ServisFirst Bancshares, Inc. Q1 FY2026 Earnings Call

Greetings, and welcome to the ServisFirst Bancshares First Quarter Earnings Conference Call. It’s now my pleasure to turn the call over to Davis Mange, Director of Investor Relations. Davis, please go ahead.

Good afternoon, and welcome to our first quarter earnings call. We'll have Tom Broughton, our CEO; Jim Harper, our Chief Credit Officer; and David Sparacio, our CFO, covering some highlights from the quarter and then 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 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.

Davis, thank you. Good afternoon, and thank you for joining our first quarter conference call. We're really pleased with our start to the year, and I'm going to highlight a few things before I turn it over to Jim Harper to give a credit update. On the loan side, we had solid loan growth for the quarter. Loan growth is usually not very robust in the first quarter, but we did see good loan growth. We are seeing loan payoffs begin to diminish compared to the last two years, which is certainly a great thing. I don't know what kind of trend we'll see in the second quarter, but on a quarter-to-date basis, we've seen nice growth in the first 20 days or so of the quarter. On the forward loan pipeline over 90 days, it is the strongest we've ever had in our history. Of course, on a 90-day loan pipeline, the closing rate is much lower than on a 30-day loan pipeline, for example. So it is great to see a long list of new relationships across all of our markets in a variety of industries on that list. On the deposit side, they grew by 8% annualized in the first quarter, which exceeded our expectations as we typically see our deposit growth in the second half of the year. We continue to manage our deposit costs to improve margins. We continue to attract new clients with our strong financial condition, our profitability and the personal service we provide to commercial clients and correspondent banks. David will elaborate in a few minutes, but our net interest margin continues to improve. Our efficiency ratio continues to be best-in-class as we dropped below 30% in the first quarter. We do have 161 producers at quarter end. We've hired over the last 12 months, 32 new FTEs and 75% of those FTEs are frontline employees. We should see improved productivity over time and profitable growth there. Our Houston team has found an office; they've leased it, and it's not ready to move into yet, but they have a 26,000 square feet to build out. We do have 18 bankers on board there today, and their pipelines are building quite nicely. We closed our first loan in Texas, which is a large supply chain company with long-term contracts in March. We're pleased with the start there. And now I’m going to turn it over to Jim Harper for a credit update.

Thanks, Tom. As noted, loan growth for the quarter was solid at 7% annualized, though we definitely experienced an uptick in loan activity beginning late in the quarter, which reinforces Tom's comments about our forward pipeline. From a credit metric standpoint, net charge-offs for the first quarter were around $8.3 million, most of which was associated with the remaining balance of one credit, with the charge representing the final resolution of a loan to a long-time troubled borrower. Our allowance to total loans remained static when compared to the end of 2025, ending the quarter with an allowance compared to total loans of 125 basis points. Nonperforming assets to total assets at quarter end were 100 basis points, which is slightly higher than the 97 basis points we reported at fiscal year-end '25. However, we are confident in some near-term reductions in NPAs of approximately $17 million or just over 9% of our 3/31/26 NPAs stemming from the U.S. Coast Guard's purchase of a private university campus and the assumption of two other loans by a long-term customer. As always, we continue to actively and aggressively manage our NPAs in this portfolio. And David will be next with a discussion of our first quarter financial performance.

