SERVISFIRST BANCSHARES, INC. The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition ofServisFirst Bancshares, Inc. (the "Company") and its wholly-owned subsidiary,ServisFirst Bank . This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and six months endedJune 30, 2022 andJune 30, 2021 . Forward-Looking Statements Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act of 1933. The words "believe," "expect," "anticipate," "project," "plan," "intend," "will," "could," "would," "might" and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company's senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including, but not limited to: the global health and economic crisis precipitated by the COVID-19 outbreak; general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes as a result of our reclassification as a large financial institution by theFDIC ; changes in our loan portfolio and the deposit base; economic crisis and associated credit issues in industries most impacted by the COVID-19 outbreak, including but not limited to, the restaurant, hospitality and retail sectors; possible changes in laws and regulations and governmental monetary and fiscal policies, including, but not limited to, economic stimulus initiatives and the ability of theU.S. Congress to increase theU.S. statutory debt limit as needed; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-bank financial institutions. The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to "Cautionary Note Regarding Forward Looking Statements" and "Risk Factors" in our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for fiscal year 2022 and our otherSEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time. Business We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered inBirmingham, Alabama . Our wholly-owned subsidiary,ServisFirst Bank , anAlabama banking corporation, provides commercial banking services through full-service banking offices located inAlabama ,Florida ,Georgia , North andSouth Carolina , andTennessee . We also operate loan production offices inFlorida . Through the bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions. 27
-------------------------------------------------------------------------------- Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings, and other deposits. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses. Second quarter highlights
? Diluted earnings per common share of
increase of 24%, from the second quarter 2021.
? Average loans of
billion, or 18%, from a year ago.
? Average deposits of
? Net interest income of
increase
margin of 3.26% for the second quarter of 2022 increased 20 bps from 3.06% in
the second quarter of 2021. The increase primarily resulted from increased
yields in 2022 and increases in average non-interest-bearing deposits and
equity.
Overview
As of June 30, 2022 , we had consolidated total assets of $14.49 billion , down
$95.4 million , or 6.2%, from total assets of $15.45 billion at December 31,
2021 . Total loans were $10.62 billion at June 30, 2022 , up $1.08 billion , or
11.4%, from $9.53 billion at December 31, 2021 . Total deposits were $11.77
billion at June 30, 2022 , down $680.50 million , or 5.5%, from $12.45 billion at
December 31, 2021 .
Net income available to common stockholders for the three months ended June 30,
2022 was $62.1 million , up $12.1 million , or 24.2%, from $50.0 million for the
three months ended June 30, 2021 . Basic and diluted earnings per common share
were both $1.14 for the three months ended June 30, 2022 , compared to $0.92 for
both in the corresponding period in 2021.
Net income available to common stockholders for the six months ended June 30,
2022 was $119.7 million , up $18.3 million , or 18.0%, from $101.5 million for the
corresponding period in 2021. Basic and diluted earnings per common share were
$2.21 and $2.20 , respectively, for the six months ended June 30, 2022 , compared
to $1.87 and $1.86 , respectively, for the corresponding period in 2021.
Performance Ratios
The following table presents selected ratios of our results of operations for
the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Return on average assets 1.67 % 1.56 % 1.60 % 1.63 %
Return on average stockholders' equity 20.93 % 18.99 % 20.52 % 19.74 %
Dividend payout ratio 20.19 % 21.79 % 20.95 % 21.46 %
Net interest margin (1) 3.26 % 3.06 % 3.07 % 3.14 %
Efficiency ratio (2) 31.64 % 30.03 % 32.16 % 29.36 %
Average stockholders' equity to average
total assets 8.09 % 8.06 % 7.82 % 8.10 %
(1) Net interest margin in the net yield on interest earning assets and is the difference between the interest yield earned on
interest-earning assets and interest rate paid on interest-bearing liabilities, divided by
average earning assets.
