ServisFirst Bancshares Inc Stock

Greetings, and welcome to the ServisFirst Bancshares Second Quarter Earnings Call. [Operator Instructions] 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, Davis. You may begin.

Good afternoon, and welcome to our second quarter earnings call. We will have Tom Broughton, our CEO; and Jim Harper, our Chief Credit Officer; and David Sparacio, our CFO, covering some highlights from the quarter, and then we'll take your questions.

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 Service First assumes no duty to update them.

With that, I'll turn the call over to Tom.

Thank you, Davis. 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'll 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 really solid loan growth. The best growth was in our 2 Florida regions and Tennessee, to really no rigid contributed more than 15% of the total growth and almost none of them are less than 10% of the total growth. So it really was very granular, it was not due to several large credits, which is really good. And 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 2 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. So hopefully, we're seeing loan demand rebuild and begin to things normalize a bit on that side.

Our Houston pipeline is beginning to build, and we are seeing -- see increased activity in Texas. On the deposit side, our growth rate was constrained by some large income tax payments due to sales and properties and companies by our clients. Our [indiscernible] 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 as none of these bank mergers are done to improve customer service.

On the new employee front, we added 9 bankers in the quarter. We added 2 in the Piedmont region, 3 in Northwest Florida and 3 in Houston including a new market president and owner of regional CEO 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 and 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 embarrass the culture of ServisFirst.

I'll 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. While 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 6/30/26, that lending momentum and activity has continued into the early third quarter across our footprint and including Texas, where the team continues to grow and source new opportunities.

With regards to NPAs, as noted 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 on a net basis. And we don't 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 126 basis points versus 125 basis points 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'll walk you through the financial details of our second quarter, and I'm pleased to report that the momentum we described in the first quarter continued into this quarter.

Net interest margin expanded again loan growth reached fastest pace in several quarters. credit metrics improved meaningfully and capital continue 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 $1.21 a year ago. For the first 6 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 in 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.

Noninterest 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 was $3.3 million, up 25% year-over-year, reflecting the treasury management pricing changes we implemented last July and roughly flat linked to the quarter previously.

Mortgage banking revenue was $2.2 million, up 68% year-over-year and 17% linked quarter driven by higher secondary market loan sales in 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.

Noninterest 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 adjustment 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 head count 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 or 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% and with our pipeline remaining at record levels and growth 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, noninterest-bearing demand deposits are low cost most durable funding source grew $2 billion, $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 in our healthy loan growth, we recognized our quarterly provision for loan loss expense of $11.4 million versus $10.6 million from 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 coverage given the current portfolio performance.

Capital continued to build meaningfully in the second quarter. Common equity Tier 1 capital risk to 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're generating capital organically at a pace that comfortably funds the loan growth we're seeing while still building 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 had no FHLB advances in no brokered deposits. Our funding remains entirely core and relationship driven.

I'll 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 really know how much we can improve from where we are today. So I think we can do much better than what we are doing today. We aren't hitting on all 8 cylinders yet to equate it to an automotive car. But I feel like we are getting closer to all 8 cylinders than we have been in the last 2 years.

While we're in the middle of our largest regional start-up 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 does seem 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 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'd be happy to answer any questions you might have.

[Operator Instructions] Our first question comes from the line of David Bishop with Hovde Group.

I appreciate all the commentary and the preamble there. Just curious in terms of the lending environment, Obviously, you said in market consolidation is usually beneficial to you all. Just curious maybe what the hiring pipeline looks like at this point? Or is there a line of sight into additional banker hires into the second half of the year.

I really can't give you a very good answer, Dave. We talk to people all the time and we're talking to a lot of different people from a lot of different banks, and they're -- there are mergers going on that you don't see because they're private banks merging or a private bank sell into a public buying and you don't notice that.

So there's constantly -- especially in Texas. I'd say there's a lot of movement in the Texas market in terms of mergers and integrations. So I think it's a more active network than in terms of mergers than we've seen in a long time from that standpoint. So we're optimistic we'll continue to get looks in, of course, in many cases, people have -- they have stay [indiscernible] certainly for a year after a merger is typically sort of a point before they even think about making a change.

So we're constantly looking and talking to people, but I don't have a really good answer for you. I don't think -- I know there's been some changes in the Nashville market would didn't affect us, but any event. I'm sorry, I can't give you a better answer.

Do understood. And maybe talk about the state of loan demand. I think in the past, maybe it was an A- B+, it sounds like the pipeline continues to hit record levels. Just curious how would you characterize the loan demand environment at this point?

I guess I have to call it an A because it's broad-based it was granular. There's a lot of smaller loans. It's just things were -- and it's almost every region of our bank in segment had really good loan demand. So I've got to think it's getting much better.

And of course, we all know Florida is strong and has been compared to the average. We've just had a lot of payoffs in Florida especially in our West Central Florida regions have more payoffs than -- because the heavy real estate concentration down there than normal. So -- but I'd say I'd give it an A now.

Got it. One final question, I'll hop off and get back on. But the commercial real estate concentration ratio, it takes had about 300% still comfortable with the ratio at this level of capacity to continue to grow that product?

