Earnings Call Transcript - SFBS Q4 2025

Operator, Operator

Greetings, and welcome to ServisFirst Bancshares' Fourth Quarter and Year-End Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Jim Harper. Thank you. You may begin.

Davis Mange, Moderator

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

Thomas Broughton, CEO

Thank you very much, Davis, and good afternoon, and thank you for joining our fourth quarter earnings call. I'll give you a few highlights, and then Jim Harper will give a credit update and then David Sparacio will give financial update. So let's start with loans in the quarter. Loan growth was really in line with our pipeline projection with annualized growth of 12% for the quarter. Our pipeline quarter-over-quarter increased by 11%, but net of projected payoffs had increased by 80%. I believe that projected payoffs are most likely understated, but it does appear the payoff headwind is diminishing to some extent. A loan pipeline is an exact science, but we have found is indicative of a trend over several quarters. So we're pleased with the quarterly loan growth and a little bit optimistic that things will improve as we go forward. On the deposit side, we did continue to manage down our high-cost deposits, primarily municipal deposits for both the quarter and the year. We believe that if we have some robust loan demand, we can attract some of those types of deposits back if they are needed. I talk about new markets, and we are very excited about our new Texas banking team based in Houston that joined us in early December and some during the course of December as we went on. They are in the process of opening an office, but they have been productive in temporary office space already. This group has worked together in the past, so they have hit the ground running. We have 9 members on the Houston team today and anticipate hiring more in the first and second quarters of the year. This is a much larger team than we have hired in the recent past since opening the bank in 2005. In addition, the new Texas team, our correspondent Texas correspondent division has 35 active correspondent banking relationships and 2 correspondent bankers based in Texas. Speaking of correspondent banks, we do have 388 correspondent banks today, including 145 for which we settle at the Federal Reserve Bank. Our Asian credit card program is also endorsed by the American Bankers Association along with 12 state banking associations. We have 150 Asian credit card banks in a robust pipeline of new clients and banks in 27 states. In the past year, we added Ohio and Maryland State Banking Association that endorse our agent program. So we're very pleased with the corresponding growth and outlook. I'll now turn it over to Jim Harper for a credit update.

Jim Harper, Chief Credit Officer

Thanks, Tom. As Tom noted, loan growth for the year was solid, highlighted by a very busy fourth quarter of loan activity that produced an annualized growth rate of 12%. While loan growth was not centered in any particular geography or industry, I'd like to draw particular attention to the nearly 10% growth in our C&I book during the year, which reflects the highest growth rate in that portion of our portfolio in the past several years. From a credit metric standpoint, net charge-offs for the fourth quarter were approximately $6.7 million, with the majority being related to 1 credit and charge-offs for the full year 2025 coming in at 21 basis points. Our allowance to total loans remained relatively stable throughout the course of the year, ending the year with an allowance to loan loss reserve to total loans of 1.25%. Nonperforming assets to total assets at the end of the year were 97 basis points, which was higher compared to 26 basis points at the end of fiscal year '24, but largely consistent with the 96 basis points we ended at third quarter. The driver of that notable increase is a year-over-year change associated with exposure to a single merchant developer, which we've gone into detail about previously. We continue to proactively manage our loan portfolio achieving a number of successful outcomes within our problem loan book during the fourth quarter. And as always, we'll continue to actively manage this portion of our portfolio throughout the year. As Tom noted, we're really excited about the addition of our Texas team and based off early activity, they've really hit the ground running. I'll turn it over to David for our discussion of financial performance.

