ServisFirst Bancshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated financial statements; amounts below are in millions of dollars unless stated otherwise. ServisFirst operates a commercial bank across Alabama, Florida, Georgia, South Carolina and Tennessee.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Change / context |
|---|---|---|---|
| Net interest income | $85.1 | $73.0 | Up $12.1, or 16.6% |
| Provision for loan losses | $12.3 | $7.0 | Up $5.3 |
| Noninterest income | $8.2 | $6.2 | Up $2.0; mortgage banking was a leading contributor |
| Noninterest expense | $26.6 | $25.2 | Up $1.4 |
| Net income | $43.4 | $37.6 | Up 15.4% |
| Diluted EPS | $0.80 | $0.69 | Up $0.11 |
| Net interest margin | 3.14% | 3.36% | Down 22 basis points |
| Return on average assets | 1.54% | 1.67% | Lower year over year |
| Return on average common equity | 18.43% | 18.69% | Lower year over year |
For the nine months ended September 30, 2020, net income was $118.6 million versus $108.2 million; diluted EPS was $2.19 versus $2.00. Net interest income rose $34.1 million, while provision expense rose $19.4 million. Net interest margin was 3.33%, compared with 3.45% in the prior-year period. Lower asset yields were partly offset by reduced deposit and borrowing costs and growth in average earning assets.
At September 30, 2020, total assets were $11.39 billion, up 27% from year-end 2019; loans were $8.51 billion, up 17%; and deposits were $9.67 billion, up 29%. Cash and cash equivalents were $1.62 billion, compared with $630.6 million at December 31, 2019. Management attributed much of the deposit and reserve-balance growth to customer funds associated with federal pandemic stimulus and PPP lending.
For the first nine months, operating cash flow was $117.5 million, investing cash flow was negative $1.45 billion, and financing cash flow was positive $2.33 billion. Cash and cash equivalents increased $992.8 million. These flows reflect substantial loan growth and deposit inflows, and should be read in the context of banking operations.
At quarter-end, the allowance for loan losses was $92.4 million, or 1.09% of loans, versus $76.6 million, or 1.05%, at year-end 2019. Net charge-offs were $11.4 million in Q3; annualized net charge-offs to average loans were 0.54%, compared with 0.49% a year earlier. Nonperforming loans were $26.6 million, or 0.31% of loans, down from $36.1 million, or 0.50%, at year-end. Impaired loans increased to $93.8 million from $43.1 million, primarily due to four commercial relationships newly classified as impaired.
Equity attributable to the company was $949.1 million, or 8.33% of assets, versus $842.2 million, or 9.41%, at year-end. The company reported regulatory capital ratios above stated minimums and said the bank was categorized as well-capitalized. Borrowings included $669.4 million of federal funds purchased and $64.7 million of other borrowings at quarter-end. Liquid assets were $2.13 billion; available borrowing capacity included approximately $923 million of correspondent-bank lines and $2.84 billion of Federal Reserve Bank lines, subject to restrictions and collateral requirements.
Material changes, outlook and risks
- Q3 earnings growth was driven principally by higher net interest income from asset growth and lower funding costs, and higher mortgage banking revenue. The yield on interest-earning assets fell to 3.55% from 4.65%; the cost of interest-bearing liabilities fell to 0.59% from 1.73%. Net interest margin nonetheless contracted.
- The bank funded approximately 4,900 PPP loans totaling $1.05 billion by September 30. PPP loans carry a 1% stated rate; deferred origination fees contributed to loan yield. Unaccreted net PPP fees were $25.3 million at quarter-end.
- COVID-19-related payment deferrals covered 42 loans totaling $28.2 million; accrued interest on these loans was $6.0 million. The CARES Act treatment meant these modifications were not classified as TDRs at quarter-end. Management added a COVID-19 qualitative allowance factor, which declined from $14.9 million in June to $11.3 million in September, mainly reflecting improvement in the national unemployment rate.
- The company delayed CECL adoption under the CARES Act, with adoption planned by the earlier of termination of the national emergency or December 31, 2020, retrospectively effective January 1, 2020. Its parallel estimate indicated a CECL allowance within 5% of the incurred-loss allowance; this is an estimate, not a reported adopted balance.
- Noninterest expense rose 5.6% in Q3. Year-to-date increases included third-party processing costs, regulatory assessments and OREO expense; OREO write-downs included updated appraisals on two Birmingham properties. Mortgage banking income increased 89% in Q3, and mortgage loans originated for sale increased about 67% year to date.
- On October 21, 2020, the company issued $34.8 million of 4.00% subordinated notes due 2030 and used the net proceeds to redeem its 5.00% subordinated notes due 2025. The notes are not redeemable before October 21, 2025. The MD&A separately describes the refinanced principal as $34.75 million.
- Management gave no specific earnings or balance-sheet guidance. It said liquidity sources were adequate for anticipated needs but warned COVID-19 could adversely affect funding availability or cost. Key risks include pandemic-related borrower stress, credit deterioration in affected sectors, interest-rate changes, operational disruption, cyber and payment fraud, and broader economic uncertainty. The filing reported no material legal proceedings and no material change in previously disclosed risk factors other than the COVID-19 risk discussion.
Most important facts for investors to verify
- How PPP forgiveness, fee accretion and the eventual runoff of stimulus-related deposits affect loan growth, funding costs and net interest margin.
- Whether elevated impaired loans and Q3 commercial charge-offs lead to further credit losses; monitor deferrals, criticized loans and allowance adequacy as CECL adoption proceeds.
- Whether the decline in the COVID-19 qualitative allowance factor remains appropriate given the pandemic’s uncertain duration and effects on borrowers and regional markets.
- The sustainability of mortgage banking gains and expense trends, including processing costs, regulatory assessments and OREO valuation changes.
- Confirm the precise principal amount and terms of the October subordinated-note refinancing; the filing states $34.8 million in the subsequent-event note and $34.75 million in MD&A.