ServisFirst Bancshares Inc (SFBS) 2025 Q1 法說會逐字稿

Greetings, and welcome to the ServisFirst Bancshares first-quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Davis Mange, Senior Vice President. Thank you, Davis, you may begin.

Good afternoon, and welcome to our first quarter earnings call. We'll have Tom Broughton, our CEO; David Sparacio, our CFO; Henry Abbott, our Chief Credit Officer; and Rodney Rushing, our Chief Operating Officer; covering some highlights from the quarter, and then we'll take your questions.

I'll now cover our forward-looking statements. Some of the discussed in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today, due to factors described in the 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.

Thank you, Davis. Good afternoon, and thank you for joining our first quarter conference call. We felt we had a great start to the year, and I'll give a few details followed by a credit update from Henry Abbott. After Henry, David Sparacio will give us a financial update, and this will be David's first quarterly conference call since joining us several weeks ago.

We are pleased to have David with us today. Ed Woodie, our Controller, acted as interim CFO for the last several months and did a great job of getting us through year-end and 10-K filing, and we appreciate it's hard work.

On the loan side, we were pleased with very solid growth net of payoffs for the first quarter with a 9% annualized growth is often the first quarter is down or flat in the loan book. So that was very, very solid start to the year. The loan pipeline is up 10% from January, and we do still have some projected loan payoffs at roughly the same as in the prior quarter.

On the deposit side, we saw strong deposit growth in the first quarter, which is a typical of what we usually see in the first quarter. Most of the growth was in municipal and correspondent deposits. We still see COVID funds working a way through the government system, which has aided municipal deposit growth. We did exit most noncore deposit relationships in the first quarter of last year.

On the new markets, we did add four new producers in the first quarter around different markets. We continue to be pleased with the progress of our newer markets, and they are hitting their goals. We are in discussions with several potential new markets that could happen later this year.

So all in all, I'd like to just say that I think it's business as usual. So far, we see an improvement and things are going according to plan. So I'll now turn it over to Henry, but for a credit update.

Thank you, Tom. The bank got off to a strong start with the loan growth, Tom previously mentioned. We continue to see good loan opportunities for both new and core markets as businesses are looking to expand or in other cases, we see new opportunities due to changes with their current bank, pending mergers or other market disruption. While there is plenty of uncertainty related to the economic environment, we want to continue to lend through this cycle to high-performing businesses and long-time established players in our markets.

Charge-offs were slightly higher than we would have liked at an annualized rate of 19 basis points for the first quarter. This figure is higher than the prior few quarters, but more in line with pre-COVID benchmarks. The overwhelming majority of the loans that were charged off were individually analyzed and compared to prior quarters, so we charged off previous impairments based on updated information.

While we did charge down some of these loans, I'm pleased to say we did grow our ALLL on a dollar amount for the quarter, but given the loan growth we previously discussed, ALLL to total loans did slightly decrease from 1.30% to 1.28% quarter over quarter.

Our NPAs rose in the first quarter of roughly 70% of the increase was related to two specific relationships. These relationships are in two different markets and both are real estate secured that neither is related to speculative AD&C or income-producing theory.

We continue to try to work loans through the NPA cycle as quickly as we can, and I'm pleased to say we even reduced our OREO to under $1 million with a $1.75 million reduction from year-end. We took aggressive actions where needed to quarter on a handful of credits, which slightly impacted our earnings, but hopefully set us up for success in the remaining quarters of 2025.

We continue to be conservative in our underwriting and diligent in our credit servicing. With that, I'll pass it over to David.

Thank you, Henry. Good afternoon. I will echo the comments that we feel the quarter was a solid start to 2025. And we reported net income of $63.2 million, diluted earnings per share of $1.16 and pre-provision net revenue of $85.7 million. This represented a return on average assets of 1.45% and a return on common equity of 15.63%.

Net income grew more than $13 million or 26% from the first quarter of 2024. Compared to the fourth quarter of 2024, net income was down slightly by about $2 million or 3%, mostly driven by a reduction in day count and changes in our effective tax rate. In line with the loan growth referenced by both Tom and Henry, we grew our total assets by nearly $1.3 billion from December 31, and ended the quarter at $18.6 billion. This is a 7% growth from December 31 and a 19% growth from March 31, 2024.

The period end cash balances at the Fed grew by about $959 million and ending loan balances grew about $281 million. This loan growth was spread evenly throughout our portfolio with new loan yields of 6.81% and about an even split between variable and fixed rates. We ended with just slightly less than 49% of our loan book being variable rate based.

