Prepared remarks
Greetings, and welcome to the ServisFirst Bancshares Second Quarter Earnings Call. At this time, 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 conference over to Davis Mange, Director of Investor Relations.
Thank you, David. You may begin.
Good afternoon and welcome to our second 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, 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-Ks 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 will turn the call over to Tom.
Thank you, David. Good afternoon. Thank you for joining our second quarter earnings conference call. We are generally pleased with the results and I want to give you a few highlights of the quarter and I will be followed by Jim Harper, our Chief Credit Officer, and David Sparacio, our Chief Financial Officer. On the loan side, we saw improved loan demand with annualized loan growth of over 15%. Almost all of our 13 regions or segments had solid loan growth. The best growth was in our two Florida regions and Tennessee, but really no region contributed more than 15% of the total growth and almost none of them were less than 10% of the total growth. So it was very granular. It was not due to several large credits, which is really good. We also saw some improvement in our C&I line utilization in the quarter and that was encouraging as well. Our loan pipeline did grow quarter over quarter and is now at a record level. Projected payoffs this quarter are 17%, which is roughly the same as last quarter and is down from around 33% over the last two years in rough numbers. So we are seeing payoffs diminish and return closer to historical levels of typical payoffs. You tend not to notice payoffs when you have robust loan demand. Hopefully, we are seeing loan demand rebuild and begin to normalize a bit on that side. Our Houston pipeline is beginning to build. We also have seen increased activity in Texas. On the deposit side, our growth rate was constrained by some large income tax payments due to sales of properties and companies by our clients. Our non-interest-bearing deposits grew 20% annualized in the quarter and 14% year over year as we continue to emphasize our treasury management services and we benefit from the continued trend of bank mergers. None of these bank mergers are done to improve customer service. On the new employee front, we added nine bankers in the quarter. We added two in the Piedmont region, three in North Florida, three in Houston including a new Market President and one of our Regional CEOs in Houston. Our goal is never to set a numerical goal for new bankers but we try to make our bankers more productive and successful, grow their loan and deposit portfolios, and be very responsive to our customers' needs. With a name like ServisFirst, customer service is our primary goal and we want bankers who embrace the culture of ServisFirst. I will now turn it over to Jim Harper for a credit update.
Thanks, Tom. As mentioned, lending activity definitely picked up as we progressed through the quarter as we experienced solid loan growth across most markets. Our growth was granular; it was driven by CRE activity. As a result, we experienced an uptick in our CRE outstandings relative to capital, moving from 298% of capital at 3/31 to 307% at 6/30/2026. That lending momentum and activity has continued into the early third quarter across our footprint, including Texas, where the team continues to grow and source new opportunities. With regard to NPAs, following the first quarter we did have successful resolution in several credits early in the second quarter. For the quarter, we saw a net decrease of NPAs of just under $7 million. We do not see any systemic weakening in any particular sector of lending and our credit quality continues to be strong. On a related note, charge-offs for the quarter and year-to-date continue to be modest, totaling approximately $3.7 million for the quarter and totaled just over $12 million, or 9 basis points, for the first half of the year. Lastly, the allowance for loan losses ended the quarter at 1.26% versus 1.25% at the end of the first quarter, with increases occurring both within the pool portfolio and our loans assessed for individual impairment. David will now provide a summary of our financial performance for the second quarter.