Thank you, Jim, and good afternoon, everyone. I will walk you through the financial details of our first quarter, and I am pleased to report a strong start to 2026 across virtually every metric we track. The headline numbers reflect continued expansion in the net interest margin, disciplined expense control, solid loan and deposit growth and a meaningful year-over-year improvement in operating leverage, all of which speak to the durability of the ServisFirst model. For the first quarter of 2026, we reported net income of $83 million or $1.52 per diluted share or $1.54 on a normalized basis. To put that in context, we earned $1.16 per diluted share in the first quarter of 2025. So we are up 33% year-over-year on earnings per share. On a linked-quarter basis, EPS stepped back from the $1.58 we reported in the fourth quarter of '25, and I want to briefly explain why. The fourth quarter included a $4.3 million nonrecurring BOLI death benefit that flowed through noninterest income, and the fourth quarter also had more calendar days to earn net interest and fee income. During the first quarter, we also had a prior period adjustment to BOLI income of $1 million, which was a headwind. Excluding those items, the core earnings trajectory is clearly upward. Our return on average assets was 1.89% for the quarter, which was essentially in line with the fourth quarter and well above the 1.45% we delivered one year ago. Return on average common equity was 17.91%. These are strong industry-leading returns and they reflect the operating leverage inherent in our model when loan growth, deposit repricing and expense discipline all move together in the right direction. In net interest income for the first quarter, it was $148.2 million, which is up from $146.5 million in the fourth quarter and up from $123.6 million a year ago. The net interest margin expanded to 3.53%, 15 basis points better than linked quarter and 61 basis points better than the same quarter last year. That progression reflects two drivers working in tandem: continued repricing of our low fixed-rate loan portfolio and a full quarterly impact of the Fed rate cuts from the fourth quarter. As we have mentioned in previous quarters, we continue to see opportunities on loan repricing. For the next 12 months, we have about a $2 billion opportunity for low fixed-rate loans renewing, normal payment cash flows, covenant violations and modifications. In fact, we have about $2.9 billion in fixed-rate loans maturing in the next three years at a price below our current going on rate for loans. On the deposit side, average interest-bearing deposit costs fell to 2.79%, down 22 basis points from the fourth quarter and 61 basis points from over a year ago. That repricing is still working through the book, and we continue to expect meaningful benefit as higher-rate time deposits mature and renew at current market rates. On the asset side, loan yields were 6.18%, an 11 basis point step down from quarter four that reflects the normal variability in the declining rate environment, and it does not represent any systemic pricing pressure. Investment yields of 3.78% were essentially flat versus fourth quarter and up meaningfully from a year ago. I would also note that during the fourth quarter, we redeemed the $30 million in 4.5% subordinated notes due in November of 2027, which was a cleanup item that removed an above-market funding cost as we entered 2026. From a noninterest income perspective, our income was $10.8 million for the quarter compared to $15.7 million in the fourth quarter. The linked quarter decline is explained almost entirely by a $4.3 million nonrecurring BOLI death benefit that boosted the fourth quarter. Stripping that out and the negative adjustment this quarter to BOLI, noninterest income was essentially up 4% versus fourth quarter and continues to show solid organic growth year-over-year. Service charges were $3.3 million, which is flat versus linked quarters despite fewer days and up 29% year-over-year, fully reflecting the service charge rate increases we implemented in July 2025. Mortgage banking revenue was $1.9 million, a 14% increase on a linked-quarter basis, driven by higher secondary market volumes. Net credit card income grew 12% year-over-year to $2.2 million, and underlying BOLI income was up $2.8 million, up 32% from a year ago, which is in line with the growth in our portfolio assets. These fee lines reflect genuine relationship deepening across our markets. From a noninterest expense perspective, the total was $47.4 million in the first quarter, which is up modestly from $46.7 million in the fourth quarter and up 2.8% versus quarter a year ago. We are very pleased that the efficiency ratio came in at 29.81%, the second consecutive quarter below 30%. This is a benchmark that very few banks our size can claim, and it reflects the fundamental scalability of the ServisFirst model. The primary driver of the salary increase, up 13% on a linked-quarter basis and up 17% year-over-year, is the combination of the continued build-out of our Texas banking team and the seasonally higher payroll taxes in the first quarter. We are investing intentionally in Texas and expect the revenue contribution to more than justify the cost over time. Offsetting this, other operating expenses fell 37% year-over-year to $4.3 million and third-party processing costs were modestly lower, keeping overall expense growth a fraction of our revenue growth rate. Our effective tax rate for the first quarter was 17.83%, down considerably from 19.72% in the fourth quarter and 20.06% a year ago. This reduction reflects the purchase of investment tax credits during the quarter, a tax planning strategy that delivers immediate recognized benefit and fits well within our capital deployment framework. We continue to evaluate similar opportunities selectively and expect the full-year effective rate to remain modestly below our peers. Our capital position continued to strengthen in the first quarter. Common equity Tier 1 capital to risk-weighted assets reached 11.86% on a preliminary basis, up 21 basis points from year-end and up 38 basis points from one year ago. Total capital to risk-weighted assets was 13.13%. Our Tier 1 leverage ratio was 10.71%, and tangible common equity to total tangible assets stood at 10.46%. We are building capital organically while supporting balance sheet growth, and we believe the current capital trajectory is highly sustainable. Book value per share was $34.99 at quarter end, reflecting annualized growth of 13.4% from year-end and 14.5% year-over-year growth. Tangible book value per share was $34.74. Shareholders are seeing real compounding growth in intrinsic value. On liquidity, we ended the quarter with $1.84 billion in cash, approximately 10% of total assets. We have no FHLB advances. We have no broker deposits. Our funding base is entirely core and relationship-driven, which we believe positions us well to support continued organic growth, especially as we build out our Texas market. In summary, the first quarter was a quarter that demonstrated the strength and consistency of the ServisFirst franchise. Net interest margin continues to expand. The efficiency ratio came in below 30% for the second consecutive quarter. Normalized earnings per share are up 33% year-over-year. Capital is building and our liquidity position remains strong. We remain focused on what we control, deepening relationships, building the Texas franchise and sustaining the operational discipline that has driven these results. Now I will turn it back over to the operator to begin the question-and-answer session.

