ServisFirst Bancshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited consolidated results compare with the same 2017 periods; balance-sheet comparisons are primarily to December 31, 2017. ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating through ServisFirst Bank’s 20 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $66.9 million | $58.4 million | $193.8 million | $166.0 million |
| Provision for loan losses | $6.6 million | $4.8 million | $14.9 million | $14.2 million |
| Net income available to common | $34.6 million | $25.3 million | $100.7 million | $71.9 million |
| Basic / diluted EPS | $0.65 / $0.64 | $0.48 / $0.47 | $1.89 / $1.86 | $1.36 / $1.33 |
| Taxable-equivalent net interest margin | 3.77% | 3.77% | 3.80% | 3.69% |
| Return on average assets | 1.87% | 1.55% | 1.90% | 1.52% |
| Return on average common equity | 20.42% | 17.28% | 20.88% | 17.24% |
Amounts are rounded; the filing reports dollar figures in thousands unless stated otherwise.
- Balance sheet at September 30: Assets were $7.52 billion, up 6.1% from year-end 2017. Loans were $6.36 billion, up 8.8%; deposits were $6.51 billion, up 6.8%. Stockholders’ equity totaled $681.5 million.
- Cash flow, nine months: Operating activities provided $116.0 million; investing activities used $573.5 million, primarily reflecting loan growth and securities purchases; financing activities provided $345.7 million. Cash and cash equivalents declined $111.8 million to $365.8 million.
- Funding and liquidity: Cash, federal funds sold and unpledged available-for-sale securities totaled $692.7 million. The Bank reported approximately $522 million of unused federal funds borrowing lines, subject to restrictions and collateral requirements. Management said liquidity sources were adequate for anticipated needs.
- Borrowings: Federal funds purchased were $246.1 million; other borrowings were $64.7 million, including $34.75 million of 5% subordinated notes due 2025 and $30 million of 4.5% subordinated notes due 2027.
- Capital: At September 30, the Bank’s CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 11.03%, 11.04%, 12.04% and 10.16%, respectively. The company reported that it was well-capitalized under prompt corrective action rules.
Material changes versus comparable periods
- Q3 net income available to common increased 36.8%; nine-month income increased 40.0%. Management attributed growth primarily to higher net interest income from expansion in earning assets, higher noninterest income, and lower income-tax expense following the Tax Cuts and Jobs Act.
- Taxable-equivalent net interest income rose 13.7% in Q3 and 18.2% for the nine months. Average earning assets grew 13.9% and 12.7%, respectively. Loan yields increased, but the cost of interest-bearing liabilities also rose; Q3 net interest margin was unchanged year over year.
- Noninterest income increased 16.7% in Q3 and 12.6% for the nine months, led by credit-card income. Mortgage-banking income declined 19.3% and 28.7%, respectively, amid slower refinance activity.
- Noninterest expense increased 7.7% in Q3 and 9.3% for the nine months, including higher salaries, processing and other operating costs. OREO expense also rose, including land preparation and a property write-down.
- The effective tax rate declined to 19.0% in Q3 and 18.9% for the nine months, from 31.5% and 29.0% in the respective 2017 periods. The filing also reports excess tax benefits from stock awards as reducing tax expense.
- Loans grew faster than deposits from year-end. Commercial, financial and agricultural loans represented 39.0% of loans; total real-estate mortgage loans represented 51.5%. About 73% of loans were in Alabama MSAs.
Outlook, risks and unusual items
- The filing provides no numerical earnings or growth guidance. Management described plans for sustainable deposit growth through developing newer markets and organic growth in established markets, and said it was not aware of trends reasonably likely to materially change liquidity.
- Credit indicators merit monitoring: nonperforming loans increased to $14.9 million, or 0.23% of loans, from $10.8 million, or 0.19%, at year-end. The increase in loans 90 or more days past due and accruing primarily reflected one $5.0 million commercial real-estate mortgage loan that management said was well-collateralized and being collected. Special-mention and substandard loans rose to $136.1 million from $99.8 million.
- The allowance for loan losses was $66.9 million, or 1.05% of loans, versus $59.4 million, or 1.02%, at year-end. Q3 net charge-offs to average loans were 0.25%, up from 0.10% a year earlier. Management considered the allowance adequate, while noting future provisions may be necessary.
- Available-for-sale securities had $13.3 million of gross unrealized losses at September 30, versus $3.5 million at year-end; accumulated other comprehensive loss was $9.8 million versus $0.2 million. Management attributed the security-value declines to interest rates rather than credit quality, did not consider them other-than-temporary impairment, and stated it did not expect to be required to sell before recovery.
- Off-balance-sheet commitments totaled $2.15 billion, including $1.94 billion to extend credit. The company maintained a $0.5 million reserve for these arrangements and a $0.4 million reserve for mortgage-loan repurchase demands.
- Management identified risks including economic and credit conditions, interest rates and yield curves, customer creditworthiness and collateral values, regulatory or accounting changes, competition, and natural disasters in its markets. It reported no material change to previously disclosed risk factors, no material legal proceedings, and no material change in internal control over financial reporting.
- Adopted revenue-recognition guidance had no material financial-statement impact. The company was assessing the upcoming lease standard and expected recognition of right-of-use assets and lease liabilities relating primarily to $17.4 million of operating lease commitments; management did not expect the capital-ratio effect to be material. The company was preparing for CECL adoption, effective for it after December 15, 2019.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further pressure on funding costs, net interest margin and liquidity.
- Trends in delinquency, criticized loans, charge-offs, nonperforming loans and the adequacy of the allowance as the portfolio expands.
- The collection progress and collateral support for the $5.0 million past-due commercial real-estate loan, and changes in troubled debt restructurings.
- Whether unrealized securities losses remain interest-rate-driven and whether any need to sell securities could turn those losses into realized losses.
- The effects of rising deposit costs, CECL implementation and lease-accounting adoption on earnings, capital and reported financial position.
- Actual utilization of the $2.15 billion in off-balance-sheet credit commitments and any changes to mortgage repurchase demands or related reserves.