ServisFirst Bancshares (SFBS) Q2 2026 earnings call transcript

Thank you, Davis.

Good afternoon, and welcome to our second quarter earnings call. We will have Tom Broughton, our CEO, Jim Harper, our Chief Credit Officer, and David Sparacio, our CFO, 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 projection shared today due to factors described in our most recent 10K and 10Q filings. Forward-looking statements speak only as of the date they are made, and ServiceFirst assumes no duty to update them.

With that, I'll turn the call over to Tom.

Thank you, Davis. Good afternoon. Thank you for joining our second quarter earnings conference call. We are generally pleased with the results, and I want to give you a few highlights of the quarter, and I'll be followed by Jim Harper, our Chief Private Officer, and David Sprecio, our Chief Financial Officer. On the loan side, we saw improved loan demand with annualized loan growth of over 15%. Almost all of our 13 regions or segments had really solid loan growth. The best growth was in our two Florida regions and Tennessee, though really no region contributed more than 15% of the total growth, and almost none of them were less than 10% of the total growth. So it really was very granular.

It was not due to several large credits, which was really good. And we also saw some improvement in our CFI line utilization in the quarter, and that was encouraging as well. So our loan pipeline did grow quarter over quarter and is now at a record level.

Projected payoffs this quarter are 17%, which is roughly the same as last quarter, and is down from around 33% over the last two years in rough numbers. So we are seeing payoffs diminish and return closer to historical levels of typical payoffs. You know, you tend not to notice payoffs when you have robust loan demand. So hopefully we're seeing loan demand rebuild and begin to things normalize a bit on that side.

Our Houston pipeline is beginning to build, and we are seeing increased activity in Texas. On the deposit side, our growth rate was constrained by some large income tax payments due to sales from properties and companies by our clients. Our non-dispositive-bearing deposits grew 20% annualized in the quarter and 14% year-over-year as we continue to emphasize our treasury management services, and we benefit from the continued trend of bank mergers, as none of these bank mergers are done to improve customer service.

On the new employee front, we added nine bankers in the quarter. We added two in the Piedmont region, three in northwest Florida, and three in Houston, including a new market president and other regional CEO in Houston. Our goal is never to set a numerical goal for new bankers, but we try to make our bankers more productive and successful and grow their loan and deposit portfolios and be very responsive to our customers' needs. With a name like Service First, customer service is our primary goal, and we want bankers who embrace the culture of Service First. I now turn it over to Jim Harper for a credit update.

Thanks, Tom. As mentioned, lending activity definitely picked up as we progressed through the quarter, as we experienced solid loan growth across most markets. While growth was granular, it was driven by CRE activity. As a result, we experienced an uptick in our CRE outstanding relative to capital, moving from 298% of capital at 331 to 307% at 630.26. That lending momentum and activity has continued into the early third quarter across our footprint, and including Texas, where the team continues to grow and source new opportunities.

With regards to NPAs, as noted following the first quarter, we did have successful resolution in several credits early in the second quarter. For the quarter, we saw a net decrease of MPAs of just under $7 million on a net basis. We don't see any systemic weakening in any particular sector of lending, and our credit quality continues to be strong.

On a related note, charge-offs for the quarter and year-to-date continue to be modest, We have a list totaling approximately $3.7 million for the quarter and totaled just over $12 million or nine basis points for the first half of the year.

Lastly, the allowance for loan losses in the quarter at 126 basis points versus 125 basis points at the end of the first quarter, with increases occurring both within the pooled portfolio and our loans assessed for individual impairment. David will now provide a summary of our financial performance for the second quarter.

Thank you, Jim, and good afternoon, everyone. I'll walk you through the financial details of our second quarter, and I'm pleased to report that the momentum we described in the first quarter continued into this quarter. Net interest margin expanded again. Loan growth reached fastest pace in several quarters, credit metrics improved meaningfully, and capital continued to build. Taken together, this was solid financial performance for us. For the second quarter of 2026, we reported net income of $85.8 million, or $1.57 per diluted share. That compares to $1.52 per share in the first quarter, up 3.4% on the linked quarter basis, and compared to $1.12 per diluted share in the second quarter of last year. An increase of 40% year over year.

