ServisFirst Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Unless stated otherwise, dollar amounts below are in millions.
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.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $101.3 | $116.4 | $209.6 | $222.1 |
| Provision for credit losses | $6.7 | $9.5 | $10.9 | $14.9 |
| Noninterest income | $8.6 | $9.5 | $14.9 | $17.5 |
| Noninterest expense | $38.5 | $39.8 | $78.1 | $77.0 |
| Net income available to common shareholders | $53.4 | $62.1 | $111.4 | $119.7 |
| Diluted EPS | $0.98 | $1.14 | $2.04 | $2.20 |
| Net interest margin | 2.93% | 3.26% | 3.04% | 3.07% |
| Return on average assets | 1.50% | 1.67% | 1.57% | 1.60% |
Second-quarter taxable-equivalent interest income rose to $189.7 million from $126.7 million, but interest expense increased to $88.4 million from $10.2 million. Management attributed the margin pressure primarily to higher deposit costs. The Q2 net interest spread was 1.94%, compared with 3.08% a year earlier.
For the six months ended June 30, operating cash flow was $93.5 million, compared with $126.0 million in 2022; investing activities used $321.2 million, versus $1.63 billion; and financing activities provided $389.4 million, versus using $1.03 billion. Cash and cash equivalents increased $161.6 million to $977.7 million.
Financial position and material changes
- Total assets were $15.07 billion, up 3.3% from year-end 2022. Loans were $11.60 billion, down 0.7% from year-end; average Q2 loans were up 14% year over year. Deposits were $12.29 billion, up 6.4% from year-end, while average Q2 deposits were down 4% year over year.
- Noninterest-bearing deposits fell to $2.86 billion from $3.32 billion at year-end, while interest-bearing deposits increased. Management said customers shifted balances toward interest-bearing accounts as rates rose.
- Federal funds purchased were $1.30 billion, down from $1.62 billion at year-end. Other borrowings were $64.7 million, principally subordinated notes. The notes include $34.75 million at 4% due 2030 and $30 million at 4.5% due 2027.
- Stockholders’ equity was $1.36 billion. Accumulated other comprehensive loss widened to $58.7 million from $42.3 million at year-end. Available-for-sale securities had $84.1 million of gross unrealized losses; held-to-maturity securities had $93.5 million. Management attributed the losses primarily to higher market interest rates and stated it did not expect to be required to sell the securities before recovery.
- The Bank was categorized as well-capitalized. Its reported CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 10.81%, 10.81%, 11.94% and 10.25%, respectively.
- Allowance for credit losses was $152.3 million, or 1.31% of loans, versus $146.3 million, or 1.25%, at year-end. Q2 net charge-offs were $3.35 million; annualized net charge-offs to average loans were 0.11%, versus net recoveries of 0.02% in Q2 2022.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management anticipated a slower pace of loan growth than historical averages, citing the higher-rate environment, and said net interest income may benefit over a short period after Federal Reserve rate increases cease.
- Management identified deposit pricing and funding costs, interest-rate and yield-curve movements, credit quality, economic conditions, competition, regulatory changes, and the value of collateral as risks. It said liquidity sources were adequate for anticipated needs, while noting additional funding could be needed to sustain current growth.
- Estimated uninsured deposits were $7.8 billion; approximately $1.9 billion of those deposits were collateralized. Liquid assets were reported at $1.7 billion. Additional stated sources included about $1.9 billion of FHLB borrowing capacity, up to $3.6 billion in brokered deposits under policy limits, and $931 million of unused federal funds lines, subject to restrictions and collateral requirements.
- Q2 2023 noninterest income included $890,000 primarily related to a BOLI death benefit. The interest-rate cap expired May 4, 2023; related income was $48,000 in Q2 2023, compared with $2.2 million in Q2 2022. Q2 2022 also included a $2.8 million securities sale loss. Federal new markets tax credits were $3.8 million in Q2 2023.
- Nonperforming loans were reported as $22.8 million in the detailed table and elsewhere as $21.5 million at June 30, 2023; the filing text does not clearly reconcile these values. The detailed table reports nonperforming assets of $23.7 million, compared with $18.1 million at year-end.
- Commitments to extend credit, credit-card arrangements and standby letters of credit totaled $4.25 billion. Management reported no material legal proceedings, no material changes to risk factors, and effective disclosure controls.
Important facts for investors to verify
- Reconcile the filing’s differing nonperforming-loan figures and monitor delinquency, charge-offs and allowance coverage.
- Track deposit mix, deposit pricing, uninsured balances and the continued use of wholesale funding as rates and liquidity conditions change.
- Review net interest margin and interest-rate sensitivity as deposit costs reprice; management reported a materially lower Q2 spread than a year earlier.
- Assess the significance of unrealized securities losses, pledged securities and the assumptions behind management’s ability to hold investments until recovery.
- Distinguish recurring earnings from BOLI death benefits, tax credits, and the expired interest-rate cap when evaluating period-to-period results.