ServisFirst Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless stated otherwise. The interim financial statements are unaudited.
Business context
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Through ServisFirst Bank, it provides commercial banking, lending, deposit, treasury-management and electronic banking services across Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Net income | $57.6 million; diluted EPS $1.06 | Net income $51.5 million and EPS $0.95 in Q1 2021 |
| Net interest income | $105.7 million | Up 14.5% from $92.4 million |
| Net interest margin | 2.89% | 3.20% in Q1 2021 |
| Total assets | $15.34 billion | Down 0.7% from $15.45 billion at year-end |
| Total loans | $9.90 billion | Up 3.8% from $9.53 billion at year-end |
| Total deposits | $12.41 billion | Down 0.4% from $12.45 billion at year-end |
| Allowance for credit losses | $119.5 million, or 1.21% of loans | $116.7 million, or 1.22%, at year-end |
| Cash and cash equivalents | $3.44 billion | $4.22 billion at year-end |
| Operating cash flow | $69.3 million | $66.8 million in Q1 2021 |
Interest income was $113.2 million and interest expense was $7.5 million. Provision for credit losses was $5.4 million. Noninterest income was $7.9 million and noninterest expense was $37.2 million. The efficiency ratio was 32.74% versus 28.68%; return on average assets was 1.53% versus 1.72%, and return on average equity was 20.09% versus 19.83%.
Net cash used in investing activities was $718.8 million, principally reflecting loan growth and securities purchases; financing activities used $129.2 million. Federal funds purchased were $1.64 billion and other borrowings were $64.7 million. The company reported $4.61 billion of liquid assets and approximately $1.04 billion of unused federal funds lines, subject to restrictions and collateral requirements. Consolidated regulatory capital ratios included 9.86% CET1, 9.87% Tier 1 risk-based capital and 11.43% total risk-based capital; the Bank was categorized as well-capitalized.
Material changes versus comparable periods
- Net income increased 11.8% year over year. Growth in average earning assets, loans and noninterest-bearing deposits supported higher net interest income; lower provision expense also contributed.
- Average loans rose 13.3% year over year to $9.65 billion and average deposits rose 21.6% to $12.38 billion. The margin nevertheless fell 31 basis points, reflecting low rates and elevated liquidity.
- Noninterest income declined $515,000, or 6.1%. Mortgage banking income fell $2.2 million as the company shifted to retaining mortgage loans; credit-card income rose $1.2 million. A $3.3 million securities-sale loss also weighed on income.
- Noninterest expense increased $8.3 million, or 28.7%, led by payroll, processing and other operating costs. Q1 2022 included a $2.5 million write-down of investments in new-market tax-credit entities and $874,000 of costs related to a planned core-system conversion.
- Net interest income benefited from asset growth, while asset yields fell. The taxable-equivalent yield on earning assets decreased to 3.10% from 3.48%; the cost of interest-bearing liabilities declined to 0.33% from 0.40%.
- Nonperforming loans increased to $19.4 million, or 0.20% of loans, from $12.1 million, or 0.13%, at year-end. Net charge-offs rose to $2.6 million from $487,000 in Q1 2021.
- Accumulated other comprehensive income moved from a $14.1 million gain at year-end to a $10.9 million loss, including $24.9 million of Q1 after-tax other comprehensive loss, primarily from securities valuation changes.
Outlook, risks and unusual items
- No formal earnings or full-year financial guidance is provided. Management said it expects net interest income to benefit from Federal Reserve rate increases, assuming deposit pricing increases lag loan pricing.
- The company anticipated further Federal Reserve rate increases during the remaining 2022 meetings. Higher rates could raise deposit and short-term borrowing costs, increase loan-pricing competition and affect asset values and margins. Management reported no significant change in modeled rate sensitivity since year-end.
- Management anticipated investing about $50 million per month in two-year U.S. Treasury securities and $25 million per month in mortgage-backed securities to redeploy excess liquidity; the plan could change with monetary policy or loan growth.
- Available-for-sale and held-to-maturity securities had gross unrealized losses of $23.0 million and $34.4 million, respectively. Management attributed the losses to higher market interest rates, said it did not intend to sell the securities and did not consider them credit-impaired. The filing states that declines could still result in noncash charges in future periods.
- Estimated uninsured deposits were approximately $10.15 billion. Management cited deposit retention, funding competition, loan commitments and possible pandemic-related economic effects as liquidity and credit considerations. It stated that available funding sources were adequate for anticipated needs, while noting continued growth could require additional funding.
- The company recorded $3.4 million of increased fair value in other operating income from its interest-rate cap. Q1 tax credits were $3.3 million, compared with $272,000 a year earlier; these items affect comparability.
- Nonperforming assets rose to $21.4 million from $13.3 million at year-end. COVID-related borrower deferrals carried $3.8 million of accrued interest income; management said the potential future effect of credit losses on these borrowers could not be projected clearly.
- The company reported no material change in risk factors from its 2021 Form 10-K and no material legal proceeding changes. It planned to adopt the new TDR and vintage-disclosure accounting standard effective January 1, 2023.
Important facts for investors to verify
- Whether loan delinquencies, nonperforming loans and net charge-offs continue to rise, and whether the allowance remains adequate as loan balances grow.
- Deposit stability, the level and concentration of uninsured deposits, and the cost and availability of wholesale or correspondent-bank funding.
- How Federal Reserve rate increases affect loan yields, deposit pricing, net interest margin and securities valuations.
- The future earnings impact of the securities loss, the interest-rate cap valuation, tax credits, tax-credit investment write-down and core-system conversion costs.
- Execution of the planned securities purchases and core-system conversion, and whether liquidity and capital remain sufficient to support loan growth and commitments.