ServisFirst Bancshares (SFBS) Q3 2026 earnings call transcript

Thank you. You may begin.

Good afternoon, and welcome to our third quarter earnings call. We'll have Tom Bralton, our CEO, Jim Harper, our Chief Credit Officer, and David Sperazio, our CFO, covering some highlights from the quarter, then we'll take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10K and 10Q filings. Forward-looking statements speak only as of the date they are made. ServisFirst assumes no duty to update them.

With that, I'll turn the call over to Tom. Thank you, Davis. Good afternoon, and thank you for joining our third quarter conference call. I'll give you a few quick highlights of the quarter, followed by Jim Harper, our Chief Credit Officer, and Davis Braccio, our Chief Financial Officer. On the loan side, while the growth in the loan book was lower than we would like, we think it was a combination of unexpected payoffs and loans not closing as expected during the quarter.

We did see some low fixed rate loans pay off in the quarter, which is always good for our earnings per share, so that's very much positive. We did see some good growth in C&I loans in the third quarter, which is very positive, and I like seeing that. On the loan pipeline, you know, I went back and looked at the pipeline three months ago, and it was very solid, and it was at record levels, but 40% of the total pipeline was over 90 days. So, in this quarter, the total pipeline less than 90 days is up 58% over last quarter. So we think that is a good indicator of future closings over the next few months.

We do see that our Houston pipeline continues to build. We have a large, we're talking about it, a large group of bankers out there. They're doing a great job getting off to a good start. On the deposit side, we did allow some large municipal deposits to roll off in the quarter due to rate competition. The rate competition is primarily coming from G-CIF banks rather than regional banks, so we couldn't compete at that rate and chose to not compete. We do have some deposit initiatives underway and expect good results in the quarter. We have emphasized non-interest bearing deposits, and we have seen good growth year over year of 12% in non-interest bearing deposits, so that's a positive for the bank.

We did add six new bankers during the quarter, including two in Houston. We do have, as I mentioned, we have 22 bankers there now, and it's the largest startup in our history, even larger than when we started the Birmingham Bank. So, it's very much a work in progress, but we're very optimistic about the future there. We do expect the startup losses to begin to decline over the next few quarters, as they do have a solid loan and deposit pipeline.

So, with that, I'll turn it over to Tim Harper for a credit update.

Good afternoon. As Tom mentioned, third quarter loan growth was muted relative to second quarter 2026 performance. As we ended the quarter with just over $14.7 billion in outstanding loans versus just under $14.5 billion of loans at 630.26. However, those figures did represent loan growth year-to-date of over $1 billion and produced an annualized growth rate of 10%. Anecdotally, loan activity does seem to have picked up in recent weeks, so early indications are that we're on pace to finish the year strong. On the topic of payoffs, we did experience higher payoffs in the third quarter versus the second quarter, and while we do our best to handicap expected payoff activity on a forward-looking basis, given the uneven nature of payoffs over the course of this year and the current rate environment, it continues to be challenging to pin down a reliable estimate of payoff activity.

Turning to credit quality, while total non-performing assets increased slightly on a quarter-over-quarter Non-apprual loans decreased by approximately $9.6 million during the quarter to $161.8 million. The net decline in non-appruals was driven by the successful resolution of two problem credits during the quarter, as well as the movement of two loans into our OREO portfolio.

Lastly, I'll address net charge-offs and provision activity for the quarter. Charge-offs total We have held $7.7 million for the third quarter and are $19.8 million year-to-date, equating to 21 basis points annualized.

Regarding provisions, we increased our allowance for loan losses by approximately $7.2 million to $189 million as of the end of the quarter. And that allowance increased slightly to 1.28% of loans, which was up two basis points from June and covers our non-accrual loans 118%, up from 107% last quarter. David's up next with an overview of our quarterly financial performance.

Thank you, Jim, and good afternoon, everyone. Before I get into the numbers, a quick housekeeping note. We completed our two-for-one stock split during the quarter, so every per share figure that I referenced today, including prior periods, is adjusted for that split. The story of the third quarter is consistent with what we have been telling you all year. We continue to increase our revenue through asset growth and a wider margin, while holding a best-in-class efficiency ratio, and that combination continues to produce top quartile returns. For the third quarter of 2026, we reported net income of $87.3 million, or $0.80 per diluted share. That compares to $0.78 in the second quarter, up 2.6% on the linked quarter basis.

