ServisFirst SFBS Q2 2025 Earnings Call Transcript

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DATE

Monday, July 21, 2025 at 5:15 p.m. ET

CALL PARTICIPANTS

Chairman, President, and Chief Executive Officer — Tom Broughton

Chief Financial Officer — David Sparacio

Chief Credit Officer — Jim Harper

Chief Operating Officer — Davis Mange

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TAKEAWAYS

Loan Growth: Loan growth, net of payoffs, reached 11% annualized in Q2 2025, supported by an active pipeline across commercial and industrial as well as commercial real estate segments.

Net Income: Net income was $61.4 million in Q2 2025, up 18% or more than $9 million year over year. This represented a decrease of $1.8 million, or 3%, compared to the first quarter of 2025.

Diluted Earnings Per Share: Diluted earnings per share was $1.12 in the second quarter of 2025.

Pre-Provision Net Revenue: Pre-provision net revenue was $87.9 million in the second quarter of 2025.

Return on Average Assets: Return on average assets was 1.4% in the second quarter of 2025.

Return on Common Equity: Return on common equity was 14.56% in the second quarter of 2025.

Allowance for Credit Losses: The allowance for credit losses remained steady at 1.28% of total loans in Q2 2025, and increased by almost $5 million compared to the first quarter, primarily due to a single $5 million charge-off during Q2 2025.

Nonperforming Assets: Nonperforming assets moved from 40 basis points at March 31, 2025 to 42 basis points at June 30, 2025.

Bond Portfolio Restructuring: An $8.6 million loss was incurred by selling $70 million in low-yield securities (1.34% yield) in Q2 2025, with $62 million reinvested into investments yielding 6.28% in Q2 2025, and a projected payback period of 3.8 years.

Interest Expense Accrual Reversal: $2.3 million was reversed due to the resolution of a legal matter in Q2 2025, which lowered reported deposit costs to 3.5% in Q2 2025

Net Interest Margin: Adjusted margin was 3.05%, up 13 basis points from the previous quarter; management expects further quarterly increases, projecting 3.25%-3.30% by year-end absent Fed action.

Variable Rate and Fixed Rate Loans: Approximately $1 billion in variable rate loans and $1.5 billion in fixed rate loans (with a weighted average yield of 4.87%) will reprice in the next twelve months.

Tangible Book Value: Tangible book value increased at a 12.5% annualized rate quarter over quarter in Q2 2025, and 14% year over year (Q2 2025 vs. Q2 2024), reaching $31.27 per share in Q2 2025.

Net Interest Income: Net interest income was $131.7 million in Q2 2025, and adjusted net interest income was $129.4 million. This was $5.9 million higher than in the first quarter of 2025 and more than $23 million higher than in the second quarter of 2024.

Non-Interest Income: Adjusted non-interest income was just under $9 million in the second quarter of 2025, which is $706,000 higher than in the first quarter of 2025, and about 1% higher than in the second quarter of 2024.

Non-Interest Expense: Non-interest expense was down $1.9 million from the first quarter of 2025, but up $1.4 million, or 3%, compared to the same quarter of 2024; The efficiency ratio remained below 34% in Q2 2025 with expectations for non-interest expense of $46 million to $46.5 million per quarter going forward.

Capital Ratios: The common equity Tier 1 capital ratio was 11.38% in Q2 2025; and the total risk-based capital ratio was 12.81% at quarter end.

Deposit Trends: Noted runoff of certain large, high-cost municipal deposits, while maintaining focus on core deposit growth tied to treasury products.

Merchant Services Expansion: New team onboarded, with opportunities identified to increase merchant processing penetration from 1% to an anticipated 8% within the customer base.

Treasury Management Fee Adjustments: Service charge increases took effect July 1 after two decades without changes; revenue impact is expected in future quarters, not reflected this period.

Core Processing Conversion: Shifted to direct relationship with Jack Henry, targeting cost savings in future quarters.

SUMMARY

ServisFirst Bancshares, Inc. (NYSE:SFBS) reported substantial year-over-year growth in net income and tangible book value in Q2 2025 while navigating higher payoff activity in commercial real estate and elevated provision expenses tied to loan growth and a significant individual charge-off. Management executed a strategic bond portfolio restructuring in Q2 2025, incurring an $8.6 million loss but reinvesting the proceeds into substantially higher-yielding assets, which is expected to benefit net interest margin over time. Deposit outflows stemmed primarily from anticipated runoff in high-cost municipal accounts, while targeted investments in core deposit-gathering initiatives and treasury management fee increases were outlined for future growth. Operating expenses were well-controlled with efficiency maintained, and capital ratios reinforced the bank’s well-capitalized status.