David Sparacio, CFO

Thank you, Jim. Good afternoon, everyone. As you have seen from our press release, we recorded $1.58 of earnings per diluted share for the fourth quarter, which is a 32% increase from the third quarter of 2025 and a 33% increase from the fourth quarter of 2024. Full-year earnings per share was $5.25 on an operating basis and $5.06 on a GAAP basis. Net income available to common shareholders was $86.4 million for the quarter and $276.5 million for the year. Our adjusted net income generated a return on average assets of 1.62% for the year and a return on common equity of nearly 17%. During the quarter, our tangible book value grew 4% to $33.62 per share. Our net interest margin experienced healthy growth throughout 2025, rising from 2.92% in the first quarter to 3.38% in the fourth quarter. This expansion was driven by disciplined loan pricing, including a 40% increase in loan fee collection, boosted by deposit rate reductions in the fourth quarter. We continue to experience tailwinds from our repricing opportunities on low fixed-rate assets. Our efficiency ratio dipped below 30% for the quarter as we maintained our cost control and increased our operating leverage. For the full year, the adjusted efficiency ratio stood near 32%, which is a 14% improvement over 2024. Looking deeper into our income statement, we will start with our net interest income. Our asset yields remain strong at 5.79% for the quarter, which is down 3 basis points from the third quarter of 2025 and up 10 basis points from the first quarter of 2025. Loan yields dropped slightly during the quarter to 6.30%, which was pleasing given the 75 basis point reduction in benchmark interest rates during the quarter. We are confident about our asset yields as we continue to be disciplined on our loan repricing efforts. As we enter 2026, we are armed with a steady pipeline. During the quarter, we aggressively reacted to the rate cuts and customers responded favorably. This allowed us to reduce our cost of interest-bearing liabilities by 40 basis points versus linked quarters and by 65 basis points versus the same quarter last year. During this 2025 declining rate cycle, we experienced a strong deposit beta of 83 basis points. As Jim mentioned, our credit metrics remained normalized. As a result, using our CECL model, we recorded $7.9 million of provision expense for the quarter and ended the year with an allowance for credit losses ratio of 1.25%. On the noninterest revenue front, we continue to experience lift in service charges driven by our fee increases implemented on July 1, which are reflected in our 26% growth from full-year 2024 to full-year 2025. We also experienced an 11% annual increase in mortgage banking fee income driven by increased mortgage volume. Excluding our adjustments during the year, our operating noninterest revenue is up 12% for the full year. From an expense standpoint, our noninterest expense compared to the same quarter last year is flat and down about 3% versus linked quarters. For the full year, our noninterest expense is up only 2%. As we enter 2026 and continue to build the Texas franchise, we expect to see growth in our expense base. However, this should be neutral to our efficiency ratio as their book of business grows and generates revenue. In regards to our balance sheet, our loan growth was equally split between our C&I and real estate portfolios with about 10% annual growth in each. As you will recall, we recorded securities losses in both the second and third quarters of this year in relation to a conscious decision to restructure our bond portfolio. The remaining portfolio value has little in regards to embedded losses as evidenced by our small unrealized loss in accumulated other comprehensive income. From a liabilities perspective, year-over-year deposits grew by 5%, and our Fed funds purchase dropped by 26%, driven by our downstream correspondent banks positioning for year-end. Additionally, during the quarter, we paid down $30 million of sub debt at the holding company level at a cost of 4.5%. Our dividend was recently increased in keeping with our long-standing policy of returning capital to our shareholders. We continue to make investments in our organic growth, highlighted by our Texas expansion. Our liquidity levels remain strong and we continue to operate without broker deposits or FHLB debt. From a financial standpoint, we are pleased with the company's performance in 2025, and we are in a solid position entering 2026. Now I will turn it back over to Tom for closing comments.

Thomas Broughton, CEO

Thank you, David, and we appreciate you joining us. We'll take your questions in a minute, but we are pleased to have concluded 2025 on a positive note. All of our markets are profitable, with the exception of our newest market in Texas. We maintain a best-in-class efficiency ratio and are excited about 2026 and the future of banking. Now, we will take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from David Bishop with Hovde Group.

David Bishop, Analyst

Good evening, gentlemen. Tom, I think last quarter, you mentioned that for every dollar of like new loans, you were seeing maybe half of that go out the back door in terms of payoffs, I think it was 50 cents of payoffs. Just maybe curious how you're seeing payoff trend this quarter from maybe a dollar perspective and maybe expectations in terms of loan growth as you head into the early part of this year?

Thomas Broughton, CEO

Yes. Our net pipeline is way up this quarter over last quarter. It all has to do with the projected payoffs being much lower this quarter, and I don't completely believe that's true. But the projected payoffs have dropped substantially quarter-over-quarter. So again, it's an inexact science, and there are probably payoffs we don't know about that are coming, though based on the 10-year treasury yields today, maybe not anytime soon given the current change in treasury deals. Nevertheless, we are pleased to see at least it's trending in the right direction; the payoffs will be declining.