Last year's third quarter included a $7.8 million pre-tax loss on securities. Excluding that, adjusted diluted EPS from a year ago, 65 cents. So on an adjusted basis, we grew earnings per share 23%. For the first nine months of 2026, net income was $256 million, up 28% from adjusted EPS of $1.84 in 2025. Pre-provision net revenue was $120.7 million, up 1.8% from the second quarter, and up 26% from an adjusted pre-provision net revenue a year ago. Net interest income was $159.8 million, up $4.2 million, or 2.7 percent from the second quarter, and up $26.4 million, or nearly 20 percent from a year ago. Net interest margin was 3.63 percent, unchanged from last quarter on a gap basis.

But as you'll recall, the second quarter included a recovery of interest income from a payoff on a non-accrual relationship, which added about five basis points to margin. Excluding that recovery, our margin expanded about five basis points this quarter, and it is up 54 basis points from 3.09% a year ago. On the asset side, total loan yields were 6.24% compared to 6.23% last quarter. Investment yields were 3.85% up from 3.82% last quarter and 3.60% a year ago. The securities portfolio was billion at quarter end down nearly million from a year ago as we continue to deploy portfolio cash flows into loans As we have mentioned in the past we continue to have low fixed rate loans repricing in the next 12 months We currently have about billion of loans with a weighted average yield of 5 Plus we have a normal cash flow and covenant violation flow that allow us to gain yield in our loan portfolio Additionally, we are restructuring some securities and other non-lending assets in the fourth quarter to improve the margin in future periods, so we expect to continue our margin expansion into 2027.

On the funding side, despite the increase in benchmark rates, our average cost of interest-bearing deposits was flat at 2.80% and is down 61 basis points from a year ago. We were also encouraged to see average interest-bearing checking balances grow by about $378 million in the quarter at a cost of 1.58%. Our average rate on federal funds purchased, which is primarily our correspondent banking funding, was 3.78%, compared to 3.74% last quarter and 4.46% a year ago.

On non-interest income, we came in at $13.1 million for the quarter, which was up from $12.9 million in the second quarter, and up 23% from $10.6 million on an adjusted basis a year ago. Bank-owned life insurance income was the biggest driver at $4.3 million, up 81% year-over-year and 5% linked quarter, reflecting the policies we added over the past year. Service charges on deposit accounts was $3.4 million, up 4% year-over-year and 3% linked quarter, and credit card income held steady at $2.4 million for the quarter.

Non-interest expense was $52.2 million for the year, up 4.5% on a linked quarter basis and 8.8% year-over-year, or $4.2 million. Of this year-over-year increase, 40% of that is the full impact of the Houston market. The remaining expense increase of $2.4 million is composed of mostly non-recurring expenses experienced during the quarter. This expense growth rate is a fraction of our revenue growth, which grew 20% year over year. Our efficiency ratio is 30.20% compared to 29.65% last quarter and 35.22% a year ago, or 33.31% adjusted. Our effective tax rate for the quarter was 17.20%, compared to 19.94% last quarter and 16.81% a year ago. The linked quarter decline reflects investment tax credits we purchased during the quarter.

These continue to give us a meaningful benefit, and we will keep evaluating similar opportunities. Turning to the balance sheet, as Jim mentioned, our end in loans were $14.7 million, up $259 million from the second quarter, or 7.1% annualized, and up $1.43 billion, or 10.7% from a year ago. So, average loans grew $320 million, or 8.9% annualized. Over the past year, growth has been balanced between C&I loans, up 15%, and investor real estate, up about 16%.

Capital continued to build. Stockholders' equity passed $2 billion for the first time at $2.04 billion. Again, common equity tier one capital to risk-weighted assets was 11.98% on a preliminary basis, up 49 basis points from 11.49% a year ago. Total risk-based capital was 13.26%. Our tier one leverage ratio was 11.11%, and tangible common equity to tangible assets rose to 11.05%, Up 33 basis points on a linked quarter and nearly 100 basis points year over year. Tangible book value per share was $18.51, up 14.4% year over year. On liquidity, we ended the quarter with $1.19 billion in cash and cash equivalents, along with $1.56 billion in securities. We continue to have no FHLB advances and no broker deposits.

Our funding remains core and relationship driven. To sum up the third quarter, earnings per share grew 33% year over year. Our core margin expanded again. Loans grew more than 10%. Our efficiency ratio stayed around 30%. Credit metrics improved, and book value per share is up 14%. We are generating capital faster than we are using it, which gives us real flexibility as we head into the fourth quarter, and with our newly approved share repurchase plan, we expect to deploy some of that excess capital in a value-added way.

With that, we will now take your questions.

