. With that, I will turn it back to Tom.

Thank you, Rodney. I think we will now open it up for questions.

Thank you. We will now conduct a question and answer session. One moment please while we poll for questions. Thank you. Our first question comes from the line of Stephen Scouten with Piper Sandler. Please proceed.

Yeah. Good afternoon, everyone. Congrats on a great quarter here. I know you mentioned some influence from municipal deposits, but just kind of curious how you are thinking about deposit trends for the rest of the year given such a strong start here in the first quarter.

Yeah. Stephen, I would not project that out for the next three quarters. I do not think I think some of that is probably on the correspondent side. Rodney can address that, but I think some of the municipal deposits will probably be, you know, run down as the course of the year goes on. Rodney, you know, for the first quarter, correspondent was up a little over $430 million in total fundings from year-end. And, you know, in the first quarter, correspondent balances tend to grow and accumulate heading to the tax season. And we have seen that level off since then. So but that is where a large chunk of it came from.

Okay. So if I think about that, I mean, that kind of normalizes but still continues to grow. And when they will we it would be fair to assume kind of cash balances moved down in a likewise fashion throughout the year and kind of the NIM maybe pulls back up as the balance sheet remixes. Is that the right way to think about the trajectory of the NIM from here?

Yes, Stephen. This is David Sparacio. Yes, we are already actually seeing that come down a bit the cash balances. We track them on a daily basis, and we are seeing some of that retract as well. So, I mean, you could see the average balances are not nearly as high as the period-end balances were. So we expect that those cash balances to come down over the next few months.

Okay. Great. And then just last thing for me. Just kind of curious. I mean, obviously, loan growth was fantastic here in the quarter. And just anything kind of anecdotal that you are hearing from customers, if there has been any sort of change in the pipeline or demand kind of post-April second and a little bit of this uncertainty that the market seems to be overwhelmed by?

You know, I think there may be a bit of a slowdown, Stephen, but you know, Main Street is a heck of a lot more durable than Wall Street. And I think the effect is, you know, it helps some companies, it hurts some companies. You know? If you are a Porsche dealer and they make nothing in the United States, then you probably are pretty concerned right now. We do not bank any Porsche dealers, I do not think, to my knowledge. You know, if you are a Ford dealer, you are feeling pretty good about, you know, with 80% of their models assembled and made here, parts and all. So we just do not see, you know, certainly, it is not in, you know, the commercial real estate transactions need short-term interest rates to come down to improve the environment there a bit. But you know, we think that, you know, what we need to see is a combination of asset repricing and growth at the same time, and that will get us to, you know, where we need to be. In terms of growing our earnings back to more normal historical levels of profitability in terms of return on assets or return on equity that we enjoy. So we do not at this point see any significant impact from tariffs. I could be naive, but, you know, things like that that get a big, you know, they carry on about it on CNBC all day long, but people on Main Street do not watch CNBC. They are running their companies and businesses, and you know, obviously, there is a certainly, a buy head aspect that people fear inflation. They tend to spend money now. So there are, you know, I think there are as many positive benefits as negative benefits at this point in time, Steven. I am just giving and I, you know, we do not see anything odd from our first correspondent banks either. There is nothing, you know, they are, you know, we have 390 correspondent banks. So we really capture a pretty good cross-section of the Southeast United States plus more. So I do not think we would be hearing things, and I think everything is, you know, we do not see anything in our card portfolio, credit card portfolio of anything odd. We do not, you know, everything, even the seems like the senior housing is healing up a bit. You know? Obviously, if you look at the cost of new senior housing and look at what you can buy, there are people out buying senior housing projects today, existing ones because they are substantially cheaper than building new. So people are looking to the future a little bit. They are it had nailed up. Do not get me wrong, but it is healing a bit. So you know, I am reasonably optimistic about the balance of the year, Steve.

Great. I like it. Appreciate all the color, guys. Thanks for the time.

Thank you.

Thank you. Our next question comes from the line of Steve Moss with Raymond James. Please proceed.

Hi. Good afternoon.

Hey, Steve.

Maybe Tom, just following up on loan growth here. The pipeline is up. You know, you had a good quarter production, you know, still thinking, like, low double digits could be a good pace.

Yeah. We do. You know, some of the we still have some payoffs. So I was kind of hoping they would go away after the first quarter, but some of it seems like they, you know, I guess, not all of them paid off that I had thought would pay off in the first quarter, but you know, we are not seeing any big projects. All of our growth we have had so far this year is in smaller, you know, chunks, which is good. And you know, we are seeing nice, steady, granular, you know, growth in the loan portfolio. So you know, we feel good about and it is broad-based. It tends to be in every market. Of course, you know, Florida is by far probably the best, but we are seeing a lot of opportunities in a lot of places. So I think, do not know. Rodney, do you have anything else you want to add there?