Yes. David, Absolutely. So we have a ratio we're managing to. We've got lots of headroom before we get close to the ratio that would put us in a territory we don't really want to be in and I think we saw lots of really good opportunity even within the CRE asset class. It wasn't a particular -- it was a retail or office or 1 to 4 family, it was broad-based even within real estate. So we saw a little bit of everything in real estate.

So yes, I don't think we have any concerns about where we are from a concentration standpoint.

Dave, 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 some drop out for our good customers no matter what sort of loan request it is. I mean even -- well, I mean car wash be wouldn't be a good answer because we're not looking for car watch loans, but if a really good customer also do car wash we're going to do a carwash. How about that.

Sounds great. I appreciate the color.

Our next question comes from the line of Stephen Scouten with Piper Sandler.

Yes. Great order here. Obviously, the NIM expansion, in particular, was really impressive. I know you noted there was a bit of a recovery there, maybe contributed 5 bps to the loan yield. So just kind of want to level set a little bit. And when you talk about expecting the margin to continue to expand from here, would that be off of this 3.63% NIM? Or would that -- should we use maybe the June NIM of the 3.59% more as a starting point for continued expansion from here?

Yes, Stephen, this is David. Yes, when I'm talking about it, I would refer to the adjusted number, which is the 3.58%. To your point, 3.59% was our spot rate for the month of June. And 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 on the loan portfolio adjusted for the quarter, it's coming in at 6.18%, our going on rate is at 6.32%. So we still have some room to grow that to expand that, but that gap is starting to narrow. So when we still expect to see expansion in the margin. But as I said, I think it's just going to slow because of that gap of going on versus total portfolio is starting to narrow.

Yes, that makes sense. Okay. Because I think previously, you kind of thought a 7 to 9 basis points of NIM expansion quarterly, but maybe that's 4 to 6 or something in this sort of -- as we move further down the path, is that a decent way to think about it?

Yes. We may get 1 more quarter of the 7% to 9% range, but I would start to think about the 5%, 4% to 6% kind of range of expansion as we get towards the year.

Yes. Still something a lot of folks don't have directionally, so that's fantastic. In terms of kind of balance sheet migrations and ability to fund loan growth, I mean, the loan deposit ratios obviously ticked up here on the really strong growth could we expect to see maybe securities balances decrease further? How do you think about -- Tom, you said, look, if a good customer wants to make a loan, we're going to make the loan. How do you make sure you have the funding to be able to do that? And does that potentially put pressure on deposit costs moving forward to make sure you can do that?

Well, we always want to be in a position where we need deposits. So that's the first thing. If we generate the loan demand, then we'll work hard to generate the deposits to fulfill the loan demand. So that's the preferred -- that's a preferred position for the bank is to need deposits and rather than trying to find loans to make. So that's the second part of a leg, and we feel confident we can do that.

And the second half is typically -- we see -- typically see nice deposit growth in the second half of the year. I did see a lot -- we saw a large number of tax payments, some major large tax payments by individuals, well over -- several well over $100 million each on April 15 filing cycle or at least paying estimates.

So we -- the second half of the year is when we always generate deposits. So we feel good about it.

And Stephen, I will add, when Tom talks about a healthy pipeline, we're talking about loans and deposits at the same time, not just the landscape. I mean we're seeing opportunities in deposits, especially out of Texas. We're having some opportunities in Texas.

Got it. Got it. And just with that securities book, I thiNeue Klasse will maybe you showed in the supplement $260 million or so of unpledged securities remaining. Is that kind of the magnitude of what could potentially run down, if needed to kind of remix the balance sheet away from securities maybe into loans given the demand?

Yes. I don't think our first priority is going to be to run down the security book because we use that for collateralization because we do a fair amount of business for municipal deposits, right, and we have to collateralize those I think we have some mortgage repos, which is a short-term investment we have, and we can unwind some of those if we need the liquidity. So I think that's what we would look to. But yes, that's what we're going to do.

Okay. Great. And then just last thing for me. Maybe a very high class. I don't want to call it a problem, but high-class issue to think through. It's just -- I mean you're growing capital even with this rapid loan growth given the strength of the profitability. So -- how do you think about what to do with this building excess capital and what the best uses are for it above and beyond organic growth? And would a share repurchase at any point beyond the table?

It is a champagne problem. I would agree. And the last time we had this issue was right before COVID hit, and then we had extremely rapid growth during the COVID period and all of those questions went away because we grew into our capital pretty quickly there for a period of time. So we don't take anything off the table, whether it will be an acquisition or whether it would be stock repurchase. We're not going to -- we're going to do the best thing for our shareholders, whatever we think that is.

Got it. Okay. Makes sense. I appreciate you guys' time and all the color. Congrats again on a great quarter.

Stephen, I will add also just a side note. When you're asking about the securities, the $260 million in securities on our supplemental data we are applying a haircut to that. We work with the regulators, and we are highlighting our available liquidity in that supplement. And so we agreed with the regulators that we would haircut our securities in the event of a liquidity crisis. So that's why you've seen a decrease on that so much in the second quarter.

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

Maybe just sorting back here to loan demand and the pipeline being at record highs and given that paydowns have slowed, do you think for the remainder of the year, are you thinking a mid-teens-type growth rate is a fair assumption?

It's hard to say. I don't like to give a forecast because we really don't know. We had a pretty good sized payoff this month that we knew was coming. It was also watch list loans, so that's not all bad to get a watch list paydown. But if loan demand holds up, we think we can have -- end up with a pretty decent year, Steve. But it's kind of hard to say for right now, it looks pretty good.