David Bishop, Analyst

Got it. Then I think we last spoke, I think on the call, you were saying, I guess, loan demand was okay, not great. Just curious with that in mind in terms of what's happening from an economic backdrop, 10-year rising. Just curious what you're seeing in terms of commercial borrower loan demand on both the C&I and CRE front?

Thomas Broughton, CEO

It's a little bit better than I'd give it a B-minus, something like that right now. Certainly not A-plus, probably not an A. I'd give an A-minus for now, which is better than it has been. We're certainly heading in the right direction. Of course, there are certain asset classes; we could book 100% of our loans that are hospitality related. There are a lot of hospitality loans out there in the market and we are very pleased to see C&I demand pick up during the quarter, and that was the best C&I growth we've had in a while. So we're pleased with that.

David Bishop, Analyst

Got it. I'll stop there and get back in the queue.

Operator, Operator

And our next question comes from the line of Steve Moss with Raymond James.

Stephen Moss, Analyst

Maybe just starting on the margin here. David, I heard your comment about there was more fee collection in the margin. Just wondering, is that juiced up the margin a little bit more than expected? Or should we use this December margin of 350 as a good run rate for you guys into 2026?

David Sparacio, CFO

Yes, Steve, I think using the December spot margin is a good starting point for 2026. What we did on the loan collection piece. The reason it's up was we added a metric in our bankers' incentives to pay them for fees that they collected. And so believe it or not, people do what you incent them to do. And we've realized some of the loan fees coming through in our income statement. I haven't quantified it in regards to how much it is and margin, how many basis points it is on margin. I mean, I can tell you, our margin, we expect to continue to expand. We talked about how our loan rates, the loan yields are remaining steady in a declining rate environment or at least they're not declining as fast as index rates or even the deposit costs are dropping. So we've talked about in the past our repricing opportunities on low fixed rate loans, and we continue to see those throughout 2026. So we expect continued margin expansion throughout 2026.

Stephen Moss, Analyst

Could you size up the repricing opportunity for 2026, David?

David Sparacio, CFO

Yes. I mean, on the fixed rate loans, we have right around $1 billion throughout 2026 that's going to reprice, and the weighted average yield on those is 5.18%. If you look at that compared to our going on rate of about 6.47%, we have an opportunity to pick up 130 basis points or so on the loan side. That offsets any rate reductions we're seeing on variable rate loans. And of course, we have floors in as well. We've talked about that in the past. We have floors on about 86% of our variable rate loans and the weighted average rate on those floors is 4.74%. So I think we're in a good position given this rate environment. We remain slightly liability sensitive. I talked about our beta. We were aggressive in reducing deposit costs. So we were able to take advantage of rate reductions late in the year. We're going to benefit from that going into 2026. As far as expectations of rate cuts in 2026, I mean, you guys know how crazy the market is right now. We don't know what's going to happen with Powell, if he can be removed early or not, but there's pressure on him to reduce rates. If you look at the economic projections that the Fed put out at their December 10th meeting, their projection is only a 25 basis point reduction in Fed funds rate for all of 2026. So it's not exactly science right now on what we expect the Fed rates to do.

Thomas Broughton, CEO

And the $1 billion of repricing you mentioned, that does not include cash flow from loans.

David Sparacio, CFO

Does not include cash flow. We have an additional $700 million roughly in cash flows. We also talk about covenant valuations and loan modifications. We saw about at least in 2025, we had about $300 million in repricing as a result of covenant violations and loan modifications. So all in, it's about a $2 billion opportunity we have going forward in the next 12 months, Steve.

Stephen Moss, Analyst

Appreciate all that color there. And then the other question I have here is just kind of curious in terms of the $5 million charge-off in the quarter. Just wondering which NCL that came from? And just curious as to how you guys are feeling about the multifamily workforce housing nonperforming from last quarter?

Thomas Broughton, CEO

So the charge was related to the health care asset, and this was not surprising in any way, and we were largely reserved for the charge before this happened. So this was not a surprise, largely has been put behind us now that we're through the fourth quarter. Now with regards to the multifamily asset that we discussed several times last quarter, I think Tom can weigh in here. I'd just say we're continuing to work with the borrower to manage those assets and find an orderly way to produce the best outcome we can across the portfolio of 8 loans. The process of trying to sell most all of this portfolio is a slow process in the course of this year. Yes.

Stephen Moss, Analyst

Okay. Great. Appreciate that color there. And I guess just 1 last one for me. Just curious as to what you guys were thinking about for the tax rate for 2026?

