Please note this conference is being recorded. I will now turn the conference over to Mr. Davis Mange, Treasurer. Thank you. You may begin.
Good afternoon, and welcome to our third quarter earnings call. We will have Tom Broughton, our CEO, Jim Harper, our Chief Credit Officer, and David Sparacio, our CFO, covering some highlights from the quarter, and then we will take your questions. I will now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made. ServisFirst assumes no duty to update them. With that, I will turn the call over to Tom.
Thank you, Davis. Good afternoon, and thank you for joining our third quarter conference call. I will give you a few quick highlights of the quarter, followed by Jim Harper, our Chief Credit Officer, and David Sparacio, our Chief Financial Officer. On the loan side, while the growth in the loan book was lower than we would like, we think it was a combination of unexpected payoffs and loans not closing as expected during the quarter. We did see some low fixed rate loans pay off in the quarter, which is always good for our earnings per share. That is very much positive. We did see some good growth in C&I loans in the third quarter, which is very positive and like seeing that.
On the loan pipeline, I went back and looked at the pipeline three months ago, and it was very solid, and it was at record levels, but 40% of the total pipeline was over 90 days. In this quarter, the total pipeline less than 90 days is up 58% over last quarter. We think that is a good indicator of future closings over the next few months. We do see that our Houston pipeline continues to build. We have a large, we are talking about it is a large group of bankers out there. They are doing a great job and getting off to a good start. On the deposit side, we did allow some large municipal deposits to roll off in the quarter due to rate competition. The rate competition is primarily coming from G-SIB banks rather than regional banks.
We couldn't compete at that rate and chose to not compete. We do have some deposit initiatives underway and expect good results in the fourth quarter. We have emphasized non-interest-bearing deposits, and we have seen good growth year-over-year of 12% in non-interest-bearing deposits. That's a positive for the bank. We did add six new bankers during the quarter, including two in Houston. We do have, as I mentioned, we have 22 bankers there now, and it's the largest startup in our history, even larger than when we started the Birmingham bank. It's very much a work in progress, but we're very optimistic about the future there. We do expect the startup losses to begin to decline over the next few quarters as they do have a solid loan and deposit pipeline. With that, I'll turn it over to Jim Harper for a credit update.
Good afternoon. As Tom mentioned, third quarter loan growth was muted relative to second quarter 2026 performance as we ended the quarter with just over $14.7 billion in outstanding loans versus just under $14.5 billion in loans at 6/30/2026. However, those figures did represent loan growth year- to- date of over $1 billion and produced an annualized growth rate of 10%. Anecdotally, loan activity does seem to have picked up in recent weeks, so early indications are that we're on pace to finish the year strong. On the topic of payoffs, we did experience higher payoffs in the third quarter versus the second quarter.
While we do our best to handicap expected payoff activity on a forward-looking basis, given the uneven nature of payoffs over the course of this year and the current rate environment, it continues to be challenging to pin down a reliable estimate of payoff activity. Turning to credit quality, while total non-performing assets increased slightly on a quarter-over-quarter basis, nonaccrual loans decreased by approximately $9.6 million during the quarter to $161.8 million. The net decline in nonaccruals was driven by the successful resolution of two problem credits during the quarter, as well as the movement of two loans into our OREO portfolio. Lastly, I'll address net charge-offs and provision activity for the quarter. Charge-offs totaled $7.7 million for the third quarter and are $19.8 million year-t o- date, equating to 21 basis points annualized.
Regarding provisions, we increased our allowance for loan losses by approximately $7.2 million- $189 million as of the end of the quarter. That allowance increased slightly to 1.28% of loans, which was up 2 basis points from June and covers our nonaccrual loans 118%, up from 107% last quarter. David's up next with an overview of our quarterly financial performance.
Thank you, Jim, and good afternoon, everyone. Before I get into the numbers, a quick housekeeping note. We completed our two for one stock split during the quarter, so every per share figure that I reference today, including prior periods, is adjusted for that split. The story of the third quarter is consistent with what we have been telling you all year.
