ServisFirst Bancshares - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered stronger core spread income and loan growth, but GAAP EPS of $1.12 was down 3% QoQ due to an $8.6M securities loss; adjusted EPS rose to $1.21, up 27% YoY, and net interest margin improved to 3.10% from 2.92% in Q1.
• Loans grew $346M (11% annualized) to $13.23B; deposits fell $567M (15.8% annualized) to $13.86B as expected municipal outflows normalized, while liquidity remained strong with $1.71B in cash equivalents (10% of assets).
• Non-interest income plunged to $0.4M on the $8.6M AFS portfolio restructuring loss (payback ~3.8 years), partially offset by a $2.3M legal accrual reversal in interest expense; adjusted NIM was 3.06% and spot margin improved to 3.19% by June.
• Management guided to continued NIM expansion (~3.20–3.25% by year end), deposit costs normalizing ~3.57%, and noninterest expense ~$46–$46.5M per quarter, with Treasury Management fee increases effective July 1 and Merchant services ramp as catalysts.

What Went Well and What Went Wrong

What Went Well

• Net interest income rose to $131.7M (+6.6% QoQ, +24.4% YoY); NIM improved to 3.10% (adjusted 3.06%) on disciplined pricing and asset repricing; CFO: “We expect our margin to continue to increase throughout the year”.
• Loan growth remained robust: +$345.7M to $13.23B (10.8% annualized); CEO: “We did see solid loan growth… pipeline being very robust”.
• Capital and book value strengthened: CET1 11.38%; book value/share $31.52 (+14% YoY); CFO: “Tangible book value grew… ending at $31.27 per share”.

What Went Wrong

• Non-interest income fell to $0.42M (–$8.48M YoY) due to an $8.6M securities loss; provision rose to $11.3M on higher loan growth and a ~$5M single-loan charge-off; NPAs increased to 0.42% of assets.
• Deposits declined to $13.86B (–$567M QoQ) as anticipated municipal outflows normalized; CEO flagged elevated CRE payoffs and “good, not great” loan demand amid higher-rate project feasibility.
• Reported deposit cost was artificially lowered by a $2.3M accrual reversal (–7 bps); CFO cautioned reported 3.50% cost would not sustain, guiding back to ~3.57%.

Transcript

Operator (participant)

Greetings and welcome to the ServisFirst Bancshares second quarter earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press Star 0 on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing Star 1 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Davis Mange, Director of Investor Relations. Davis, please go ahead.

Davis Mange (Director of Investor Relations)

Good afternoon and welcome to our second quarter earnings call. Today's speakers will cover some highlights from the quarter and then we'll take your questions. We'll have Tom Broughton, our CEO, Jim Harper, our Chief Credit Officer, and David Sparacio, our CFO. Now I'll cover a 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.

Tom Broughton (CEO)

Thank you Davis and thank you for joining our second quarter conference call.

I'm going to give you a few highlights and we'll follow that with a credit update from Jim Harper and then David Sparacio will give you a little bit more financial information on the quarter. From a loan standpoint, we did see solid loan growth in the quarter. Net of payoffs, our growth was 11% annualized. We do continue to see the loan pipeline being very robust and staying at robust levels. I will say, you know, characterize the loan demand as good, not great. Of course, we're not immune from the payoffs that you're hearing from everybody. We do have elevated payoffs on the commercial real estate side. Luckily, we are known as a commercial and industrial lending bank. Those certainly do not have the same level of payoffs that you see on the CRE side.

We are replacing, on the CRE side, we are replacing the payoffs with new projects. With the large equity requirements that we have today, our funding will not begin until the projects are well underway. On the real estate projects, a lot of projects still don't pencil out at today's higher interest rates. If we see a few cuts, we think the demand would be a good bit better. I think a lot of projects we're seeing are tax credit oriented, low income housing type products that are government supported projects. Those still have robust demand. On the deposit side, we saw some normalization of some of our higher cost municipal and correspondent deposits in the quarter.

We have had one large municipal deposit where the funds have been sitting for two years while construction projects are beginning, and those have begun so that those funds are running off as we expected in that large account. We are focused on opening core deposit accounts with, you know, Treasury products that go along with those. That is our focus of our bank and always has been and always will be in the new markets area. We did hire seven new producers in the second quarter in our footprint, and also I wanted to mention that we have ramped up in the last couple of quarters in a Merchant area. We brought on a team of Merchant group to increase our production on the Merchant side. We think we have great potential to grow our Merchant business.

We don't count those people as revenues, as their producer count is only commercial bankers, but they are revenue generators and we think they'll do a fantastic job growing Merchant revenue for us. I'm going to now turn it over to Jim Harper for a credit update.