Thank you, Jim, and good afternoon, everyone. I will walk you through the financial details of our second quarter, and I am pleased to report the momentum we described in the first quarter continued into this quarter. Net interest margin expanded again, loan growth reached the fastest pace in several quarters, credit metrics improved meaningfully, and capital continued to build. Taken together, this was solid financial performance for us. For the second quarter of 2026, we reported net income of $85.8 million or $1.57 per diluted share. That compares to $1.52 per share in the first quarter, up 3.4% on a linked quarter basis, and compared to $1.12 per diluted share in the second quarter of last year, an increase of 40% year over year. On an adjusted basis, which excludes a legal matter accrual reversal and a loss on marketable securities that affected last year's results, diluted earnings per share grew 30% from $1.20 a year ago. For the first six months of 2026, net income was $168.8 million or $3.09 per diluted share, up 35% from $124.6 million or $2.28 per diluted share in the same period last year. Return on average assets was 1.91%, up from 1.89% in the first quarter and well above the 1.40% we delivered a year ago. Return on average common equity was 17.71% compared to 17.91% last quarter and 15.68% on an adjusted basis in the same quarter of last year. These returns continue to reflect the operating leverage in our model: margin expansion, strong loan growth, and expense discipline all moving in the right direction together. Net interest income for the second quarter was $155.6 million, up from $148.1 million in the first quarter and from $131.7 million a year ago. Net interest margin expanded to 3.63%, up 10 basis points on a linked quarter basis and up 53 basis points year over year. I would note that during the quarter, we were fully paid out of a large credit relationship that had previously been on nonaccrual status, and we recovered $1.9 million of interest income as a result. That recovery accounted for 5 basis points of the improvement in loan yields and total net interest margin. On the funding side, average interest-bearing deposit cost was 2.80%, essentially flat to the 2.79% we reported last quarter but down 53 basis points from a year ago as last year's rate cuts worked through the deposit portfolio. On the asset side, loan yields were 6.23%, up 5 basis points linked quarter, but 6.18% on a normalized basis. Investment yields were 3.81%, up modestly from 3.78% last quarter. Our average rate on federal funds purchased was 3.74%, unchanged from a linked quarter perspective and down from 4.49% a year ago, which is a direct correlation to Fed funds rates. In total, our net interest margin continues to expand, although we are seeing some slowdown in the pace. We expect to continue aggressive repricing on fixed-rate loans as they mature and disciplined pricing on deposits, which will continue our margin expansion. Non-interest income was $12.9 million for the quarter, up from $10.8 million in the first quarter and up 43.5% from $9 million a year ago on an adjusted basis. Growth was broad-based. Service charges on deposit accounts were $3.3 million, up 25% year over year reflecting the treasury management pricing changes we implemented last July and roughly flat linked quarter. Mortgage banking revenue was $2.2 million, up 68% year over year and 17% linked quarter, driven by higher secondary market loan sales and the per-loan administrative fee increase we put in place earlier this year. Credit card income grew 18% year over year to $2.5 million and bank-owned life insurance income was $4.1 million, up 94% year over year and 47% linked quarter, reflecting the $25 million of new BOLI contracts we purchased this quarter on top of the $150 million we added in the third quarter of last year. Non-interest expense was $50 million for the quarter, up 5.4% linked quarter and 13% year over year. The linked quarter increase is primarily due to a negative recorded in the FDIC special assessment in the first quarter. Despite that growth, our efficiency ratio came in at 29.65%, the third consecutive quarter below 30%, and a meaningful improvement from 33.46% a year ago. Salary and benefit expense was $26.3 million, up 16.4% year over year, primarily reflecting the full run-rate impact of our Houston market expansion. Full-time equivalent headcount was 663 at quarter end, up 22 from a year ago and up 3 from the first quarter — very modest growth relative to the balance sheet expansion we are generating. Our effective tax rate was 19.94% for the second quarter compared to 17.82% last quarter and 19.82% a year ago. The linked quarter increase reflects timing of investment tax credits for purchases. We continue to actively pursue federal credits with carryback provisions and expect to realize more tax savings in the future. We expect to continue evaluating similar tax-advantaged investment opportunities as part of our current year tax plan. Turning to the balance sheet, as Tom mentioned, this was a standout quarter for loan growth. Ending loans were $14.48 billion, up $533 million from the first quarter or 15.3% annualized — our fastest quarterly growth rate in some time. On an average basis, loans grew $440 million or 12.8% annualized on a linked quarter basis. Year over year, loans are up $1.25 billion or 9.4% with our pipeline remaining at record levels; growth was broad-based across markets, including a contribution from our Texas market. Deposit growth was more measured this quarter due to the competitive landscape but