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DATE
Monday, Oct. 20, 2025, at 5:15 p.m. ET
CALL PARTICIPANTS
- Chief Executive Officer — Thomas Broughton
- Chief Credit Officer — Jim Harper
- Chief Financial Officer — David Sparacio
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RISKS
- Nonperforming Assets Increase — Jim Harper stated, Nonperforming assets were notably higher in Q3 2025, increasing by approximately $96 million during the quarter, driven by our relationship consisting of eight loans with a large merchant developer and rehabilitator of multifamily properties.
- Higher Net Charge-offs — Charge-offs totaled just over $9 million, resulting in an annualized net charge-off to average loan percentage of 0.27%, which is higher than in recent periods.
- Loss on Bond Portfolio Sale — David Sparacio said, "we recognized a loss of $7.8 million on the sale of bonds."
TAKEAWAYS
- Net Income -- $65.6 million in net income and diluted EPS of $1.20; when normalized for significant items, net income was $73.8 million, or $1.35 per share.
- Net Interest Income -- $133.4 million as reported and $137.8 million normalized net interest income.
- Net Interest Margin (NIM) -- 3.09% as reported, with a normalized NIM of 3.19%; management expects 7-10 basis points NIM improvement per quarter with further Fed rate cuts.
- Book Value Per Share -- Book value per share grew by an annualized 14% versus the prior quarter, ending at $32.37 per share.
- Efficiency Ratio -- 35.22%, with adjusted efficiency ratio at 33.31%, both improved year-over-year.
- Allowance to Total Loans -- Remained unchanged at 1.28% compared to the previous quarter.
- Loan Pipeline -- Increased over 10% month-over-month in October and stands 40% higher than a year ago as of October.
- Deposit Composition -- Reduction in high-cost municipal deposits was offset by large corporate inflows; deposit cost managed in response to rate cuts.
- Credit Concentration -- Nonperforming asset increase was attributed to one multifamily borrower, but additional collateral reduced perceived risk; management expects resolutions on material credits in late Q4.
- Bond Portfolio Actions -- $83.4 million in bonds with a 1.66% yield were sold at a $7.8 million loss and reinvested at 6.14%; full benefit of the move expected in Q4 NIM.
- Solar Tax Credit Investment -- Resulted in a reduced effective average tax rate of 18.9% for the year, with similar rates targeted for the near term.
- New Hires and Market Expansion -- Seven new producers added across regions; all markets profitable for the first time since inception.
- NDFI Loan Exposure -- Total nondepository financial institutional lending exposure is $71 million, or less than 1% of the loan portfolio; management emphasized low exposure and credit discipline.
SUMMARY
ServisFirst Bancshares (SFBS 0.07%) management highlighted a notable increase in the loan pipeline in October compared to September, which may drive improved loan growth in upcoming quarters and offset recent weakness from elevated paydowns. Actions to restructure the bond portfolio included the sale of low-yielding securities and reinvestment into higher yields, which is expected to support further net interest margin expansion in subsequent quarters. The increase in nonperforming assets was linked to a single borrower, but management described successful collateral enhancements and ongoing asset resolutions anticipated before the end of Q4. New hires contributed to the full profitability of all operating markets.
- David Sparacio said, "We are managing our noninterest expense, which resulted in an improved efficiency ratio."
- Thomas Broughton differentiated credit risk from fraud risk, noting they have "avoided any significant exposure" in most NDFI categories due to historical fraud incidence.
- Management acknowledged a $2.4 million tax benefit from a solar investment, reducing the effective tax rate to 18.9% for the year, and indicated openness to further tax-advantaged investments.
- Sequentially, normalized net interest income increased $8.4 million compared to Q2, with a Normalized net interest income increased by $22.7 million year-over-year.
- Jim Harper said, "ServisFirst continues to aggressively manage our NPAs, and we expect to have resolutions on several material credits as soon as late in the fourth quarter."