On an adjusted basis, which excludes a legal matter, accrual reversal, and a loss on marketable securities that affected last year's results, diluted earnings per share grew 30% from $1.21 a year ago. For the first six months of 2026, net income was $168.8 million, or $3.09 per diluted share, up 35% from $124.6 million, or $2.28 per diluted share in the same period last year. Return on average assets was 1.91%, up from 1.89% in the first quarter and well above the 1.40% we delivered a year ago.

Return on average common equity was 17.71% compared to 17.91% last quarter and 15.68% on an adjusted basis the same quarter of last year. These returns continue to reflect the operating leverage in our model. Margin expansion, strong loan growth, and expense discipline all moving in the right direction together.

Net interest income for the second quarter was $155.6 million, up from $148.1 million in the first quarter and from $131.7 million a year ago. So, net interest margin expanded to 3.63%, up 10 basis points on the linked quarter basis, and up 53 basis points year over year. I would note that during the quarter, we were fully paid out of a large credit relationship that had previously been on non-accrual status, and we recovered $1.9 million of interest income as a result. That recovery accounted for five basis points of the improvement in loan yields and in total net interest margin. On the funding side, average interest bearing deposit cost was 2.80%, essentially flat to the 2.79% we reported last quarter, but down 53 basis points from a year ago as last year's rate cuts worked through the deposit portfolio.

On the asset side, loan yields were 6.23%, up five basis points linked quarter, but 6.18% on a normalized basis. Investment yields were 3.81%, up modestly from 3.78% last quarter. Our average rate on federal funds purchased was 3.74%, unchanged from a linked quarter perspective and down from 4.49% a year ago, which is a direct correlation to Fed funds rates. In total our net interest margin continues to expand although we are seeing some slowdown in the pace We expect to continue aggressive repricing on fixed rate loans as they mature and disciplined pricing on deposits which will continue our margin expansion Non income was million for the quarter up from million in the first quarter and up 43 from million a year ago on an adjusted basis Growth was broad-based.

Service charges on deposit accounts was $3.3 million, up 25% year-over-year, reflecting the treasury management pricing changes we implemented last July and roughly flat linked to the quarter previously. First, mortgage banking revenue was $2.2 million, up 68% year-over-year and 17% linked quarter, driven by higher secondary market loan sales and the per-loan administrative fee increase we put in place earlier this year. Credit card income grew 18% year-over-year to $2.5 million, and bank-owned life insurance income was $4.1 million, up 94% year-over-year and 47% linked quarter, reflecting the $25 million of new BOLI contracts we purchased this quarter on top of the $150 million we added in the third quarter of last year. Non-interest expense was $50 million for the quarter, up 5.4% linked quarter and 13% year-over-year.

The linked quarter increase is primarily due to a negative adjustment recorded in the FDIC special assessment in the first quarter. Despite that growth, our efficiency ratio came in at 29.65%, the third consecutive quarter below 30%, and a meaningful improvement from 33.46% a year ago. Salary and benefit expense was $26.3 million, up 16.4% year-over-year, primarily reflecting the full run rate impact of our Houston market expansion. Full-time equivalent headcount was 663 at quarter end, up 22 from a year ago, and up 3 from the first quarter. Very modest growth relative to the balance sheet expansion we're generating. Thank you. Our effective tax rate was 19.94% for the second quarter compared to 17.82% last quarter and 19.82% a year ago.

The linked quarter increase reflects timing of investment tax credits purchases. We continue to actively pursue federal credits with carryback provisions and expect to realize more tax savings in the future. We expect to continue evaluating similar tax advantage investment opportunities as part of our current year tax plan.

