ServisFirst Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and financial performance
ServisFirst Bancshares is a bank holding company headquartered in Birmingham, Alabama. Its wholly owned ServisFirst Bank provides commercial and personal banking across 21 offices in the Southeast.
- Q3 earnings: Net income available to common shareholders was $52.5 million, up 21.0% from $43.4 million a year earlier. Diluted EPS was $0.96, versus $0.80.
- Nine-month earnings: Net income available to common shareholders was $154.0 million, up 29.9% from $118.6 million. Diluted EPS was $2.83, versus $2.19.
- Interest income and margin: Q3 net interest income was $96.3 million, compared with $85.1 million; nine-month net interest income was $283.4 million, compared with $246.0 million. On a taxable-equivalent basis, net interest margin declined to 2.85% for Q3 from 3.14%, and to 3.03% for nine months from 3.33%.
- Other income and expenses: Q3 noninterest income was $8.0 million, down slightly from $8.2 million; nine-month noninterest income rose 19.2% to $26.1 million. Noninterest expense increased 29.4% in Q3 to $34.4 million and 13.6% for nine months to $94.6 million.
- Credit costs and asset quality: Provision for credit losses was $6.0 million in Q3 and $23.1 million for nine months, both below the prior-year periods. The allowance for credit losses was $109.0 million, or 1.24% of loans, at quarter-end. Net charge-offs were 0.08% of average loans for Q3. Nonperforming loans were $14.5 million, or 0.16% of loans, versus $19.0 million, or 0.22%, at year-end 2020.
- Returns: Return on average assets was 1.50% for Q3 and 1.58% for nine months. Return on average common equity was 18.93% and 19.45%, respectively.
Financial position, funding and liquidity
- Total assets were $14.60 billion at September 30, up 22.4% from year-end 2020. Loans were $8.81 billion, up 4.1%; excluding PPP loans and their origination and forgiveness effects, management reported loan growth of 11.4%.
- Deposits were $12.08 billion, up 21.1% from year-end. Management attributed much of the increase to PPP-related balances and pandemic stimulus funds and expects the elevated balances to be temporary.
- Cash and cash equivalents were $4.44 billion, up from $2.21 billion at year-end, largely reflecting customer deposits held at the Federal Reserve. Liquid assets, including unpledged available-for-sale securities, totaled $5.03 billion. The Bank also reported approximately $986 million of available, unused federal funds lines, subject to restrictions and collateral requirements.
- Federal funds purchased were $1.29 billion, compared with $851.5 million at year-end. Other borrowings were $64.7 million, principally subordinated notes bearing interest at 4.0% and 4.5%.
- Stockholders’ equity attributable to the Company was $1.11 billion, or 7.63% of assets, compared with 8.32% at year-end. The Company reported a 10.46% consolidated CET1 ratio; the Bank’s CET1 ratio was 11.06%. The Bank remained classified as well-capitalized.
- For the first nine months, operating cash flow was $195.5 million, investing cash flow was negative $479.4 million, and financing cash flow was positive $2.52 billion. Financing inflows were led by deposit growth and increased federal funds purchased.
Material changes versus comparable periods
- Earnings increased as net interest income rose and credit-loss provisions fell. Lower deposit and borrowing costs helped offset a decline in earning-asset yields and net interest margin.
- Average earning assets grew 24.7% in Q3 and 26.9% for the nine-month comparison. The taxable-equivalent yield on earning assets fell to 3.08% in Q3 from 3.55%; the cost of interest-bearing liabilities fell to 0.35% from 0.59%.
- Loan balances shifted: PPP loans outstanding fell to $387.7 million from $900.5 million at year-end, while real estate construction and mortgage lending grew. PPP fees recognized in loan interest income were $5.2 million in Q3 and $22.3 million for nine months.
- Nonperforming assets decreased to $16.5 million from $25.5 million at year-end. The allowance rose to $109.0 million from $87.9 million, in part reflecting non-PPP loan growth and the changing portfolio mix.
- Available-for-sale securities declined to $723.3 million from $886.7 million. In Q3, $261.3 million of mortgage-backed securities were transferred to held-to-maturity; no gain or loss was recognized on transfer.
Outlook, commentary, risks and unusual items
- No specific earnings, growth or margin guidance was provided. Management said it expects national unemployment to remain above pre-pandemic levels during its forecast period, with GDP growth improving as the economy reopens.
- Management noted that Federal Reserve signals of eventual rate increases could benefit loan interest income, while disclosing that rate movements and asset-liability repricing affect margins. The company reported no material change in interest-rate sensitivity since year-end.
- Management considers liquidity sources adequate but cautioned that COVID-19-related uncertainty could impair funding access or increase funding costs. Deposit balances may be temporary, and the timing of possible withdrawals is unclear.
- At quarter-end, 18 COVID-19-related loans totaling $2.7 million remained under payment deferral. Accrued interest on COVID-related deferrals was $4.1 million; management said eventual credit losses could require nonaccrual treatment and reversal of interest income.
- Other operating expense included a $2.8 million write-down of a federal new markets tax credit investment made in July 2021. The investment also generated $3.2 million of tax credits recognized in Q3. FDIC and regulatory assessment expense rose as the Bank’s assets grew; the Bank was reclassified as a large financial institution by the FDIC effective September 30.
- Risks highlighted include COVID-19 and borrower credit quality, economic and interest-rate changes, deposit retention, real estate and collateral values, competition, regulatory changes, and natural disasters and climate-related impacts. The filing reports no material legal proceedings and no material changes to the previously disclosed risk factors, while adding discussion of climate-related risks.
Important facts for investors to verify
- Whether elevated deposits are retained or run off, and how that affects liquidity and reliance on federal funds purchased.
- PPP loan forgiveness, fee recognition and remaining balances, and the credit performance of borrowers after program support ended.
- Allowance adequacy and the assumptions used in forecasts, including the newly downgraded commercial relationship and COVID-related deferred loans.
- Whether higher operating costs, including the tax-credit investment write-down and increased regulatory assessments, persist or recur.
- How interest-rate changes affect net interest margin, loan yields and deposit costs, particularly given the large interest-bearing balances held at the Federal Reserve.
- Capital and liquidity ratios relative to regulatory requirements, and the sustainability of reported earnings and dividends.