- Deposit cost discipline remains a focus as Federal Reserve policy shifts, with management targeting deposit cost reductions in excess of future rate cuts.
INDUSTRY GLOSSARY
NDFI: Nondepository Financial Institution; lending segment considered higher risk for fraud, including warehouse lending, asset-based lending (ABL), and floor-plan finance.
CECL: Current Expected Credit Loss; a model banks use to estimate future credit losses in their portfolios.
Efficiency Ratio: A measure of noninterest expense as a percentage of revenue, where a lower ratio indicates greater efficiency.
Nonperforming Assets (NPAs): Loans or assets that are not generating expected returns due to borrower delinquency or default.
Full Conference Call Transcript
Thomas Broughton: Thank you, Davis. Good afternoon, and thank you for joining our third quarter conference call. I'll give you a few highlights followed by credit update from Jim Harper and followed by David Sparacio with some financial updates. Talk about loan growth, it was below our expectation for the third quarter. We went back and reviewed loans booked and draws versus paydowns over the 3 quarters of 2025 and loan paydowns were up $500 million over the prior 2 quarters in the third quarter. So this contributed to the lack of -- real significant loan growth. We did see a nice increase of over 10% in our loan pipeline in October compared to September.
In comparing our loan pipeline to 1 year ago, the pipeline is 40% higher today. In addition, the projected payoffs today are 30% of the projected pipeline versus 1 year ago, there were 41% of the projected new loans. So we do see that there is a slight decline in the pipeline as a percent of the loan payoffs as a percent of the loan pipeline. So the pipeline is not scientific, though we do stress to our bankers, and we want to be as accurate as possible. Every fourth quarter that I can remember has been -- we've had solid loan growth -- so my expectation will be that we'll have a good closing long quarter in loans.
And I'll say that not all loan payoffs are bad because some of them that are low fixed rates pay off on the asset sale. So we've had several this quarter. So we're glad to see those pay off. So on the deposit side, we did see some continued reduction in our high-cost municipal deposits in the third quarter. They were offset by some large corporate deposit inflows -- so -- but as David will discuss in a few minutes, we're trying to manage down our total deposit costs as the Federal Reserve reduces the Fed funds rate. On the new markets, we did hire 7 new producers. In the quarter spread throughout our footprint.
And we're also proud of that all of our markets are now profitable. I don't think we've ever achieved this before since our first year in business. So we're very proud of that. So I'm going to turn it over now to Jim Harper for a credit update.
Jim Harper: Thanks, Tom. As Tom noted, lending activity softened a bit during the third quarter, but activity as we moved into the fourth quarter has been robust. With activity across our footprint. From a credit metric standpoint, charge-offs totaled just over $9 million in the third quarter, which results in an annualized net charge-off to average loan percentage of 27 basis points, on higher than recent historical periods, the charges were primarily taken on loans, which had previously been impaired with one exception of a $3 million charge taken on a loan that had not previously been impaired. From an allowance perspective, the allowance to total loan percentage remains static compared to the second quarter at 1.28% at quarter end.
Nonperforming assets were notably higher at [ 9/30 ], increasing by approximately $96 million during the quarter with the increase driven by our relationship consisting of 8 loans with a large merchant developer, rehabilitator of multifamily properties. Properties associated with the loans are in Alabama, Louisiana and Texas. Despite us placing these loans on nonaccrual during the quarter, the bank was able to successfully obtain additional collateral to -- bolster our position. Additionally, the borrower is actively selling assets as evidenced by purchase and sale agreements on 5 properties and 8 letters of intent on others as well as pursuing other corporate actions, which are expected to produce meaningful liquidity in the coming quarters.
ServisFirst continues to aggressively manage our NPAs, and we expect to have resolutions on several material credits as soon as late in the fourth quarter of this year. I will now turn it over to David to provide his comments on our third quarter financial performance.
