ServisFirst Bancshares - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid fundamentals: EPS was $1.16 (up 26% YoY) on strong deposit (+$886M) and loan (+$281M) growth; PPNR rose 31% YoY while efficiency improved to 35.0%.
• Against S&P Global consensus, EPS was a slight miss (actual $1.16 vs $1.18*) and S&P “Revenue” was below ($125.2M* vs $134.1M*); management cited fewer days in the quarter, a higher effective tax rate (20% vs ~18% in 2024), and elevated cash at the Fed that diluted NIM by ~6 bps as near‑term headwinds.
• Credit normalized: NPAs/Assets rose to 0.40% and annualized NCOs to 19 bps, driven by previously impaired, individually evaluated credits; ACL/Loans eased to 1.28% with hurricane reserve release, but dollar ACL increased.
• Liquidity and capital remained strong (cash $3.35B; CET1 11.48%); deposit growth skewed to municipal and correspondent balances that management expects to seasonally run down, a potential NIM tailwind as cash normalizes.
• 2025 setup: OpEx guided to ~$46.0–$46.5M per quarter and tax rate ~20%; asset repricing pipeline (>$1.9B over 12 months) and fixed‑rate run‑off (weighted ~4.76%) provide earnings levers alongside steady loan demand; new Chief Credit Officer appointed.

What Went Well and What Went Wrong

• What Went Well

  • PPNR strength and expense discipline: PPNR reached ~$85.7M and efficiency ratio improved to 34.97%; CFO: “This resulted in an efficiency ratio below 35%, which we are very proud of.”
  • Robust balance sheet momentum: Ending deposits +$886M QoQ (26% annualized) and loans +$281M QoQ (9% annualized), with liquidity of $3.35B and CET1 at 11.48%.
  • Healthy growth outlook and market expansion: “Loan pipeline is up 10% from January… we continue to look at new market expansions in the Southeast.”.

• What Went Wrong

  • NIM percentage diluted by excess cash: CFO quantified ~6 bps dilution from elevated Fed cash in Q1; loan yields also declined QoQ (6.28% vs 6.43% in Q4).
  • Credit normalization: NPAs/Assets increased to 0.40% (from 0.26% in Q4), annualized NCOs to 0.19% (vs 0.09% in Q4), tied to previously impaired, individually analyzed loans; two relationships (real estate‑secured, medical‑related) drove much of NPA uptick.
  • Noninterest income down YoY on BOLI compare and seasonal softness: Noninterest income fell 7% YoY, with prior‑year BOLI death benefit driving the comp; mortgage and card were seasonally softer vs Q4.

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, David Sparacio, Senior Vice President. Thank you, David. You may begin.

Good afternoon and welcome to our First Quarter Earnings Call. We will have Tom Broughton, our CEO, David Sparacio, our CFO, Henry Abbott, our Chief Credit Officer, and Rodney Rushing, our Chief Operating Officer covering some highlights from the quarter and then we'll take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements.

Actual results may differ from any projections shared today due to factors described in. Our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom.

Thomas Broughton (CEO)

Thank you, David. Good afternoon and thank you for joining our first quarter conference call. We felt we had a great start to the year and I'll 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 and 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, 9% annualized growth. As often the first quarter is down or flat in the loan book. That was a very, very solid start to the year. The loan pipeline is up 10% from January and we do still have some projected loan payoffs, 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. All in all I like to say that I think it's business as usual. So far we see an improvement and things are going according to plan. I'll now turn it over to Henry Abbott for a credit update.

Henry Abbott (Chief Credit Officer)

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 from pending mergers or other market disruption. While there is plenty of uncertainty related to the economic environment, we want to continue to lend through this cycle to high performing businesses and longtime 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'm pleased to say we did grow our allowance on a dollar. Amount for the quarter.

Given the loan growth we previously discussed, allowance for credit losses to total loans did slightly decrease from 1.30%-1.28% quarter-over-quarter. Our non-performing assets 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 AD&C or income producing CRE.

