ServisFirst Bancshares, Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; quarterly figures are unaudited. ServisFirst is a commercial bank holding company headquartered in Birmingham, Alabama, operating 21 banking offices and three loan production offices across five southeastern states. Its strategy emphasizes commercial banking, local lending decisions, relationship-based service, and a relatively limited branch network. The company reported approximately $11.9 billion in assets and $8.5 billion in loans at year-end.
Key financial metrics
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Interest income | $389.0 million | $390.8 million |
| Net interest income | $338.0 million | $287.6 million |
| Provision for credit losses | $42.4 million | $22.6 million |
| Noninterest income | $30.1 million | $24.0 million |
| Noninterest expense | $111.5 million | $102.1 million |
| Net income available to common stockholders | $169.5 million | $149.2 million |
| Diluted earnings per share | $3.13 | $2.76 |
| Net interest margin | 3.31% | 3.46% |
| Return on average assets / equity | 1.59% / 18.55% | 1.73% / 19.16% |
| Total assets | $11.93 billion | $8.95 billion |
| Total loans / deposits | $8.47 billion / $9.98 billion | $7.26 billion / $7.53 billion |
| Stockholders’ equity | $992.9 million | $842.7 million |
| Allowance for credit losses | $87.9 million; 1.04% of loans | $76.6 million; 1.05% of loans |
Cash flow and liquidity. Operating cash flow was $191.3 million; investing activities used $1.41 billion, principally reflecting loan growth and securities and bank-owned life insurance purchases; financing activities provided $2.80 billion, primarily from deposit growth and federal funds purchased. Cash and cash equivalents increased $1.58 billion to $2.21 billion. Management reported $2.63 billion of liquid assets and $923 million of unused federal funds lines at year-end, subject to restrictions. Net loans were 84.0% of deposits.
Debt and capital. Year-end liabilities included $851.5 million of federal funds purchased and $64.7 million of other borrowings, principally subordinated notes. The bank was classified as well-capitalized: CET1 11.15%, Tier 1 11.16%, total capital 12.15%, and leverage 8.75%. The company issued $34.75 million of 4% subordinated notes due 2030 and redeemed $34.75 million of 5% notes due 2025 during 2020.
Material changes versus the prior comparable period
- Net income available to common stockholders rose 13.6%; net interest income grew 17.5%, as interest expense fell 50.6%, more than offsetting slightly lower interest income.
- Loans increased 16.6%, deposits increased 32.5%, and total assets increased 33.4%. Year-end PPP loans were $900.5 million; the company originated more than 4,900 PPP loans totaling approximately $1.05 billion during 2020.
- The net interest margin declined 15 basis points to 3.31%. Management attributed pressure partly to substantial deposits and resulting low-yield balances at banks; average earning-asset yield fell to 3.80% from 4.69%, while the average cost of interest-bearing liabilities fell to 0.71% from 1.67%.
- Credit provision nearly doubled to $42.4 million, reflecting COVID-19-related economic uncertainty and adoption of the CECL expected-loss methodology. Net charge-offs rose to $29.1 million from $22.1 million, while nonperforming loans declined to $19.0 million from $36.1 million.
- Noninterest income increased 25.6%, led by mortgage banking income, up $4.4 million, and BOLI income, up $2.6 million. Noninterest expense rose 9.2%, including higher processing costs, FDIC assessments, and other-real-estate-owned expenses.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific earnings, revenue, or margin guidance. Management expected to continue quarterly cash dividends subject to board approval and regulatory limits; the quarterly dividend was increased to $0.20 per share in December 2020. The company began processing a second round of PPP loans in January 2021, reporting 593 funded loans totaling $123.7 million through January 31, 2021.
- COVID-19 and credit: Management described significant uncertainty around the pandemic, economic recovery, borrower repayment capacity, and effects on industries including travel, lodging, entertainment, and retail. Those sectors represented 5% of outstanding loans. The company reported $5.8 million of accrued interest on COVID-affected loan deferrals and said the future impact was not yet predictable.
- Credit estimates: CECL adoption was effective January 1, 2020, with a $2.0 million decrease in the loan allowance and a $1.1 million net-of-tax increase to opening retained earnings. The auditor identified the loan allowance and management’s qualitative assumptions as a critical audit matter. PPP loans carried no allowance because they were SBA-guaranteed.
- Concentration and interest-rate exposure: Real-estate mortgage loans were 53.3% of loans; 68% of loans were assigned to Alabama markets. Management described its interest-rate sensitivity as somewhat liability-sensitive. A modeled 100-basis-point rate decline reduced economic value of equity 23.1%, while modeled increases raised it; these are model estimates, not forecasts.
- Regulatory transition: Assets exceeded $10 billion for the last three quarters of 2020. The company expected to cross the four-consecutive-quarter threshold in 2021, bringing CFPB supervisory exposure and other added regulatory and compliance burdens. Management also expected the bank’s FDIC assessment methodology to move to the large-bank scorecard in the second quarter of 2021, potentially increasing assessments.
- Other items: The company recorded $2.2 million of OREO expense, including significant appraisal-related write-downs. It purchased $60.7 million of BOLI contracts. The interest-rate cap had a $139,000 year-end fair value and a $656,000 write-down was recorded in 2020.
- Reporting and legal matters: The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. The company reported no material legal proceedings.
Investor verification priorities
- Assess the sustainability of earnings growth given lower asset yields, reduced funding costs, elevated year-end liquidity, and $14.1 million of PPP origination fees recognized in loan yield during 2020.
- Review subsequent credit performance, COVID-19 deferrals, borrower exposure by industry and geography, charge-offs, and the assumptions underlying the $87.9 million CECL allowance.
- Verify PPP forgiveness and SBA reimbursement progress, including the reported January 2021 repayment and second-round lending figures.
- Evaluate liquidity and funding structure, especially the growth in deposits, $851.5 million of federal funds purchased, and the availability and terms of unused credit lines.
- Confirm the effects and timing of CFPB supervision, large-bank FDIC pricing, and other regulatory costs as asset thresholds apply.
- Review the impact of the 2020 debt refinancing, dividend increase, and interest-rate sensitivity on future capital, earnings, and shareholder distributions.