ServisFirst Bancshares - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 diluted EPS was $1.19, up 8% q/q; net income rose to $65.2M and book value per share reached $29.63 (+12% y/y).
• Net interest margin expanded to 2.96% (+12 bps q/q), with net interest income up $8.0M (28% annualized) as deposit costs fell and fixed-rate loans continued to reprice.
• Balance sheet growth was healthy: deposits +$397M (12% annualized) and loans +$268M (9% annualized); liquidity remained strong with $2.4B cash and no FHLB advances or brokered deposits.
• Credit quality stayed solid (NPA/Assets 0.26%; annualized NCOs 0.09%); CET1 increased to 11.42% (from 10.91% y/y).
• Dividend increased 12% to $0.335 per share and management signaled ongoing margin tailwinds from ~$1.5B fixed-loan repricing plus ~$325M securities cash flows in 2025.

What Went Well and What Went Wrong

What Went Well

• Sustained margin momentum with NIM at 2.96% and net interest income at $123.2M; CFO highlighted earning asset yields and deposit rate reductions driving the 12 bps q/q NIM increase.
• Deposit franchise strengthened: noninterest-bearing demand rose to 20% of average deposits (from 19% in Q3), service charges grew 21.5% y/y, and correspondent funding channel expanded to 378 banks (+24 in 2024).
• Credit remained benign: annualized net charge-offs at 9 bps for Q4 and FY, ALLL/Loans steady at 1.30%, and management sees issues more “weak companies” than “industries,” implying portfolio resilience.
• Management tone constructive post-election: “We are optimistic… make stock sellers and short sellers remorseful” and expect loan demand and margins to improve.

What Went Wrong

• Loan yields dipped to 6.43% in Q4 (from 6.62% Q3) amid mix effects; earning asset yields fell 25 bps, partially offset by a 46 bps drop in interest-bearing liability rates.
• NPA/Assets ticked up to 0.26% (vs. 0.14% in Q4’23) driven by a single relationship; one nonperformer sale fell through and remains under contract, with resolution still pending.
• Expenses reported at $46.9M included health plan shortfall funding, one-time EDP costs, and a fraud receivable write-down; core expense run-rate increased modestly to ~$45.3M vs. the earlier ~$44.8M target.
• Excess liquidity (~$370M held) weighed on NIM percent; December margin would be “around 3%” absent excess funds, indicating some near-term drag from liquidity positioning.

Transcript

Operator (participant)

Greetings, and welcome to the ServisFirst Bancshares Q4 and Full Year Earnings Conference 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, please press star zero on your cell phone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Mange. Thank you. You may begin.

Davis Mange (Corporate Treasurer, Director of Investor Relations and SVP)

Good afternoon, and welcome to our Q4 Earnings Call. Today's speakers will cover some highlights from the quarter and then take questions. We'll have Tom Broughton, our CEO, Henry Abbott, our Chief Credit Officer, and Ed Woodie, our Interim 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 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 (Chairman, President, and CEO)

Thank you, Davis. Good afternoon, and thank you for joining our Q4 Conference Call. We were really pleased with the quarter, and all of our trends turned out to be positive. If we recap the year, we ended with earnings per share, diluted earnings per share up 10% over 2023, and our net interest margin did climb steadily from 2.57% in the Q4 of 2023 to 2.96% in the Q4 of 2024, and also, our book value, more importantly, grew 12% year-over-year, so in any event, we're really happy how the year ended up, and it got better as the year went on, and a year ago, on the call, I said that loan losses were low and would probably normalize, and here we are a year later, and the loan losses are still low, and I'm still saying they're going to normalize.

But Henry will talk about credit in a few minutes, but we don't really see any industries with problems. We just see weak companies that have problems and are used to the borrowers we see that we have to deal with. So on the loan front, we were concerned about, we knew we had a pretty good loan pipeline for the Q4, but we were concerned about payoffs in the Q4. Now, loan payoffs turned out to be about 40% of our net loan growth, excuse me, of our gross loan growth. So we had a net loan growth of $268 million for the quarter, and I will say not all those payoffs were a bad thing. About half those payoffs were low fixed-rate loans, so we're glad to see those payoffs.