We continue to try to work loans through the non-performing asset cycle as quickly as we can and I'm 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'll pass it over to David.

David Sparacio (CFO)

Thank you, Henry. Good afternoon. I will echo the comments that we feel the quarter was a solid start to 2025. We reported net income of $63.2 million, diluted earnings per share of $1.16, and pre-provision 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 31 of the 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 in. Our loan to deposit ratio stands at 89% with our adjusted loan to deposit ratio including correspondent Fed funds purchased of 77%. As 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% since last quarter and 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 risk-based capital ratio of 12.9% for the quarter. On net interest income for the quarter it was $123.5 million which is $21 million higher than first quarter 2024 and just slightly higher than fourth quarter 2024.

I will remind you that in first quarter of 2024 we had one extra day due to leap year and fourth quarter 2024 we had two extra days when compared to first quarter 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 6 basis points this quarter. Over the next 12 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 the 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 are $60 million and $95 million are pending. Thus we anticipate over $1.9 billion in asset repricing over the next 12 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, so when we unwound that and updated our CECL model the result was a provision expense of $6.6 million which is up $2.1 million from first quarter 2024 and $900,000 from fourth quarter. The allowance for credit losses ended the quarter just over $165 million which is an increase of about $576,000 from fourth quarter 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 second quarter of 2024 before the general hurricane reserve was established. This is just a normalization of our allowance level on noninterest income.

In first quarter of 2025 we were down about 7% versus first quarter 2024, but this decline was driven by a one time BOLI death benefit recorded in 2024. From a normalized rate we saw an increase of about 7% in non-interest income versus first quarter of 2024 primarily driven by higher service charges on deposit accounts versus fourth quarter 2024.

Non-interest income was down $526,000 due to a lower day count and seasonal declines in credit card and mortgage activity. We expect non-interest income to pick back up in second quarter of 2025. During the quarter our non-interest expense was down $789,000 versus fourth quarter 2024 and flat versus first quarter 2024.

This is a testament to our expense discipline as we have experienced growth of 5% in our number of employees since first quarter 2024 and first quarter always sees a seasonal spike in payroll taxes versus fourth quarter. Payroll expense was down about 5% versus 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 non-interest expense to be in the $46 million-$46.5 million range, obviously fluctuating based on our expansion efforts that Tom mentioned earlier.

For the first quarter, our pre-tax net income was relatively flat compared to fourth quarter 2024, which we view as a win considering the fewer days. Versus the same quarter last year, our pre-tax 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 less 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.

Thomas Broughton (CEO)

Thank you, David. I'm sure you've all seen the 8-K we filed a little bit ago after the market closed regarding Henry's career change. 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. I know Rodney wants to make—Rodney Rushing wants to make a few comments as well about Henry.

Rodney Rushing (COO)

Thanks, Tom. I would also 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. Thank you again and good luck. With your work ethic. I am sure you will be successful in whatever you do with that. I'll turn it back to Tom.

Thomas Broughton (CEO)

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

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. 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.

Stephen Scouten (Managing Director)

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 think, or how you're thinking about deposit trends for the rest of the year given such a strong start here in the first quarter.

Thomas Broughton (CEO)

Yeah, Stephen, I wouldn't. I wouldn't be. I wouldn't project that out for the next three quarters. I don't 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, you know, run down as the course of the year goes on. Rodney, you want to.

Rodney Rushing (COO)

Yeah, for the first quarter, correspondent was up a little over $430 million in total fundings from year end. You know, in the first quarter, correspondent balances tend to grow and accumulate heading into the tax season and we have seen that level off since then. That is where a large chunk of it came from.

Stephen Scouten (Managing Director)

Okay. If I think about that, I mean that should kind of normalize but still continue to grow and when they would be fair to assume kind of cash balances move down in a likewise fashion throughout the year and kind of. The NIM maybe pulls back up as. As the balance sheet remixes, is that the right way to think about the trajectory of the NIM from here?

