SERVISFIRST BANCSHAR

SFBS
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SERVISFIRST BANCSHARES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/29/2021 | 03:26pm


The following discussion and analysis is designed to provide a better
understanding of various factors relating to the results of operations and
financial condition of ServisFirst 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 nine months ended
September 30, 2021 and September 30, 2020.



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 the FDIC; 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 the U.S.
Congress
to increase the U.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 2021 and our other SEC 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 in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst
Bank
, an Alabama banking corporation, provides business and personal financial
services through 21 full-service banking offices located in Birmingham,
Huntsville, Mobile, Montgomery and Dothan, Alabama, Northwest Florida, West
Central Florida, Nashville, Tennessee, Atlanta, Georgia, and Charleston, South
Carolina
. 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.



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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.




Overview of Quarter and Year-to-Date Results






As of September 30, 2021, we had consolidated total assets of $14.60 billion, up
$2.67 billion, or 22.4%, from total assets of $11.93 billion at December 31,
2020
. Total loans were $8.81 billion at September 30, 2021, up $347.1 million,
or 4.1%, from $8.47 billion at December 31, 2020. Total deposits were $12.08
billion
at September 30, 2021, up $2.10 billion, or 21.1%, from $9.98 billion at
December 31, 2020.



Net income available to common stockholders for the three months ended September
30, 2021
was $52.5 million, up $9.1 million, or 21.0%, from $43.4 million for
the three months ended September 30, 2020. Basic and diluted earnings per common
share were $0.97 and $0.96 for the three months ended September 30, 2021,
compared to $0.80 and $0.80, respectively, for the corresponding period in 2020.



Net income available to common stockholders for the nine months ended September
30, 2021
was $154.0 million, up $35.4 million, or 29.9%, from $118.6 million for
the corresponding period in 2020. Basic and diluted earnings per common share
were $2.84 and $2.83, respectively, for the nine months ended September 30,
2021
, compared to $2.20 and $2.19, respectively, for the corresponding period in
2020.



Critical Accounting Policies



The accounting and financial policies of the Company conform to U.S. generally
accepted accounting principles and to general practices within the banking
industry. To prepare consolidated financial statements in conformity with U.S.
GAAP, management makes estimates and assumptions based on available information.
These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for credit losses and income taxes are particularly subject to change.
Information concerning our accounting policies with respect to these items is
available in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2020.



Financial Condition



Cash and Cash Equivalents



At September 30, 2021, we had $44.7 million in federal funds sold, compared to
$1.8 million at December 31, 2020. We also maintain balances at the Federal
Reserve Bank of Atlanta
, which earn interest. At September 30, 2021, we had
$4.21 billion in balances at the Federal Reserve, compared to $1.92 billion at
December 31, 2020. The increase in balances kept at the Federal Reserve in 2021
result from federal stimulus funds on deposit with us by our customers stemming
from the COVID-19 pandemic.



Debt Securities



Debt securities available for sale totaled $723.3 million at September 30, 2021
and $886.7 million at December 31, 2020. Investment securities held to maturity
totaled $261.2 million at September 30, 2021 and $250,000 at December 31, 2020.
During the third quarter of 2021, we transferred, at fair value, $261.3 million
of mortgage-backed securities from the available for sale portfolio to the held
to maturity portfolio. The unrealized after-tax gain of $5.6 million associated
with these securities remained in accumulated other comprehensive income and
will be amortized over their remaining life, offsetting the related amortization
of discount on the transferred securities. We had paydowns of $143.9 million on
mortgage-backed securities and government agencies, maturities of $44.0 million
on municipal bonds, corporate securities and treasury securities, and calls of
$35.1 million on U.S. government agencies and municipal securities during the
nine months ended September 30, 2021. We recognized a $620,000 gain on the call
of a corporate bond during the second quarter of 2021. We purchased $218.7
million
in mortgage-backed securities and $80.0 million in corporate securities
during the first nine months of 2021. For a tabular presentation of debt
securities available for sale and held to maturity at September 30, 2021 and
December 31, 2020, 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.



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The Company does not invest in collateralized debt obligations ("CDOs"). At
September 30, 2021, we had $379.4 million of bank holding company subordinated
notes. If rated, all of these notes were rated BBB or better by Kroll Bond
Rating Agency
at the time of our 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 at September 30, 2021 has a combined average credit rating
of AA.