But we will have some more payoffs in the Q1, but at a much lower level than we saw in the Q4, we believe. So from a C&I loan growth standpoint, we did see some. It was encouraging, and we saw the increase in loan line utilization from 36.7%-38.4% quarter-over-quarter. Our loan pipeline increased $150 million after the election, which is very positive. And we do expect loan growth to normalize more over the course of 2025. I will mention our two new markets, Memphis and Auburn. Memphis, Tennessee, and Auburn, Alabama, are making very good progress. And they've been working out of their cars until the last couple of months. So they've just now got an office. So we are proud of how they're doing and optimistic for their future.

I think we'll do really well and have great leadership in both of those cities. We did add four new producers in the Q4. It's not common to add many in the Q4. Usually, you see them in the first half of the year. So in any event, we are pleased with those markets. From a deposit standpoint, we did see very nice deposit growth in the quarter, including our non-interest-bearing deposits. We did see some good growth in our correspondent channel with year-over-year growth and 28% in funding. Now we have 378 banks in 30 states that are our correspondent customers. We added 24 new banks in 2024, and 65% of the funding comes from banks that are settled with us or settlement banks. So that was very much a positive.

So that's a quick overview, and I'm going to turn it over to Henry now to discuss credit in more detail.

Henry Abbott (Chief Credit Officer)

Thank you, Tom. I'm extremely pleased with the bank's performance in 2024, and more specifically in the Q4. The bank's loan portfolio continued to perform at an exceptional level, and our commercial-focused business model continues to outperform our peers. As we exited the COVID stimulus era, our bank was at historical lows for most credit metrics a few years ago, and remarkably, we've been able to continue to stay at or near these historic low figures punctuated by a very strong 2024. Annualized net charge-offs for the Q4 were nine basis points, and we had nine basis points in charge-offs for the entire year. This is less than the 10 basis points we had in 2023. I'm very proud and pleased with these minimal charge-offs that we experienced in 2024.

Our ALLL to total loans was stable throughout the course of 2024, and we ended the year with an allowance for loan and lease losses to total loans of 1.30. Non-performing assets to total assets were 26 basis points, which is generally in line with the results for the Q3. We continue to proactively monitor the portfolio to ensure we appropriately understand the potential risk and act accordingly as well as conservatively. 2024 was a very strong and stable year from a credit perspective, and with the new administration in place in Washington, we look forward to growing and prospering in 2025 and beyond. Ed, I'll turn it over to you.

Ed Woodie (Interim CFO)

Thank you, Henry, and good afternoon, everyone. We are very pleased with our Q4 results and our update about our earnings momentum heading into the new year. While we have experienced four straight quarters of net interest margin improvement, I'll focus my comments today on late quarter because recent trends are meaningful to our momentum. Net income was up $5.2 million over the Q3, or 9%, and diluted EPS was up 8%. Net interest income increased 28% on an annualized basis and continues to be a growth leader for net income. Margin increased to $123.2 million in the Q4 compared to $115.1 million in the Q3. We continue to benefit from the upward repricing of fixed-rate assets, and we have successfully managed the cost of liabilities. Earning asset yields decreased by 25 basis points, while interest-bearing liability rates decreased by 46 basis points.

Net interest margin increased 12 basis points over the prior quarter, while holding an additional $370 million in cash, which negatively impacts the net interest margin percentage. We spoke at length last quarter about the interest rate position of our balance sheet being slightly liability sensitive, and that hasn't changed. I'd like to offer some more specific numbers that may help with everyone's analysis. Approximately $325 million of our securities are set to mature or pay down during 2025, and those currently yield 3.2%. We have $6.3 billion in fixed-rate loans, and they repriced up 10 basis points during the Q4. We believe we have several more quarters of increasing yield in this portfolio. We have $6.1 billion in variable-rate loans currently yielding 7.3%. Most of these repriced within 30 days following a rate change.

