ServisFirst Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The unaudited consolidated statements cover the company and its banking subsidiary, ServisFirst Bank. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Business context and financial performance
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Its bank provides commercial banking services across Alabama, Florida, Georgia, North and South Carolina, and Tennessee.
| Metric | Q2 2022 | Comparable period | Change |
|---|---|---|---|
| Net interest income | $116.4 million | $94.7 million in Q2 2021 | +23% |
| Net income available to common stockholders | $62.1 million | $50.0 million in Q2 2021 | +24.2% |
| Diluted earnings per share | $1.14 | $0.92 in Q2 2021 | +24% |
| Net interest margin | 3.26% | 3.06% in Q2 2021 | +20 basis points |
| Efficiency ratio | 31.64% | 30.03% in Q2 2021 | Higher, indicating weaker efficiency |
For the first half of 2022, net income available to common stockholders was $119.7 million, versus $101.5 million a year earlier; diluted EPS was $2.20 versus $1.86. Net interest margin was 3.07% for the half-year, compared with 3.14% in 2021. Q2 return on average assets was 1.67% and return on average stockholders’ equity was 20.93%.
Balance sheet, funding, liquidity and cash flow
- At June 30, total assets were $14.49 billion, down 6.2% from December 31, 2021. Loans were $10.62 billion, up 11.4%; deposits were $11.77 billion, down 5.5%.
- Cash and cash equivalents were $1.69 billion, compared with $4.22 billion at year-end. Management reported $2.87 billion of liquid assets, including cash, federal funds sold and unpledged available-for-sale securities, plus approximately $1.04 billion of available federal funds lines, subject to restrictions and collateral requirements.
- Federal funds purchased were $1.39 billion, down from $1.71 billion at year-end. Other borrowings totaled $64.7 million and consisted of subordinated notes. The filing reports the company as well-capitalized; consolidated CET1 and total risk-based capital ratios were 9.64% and 11.18%, respectively.
- Six-month operating cash flow was $126.0 million. Investing activities used $1.63 billion, principally reflecting $1.09 billion of loan growth and securities purchases. Financing activities used $1.03 billion, including deposit and federal-funds-purchased outflows. Cash and cash equivalents declined $2.53 billion during the half.
- Stockholders’ equity attributable to the company was $1.21 billion. Accumulated other comprehensive loss was $22.4 million, versus income of $14.1 million at December 31, 2021.
Material changes and notable items
- Loan growth and higher average earning assets drove higher net interest income. Average loans increased 18% year over year in Q2; average deposits increased 12%. Management attributed the higher Q2 margin partly to improved asset yields and growth in noninterest-bearing deposits and equity.
- Q2 noninterest income was $9.5 million, approximately flat year over year. Lower mortgage banking income and a $2.8 million securities-sale loss were offset in part by higher other operating income, credit card income and a $2.1 million BOLI death benefit. The company also recorded a $1.9 million increase in the interest-rate cap’s value during Q2.
- Noninterest expense rose 27.2% to $39.8 million. Increases included salaries and benefits, third-party processing and other services, and other operating expenses. Management cited $1.7 million of higher Federal Reserve settlement charges year over year in Q2, as well as incentive accruals and fraud-related accruals.
- The allowance for credit losses was $128.4 million, or 1.21% of loans, compared with $116.7 million, or 1.22%, at year-end. Q2 provision expense was $9.5 million. Nonperforming loans increased to $15.5 million from $12.1 million at year-end; the ratio to total loans rose to 0.15% from 0.13%.
- The investment portfolio included $724.5 million of available-for-sale and $1.07 billion of held-to-maturity securities. Their combined gross unrealized losses were approximately $97.4 million at June 30. Management attributed the losses primarily to higher market interest rates, said securities continued to perform as scheduled, and stated it did not expect to have to sell them before recovery. The company recognized $6.2 million of available-for-sale securities losses in the first half.
- PPP loans outstanding fell to $23.0 million from $595.0 million at December 31, 2021, reflecting continued forgiveness and repayment.
Outlook, risks and contingencies
- No numerical earnings or growth guidance is provided. Management said it expects higher and future Federal Reserve rate increases to benefit net interest income, anticipating that deposit pricing will lag loan pricing; faster deposit repricing or other rate changes could affect that outcome.
- The credit-loss forecast assumes rising national unemployment and declining GDP growth. Management identifies economic conditions, borrowers’ repayment capacity, collateral values, loan concentrations and commercial real estate conditions as relevant credit risks. COVID-related borrower deferrals included $3.2 million of accrued interest at quarter-end; possible future credit losses could reduce income.
- Uninsured deposits were estimated at $9.62 billion, approximately 82% of total deposits. Deposit competition, deposit outflows and funding costs are liquidity considerations. Management said current funding sources are adequate for anticipated needs, but additional funding may be needed to sustain the current growth rate.
- Off-balance-sheet commitments included $3.83 billion to extend credit, $387.1 million in credit card arrangements and $71.4 million in standby letters of credit. These amounts are contractual exposures, not necessarily expected cash outflows.
- The filing cites interest-rate and market risks, economic conditions, competition, regulatory and legal matters, and changes in credit quality among forward-looking risks. It reports no material change in risk factors from the 2021 Form 10-K and no material legal proceedings known to management.
- The company plans to adopt ASU 2022-02, addressing troubled debt restructuring and vintage disclosures, effective January 1, 2023; the impact was still being assessed.
Most important facts for investors to verify
- Whether loan and deposit trends persist, particularly given the decline in period-end deposits and the large estimated uninsured-deposit balance.
- How rising rates affect net interest margin, deposit costs and the value or potential sale of securities; monitor the unrealized losses in both available-for-sale and held-to-maturity portfolios.
- Whether credit quality deteriorates: track nonperforming loans, charge-offs, the allowance and the economic assumptions used in the credit-loss estimate.
- Whether elevated operating expenses and noninterest-income items—including the BOLI death benefit, interest-rate-cap valuation and securities losses—are recurring or unusual.
- Liquidity and capital capacity to fund continued loan growth, including the availability and conditions of borrowing lines and the effect of regulatory limits on dividends.