Jim Harper (Chief Credit Officer)

Thanks Tom.

Good afternoon.

As Tom mentioned, we continue to see solid loan growth in the second quarter and through year to date 2025, and there appears to be continued solid demand into the third quarter and the second half of the year with active owner and non-owner occupied CRE and C&I pipelines. While total charge-offs in the second quarter were just under $6.5 million, they were driven primarily by a charge-off of just over $5 million related to one loan, which was a situation in which the borrower's performance deteriorated quickly and unexpectedly. Our allowance relative to total loans, which did increase by almost $5 million, compared.

To the first quarter remained flat.

A relative basis at 1.28% at quarter end. On the nonperforming asset front, NPAs remained stable also on a quarter-over-quarter basis, moving from 40 basis points at 3/31 to 42 basis points at 6/30. We continue to aggressively manage our NPAs. As evidence of those efforts, we achieved resolution on a couple of long-term problem credits in the second quarter and expect additional resolutions throughout the second half of this year. In summary, through our granular portfolio review that we execute on a quarterly basis, we haven't identified any systemic issues or concerns whether by industry or borrower type, including within our income producing and AD&C portfolios. Of course, there continue to be isolated incidents and credit deterioration, but we're not seeing any broader negative trends from a credit quality perspective and I'll turn it over to David for his financial highlights.

David Sparacio (CFO)

Thank you, Jim. Good afternoon everybody. For the quarter we reported net income of $61.4 million, diluted earnings per share of $1.12, and pre-provision net revenue of $87.9 million. This represented a return on average assets of 1.40% and a return on common equity of 14.56%. Net income grew more than $9 million or 18% from second quarter 2024 compared to the first quarter of 2025. Net income was down slightly by about $1.8 million or 3%. During the quarter we had two significant non-routine transactions. The first was an $8.6 million loss on the restructuring of our bond portfolio. During the quarter we decided to strategically sell about $70 million of bonds that were yielding 1.34% at a loss, and when we sold those we reinvested the $62 million of proceeds in new investments with a yield average of 6.28%.

The expected payback period on this transaction is 3.8 years. The restructuring will position us for stronger margin performance in future quarters. Secondly, we reversed an interest expense accrual of about $2.3 million that had been building for several quarters. This accrual was related to a legal matter that has been resolved, so we have seen an artificial reduction of about 7 basis points in our deposit cost. The reported 3.50% deposit cost will not sustain in future quarters. We expect it to be similar to first quarter at about 3.57%. We continue to focus internally on growing our margin, emphasizing price discipline for both loans and deposits. Our adjusted margin is 3.05% for the quarter, which is up 13 basis points from linked quarter and 26 basis points from the same quarter last year.

We continue to have repricing opportunities and cash flow paydowns in our existing fixed rate book of loans. We have about $1 billion in variable rate loans maturing in the next 12 months. Lastly, our tangible book value grew by an annualized 12.5% versus last quarter and by nearly 14% from the same quarter a year ago, ending at $31.27 per share. We continue to be well capitalized with a common equity tier 1 capital ratio of 11.38% and risk-based capital ratio of 12.81% for the quarter. Net interest income for the quarter was $131.7 million as reported, and adjusted net interest income was $129.4 million. This adjusted net interest income is $5.9 million higher than first quarter 2025 and more than $23 million higher than second quarter 2024.

We are pleased in the margin improvement which has increased from a normalized spot rate of 3.06% in March to 3.19% in June. If you recall, first quarter margin was weighed down by excess cash balances. Those balances have reduced as expected and are more stable as a result. We expect our margin to continue to increase throughout the year and expect that to accelerate if the Fed decides to lower benchmark rates. This quarter saw a significant increase in our provision expense which was necessary to maintain our allowance for credit losses given the loan growth and significant charge-off that Jim mentioned. In the second quarter we had little change in our economic and credit indicators in our CECL model and as a result our allowance for credit losses ratio had held steady at 1.28%.

We expect provision expense to normalize based on the current economic environment and the steady loan growth we have experienced year to date. Noninterest income was down significantly due to the bond book restructure that I discussed earlier. Excluding that loss, adjusted net interest revenue for the quarter was just under $9 million which is $706,000 better than 1st quarter of 2025 and about 1% higher than 2nd quarter of 2024. We continue to focus on noninterest income growth through Merchant Services processing and Treasury services. Tom already spoke about the onboarding of the new Merchant team and they continue to concentrate on cross selling opportunities. We also increased service charges related to our Treasury Management services on July 1 which is the first we've done in 20 years. Although we haven't seen those results in the second quarter, we will see those in future quarters.