But you get rates going up, we get some kind of geopolitical event is funny how the -- when this -- the thing that on started, that kind of beat everything back for a few weeks and things slow down. And I mean, Jim Harper sitting here, he sits there at his desk and has the deal flow come in and it will drop and then it'll come back and it has not been consistent all the year.

I actually even thought early May was really slow when you look up at the end of June, and this is what we've done, right? So it lasted a couple of weeks and rebounded really quickly.

Yes. Yes. So barring any geopolitical events certainly rate increases. We think we're positioned for rates to go up or down. We think we're going to be fine. We think it will work out. But I guess I don't have a very good answer for your question, Steve.

No worries, I figured I'd ask and see what you'd say, Tom -- and then I guess the color was helpful. I will say that. The other thing here in terms of sticking with loans for a moment. With the large nearly $100 million relationship that you guys have on nonaccrual, just kind of wondering what's the update on that process of that [indiscernible] to date.

Yes. All those properties are being listed for sale and expect those to be disposed of. And like 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 one for me here, just on the sub 30% efficiency ratio subject. Curious how you guys are thinking about expenses for the upcoming quarter? Obviously, you had both a fair amount of investment in Houston. But just kind of curious as to how you guys think about total expenses here.

Yes. So Steve, this is David. I think our $50 million run rate is a good run rate right now. I think we have fully baked in there, the Houston team, right? The Houston team is going to continue to expand, although not as quickly as it has the last couple of quarters, I don't think. And so what we're seeing right now is it's [indiscernible] to sort of a drag on the efficiency ratio, right?

And so because they're not -- their loans and their business or deposits are not ramping up as quickly as their expenses are. It's just a natural evolution of building up franchise, right? And so I think from here, Houston is only going to improve in regards to the efficiency ratio. They're going to grow their income, right, more loans are going to come on the books.

So is the efficiency ratio going to stay below 30%. I mean, that's going to be a challenge. I mean, we are going to -- we're not adding a ton of pay count. You could see what we -- what we put on in the quarter, and Tom talked about it, we had 9 vapors that were added in the quarter. Most of what we add from an FTE perspective, are customer facing, we're not adding back office costs. We don't have additional technology that we're spending money on. And so I think the noninterest expense run rate is pretty stable at the $50 million rate right now.

Okay. Great. I appreciate all that color there.

Our next question comes from the line of David Bishop with Hovde Group.

Yes. Just a quick follow-up maybe for David. Just David, just curious, it sounds like maybe the Fed's next move is up, maybe rather than down or stable as we thought maybe last quarter. Just curious if the interest rate risk profile, how that shapes out for a more hawkish [indiscernible] rather than the dovish here at this point?

Yes. I mean, Dave, I mean, if I could predict what the Fed was going to be doing, I would be in a different business, right? I'd probably be making more money bidding on the market. We have passed our asset liability management consultant to run a couple of different scenarios for us. And so as we stand right now, I mean we're pretty neutral in regards to interest rate sensitivity. We're still slightly liability sensitive, but just barely.

So we looked at 2 scenarios, we looked at increasing 25 basis points which, if that happens, we lose about $240,000 in the first year of net interest income, not a big amount at all. It's a nominal impact. If rates decreased 25 basis points, we're looking at gaining $105,000 in net interest income. So I point those out to show you, that's the bank. I mean we have like a $300,000 swing either way.

And so to Tom's point, what's going on in Iran, there's just a lot of unknowns in the economy right now. And I think the Fed as much as they want to decrease interest rates, there's going to be pressure -- continued pressure from an inflationary standpoint to increase rates. And so I think we're just going to get a stagnant environment, at least for the remainder of this year. I don't see any rate movement this year. Barring any to Tom's point, any geopolitical event that's going to change that. But I think as we stand right now, we're going to be at a neutral rate environment.

Okay. Great. I appreciate that. And then David, maybe a good effective tax rate to use. I know it's bounced around a little bit here, but just curious, any color you can give there.

Yes. Dave, that's -- we -- I talked about it, I mean, we're trying -- we have some carryback capacity on tax credits, and we continue to work on that front to maximize those. I expect to see some benefit from those in the future in the second half of the year.

I -- my target is to stay below 20% on an effective tax rate. And so we're doing things where we try to look at tax investments for the current year and then purchasing credits from a carryback perspective. And so I guess for your benefit, I would try to target below 20% is what I would hope for.

Okay. Got it. Got it. And then maybe one final question. Tom, just curious in terms of the Houston expansion, if you're at a point where you can maybe give outstanding balances, just curious if those offices started funding out from a loan-to-deposit basis.

Yes. I mean, we funded. They funded $50 million or so in the quarter in loans and maybe $25 million, $30 million in deposits in the quarter. So -- but it's building. It is starting to ramp up at in terms of both loans and deposits.

There are no further questions at this time. I'd like to pass it back over to Tom for any closing remarks.

Have none. Thank you, everybody, for joining us. Have a great evening.

This concludes today' teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the ServisFirst Bancshares First Quarter Earnings Conference Call. [Operator Instructions]. It's now my pleasure to turn the call over to Davis Mange, Director of Investor Relations. Davis, please go ahead.