remains healthy on a year-over-year basis. Ending deposits were $14.55 billion, up $62 million on a linked quarter basis and up $686 million or 5% from a year ago. Importantly, non-interest-bearing demand deposits, our lowest-cost, most durable funding source, grew $3 billion, up 5.6% linked quarter and 13.8% year over year, which tells us our bankers continue to win core operating account relationships even as overall deposit growth moderated this quarter relative to loan growth. As Jim mentioned, net charge-offs were low at just 11 basis points, annualized for the quarter, down sharply from 25 basis points last quarter and 20 basis points a year ago. With these low charge-offs and our healthy loan growth, we recognized our quarterly provision for loan loss expense of $11.4 million versus $10.6 million in the first quarter of 2026 and $11.3 million in the second quarter of 2025. Our allowance for credit losses stood at 1.26% of total loans, essentially stable versus 1.25% last quarter. We remain comfortable with our reserve given the current portfolio performance. Capital continued to build meaningfully in the second quarter. Common Equity Tier 1 capital risk-weighted assets reached 11.83% on a preliminary basis, relatively flat from 11.86% last quarter and up 45 basis points from a year ago. Total capital to risk-weighted assets was 13.09%. Our Tier 1 leverage ratio was 10.93%. Intangible common equity to tangible total assets was 10.72%. We are generating capital organically at a pace to comfortably fund the loan growth we are seeing while still building a cushion. Our book value per share was $36.19 at quarter-end, up from $34.99 last quarter and up nearly 15% from $31.52 a year ago. Tangible book value per share was $35.94. On liquidity, we ended the quarter with $1.46 billion in cash and cash equivalents, or about 8% of our total assets. We have no FHLB advances and no brokered deposits. Our funding remains entirely core and relationship-driven. I will now turn it back over to Tom for his closing comments.
Thank you, David. We certainly were pleased with the quarter, but not satisfied. I know how much we can improve from where we are today, and I think we can do much better. We are not hitting on all eight cylinders yet, but I feel like we are getting closer to all eight singing than we have been in the last two years. While we are in the middle of our largest regional startup in our history in Houston, we still earned a 1.9% return on assets. I know reaching a 2% return on assets may be tough for the last 10 basis points, but it sure seems like a worthy goal for us to strive for, even though our primary goal will always be to grow earnings per share. Having more of our regions and markets perform at a higher level can get us to a consistently higher level of financial performance. On an industry level, we are seeing generally good bank earnings and improvement — modest loan losses, controlled expenses, and a decent growth outlook coupled with a backdrop of a good economic outlook. In addition, we see what appears to be a more favorable, or at least not as hostile, regulatory environment for banks. Overall, most banks have a favorable outlook for the industry but bank stocks continue to be priced well below historical benchmarks over the last decade. I guess only time can make the cloud dissipate over the banks while we continue to perform at a high level every day. We would be happy to answer any questions you might have. Thank you.
Questions and answers
We will now be conducting a question-and-answer session. You may press 2 if you would like to remove your question from the queue. Our first question comes from the line of David Bishop with Hovde Group. Please proceed.
Hey, good evening to Tom. Appreciate all the commentary and the preamble there. Just curious, in terms of the lending environment, obviously you said market consolidation already is usually beneficial to you. Just curious, maybe what the hiring pipeline looks like at this point? Is there line of sight into additional banker hires into the second half of the year?
I cannot give you a very specific answer, David. We talk to people all the time and we are talking to a lot of different people from many banks. There are mergers going on that you may not see because they are private banks merging or private banks selling to a public bank. There is constantly movement, especially in Texas, where there is a lot of activity in terms of mergers and integration. I think it is a more active environment than we have seen in a long time. We are optimistic and will continue to get looks. In many cases, people have stay-pay arrangements for about a year after a merger before they think about making a change. So we are constantly looking and talking to people, but I do not have a definitive answer for you. There have been some changes in the Nashville market that affect us, but I am sorry I cannot give you a better answer.
Yes, understood. Maybe talk about the state of loan demand. In the past, maybe it was A-minus or B-plus. It sounds like the pipeline continues to hit record levels. How would you characterize the loan demand environment at this point?
I would call it an A. It is broad-based and granular; there are a lot of smaller loans. Almost every region of our bank had really good loan demand. Florida has been especially strong compared to the average. We have had a lot of payoffs in Florida, particularly in our West Central Florida regions because of heavy real estate concentration, but overall loan demand is getting much better, so I have to give it an A now.