Our first question today is coming from Stephen Scouten from Piper Sandler.

Tom, it sounds like you're pretty encouraged about the trends you're seeing around loan and deposit growth for the remainder of the year. What would you anticipate that could translate to? And maybe getting specific on it, how much have you seen out of the new Texas team now that they've kind of started booking loans? I know you mentioned a first loan closing in March. Just kind of how you feel about the potential of that team now that you know a little bit more about their potential within the franchise.

Yes, I think they have a strong pipeline, although I can't say exactly what the closing percentages will be. There are many names and several new deals with clients they've worked with over the years. We're optimistic that as we approach the end of the year, we'll see some success in closing deals. Even if we don't meet our expectations in the pipeline, we believe this will lead to a more positive outlook on loan growth for the entire year. Loan growth isn't outstanding; I'd rate it a B+. It's challenging, and there's quite a bit of competition regarding pricing and credit terms, which we prefer to avoid. If a competitor is satisfied with a 10% return on equity while we aim for a 20% return, they're likely to win on some terms and rates. This competition is still relevant today, even though the economy is performing well. A key variable for consumers will be gas prices, which could impact the broader economy if we don't see some moderation in those prices over the next two to three months. But that strays from your question. Did I address your concerns?

Yes, you did. That's helpful directionally for sure. And then if I can think about maybe the kind of what you would expect from average earning assets this year relative to maybe the loan book. The past year, you saw really nice loan growth, but average assets were kind of flat and average earning assets trended down a little bit over the course of the year. So I'm curious if this year, you think maybe that average earning asset growth can more closely match the growth in loans that you expect to see?

Yes. I would agree with that, Stephen. This is David. I mean, we're going to continue to see growth in our assets. We saw about 8% in loan growth year-over-year. And so we continue to look at investments, and we have good deposit growth, which is going to obviously drive the asset growth. We are looking at investments with the offset that loan demand is not there. And so we can continue to do that. So I would expect average assets to rise in line with loan growth.

Okay. Great. And then maybe just the last thing for me. I was curious about the expense side of things, obviously, continue to be best-in-class there. There was a particularly large move. I think you guys called out in the release on the other noninterest expense. Just curious if you can give any detail on that and if this is kind of a good run rate to think about into the second quarter or beyond?

There were two factors affecting our other operating expenses. In the first quarter of 2025, we experienced a significant operational loss of about $1.8 million, which elevated our other operating expenses for that quarter. Additionally, this quarter, we benefited from a $1.2 million reduction in the special assessment from the FDIC related to the spring 2023 crisis, which has also been noted by other banks. Therefore, I recommend not using the $4.4 million figure for other operating expenses as a baseline going forward. I believe a more accurate figure is closer to $5.5 million.

Got it. That's extremely helpful, David. Thank you guys for the color and congrats on the quarter.

Next question today is coming from Steve Moss from Raymond James.

Tom, maybe just following up on expenses here and the efficiency ratio. You guys came in sub-30%. I hear you a little bit of extra benefit from the FDIC expense here. But going forward, you talked about margin expansion, loan growth. I'm just kind of curious, it seems like you guys can run around 30% or maybe a little bit below. Just how do you guys think about the expense trajectory for the remainder of the year as you make investments?

Yes. I know we talked to you in Chicago last year and told you that you were aggressive on our efficiency ratio right in the mean 30%. Dropping below 30% I think is kind of a flattening point. I mean we're going to continue to grow as an organization. Built into that, we have a fairly sizable complement of the Texas franchise, right, and they're not producing revenue. So as they produce revenue as the year goes on and they build out their book of business, that's going to help us. But I mean, we don't have any major investments to do in the back-office side. But as we continue to grow, there will be increases in expenses. I mean our biggest expenses are employees. We're not on a one cycle for merit increases. So you'll see each month, employees will get merit increases, and that will drive the salary and benefit expense up. So I think if you're using that 30% mark, we're not going to dip too much lower than where we are at a high 29% efficiency ratio today.

Right. And then just kind of thinking about expense growth for the year, like high single digits to low double digits is kind of a fair assumption based on what you see?

Yes. I would say mid- to high single digits. I wouldn't put it in the double digits on expense growth.