Yeah, no, Stephen, this is David, and, you know, I still expect it in that five to seven basis point increase range. You know, I mentioned it, we still have about $1.5 billion of fixed rate, low fixed rate loans repricing. The average rate on those is about 508. You know, our going on rate or the average rate for renewals and new loans was $6.59 in the quarter. So we still have some room to grow there. You know, the more important piece of it, I think, is deposit costs. We were able to be selective on deposit costs as the Fed raised rates this quarter. And so we were able to tamp down any increases in our deposit costs.

And we expect to do the same thing for any future hikes. You know, Tom mentioned in his comments about the expense of municipal deposits that we let walk away because we were being outbid by a G-SIP. And so, you know, it's going to be opportunistic pricing on deposits, and it's going to be discipline on the asset side as we get those repricing opportunities in front of us. And so, yeah, I don't expect anything. I mean, we still, you know, 53% of our loan book is variable rate. And so, you know, we're going to have some upside potential in existing variable rate loans as well that get a higher yield as well as the Fed is raising rates.

So, I mean, you throw all that in and we still have room for expansion. It's just going to be at a slower pace than what we saw earlier in this year. But the point is, it's still expansion at the end of the day. Okay that really helpful Thank you And then it sounds like the pipelines are building loan demand is good I guess you know Houston is still in relatively early stages So if we have like continued strong loan growth how much of an impediment is the loan to deposit ratio where it sits today And you know could deposit growth be a constraint on loan growth if it can you know match the robust loan growth you guys have been delivering Given a choice this is Tom of course Stephen Given a choice we always prefer to need deposits rather than need loans because we can find the deposits But you can't just go find the loans, as you well know.

You've got to have the loan demand. So, given if we can have the loan demand, we'll come up with ways to, you know, match off with deposits. So, and this is typically the time of year we have really good, you know, deposit growth in the fourth quarter. So, we anticipate that again, and our deposit pipeline is good. So, we're optimistic on that front. We've always found a way to grow deposits.

No, well, we do it individually by region, and each region has their own unique, you know, goals and ways to grow deposits. So that is something we work, you know, all 12 regions on, 13 including correspondence. So we feel like we have some good initiatives underway, and, you know, you got to go to where you find deposits, first of all. You know, where's the money?

You know?

Thank you, Steve.

Yeah, absolutely, David. This is David again. You know, we did, you'll notice in the financials, we had a small securities gain. And, you know, we had some treasuries that were maturing in the fourth quarter. And just in light of the interest rate environment and what was available in the third quarter, we decided to accelerate those and swap those out. And so we did that in the third quarter. We'll continue. We got some smaller subsets of securities that are maturing in the fourth quarter. So we'll be opportunistic on those as well. But the big thing is, you know, in July, the Treasury had a ruling on exchanges on bank-owned life insurance on Bowley. And so, you know, we have about $465 million in assets in Bowley.

That's, you know, we have some pretty low yields on policies that were put on the books in 2011, 2012, 2013. And so we have an opportunity now with that favorable ruling from the Treasury to structure a deal where we can improve those yields and do some swap outs on those. So that's the part that we're looking at as we move into the fourth quarter.

We're not contemplating any restructuring where we would take security losses. David, if that's a question.

That is correct, yes.

Yeah, David, I mean, I would focus on the efficiency ratio, right? I mean, we ticked up above 30% this quarter when we had been sub-30% for a couple quarters. You know, in a normalized environment, I would say we would stay below 30%. You know, we were probably about $2 million over, you know, our expense run rate that I would expect due to those one-time non-recurring costs. And so if you model that out, I think that gets you somewhere around $50-$51 million a quarter is what I expect our run rate to be.

It was just a catch-all, David, just a bunch of stuff. I mean, we repoed a yacht, going to be for sale for soon, if anybody interested. And we never owned a yacht, but it'll be our first one. So, you know, we had some expenses to get the yacht back in the States and get it operational. It was fairly expensive.

Proposition. So, but anyway, we had some other ORE type expenses and some NPA expenses. So, we just went ahead and took all those and expensed everything rather than capitalizing them, David.

That's a really good question. When I talk to other bankers, we talk to other bankers all the time. We have 400 correspondent banks. Are competitors being more rational? I would say definitely yes. Because when customers ask us for a fixed-rate loan quote, I think it blows them back a little bit when we tell them, okay, here's the curve today, and here's your five-year rate. And they don't like that. They immediately would opt for today for a floating rate. And I think other banks are doing the same thing, so we're seeing a lot less. You know, that's the good part of higher rates is I think you get, you know, a little bit rationalized, a little bit better competition than we saw.

