ServisFirst Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted. Unaudited. ServisFirst Bancshares is a bank holding company operating ServisFirst Bank across the Southeast.
Financial performance and position
- Earnings: Net income was $50.0 million, down 13.7% from $58.0 million in Q1 2023. Basic and diluted EPS were both $0.92, versus $1.07 and $1.06, respectively. Return on average assets was 1.26% (1.63% prior year); return on average equity was 13.82% (17.83%).
- Income and margins: Interest income rose to $226.7 million from $181.3 million, but interest expense increased to $124.2 million from $73.0 million. Net interest income fell 5.4% to $102.5 million. Net interest margin was 2.66%, down from 3.15% year over year but up from 2.57% in Q4 2023. Noninterest income increased 39.4% to $8.8 million. The efficiency ratio worsened to 43.30% from 34.60%.
- Expenses and credit costs: Noninterest expense rose 16.7% to $46.3 million, including higher compensation and FDIC/regulatory assessments. Provision for credit losses was $4.4 million, versus $4.2 million.
- Loans and credit: Loans totaled $11.88 billion, up $221.9 million, or 1.9%, from year-end. The allowance for credit losses was $155.9 million, or 1.31% of loans. Net charge-offs were $1.8 million; annualized net charge-offs to average loans were 0.06%. Nonperforming loans increased to $34.8 million, or 0.29% of loans, from $21.5 million, or 0.18%.
- Deposits and liquidity: Deposits declined $522.1 million, or 3.9%, to $12.75 billion; management attributed the decline partly to reducing high-cost, non-core deposits. Estimated uninsured deposits were $8.42 billion. Liquid assets, as defined by management, were $1.91 billion; additional stated funding sources included $2.76 billion of FHLB availability, $2.15 billion of Federal Reserve availability, and $888 million of unused federal funds lines. Management believes funding is adequate for immediate and longer-term anticipated needs, but notes additional funding may be needed if current growth continues.
- Borrowings and capital: Federal funds purchased were $1.35 billion; other borrowings were $64.7 million, including $64.75 million of subordinated notes. The company reported consolidated CET1 of 11.07%, total risk-based capital of 12.61%, and Tier 1 leverage of 9.44%; the Bank was categorized as well-capitalized.
- Cash flow: Operating activities provided $53.5 million. Investing activities used $283.9 million, including $223.8 million of net loan growth; financing activities used $449.8 million, principally reflecting deposit outflows. Cash and cash equivalents decreased $680.2 million to $1.45 billion.
Material changes and management commentary
- Loan growth was 8% annualized for the quarter; owner-occupied commercial real estate loans accounted for over half of the increase. Management said the loan pipeline had expanded and demand was improving in its markets.
- Management attributed pressure on net interest income to deposit growth and pricing: average interest-bearing deposit rates rose to 4.04% from 2.68% a year earlier, while loan yields rose to 6.40% from 5.70%. Management noted deposit-cost competition following Federal Reserve rate increases.
- Noninterest income included $1.2 million of BOLI income from a death benefit related to a former employee. FDIC and other regulatory assessments included an additional $1.8 million expense for the FDIC Deposit Insurance Fund special assessment estimate.
- Nonperforming loans rose primarily because one relationship moved to nonaccrual; management said it was closely monitored and well-collateralized. Nonperforming assets were 0.22% of total assets, per the quarter highlights.
- Available-for-sale and held-to-maturity securities had gross unrealized losses of approximately $65.7 million and $82.4 million, respectively. Management attributed losses to higher market interest rates, stated the securities continued to perform as scheduled, and said it did not expect to need to sell before recovery. No credit-loss allowance was recorded for these securities.
- The filing provides no specific earnings or balance-sheet guidance. Management expects sustainable deposit growth over time and stated liquidity was adequate for anticipated needs, subject to possible additional funding needs if growth persists.
Risks, contingencies, and other items
- Key disclosed risks include interest-rate and funding-cost changes, deposit competition and liquidity outflows, credit deterioration and collateral values, economic conditions in the Southeast, cybersecurity, regulatory changes, and natural disasters.
- Commitments to extend credit were $3.51 billion; credit-card arrangements were $406.7 million; standby letters of credit were $122.4 million. These off-balance-sheet commitments may not be fully drawn.
- The company described mortgage-loan repurchase obligations related to breaches of representations and warranties; it reported a manageable level of investor repurchase demands. Management reported no material change in previously disclosed legal proceedings or risk factors.
- The company adopted proportional amortization accounting for qualifying New Markets and Historic Tax Credit investments on January 1, 2024; adoption had no material financial-statement impact.
Important facts for investors to verify
- Whether deposit reductions reflect continued deliberate runoff of higher-cost funding, and how deposit mix, uninsured deposits, and funding costs evolve.
- Whether the Q1 increase in nonperforming loans—particularly the single large relationship—remains well-collateralized and is resolved without material losses.
- Whether loan growth and improving pipeline translate into earnings while maintaining underwriting standards and adequate credit reserves.
- How net interest margin responds to rates, deposit repricing, and balance-sheet changes; Q1 margin improved sequentially but remained below the prior-year level.
- Whether securities unrealized losses, liquidity availability, and the company’s ability to hold securities through recovery change materially.
- The durability of Q1 earnings given the BOLI death-benefit income and FDIC special-assessment expense, as well as rising compensation and regulatory costs.