We continue to increase our revenue through asset growth and a wider margin while holding a best-in-class efficiency ratio, and that combination continues to produce top quartile returns. For the third quarter of 2026, we reported net income of $87.3 million, or $0.80 per diluted share. That compares to $0.78 in the second quarter, up 2.6% on a linked-quarter basis. Last year's third quarter included a $7.8 million pre-tax loss on securities. Excluding that, adjusted diluted EPS from a year ago, $0.65. So, on an adjusted basis, we grew earnings per share 23%. For the first nine months of 2026, net income was $256 million, up 28% from adjusted EPS of $1.84 in 2025. Pre-provision net revenue was $120.7 million, up 1.8% from the second quarter, and up 26% from an adjusted pre-provision net revenue a year ago.
Net interest income was $159.8 million, up $4.2 million or 2.7% from the second quarter, and up $26.4 million or nearly 20% from a year ago. Net interest margin was 3.63%, unchanged from last quarter on a GAAP basis. But as you'll recall, the second quarter included a recovery of interest income from a payoff on a nonaccrual relationship, which added about 5 basis points to margin. Excluding that recovery, our margin expanded about 5 basis points this quarter, and it is up 54 basis points from 3.09% a year ago. On the asset side, total loan yields were 6.24%, compared to 6.23% last quarter. Investment yields were 3.85%, up from 3.82% last quarter, and 3.60% a year ago. The securities portfolio was $1.56 billion at quarter end, down nearly $290 million from a year ago as we continue to deploy portfolio cash flows into loans.
As we have mentioned in the past, we continue to have low fixed rate loans repricing in the next 12 months. We currently have about $1.5 billion of loans with a weighted average yield of 5.08%. Plus, we have a normal cash flow and covenant violation flow that allow us to gain yield in our loan portfolio. Additionally, we are restructuring some securities and other non-lending assets in the fourth quarter to improve the margin in future periods. We expect to continue our margin expansion into 2027. On the funding side, despite the increase in benchmark rates, our average cost of interest-bearing deposits was flat at 2.80%, and is down 61 basis points from a year ago. We were also encouraged to see average interest-bearing checking balances grow by about $378 million in the quarter at a cost of 1.58%.
Our average rate on federal funds purchased, which is primarily our correspondent banking funding, was 3.78%, compared to 3.74% last quarter and 4.46% a year ago. On non-interest income, we came in at $13.1 million for the quarter, which was up from $12.9 million in the second quarter and up 23% from $10.6 million on an adjusted basis a year ago. Bank-owned life insurance income was the biggest driver at $4.3 million, up 81% year-over-year and 5% linked quarter, reflecting the policies we added over the past year. Service charges on deposit accounts was $3.4 million, up 4% year-over-year and 3% linked quarter, and credit card income held steady at $2.4 million for the quarter. Non-interest expense was $52.2 million for the year, up 4.5% on a linked-quarter basis and 8.8% year-over-year, or $4.2 million.
Of this year-over-year increase, 40% of that is the full impact of the Houston market. The remaining expense increase of $2.4 million is composed of mostly non-recurring expenses experienced during the quarter. This expense growth rate is a fraction of our revenue growth, which grew 20% year-over-year. Our efficiency ratio is 30.20%, compared to 29.65% last quarter and 35.22% a year ago, or 33.31% adjustment. Our effective tax rate for the quarter was 17.20%, compared to 19.94% last quarter and 16.81% a year ago. The linked-quarter decline reflects investment tax credits we purchased during the quarter. These continue to give us a meaningful benefit, and we will keep evaluating similar opportunities. Turning to the balance sheet, as Jim mentioned, our ended loans were $14.7 billion, up $259 million from the second quarter, or 7.1% annualized, and up $1.43 billion or 10.7% from a year ago.
Average loans grew $320 million or 8.9% annualized. Over the past year, growth has been balanced between C&I loans up 15% and investor real estate up about 16%. Capital continued to build. Stockholders' equity passed $2 billion for the first time at $2.04 billion. Common equity Tier one capital to risk-weighted assets was 11.98% on a preliminary basis, up 49 basis points from 11.49% a year ago. Total risk-based capital was 13.26%. Our Tier one leverage ratio was 11.11%, and tangible common equity to tangible assets rose to 11.05%, up 33 basis points on a linked quarter and nearly 100 basis points year-over-year. Tangible book value per share was $18.51, up 14.4% year-over-year. On liquidity, we ended the quarter with $1.19 billion in cash and cash equivalents, along with $1.56 billion in securities. We continue to have no FHLB advances and no broker deposits. Our funding remains core and relationship-driven.