David Sparacio: Thank you, Jim. Good afternoon, everybody. For the quarter, we reported net income of $65.6 million and diluted earnings per share of $1.20 and preprovision net revenue of $88.3 million. This represented a return on average assets of 1.47% and a return on common equity of 14.9%. Net income grew more than $9 million or 18% from same quarter last year. During this quarter, we had a few unique transactions. The first was the reversal of about $4.4 million of accrued interest on the credit that Jim spoke of. Secondly, we recognized a loss of $7.8 million on the sale of bonds.
And thirdly, we invested in a solar tax credit, which gave us a benefit of about $2.4 million in tax provision. When we take these 3 transactions into account, we view our normalized net income for the quarter to be $73.8 million or $1.35 earnings per common share. I will talk more about these 3 transactions later on. And lastly, our book value grew by an annualized 14% versus last quarter and by more than 13% from the same quarter a year ago ending at $32.37 per share. We continue to be well capitalized with common equity Tier 1 capital ratio of 11.5% and risk-based capital ratio of 12.8% for the quarter. Of course, these are preliminary numbers.
In net interest income, our amount for the quarter was $133.4 million as reported and normalized net interest income was $137.8 million. This equates to a net interest margin of 3.09% as reported and more importantly, 3.19% when normalized for the interest income reversal previously mentioned. This normalized net interest income is $8.4 million higher than the normalized number for second quarter of '25 and more than $22.7 million higher than third quarter of '24. We are pleased with the continued margin expansion. We certainly benefited from the Fed's rate reduction in September and are expecting continued margin expansion in fourth quarter due to anticipated additional rate cuts.
On the provision side, we had single-digit loan growth, which equated to a reduction of about $1.8 million of provision expense for the second quarter -- I'm sorry, versus the second quarter. We had little change in our economic and credit indicators in our CECL model. And as a result, our allowance ratio held steady at 1.28%. During the quarter, we recognized, as I mentioned, $7.8 million loss on the restructuring of our bond portfolio. As we did in the second quarter, we strategically sold $83.4 million of bonds with a weighted average yield of 1.66% at a loss. We took advantage of the opportunistic market and reinvested the proceeds in new investment purchases yielding an average of 6.14%.
The expected payback period on this transaction is about 3 years. This restructuring will position us for stronger margin performance in future quarters. This transaction has significantly reduced our low-yielding bonds as well as our accumulated other comprehensive losses, and we do not anticipate continued restructuring of our bond portfolio. Excluding these bond losses, our net interest revenue increased by more than $1.6 million from the second quarter of '25, to the third quarter. This positive increase is primarily driven by our increased service charges, which were implemented on July 1 and on stronger mortgage production. We continue to focus on noninterest income growth, especially through our credit cards, merchant services and treasury management products.
As our revenue is growing, we are managing our noninterest expense, which resulted in an improved efficiency ratio. Our best-in-class efficiency improved from 36.90% in third quarter of '24 to 35.22% in third quarter of '25. Our adjusted efficiency ratio for this quarter is 33.31%, which has dramatically improved from same quarter last year. During this quarter, our noninterest expense was up versus second quarter of '25 due primarily to the rightsizing of our incentive accrual in the second quarter. Versus the same quarter last year, we experienced an increase in noninterest expense of about $2.4 million, which is more than outsized by the $12.6 million increase in revenue.
My goal remains to constrain noninterest expense growth to a fraction of our revenue growth. We remain focused on expense control and continue to seek opportunities to reduce our operating cost. So all in, the third quarter of '25, our pretax net income was up about $2.2 million compared to the second quarter of '25 and up over $6.4 million versus third quarter of '24. We remain focused on organic loan and deposit growth priced both competitively and profitably, and we are concentrated on continuing the expansion of our margin. As I previously mentioned, we also invested in a solar tax project, which essentially lowered our effective average tax rate for the year to 18.9%.
The solar investment is our first, and we will continue to evaluate other tax improvement opportunities as they arise. This concludes my remarks, and I will now turn it back over to Tom for additional comments.
