SERVISFIRST BANCSHARES, INC. The following discussion and analysis is designed to provide a better
understanding of various factors relating to the results of operations and
financial condition of
Forward-Looking Statements
Statements in this document that are not historical facts, including, but not
limited to, statements concerning future operations, results or performance, are
hereby identified as "forward-looking statements" for the purpose of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "believe," "expect,"
"anticipate," "project," "plan," "intend," "will," "could," "would," "might" and
similar expressions often signify forward-looking statements. Such statements
involve inherent risks and uncertainties. The Company cautions that such
forward-looking statements, wherever they occur in this quarterly report or in
other statements attributable to the Company, are necessarily estimates
reflecting the judgment of the Company's senior management and involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. Such forward-looking
statements should, therefore, be considered in light of various factors that
could affect the accuracy of such forward-looking statements, including, but not
limited to: the global health and economic crisis precipitated by the COVID-19
outbreak; general economic conditions, especially in the credit markets and in
the Southeast; the performance of the capital markets; changes in interest
rates, yield curves and interest rate spread relationships, including in light
of the continuing high rate of domestic inflation; changes in accounting and tax
principles, policies or guidelines; changes in legislation or regulatory
requirements; changes in our loan portfolio and deposit base; economic crisis
and associated credit issues in industries most impacted by the COVID-19
outbreak; possible changes in laws and regulations and governmental monetary and
fiscal policies; the cost and other effects of legal and administrative cases
and similar contingencies; possible changes in the creditworthiness of customers
and the possible impairment of the collectability of loans and the value of
collateral; the effect of natural disasters, such as hurricanes and tornados, in
our geographic markets; and increased competition from both banks and non-banks.
The foregoing list of factors is not exhaustive. For discussion of these and
other risks that may cause actual results to differ from expectations, please
refer to "Cautionary Note Regarding Forward Looking Statements" and "Risk
Factors" in our most recent Annual Report on Form 10-K and our other
Business
We are a bank holding company under the Bank Holding Company Act of 1956 and are
headquartered in
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Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings, and other deposits. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.
First quarter highlights ? Diluted earnings per common share of$1.06 for the first quarter of 2023. ? Return on assets increased from 1.53% to 1.63% year-over-year. ? Book value per share grew from$21.61 to$24.63 , or 14%, year-over-year. ? Deposit balances grew$69 million during the first quarter of 2023 while the deposit pipeline increased by$244 million , or 51%. ? Bank level Tier 1 capital to average assets increased from 8.08% to 9.91% year-over-year. Overview
As of
Net income available to common stockholders for the three months ended
Performance Ratios
The following table presents selected ratios of our results of operations for
the three months ended
Three Months Ended March 31,
2023 2022
Return on average assets 1.63 % 1.53 %
Return on average stockholders' equity 17.83 % 20.09 %
Dividend payout ratio 26.34 % 21.77 %
Net interest margin (1) 3.15 % 2.89 %
Efficiency ratio (2) 34.60 % 32.74 %
Average stockholders' equity to average total assets 9.16 % 7.61 %
(1) Net interest margin in the net yield on interest earning assets and is the difference between the interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.
(2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
Financial Condition Cash and Cash Equivalents
At
Investment Securities
Debt securities available for sale totaled
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The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we seek to balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer-term securities purchased to generate level income for us over periods of interest rate fluctuations.
Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer's financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts' reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash charges to earnings in one or more future periods. All securities held are traded in liquid markets.
The Company does not invest in collateralized debt obligations ("CDOs"). As of
The carrying value of investment securities pledged to secure public funds on
deposit and for other purposes as required by law was
Loans
We had total loans of
Asset Quality
The Company assesses the adequacy of its ACL at the end of each calendar quarter. The level of ACL is based on the Company's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors. The ACL is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. We believe the ACL is adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio.
Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow ("DCF"), probability of default / loss given default ("PD/LGD") or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company's historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. See "Note 1 - General" in the Notes to Consolidated Financial Statements included in Item 1. Consolidated Financial Statements elsewhere in this report.
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The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions.
Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, modified loans, and for periods prior to the adoption of ASU 2022-02 modified loans classified as TDRs. Specific allocations of the ACL for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.