To sum up the third quarter, earnings per share grew 33% year-over-year. Our core margin expanded again. Loans grew more than 10%. Our efficiency ratio stayed around 30%. Credit metrics improved, and book value per share is up 14%. We are generating capital faster than we are using it, which gives us real flexibility as we head into the fourth quarter. With our newly approved share repurchase plan, we expect to deploy some of that excess capital in a value-added way. With that, we will now take your questions.
Excellent. We will now be conducting a question-and-answer section. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We will now poll for questions. Our first question is from Stephen Scouten of Piper Sandler. You may proceed with your question.
Yeah, good afternoon. Thanks. Maybe if I could start on the margin. I know, David, you said it feels like you have additional upside into 2027, and it looks like the margin was maybe 3.68% in the final month, so up another 5 basis points. Just kind of wondering magnitude of change, if you still think we are kind of in this 4 basis points to 5 basis points a quarter range, or if with the potential for another December hike, if any of that math changes with you guys being slightly liability sensitive and kind of any underlying assumptions within that would be great.
No, Stephen, this is David. I still expect it in that 5 basis points to 7 basis point increase range. I mentioned it, we still have about $1.5 billion of fixed rate, low fixed rate loans repricing. The average rate on those is about 5.08%. Our going on rate or the average rate for renewals and new loans was 6.59% in the quarter. So, we still have some room to grow there. The more important piece of it, I think, is deposit cost. We were able to be selective on deposit cost as the Fed raised rates this quarter, and so we were able to tamp down any increases in our deposit costs, and we expect to do the same thing for any future hikes. Tom mentioned in his comments about the expense of municipal deposits that we let walk away because we were being outbid by a G-SIB.
It's going to be opportunistic pricing on deposits, and it's going to be discipline on the asset side as we get those repricing opportunities in front of us. I don't expect anything. I mean, we still, 53% of our loan book is variable rate. We're going to have some upside potential in existing variable rate loans as well that get a higher yield as well as the Fed is raising rates. I mean, you throw all that in, and we still have room for expansion. It's just going to be at a slower pace than what we saw earlier in this year. But the point is, it's still expansion at the end of the day.
Okay. That's really helpful. Thank you. Then it sounds like the pipelines are building, loan demand is good. I guess Houston is still in relatively early stages. If we have continued strong loan growth, how much of an impediment is the loan-to-deposit ratio where it sits today, and could deposit growth be a constraint on loan growth if it can't match the robust loan growth you guys have been delivering?
Given a choice, this is Tom, of course, Stephen. Given a choice, we always prefer to need deposits rather than need loans because we can find the deposits. But you can't just go find the loans, as you well know. You've got to have the loan demand. If we can have the loan demand, we'll come up with ways to match off with deposits. This is typically the time of year we have really good deposit growth in the fourth quarter. We anticipate that again, and our deposit pipeline is good. We're optimistic on that front. We've always found a way to grow deposits.
Yeah. No, that's fair. I think, Tom, you mentioned some deposit initiatives underway. Anything specific there that you could comment on? Just give us an idea of where you might look to drive deposit growth here.
No. We do it individually by region, and each region has their own unique goals and ways to grow deposits. That is something we work all 12 regions on, or 13, including correspondent. We feel like we have some good initiatives underway and you got to go to where you find deposits, first of all. Where's the money?
Absolutely. No doubt. Okay, well, thank you for the time. I'll step back and let someone else ask a few questions. Thank you, guys.
Thank you, Stephen.
Thank you. Our next question is from David Bishop of the Hovde Group. You may proceed with your question.
Yeah, thanks. Good evening, gentlemen. Hey, during the preamble, it sounded like Tom or David mentioned that maybe you're contemplating some restructurings, either in the securities portfolio or non-earning assets. Maybe what you're thinking along the lines there and how large this could be as a percent of the portfolio? Thanks.
Yeah, absolutely, David. This is David again. You'll notice in the financials, we had a small securities gain. We had some treasuries that were maturing in the fourth quarter, and just in light of the interest rate environment and what was available in the third quarter, we decided to accelerate those and swap those out. We did that in the third quarter. We'll continue. We got some smaller subsets of securities that are maturing in the fourth quarter, so we'll be opportunistic on those as well. But the big thing is, in July, the Treasury had a ruling on exchanges on bank-owned life insurance, on BOLI. We have about $465 million in assets in BOLI. We have some pretty low yields on policies that were put on the books in 2011, 2012, 2013.