Thomas Broughton: Thank you, David. Last thing I'd like to cover is there's been recent attention in the media in recent days on the increase of fraud and a few regional banks. Much of this is related to category -- lending called NDFI, which stands for nondepository financial institutional lending. We have avoided any significant exposure in most of the categories that fall within the NDFI category for one main reason, and that's because trois more common in NDFI loans, and it's hard to full-proof your process. warehouse lending, ABL lended and floor plans historically have had a greater incidence in fraud than any other types of loans.
To cover our total NDFI exposure is $71 million or less than 1% of our loan portfolio. I think everybody knows that our correspondent division does business with our -- with community correspondent banks. And -- most of our exposure is to holding company lines of credit to community banks, a holding company. So we certainly are comfortable with our exposure in this category. I would differentiate a fraud issue from a credit issue. It's not that the credit deteriorated where there's [ fall ]. This [ fall ] is just a fraud and it typically is fairly common. You see it all the time.
It continues in some sort of a pony scheme type situation until they are found out by their lender. And they have to come clean on it. So we avoid most of these categories like this, we avoid -- we shared national credits. We try to lend to borrowers. We think we know well, owner-managed companies and real estate developers are the best examples. We -- as lenders, we all make mistakes from time to time, but we -- because we have a record of lending to people we know. Our loan losses have been much lower and our credit quality has been much better at ServisFirst Bank. So we consider ourselves of community buy.
We have 11 community banks plus our correspondent division. So we are proud of what we have built here over the last 20 years and certainly still the test of time, and we'll continue to do so. So this will conclude our prepared remarks, and now I'll turn it over to operator for questions.
Operator: [Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James.
Stephen Moss: Good afternoon, guys. Maybe just starting with the nonperformer here. Just curious, what was the dynamic, if you can give us any color that pushed the borrower over to nonperforming status -- and also, what's the loan-to-value on the loans?
Thomas Broughton: Well, we -- as again, said we took additional substantial additional collateral during the quarter and substantially he offered it. And we -- because he was expecting a large payment before quarter end, it did not come in. So we will have no choice other than -- move it to nonaccrual and we'll start -- like to think we will turn it to accrual status over the next 6 months. As [ selling ] these properties and many others. So it's workforce housing redeveloper, long-term customer. We have confidence in the this borrower. So we feel good about our exposure. We don't have a -- it's a good loan.
Obviously, it's not a good loan in terms of -- it's not current at the current time. We feel comfortable where we are.
Stephen Moss: Okay. Got it. And just in terms of just thinking like when you guys just -- I hear you on the additional collateral kind of like just maybe just a little comfort in terms like what's the loan to cost or just kind of how you're thinking about how secure you are? I hear you're going to start to come back to accrual status just kind of -- you can [ sit limit ]1.
Thomas Broughton: So we think through the forbearance process and all the actions that we were able to execute toward the end of the quarter. We did think there was possibly a little bit of a collateral shortfall, and we were able to work with the borrower to obtain additional collateral across several different fronts, and we think we've shored that up. So our loan to value, while certainly elevated, we don't -- we certainly think that it's below 1:1 at this point, and we've got adequate security to cover the loans for sure right now.
Stephen Moss: Appreciate that. And then in terms of just kind of on the margin front. I hear you guys about the amount of the reversal of accrued interest. Just curious, probably getting effect that next week, underlying margin was 3.19% -- just kind of curious on the cadence of margin are you guys still thinking something close to high single digits to tens given rate cuts? And also just curious on loan yields, where loan pricing is these days?
David Sparacio: Yes. So Steve, this is David. Yes, we're still confident with, I'll call it, 7 to 10 basis points improvement in margin each quarter as we've been seeing -- for reference, our -- I don't want to call it adjusted, but our normalized spot rate for September was [ $328 ], right, for the month, excluding the net interest accrual reversal. So we're in good shape on margin. the Fed cut happened September 17, so we only experienced about 2 weeks of benefit from that -- so we'll see that throughout the fourth quarter as well as we anticipate additional cuts in the October and December meetings.