During the quarter our noninterest expense was down $1.9 million versus first quarter primarily due to the large operational loss recorded in first quarter versus same quarter. Last year we experienced an increase of noninterest expense of about $1.4 million. This roughly 3% increase versus second quarter of 2024 is a modest increase given the 18% increase we realized in net income. My goal is to constrain noninterest expense growth to a fraction above revenue growth. We remain focused on expense control and continue to seek opportunities to reduce our operating costs. The largest effort we had this quarter in back office operation was a conversion involving our core processing system. We successfully unwound a configuration that involved a third party processing our transactions and switched to a direct relationship with Jack Henry. We will realize some cost savings in future quarters associated with this change.

We continue to expect our noninterest expense to be in the $46 million-$46.5 million range per quarter. Our noninterest expense this quarter represents an efficiency ratio below 34%. We do not expect drastic changes in our efficiency ratio going forward. All in, our second quarter 2025 pre-tax net income was down about $2.5 million compared to first quarter and up over $10 million versus second quarter of 2024. Our adjusted pre-tax net income was up $3.8 million versus first quarter and up over $16 million versus second quarter of 2024. We remain focused on organic loan and deposit growth priced both competitively and profitably. Lastly, we continue to strategize on reducing our tax expense and we were able to realize a slight decrease from first quarter to second quarter tax rate which we will continue to focus on going forward.

That now concludes our prepared comments and we will turn it over to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you'd like to be placed into the question queue, please press star 1 on your telephone keypad. Our first question today is coming from Stephen Scouten from Piper Sandler. Your line is now live.

Stephen Scouten (Managing Director)

Hey, good afternoon everyone.

I guess if I could start.

On just the net interest margin and kind of how I know you said you expect it to move higher from here.

What's kind of the starting point?

That interest reversal in your mind and kind of where that could potentially end the year from a trajectory standpoint.

Any Fed actions.

David Sparacio (CFO)

Yeah. Stephen, this is David Sparacio. The starting point, our adjusted margin is 3.06% for the quarter, right, excluding the interest expense item that we talked about. I mentioned we continue to focus on deposit and loan pricing across the footprint, and absent any changes from the Fed, we expect it to continue to increase on a quarterly basis. We're seeing about anywhere from 10-14 basis points each quarter. If you just interpolate that and think that we could get like 10 basis points in the third quarter and then another 10 basis points in the fourth quarter, we should be ending the year somewhere near the 3.25%-3.20% range is what we're anticipating.

Stephen Scouten (Managing Director)

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

David Sparacio (CFO)

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

Stephen Scouten (Managing Director)

Okay, great. Just kind of last thing.

For me, I think you guys noted maybe 23 new FTEs this quarter. I think Tom said seven of those were new lenders potentially.

Can you give us a feel maybe what markets those new lenders are coming from?

If there's any potential new markets that you guys are thinking about, new MSAs moving into, and then maybe any color, any additional color on that Merchant Banking initiative. Just kind of what the focus.

Is there, whether it's certain dollar revenue?

Companies or kind of how we should.

Think about that opportunity.

Tom Broughton (CEO)

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

David Sparacio (CFO)

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

Stephen Scouten (Managing Director)

Okay.

Tom Broughton (CEO)

If they're not production people and they're support for production people, we hire a new teller in Auburn, Alabama or Memphis, Tennessee or something like that, they're not very expensive people.

Stephen Scouten (Managing Director)

Maybe thinking about.

That opportunity set in that Merchant Banking

Area that you spoke of.

David Sparacio (CFO)

It's not in [audio distortion], it's Merchant, it's Merchant card, it's card processing. The thinking there is, you know, the Merchant processing we do for our existing customer base is a very low penetration rate. The theory there is that we're going to be able to increase our penetration rate amongst our existing customers.

Tom Broughton (CEO)

It's not, you know, it's pretty good profitability on, it's not big dollars, but it's, you know, we have like a 1% penetration and the new team says we should have 8% penetration. You know, we can go up. It's fairly substantial. Nice little kick to the noninterest income.

Stephen Scouten (Managing Director)

Got it.

Okay.

Thanks for all the color there.

I appreciate the time. Thank you.

Operator (participant)

Thank you.

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

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

You'Ve heard.

Tom Broughton (CEO)

I think tariffs.

It's a good excuse if you're not executing. I think it's a great excuse to not be executing because we just don't see that much impact from the tariffs now. Our construction loan bucket went up in the quarter, and because of our CECL model, we have to keep a lot more money in reserve for construction loans. Our construction loan, we had to increase our, what, $5 million, Jim, in our construction loan loan loss reserve. That's costly to add to the construction loans. It's not one area, I could say, it's a lot in Florida. It's really broad based. It's a lot of markets. It's some of our new markets like Memphis and Auburn, Alabama, doing real well in Atlanta, we're doing, of course, well in Florida, Montgomery, Alabama, through the Auburn expansion.

