ServisFirst Bancshares, Inc. — FY 2022 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2022; filed February 28, 2023. ServisFirst is a Birmingham-based bank holding company operating through ServisFirst Bank, with banking offices across Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. Its relationship-focused commercial banking model emphasizes business lending, local decision-making and a limited branch network.
Financial performance and condition
| Metric | FY 2022 / December 31, 2022 | Comparable period |
|---|---|---|
| Net interest income | $470.9 million | $384.5 million in 2021; up 22.5% |
| Net interest margin | 3.32% | 2.94% in 2021 |
| Noninterest income | $33.4 million | $33.5 million in 2021; down 0.3% |
| Net income available to common stockholders | $251.4 million; diluted EPS $4.61 | $207.7 million; diluted EPS $3.82 in 2021 |
| Return on average assets / equity | 1.71% / 20.73% | 1.53% / 19.27% in 2021 |
| Efficiency ratio | 31.30% | 31.84% in 2021 |
| Total assets | $14.60 billion | $15.45 billion at year-end 2021; down 5.5% |
| Gross loans / deposits | $11.69 billion / $11.55 billion | Loans up 22.6%; deposits down 7.3% from year-end 2021 |
| Allowance for credit losses | $146.3 million, or 1.25% of loans | $116.7 million, or 1.22%, at year-end 2021 |
| Cash and cash equivalents | $816.1 million | $4.22 billion at year-end 2021 |
| Stockholders’ equity | $1.30 billion | $1.15 billion at year-end 2021 |
Interest income was $559.3 million and interest expense was $88.4 million. Provision for credit losses was $37.6 million, up 19.3%; noninterest expense was $157.8 million, up 18.6%, largely reflecting higher salaries and third-party processing costs. The effective tax rate was about 18.6%.
Net cash provided by operating activities was $272.6 million. Investing activities used $2.64 billion, principally reflecting $2.16 billion of loan growth and securities purchases; financing activities used $1.04 billion. Cash and cash equivalents declined by $3.41 billion during the year.
Year-end borrowings included $1.62 billion of federal funds purchased and $64.7 million of subordinated notes: $30.0 million at 4.5% due 2027 and $34.75 million at 4% due 2030. The Bank reported unused federal funds lines of $698 million and total available lines of $963 million, with $265 million outstanding on certain lines. Regulatory capital ratios remained above well-capitalized thresholds; the Bank’s CET1, total capital and leverage ratios were 9.98%, 11.04% and 9.71%, respectively.
Material changes versus 2021
- Average loans rose 21% to $10.56 billion. Ending loans increased $2.16 billion; excluding Paycheck Protection Program loans, growth was $2.38 billion, or 25.6%.
- Average deposits increased 5.6% to $11.83 billion, but year-end deposits fell to $11.55 billion from $12.45 billion. Noninterest-bearing deposits fell from $4.80 billion to $3.32 billion; estimated uninsured deposits were $8.95 billion, versus $10.65 billion a year earlier.
- Higher market rates lifted asset yields and net interest margin, but interest expense rose 178% as funding costs increased. Average yield on earning assets rose to 3.94% from 3.18%; the average rate on interest-bearing liabilities rose to 0.98% from 0.36%.
- Nonperforming loans rose to $17.8 million, or 0.15% of loans, from $12.1 million, or 0.13%. Net charge-offs increased to $8.0 million from $2.8 million, while remaining low relative to average loans.
- Accumulated other comprehensive income moved to a $42.3 million loss from $14.1 million of income, principally reflecting securities valuation changes. The securities portfolio had $160.7 million of gross unrealized losses at year-end, primarily attributed by management to higher interest rates; the filing reported no credit-loss allowance on these securities.
- The quarterly common dividend was increased from $0.23 to $0.28 per share in December 2022.
Outlook, risks and unusual items
- No quantified earnings, loan-growth, deposit-growth or margin guidance is provided. Management said funding sources were adequate for anticipated needs over the next 12 months and longer term, while identifying loan originations, commitments and deposit withdrawals as key liquidity needs.
- Management described the balance sheet as somewhat asset-sensitive overall, but its one-year gap was negative 14.52%, indicating potential near-term net interest income sensitivity to rising rates. The reported rate-shock model showed economic value of equity decreasing 1.1% under a 200-basis-point increase and 2.6% under a 400-basis-point increase.
- Key risks include rising deposit costs and competition for funding, the high proportion of deposits exceeding FDIC insurance limits, commercial and other real-estate lending exposure, regional economic weakness, interest-rate movements, and cyber, operational and regulatory risks. Real estate mortgage loans were 59.4% of loans; construction loans grew $429 million to $1.53 billion.
- Noninterest income included a $6.2 million securities loss, partly offset by a $7.0 million gain in the fair value of the interest-rate cap and a $2.1 million bank-owned life insurance death benefit. Mortgage banking income declined 66.8% to $2.4 million.
- Noninterest expense included litigation settlement and private-investment write-down items; the filing does not clearly quantify these items separately. Other operating expenses increased $3.9 million overall. The filing also reports $10.0 million of write-downs of tax-credit partnership investments in 2022.
- Off-balance-sheet commitments to extend credit were $4.23 billion, with standby letters of credit and financial guarantees of $67.3 million. Credit-card commitment figures differ across sections of the filing. Most commitments may expire undrawn.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter, particularly the judgment involved in qualitative adjustments. No material legal proceedings were reported; routine litigation continues in the ordinary course.
Important facts for investors to verify
- Reconcile credit-card commitment disclosures: the filing reports $368.7 million in the commitments note and business discussion, but $481.0 million in another off-balance-sheet table.
- Reconcile the Bank’s stated dividend capacity: the narrative gives $559.5 million, while the regulatory note gives $449.8 million as of December 31, 2022.
- Review the drivers and durability of 2022 earnings, including rate-driven margin expansion, higher deposit and wholesale funding costs, securities losses, and the nonrecurring interest-rate-cap and insurance benefit income.
- Assess deposit stability and liquidity given the year-end deposit decline, estimated $8.95 billion of uninsured deposits, substantial federal funds usage, and the sharp reduction in cash balances.
- Examine loan growth and credit quality by real-estate segment, construction exposure, borrower concentration and market; compare the higher provision and charge-offs with management’s economic assumptions and ACL estimates.
- Review unrealized securities losses, held-to-maturity fair-value shortfalls and their potential implications for liquidity or capital if securities must be sold.