The Fed is going to have -- so we're going to continue to see improvement in margin. As far as loan yields, the going-on rate dropped a bit. Last quarter, we were at [ $7.07 ] this quarter, we're at [ $6.87 ] for loans going on. But we're continuing to manage through the process. We continue to have healthy repricings and cash flows. We're still sitting at about $1.7 billion in the next 12 months. in cash flows. And then on top of that, as Tom alluded to in earlier conference calls, we have another roughly $300 million a year in covenant bust that get repriced.
And so we're sitting at about $2 billion worth of opportunity of repricing on loans. So we feel really good about the margin expansion and we think that's going to continue at least for the foreseeable Future as long as there's nothing drastic done by the Fed.
Stephen Moss: Got you. And just in terms of the cash flows for the next 12 months, it's still in the high 4s in terms of fixed rate loans, cash flow?
David Sparacio: Yes. It's still in the high 4s. [ 4.87 ] was a number for second quarter. We don't have an updated number from our external ALM consulting yet for the third quarter. So -- but we can get that to you, but still in the high 4s.
Stephen Moss: Of course. Okay. And Tom, in terms of the loan pipeline here picking up, just curious where are you seeing the growth and kind of what you're seeing the demand for loans [indiscernible]?
Thomas Broughton: I can't give you a good answer, Steve. It's all over the [ bollard ]. That's what it, we obviously would like to see more C&I than we spend more commercial real estate oriented. But our AD&C is the lowest it's been in.
Unknown Executive: In years and years -- from a percentage.
Thomas Broughton: The CRE is below 300% of capital -- so it's by region, it's hit or miss, it's here or there in younger. I mean, Atlanta has been really strong, and we've had pockets of places that some of our markets are doing quite well. Some of our near markets, obviously, you would think they would do well, right? And they are. The new markets are Memphis and Auburn and Piedmont region have had good loan growth this year, and that you would expect that and they are doing that. So I mean, I'd still say loan demand is okay. I saw a banker, Saturday and he said, "I was loan demand. He said Okay.
I said, yes, I know it's okay. It's not great. So we need a few more rate cuts to hopefully help out loan demand overall.
Operator: Our next question comes from the line of Dave Bishop with Hovde Group.
David Bishop: I'm curious -- Tom, on the expense side, Tom and Dave came in a little bit, I think, above expectations. Sounds like there was some shoring up on the incentive accruals. Is that correct? And maybe you can sort of ring fence that about maybe expectations where you see that compensation, salaries and benefits maybe settling into the final quarter of the year?
Thomas Broughton: Yes, Dave, the true-up really happened in second quarter. So when you compare second quarter to the third quarter, it's really second quarter that was lower because of the true-up. We did an incentive true-up, it's all in incentive comp. And so it's going to depend a lot on loan production. We went back to accruing our normal incentive rate for the third quarter. And so fourth quarter, at this point in time, given the uptick in the pipeline, we expect fourth quarter to be very similar to third quarter from an incentive standpoint. And so I would expect the noninterest expense to come in at the same level as well. So roughly $48 million.
I know it's higher than expected. But I would just guide you back to our efficiency ratio. Our efficiency ratio is still best-in-class in the [ 130 ] we're not -- the expense increase is a fraction of what our revenue increase is. And as long as we continue on that trajectory. That's what I'm pleased with from the results standpoint.
David Bishop: Got it. Appreciate that color. Then Tom, I think when we had you on the virtual road last month or so, still sort of fresh in the news, the opportunities from the MOE in your backyard. Any early signs of success there? Or you're pretty active in terms of recruiting efforts? Any -- any commentary you can provide there in terms of maybe early reads of relationship wins or bank or [indiscernible]?
Thomas Broughton: Broadening that it's not only mergers that cause that create opportunity. We're looking at -- obviously, there are other mergers announced are going on and we look for opportunities in many fronts. And feel good about our ability to at least attract customers and offer them a more stable -- base than they've seen in some cases out there in the market. So we feel confident about where we are and opportunities. Again, you've got to be out seeing people. And again, most of our opportunities come from existing customers, about 80% of our new business comes from referrals from existing clients.