The carrying value of investment securities pledged to secure public funds on
deposit and for other purposes was $536.0 million and $477.6 million as of
September 30, 2021 and December 31, 2020, respectively.






Loans



We had total loans of $8.81 billion at September 30, 2021, an increase of $347.1
million
, or 4.1%, compared to $8.47 billion at December 31, 2020. Excluding the
impact of PPP loan origination and forgiveness, we grew our loans by $859.9
million
, or 11.4% from December 31, 2020 to September 30, 2021. We originated
approximately 7,400 PPP loans totaling $1.5 billion during the Covid-19
pandemic. Over 6,300 of these loans had a balance of less than $350,000.



As of September 30, 2021, there are 18 loans outstanding totaling $2.7 million
that have payment deferrals in connection with the COVID-19 relief provided by
the CARES Act. All of these payment deferrals were principal and interest
deferrals. The amount of accrued interest related to payment deferrals provided
by the CARES Act on all loans originated to date totaled $4.1 million at
September 30, 2021. These deferrals were not considered troubled debt
restructurings based on interagency guidance issued in March 2020.



Asset Quality



The Company assesses the adequacy of its allowance for credit losses at the end
of each calendar quarter. The level of allowance 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 allowance is increased by a provision
for credit losses, which is charged to expense, and reduced by charge-offs, net
of recoveries. The allowance for credit losses is believed adequate to absorb
all expected future losses to be recognized over the contractual life of the
loans in the portfolio.



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. For all loan pools utilizing the DCF method, the Company utilizes
and forecasts the national unemployment rate as a loss driver. The Company also
utilizes and forecasts GDP growth as a second loss driver for its agricultural
and consumer loan pools. Consistent forecasts of the loss drivers are used
across the loan segments. At September 30, 2021 and December 31, 2020, the
Company utilized a reasonable and supportable forecast period of twelve months
followed by a six-month straight-line reversion to long term averages. The
Company leveraged economic projections from reputable and independent sources to
inform its loss driver forecasts. The Company expects national unemployment to
remain above pre-pandemic levels over the forecast period with an improved
national GDP growth rate as the economy comes back on-line over the next year.



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 5 -
Loans" in our Notes to Consolidated Financial Statements.



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.



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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 troubled debt restructurings. Specific allocations
of the allowance 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.



Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, the allowance for
loan losses represented management's best estimate of inherent losses that had
been incurred within the existing portfolio of loans. The allowance for losses
on loans included allowance allocations calculated in accordance with FASB
Accounting Standards Codification ("ASC") Topic 310, "Receivables" and allowance
allocations calculated in accordance with ASC Topic 450, "Contingencies."



As of and for the Three Months As of and for the Nine Months
Ended Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars in thousands)
Total loans outstanding, net of unearned
income $ 8,812,811 $ 8,508,554 $ 8,812,811 $ 8,508,554
Average loans outstanding, net of
unearned income $ 8,680,174 $ 8,365,155 $ 8,613,172 $ 8,021,262
Allowance for credit losses at beginning
of period 104,670 -


87,942



Allowance for loan losses at beginning
of period - 91,507 - 76,584


Charge-offs:



Commercial, financial and agricultural
loans 1,541 11,146 2,168 15,144
Real estate - construction - - - 830
Real estate - mortgage 208 200 279 4,397
Consumer loans 86 44 227 165
Total charge-offs 1,835 11,390 2,674 20,536
Recoveries:
Commercial, financial and agricultural
loans 140 12 464 158
Real estate - construction - - 52 2
Real estate - mortgage 4 12 68 26
Consumer loans 8 15 32 55
Total recoveries 152 39 616 241
Net charge-offs 1,683 11,351 2,058 20,295
Provision for credit losses 5,963 12,284 23,066 36,151
Allowance for credit losses at period
end $ 108,950 $ - $ 108,950 $ -
Allowance for loan losses at period end $ - $ 92,440 $ - $ 92,440
Allowance for credit losses to period
end loans 1.24 % - % 1.24 % - %
Allowance for loan losses to period end
loans - % 1.09 % - % 1.09 %
Net charge-offs to average loans 0.08 % 0.54 % 0.03 % 0.34 %




Percentage of loans
in each category
September 30, 2021 Amount to total loans
(In Thousands)
Commercial, financial and agricultural $ 40,888 33.22 %
Real estate - construction 24,537 10.08 %
Real estate - mortgage 42,007 55.97 %
Consumer 1,518 0.73 %
Total $ 108,950 100.00 %