David Sparacio (CFO)

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

Stephen Scouten (Managing Director)

Okay, great. Just last thing for me, just kind of curious, I mean, obviously loan growth was fantastic here in the quarter. Just anything kind of anecdotal that you're hearing from customers, if there's been any sort of change in the pipeline or demand kind of post April 2nd and a little bit of this uncertainty that the market seems to be overwhelmed by.

David Sparacio (CFO)

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. I think the effect is, you know, it helps some companies, it hurts some companies. You know, if you're a Porsche dealer and they make nothing in the United States, then you probably are pretty, pretty concerned right now.

We do not bank any Porsche dealers. I do not think to my knowledge, you know, if you're a Ford dealer, you're feeling pretty good about, you know, the 80% of their models assembled and made here, parts and all. We just do not see, you know, certainly it is not, you know, the commercial real estate transactions need short term interest rates to come down to improve the environment there a bit.

We think that, you know, what we need to see is a combination of asset repricing and growth at the same time. That will get us to 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, return on equity that we enjoy. 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. People on Main Street do not watch CNBC. They are running their companies and businesses and you know, obviously there is certainly a buy-ahead aspect. If people fear inflation, they tend to spend money now.

They're, you know, I think there's as many positive benefits as negative benefits at this point in time, Stephen. I'm just, you know, we don't see anything odd from our correspondent banks either. There's nothing, you know, they're, you know, we have 390 correspondent banks so we really capture a pretty good cross section of the southeast United States, plus more.

I don't think we'd be hearing things and I think everything is, you know, we don't see anything in our card portfolio, credit card portfolio, anything odd. We don't, 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, the existing ones because they're substantially cheaper than building new.

People are looking to the future a little bit. It had not healed up, do not get me wrong. It is healing a bit. You know, I am reasonably optimistic about the balance of the year. Stephen.

Stephen Scouten (Managing Director)

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

David Sparacio (CFO)

Thank you.

Operator (participant)

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

Steve Moss (Analyst)

Good afternoon.

David Sparacio (CFO)

Hey, Steve.

Steve Moss (Analyst)

Maybe Tom, just following up. On loan growth here. You know, the pipeline's up, you know you had a good quarter production. You know, you still thinking like low double digits could be a good pace?

Thomas Broughton (CEO)

Yeah, we do, you know, some of that, we still have some payoffs. 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. You know, we are, we're not seeing any big projects. All of our growth we've had so far this year is in smaller, you know, chunks, which is good. You know, we, we're seeing nice, steady, granular, you know, growth in the loan portfolio.

You know, we feel good about. And it's broad based. It tends to be in every market. Of course, you know, Florida is by far probably the best, but we're seeing a lot of, a lot of opportunity in a lot of places. I think, I don't know. Rodney, do you have anything else you want to add there?

Rodney Rushing (COO)

It's been steady from our correspondence. I mean, the number of participation opportunities we're seeing has just, we've not had a spike and we've not had a, you know, a decline. It's been steady for the first quarter and we've seen several of the last two or three weeks. I mean, it just, we've not seen the slowdown in the projects from the downstream banks. Again, I don't, I think the tariff effect is, it's been NIL at this, you know, point in time.

Steve Moss (Analyst)

Right, okay. No, that's fair. That makes sense. In terms of, you know, just kind of curious, you know, loan pricing for the quarter on new originations was 684, I guess, new and renewals. Just curious, you know, has that gotten tighter here as the quarter's gone on or are you kind of still holding? You think, in the high sixes on originations? Just kind of thinking about that roll. On roll off dynamic with loans repricing going forward? I think it's been the same. It's already too tight.

Thomas Broughton (CEO)

Don't get me wrong, Steve. I mean, I'm not happy with the pricing we're achieving today. I think it should be higher given. Obviously people are projecting that we're going to see a downturn in rates at some point in the year. It's been steady at those levels.

