ServisFirst Bancshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The unaudited consolidated statements cover ServisFirst Bancshares and its banking subsidiary, ServisFirst Bank. The company operates 22 full-service banking offices across Alabama, Florida, Tennessee, Georgia and South Carolina.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $94.7 million | $83.2 million | $187.0 million | $160.9 million |
| Provision for credit losses | $9.7 million | $10.3 million | $17.1 million | $23.9 million |
| Noninterest income | $9.6 million | $7.0 million | $18.1 million | $13.7 million |
| Noninterest expense | $31.3 million | $28.8 million | $60.2 million | $56.7 million |
| Net income available to common stockholders | $50.0 million | $40.4 million | $101.5 million | $75.2 million |
| Diluted earnings per common share | $0.92 | $0.75 | $1.86 | $1.39 |
| Net interest margin, taxable-equivalent basis | 3.06% | 3.32% | 3.14% | 3.44% |
- At June 30, 2021, total assets were $13.21 billion, loans were $8.65 billion, deposits were $10.96 billion and stockholders’ equity was $1.07 billion. Since December 31, 2020, these increased 10.7%, 2.2%, 9.8% and approximately $80.4 million, respectively.
- Cash and cash equivalents were $3.18 billion, including $2.97 billion at the Federal Reserve. The company reported $3.72 billion in liquid assets and approximately $986 million in available, unused federal funds lines, subject to restrictions and collateral requirements.
- Six-month cash flows: $129.5 million provided by operations, $329.3 million used in investing and $1.17 billion provided by financing; cash and cash equivalents increased by $969.4 million.
- Borrowings included $1.06 billion in federal funds purchased and $64.7 million in subordinated notes. The notes consist of $34.75 million at 4% due 2030 and $30 million at 4.5% due 2027.
- The Bank was categorized as well-capitalized. At June 30, the Bank’s CET1, total risk-based capital and Tier 1 leverage ratios were 11.24%, 12.34% and 8.59%, respectively.
Material changes and operating drivers
- Q2 net income available to common shareholders rose 23.7%; six-month net income rose 35.0%. Management attributed the gains principally to growth in average earning assets and noninterest-bearing deposits, lower funding costs, and higher noninterest income.
- Net interest income increased despite margin compression: Q2 net interest margin fell 26 basis points year over year, to 3.06%, and the six-month margin fell 30 basis points, to 3.14%. Lower interest expense partly offset reduced earning-asset yields.
- Noninterest income increased 36.5% in Q2, including stronger mortgage banking and credit card income and a $620,000 gain on a called corporate bond. Six-month noninterest income rose 31.8%.
- Noninterest expense increased 8.7% in Q2 and 6.1% for the first half. Higher salaries, occupancy, processing costs and regulatory assessments contributed; lower OREO expense partly offset increases.
- The allowance for credit losses was $104.7 million, or 1.21% of loans, versus $87.9 million, or 1.04%, at year-end 2020. Management cited PPP loan runoff and growth in non-PPP loans; a new qualitative factor related to PPP termination and potential SBA nonpayment added $3.5 million to the allowance.
- Nonperforming loans declined to $17.2 million (0.20% of loans) from $19.0 million (0.22%) at year-end; nonperforming assets fell to $19.2 million from $25.5 million. OREO and repossessed assets decreased to $2.0 million, including $3.8 million in internally financed property sales.
Outlook, risks and unusual items
- No specific earnings, revenue or margin guidance is provided. Management expects deposit growth to be supported by developing markets and organic growth in established markets, but believes some elevated deposits tied to PPP activity may be temporary.
- Management’s credit-loss forecast assumed unemployment would remain above pre-pandemic levels while GDP growth improves as the economy reopens. COVID-19 effects, borrower repayment capacity and the end of PPP support remain credit risks.
- The company had funded approximately 7,400 PPP loans totaling $1.5 billion since April 2020; $595.0 million remained outstanding at June 30. The program closed to new applications effective May 28, 2021. Twenty COVID-related payment-deferral loans totaling $3.6 million remained outstanding.
- Off-balance-sheet commitments included $3.18 billion to extend credit, $334.0 million in credit card arrangements and $69.4 million in standby letters of credit. The company notes commitments may not be fully drawn, but they carry credit and potential funding risk.
- Other risks include interest-rate and funding-cost changes, economic conditions in the Southeast, credit exposures in industries affected by COVID-19, and loan-sale representations and warranties. Management reported no material change in risk factors, no material legal proceedings, and no material change in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether elevated deposits and Federal Reserve balances persist as PPP proceeds are forgiven or spent, and how deposits and funding needs evolve.
- Whether the $104.7 million credit-loss allowance adequately reflects PPP exit risks, borrower performance and the outlook for non-PPP loan growth.
- Trends in nonperforming loans, COVID-related deferrals, TDRs and commercial real estate credit quality.
- Whether loan and deposit growth can sustain earnings as net interest margin remains below the prior-year level and interest rates change.
- The potential drawdown and liquidity implications of $3.59 billion in disclosed customer credit commitments, alongside the availability and conditions of backup borrowing lines.