Business context and reporting period
ServisFirst Bancshares, Inc. is a bank holding company headquartered in Birmingham, Alabama. Its subsidiary, ServisFirst Bank, provides commercial banking across Alabama, Florida, Georgia, South Carolina and Tennessee, as well as loan production in Florida and North Carolina. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. Dollar amounts below are in millions unless noted.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net interest income | $126.4 | $96.3 | +31% |
| Net income | $64.0 | $52.5 | +22% |
| Diluted EPS | $1.17 | $0.96 | +$0.21 |
| Net interest margin | 3.64% | 2.85% | +79 bps |
| Return on average assets | 1.77% | 1.50% | +27 bps |
- For the first nine months, net interest income was $348.5 million versus $283.4 million; net income was $183.8 million versus $154.0 million; diluted EPS was $3.37 versus $2.83.
- At September 30, total assets were $13.89 billion, loans $11.28 billion, deposits $11.05 billion and total stockholders’ equity $1.24 billion. Compared with year-end 2021, loans increased 18.3%, while deposits declined 11.3% and assets declined 10.1%.
- Q3 average loans were $10.92 billion, up 26% year over year. The allowance for credit losses was $141.0 million, or 1.25% of loans, versus $116.7 million, or 1.22%, at year-end 2021.
- Provision for credit losses was $15.6 million in Q3 and $30.5 million year to date, versus $6.0 million and $23.1 million in the comparable 2021 periods. Q3 net charge-offs were $3.0 million; annualized net charge-offs were 0.11% of average loans.
- Nonperforming loans were $16.5 million (0.15% of loans), up from $12.1 million (0.13%) at year-end 2021. Nonperforming assets were $17.7 million.
- For the nine months, operating cash flow was $198.8 million, investing cash outflow was $2.26 billion and financing cash outflow was $1.67 billion. Cash and cash equivalents fell to $488.3 million from $4.22 billion at year-end, primarily reflecting loan growth and lower deposits.
- At quarter-end, federal funds purchased were $1.47 billion and subordinated notes/other borrowings were $64.7 million. Liquid assets, as defined by the company, totaled $1.57 billion, with approximately $963 million of unused federal funds lines available, subject to restrictions and collateral requirements.
- The company reported regulatory capital ratios above minimum requirements and said it was well-capitalized. Consolidated CET1 was 9.42%, total risk-based capital 10.96%, and Tier 1 leverage 8.84% at September 30.
Material changes versus comparable periods
- Higher loan balances and rising asset yields drove most of the increase in net interest income. Q3 taxable-equivalent net interest margin rose to 3.64%; the cost of interest-bearing liabilities also rose, to 1.05% from 0.35% a year earlier.
- Q3 noninterest expense increased 24.2% to $42.7 million; nine-month expense rose 26.6% to $119.7 million. Higher staffing, third-party processing costs and other operating costs were key contributors.
- Mortgage banking income fell 44.9% in Q3 and 72.0% year to date, reflecting higher borrowing costs and slower housing sales. Credit-card income increased 27.9% in Q3 and 48.7% year to date.
- Deposits declined by $1.40 billion from year-end, including a $1.14 billion reduction in noninterest-bearing deposits. Management attributed some Q3 outflow to correspondent deposits; non-correspondent deposits were stable during the quarter.
- Available-for-sale securities had $61.9 million of gross unrealized losses at September 30; held-to-maturity securities had $106.6 million. Accumulated other comprehensive income/loss moved from $14.1 million of income at year-end to a $44.1 million loss, largely reflecting securities valuation changes.
Outlook, commentary, risks and unusual items
- No specific earnings, loan-growth or deposit-growth guidance is provided. Management said it expects net interest income to benefit from further rate increases, anticipating deposit pricing to lag loan pricing; it also noted rising rates and inflation could affect funding availability and cost.
- Management attributed the increased credit-loss provision primarily to deterioration in economic projections used in its allowance model, including expectations for higher unemployment and slower GDP growth. It stated the allowance was adequate, but future credit losses and borrower repayment capacity remain uncertain.
- The company sold $75.0 million of available-for-sale securities yielding below 1% during the first nine months and recorded a $6.2 million loss. Management said unrealized losses were driven by higher market rates, not credit deterioration, and that it did not expect to be forced to sell before recovery; future sale decisions or credit assessments could still result in losses or provisions.
- Q3 other operating expense included $3.1 million of combined charges from a preliminary lawsuit settlement and a write-down of a private investment ($2.4 million after tax). Management said it did not believe the company or bank was party to a material legal proceeding; the filing does not give a breakdown of the two charges.
- Uninsured deposits were estimated at $8.58 billion at September 30. The company also reported $4.72 billion of commitments to extend credit, credit-card arrangements and standby letters of credit; actual funding needs may be lower because some commitments expire unused.
- The company carried $2.5 million of accrued interest on COVID-19-related payment deferrals and said it could not project the materiality of any future credit impact. It identified interest-rate risk, deposit competition, economic conditions, credit quality, regulation and legal contingencies among risks that could affect results.
Most important facts for investors to verify
- Whether deposit outflows—particularly correspondent balances—and the high estimated uninsured-deposit level persist, and how that affects liquidity and funding costs.
- Whether the expected benefit from higher rates exceeds rising deposit and borrowing costs, and how net interest margin changes as rates and deposit pricing adjust.
- Loan growth quality, credit migration, delinquencies, charge-offs and allowance adequacy, especially given worsening economic forecasts and higher provision expense.
- The duration and recovery prospects of securities unrealized losses, and any future securities sales or credit-loss provisions.
- The nature and final cost of the preliminary lawsuit settlement and private-investment write-down, and any related developments.
- Whether operating expenses, particularly processing and other operating costs, continue to outpace revenue growth.