Management projects that adjusted net interest margin will rise steadily by 10 to 14 basis points per quarter, absent Federal Reserve rate changes, aiming for a 3.25% to 3.30% adjusted margin by year-end 2025.

Net loan growth reached 11% annualized in the second quarter of 2025, with leadership stating a targeted shift in emphasis toward deposit generation going forward.

The onboarding of a merchant services team could increase non-interest income penetration, with internal estimates suggesting a possible expansion from 1% to 8% among the existing customer base.

The efficiency ratio remained below 34% in Q2 2025 and was supported by successful core processing system conversion aimed at future cost reductions.

The adjusted loan-to-deposit ratio, factoring in Fed funds purchased, was reported in the mid-80% range as discussed during the Q2 2025 earnings call, with no immediate liquidity concerns noted by management.

INDUSTRY GLOSSARY

CECL: Current Expected Credit Loss, a standard that requires banks to estimate expected credit losses over the life of a financial asset.

Efficiency Ratio: A measure of non-interest expense as a percentage of revenue, commonly used to assess cost control at banks.

Nonperforming Assets (NPAs): Loans or assets that are not generating income, typically due to nonpayment by borrowers.

Merchant Processing (Merchant Card): Bank service enabling client businesses to process debit and credit card transactions.

Full Conference Call Transcript

Tom Broughton: 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 life loan pipeline being very robust and staying at robust levels. I will say, you know, characterize the loan demand as good, not great. And, of course, everybody, we're not immune from the payoffs that you're hearing from everybody.

So we do have elevated payoffs on the commercial real estate side. Luckily, we are known as a commercial and industrial lending bank. So those certainly do not have the same level of payoffs that you see on the CRE side. So we are replacing on the CRE side. We are replacing the payoffs with new projects but with the large equity requirements that we have today, our funding will not begin until the projects are well underway.

On real estate projects, you know, a lot of projects still don't pencil out at today's higher interest rates. We see a few cuts, think the demand would be a good bit better. And I think a lot of projects we're seeing are tax credit-oriented low-income housing type products that are government-supported projects. So those still have robust demand. You know, on the deposit side, we saw some normalization of some of our higher-cost municipal and correspondent deposits in the quarter. We 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.

So really, we are focused on opening core deposit accounts with treasury products that go along with those. That is our focus of our bank and always has been and always will be. And also I wanted to mention that we have ramped up in the last couple of quarters in a mercenary. 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.

So I'm going to now turn it over to Jim Harper for a credit update.

Jim Harper: Thanks, Tom. Good afternoon. As Tom mentioned, we continue to see solid loan growth in the second quarter and through year to date. 25%. And there appears to be continued solid demand into the third quarter and second half of the year with active owner and non-owner occupied CRE and C&I pipelines. While total charges in the second quarter were just under $6.5 million, they were driven primarily by a charge 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 on 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. And 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 conduct 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 of credit deterioration, but we're not seeing any broader negative trends from a credit quality perspective. And I will turn it over to David for his financial highlights.

David Sparacio: Thank you, Jim. Good afternoon, everybody. For the quarter, we reported net income of $61.4 million and diluted earnings per share of $1.12 and pre-provision net revenue of $87.9 million. This represented a return on average assets of 1.4% and a return on common equity of 14.56%. Net income grew more than $9 million or 18% from the second quarter of 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 a 1.34% at a loss. And when we sold those, we reinvested the $62 million of proceeds into new investments with a yield of an 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 seven basis points in our deposit cost.

The reported 3.5% of deposit costs will not sustain in future quarters. We expect it to be similar to the 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 the linked quarter and 26 basis points in the same quarter of 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 twelve 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 a 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 the first quarter of 2025 and more than $23 million higher than the second quarter of 2024. We are pleased with the margin improvement which has increased from a normalized spot rate of 3.06 in March to 3.19% in June. If you recall, the 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 has 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.

On non-interest income, it 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 the first quarter of 2025 and about 1% higher than the second quarter of 2024. We continue to focus on non-interest income growth through merchant services processing and treasury management 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 twenty years.