Rates for interest-bearing checking deposits dropped from 3.65% at the end of the Q3 to 3.32% at the end of the Q4, indicating a beta of 66. Non-interest-bearing demand deposits increased to 20% of total average deposits, up from 19% in the Q3. Please refer to our supplementary information attached to our press release for further details on our balance sheet structure. We had another good quarter of non-interest income. Deposit service charges increased, resulting from higher analysis charges, and mortgage income increased due to continued strong origination volumes. However, credit card net revenue declined slightly. We had another quarter of successful expense management. We recently directed to $44.8 million of core expenses per quarter. We believe this has increased modestly to $45.3 million currently. We are reporting $46.9 million for the quarter.

However, that includes an adjustment to fully fund a shortfall in our health plan, one-time EDP costs related to upcoming systems enhancements, and the write-down of check fraud receivable from other banks. These are offset by a decrease in our annual incentive plan accrual. Our efficiency ratio improved each quarter during the past year. Our tax rate for the quarter was 17.9%, but benefited from a positive adjustment to a tax credit investment, which had delays in construction. Excluding this adjustment, our tax rate was 18.8%, and we believe our prior guidance of a 19% tax rate is still correct. I'll now turn the call back over to Tom for his final thoughts.

Tom Broughton (Chairman, President, and CEO)

Thank you, Ed. And we're thinking in the wake of the election, we do see we were optimistic before the election, and we're more optimistic after the election because we are a business bank, and the business community overall is very optimistic about the outlook and for the future. And of course, some of that's dependent on a continued downward trend in short-term rates, I think, to make projects pencil out a little bit better. I think we're going to have to have some rate cuts over the next year. So we do expect loan demand to continue to improve and our margins to improve a little bit. Our goal here is to make stock sellers and short sellers remorseful, and we hope there'll be more so in the course of the coming year. We're now opening up for questions.

Operator (participant)

Great. Thank you. At this time, we will be conducting a question-and-answer session. If you'd like to ask a question, please press Star 1 on your cell phone keypad. A confirmation tone will indicate 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 your handset before pressing the Star keys. One moment, please, while we poll for questions. Our first question is from Stephen Scouten from Piper Sandler. Please go ahead.

Stephen Scouten (Managing Director)

Yeah, thanks. Good afternoon. Just kind of curious, first, if you were surprised to the upside at all about the deposit beta as you were able to extract this quarter. That was really nice to see. And kind of how you think about that upside potential for the NIM, Tom, that you spoke to, maybe in the current expectations where maybe there's not any additional cuts or maybe an environment where there are additional cuts, kind of how we can think about that trajectory.

Tom Broughton (Chairman, President, and CEO)

Oh, that's kind of a tough question. I guess when you have the luxury of having a fair amount of excess cash, you can be pretty disciplined about your interest rate expense management, Stephen, and when you're in a position where you're not, you cannot be, so we have that luxury of having excess cash, and we can be pretty disciplined about it, but I'll just say that we haven't had any pushback, and we've been fair and reasonable with our clients, and I'm very surprised at how little pushback because we deal with business clients. Our cost of funds is higher than your average bank to begin with, so we're already paying them a market rate, so I think they're fully expecting if we see any more cuts, they're fully expecting to see some more.

Of course, at some point, there's a law of diminishing returns here as rates go lower and lower and lower. How low we can cut rates, and you know that. So we try to have really nice floors compared to nice for us on our loans compared to I think what you used to see in floors a few years ago is much higher today than what we looked for in earlier years. So I think that'll help us down the road is the loan pricing on the floors on the loans will help us. I think we'll flop from saving on the expense side to the floors on the loan side will help us, if that answers your question.

Stephen Scouten (Managing Director)

Yeah. No, that's really helpful color, Tom. Appreciate that. And then maybe you said you hired, I think, four people here this quarter. Can you talk about how you're thinking about hiring into the new year? If you expect that to be kind of business as usual and continue to hire good people as they come about? And kind of along those lines, if we see more M&A, which everyone seems to be expecting, would you potentially be more aggressive with dislocation in and around your existing markets?