As of and for the Three Months Ended
March 31,
2023 2022
(Dollars in thousands)
Total loans outstanding, net of unearned income
146,297 116,660
Charge-offs:
Commercial, financial and agricultural loans 1,257 2,574
Real estate - construction - -
Real estate - mortgage 26 27
Consumer loans 390 75
Total charge-offs 1,673 2,676
Recoveries:
Commercial, financial and agricultural loans 128 105
Real estate - construction 3 -
Real estate - mortgage 1 -
Consumer loans 11 12
Total recoveries 143 117
Net charge-offs 1,530 2,559
Provision for credit losses 4,197 5,362
Allowance for credit losses at period end $ 148,965 $ 119,463
Allowance for credit losses to period end loans 1.28 % 1.21 %
Net charge-offs to average loans 0.05 % 0.11 %
Percentage
of loans in
each
category to
March 31, 2023 Amount total loans
(In Thousands)
Commercial, financial and agricultural $ 42,895 26.50 %
Real estate - construction 40,483 12.64 %
Real estate - mortgage 63,157 60.24 %
Consumer 2,430 0.62 %
Total $ 148,965 100.00 %
Percentage
of loans in
each
category to
December 31, 2022 Amount total loans
(In Thousands)
Commercial, financial and agricultural $ 42,830 26.91 %
Real estate - construction 42,889 13.11 %
Real estate - mortgage 58,652 59.42 %
Consumer 1,926 0.57 %
Total $ 146,297 100.01 %
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Nonperforming Assets
Total nonperforming loans, which include nonaccrual loans and loans 90 or more
days past due and still accruing, remained flat at
OREO and repossessed assets decreased to
Three months ended March 31,
2023 2022
(In thousands)
Balance at beginning of period $ 248 $ 1,208
Transfers from loans and capitalized expenses - 830
Proceeds from sales - (44 )
Write-downs / net gain (loss) on sales - (5 )
Balance at end of period $ 248 $ 1,989
The following table summarizes our nonperforming assets at March 31, 2023 and
December 31, 2022 :
March 31, 2023 December 31, 2022
Number of Number of
Balance Loans Balance Loans
(Dollar Amounts In Thousands)
Nonaccrual loans:
Commercial, financial and
agricultural $ 7,219 22 $ 7,108 18
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial 3,388 3 3,312 3
1-4 family mortgage 2,044 20 1,524 16
Other mortgage 506 2 506 2
Total real estate - mortgage 5,938 25 5,342 21
Consumer - - - -
Total Nonaccrual loans: $ 13,157 47 $ 12,450 39
90+ days past due and accruing:
Commercial, financial and
agricultural $ 146 22 $ 195 26
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial - - - -
1-4 family mortgage - 5 594 5
Other mortgage 4,456 1 4,512 1
Total real estate - mortgage 4,456 6 5,106 6
Consumer 81 31 90 44
Total 90+ days past due and accruing: $ 4,683 59 $ 5,391 76
Total Nonperforming Loans: $ 17,840 106 $ 17,841 115
Plus: Other real estate owned and
repossessions 248 2 248 2
Total Nonperforming Assets $ 18,089 108 $ 18,089 117
Restructured accruing loans:
Commercial, financial and
agricultural $ - - $ 2,480 5
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial - - - -
1-4 family mortgage - - - -
Other mortgage - - - -
Total real estate - mortgage - - - -
Consumer - - - -
Total restructured accruing loans: $ - - $ 2,480 5
Total Nonperforming assets and
restructured accruing loans $ 18,089 108 $ 20,569 122
Ratios:
Nonperforming loans to total loans 0.15 % 0.15 %
Nonperforming assets to total loans
plus other real estate owned and
repossessions 0.16 % 0.15 %
Nonperforming assets plus
restructured accruing loans to total
loans plus other real estate owned
and repossessions 0.16 % 0.18 %
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The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the ACL to reflect management's estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.
In keeping with this guidance from regulators, the bank offered short-term
modifications made in response to COVID-19 to borrowers who were current and
otherwise not past due. Should eventual credit losses on these deferred payments
emerge, the related loans would be placed on nonaccrual status and interest
income accrued would be reversed. In such a scenario, interest income in future
periods could be negatively impacted. As of
Deposits
We rely on increasing our deposit base to fund loan and other asset growth. Each
of our markets is highly competitive. We compete for local deposits by offering
attractive products with competitive rates. We expect to have a higher average
cost of funds for local deposits than competitor banks due to our lack of an
extensive branch network. Our management's strategy is to offset the higher cost
of funding with a lower level of operating expense and firm pricing discipline
for loan products. We have promoted electronic banking services by providing
them without charge and by offering in-bank customer training. Despite a
decrease in non-interest bearing deposits, our total deposits increased by
For amounts and rates of our deposits by category, see the table "Average Consolidated Balance Sheets and Net Interest Analysis on a Fully Taxable-equivalent Basis" under the subheading "Net Interest Income" below.
The following table summarizes balances of our deposits and the percentage of
each type to the total at
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