And I don't know, Rodney, do you? Yeah, it's market to, you know, region to region, market to market. But I think here in Birmingham, you know, we had a number of new banks come into our market two, three, four years ago that were doing some irrational things. And that seems to have gone by the wayside for the last six months, certainly here in Birmingham.

Yeah, I think that's true. So I think there is an upside to higher interest rates, Stephen. Of course, you know, will there be demand destruction? Who knows the answer to that question? And I think rates were already high enough that it made a lot of projects uneconomical to start. So I don't think it's, you know, another 25 or 50 basis points. Now another 100 basis points would be another, a whole other matter, right? So I'm optimistic that we'll see continued, you know, a little bit more rational competition out there than what we've seen, you know, over the last six months. I mean, you shouldn't be having intense loan and deposit competition at exactly the same time, should you?

That seems highly irrational, but that's what we've seen to an extent. So, you know, people, maybe they're going to figure it out. If they're going to compete on deposits, they need to have higher loan yields. And that's what I tell our people internally is, okay, well, if you've got to pay up for deposits, you're going to have to charge more for loans in your region so that we have an adequate margin within each region.

Quite frankly, we had one notable credit action that was unexpected that we had to address, but even it didn't come close to a basis point of movement. So it was actually across the board and more portfolio-based than it was, you know, specifically impaired assets.

Mark Lentz, Jr. : Large credits. We took a charge of just over $7 million this quarter. That represents the first true charge-off we've taken with respect to that portfolio of large multifamily properties. We're continuing to work through an orderly liquidation process with those eight credits. And we're working with a broker to identify potential sales opportunities to, you know, get those marketed and liquidated. And so, so far, so good. We'll hope to kind of execute this in an orderly fashion over the next, you know, two to four quarters.

Can we do it? I'm not sure that as insiders, I'm not sure we know. We have a present value analysis, but I'm not sure we all know exactly what the future holds and what back stock prices will do over the next year. In any event, we're going to be reasonably cautious would be my answer to you, Steve, Try to, you know, try to make good decisions for the shareholders.

Yeah, given, you know, not from a liquidity standpoint, but just from a capital standpoint, we want to make sure that we always have adequate capital to be able to fund our growth. And that's clearly the number one goal. And clearly it's the number one thing that's in the shareholders' best interest to create value. You know, anything we could do to create value involves expansion, right? Organic growth. So you're absolutely right. We've got to keep that as our main focus.

Thank you, everybody.

Yeah, we found that the pricing is stronger in Texas than we've seen. The loans and deposits are larger. Everything's bigger in Texas, as they say. We're optimistic that they'll continue to... You lead with credit, and the deposits follow, but they are certainly focused on generating net deposit relationships as well as lending relationships. So, you know, we expect, you know, they probably have $200 million in the pipeline for the remainder of the year, and I would anticipate them trying to get to, you know, break even by the first or second quarter of next year in terms of, you know, the fairly sizeful overhead that we have. And so we're optimistic. There's a lot of stuff in the hopper.

They're doing a great job. The team's doing a great job of making contact and seeing prospects. And I think with all the, you know, the mergers in the market out there, I think that certainly makes it a target-rich environment for a good, stable, growing bank. So we're optimistic on that front, Dave.

And curious, you know, you've noted the good C&I growth this quarter, and I think the bankers you hired out of Wood Forest were mostly C&I. Is Texas driving the bulk of the C&I growth you're seeing lately, or is that spread out across the broader footprint of the company? Interestingly, I'd say that they've originated more real estate activity than they ever would have imagined so far.

So, actually been pretty evenly split out of Texas so far from real estate and C&I. So, we had some C&I growth in other regions too over the quarter, which was good to see. The first thing they ran across were commercial real estate opportunities because you talk to developers, oh, I've got a need, immediate need, and that's the things that you, you know, that's why bankers like to book CRE deals because they're more immediate, right? So, C&I takes longer, takes a good bit longer, but we do see a lot of C&I opportunities coming our way, including some energy credits that are strong credits with very good pricing on them.

I think the thought was that we could, unless we see extraordinary organic growth opportunities, we can over time maybe repurchase some stock and our capital not decline as a percent of assets for CTE1. So we feel confident we can do both and don't want to certainly, we want to be in the top tier of capitalized banks, well-capitalized banks, and we are, and we want to stay that way.

So we think that contributes to our position as one of the more recognized banks in our peer group.

Well, thank you, everybody, for joining us today. Have a good evening.