Good afternoon, and welcome to our first quarter earnings call. We'll have Tom Broughton, our CEO; Jim Harper, our Chief Credit Officer; and David Sparacio, our CFO, covering some highlights from the quarter and then take your questions. 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 them. With that, I'll turn the call over to Tom.

Davis, thank you. Good afternoon, and thank you for joining our first quarter conference call. We're really pleased with our start to the year, and I'm going to highlight a few things before I turn it over to Jim Harper to give credit update.

On the loan side, we had pretty solid loan growth for the quarter. Loan growth is usually not very robust in the first quarter, but we did see some pretty good loan growth. We are seeing loan payoffs begin to diminish compared to the last 2 years, which is certainly a great thing. I don't know what kind of trend we'll see in the second quarter, but on a quarter-to-date basis, we've seen some very nice growth in the first 20 days or so of the quarter.

And on the forward loan pipeline over 90 days is the 90-plus days. It is the strongest we've ever had in our history. And of course, on a 90-day loan pipeline, the closing rate is much lower than on a 30-day loan pipeline, for example. So -- but it is great to see a long list of new relationships across all of our markets in a variety of industries on that list.

On the deposit side, they grew by 8% annualized in the first quarter, which has exceeded our expectations as we typically see our deposit growth in the second half of the year. We continue to try to manage our deposit costs to improve margins. We continue to attract new clients with our strong financial condition, our profitability and our personal service that we provide to commercial clients and correspondent banks.

David will elaborate in a few minutes, but our net interest margin continues to improve. Our efficiency ratio continues to be the best-in-class as we dropped below 30% in the first quarter. We do have 161 producers at quarter end. We've hired over the last 12 months, 32 new FTEs and 75% of those FTEs are frontline employees. So we should see obviously some improved productivity over time and profitable growth there.

Our Houston team has found an office, they've leased it not ready to move into yet, but they've got a 26,000 square feet to build out. We do have 18 bankers on board there today, and their pipelines are building quite nicely. We actually closed our first loan in Texas, which is a large supply chain company with long-term contracts in March. So we're pleased with the start there. And now I'm going to turn it over to Jim Harper for a credit update.

Thanks, Tom. As noted, loan growth for the quarter was solid at 7% annualized, though we definitely experienced an uptick in loan activity beginning late in the quarter, which reinforces Tom's comments about our forward pipeline.

From a credit metric standpoint, net charge-offs for the first quarter were around $8.3 million, most of which was associated with the remaining balance of one credit with the charge representing the final resolution of a loan to a long-time troubled borrower. Our allowance to total loans remained static when compared to the end of 2025, ending the quarter with an allowance compared to total loans of 125 basis points.

Nonperforming assets to total assets at quarter end were 100 basis points, which was slightly higher than the 97 basis points we reported at fiscal year-end '25. However, we are confident in some near-term reductions in NPAs of approximately $17 million or just over 9% of our 3/31/26 NPAs stemming from the U.S. Coast Guard's purchase of a private university campus and the assumption of 2 other loans by a long-term customer.

As always, we continue to actively and aggressively manage our NPAs in this portfolio. And David will be next with a discussion of our first quarter financial performance.

Thank you, Jim, and good afternoon, everyone. I will walk you through the financial details of our first quarter, and I am pleased to report a strong start to 2026 across virtually every metric we track.

The headline numbers reflect continued expansion in the net interest margin, disciplined expense control, solid loan and deposit growth and a meaningful year-over-year improvement in operating leverage, all of which speak to the durability of the ServisFirst model.

For the first quarter of 2026, we reported net income of $83 million or $1.52 per diluted share or $1.54 on a normalized basis. To put that in context, we earned $1.16 per diluted share in the first quarter of 2025. So we are up 33% year-over-year on earnings per share.

On a linked-quarter basis, EPS stepped back from the $1.58 we reported in the fourth quarter of '25, and I want to briefly explain why. Fourth quarter included a $4.3 million nonrecurring BOLI death benefit that flowed through noninterest income and fourth quarter also had more calendar days to earn net interest and fee income. During the first quarter, we also had a prior period adjustment to BOLI income of $1 million, which was a headwind.

Excluding those items, the core earnings trajectory is clearly upward. Our return on average assets was 1.89% for the quarter, which was essentially in line with fourth quarter and well above the 1.45% we delivered 1 year ago. Return on average common equity was 17.91%. These are strong industry-leading returns and they reflect the operating leverage inherent in our model when loan growth, deposit repricing and expense discipline all move together in the right direction.

In net interest income for the first quarter, it was $148.2 million, which is up from $146.5 million in the fourth quarter and up from $123.6 million a year ago. The net interest margin expanded to 3.53%, 15 basis points better than linked quarter and 61 basis points better than the same quarter last year. That progression reflects 2 drivers working in tandem. Continued repricing of our low fixed rate loan portfolio and a full quarterly impact of the Fed rate cuts from the fourth quarter.

As we have mentioned in previous quarters, we continue to see opportunities on loan repricing. For the next 12 months, we have about a $2 billion opportunity for low fixed rate loans renewing, normal payment cash flows, covenant violations and modifications.