We continue to see core deposit growth in our wound to deposit ratio stands at 89%, with our adjusted loan-to-deposit ratio, including correspondent Fed funds purchased of [77%]. As I mentioned, our Fed balances increased significantly during the quarter, about $380 million on average balances versus the fourth quarter, which certainly helps our liquidity but hurts our percentage margin calculation.

Additionally, we grew our tangible book value by 3% since last quarter and 13% from the same quarter a year ago, ending at $30.31 per share. We continue to be well capitalized with a common equity Tier 1 capital ratio of 11.4% and risk-based capital ratio of 12.9% for the quarter.

On net interest income for the quarter, it was $123.5 million, which is $21 million higher than first quarter 2024 and just slightly higher than fourth quarter 2024. I will remind you that in first quarter of 2024, we had 1 extra day due to leap year and fourth quarter 2024, we had two extra days when compared to first quarter 2025. We feel good about our dollar margin given the reduction in day count.

The margin percent is diluted this quarter by our higher-than-normal cash balances at the Fed. Excess cash diluted our margin by 6 basis points this quarter. Over the next 12 months, we will have $1.5 billion of projected cash flow from fixed rate loans at a rate of 4.76% and projected paydowns of mortgage-backed securities of $100 million at a rate of 2.5%. In addition, with tax and audited statements do soon, we anticipate loan repricing opportunities. In 2024, total repricing was $357 million.

Year-to-date for 2025, total loans repriced for $60 million and $95 million or pending. Thus, we anticipate over $1.9 billion in asset repricing over the next 12 months.

Our provision expense was down this quarter due to the release of the reserve previously marked for hurricane losses. We have not seen any hurricane loss materialize. So when we unwound that and update our CECL model, The result was a provision expense of $6.6 million, which is up $2.1 million from first quarter 2024 and $900,000 from the fourth quarter. The allowance for credit losses ended the quarter just over $165 million, which is an increase of about $576,000 from fourth quarter, primarily due to the growth in the loan balances.

As Henry mentioned, our allowance ratio dropped from 1.30% of total loans in the fourth quarter to 1.28% in the first quarter of 2025. I will point out that we were at 1.28% in the second quarter of 2024 before the general hurricane reserve was established. So this is just the normalization of our allowance level.

On noninterest income in the first quarter of 2025, we were down about 7% versus quarter 2024 but this decline was driven by a onetime BOLI death benefit recorded in 2024. From a normalized rate, we saw an increase of about 7% in noninterest income versus first quarter of 2024, primarily driven by higher service charges on deposit accounts. Versus fourth quarter 2024, noninterest income was down $526,000 and due to a lower day count and seasonal declines in credit card and mortgage activity.

We expect noninterest income to pick back up in the second quarter of 2025. During the quarter, our noninterest expense was down $789,000 versus fourth quarter 2024 and flat versus first quarter 2024. This is a testament to our expense discipline as we have experienced growth of 5% in our number of employees since first quarter 2024. And first quarter always sees a seasonal spike in payroll taxes versus fourth quarter.

Payroll expense was down about 5% versus fourth quarter due to the true-up of 2024 incentive plan payouts, this incentive reduction was offset by a onetime operational loss we experienced in the first quarter. This resulted in an efficiency ratio below 35%, which we are very proud of.

For the remainder of the year, we expect our noninterest expense to be in $46 million to $46.5 million range, obviously fluctuating based on our expansion efforts that Tom mentioned earlier. For the first quarter, our pretax net income was relatively flat compared to fourth quarter 2024, which we view as a win considering the fewer dates. Versus the same quarter last year, our pretax net income is up over $18 million or 30%. We continue to focus on organic loan and deposit room priced both competitively and profitably.

On our income tax provision, we saw an increase driven by less credits. Our 2024 effective tax rate, which was about 18% increased in the first quarter to about 20% and which is the expected run rate for the remainder of 2025.

Now I will turn it back over to Tom for additional comments.

Thank you, David, and I'm sure you've all seen 8-K, we filed a little bit ago after the market close, regarding Henry's career change, and I would like to thank Henry Abbott for all his contributions to our strong credit culture, and we wish him well in his next chapter of his business career. And I know Rodney wants to make -- Rodney Rushing wants to make a few comments as well about Henry.