Tom Broughton (Chairman, President, and CEO)

We've always said we're not going to let our budgeted goals that we certainly don't disclose those, but we have those internally dictate our strategy. We're going to always be opportunistic about hiring the very best people. We have a couple of irons in the fire, one kind of small and one kind of large in terms of potential expansions. I don't know. We're not anywhere close to a maybe on those yet, so we don't know. But yes, if we see merger activity has always helped us because there's always people that fall out of it that are unhappy in terms of the musical chairs. The chairs are arranged differently after the music stops. So we see that as a huge potential upside given the brighter environment for banks, the brighter merger activity.

Of course, if I was a bank looking to sell, I mean, you'd certainly think they would get in line in the next four years or certainly before that while we have a bank-friendly, at least seemingly bank-friendly administration just came into office.

Stephen Scouten (Managing Director)

Yeah. I think you're right about that, and how do you guys just from a strategic perspective, how do you think about that? Do you have a list of, I don't know, four or five markets that you think about, "Hey, if the opportunity arose, here's a market we really want to be in?" Or kind of how do you think about that potential for expansion?

Tom Broughton (Chairman, President, and CEO)

Yeah. I've got a list in my drawer. I've got a file on probably 20 different markets, and I've got a list of everybody we've ever talked to over the last 19 and a half years in that file of each one of each of those markets. So we dust it off, and when a merger's announced, we think, "Oh, okay. Who is in that market that we're interested in?" And luckily, we do have pretty good connectivity in the Southeast to the point to where we think we'll get a call. We have a lot of correspondent bank network that Rodney's put together, a lot of friends in the correspondent world that we can try to spot opportunity, and they'll spot opportunity for people they're interested in hiring as well. So we tend to work together with other friends in the industry.

Stephen Scouten (Managing Director)

Got it. Really helpful. Congrats on a great year. Appreciate all the color.

Tom Broughton (Chairman, President, and CEO)

Thank you, Steve.

Operator (participant)

Our next question is from Steve Moss from Raymond James. Please go ahead.

Steve Moss (Managing Director)

Good afternoon.

Tom Broughton (Chairman, President, and CEO)

Hey, Steve.

Steve Moss (Managing Director)

Hey, Tom. With your upbeat comments here on the loan pipeline here, just kind of curious how you're thinking about loan growth for the upcoming year. You did about 8% or so for 2024, maybe low double digits, or could there be a little bit more upside potential in that?

Tom Broughton (Chairman, President, and CEO)

I hesitate to give any because in 2024, you go back through it. The Q1 was zero. Q2 was really good. Q3, I think, was pretty close to nothing, and then Q4 was pretty good, so it's been inconsistent. I don't know what you analysts think that we'll see the organic growth rate at for loans, and we still have a problem where rates are too high. The 10-year is too high for people to start new projects in many cases. They don't like the 10-year today, and the short-term borrowing cost is really higher than we talked to a lot of our commercial real estate customers, and they all say that it's a little bit of an issue.

I think our merchant developers are moving ahead pretty well, but the multifamily world still and construction cost is obviously a big issue. And it's not like they can just force down the cost of steel and concrete and lumber with the new administration in place. That's not going to happen. So I'm optimistic, but I'm not counting on anything, any substantial improvement, I don't think, Steve, from what we saw in 2024. We had to fight and scrap to put together what we did in 2024. And I don't think outside of I see, obviously, there's a lot of potential in Florida. We see anytime you've got net in migration like the state of Florida has, that's going to lead to increased opportunity. They'll even have to build more senior housing or active living, I think they call it these days.

They're going to have to build more of that eventually in Florida. They'll run out of bedrooms down there for the active living component, so we're optimistic that Florida will be a help, but certainly, we have a pretty well-rounded loan portfolio throughout the Southeast.

Steve Moss (Managing Director)

Got it. Okay. And then in terms of the producers hired, just kind of curious, is it more C&I, CRE, just kind of how do we think about that? And was it in the new markets or of new markets or previous markets, Memphis, Auburn versus elsewhere?

Tom Broughton (Chairman, President, and CEO)

Yeah. In the Q4, it was a lot of additional Memphis, Auburn. I think maybe one Nashville. In the Q1, we've already added four in Florida, in terms of the West Central Florida region. We've already added four new bankers down there. And they all are really on our company. We only have one dedicated commercial real estate lender. And he is in Nashville, and he is from Texas. And he has probably half his customers in Texas and half are in other places, Henry, if that would be fair to say, including Tennessee. But everybody else is sort of at least has a C&I bent, and they do some commercial real estate as well.