In fact, we have about $2.9 billion in fixed rate loans maturing in the next 3 years at a price below our current going on rate for loans. On the deposit side, average interest-bearing deposit costs fell to 2.79%, down 22 basis points from fourth quarter and 61 basis points from over a year ago. That repricing is still working through the book, and we continue to expect meaningful benefit as higher rate time deposits mature and renew at current market rates.

On the asset side, loan yields were 6.18%, an 11 basis point step down from quarter 4 that reflects the normal variability in the declining rate environment, and it does not represent any systemic pricing pressure. Investment yields of 3.78% were essentially flat versus fourth quarter and up meaningfully from a year ago. I would also note that during the fourth quarter, we redeemed the $30 million and 4.5% subordinated notes due in November of 2027, which was a cleanup item that removed an above-market funding cost as we entered 2026.

From a noninterest income perspective, our income was $10.8 million for the quarter compared to $15.7 million in fourth quarter. The linked quarter decline is explained almost entirely by a $4.3 million nonrecurring BOLI death benefit that boosted the fourth quarter. Stripping that out and the negative adjustment this quarter to BOLI, noninterest income was essentially up 4% versus fourth quarter and continues to show solid organic growth year-over-year.

Service charges were $3.3 million, which is flat versus linked quarters despite fewer days and up 29% year-over-year, fully reflecting the service charge rate increases we implemented in July 2025. Mortgage banking revenue was $1.9 million, a 14% increase on a linked-quarter basis, driven by higher secondary market volumes. Net credit card income grew 12% year-over-year to $2.2 million, and underlying BOLI income was up $2.8 million, up 32% from a year ago, which is in line with the growth in our portfolio assets.

These fee lines reflect genuine relationship deepening across our markets. From a noninterest expense perspective, the total was $47.4 million in the first quarter, which is up modestly from $46.7 million in fourth quarter and up 2.8% versus quarter a year ago. We are very pleased that the efficiency ratio came in at 29.81%, the second consecutive quarter below 30%. This is a benchmark that very few banks our size can claim, and it reflects the fundamental scalability of the ServisFirst model.

Primary driver of the salary increase, up 13% on a linked quarter basis and up 17% year-over-year is the combination of the continued build-out of our Texas banking team and the seasonally higher payroll taxes in the first quarter. We are investing intentionally in Texas and expect the revenue contribution to more than justify the cost over time.

Offsetting this, other operating expenses fell 37% year-over-year to $4.3 million and third-party processing costs were modestly lower, keeping overall expense growth a fraction of our revenue growth rate. Our effective tax rate for first quarter was 17.83%, down considerably from 19.72% in fourth quarter and 20.06% a year ago.

This reduction reflects the purchase of investment tax credits during the quarter, a tax planning strategy that delivers immediate recognized benefit and fits well within our capital deployment framework. We continue to evaluate similar opportunities selectively and expect the full year effective rate to remain modestly below our peers. Our capital position continued to strengthen in the first quarter. Common equity Tier 1 capital to risk-weighted assets reached 11.86% on a preliminary basis, up 21 basis points from year-end and up 38 basis points from 1 year ago.

Total capital to risk-weighted assets was 13.13%. Our Tier 1 leverage ratio was 10.71% and tangible common equity to total tangible assets stood at 10.46%. We are building capital organically while supporting balance sheet growth, and we believe the current capital trajectory is highly sustainable. Book value per share was $34.99 at quarter end, reflecting annualized growth of 13.4% from year-end and 14.5% year-over-year growth.

Tangible book value per share was $34.74. Shareholders are seeing real compounding growth in intrinsic value. On liquidity, we ended the quarter with $1.84 billion in cash, approximately 10% of total assets. We have no FHLB advances. We have no broker deposits. Our funding base is entirely core and relationship-driven, which we believe positions us well to support continued organic growth, especially as we build out our Texas market.

In summary, the first quarter was a quarter that demonstrated the strength and consistency of the ServisFirst franchise. Net interest margin continues to expand. The efficiency ratio came in below 30% for the second consecutive quarter. Normalized earnings per share are up 33% year-over-year. Capital is building and our liquidity position remains strong.

We remain focused on what we control, deepening relationships, building the Texas franchise and sustaining the operational discipline that has driven these results. Now I will turn it back over to the operator to begin the question-and-answer session.

[Operator Instructions]. Our first question today is coming from Stephen Scouten from Piper Sandler.

Tom, it sounds like you're pretty encouraged about the trends you're seeing around loan and deposit growth for the remainder of the year. What would you anticipate that, that could translate to? And maybe getting specific on it, how much have you seen out of the New Texas team now that they've kind of started booking loans.

I know you mentioned first loan closing in March. Just kind of how you feel about the potential of that team now that you know a little bit more about their potential within the franchise.

Yes. I think they have a robust pipeline. I don't know exactly what the closing percentages would be on that, Stephen. But it's a lot of names. It's a lot of new deals with people they've worked with over the years.

So we are optimistic that they'll end on -- it takes time to build a pipeline, but towards the end of the year, we think we'll certainly see some success in closing and help -- if we fall short in our pipeline of where we think we are already, we think it will certainly help push us to a more optimistic tone of loan growth for the whole year.

And I don't -- loan growth is not great. I mean I give it a B+ if I had to rate it. It's not easy, and there's a lot of -- a fair amount of price and credit term competition that we try not to take part in.