Yes. Thanks, Tom. And also, I'd like to thank Henry for the hard work you and all your team put in and accomplished over the last few years.

As you make this transition to your next business in Denver, I want to especially thank you for making the transition of smooth, seamless one. Agreeing to work over the next few weeks full time and then in a consulting role with Jim has made this much easier for all of us, and thank you again, and good luck. With your work ethic, I am sure you will be successful in whatever you do.

With that, I'll turn it back to Tom.

Thank you, Rodney. And I think we'll now open it up for questions.

(Operator Instructions) Stephen Scouten, Piper Sandler.

Congrats on a great quarter here. I know you mentioned some influence from municipal deposits, but just kind of curious how you think -- or how you're thinking about deposit trends for the rest of the year, given such a strong start here in the first quarter?

Yes. Stephen, I wouldn't be -- I wouldn't project that out for the next 3 quarters. I don't think I think some of that is probably on the correspondent side. Randy can address that. But I think some of the municipal deposits will probably run down as the course of the year goes on.

Rodney?

Yes. For the first quarter, correspondent was up a little over $430 million in total fundings from year-end. And in the first quarter, correspondent balances tend to grow and accumulate head into the tax season. And we have seen that level off sets then. So -- but that's where a large chunk of it came from.

Okay. So if I think about that, I mean, that should kind of normalize but still continue to grow. And when the -- it would be fair to assume kind of cash balances move down in a likewise fashion throughout the year? And kind of the NIM maybe pulls back up as the balance sheet remixes? Is that the right way to think of the trajectory of the NIM from here?

Yes, Stephen, this is David Sparacio. Yes, we're already actually seeing that come down a bit. The cash balances. We track on a daily basis. we're seeing some of that retract as well.

So I mean, you could see the average balances are not nearly size the period end balances were. So we expect that those cash balances to come down over the next few months.

Okay. Great. And then just last for me. Just kind of curious, I mean, obviously, loan growth was fantastic here in the quarter. And just anything kind of anecdotal that you're hearing from customers if there's been any sort of change in the pipeline and kind of post April two this uncertainty that the market seems to be overwhelmed by?

I think there may be a bit of a slowdown, Stephen, but Main Street, a heck of a lot more durable than Wall Street. And I think the effect is it helps some companies, it hurt some companies. If you're a Porsche dealer and they make nothing in the United States, then you probably are pretty concerned right now. We don't bank any Porsche dealers, I don't think to my knowledge.

If you're a Ford dealer, you're feeling pretty good about the 80% of their models assembled and made her parts and all. So we just don't see -- certainly, it's not -- the commercial real estate transactions be short-term interest rates to come down to improve the environment there a bit. But we think that what we need to see is a combination of asset repricing and growth at the same time, and that will get us to where we need to be in terms of growing our earnings back to more normal historical levels of profitability in terms of return on assets, return on equity that we enjoy.

So we don't, at this point, see any significant impact from tariffs. I could be naive. But things like that, that get a big -- they carry on a ballot on CNBC all day long, but people on Main Street don't watch CNBC. They're running their companies and businesses. And obviously, there's a certainly a buy ahead aspect to people fear inflation, they tend to spend money now.

So there -- I think there's many positive benefits as negative benefits at this point in time, Stephen. I'm just -- we don't see anything odd from our correspondent bank either. There's nothing -- there we have 390 correspondent banks. So we really capture a pretty good cross-section of the Southeast United States plus more.

So I don't think we'd be hearing things. And I think everything is -- we don't see anything in our card portfolio -- credit card portfolio, anything odd. We don't -- everything even the -- seems like the senior housing is healing up a bit. Obviously, if you look at the cost of new senior house and then look at what you can buy, there are people out buying senior housing projects today, the existing ones because they they're substantially cheaper than building new. So people are looking to the future a little bit.

It hadn't yield up, don't get me wrong, but it's heading a bit. So I'm really optimistic about the balance of the year, Stephen.

Steve Moss, Raymond James.

Tom, just following up on loan growth here. The pipeline is up. You had a good quarter of production. You're still thinking like low double digits could be a good pace?

Yes, we do. Some of the -- we still have some payoffs, I was kind of hoping they would go away after the first quarter, but some of it seems like they I guess not all of them paid off that I had thought would pay off in the first quarter, but we're not seeing any big projects. All of our growth we've had so far this year is in smaller chunks, which is good.