Steve Moss (Managing Director)

Okay. Got it. And then in terms of just on the margin here, I heard I mentioned the cash flows from the securities portfolio. Just curious, updated thoughts on fixed-rate asset repricing for the loan portfolio here, what cash flows for the upcoming year? If there's any change in these days.

Ed Woodie (Interim CFO)

Yeah. We talked about it last quarter, and I think it's a little changed this quarter. But we're still looking at about $1.5 billion of fixed-rate loans that are repricing in the first year. And then you add to it the $300 million that we talked about in securities, and that gets us back up to that $1.8 billion I think we talked about last quarter. And so that $1.5 billion of fixed-rate loans are coming off in the high fours. We think they're coming back on in high sixes.

Steve Moss (Managing Director)

Okay. And in terms of just the margin trends, I assume the margin was expanding every quarter. Was the December margin fair to assume was above 3% at this point? And just kind of curious how you guys are thinking about that for over the near term.

Ed Woodie (Interim CFO)

Yeah. It is right around that 3%, except for if we're holding excess on-balance sheet liquidity on our books, that tends to impact that net margin percentage. So you're probably seeing in the mid-290s as opposed to 3, but for that item.

Steve Moss (Managing Director)

Okay. Got it.

Ed Woodie (Interim CFO)

Yeah. So if we were running more like, say, about $2 billion in excess funds, our margin would be in that 3% range.

Tom Broughton (Chairman, President, and CEO)

I guess we tend to correspondent. Rodney Rushing sitting here, they tend to when they see a peak in the Q4 in terms of deposit balances.

Rodney Rushing (EVP and COO)

They do. And that happened this quarter as it has in previous years, up for the Q4. And our existing customers will be flat usually through the first and halfway through the Q2.

Steve Moss (Managing Director)

Okay. Got it. Appreciate all that color. And then just one last one for me in terms of the non-performing that I know was under contract to be sold and then fell through. Just kind of curious if you have any update on timing of potential resolution?

Ed Woodie (Interim CFO)

Don't have any immediate update. It's still one we're working on. A lot of attention, but there's nothing that's definitive at this time.

Tom Broughton (Chairman, President, and CEO)

It's under a contract, but they have, let's put it this way, any sale is going to be at a multiple of our debt amount. So we're fine, but there are other creditors out there, and that's why they're trying to get everybody paid in full, which may be a little bit difficult to do. So we have a backup buyer potentially as well. So we don't feel like there's any risk of loss there with that asset.

Ed Woodie (Interim CFO)

Yeah. I think that's a good statement of risk of loss, but yeah, it's just going to take time.

Steve Moss (Managing Director)

Right. Okay, well, really appreciate all the call here, and nice quarter, guys. Thank you very much.

Tom Broughton (Chairman, President, and CEO)

Thank you, Steve.

Operator (participant)

Our next question is from Dave Bishop from Hovde Group. Please go ahead.

Dave Bishop (Director)

Hey, good evening, gentlemen.

Tom Broughton (Chairman, President, and CEO)

Dave, how are you doing?

Dave Bishop (Director)

I'm good, Tom. How are you doing?

Tom Broughton (Chairman, President, and CEO)

Good, bud.

Dave Bishop (Director)

Hope the snow didn't bury you too much. Hey, quick question for you. I appreciate the supplemental disclosures in terms of the loan origination pulled back a little bit, I think right on top of 7.10% end of the quarter. Just curious how they've trended post-quarter, any sort of material movement in those origination yields?

Ed Woodie (Interim CFO)

No.

Tom Broughton (Chairman, President, and CEO)

Go ahead, Ed.

Ed Woodie (Interim CFO)

No, Dave. I think that's about right.

Tom Broughton (Chairman, President, and CEO)

We're looking at a little bit of a more of a balance between fixed and floating rate loans where we're doing some more fixed rate than we were. We were doing practically none, let's say, a year ago. That we're now, as we approach being asset neutral, I mean, liability-sensitive neutral and asset-sensitive neutral, we're looking at a little bit better mix of some fixed and floating rate loans, Dave.