Got it. One final question, I will pop off and get back on. The commercial real estate concentration ratio ticked a bit above 300%. Are you still comfortable with the ratio at this level and the capacity to continue to grow that product?
Absolutely. We manage to a ratio and we have lots of headroom before we get close to a ratio that would put us in territory we do not want to be in. We are seeing lots of opportunity even within the CRE asset class. It was not concentrated in one type of property — it was broad-based across real estate, not just retail or office or 1-4 family. We saw a bit of everything. So I do not think we have concerns about where we are from a concentration standpoint.
We never want to get to the point where we have to tell a good customer that we cannot take care of their needs. So we always make sure that we have room to serve our customers. No matter what sort of loan request it is, if a really good customer wants to do a car wash, we will consider it. We are focused on servicing good customers.
Sounds great. Appreciate the color.
Thank you. Our next question comes from the line of Stephen Scouten with Piper Sandler. Please proceed.
Yes. Good afternoon, everyone. Great quarter here. Obviously, the NIM expansion in particular was really impressive. I know you noted there was a bit of a recovery that contributed 5 basis points to the loan yield. When you talk about expecting the margin to continue to expand from here, would that be off of this 3.63% NIM, or should we use maybe the June NIM of 3.59% more as a starting point for continued expansion from here?
Yeah, Steven, this is David. When I am talking about it, I would refer to the adjusted number, which is 3.58%. The 3.59% was our spot rate for the month of June. We still have over $2 billion of opportunity between scheduled maturities on loans, cash flows, as well as covenant violations and loan modifications. If you look at our total yield in the loan portfolio, adjusted for the quarter it is coming in at 6.18%. Our going-on rate is at 6.32%, so we still have some room to grow and expand that, but that gap is starting to narrow. We still expect to see expansion in the margin, but it will likely slow because the gap between the going-on rate and the total portfolio is narrowing.
That makes sense. Previously you thought perhaps 7 to 9 basis points of NIM expansion quarterly, but maybe that moves to 4 to 6 as we progress. Is that a decent way to think about it?
We may get one more quarter in the 7 to 9 basis point range, but I would start to think about the 4 to 6 basis point range of expansion as we get toward the end of the year.
Still something many folks do not have directionally, so that is helpful. In terms of balance sheet migrations and ability to fund growth, the loan-to-deposit ratio obviously ticked up with the strong growth. Could we expect to see securities balances decrease further, or how do you think about funding loans if demand holds — does that potentially put pressure on deposit cost moving forward to make sure you can do that?
We always want to be in a position where we need deposits. If we generate loan demand, we will work hard to generate the deposits to fulfill that loan demand. That is the preferred position for the bank rather than trying to find loans to make. We feel confident we can generate deposits when needed. Typically, we see nice deposit growth in the second half of the year. This year we saw a large number of tax payments — some major tax payments by individuals well over several, well over $100 million each during the April filing cycle. The second half of the year is when we always generate deposits, so we feel good about it.
And Steven, to add, when Tom talks about the healthy pipeline, we are talking about loans and deposits at the same time, not just loans. We are seeing deposit opportunities, especially out of Texas.
Got it. With the securities book, I think you showed about $260 million of unpledged securities remaining. Is that the magnitude of what could potentially run down if needed to remix the balance sheet into loans given the demand?
I do not think our first priority would be to run down the securities book because we use that collateralization for municipal deposits and we have to collateralize those. We do have some mortgage repos, which are short-term investments we can unwind if we need liquidity. That is likely what we would do first.
Okay, great. And then just one last thing: given you are growing capital even with loan growth, how do you think about using the building excess capital above and beyond organic growth? Would share repurchases be on the table?
It is a champagne problem. The last time we had this issue was right before COVID and then we grew into our capital quickly during the COVID period. We do not take anything off the table — it could be an acquisition or a stock repurchase. We will do the best thing for our shareholders based on what we think is optimal.
Makes sense. Appreciate your time and the color. Congrats again on a great quarter.