Turning to the balance sheet, as Kyle mentioned, this was a standout quarter for loan growth. Ending loans were $14.48 billion, up $533 million from the first quarter, or 15.3% annualized, our fastest quarterly growth rate in some time. On an average basis, loans grew $440 million, or 12.8% annualized, on a linked quarter basis. Year over year, loans are up $1.25 billion, or 9.4%, with our pipeline remaining at record levels in growth broad-based across markets, including a contribution from our Texas market. Deposit growth was more measured this quarter due to the competitive landscape, but remains healthy on a year-over-year basis. Ending deposits were $14.55 billion, up $62 million on the late quarter basis, and up $686 million, or 5% from a year ago.

So, importantly, non-interest-bearing demand deposits, our low-cost, most durable funding source, grew to $3 billion, up 5.6% linked quarter and 13.8% year-over-year, which tells us our bankers continue to win core operating account relationships, even as overall deposit growth moderated this quarter relative to loan growth. As Jim mentioned, net charge-offs were low at just 11 basis points annualized for the quarter, down sharply from 25 basis points last quarter and 20 basis points a year ago. So, with these low charge-offs and our healthy loan growth, we recognized our quarterly provision for loan loss expense of $11.4 million versus $10.6 million from the first quarter of 2026 and $11.3 million in the second quarter of 2025.

Our allowance for credit losses stood at 1.26% of total loans, essentially stable versus 1.25% last quarter. We remain comfortable with our reserve coverage given the current portfolio performance.

Capital continued to build meaningfully in the second quarter. Common equity tier one capital risk to weighted assets reached 11.83% on a preliminary basis, relatively flat from 11.86% last quarter and up 45 basis points from a year ago. Total capital to risk-weighted assets was 13.09%. Our Tier 1 leverage ratio was 10.93%. Intangible common equity to tangible total assets was 10.72%. We're generating capital organically at a pace that comfortably funds the loan growth we're seeing while still building cushion. Again, our book value per share was $36.19 a quarter in, up from $34.99 last quarter and up nearly 15% from $31.52 a year ago. Tangible book value per share was $35.94. On liquidity, we ended the quarter with $1.46 billion in cash and cash equivalents, or about 8% of our total assets.

We have no FHLB advances and no brokered deposits. Our funding remains entirely core and relationship driven. I'll now turn it back over to Tom for his closing comments.

Thank you, David. We certainly were pleased with a quarter, but not satisfied. I really know how much we can improve from where we are today, so I think we can do much better than what we are doing today. We aren't hitting on all eight cylinders yet, to equate it to an automotive car, but I feel like we are getting closer to all eight cylinders than we have been in the last two years. You know, while we're in the middle of our largest regional startup in our history in Houston, we still earned a 1.9% return on assets.

I know reaching a 2% return on assets may be tough for the last 10 basis points, but it sure does seem like a worthy goal for us to strive for, even though our primary goal will always be to grow earnings per share. Having more of our regions and markets perform at a higher level can get us to a consistently higher level of financial performance.

On an industry level, we are seeing generally good bank earnings and improvement, modest loan losses, controlled expenses, and a decent growth outlook, coupled with a backdrop of a good economic outlook. In addition, we see what appears to be a more favorable, or at least not as hostile, regulatory environment for banks. Overall, most banks have a favorable outlook for industry, but bank stocks continue to be priced well below historical benchmarks over the last decade.

I guess only time can make the cloud dissipate over the banks while we continue to perform at a high level every day. We'll be happy to answer any questions you might have.

Hey, Dave.

I really can give you a very good answer Dave We talk to people all the time and we talking to a lot of different people from a lot of different banks and there are mergers going on that you don see because they private banks merging or private banks selling to a public bank and you don notice that So there constantly especially in Texas I say there a lot of movement in the Texas market in terms of mergers and integration So, you know, I think it's a more active network in terms of mergers than we've seen in a long time from that standpoint. So we're optimistic we'll continue to get looks. And of course, in many cases, people have a, you know, they have stay pay, and certainly for a year after a merger is typically sort of a point before they even think about making a change.