Thomas Broughton, CEO

Yes. Tax rate, we're going to continue to take advantage of any kind of tax credits we can. We did it, of course, in the third quarter; we saw that come through. We saw our state rates jump up. Our state apportionments in the fourth quarter bounced up a little bit from that. I mean, we're going to continue to evaluate, Steve, any opportunities we have, particularly around solar credits. That's what we got introduced to, and that's what we like. We're going to continue to try to manage that down going forward.

Operator, Operator

And it looks like we do have a follow-up from David Bishop with Hovde Group.

David Bishop, Analyst

Tom, maybe you noted in the preamble about the Texas lift-out, that the team you got going there. I assume probably too early to talk about balances, anything they booked here. But curious, as we think about 2026, any thoughts in terms of how big that group can get from a size perspective in terms of loan balances and deposits?

Thomas Broughton, CEO

Yes, their projected growth for 2026 exceeds that of any other region. We have high hopes for Texas, and we're feeling optimistic. They mainly focus on commercial and industrial lending rather than commercial real estate. Currently, our commercial real estate exposure is under 300% of capital, and our acquisition, development, and construction lending is at 71% of capital. We are pleased with the reduction in our CRE exposure and our current standing. Overall, we feel positive about the market opportunities and their active participation.

David Bishop, Analyst

Got it. It sounded like from an expense drag perspective, any additional expenses there you expect to offset on a top-line basis. It sounds like you're expecting the efficiency ratio to hold in fairly steady, it sounds like?

Jim Harper, Chief Credit Officer

Yes. I mean we're not going to remain below 30%, David. Especially with bringing Texas on, I mean, right now, they don't have a book of business, but they do have expenses, right? We're paying salary benefits and leasing space. They're going to be a drag, not a significant drag, but there will be a drag, albeit on the efficiency ratio for the short term until they build their book of business and start to generate some revenue. But I think the expectation is in the low-30s for our efficiency ratio, closer to somewhere probably between 30% and 33% is where we expect to see it shake out for 2026.

Operator, Operator

And it looks like we do have a follow-up from Steve Moss with Raymond James.

Stephen Moss, Analyst

David, you just partially answered my question there. In terms of just thinking about overall expense growth for 2026, it sounds like you're kind of thinking like high single-digit expenses for the upcoming year?

David Sparacio, CFO

Yes. We're thinking high single-digit, Steve. I mean, we actually just went through the budget process for 2026, right? We've built in there some additional hires, but there's no back-office hires that are going to be drags on the efficiency. What we have plugged in are producers who are going to generate a book of business and generate revenue for us as well as expenses. So a good expectation is high single digits for expense growth.

Stephen Moss, Analyst

Okay. Great. And then maybe just along those lines, just in terms of the investment thought process here. Obviously, helping the group hires in Texas. Just curious what you guys think will be the opportunity for the upcoming year. Obviously, we've had a lot of M&A, whether it's Pinnacle or Cadence. Do you think there could be additional large team hires that maybe push you guys above that number? Just kind of curious what your thoughts are around the M&A disruption and your ability to hire?

Thomas Broughton, CEO

Yes. As you know, there are several mergers happening in both the Southeast and the Southwest. I'm not sure what you specifically include in the Southeast, so I would also consider the Southwest. We believe there will be significant candidates to engage with. However, everyone is competing for the same talent. There aren't that many qualified bankers available. Many people claim they plan to hire 200 new bankers this year, but from where? I doubt there are 200 qualified bankers in the Southeast. If I had to make a guess, I would say there aren’t that many. Nonetheless, we will strive to hire as many qualified individuals as we can find. One of our directors asked us today if we would prioritize meeting earnings targets or hiring staff. My response is that we will focus on hiring. We'll manage the budget for next year if necessary. So, our goal is to hire as many qualified people as possible.

Stephen Moss, Analyst

Got it. Appreciate that. And then one other cleanup question for me here, just in terms of the BOLI, I think $4.3 million was a death benefit. So the run rate here going forward is about $4 million a quarter.

Thomas Broughton, CEO

Yes, that's correct. We had a $4.3 million death benefit. So yes, if you back that out, that would be a run rate going forward.

Operator, Operator

Thank you. And with that, this does conclude today's question-and-answer session as well as today's teleconference. We'd like to thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.