ServisFirst Bancshares Inc. 2026 Q3 Earnings Call

Good afternoon, and welcome to our third quarter earnings call. We will have Tom Broughton, our CEO, Jim Harper, our Chief Credit Officer, and David Sparacio, our CFO, covering some highlights from the quarter, and then we will take your questions. I will 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. ServisFirst assumes no duty to update them. With that, I will turn the call over to Tom.

Thank you, Davis. Good afternoon, and thank you for joining our third quarter conference call. I will give you a few quick highlights of the quarter, followed by Jim Harper, our Chief Credit Officer, and David Sparacio, 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. That is very much positive. We did see some good growth in C&I loans in the third quarter, which is very positive and like seeing that.

On the loan pipeline, I went back and looked at the pipeline 3 months ago, and it was very solid, and it was at record levels, but 40% of the total pipeline was over 90 days. In this quarter, the total pipeline less than 90 days is up 58% over last quarter. 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 are talking about it is a large group of bankers out there. They are doing a great job and 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-SIB banks rather than regional banks.

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 fourth quarter. We have emphasized non-interest bearing deposits, and we have seen good growth year-over-year of 12% in non-interest bearing deposits. 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. 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.

With that, I'll turn it over to Jim 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 in loans at 6/30/2026. 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.

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 basis, nonaccrual loans decreased by approximately $9.6 million during the quarter to $161.8 million. The net decline in nonaccruals 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 totaled $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. That allowance increased slightly to 1.28% of loans, which was up 2 basis points from June and covers our nonaccrual 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 reference 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 a 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, $0.65. So on an adjusted basis, we grew earnings per share 23%. For the first 9 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% from the second quarter, and up $26.4 million or nearly 20% from a year ago. Net interest margin was 3.63%, unchanged from last quarter on a GAAP basis. But as you'll recall, the second quarter included a recovery of interest income from a payoff on a nonaccrual relationship, which added about 5 basis points to margin. Excluding that recovery, our margin expanded about 5 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 $1.56 billion at quarter end, down nearly $290 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 $1.5 billion of loans with a weighted average yield of 5.08%. 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. 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.