(2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
28
--------------------------------------------------------------------------------Financial Condition Cash and Cash Equivalents AtJune 30, 2022 , we had$101.4 million in federal funds sold, compared to$58.4 million atDecember 31, 2021 . We also maintain balances at theFederal Reserve Bank of Atlanta , which earn interest. AtJune 30, 2022 , we had$1.32 billion in balances at theFederal Reserve , compared to$4.07 billion atDecember 31, 2021 .Investment Securities Debt securities available for sale totaled$724.5 million atJune 30, 2022 and$842.6 million atDecember 31, 2021 . Investment securities held to maturity totaled$1.07 billion atJune 30, 2022 and$463.0 million atDecember 31, 2021 . We had paydowns of$77.4 million on mortgage-backed securities and government agencies, maturities of$22.0 million on municipal bonds, corporate securities and treasury securities, and calls of$10.3 million onU.S. government agencies and municipal securities during the six months endedJune 30, 2022 . We recognized a$2.8 million loss on the sale of available for sale debt securities during the second quarter of 2022. We sold seven debt securities available for sale for$33.4 million that were yielding less than 1.00%. We purchased$360.5 million in US Treasuries,$286.7 million in mortgage-backed securities, and$76.4 million in corporate securities during the six months endedJune 30, 2022 . For a tabular presentation of debt securities available for sale and held to maturity atJune 30, 2022 andDecember 31, 2021 , see "Note 4 - Securities" in our Notes to Consolidated Financial Statements. The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer-term securities purchased to generate level income for us over periods of interest rate fluctuations. All investment securities in an unrealized loss position as ofJune 30, 2022 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is not due to credit-related factors. In addition, we have the ability to hold these securities within the portfolio until maturity or until the value recovers, and we believe that it is not likely that we will be required to sell these securities prior to recovery. We continue to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods. The Company does not invest in collateralized debt obligations ("CDOs"). As ofJune 30, 2022 , we had$416.8 million of bank holding company subordinated notes. If rated, all such bonds were rated BBB or better byKroll Bond Rating Agency at the time of our initial investment. All other corporate bonds had a Standard and Poor's or Moody's rating of A-1 or better when purchased. The total investment portfolio has a combined average credit rating of AA as ofJune 30, 2022 . The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was$666.7 million and$481.3 million as ofJune 30, 2022 andDecember 31, 2021 , respectively. Loans
We had total loans of
Asset Quality
The Company assesses the adequacy of its allowance for credit losses ("ACL") at
the end of each calendar quarter. The level of ACL is based on the Company's
evaluation of historical default and loss experience, current and projected
economic conditions, asset quality trends, known and inherent risks in the
portfolio, adverse situations that may affect the borrowers' ability to repay a
loan, the estimated value of any underlying collateral, composition of the loan
portfolio and other relevant factors. The ACL is increased by a provision for
credit losses, which is charged to expense, and reduced by charge-offs, net of
recoveries. The ACL is believed adequate to absorb all expected future losses to
be recognized over the contractual life of the loans in the portfolio.
29
--------------------------------------------------------------------------------
Loans with similar risk characteristics are evaluated in pools and, depending on
the nature of each identified pool, the Company utilizes a discounted cash flow
("DCF"), probability of default / loss given default ("PD/LGD") or remaining
life method. The historical loss experience estimate by pool is then adjusted by
forecast factors that are quantitatively related to the Company's historical
credit loss experience, such as national unemployment rates and gross domestic
product. Losses are predicted over a period of time determined to be reasonable
and supportable, and at the end of the reasonable and supportable period losses
are reverted to long term historical averages. The reasonable and supportable
period and reversion period are re-evaluated each quarter by the Company and are
dependent on the current economic environment among other factors. See "Note 1 -
General" and "Note 5 - Loans" in the Notes to Consolidated Financial Statements
included in Item 1. Consolidated Financial Statements elsewhere in this report.
The expected credit losses for each loan pool are then adjusted for changes in
qualitative factors not inherently considered in the quantitative analyses. The
qualitative adjustments either increase or decrease the quantitative model
estimation. The Company considers factors that are relevant within the
qualitative framework which include the following: lending policy, changes in
nature and volume of loans, staff experience, changes in volume and trends of
problem loans, concentration risk, trends in underlying collateral values,
external factors, quality of loan review system and other economic conditions.
Expected credit losses for loans that no longer share similar risk
characteristics with the collectively evaluated pools are excluded from the
collective evaluation and estimated on an individual basis. Individual
evaluations are performed for nonaccrual loans, loans rated substandard, and
modified loans classified as TDRs. Specific allocations of the ACL for credit
losses are estimated on one of several methods, including the estimated fair
value of the underlying collateral, observable market value of similar debt or
the present value of expected cash flows.
As of and for the Three Months
Ended As of and for the Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
Total loans outstanding, net of
unearned income $ 10,617,320 $ 8,649,694 $ 10,617,320 $ 8,649,694
Average loans outstanding, net of
unearned income $ 10,189,086 $ 8,644,993 $ 9,919,381 $ 8,579,116
Allowance for credit losses at
beginning of period 119,463 94,906 116,660 87,942
Charge-offs:
Commercial, financial and agricultural loans 1,667 150 4,241 627 Real estate - construction - - - - Real estate - mortgage 23 59 50 71 Consumer loans 123 54 198 141 Total charge-offs 1,813 263 4,489 839 Recoveries: Commercial, financial and agricultural loans 1,217 298 1,322 324 Real estate - construction - 2 - 52 Real estate - mortgage - 62 - 64 Consumer loans 13 13 25 24 Total recoveries 1,230 375 1,347 464 Net charge-offs 583 (112 ) 3,142 375 Provision for credit losses 9,507 9,652 14,869 17,103 Allowance for credit losses at period end$ 128,387 $ 104,670 $ 128,387 $ 104,670 Allowance for credit losses to period end loans 1.21 % 1.21 % 1.21 % 1.21 % Net charge-offs to average loans 0.02 % (0.01 )% 0.04 % 0.01 % Percentage of loans in each category June 30, 2022 Amount to total loans (In Thousands) Commercial, financial and agricultural$ 41,610 33.22 % Real estate - construction 35,993 10.08 % Real estate - mortgage 48,793 55.97 % Consumer 1,992 0.73 % Total$ 128,387 100.00 % 30
--------------------------------------------------------------------------------
Percentage of loans
in each category
December 31, 2021 Amount to total loans
(In Thousands)
Commercial, financial and agricultural $ 41,869 31.30 %
Real estate - construction 26,994 11.57 %
Real estate - mortgage 45,829 56.43 %
Consumer 1,968 0.70 %
Total $ 116,660 100.00 %
Nonperforming Assets
Total nonperforming loans, which include nonaccrual loans and loans 90 or more
days past due and still accruing, increased to $15.5 million at June 30, 2022 ,
compared to $12.1 million at December 31, 2021 . Of this total, nonaccrual loans
of $10.5 million at June 30, 2022 represented a net increase of $3.7 million
from nonaccrual loans at December 31, 2021 . Excluding credit card accounts,
there were three loans 90 or more days past due and still accruing totaling $4.9
million at June 30, 2022 , compared to four loans totaling $5.3 million at
December 31, 2021 . TDRs at June 30, 2022 and December 31, 2021 were $2.4 million
and $2.6 million , respectively. There were no loans newly classified as TDR or
renewals of existing TDRs for the three months ended June 30, 2022 and 2021.