Percentage of loans
in each category
December 31, 2020 Amount to total loans
(In Thousands)
Commercial, financial and agricultural $ 36,370 38.93 %
Real estate - construction 16,057 7.01 %
Real estate - mortgage 33,722 53.29 %
Consumer 1,793 0.77 %
Total $ 87,942 100.00 %




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Nonperforming Assets



Total nonperforming loans, which include nonaccrual loans and loans 90 or more
days past due and still accruing, decreased to $14.5 million at September 30,
2021
, compared to $19.0 million at December 31, 2020. Of this total, nonaccrual
loans of $9.1 million at September 30, 2021 represented a net decrease of $4.9
million
from nonaccrual loans at December 31, 2020. Excluding credit card
accounts, there were five loans 90 or more days past due and still accruing
totaling $5.3 million at September 30, 2021, compared to one loan totaling $4.9
million
at December 31, 2020. Troubled Debt Restructurings ("TDR") at September
30, 2021
and December 31, 2020 were $2.9 million and $1.4 million, respectively.



OREO and repossessed assets decreased to $2.1 million at September 30, 2021,
from $6.5 million at December 31, 2020. The following table summarizes OREO and
repossessed asset activity for the nine months ended September 30, 2021 and
2020:



Nine Months Ended September 30,
2021 2020
(In thousands)
Balance at beginning of period $ 6,497 $


8,178



Transfers from loans and capitalized expenses 1,419 2,406
Proceeds from sales (911 ) (1,780 )
Internally financed sales (3,779 ) -
Write-downs / net gain (loss) on sales (1,158 ) (1,828 )
Balance at end of period $ 2,068 $ 6,976





The following table summarizes our nonperforming assets and TDRs at September
30, 2021
and December 31, 2020:






September 30, 2021 December 31, 2020
Number of Number of
Balance Loans Balance Loans
(Dollar Amounts In Thousands)
Nonaccrual loans:
Commercial, financial and agricultural $ 6,966 23 $ 11,709 22
Real estate - construction 234 1 234 1
Real estate - mortgage:
Owner-occupied commercial 1,061 2 1,259 4
1-4 family mortgage 884 9 771 7
Other mortgage - - - -
Total real estate - mortgage 1,945 11 2,030 11
Consumer - - - -
Total Nonaccrual loans: $ 9,145 35 $ 13,973 34

90+ days past due and accruing:
Commercial, financial and agricultural $ 36 5 $ 11 2
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial - - - -
1-4 family mortgage 579 4 104 1
Other mortgage 4,691 1 4,805 1
Total real estate - mortgage 5,270 5 4,909 2
Consumer 20 17 61 25
Total 90+ days past due and accruing: $ 5,326 27 $ 4,981 29

Total Nonperforming Loans: $ 14,471 62 $ 18,954 63

Plus: Other real estate owned and
repossessions 2,068 7 6,497 11
Total Nonperforming Assets $ 16,539 69 $ 25,451 74

Restructured accruing loans:
Commercial, financial and agricultural $ 437 2 $ 818 3
Real estate - construction - - - -
Real estate - mortgage:
Owner-occupied commercial - - - -
1-4 family mortgage - - - -
Other mortgage - - - -
Total real estate - mortgage - - - -
Consumer - - - -
Total restructured accruing loans: $ 437 2 $ 818 3

Total Nonperforming assets and
restructured accruing loans $ 16,976 71 $ 26,269 77


Ratios:



Nonperforming loans to total loans 0.16 % 0.22 %
Nonperforming assets to total loans plus
other real estate owned and
repossessions 0.19 % 0.30 %
Nonperforming assets plus restructured
accruing loans to total loans plus other
real estate owned and repossessions 0.19 % 0.31 %




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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 of September 30, 2021, the Company carries $4.1 million of accrued interest
income on deferrals made to COVID-19 affected borrowers compared to $5.8 million
at December 31, 2020. 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



Total deposits were $12.08 billion at September 30, 2021, an increase of $2.10
billion
, or 21.1%, over $9.98 billion at December 31, 2020. Increased growth
rates during 2020 and 2021 have been the result of PPP lending in which our
borrowers have retained portions of their proceeds in the Bank. We believe that
these increased deposit balances will be temporary in nature. 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.




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 September 30, 2021 and December 31, 2020:

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