If you don't say, if a competitor is happy with a 10% return on equity, you're trying to get a 20% return on equity, he's probably going to beat you on some terms and rates. So that's certainly still the case today, and we see it today probably more than you think we would, given that the economy is pretty good, things are progressing nicely.

So I mean, I guess the wildcard on everything with the consumer is, of course, going to be gas prices. So I don't -- I think that could trickle into the whole economy if we don't see some moderation in gasoline prices in the next 60, 90 days.

But that's far afield from your question, Stephen. Did I answer your question?

Yes, you did. That's helpful directionally for sure. And then if I can think about maybe the kind of what you would expect from average earning assets this year relative to maybe the loan book.

The past year, you saw really nice loan growth, but average assets were kind of flat and average earning assets trended down a little bit over the course of the year. So I'm curious if this year, you think maybe that average earning asset growth can more closely match the growth in loans that you expect to see?

Yes. I would agree with that, Stephen. This is David. And I mean, we're going to continue to see growth in our assets. We saw about 8% in loan growth year-over-year.

And so we continue to look at investments, and we have good deposit growth, which is going to obviously drive the asset growth. So we are looking at investments with the offset that loan demand is not there. And so we can continue to do that. So I would expect average assets to rise in line with loan growth.

Okay. Great. And then maybe just last thing for me. I was curious on the expense side of things, obviously, continue to be best-in-class there. There was a particularly large move. I think you guys called out in the release on the other noninterest expense.

Just curious if you can give any detail on that and if this is kind of a good run rate to think about into the second quarter or beyond?

Yes. So there were 2 things that were going on in other operating expense. If you recall, first quarter of 2025, we had a pretty large operational loss. It was about $1.8 million. So that inflates first quarter of 2025 operating -- other operating expense.

And then this quarter, we saw, which I think I've seen other banks come out in their releases as well and noted was a reduction in the special assessment from the FDIC from the spring of 2023 crisis.

And so we saw a $1.2 million benefit from that. And so I would advise you not to use the $4.4 million number as an other operating expense kind of a go-forward model. I think it's closer to a $5.5 million number.

Got it. That's extremely helpful David. Thank you guys for the color and congrats on the quarter.

Next question today is coming from Steve Moss from Raymond James.

Tom, maybe just following up on expenses here and the efficiency ratio. You guys came in sub-30%. I hear you a little bit of extra benefit from the FDIC expense here.

But going forward, you talked about margin expansion, loan growth. And just kind of curious, it seems like you guys can run around 30% or maybe a little bit below. Just how do you guys think about the expense trajectory for the remainder of the year as you make investments?

Yes. So I know we talked to you in Chicago last year and told you that you were aggressive on our efficiency ratio right in [ mean 30% ], dropping below 30%, I think, is kind of a flattening point, right? I mean we're going to continue to grow as an organization.

Built into that, we have a fairly sizable complement of the Texas franchise, right, and they're not producing revenue. So as they produce revenue as the year goes on and they build out their book of business, that's going to help us. But I mean, we don't have any major investments to do in the back office side.

But as we continue to grow, there will be increases in expenses. I mean our biggest expenses are employees. We're not on a one cycle for merit increases. So you'll see each month, you'll see employees get merit increases, and that will drive the salary and benefit expense up. So I think if you're using that 30% mark, we're not going to dip too much lower than where we are at a high 29% efficiency ratio today.

Right. And then just kind of thinking about expense growth for the year, like high single digits to low double digits is kind of a fair assumption based on what you see?

Yes. I would say mid- to high single digits. I wouldn't put it in the double digit on expense growth.

Okay. Appreciate that. And then on the margin here, I guess just a couple of questions. David, in your comments, you said continue to see core margin expansion. Kind of curious how much additional margin expansion you expect?

And also on the $2 billion in loans repricing maturing cash flow as you name it. Just kind of curious as to what that incremental pickup is versus on the roll-off yields versus the roll-on yields.

Yes, absolutely, Steve. So I stand by my comments that I've made for a while now and that I expect the margin to expand 7 to 9 basis points given a flat rate environment, right? Obviously, in fourth quarter, we had a few rate cuts, and we had the full impact of the September rate cut in the fourth quarter as well.

So we saw a pretty dramatic decrease in our deposit costs. And even this quarter, the last rate cut was, I think it was December 10. And so we didn't get much of an impact of that in the fourth quarter, but we saw it this quarter. And nobody obviously knows what the Fed is going to do with rates, right?

I mean the latest projection that the Fed released it was in early March, mid-March, and they -- it was a prediction that they're going to raise -- I'm sorry, lower 25 basis points one time this year. I don't know if that's going to hold true today or not. I mean that's -- as Tom's point, I mean, that was before the war in the Mid East and gasoline prices started to rise.

And so I'm not sure what the Fed is going to do on the rate side. If they do reduce rates once, we're going to aggressively drop our rates as well on deposits, and we'll see a significant benefit given the beta that we realized in the fourth quarter.

On the asset side, you talked about the $2 billion we have. And yes, I mean, for instance, we have $1.2 billion in loan maturities at a fixed rate -- low fixed rate loan maturities in the next 12 months. And their weighted average yield is 5.19% today. Our going on rate for new loan activity is 6.5%. So we have substantial pickup. I'm not saying we're going to get 131 basis points on every single loan that we reprice, but we're going to see some decent sized pickup on that loan repricing.