So we're constantly, you know, looking and talking to people, but I don't have a, you know, really good, you know, good answer for you, I don't think. I know there have been some, you know, some changes in the national market that didn't affect us, but in any event, I'm sorry, I can't give you a better answer.

I guess I have to call it an A, because it's broad-based, it's granular, it's a lot of smaller loans, it's just things were, and it's almost every region of our bank and segment had really good loan demand, so I've got to think it's getting much better. And of course, we all know Florida is strong and has been compared to the average. We've just had a lot of payoffs in Florida, especially in our west central Florida regions, have more payoffs because of the heavy real estate concentration down there than normal.

But I'd say I'd give it an A now.

Yeah, hey, David. Absolutely. So we have a ratio we're managing to. We've got lots of headroom before we get close to the ratio that would put us in territory we don't really want to be in. And I think we saw lots of really good opportunity, even within the CRE asset class.

It wasn't a particular, you know, it wasn't retail or office or one to four family. It was broad based even within real estate. So we saw a little bit of everything in real estate. So, yeah, I don't think we have any concerns about where we are from a concentration standpoint. Dave, we never want to get to the point where we have to tell a good customer that we cannot take care of their needs. So we always make sure that we have some drop-outer for our good customers, no matter what sort of loan request it is. I mean, even a car wash wouldn't be a good answer, because we're not looking for car wash loans, but if a really good customer wants to do a car wash, we're going to do a car wash.

How about that?

Yes, Stephen, this is David. Yes, when I'm talking about it, I would refer to the adjusted number, which is the 358. To your point, 359 was our spot rate for the month of June. And we still have over $2 billion of opportunity between scheduled maturities on loans, cash flows, as well as covenant violations and loan modifications.

You know, if you look at our total yield in the loan portfolio adjusted for the quarter, it's coming in at 618.2018, our going on rate is at 632, so we still have some room to grow that, to expand that, but that gap is starting to narrow. So, you know, we still expect to see expansion in the margin, but as I said, I think it's just going to slow because that gap of going on versus total portfolio is starting to narrow.

Well, we always want to be in a position where we need deposits. So, you know, that's the first thing is if we generate the loan demand, then we'll work hard to generate the deposits to fulfill the loan demand. So, that's the preferred position for the bank, is to need deposits, rather than trying to find loans to make. So, that's the second part of the leg, and we feel confident we can do that. And the second half is typically, you know, we typically see nice deposit growth in the second half of the year. I did see a lot. We saw a large number of tax payments, some major large tax payments by individuals, several well over $100 million each in April 15th filing cycle, or at least paying estimates.

So the second half of the year is when we always generate deposits, so we feel good about it.

And Stephen, I will add, you know, when Tom talks about the healthy pipeline, we're talking about loans and deposits at the same time, not just the loans. We're seeing opportunities in deposits, especially out of Texas. We're having some opportunities in Texas.

Yeah, I don't think our first priority is going to be to run down the security book because we use that for collateralization because we do a fair amount of business for municipal deposits, right? And we have to collateralize those. I think we have some mortgage repos, which is a short-term investment we have, and we can unwind some of those if we need the liquidity.

So I think that's what we would want to. But yeah, that's what we're going to do.

It is a champagne problem. I would agree. And, you know, the last time we had this issue was right before COVID hit, and then we had extremely rapid growth during the COVID period. And all those questions went away because we grew into our capital pretty quickly there for a period of time. So we don't take anything off the table, whether it would be an acquisition or whether it would be stock repurchase.

When you're asking about the securities, the $260 million in securities on our supplemental data, we are applying a haircut to that. We work with regulators, and we are highlighting our available liquidity in that supplement. And so we agreed with the regulators that we would haircut our securities in the event of a liquidity crisis. So that's why you've seen a decrease on that so much in the second quarter.

Hey, Steve. Hey, Tom.

It's hard to say. I don't like to give a forecast because we really don't know. We had a pretty good-sized payoff this month that we knew was coming. It was also a watch list loan, so that's not all bad to get a watch list pay down. So, but, you know, if loan demand holds up, we think we could have a, you know, end up with a pretty decent year, Steve. But it's kind of hard to say, you know, for right now, it looks pretty good. But, you know, you get rates going up. We get some kind of geopolitical event. You know, it's funny how the, you know, when this little thing in Iran started, that kind of beat everything back for a few weeks.