So although we haven't seen those results in the second quarter, we will see those in future quarters. During the quarter, our non-interest expense was down $1.9 million versus the first quarter, primarily due to the large operational loss recorded in the first quarter. Versus the same quarter of last year, we experienced an increase in non-interest expense of about $1.4 million. This roughly 3% increase versus 2024 is a modest increase given the 18% increase we realized in net income. My goal is to constrain non-interest expense growth to a fraction of 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 but we continue to expect our non-interest expense to be in the $46 million to $46.5 million range per quarter. Our non-interest expense this quarter represents an efficiency ratio below 34% and we do not expect drastic changes in our efficiency ratio going forward.

So all in, our 2025, I'm sorry, second quarter 2025 pretax net income was down about $2.5 million compared to the first quarter and up over $10 million versus the second quarter of 2024. Our adjusted pretax net income was up $3.8 million versus the first quarter and up over $16 million versus the second quarter of 2024. We remain focused on organic loan and deposit growth priced both competitively and profitably. And lastly, we continue to strategize on reducing our tax expense and we were able to realize a slight decrease from the first quarter to the second quarter in our effective 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: Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Stephen Scouten from Piper Sandler. Your line is now live.

Stephen Scouten: Hey, good afternoon, everyone. I guess maybe if I could start on just the net interest margin and kind of how I know you said expect it to move higher from here. What's kinda the starting point excluding that interest reversal in your mind and kind of where that could potentially end the year from a trajectory standpoint? Ex any Fed action?

David Sparacio: Yes. So Stephen, this is David Sparacio. You know, the starting point, our adjusted margin is 3.06% for the quarter, right, excluding the interest expense item that we talked about. You know, I mentioned we continue to focus on deposit and loan pricing across the footprint. And you know, absent any changes from the Fed, we expect it to continue to increase on a quarterly basis. We're seeing about, you know, anywhere from 10 to 14 basis points each quarter.

So, you know, 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% to 3.30% range is what we're anticipating.

Stephen Scouten: Okay. Fantastic. Very helpful. And then 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, I guess, the ability to drive deposit growth in line with the nice loan growth you've had?

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

Stephen Scouten: Okay. Great. And then 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, you know, potential new markets that you guys are thinking about, new MSAs moving into. And then maybe any color or any additional color on that merchant banking just kind of what the focus is there, whether it's certain dollar revenue companies or kinda how we should think about that opportunity?

Tom Broughton: You know, our HR is very literal in their headcount. 14 of them are former employees. So you can exclude 14 off that list. They don't count for anything.

David Sparacio: Yeah. There are interns. And if you look at the supplemental schedule, we shared, we were up twenty-three and fourteen of those, as Tom said, are interns. So we don't consider those full, you know, long-time employees. They're temporary employment. There are no new markets, so it's just adding to the staff that we already had in place.

Stephen Scouten: Predominantly.

Tom Broughton: Yeah. If somebody, if they're not, you know, production people and their support for production people, you know, we're hired a new teller in Auburn, Alabama or Memphis, Tennessee or something like that. They're not very expensive to beat them.

Stephen Scouten: And then just maybe thinking about that opportunity set in that merchant banking area that you spoke of.

Tom Broughton: It's not in, it's merchant.

David Sparacio: It's merchant card. It's card processing. And so the thinking there is, you know, the merchant processing we do for our existing customer base is a very low penetration rate. And so the theory there is we're going to be able to increase our penetration rate amongst our existing customers.

Tom Broughton: So that's not, you know, it's pretty good profitability on it's not big dollars, Stephen, but it's, you know, we have, like, a 1% penetration, and the new team says we should have 8% penetration. So, you know, we can go up as some fairly substantial nice little kick to the noninterest income.

Stephen Scouten: Got it. Okay. Thanks for all the color there. I appreciate the time. Thank you.

Operator: Thank you. Next question today is coming from Steve Moss from Raymond James. Your line is now live.

Steve Moss: Hey, good afternoon. This is Thomas on for Steve. Thank you for taking my question.

Tom Broughton: Sure, Thomas.

Steve Moss: Another strong quarter of loan growth from you guys. Appreciate the commentary you provided. But 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, but the tariff uncertainty that was going on. So just maybe any anecdotal things that you've heard.