We have an opportunity now with that favorable ruling from the Treasury to structure a deal where we can improve those yields and do some swap outs on those. That's the part that we're looking at as we move into the fourth quarter.
But we're not contemplating any restructuring where we would take security losses, David, if that's the question.
More of a function on better yield on the BOLI policies. Is that correct?
That is correct, yes.
Got it. David, you mentioned there was some noise in operating expenses this quarter, probably looked like other expenses that were non-recurring. Any way to size those up from a dollar perspective and perhaps what those pertain to? Thanks.
Yeah, David, I would focus on the efficiency ratio, right? We ticked up above 30% this quarter when we had been sub 30% for a couple of quarters. In a normalized environment, I would say we would stay below 30%. We were probably about $2 million over our expense run rate that I would expect due to those one-time non-recurring costs. If you model that out, I think that gets you somewhere around $50 million-$51 million a quarter is what I expect our run rate to be.
It was just a catchall, David, just a bunch of stuff. We repo'd a yacht, going to be for sale pretty soon, if anybody interested. We never owned a yacht, but it will be our first one. We had some expenses to get the yacht back in the States and get it operational. It is fairly expensive proposition. Anyway, we had some other ORE type expenses and some NPA expenses. We just went ahead and took all those and expensed everything rather than capitalizing them, David.
Got it. Appreciate the color. I will drop off and hop back in the queue. Thanks.
Thank you.
Thank you. Our next question is from Steve Moss of Raymond James. Please proceed with your question.
Hey, good afternoon, guys.
Thanks, Steve.
Tom, when we were talking a couple of weeks ago, spreads were pretty tight here for new loans. Just kind of curious, have you seen spreads improve enough to maybe be more optimistic on lending? Or just kind of curious on your thoughts in terms of loan pricing here going forward.
That's a really good question. When I talk to other bankers, which we talk to other bankers all the time, obviously, we have 400 correspondent banks. Are competitors being more rational? I think I would say definitely yes. Because when customers ask us for a fixed rate loan quote, I think it blows them back a little bit when we tell them, "Okay, here's the curve today, and here's your five-year rate." They don't like that. They immediately would opt for today for a floating rate. I think other banks are doing the same thing. So, we're seeing a lot less. That's the good part of higher rates, is I think you get a little bit rationalized, a little bit better competition than we saw. I don't know, Rodney, do you-
Yeah, it's region to region, market to market, but I think here in Birmingham, we had a number of new banks come into our market two, three, four years ago that were doing some irrational things, and that seems to have gone by the wayside for the last six months. Certainly, here in Birmingham.
Yeah, I think that's true. I think there is an upside to higher interest rates, Steve. Of course, will there be demand destruction? Who knows the answer to that question. I think rates were already high enough that it made a lot of projects uneconomical to start. I don't think it's another 25 basis points or 50 basis points. Now, another 100 basis points would be a whole another matter, right? I'm optimistic that we'll see continued, a little bit more rational competition out there than what we've seen over the last six months. You shouldn't be having intense loan and deposit competition at exactly the same time, should you? That seems highly irrational, but that's what we've seen to an extent. People, maybe they're going to figure it out, that if they're going to compete on deposits, they need to have higher loan yields too.
That's what I tell our people internally is, okay, well, if you got to pay up for deposits, you're going to have to charge more for loans in your region so that we have an adequate margin within each region.
Right. No, I hear you there. Okay. Then, maybe just kind of thinking about, just on to credit here, with regard to the reserve, up about 2 basis points quarter-over-quarter. Just kind of curious, were there any specific reserves for some credits this quarter that maybe drove that reserve higher? Any update you can provide on the roughly $100 million relationship.
So with regard to specific credits that may have moved the needle over the quarter, quite frankly, we had one notable credit action that was unexpected that we had to address, but even it didn't come close to a basis point of movement. So it was actually across the board and more portfolio-based than it was specifically impaired assets. Yeah.
Okay. Got you. In terms of the large credit, just any update you guys have there?
Large credits.
Large credits.