And things slow down, and I mean, Jim Harper's sitting here. He sits there at his desk and has the deal flow come in, and it'll drop, and then it'll come back, and it has not been consistent all year. I actually even thought early May was really slow, and you look up at the end of June, and this is what we've done, right? So it lasted a couple weeks and rebounded really quickly. Absolutely. Yeah. Yeah. So, you know, barring any geopolitical event, certainly, you know, rate increases, we think we're positioned for rates to go up or down. We think we're going to be fine. We think it'll work out. But I guess I don't have a very good answer for your question, Steve.

Yeah, all those properties are being listed for sale and expect those to be disposed of. All of our non-accrual loans are properly reserved, and we feel good about where we are on that relationship and that we have proper reserves in place as needed.

Yeah, so Steve, this is David. You know, I think our $50 million run rate is a good run rate right now. You know, I think we have fully baked in there the Houston team, right? Houston team is going to continue to expand, although not as quickly as it has the last couple of quarters, I don't think. And so what we're seeing right now is it's Houston is sort of a drag on the efficiency ratio, right? And so because they're not, you know, their loans and their business or deposits are not ramping up as quickly as their expenses are. It's just a natural evolution of building up franchises, right? And so I think from here, you know, Houston is only going to improve in regards to the efficiency ratio.

They're going to grow their income, right? More loans are going to come on the books. So, you know, is the efficiency ratio going to stay below 30%? I mean, that's going to be a challenge. I mean, you know, we are going to, you know, we're not adding a ton of headcount. You can see what we put on in the quarter, and Tom talked about it. We had nine bakers that were added in the quarter. Most of what we add from an FTE perspective are customer-facing. We're not adding back office costs. We don't have additional technology that we're spending money on. And so I think the non-interest expense run rate is pretty stable at the $50 million rate right now.

Yeah, I mean, Dave, I mean, if I could predict what the Fed was going to be doing, I would be in a different business, right? I'd probably be making more money betting on the market. We have asked our asset liability management consultant to run a couple of different scenarios for us. And so as we stand right now, I mean, we are, we're pretty neutral in regards to interest rate sensitive. We're still slightly liability sensitive, but just barely. You know, so we looked at two scenarios. We looked at increasing 25 basis points, which if that happens, you know, we lose about $240,000 in the first year of net interest income. Not a big amount at all.

It's a nominal impact. If rates decrease 25 basis points, we're looking at gaining $105,000 in net interest income. So, you know, I point those out to show you that that's the ban. I mean, we have like a $300,000 swing either way. And so, you know, to Tom's point, what's going on in Iran, there's just a lot of unknowns in the economy right now. And I think the Fed, as much as they want to decrease interest rates, there's going to be pressure, continued pressure from an inflationary standpoint to increase rates. And so I think we're just going to get a stagnant environment, at least for the remainder of this year. I don't see any rate movement this year, barring any, to Tom's point, any geopolitical event that's going to change that.

But I think as we stand right now, we're going to be in a neutral rate environment.

Yeah, Dave, that's, you know, we, I talked about it, I mean, we're trying, we have some carryback capacity on tax credits, and we continue to work on that front to maximize those. I expect to see some benefit from those in the future, in the second half of the year. You know, my target is to stay below 20% on an effective tax rate. And so, you know, we're doing things where we try to look at tax investments for the current year and then purchasing credits for carryback perspective. And so, I guess for your benefit, I would try to target below 20% is what I would hope for.

Yeah, I mean, we funded, you know, they funded, you know, $50 million or so in the quarter in loans and, you know, maybe $25, $30 million in deposits in the quarter. So, you know, but it's building. It is starting to ramp up, Dave, in terms of both loan and deposits.

I have none. Thank you, everybody, for joining us. Have a great evening.