ServisFirst Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The interim financial statements are unaudited. Dollar amounts below are in millions except per-share data and ratios.
Business context
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Through ServisFirst Bank, it provides commercial banking, lending, deposit, electronic banking, treasury-management and correspondent-banking services across several Southeastern states and Virginia.
Financial performance and condition
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $99.7 | $126.4 in Q3 2022; down 21% |
| Net interest margin | 2.64% | 3.64% in Q3 2022 |
| Net income available to common shareholders | $53.3 | $64.0 in Q3 2022; down 16.7% |
| Diluted earnings per share | $0.98 | $1.17 in Q3 2022 |
| Return on average assets | 1.37% | 1.77% in Q3 2022 |
| Efficiency ratio | 38.64% | 31.54% in Q3 2022 |
For the first nine months, net interest income was $309.3 million versus $348.5 million in 2022, and net income available to common shareholders was $164.7 million versus $183.7 million. Diluted EPS was $3.02 versus $3.37.
- Balance sheet at September 30: Assets were $16.04 billion, up 9.9% from year-end 2022. Loans were $11.64 billion, down 0.4%; deposits were $13.14 billion, up 13.8%.
- Funding and liquidity: Cash and cash equivalents were $2.07 billion. Federal funds purchased were $1.37 billion; other borrowings were $64.8 million, including subordinated notes. Management reported $2.48 billion of liquid assets, about $1.71 billion of potential FHLB funding, and $931 million of unused federal funds lines, subject to restrictions and collateral requirements.
- Capital: Company-attributable equity was $1.40 billion, or 9.04% of assets. The Bank’s regulatory capital ratios were above the stated “well-capitalized” thresholds; its CET1 ratio was 11.14% and total risk-based capital ratio was 12.27%.
- Credit: The allowance for credit losses was $152.2 million, or 1.31% of loans, versus $146.3 million, or 1.25%, at year-end 2022. Nine-month net charge-offs were $9.2 million, compared with $6.2 million a year earlier. Nonperforming loans were $22.6 million, or 0.19% of loans, versus $17.8 million, or 0.15%, at year-end.
- Cash flows, nine months: Operating activities provided $106.2 million; investing activities used $172.9 million; financing activities provided $1.32 billion. Cash and cash equivalents increased by $1.25 billion.
Material changes versus prior periods
- Deposit costs rose sharply as customers shifted funds from noninterest-bearing accounts into interest-bearing products. Q3 interest expense was $113.5 million versus $22.9 million a year earlier; the average cost of interest-bearing liabilities rose to 4.02% from 1.05%.
- Higher asset yields partly offset higher funding costs: Q3 loan yield rose to 6.13% from 4.77%, while the yield on interest-earning assets increased to 5.65% from 4.30%. Management attributed lower net interest income primarily to deposit pricing pressure and narrowing spreads.
- Noninterest income declined 9.0% in Q3 to $8.1 million. Nine-month noninterest income declined 12.7% to $23.0 million, partly reflecting lower other operating income and the expiration of an interest-rate cap in Q2 2023. The prior-year period included a $6.2 million securities-sale loss.
- Q3 noninterest expense decreased 2.4% to $41.7 million, while nine-month expense was essentially unchanged at $119.8 million. FDIC and other regulatory assessments rose 140.6% in Q3, which the filing attributes in part to a two-basis-point FDIC assessment-rate increase beginning in Q1 2023.
- Available-for-sale securities had $85.4 million of gross unrealized losses and held-to-maturity securities had $110.9 million at quarter-end. Management attributed these primarily to higher market interest rates, stated that securities were performing as scheduled, and said it did not expect to be required to sell before recovery.
Outlook, risks and unusual items
- No specific earnings or financial forecast is provided. Management expects loan growth to slow from historical levels in the higher-rate environment and believes net interest income could benefit over a short period after Federal Reserve rate increases cease.
- Management identifies interest-rate and funding-cost changes, deposit competition and liquidity, credit quality and collateral values, economic conditions, regulatory changes, cyber risk, legal contingencies and severe weather as risks. It cautions that forward-looking statements are estimates and undertakes no obligation to update them.
- Uninsured deposits were estimated at $8.5 billion, including approximately $2.1 billion in public funds; public funds exceeding FDIC limits are collateralized by securities. Noninterest-bearing deposits fell to 19.94% of deposits from 28.76% at year-end 2022.
- The company recorded $11.1 million of federal new-markets tax credits during the first nine months, contributing to a 16.51% effective tax rate, versus 18.21% in the comparable period. The filing also reports a $1.2 million year-to-date excess tax benefit from stock awards.
- Q3 2022 other operating expenses included $3.1 million of charges related to a preliminary lawsuit settlement and a private-investment write-down. Management says there are no material legal proceedings currently pending and no material changes to previously disclosed risk factors.
- The company declared a quarterly dividend of $0.28 per share. Bank and holding-company dividend payments remain subject to regulatory, capital and other restrictions.
Important facts for investors to verify
- Whether deposit repricing and the mix of noninterest-bearing versus interest-bearing deposits continue to pressure net interest margin and earnings.
- The liquidity and stability of uninsured and public-fund deposits, reliance on federal funds purchased, and availability of stated contingent funding sources.
- Trends in nonperforming loans, charge-offs, criticized loans and the adequacy of the credit-loss allowance, particularly in commercial and real-estate portfolios.
- The impact of unrealized securities losses, pledged securities and any need to sell securities before recovery.
- Whether capital levels, regulatory requirements and Bank dividend restrictions support the declared shareholder dividend.