Dave Bishop (Director)

In terms of the pipeline composition, I know the percentage of commercial industrial loans has sort of declined over the years as commercial real estate construction picked up. I'm just curious if there's more of a C&I component that might bring over operating accounts with them moving forward.

Tom Broughton (Chairman, President, and CEO)

The interesting thing is a lot of the C&I, like, I looked at our service charges December over December, and then they're up 20% year-over-year, which says we've got a lot more accounts on the books and a lot more activity. Many of those accounts are non-borrowing accounts, Dave. Many of the good C&I accounts don't borrow, or they may have a line that's inactive and no usage in it. It's sort of the interesting thing. A lot of the C&I we bring in either has no deposits or is 100% deposits. It's sort of an interesting phenomenon out there on the C&I side.

Dave Bishop (Director)

Got it. And as you sort of look at the crystal ball from a credit perspective, you noted in the preamble, obviously, net charge-offs are very well-behaved here. What would it take to maybe say move that from, say, the 10 basis points to 20 basis points level would be a collapse in unemployment? Just curious of what would have to happen to really have a draconian impact to that loss rate.

Tom Broughton (Chairman, President, and CEO)

If it goes to 30 basis points one quarter, don't be surprised, Dave. I mean, don't get used to the 10. It is not reality over a long period of time. And that's why we need the margin expansion too. Very few commercial banks can sustain a 10-15 basis point charge-off rate over a long period of time. And I've always said that on average, good banks are 25 basis points or less on average. And so, but that means we might have a year when we spike to 35, or we might. So if we got back to 25, I don't think the wheels haven't come off. That's just sort of back to a normal level. But again, I said in my script, we don't see weaknesses in any particular industry. I mean, there's some industries, obviously, senior housing has been, everybody knows, has had some issues.

Trucking has had issues as well. And the weak borrowers have long since filed bankruptcy in both those industries. And we've got a few that might be struggling a bit, but they're going to make it to the other side. But outside of that, they're randomly just companies that are just poorly operated in whatever industry they're in. Henry, do you want to add anything to that?

Henry Abbott (Chief Credit Officer)

No, I agree. I don't think there's, as you asked, one specific thing, whether it's unemployment or otherwise, that's going to drive it up. It's just going to be a deterioration in certain borrowers. Nothing specific to industries or asset classes. It's just weaker projects or weaker players.

Tom Broughton (Chairman, President, and CEO)

I would speculate in a speculation, Dave, that the only thing unemployment will have anything to do with is residential A, D, and C. I think there's probably a pretty high correlation between we could see some, and we just don't have the kind of exposure. We kind of learned our lesson after 2008-2009. 2008-2009, things have gone well for 15 years, and you tend to get complacent thinking a lot of inventory is never going to become worthless though it did. So I think outside of that, on the commercial side, I just don't see losses being affected by the increase in unemployment. I could be wrong, but my experience over the years has been that I think residential A, D, and C is tied to unemployment.

Dave Bishop (Director)

Got it. And then maybe a question for Rodney. I know the puts and takes of the correspondent banking group can be cyclical. The increase in end-of-period borrowings, period to period, does that reflect timing of fund flows or funding of loan growth? Just curious if that's related to the correspondent banking group. Thanks.

Rodney Rushing (EVP and COO)

It's both. You have the Q4 where liquidity builds with our customers, and we got 374 correspondent banks now, thereabouts, and the other thing is we added 24 relationships during the year. The largest market in growth was Texas, followed by which we hired some new producers there almost two years ago, and then followed by Tennessee, and we added some producers in Tennessee who are doing well, so it's new accounts and, in addition, that Q4 liquidity growth.

Dave Bishop (Director)

Got it. Appreciate the color.

Rodney Rushing (EVP and COO)

Thank you.

Operator (participant)

This concludes the question and answer session. I'd like to turn the floor back to management for any closing comments.

Tom Broughton (Chairman, President, and CEO)

Thank you, everybody, for joining us on the call. Appreciate your investment in our company.

Operator (participant)

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