Steve Moss (Analyst)

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

David Sparacio (CFO)

Yes, that is before any potential new hire. I had to comment in there. Tom talked about expansion efforts. You know, we continue to evaluate any new producers out there. If we hire additional, that would add to that baseline. Yes.

Steve Moss (Analyst)

Okay, I appreciate that.

David Sparacio (CFO)

Continually have a DOGE program ongoing, you know, in terms of evaluating, you know, effectiveness of our, of our producers. You always, you get some growth and then you have some, some, some reductions in force as well Steve.

Steve Moss (Analyst)

I hear you there. You there Tom. Okay, sounds good. Last one for me just on the non performers. I know you guys said they were not income producing and not speculative A. D and C. Just kind of curious what kind of industries they were to or you know any additional color you. Can you give around those, those non performers that were added.

Thomas Broughton (CEO)

Go ahead, Henry.

Henry Abbott (Chief Credit Officer)

Yeah, I mean both are, I guess I'd say, kind of medical related in very different markets, you know, but once again those are C&I operating, not just, you know, income producing properties.

Steve Moss (Analyst)

Okay. Like senior-assisted living or got a curious on a.

Henry Abbott (Chief Credit Officer)

No, one is a hospital. Yeah, one is a hospital and then one is a one is a doctor and the doctor, he's just a doctor that's got cash flow issues but a lot of assets.

Thomas Broughton (CEO)

Yes, he's overextended but we've got really good collateral. Feel good about our collateral with him. He's just, you know, you only say about doctors, Steve, sometimes they get overextended.

Steve Moss (Analyst)

Yeah, that's good Tom. I'm going to take a pass on that one but appreciate all the color. Here and thank you very much. Next quarter.

Thomas Broughton (CEO)

Thank you.

Operator (participant)

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

David Bishop (Director)

Hey, good evening gentlemen.

Thomas Broughton (CEO)

Hi Dave.

David Bishop (Director)

Hey Tom. Dave, quick question. You sort of alluded to the influx of 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 342 basis points above the quarterly average. Is that reflecting some of the pressure from that muni inflows and just, you know, how much you expect some of that, you know, is there a way to frame the dollar inflow that could flow out over the next couple quarters?

David Sparacio (CFO)

You know the two funds, the largest influx was municipal and correspondent, and they're higher cost funds, is that what you mean, Dave? I mean, they're higher cost of funds. So it doesn't, Yeah. It's not like we have repricing of our existing deposits or anything to that. Is that where you're going with it, Dave?

Yeah, just sort of trying to get a sense, you know, as those media and correspondent funds sort of trickle about out, can we expect to see that that number start to move south, so to speak, that 342, you know, where do you see that sort of trending over the next couple months or so?

David Bishop (Director)

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

Thomas Broughton (CEO)

Right. You know, given our ongoing, you know, excess liquidity, we're always, you know, we are looking for, you know, additional levers we can pull to try to improve income without, you know, undue increases in risk. We might deploy some liquidity if we can find some, some avenues to do so, Dave. We're looking. I don't. It won't be, you know, huge amounts of effect on net income, but it'll be a little bit. When you got that much cash, every little bit helps.

David Bishop (Director)

Got it. Then, Dave, I think you gave some data about the amount, number of loans you expect to reprice over the next 12 months. If you mind just going through that again real quick. Thanks.

David Sparacio (CFO)

Yeah, we have about $900 million right now. That's going to reprice in a year or less. The weighted average rate right now is 4.76%. That's on the fixed rate book. On the variable rate book, we have about $2.2 billion that's going to reprice in the next year or less. The weighted average rate on that is 7.52% right now. We have the cash flow on fixed rate loans as well. The cash flow on fixed rate loans is, I mean, and pay downs is $1.5 billion at $476 million.

David Bishop (Director)

Got it. Perfect. Appreciate the color.

David Sparacio (CFO)

Okay, Dave, thank you.

Operator (participant)

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.