And so we continue that to -- for that to happen for the next 12 months. So that's kind of what we're seeing on the margin side, Steve.

Okay. Appreciate that color there. And then just on credit here, just kind of curious with regard to the large borrower, $100 million borrower, just kind of curious as to what the status of that work is.

I know you guys mentioned last time it's going to take a lot longer. I believe they may have filed for bankruptcy. So just kind of curious as to is it still a couple of quarters to get to resolution or how that could play out?

So just keeping in mind that there are literally dozens of special purpose entities within that family of borrowers. None of our borrowers to date have filed bankruptcy. So just an important distinction so far, so good on that front. We're continuing to proactively work with the borrower and related entities to try to find the best path forward on all 8 of the loans that we have.

And slow and steady is probably the way I'd characterize it. Tom or Rodney may have a different approach, but we're working on it as diligently as we can, try to produce the best outcome we can.

We think we'll see good progress in the next 2 quarters, [6] months.

Next question today is coming from David Bishop from Hovde Group.

Tom, quick question circling back to the Texas market expansion. You're pretty -- you hired some pretty senior lenders out of their former franchise. When you ring-fence it looking out a couple of years, is the sort of opportunity set in terms of growth in the hundreds of millions? Could it approach the billions of dollars? Just curious how big you think that Texas market could get for you over time?

Over what time period, Dave?

Let's say, over 3- to 4-year period.

1 year? 3 to 4. Yes. I would think it would be more like a [ B instead of an M ] on the number in terms of opportunity in that time frame.

And the types of loans that the team can then, is it more C&I in nature versus CRE, your legacy portfolio? Just curious how you see that mix coming out of that franchise.

It's virtually all C&I at this point.

Got it. And you started to see the deposit relationships migrate yet? Or is it still too early?

Yes, C&I deposit relationships as well. So...

Got it. And then a couple of quarters ago, I think, Tom, you mentioned in terms of the loan payoffs, I think it was like $0.50 for every dollar of new loans. Is that still trending down in terms of loan payoffs versus originations?

It's trended down. It's more like $0.30. And we think we'll see it continue to moderate from there, Dave. So that's helpful to us. First quarter just kind of slow. I mean, right? But we're seeing much better moderation in loan -- probably 30% is too high is probably 20%, 25% of bookings. So it's not the 50% payoff.

Got it. And then maybe a question for Dave. You talked about the -- some of the impacts and puts and takes on the operating expense side. And then you mentioned the BOLI headwind, I think it was about $1 million.

Does that imply like a $3.8 million is a good run rate for the BOLI line moving forward?

Yes. That's correct, David, because we had, like I said, a $1 million headwind related to the fourth quarter prior period adjustment. So $3.8 million would be a more realistic trend going forward.

Got it. And then from a credit perspective, you noted the charge-offs there. Just curious if there was any significant sort of new nonaccrual inflows or backfills on the nonaccrual side that you could point out?

1 or 2 relatively small ones, but to be honest with you, I wouldn't classify any of them that's terribly material. They were both pretty small in the quarter.

Got it. I think I heard in the preamble, we expect about a near-term $17 million reduction in NPAs, if I heard you right.

That's right. We've got some really good visibility into 3 assets that will be paid off or taken out by a better quality borrower here in the really, really short term. So...

Got it. Maybe one final question for Dave on the margin outlook. If I'm looking at the supplemental information deck, it looks like deposit costs were pretty much on top of the average for the quarter.

Has most of the expected margin expansion predicated more on the earning asset side or a combination of earning asset and funding costs going lower?

I mean it's predominantly on the earning assets. We do have about a $1.3 billion book in time deposits that are going to reprice, right? I mean, those are maturing. I think there's like a 5-month remaining duration on those.

So they're going to reprice in the next couple of quarters, and they may reduce funding costs a little bit, but it's not going to be significant enough to really move the needle on deposit costs. It's going to come from the asset side.

We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

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. [Operator Instructions]. 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.

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.

Thank you very much, Jose, 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 Dave 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 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 a bit as we go forward. On the deposit side, we did continue to manage down our high-cost deposits, primarily of municipal deposits for both the quarter and the year. We given that if we have some robust loan demand, we find that we can attract some of those type deposits back if they are needed.

I talk about new markets, we are excited -- very excited about our new Texas banking team based in Houston that joined us in early December 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. So 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 settled at the Federal Reserve Bank.

Our Asian credit card program is also not only endorsed by the American Bankers Association by 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.

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 a 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 remain 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. But the driver of that notable increase being 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.

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.

The 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 and 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 and as we maintain our cost control and increase 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 -- as Jim mentioned, our credit metrics remained normalized, and as a result, 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% which was 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, as 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.

Thank you, David, and we appreciate you joining -- we'll take your questions in a minute, but we are pleased we wrapped up in 2025 with a good ending. And all of our markets are profitable, except our newest market in Texas core. So we do continue to have best-in-class efficiency ratio.

We're -- we are excited about 2026, an outlook for banking, and we'll take your questions now.

Thank you. And with that, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of David Bishop with Hovde Group.

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 set 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 yet into the early part of this year?

