ServisFirst Bancshares, Inc. — Q1 2020 Form 10-Q
Business context and period. The unaudited filing covers the three months ended March 31, 2020, with balance-sheet comparisons to December 31, 2019 and operating results compared with Q1 2019. ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating through ServisFirst Bank across markets in Alabama, Florida, Georgia, South Carolina and Tennessee.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Total assets | $9.36 billion | $8.95 billion at Dec. 31, 2019 |
| Total loans | $7.57 billion | $7.26 billion at Dec. 31, 2019 |
| Total deposits | $7.83 billion | $7.53 billion at Dec. 31, 2019 |
| Interest income | $96.8 million | $93.7 million in Q1 2019 |
| Net interest income | $77.6 million reported; $77.7 million taxable-equivalent | $68.8 million reported; $68.8 million taxable-equivalent |
| Net interest margin | 3.58% | 3.56% in Q1 2019 |
| Provision for loan losses | $13.6 million | $4.9 million in Q1 2019 |
| Noninterest income / expense | $6.7 million / $27.9 million | $4.9 million / $25.3 million in Q1 2019 |
| Income before tax / net income | $42.8 million / $34.8 million | $43.5 million / $35.0 million in Q1 2019 |
| EPS | $0.65 basic; $0.64 diluted | $0.65 basic and diluted in Q1 2019 |
| Operating cash flow | $52.2 million | $41.7 million in Q1 2019 |
| Cash and cash equivalents | $684.5 million | $630.6 million at Dec. 31, 2019 |
| Allowance for loan losses | $85.4 million, or 1.13% of loans | $76.6 million, or 1.05%, at Dec. 31, 2019 |
| Nonperforming loans | $33.9 million, or 0.45% of loans | $36.1 million, or 0.50%, at Dec. 31, 2019 |
Net cash used in investing activities was $365.9 million, principally reflecting $312.4 million of loan growth; financing activities provided $367.6 million. Total liabilities were $8.48 billion, including $543.6 million in federal funds purchased and $64.7 million in other borrowings. The company reported $1.2 billion in liquid assets and approximately $772 million of unused federal-funds credit lines. Consolidated regulatory capital ratios included 10.30% CET1, 10.30% Tier 1 risk-based capital, 12.21% total risk-based capital and 9.03% Tier 1 leverage; management reported the bank as well-capitalized.
Material changes versus prior comparable period
- Net interest income increased $8.9 million, or 12.9% on a taxable-equivalent basis, principally from higher average earning assets and lower deposit costs. The earning-asset yield declined to 4.46% from 4.85%, while the cost of interest-bearing liabilities fell to 1.19% from 1.73%.
- Net income declined $0.2 million, or 0.6%, despite stronger net interest income. The $8.7 million increase in loan-loss provision and $2.6 million increase in noninterest expense largely offset that growth.
- Return on average assets fell to 1.54% from 1.75%; return on average equity fell to 16.23% from 19.42%.
- Loans and deposits grew 4.2% and 4.0%, respectively, from year-end. Net charge-offs were $4.8 million, compared with $3.3 million in Q1 2019; the annualized ratio was 0.26% of average loans versus 0.20%.
- Noninterest income rose 35.0%, including higher mortgage banking and bank-owned life insurance income. Noninterest expense rose 10.2%, including higher salaries, processing costs, regulatory assessments and OREO costs.
Outlook, risks and unusual items
- COVID-19 and credit: Management increased the provision and allowance amid pandemic-related economic uncertainty, including a $6.7 million external qualitative allowance adjustment. The allowance was calculated under the incurred-loss model; management delayed CECL adoption under the CARES Act, with adoption planned by the earlier of the end of the national emergency or December 31, 2020. Parallel CECL analysis indicated an estimated allowance increase of approximately 10%.
- Deferrals and PPP: By March 31, the company had executed 730 COVID-related payment deferrals covering $574.7 million of loans, generally for up to three months; these were not treated as troubled debt restructurings under interagency guidance. By April 17, it had funded approximately 3,525 PPP loans totaling $920.3 million. Management expected to continue participating in PPP extensions and anticipated that most PPP loans would be forgiven by the SBA by the end of Q2 or soon thereafter. It had applied to use the Federal Reserve’s PPP Liquidity Facility; this was an application, not a reported funding draw.
- Credit concentrations and uncertainty: Impaired loans increased to $60.5 million from $43.1 million at year-end, primarily due to one commercial relationship totaling $20.0 million. Management identified restaurants, hospitality and retail among industries particularly exposed to pandemic impacts. It warned that duration and severity of the pandemic could affect credit losses, liquidity, funding costs, operations and economic activity; no quantified outlook for these effects was provided.
- Other items: Unrealized securities gains increased to $22.0 million from $7.2 million at year-end, mainly reflecting lower market interest rates. The company reported $563,000 of OREO write-downs and disposal losses, largely tied to updated appraisals for a Nashville-region relationship. No formal earnings guidance was provided.
Important facts for investors to verify
- Track subsequent delinquency, impairment, charge-off and allowance trends, especially for the $574.7 million of deferred loans and the $20.0 million impaired commercial relationship.
- Verify PPP loan funding, forgiveness timing, related fees and funding arrangements, including whether the Federal Reserve liquidity-facility application was approved or used.
- Monitor CECL adoption timing and the eventual allowance impact against the company’s approximately 10% parallel estimate.
- Assess whether deposit and loan growth, interest-rate changes and funding costs preserve net interest margin and liquidity.
- Note that the interim financial statements are unaudited and that management stated Q1 results are not necessarily indicative of full-year results.