And we're seeing a nice, steady granular within the loan portfolio. So we feel good about -- and it's broad-based. It tends to be in every market. Of course, Florida is, by far, probably the best, but we're seeing a lot of opportunity in a lot of places. So I think -- I don't know, Rodney, do you have anything else you want to add there?

Yes. It's been steady from our correspondence. I mean the number of participation opportunities we're seeing has just -- it would not had a spike and we've not had a decline. It's been steady for the first quarter, and we've seen several of the last two or three weeks. I mean, just -- we've not seen the slowdown in the projects from the stream.

Again, I think the tariff effect has been zero at this point in time.

Okay. No, that's fair. That makes sense. And then in terms of -- just kind of curious, loan pricing for the quarter on new originations was [$684], I guess, renewals -- just curious, has that gotten tighter here as the quarter has gone on? Or are you guys still holding you think, in the high 6s on originations, just kind of think about that roll on roll-off dynamic with loans repricing going forward?

I think it's been the same. It's already too tight. Don't get me wrong. I mean, I'm not happy with the pricing we're achieving today. I think should be higher given.

But obviously, people are projecting that we're going to see a downturn in rates at some point in the year. So it's been steady at those levels.

Okay. And then the other question for me here, just on the operating expenses, $46 million, just $46.5 million for each quarter versus the year. Is that before the potential of new hires?

Yes. That is before any potential new hires. So I had to comment in there. Tom talked about expansion efforts. -- we continue to evaluate any new producers out there. And so if we hire additional that would add to that baseline, yes. We continually have a [Dodge] program ongoing in terms of evaluating effectiveness of our producers. So you always -- you get some growth and then you have some reductions in force as well, Steve. So --

I hear you there. Tom. Okay. Sounds good. And last one for me. Just on the nonperformers. I know you guys said they were not income producing and not speculative AD&C. Just kind of curious what kind of industries they were to? Or any additional color you can give around those nonperformers that were added?

Yes. I mean those are I guess, I'd say kind of medical-related in very different markets. But once again, those are C&I operating not just income-producing properties.

Okay. Like senior assisted living or kind of curious how to --

No. It is a hospital. Yes, on a hospital and then on a doctor.

In the doctor, it's just doctor this got cash flow issues, but a lot of assets, he's over extended, but we've got really good collateral and feel good about our collateral with him. It's just -- only say about doctor, Steve, -- sometimes they get overstated.

David Bishop, Hovde Group.

Tom, Dave, quick question. You sort of alluded to the influx of the liquidity. I think it was 6 basis points of NIM pressure. I appreciate the data as the supplement looks like your cost of interest-bearing deposits of 3.42%, 2 basis points above the quarterly average. Is that reflecting some of the pressure from that muni inflows and just how much do you expect some of that -- is there a way to frame the dollar inflow that could flow out over the next couple of quarters?

The two funds the largest influx was municipal and correspond and they're higher cost funds. Is that what you mean, Dave? I mean, they are higher cost of funds. So it doesn't -- it's not like we have repricing of our existing deposits or anything to that -- is that where you're going with it, Dave?

Yes. Just sort of trying to get a sense of those BD correspondent funds sort of trickle that out, can we expect to see that number start to move south, so to speak at 3.42%, where do you see that sort of trending over the next couple of months or so?

Yes. I would expect, as Tom said, we don't expect that municipal deposit base to stick, right? And so we expect it to exit eventually. And so when it does that, it will drop the cost of deposits down because it is higher yielding for that bucket, right?

Given our ongoing excess liquidity, we always we are looking for additional levers we can pull to try to improve income without -- and increases in risk, but we might deploy some liquidity if we can find some avenues to do so, Dave. So we're looking -- I don't -- it won't be huge amounts of effect on net income, but it will be a little bit. So when you got that much cash, every little bit helps.

Got it. And then, Dave, I think you gave some -- Dave, about the amount and number of loans you expect to report for the next 12 months, you just going through that again real quick?

Yes. We have about $900 million right now that's going to reprice in a year or less. And the weighted average rate right now is 4.76%, and that's on the fixed rate book on the variable rate book. We have about $2.2 billion that's going to reprice in the next year are less and the weighted average rate on that is 7.52% right now.

And then we've got the cash flow on fixed rate loans as well. The cash flow on fixed rate loans is -- I mean -- and paydown is $1.5 billion. at 4.76%.

Thank you. There are no further questions at this time. With that, that concludes today's teleconference call.

You may disconnect your lines at this time. Thank you, everyone, for your participation.