No. It and it has been steady from our correspondents. I mean, the number of participation opportunities we are seeing has just it we have not had a spike, and we have not had a decline. It has been steady for the first quarter. And we have seen several of the last two or three weeks. I mean, it just we have not seen the slowdown in the projects.

From the downstream banks. Again, I do not think the tariff effect has been nil at this point in time.

Right. Okay. No. That is fair. That makes sense. And then in terms of just kind of curious, loan pricing for the quarter on new originations was 6.84 I guess, new and orig and renewals. Just curious, you know, has that gotten tighter here as the quarter gone on, or are you kind of still holding you think, in the high sixes on originations? Just kind of think about that roll on roll off roll off dynamic with loans repricing going forward.

I think it has been the same. That it is already too tight. Do not get me wrong, Steve. I mean, I am not happy with the pricing we are achieving today. I think it should be higher given, but, you know, obviously, people are projecting that we are going to see a downturn in rates and at some point in the year. So it has been steady at those levels.

Okay. And then the other question for me here just on the operating expenses, $46 million, just $46.5 million. For each quarter for the rest of the year. Is that before the potential of new hires?

Yes. That is before any potential new hires. So I to comment in there. Tom talked about expansion efforts. We continue to evaluate, any new producers out there. And so if we hire additional that would add to that baseline.

Okay. Of course. I appreciate that. We continually have a have a doge program ongoing, you know, in terms of evaluating, you know, the effectiveness of our product producer. So, you know, it is you always you get some growth, and then you have some reductions in force as well, Steve.

I hear you there. I hear you there, Tom. Okay. Sounds good. And last one for me, just on the nonperformers. I know you guys said they were not income-producing and not speculative A, B, and C. Just kind of curious what kind of industries they were to or, you know, any additional color you can give around those nonperformers? That were added.

Go ahead, Henry. Yeah. I mean, both are I guess, I would say kind of medical-related in very different markets. But once again, those are C and I operating, not just, you know, income-producing properties.

Okay. Like, senior assisted living or kind of curious how to.

No. It is a hospital. It went to hospital and then went to one's a doctor. And the doctor is just he is just a doctor that has got cash flow issues, but a lot of assets. Yes. He is overextended, but we have got really good collateral and feel good about our collateral. With him. It is just, you know, you want to say about doctors, Steve? Sometimes they get overextended.

That was good, Tom. I will take a pass on that one. But I appreciate all the call here, and thank you very much next quarter.

Thank you.

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

Hey, good evening, gentlemen.

Doug.

Hey, Tom. Dave. Quick question. You sort of alluded to the influx of the liquidity. I think it was six basis points of NIM pressure. I appreciate the data and the supplement. Looks like your cost of interest-bearing deposits were 3.42, two basis points above the quarterly average. Is that reflecting some of the pressure from that uni inflows and just how much do you expect some of that, you know, is there a way to frame the dollar inflow that should flow out over the next couple of quarters?

You know, as the two funds, the largest influx was municipal and correspondent, and they are higher cost funds. Is that what you mean, Dave? I mean, they are higher cost of funds. So it does not, it is just not like we have repricing of our existing deposits or anything to that. Is that where you are going with it, Dave?

Yeah. Just sort of trying to get a sense, you know, of the BD correspondent funds. Sort of trickle that out. Can we expect to see that number start to move south, so to speak, that 3.42, you know, where do you see that sort of trending over the next couple of months or so?

Yeah. I would expect as Tom said, we do not expect that municipal deposit base to stick. Right? And so we expect it to exit eventually. And so when it does that, it will drop the cost of deposits now because it is higher yielding for that bucket. Right?

Given our ongoing, you know, excess liquidity, we are always looking for, you know, additional levers we can pull to try to improve income without, you know, undue increases in risk. But we might deploy some liquidity we can. Find some avenues to do so, Dave. So we are looking. I do not want to be, you know, huge amounts of effect on net income, but it will be a little bit. So when you have got that much cash, every little bit helps.

Got it. Then, Dave, I think you gave some doubt about the amount number of loans you expect to reprice over the next twelve months. I just go through that again real quick. Thanks.

Yeah. We have about $900 million right now that is going to reprice in a year or less. And the weighted average rate right now is 4.76, and that is on the fixed-rate book. On the variable rate book, we have about $2.2 billion that is going to reprice in the next year or less. And the weighted average rate on that is 7.52% right now. But then we have got the cash flow on fixed-rate loans as well. The cash flow on fixed-rate loans is, I mean, and paid ounces of $1.5 billion.

Got it. Perfect. Appreciate the color.

Okay, Dave. Thank you.

Thank you. There are no further questions at this time.

With that, that concludes today's teleconference call. You may disconnect your lines at this time. Thank you everyone for your participation.