I don't believe in Asheville, North Carolina, the Piedmont area has grown, so I'm leaving some out. It's pretty broad based, Thomas, is what I'm trying to say. It's not in one asset class exactly.

So.

Okay, are we thinking, are we?

Thinking maybe low double digits? This is still on the table, potentially?

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

So.

Okay, no, great, that's fair.

I'm sorry if I missed this in the prepared remarks, but what do you have in terms of fixed rate loans repricing over the next 12 months?

David Sparacio (CFO)

We have about $1 billion.

Right.

About $1 billion in the next 12 months counting.

Tom Broughton (CEO)

You know, repricing investment securities is right at $2 billion a year for 12 months, between $1.9 billion, a little over $1.9 billion.

Caps cash flow.

On fixed rate loans and everything else.

Okay.

Last quarter, what are those loans?

Do you happen to have a yield that they're coming off at?

Are you getting a pickup?

David Sparacio (CFO)

If you give us a minute, we can get it for you. We have a weighted average yield of 4.87% right now for the next 12 months on $1.5 billion of loans, fixed rate.

Okay, great. I appreciate it.

That's all for me.

Thank you so much.

Tom Broughton (CEO)

Thank you, Tom.

Operator (participant)

Thank you. Our next question is coming from Dave.

Bishop from Hovde Group

Your line is now live.

Dave Bishop (Director)

Yeah.

Good evening, gentlemen.

David, maybe during the preamble, I think.

You spoke about maybe some of the trends you're seeing in the cost of deposits. I know there was some noise this quarter. I was wondering if you could go over what our expectations should be just in deposit cost trends.

David Sparacio (CFO)

Yeah, I think it's going to normalize more like the first quarter. We have an anomaly this quarter in the adjustment that we took. If you look at our adjusted cost of deposits, we were at 3.57% as opposed to 3.50% which is reported. I think that's what it's going to be going forward. We are slightly liability sensitive. That's assuming a Fed rate cut comes in. We will accelerate that, but without any Fed cut rates right now, we're going to hold probably around 3.50%, 3.57% range.

Dave Bishop (Director)

Got it.

I think Tom or David, you noted a change, a late quarter change, I think maybe the first of the month. The Treasury Management fees you're charging on the services—just curious how we should think about that just from a dollar perspective. Would that be a meaningful bump in that run rate moving forward?

David Sparacio (CFO)

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

Tom Broughton (CEO)

Hopefully they'll increase their noninterest bearing deposits. You know, that's, you won't see a revenue increase, Dave. You'll see an increase in NIB.

David Sparacio (CFO)

And.

Their earnings credit will account for the increased fees. We haven't increased our fees in 20 years, so we thought it was prudent and given.

Tom Broughton (CEO)

Some of them are due fees.

Dave Bishop (Director)

Got it, got it.

Tom, it sounded like the loan pipeline continues holding strong. You noted the increase in the construction loans outstanding.

Just curious if there was any sort.

Of commonality in terms of the types of projects were funded. Were these relatively newer credits, or were these, like you said, some projects where there was a lot of equity behind it, just took a while to sort of fund up.

Just curious.

Some color behind that group.

Tom Broughton (CEO)

Jim, you want to comment?

Jim Harper (Chief Credit Officer)

I'd say both, actually.

I think it was a mix of.

Projects that had a lot of equity.

That finally got to the point where.

They were drawn on lines.

I think there was certainly an.

Aspect where it was new production also. I'd say both for sure.

Dave Bishop (Director)

Got it. One final question, with the funding noise here. Yes, loan to deposit ratio at that mid 90% range.

Is there a comfort level to allow?

That to continue to creep up to basically a par. Do you think that sort of comes back down to the lower 90% over time this year? Thanks.

Tom Broughton (CEO)

Of course, we include fed funds purchased as a. If you look at our adjusted loan and deposit ratio, I don't know exactly what it is today, but it's closer to 80% than it is to 90%. Would that be correct, Davis?

Yeah, it's in the 80s. Mid 80s. Mid 80s. We're in good shape from a liquidity and funding standpoint. We want to be in a position to need to generate deposits.

Right.

Rather than needing to generate loans, we've been needing to generate loans for the last couple of years. We want it to be a problem of needing deposits, not needing loans. We'd like to swap that to problems; you either need one or the other all the time. They're never balanced. We'd much rather be in the need for deposits than a need for loans.

Dave Bishop (Director)

Got it.

Understood.

Thanks for taking my question.

Operator (participant)

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

Tom Broughton (CEO)

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

Operator (participant)

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