Tom Broughton: I think tariffs is 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, you know, impact from the tariffs. Now, you know, 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, you know, we had to increase our, what, $5 million, Jim, in our construction loan. Yeah. Loan loss reserve. So, you know, that's costly to add to the construction loans, but, you know, it's not one area. You know, I can say, well, it's a lot in Florida. It's really broad-based.

There's a lot of markets. Some of our new markets like Memphis, and Auburn, Alabama, we're doing real well in Atlanta. We're doing, of course, well in Florida, Montgomery, Alabama, you know, to the Auburn expansion. So it's and I don't believe in Asheville, North Carolina, the Piedmont area has grown, so I'm leaving some out. But it's pretty broad-based, Thomas, is what I'm trying to say. It's not, you know, it's not in one asset class. Exactly. So we're pretty good. So we can give you.

Steve Moss: Are we thinking maybe low double digits is still on the table potentially?

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

Steve Moss: Okay. No. Great. That's fair. And 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 twelve months?

David Sparacio: We have about a billion dollars probably about a billion dollars in the twelve months. I'm sorry.

Tom Broughton: Counting, you know, repricing, investment securities is right at $2 billion a year. For twelve months. Between $1.9 billion, a little over $1.9 billion. Cash flow on fixed rate loans and everything else.

Steve Moss: Okay. Last quarter. What are those loans? Do happen to have a yield that they're coming off at? Or a pickup that you're getting?

David Sparacio: If you give us a minute, we can get it for you.

Steve Moss: Yeah. So we have a weighted average yield of $4.87 right now on the, for the next twelve months. On $1.5 billion of loans.

Steve Moss: Fixed rate. Okay. Great. I appreciate it. That's all for me. Thank you so much.

Tom Broughton: Thank you, Tom. Thanks, Tom.

Operator: Thank you. Our next question is coming from Dave Bishop from Hovde Group. Your line is now live.

Dave Bishop: Yes, good evening gentlemen. Hi, Dave.

Tom Broughton: Hey, Dave.

Dave Bishop: 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 were some noise this quarter. I was wondering if you could go over what our expectations should be just on deposit cost trends.

David Sparacio: Yes. I think it's normalized more like the first quarter. We have an anomaly this quarter in the adjustment that we took. So if you look at our adjusted cost of deposits, we're at $357 million as opposed to $3.50, which is reported. And so I think that's what it's gonna be going forward. You know, we are slightly liability sensitive. So that's assuming a Fed rate cut comes in, we will accelerate that. But, without any Fed cut rates right now, we're gonna hold probably around, you know, $3.50, $3.57 range.

Dave Bishop: Got it. And I think, Tom or Dave, you noted a change, a late quarter change, I think maybe the first of the month, and the treasury management fees you're charging on the services. Just curious, we should think about that just from a dollar perspective. Would that be a meaningful bump in that run rate moving forward?

David Sparacio: Yeah. I mean, you know, you guys know we're not a big noninterest revenue bank. Right? And so, 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. Hopefully, they'll increase their noninterest bearing deposits. That's won't see a revenue increase Dave, you'll see an increase in NIBs.

Tom Broughton: And then their earnings credit will account for the increased fees. Right. Right. But we haven't increased our fees in twenty years. So we thought it was prudent in some of our new fees.

Dave Bishop: Got it. Got it. And then, Tom, it sounded like the loan pipeline continues to hold in 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? 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 growth.

Jim Harper: 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. But I think it was certainly an aspect where it was new production also, I'd say both for sure.

Dave Bishop: Got it. And then one final question that with the funding noise here. I guess loan to deposit ratio at that mid-ninety percent range. Is there a comfort level to allow that to continue to creep up to the basically, at par? Do you think that sort of comes back down to the lower nineties over time this year? Thanks.

Tom Broughton: Well, of course, we include Fed funds purchased as a so if you look at our adjusted loan and deposit ratio, I don't know exactly what it is today, but closer to 80% than it is to 90%. Would that be correct, Davis?

Davis Mange: Yeah. It's just, it's in the eighties, mid-eighties. Mid-eighties.

Tom Broughton: So, we're in good shape from a liquidity and funding standpoint. That's, 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. So we'd like to swap that to problems. You need one or the other all the time. They're never balanced. So we'd much rather be in the need for deposits than a need for loans.

Dave Bishop: Got it. Understood. Thanks for taking my question.

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

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

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

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