ServisFirst Bancshares, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2021; unaudited consolidated results. ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating through ServisFirst Bank across Alabama, Florida, Georgia, South Carolina and Tennessee. Comparisons below are generally with Q1 2020 for income and cash flow, and December 31, 2020 for balance-sheet amounts.
Key financial results
| Metric | Q1 2021 / March 31, 2021 | Comparable period / change |
|---|---|---|
| Total assets | $12.65 billion | Up 6.0% from December 31, 2020 |
| Total loans | $8.50 billion | Up 0.5% from year-end; up from $7.57 billion a year earlier |
| Total deposits | $10.58 billion | Up 6.0% from year-end |
| Interest income | $100.4 million | $96.8 million in Q1 2020 |
| Net interest income | $92.4 million | Up $14.7 million, or 18.9%, from Q1 2020 |
| Net interest margin | 3.20% | 3.58% in Q1 2020 |
| Provision for credit losses | $7.5 million | $13.6 million in Q1 2020 |
| Noninterest income / expense | $8.5 million / $28.9 million | $6.7 million / $27.9 million in Q1 2020 |
| Net income | $51.5 million; diluted EPS $0.95 | $34.8 million; diluted EPS $0.64 in Q1 2020 |
| Cash flows | Operating $66.8 million; investing $(119.7) million; financing $651.3 million | Cash and cash equivalents ended at $2.81 billion, up $598.3 million in the quarter |
| Allowance for credit losses | $94.9 million, or 1.12% of loans | $87.9 million, or 1.04%, at year-end |
Net income increased 48.0% year over year. Return on average assets was 1.72% versus 1.54%; return on average stockholders’ equity was 19.83% versus 16.23%. Interest expense fell to $8.0 million from $19.1 million. The taxable-equivalent yield on earning assets declined to 3.48% from 4.46%, while the cost of interest-bearing liabilities fell to 0.40% from 1.19%.
Financial position, credit and liquidity
- Stockholders’ equity was $1.03 billion at March 31. Federal funds purchased were $911.6 million; other borrowings were $64.7 million, comprising $30.0 million of 4.5% subordinated notes due 2027 and $34.75 million of 4% notes due 2030.
- Management reported $3.3 billion of liquid assets, including cash and unpledged available-for-sale securities, and approximately $923 million of unused federal funds lines, subject to restrictions and collateral requirements. It believes funding sources are adequate for anticipated immediate needs, but notes additional funding may be needed if growth continues.
- Nonperforming loans were $17.9 million, or 0.21% of loans, down from $19.0 million at year-end. Nonperforming assets were $20.0 million versus $25.5 million. Net charge-offs were 0.02% of average loans, compared with 0.26% in Q1 2020.
- Approximately 93% of loans were classified Pass; $32.0 million were Special Mention and $80.1 million Substandard. The allowance increased during the quarter, including provision growth in construction lending.
- The Bank was categorized as well-capitalized. At March 31, consolidated CET1, total risk-based capital and Tier 1 leverage ratios were 10.73%, 12.48% and 8.25%, respectively.
Material changes and unusual items
- Higher net interest income reflected growth in average earning assets and noninterest-bearing deposits, partly offset by lower asset yields. Average earning assets rose 34% year over year.
- Mortgage banking income rose 157% to $2.7 million, with mortgage loan sales up approximately 106%. Credit card income declined 33% to $1.2 million, primarily due to additional rewards accruals.
- Other operating expense increased $1.1 million, including a $600,000 provision for unfunded loan commitments. FDIC and other regulatory assessments rose $250,000 as the assessment base increased.
- Available-for-sale securities rose to $961.9 million. Accumulated other comprehensive income declined to $16.8 million, reflecting a $3.5 million after-tax unrealized securities loss for the quarter. Management attributed unrealized losses to rising market rates and reported no credit impairment in the securities portfolio.
- Cash and cash equivalents increased substantially, principally alongside deposit growth and financing cash inflows. Deposits grew by approximately $602 million in the quarter.
Outlook, commentary and risks
- No specific earnings, loan-growth or margin guidance is provided. Management anticipates sustainable long-term deposit growth and expects to continue participating in extensions of the Paycheck Protection Program.
- The Company had funded approximately 7,100 PPP loans totaling $1.47 billion since April 2020; $967.7 million remained outstanding at March 31. PPP fees recognized in Q1 2021 were $9.1 million. These loans are SBA-guaranteed; management expects forgiveness and related fee recognition to affect balances and interest income.
- Management’s CECL forecast assumed unemployment would remain above pre-pandemic levels while GDP growth improved as the economy reopened. The allowance depends on forecasts, borrower performance, collateral values and management’s qualitative judgments.
- Twenty-nine COVID-19 payment-deferral loans totaling $6.2 million remained outstanding. The Company reported $5.1 million of accrued interest on COVID-19 deferrals and said the eventual effect of borrower repayment difficulties could not be projected clearly.
- Principal risks include COVID-19 and economic conditions, credit deterioration in exposed industries, interest-rate and funding-cost changes, deposit and loan competition, regulatory or legal changes, and collateral-value fluctuations. The filing reports no material change in previously disclosed risk factors or legal proceedings. Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred.
Important facts for investors to verify
- How much of Q1 earnings growth and future interest income depends on PPP fee accretion, and how quickly PPP balances are forgiven or repaid.
- Whether margin pressure from lower asset yields continues, particularly as interest rates and funding costs change.
- Credit quality trends, CECL assumptions and allowance adequacy, including borrower performance after COVID-19 deferrals end.
- Deposit growth composition, liquidity needs, federal funds purchased and availability of contingent borrowing lines.
- Capital and dividend capacity, including regulatory limits on distributions from the Bank to the holding company.
Comparability note: the Company adopted CECL effective January 1, 2020, but Q1 2020 was not restated and used the prior incurred-loss methodology; allowance comparisons across periods are therefore not fully like-for-like.