ServisFirst Bancshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The interim financial statements are unaudited. ServisFirst is a bank holding company operating primarily in the Southeast through ServisFirst Bank.
Financial results and condition
| Metric | Q2 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income available to common stockholders | $40.4 million; diluted EPS $0.75 | $35.6 million; diluted EPS $0.66 in Q2 2019 |
| Net interest income | $83.2 million reported; $83.3 million taxable-equivalent | $70.1 million reported in Q2 2019 |
| Provision for loan losses | $10.3 million | $4.9 million in Q2 2019 |
| Noninterest income / expense | $7.0 million / $28.8 million | $5.8 million / $26.0 million in Q2 2019 |
| Net interest margin | 3.32% | 3.44% in Q2 2019 |
| Return on average assets / common equity | 1.55% / 18.40% | 1.69% / 18.72% in Q2 2019 |
| Total assets | $11.01 billion | $8.95 billion at Dec. 31, 2019 |
| Loans, gross / allowance | $8.32 billion / $91.5 million | $7.26 billion / $76.6 million at Dec. 31, 2019 |
| Deposits | $9.34 billion | $7.53 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $1.55 billion | $630.6 million at Dec. 31, 2019 |
| Federal funds purchased / other borrowings | $635.6 million / $64.7 million | $470.7 million / $64.7 million at Dec. 31, 2019 |
For the first six months, net income available to common stockholders was $75.2 million, versus $70.6 million in 2019; diluted EPS was $1.39 versus $1.31. Operating cash flow was $104.6 million, investing cash flow was negative $1.15 billion, and financing cash flow was positive $1.96 billion, primarily reflecting deposit growth. Cash and cash equivalents increased $918.3 million during the period.
At June 30, consolidated total risk-based capital was 13.27%, CET1 was 11.26%, and the Tier 1 leverage ratio was 9.24%. The filing states the Bank was categorized as well-capitalized. Liquid assets were reported at $1.99 billion; available borrowing included approximately $772 million of correspondent-bank lines and $2.73 billion of Federal Reserve Bank lines, subject to collateral and other requirements.
Material changes and drivers
- Q2 net income available to common stockholders rose 13.5% year over year. Management attributed the increase mainly to higher net interest income from asset growth and improved mortgage banking income.
- Taxable-equivalent net interest income increased 18.8%, while average earning-asset yield fell to 3.80% from 4.80%. Lower funding costs helped offset lower asset yields; the reported net interest margin narrowed.
- Loans grew substantially, including approximately 4,800 Paycheck Protection Program loans totaling $1.05 billion. The filing reports $28.9 million of net unaccreted PPP origination fees at quarter-end, with $2.6 million recognized in Q2 as an adjustment to loan yield.
- Deposits and cash balances expanded sharply. Management linked much of the increase in Federal Reserve balances to customer stimulus funds and described those balances as potentially temporary.
- The allowance for loan losses increased to $91.5 million, or 1.10% of loans, from $76.6 million, or 1.02%, at year-end. Management added COVID-19-related qualitative reserves of $9.0 million in Q2 and $15.7 million in the first half.
- Nonperforming loans declined to $22.0 million from $36.1 million at year-end, but impaired loans increased to $72.2 million from $43.1 million, primarily due to two commercial relationships newly classified as impaired. OREO and repossessed assets fell to $6.5 million; updated appraisals drove write-downs on two Birmingham-area properties.
Outlook, risks and other notable items
- The filing provides no quantified earnings or margin guidance. Management said it expected to continue participating in any PPP extensions and believed available liquidity sources were adequate for anticipated needs.
- COVID-19 is identified as a material, highly uncertain risk that could affect borrower repayment, credit losses, liquidity and funding costs, operations, customers, vendors, and cyber and payment fraud exposure. The effects may persist after the pandemic subsides.
- The company deferred adoption of CECL under the CARES Act, using the incurred-loss model at June 30, 2020. Management’s parallel CECL analysis estimated the allowance would be within 5% of the incurred-loss allowance; timing of adoption depended on the end of the national emergency or December 31, 2020, whichever came first.
- At June 30, 244 loans totaling $342.0 million had COVID-related payment deferrals, generally for no more than three months. They were not treated as troubled debt restructurings under then-applicable interagency guidance.
- Q2 noninterest expense included $1.3 million of OREO expense; the filing attributes elevated expense to property write-downs. Third-party processing expense also rose, including $514,000 for temporary PPP-related loan-system licenses.
- The company reported $2.84 billion of commitments to extend credit, credit-card arrangements and standby letters of credit, and a $500,000 reserve for losses on off-balance-sheet arrangements. Management reported no material legal proceedings and no material change in previously disclosed risk factors apart from COVID-19.
Important facts for investors to verify
- Reconcile balance-sheet figures: The MD&A gives certain prior-year-end asset, loan and deposit comparisons that differ from the consolidated balance sheet. For example, the balance sheet reports Dec. 31, 2019 assets of $8.95 billion and loans of $7.26 billion, while portions of the MD&A cite different starting balances and growth amounts.
- Track PPP loan forgiveness, repayment, deferred fee recognition and the potential effect of PPP balances on loan growth, yields and deposits.
- Monitor loan deferrals as they expire, particularly borrower performance in economically stressed sectors, and changes in impaired loans, criticized classifications, charge-offs and allowance adequacy.
- Assess whether elevated deposits and Federal Reserve balances are temporary, and whether liquidity remains adequate if deposits recede or funding costs rise.
- Confirm CECL adoption timing and the effect of the transition on the allowance and reported earnings.