So that is something that we emphasize on trying to do a good job of taking care of our clients and they'll send us their friends and colleagues that they do business with and know well. So we think that's the very best thing we can do is take care of our clients and take care of their needs, and we'll get more just like them. So.
David Bishop: Got it. And then one final maybe housekeeping question. The tax rate, I know with the solar tax credit investment bounced around a little bit. Maybe a good expectation for the effective tax rate going forward?
Jim Harper: Yes. I think the 18.9%, Dave was going to stick for the year, at least for 2025. As Tom mentioned, this deal that we did, it kind of opened our eyes a bit on what's available and what's out there in the market. And so we have some good contacts. We have some good relationships. And so we're going to continue to develop those opportunities and take advantage of them. And so the goal -- you saw our tax rate jumped up a little bit in second quarter. And so the goal is to keep it certainly below 20% for sure.
And so for 2026, we don't have anything that's planned right now, but we continue to have discussions with folks that have opportunities for us to take advantage of. So I would expect it to be in the 18%, 19% for the foreseeable future.
Operator: Our next question comes from the line of Stephen Scouten with Piper Sandler.
Stephen Scouten: David, I want to reconcile one number real quick. I think you said maybe a [ 328 ] margin for the month of September ex the reversal -- is that interest reversal, the main difference versus the [ $297 million ] listed in the supplemental information?
David Sparacio: Yes, that is correct. Yes. It was -- it's about 31 basis points on that interest reversal.
Stephen Scouten: Okay. Great And so you would expect to kind of see that 7 to 10 basis points, the way you would think about it in the fourth quarter would be 7 to 10 bps potential roughly off of the [ 319 ] all-in number. Is that the right way to think about it?
David Sparacio: Yes, that is correct. .
Stephen Scouten: Okay. Great. And then, Tom, maybe kind of following up on that question around dislocation. I like how you said that kind of offering stability in the market and being there for your customers. Are there any kind of new markets maybe on the horizon for you guys, where that level of business quality and stability you don't see being offered today that you'd be interested in, whether that's opened up via M&A or otherwise?
Thomas Broughton: Yes. I think certainly, we've always had an interest in finding the right people in Texas, and that's something we're very interested in -- it's not easy. Texas is not an easy -- I'm not suggesting it's an easy market. I'm suggesting that there are -- if you have the right group of people with a bank base like ours, I think it could be a really good place to do business. And I think we could -- Texas is a very Texas-centric place. You can't send people there. The Texas people like to do business with Texas. And not people from Alabama or New York or anywhere else. So I get that, and I'm aware of it.
So that's something we are certainly keenly interested in that market. And I'm not -- not to change the subject, but doubling back on what, David, to my interest rates, as the Fed cuts rate -- that rates -- that is our opportunity to say, okay, we need to try to manage down our deposit costs at least more than the Fed cut. So if the pay cut is 25, our goal is to manage down more than that, more than that 25 bps. So I think that's it's an opportunity. It's when we see the Fed cutting rates. That's our opportunity, Stephen. And I wouldn't avoid any further questions.
Stephen Scouten: Yes, that makes sense. No, I appreciate that. That's a good reminder. And along with that, kind of maybe bouncing back to the NIM a little bit, I guess, when was that security sale completed this quarter? And is there any sort of incremental benefit to the run rate of securities yields in the NIM in the fourth quarter from that trade?
Unknown Executive: Yes. The security sale was done in late in third quarter, maybe the third week of September. And so you're not going to see much more benefit at all in third quarter as a result of that. You'll see the full benefit of it in the fourth quarter. And I don't have a number off the top of my head exactly what that is, but it's going to be 500 basis points or 250 basis points on $80 million -- or I'm sorry, $70 million.
Thomas Broughton: Thank you, Stephen.
Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.