Yeah. We took a charge of just over $7 million this quarter. That represents the first true charge-off we've taken with respect to that portfolio of large multifamily properties. We're continuing to work through an orderly liquidation process with those eight credits and are working with a broker to identify potential sales opportunities to get those marketed and liquidated. So, so far, so good. We'll hope to kind of execute this in an orderly fashion over the next two to four quarters.
Okay. Got you. On the share repurchase announcement here for 2 million shares, curious on your appetite to repurchase shares and just kind of how you're thinking about buying back stock.
That's a real good question, Steve. Once you execute, it's done, right? We can't remarket those shares. I'm sure we could figure out how to remarket those shares, but once we repurchase and spend the money. We've never done this before. We're going to be very careful about how we do it and when we do it, and I'm not sure that as insiders, I'm not sure we know. We have a present value analysis, but I'm not sure we all know exactly what the future holds and what back stock prices will do over the next year. But in any event, we're going to be reasonably cautious, would be my answer to you, Steve, and try to make good decisions for the shareholders.
Maybe put it this way, given where the loan pipeline is and just the economic activity you're seeing in all your markets and Texas expansion, are you just a little more hesitant to deploy that capital near term combined with moving rates? Or to buy back stocks near term? Let me ask it again.
Yeah. Given, not from a liquidity standpoint, but just from a capital standpoint, we want to ensure that we always have adequate capital to be able to fund our growth, and that's clearly the number one goal, and clearly is the number one thing that's in the shareholders' best interest to create value. Anything we could do to create value, it involves expansion, right? Organic growth. So, you're absolutely right. We've got to keep that as our main focus all the time.
No, great. I appreciate all the color here. Thank you very much, guys.
Thank you, everybody. Thank you for your questions and [crosstalk].
There's another question.
Oh.
We do have one question left. Our next question is from David Bishop of the Hovde Group. Please proceed with your question.
Sorry to keep you a little longer, Tom, but staying on that topic of expansion, just curious, in terms of maybe an update, in terms of the dollar volume of maybe outstandings in Texas in terms of loans and deposits, and maybe what you're seeing in terms of pricing in that state, relative to some of your other regions.
Yeah, we found that the pricing is stronger in Texas than we've seen. The credits, the loans, and deposits are larger. Everything's bigger in Texas, as they say. We're optimistic that they'll continue to You lead with credit, and the deposits follow, but they are certainly focused on generating net deposit relationships as well as lending relationships. So, we expect, they probably have $200 million in the pipeline for the remainder of the year, and I would anticipate them trying to get to break even by the first or second quarter of next year in terms of the fairly sizable overhead that we have. So, we're optimistic. There's a lot of stuff in the hopper. They're doing a great job. The team's doing a great job of making contact and seeing prospects.
I think with all the mergers in the market out there, I think that certainly makes it a target-rich environment for a good, stable, growing bank. We're optimistic on that front, Dave.
Yeah. Curious, you've noted the good C&I growth this quarter. I think the bankers you hired out of Woodforest were mostly C&I. Is Texas driving the bulk of the C&I growth you're seeing lately, or is that spread out across the broader footprint of the company?
Interestingly, I'd say that they've originated more real estate activity than they ever would've imagined so far. So actually, been pretty evenly split out of Texas so far from real estate and C&I. We had some C&I growth in other regions, too, over the quarter, which was good to see.
The first thing they ran across were commercial real estate opportunities because you talk to developers, "Oh, yeah, I've got a need, immediate need," and that's the things that you, that's why bankers like to book CRE deals, because they're more immediate, right? C&I takes longer. Takes a good bit longer. But we do see a lot of C&I opportunities coming our way, including some energy credits, and that are strong credits with very good pricing on them.
Got it. Appreciate that color. I guess my final question, Tom, just circling back to the share repurchase level. Just curious, or remind us, are there any sort of enumerated targeted capital levels that lets you sleep better at night, that sort of factor into that decision? Thanks.
I think the thought was that we could, unless we see extraordinary organic growth opportunities, we can, over time, maybe repurchase some stock and our capital not decline as a percent of assets for our CET1. So, we feel confident we can do both and certainly, we want to be in the top tier of capitalized banks, well-capitalized banks, and we are, and we want to stay that way. So, we think that contributes to our position as one of the more recognized banks in our peer group.
Got it. Appreciate the color.
Thank you. Well, thank you, everybody, for joining us today. Have a good evening.
Thank you. That concludes our question and answer and our call. You may disconnect your lines at this time.