Thanks. One side note on the securities: the $260 million in securities on our supplemental data is presented with a haircut. We work with regulators and are highlighting our available liquidity in that supplement, and we agreed with the regulators that we would apply a haircut to our securities in the event of a liquidity crisis. That's why you see a decrease in that number in the second quarter versus last.
Thank you. Our next question comes from the line of Steve Moss with Raymond James. Please proceed.
Good afternoon, guys.
Thanks, Steve. Hey.
Maybe just circling back to loan demand and the pipeline being at record highs. Given that paydowns have slowed, for the remainder of the year are you thinking a mid-teens type growth rate is a fair assumption?
It is hard to say. I do not like to give firm forecasts because we really do not know. We had a pretty sizable payoff this month that we knew was coming; it was also a watch-list loan, so that is not all bad. If loan demand holds up, we think we can end up with a pretty decent year, Steve. But things can change — rate moves or geopolitical events can slow activity. For example, when the situation in Iran started, that pulled things back for a few weeks and things slowed. Jim sits with the deal flow and sees it drop and then come back. Early May was slow and then by the end of June we saw strong activity. Barring geopolitical events or rate increases, we think we are positioned well, but I do not have a precise projection for you.
It has not been consistent all year, but the slowdown lasted a couple of weeks and then rebounded really quickly.
Understood. The other thing: regarding the large, nearly $100 million relationship that was on nonaccrual, any update on that process?
Those properties are being listed for sale and we expect those to be disposed of. All of our nonaccrual loans are properly reserved and we feel good about where we are on that relationship and that we have proper reserves in place as needed.
Okay, great. And then last for me on the sub-30% efficiency ratio: curious how you are thinking about expenses for the upcoming quarter. You had investment in Houston; how are you thinking about total expenses?
Steve, I think the $50 million run rate is a good run rate right now. We have fully baked in the Houston team into that. The Houston team will continue to expand, although likely not as quickly as in the last couple of quarters. Right now Houston is a drag on the efficiency ratio because their expenses are ramping before their income fully ramps, which is a natural evolution of building out a franchise. From here, Houston should improve the efficiency ratio as their loans and deposits grow. The efficiency ratio staying below 30% will be a challenge, but we are not adding a ton of headcount — most of the additions this quarter were customer-facing. We are not adding significant back-office or technology spend. I think the noninterest expense run rate is pretty stable at the $50 million rate right now.
Okay, great. I appreciate the color. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of David Bishop with Hovde Group. Please proceed.
Yes. Just a quick follow-up for David. It sounds like maybe the Fed's next move could be up rather than down or stable as we thought last quarter. How does the interest rate risk profile shape out for a more hawkish Fed rather than a dovish one at this point?
If I could predict what the Fed was going to do I would be in a different business. We asked our asset-liability management consultant to run a couple of scenarios. As we stand right now, we are pretty neutral with regard to interest rate sensitivity. We are still slightly liability sensitive, but just barely. We looked at a 25 basis point increase, which would reduce net interest income by about $240,000 in the first year — not a large amount. If rates decrease by 25 basis points, we would gain about $105,000 in net interest income. That illustrates that the bank has a relatively small sensitivity in dollars. There are a lot of unknowns in the economy right now. The Fed may want to decrease rates, but inflationary pressures could keep them from doing so. I think we are likely to be in a neutral rate environment for the remainder of the year unless a significant geopolitical event changes that.
Okay, great. Appreciate that. And then David, what is a good effective tax rate to use? I know it has bounced around a little.
We are pursuing tax credits with carryback capacity and continue to work on that front to maximize benefits. I expect to see some benefit from those in the second half of the year. My target is to stay below 20% on the effective tax rate, and we are evaluating tax-advantaged investments and credit purchases as part of our plan to try to achieve that.
Got it. And maybe one final question for Tom on the Houston expansion: can you give outstanding balances? Are those offices funding up from a loan-to-deposit basis?
Just curious if those offices started funding up from a loan-to-deposit basis.
Thanks.
They funded roughly $50 million in loans in the quarter and $25 million to $30 million in deposits in the quarter. It is building and starting to ramp up in both loans and deposits.
Got it. Thank you.
Thank you, everybody, for joining us. Have a great evening.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.