Okay. Appreciate that. And then on the margin here, I guess just a couple of questions. David, in your comments, you said to continue to see core margin expansion. Kind of curious how much additional margin expansion you expect? And also on the $2 billion in loans repricing maturing cash flow as you name it. Just kind of curious as to what that incremental pickup is versus on the roll-off yields versus the roll-on yields.

Yes, absolutely, Steve. I stand by my comments that I've made for a while now and that I expect the margin to expand 7 to 9 basis points given a flat rate environment. Obviously, in fourth quarter, we had a few rate cuts, and we had the full impact of the September rate cut in the fourth quarter as well. So we saw a pretty dramatic decrease in our deposit costs. Even this quarter, the last rate cut was, I think it was December 10. We didn't get much of an impact of that in the fourth quarter, but we saw it this quarter. Nobody obviously knows what the Fed is going to do with rates. The latest projection that the Fed released was in early March, mid-March, and they projected that they will lower 25 basis points one time this year. I don't know if that's going to hold true today or not. As Tom said, that was before the war in the Middle East and gasoline prices started to rise. I'm not sure what the Fed is going to do on the rate side. If they do reduce rates once, we're going to aggressively drop our rates on deposits as well, and we'll see a significant benefit given the beta that we realized in the fourth quarter. On the asset side, you talked about the $2 billion we have. Yes, for instance, we have $1.2 billion in loan maturities at low fixed rate loan maturities in the next 12 months. Their weighted average yield is 5.19% today. Our going on rate for new loan activity is 6.5%. So we have substantial pickup. I'm not saying we're going to get 131 basis points on every loan that we reprice, but we're going to see some decent sized pickup on that loan repricing for the next 12 months. So that's kind of what we're seeing on the margin side, Steve.

Okay. Appreciate that color there. And then just on credit here, just kind of curious with regard to the large borrower, $100 million borrower, just kind of curious as to what the status of that work is. I know you guys mentioned last time it's going to take a lot longer. I believe they may have filed for bankruptcy. So just kind of curious as to is it still a couple of quarters to get to resolution or how that could play out?

So just keeping in mind that there are literally dozens of special purpose entities within that family of borrowers. None of our borrowers to date have filed bankruptcy. So just an important distinction so far, so good on that front. We're continuing to proactively work with the borrower and related entities to try to find the best path forward on all eight of the loans that we have. Slow and steady is probably the way I'd characterize it. Tom or Rodney may have a different approach, but we're working on it as diligently as we can, trying to produce the best outcome.

We think we'll see good progress in the next two quarters.

Next question today is coming from David Bishop from Hovde Group.

Tom, quick question circling back to the Texas market expansion. You hired some pretty senior lenders out of their former franchise. When you ring-fence it looking out a couple of years, is the sort of opportunity set in terms of growth in the hundreds of millions? Could it approach the billions of dollars? Just curious how big you think that Texas market could get for you over time?

Over what time period, Dave?

Let's say, over 3- to 4-year period.

Yes. I would think it would be more like a B instead of an M on the number in terms of opportunity in that time frame.

And the types of loans that the team can then, is it more C&I in nature versus CRE, your legacy portfolio? Just curious how you see that mix coming out of that franchise.

It's virtually all C&I at this point.

Got it. And you started to see the deposit relationships migrate yet? Or is it still too early?

Yes, C&I deposit relationships as well.

Got it. And then a couple of quarters ago, I think, Tom, you mentioned in terms of the loan payoffs, I think it was like $0.50 for every dollar of new loans. Is that still trending down in terms of loan payoffs versus originations?

It's trending down to around $0.30. We expect it to continue to moderate from there, which is beneficial for us. The first quarter has been somewhat slow. We're seeing much better moderation in loans; it's probably closer to 20% to 25% of bookings rather than the previously mentioned 30%. So it's not the 50% payoff.

Got it. And then maybe a question for Dave. You talked about the some of the impacts and puts and takes on the operating expense side. And then you mentioned the BOLI headwind, I think it was about $1 million. Does that imply like a $3.8 million is a good run rate for the BOLI line moving forward?

Yes, that's correct, David, because we had, like I said, a $1 million headwind related to the fourth quarter prior period adjustment. So $3.8 million would be a more realistic trend going forward.

Got it. And then from a credit perspective, you noted the charge-offs there. Just curious if there was any significant sort of new nonaccrual inflows or backfills on the nonaccrual side that you could point out?

One or two relatively small ones, but to be honest with you, I wouldn't classify any of them as terribly material. They were both pretty small in the quarter.

Got it. I think I heard in the preamble, we expect about a near-term $17 million reduction in NPAs, if I heard you right.

That's right. We've got some really good visibility into three assets that will be paid off or taken out by a better quality borrower here in the really, really short term.

We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.