Yes. The our net pipeline is way up this quarter over last quarter. And it all has to do with the projected payoffs are much lower this quarter, and I don't completely believe that's true. But the payoff -- projected payoffs has dropped substantially quarter-over-quarter. So again, I don't -- it's an inexact science, and there are probably payoffs we don't know about that are that are coming, though, based on the 10-year treasury yields today, maybe not in head time soon based on the Greenland change in treasury deals today, whatever the grain land has gotten to do with it. But nevertheless, we are pleased to see -- at least it's trending in the right direction, Dave, the payoffs will be declining.

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?

It's a little bit better than I'd give it a 8 mile, something like it right now, certainly not 8 plus -- as it's probably not an. I give an 8-mile stay, which better than it has been. So we're certainly hitting in the right direction. And of course, you could there are certain asset classes we could book 100% of our loans and hospitality. There are a lot of hospitality loans out there in the market and -- we are pleased that we were 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 good while. So we're pleased with that.

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

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

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 you up the margin a little bit more than expected? And -- or should we use this December margin of 350 as a good run rate for you guys into 2026?

Yes, Steve, I think using the December spot margin is a good starting point -- what we did on loan collection piece. The reason it's up was we added a metric in our bankers' incentives to to pay them for fees that they collected. And so believe it or not, people do what you incent them to do.

And so 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 in 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 -- expansion throughout 2026.

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

Yes. I mean, on the fixed rate loans, low fixed rate loans, we have right around $1 billion throughout 2026 that's going to reprice and the weighted average yield on those is 51%. So if you look at that compared to our going on rate of about 647, then we got an opportunity to pick up 130 basis points or so on the loan side. And so that's kind of -- that offsets any rate reductions we're seeing on variable rate loans.

And of course, we have the floors in as well. We've talked about that in the past. We have 4s on about 86% of our variable rate loans and the weighted average rate on those 4 is 4.74%. So I think we're in a good position given this rate environment. We remain slightly liability sensitive. And 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. And we're going to get benefit of 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 Polo, 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.

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

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

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 came from? And -- just curious as to how you guys are feeling about the multifamily workforce housing nonperforming from last quarter.

So the charge was related to the health care asset that's -- and this was not surprising in any way, and we were we were largely reserved for the charge before this happens. 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 try to manage those assets and find an orderly way to produce the best outcome we can across the portfolio of 8 loans.

The process or trying to sell -- most all of this portfolio slow process in the course of this year. Yes.

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

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. And we saw really our state rates jump up. Our state apportionments in fourth quarter, so it 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. So that we're going to continue to try to manage that down going forward.

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

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?

Yes. We've got their budgeted growth for 2026 is higher than any other region. To give you an answer. So we have great expectations from Texas, Dave. So we're optimistic. And again, it's -- they're primarily C&I lenders. They're not commercial real estate lenders and our commercial real estate has been -- we've got under 300% of capital right now, and our AD&C is down to 71% of capital.

So we feel really good about the reduction in our CRE exposure and where we are. So we're optimistic. We think -- and they're optimistic. They're pretty active in the market. Feel good about the opportunities.

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

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 releasing space. So 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 an expectation is in the low 30s for our efficiency ratio to closer to somewhere probably between 30% and 33% is where we expect to see it shake out for 2026.

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

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?

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

Okay. Great. And then maybe just along those lines, just in terms of the investment thought process here. and obviously, helping group hires in Texas. Just curious what you guys think will be the opportunity for the upcoming year. oviously 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 -- your guys' thought process thoughts are around the M&A disruption and your ability to hire.

Yes. As you obviously are well aware, there are a number of mergers going on, both in the Southeast and the Southwest. I don't know what you include in the Southeast, so I'd add to the Southwest there as well. So we think there will be significant people to talk to. But again, everybody wants to hire the same people. I think right?

There's not that many good bankers out in the market. And you read people say they're going to hire 200 new bankers this year from where? The I don't think it was 200 good was in the Southeast, if I had to if I had to put my money on the line, I'd say there's not 200 good was in the Southeast, but there -- certainly, we're going to hire everybody we can hire.

One of our directors asked us today -- if you have a choice between meeting and the earnings, our earnings budget or hiring people which you're going to do. And my answer is we're going to hire the people. We'll let the budget take care of itself next year instead of this year if we need to. So we're going to hire as many good people as we can find.

Got it. Appreciate that. And then 1 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 about $4 million a quarter.

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

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.

Greetings, and welcome to the ServisFirst Bancshares Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Davis Mange, Director of Investor Relations. Thank you, Davis. You may begin.

Good afternoon, and welcome to our third quarter earnings call. Today's speakers will cover some highlights from 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 them.

With that, I'll turn the call over to Tom.

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.

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.

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.

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 Instructions] Our first question comes from the line of Steve Moss with Raymond James.

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?

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.

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.

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.

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?

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.

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?

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.

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]?

I can't give you a good answer, Steve. It's all over the [ bollard ]. That's what it 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.

In years and years -- from a percentage.

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.

Our next question comes from the line of Dave Bishop with Hovde Group.

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?

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 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.

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]?

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 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.

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?

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.

Our next question comes from the line of Stephen Scouten with Piper Sandler.

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?

Yes, that is correct. Yes. It was -- it's about 31 basis points on that interest reversal.

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?

Yes, that is correct. .

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?

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.

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?

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.

Thank you, Stephen.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.