The following table summarizes our nonperforming assets and TDRs at June 30,
2022 and December 31, 2021 :
June 30, 2022 December 31, 2021
Number of Number of
Balance Loans Balance Loans
(Dollar Amounts In Thousands)
Nonaccrual loans:
Commercial, financial and
agricultural $ 5,202 20 $ 4,343 17
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial 3,179 2 1,021 2
1-4 family mortgage 1,228 12 1,398 12
Other mortgage 931 1 - -
Total real estate - mortgage 5,338 15 2,419 14
Consumer - - - -
Total Nonaccrual loans: $ 10,540 35 $ 6,762 31
90+ days past due and accruing:
Commercial, financial and
agricultural $ 249 4 $ 39 4
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial - - - -
1-4 family mortgage 134 1 611 3
Other mortgage 4,586 1 4,656 1
Total real estate - mortgage 4,720 2 5,267 4
Consumer 22 9 29 22
Total 90+ days past due and
accruing: $ 4,991 15 $ 5,335 30
Total Nonperforming Loans: $ 15,531 50 $ 12,097 61
Plus: Other real estate owned and
repossessions 1,207 7 1,208 5
Total Nonperforming Assets $ 16,738 57 $ 13,305 66
Restructured accruing loans:
Commercial, financial and
agricultural $ 421 2 $ 431 2
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial - - - -
1-4 family mortgage - - - -
Other mortgage - - - -
Total real estate - mortgage - - - -
Consumer - - - -
Total restructured accruing loans: $ 421 2 $ 431 2
Total Nonperforming assets and
restructured accruing loans $ 17,159 59 $ 13,736 68
Ratios:
Nonperforming loans to total loans 0.15 % 0.13 %
Nonperforming assets to total loans
plus other real estate owned and
repossessions 0.16 % 0.14 %
Nonperforming assets plus
restructured accruing loans to total
loans plus other real estate owned
and repossessions 0.16 % 0.14 %
31--------------------------------------------------------------------------------
OREO and repossessed assets remained unchanged at
Six Months Ended June 30,
2022 2021
(In thousands)
Balance at beginning of period $ 1,208 $ 6,497
Transfers from loans and capitalized expenses 857 1,125 Proceeds from sales (1,091 ) (761 ) Internally financed sales - (3,779 ) Write-downs / net gain (loss) on sales 233 (1,043 ) Balance at end of period$ 1,207 $ 2,039 The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent if management believes that the collection of interest is not expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for credit losses to reflect management's estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments and interest. While interest continues to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As ofJune 30, 2022 , the Company carries$3.2 million of accrued interest income on deferrals made to COVID-19 affected borrowers compared to$4.0 million atDecember 31, 2021 . At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers but recognizes the breadth of the economic impact may affect its borrowers' ability to repay in future periods. Deposits We rely on increasing our deposit base to fund loan and other asset growth. Each of our markets is highly competitive. We compete for local deposits by offering attractive products with competitive rates. We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network. Our management's strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. We have promoted electronic banking services by providing them without charge and by offering in-bank customer training. Total deposits were$11.77 billion atJune 30, 2022 , a decrease of$680.50 million , or 5.5%, from$12.45 billion atDecember 31, 2021 . We anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in our mature markets. A significant amount of federal and state stimulus money resulting from the COVID-19 pandemic remains on deposit at our bank. We are currently taking measures to deploy these excess funds out of cash into higher-earning assets. 32 --------------------------------------------------------------------------------
For amounts and rates of our deposits by category, see the table "Average Balance Sheets and Net Interest Analysis on a Fully Taxable-Equivalent Basis" under the subheading "Net Interest Income."
The following table summarizes balances of our deposits and the percentage of
each type to the total at
© Edgar Online, source
