ServisFirst Bancshares, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
The unaudited filing covers the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017, and operating results are compared with Q1 2017. ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Its bank operates 20 full-service offices across Alabama, Florida, Georgia, South Carolina, and Tennessee, providing commercial banking, lending, deposit, and related services. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparison |
|---|---|---|
| Total assets | $7,011.7 | Down 1.0% from $7,082.4 at year-end 2017 |
| Loans | $5,928.3 | Up 1.3% from $5,851.3 at year-end 2017 |
| Deposits | $5,977.4 | Down 1.9% from $6,091.7 at year-end 2017 |
| Net interest income | $62.4 reported; $62.6 taxable-equivalent | Reported amount up $10.4, or 20.0%, year over year |
| Net income / diluted EPS | $32.6 / $0.60 | $22.5 / $0.42 in Q1 2017 |
| Net interest margin | 3.81% taxable-equivalent | 3.53% in Q1 2017 |
| Provision for loan losses | $4.1 | $5.0 in Q1 2017 |
| Cash and cash equivalents | $316.1 | Down from $477.6 at year-end 2017 |
| Total stockholders’ equity | $629.3 | Up from $607.6 at year-end 2017 |
Interest income was $74.0 million and interest expense was $11.6 million. Noninterest income was $4.9 million; noninterest expense was $23.5 million. Income before taxes was $39.7 million and income tax expense was $7.1 million. Return on average assets was 1.91%, and return on average stockholders’ equity was 21.40%.
Operating cash flow was $38.9 million, versus $29.2 million in Q1 2017. Investing activities used $107.5 million, primarily reflecting $78.7 million of loan growth and securities purchases; financing activities used $92.8 million, including net deposit outflows. The resulting net decrease in cash and cash equivalents was $161.5 million.
Federal funds purchased were $326.4 million; other borrowings were $64.7 million, including $64.75 million of subordinated notes. The company reported $674.1 million of liquid assets and approximately $533.0 million of available federal-funds lines. Regulatory capital ratios remained above applicable well-capitalized thresholds: the bank’s CET1 ratio was 10.88%, total risk-based capital ratio 11.89%, and Tier 1 leverage ratio 9.87%.
Material changes versus comparable periods
- Net income rose 44.9% year over year. Management attributed the increase chiefly to $10.4 million of additional net interest income and $0.8 million less income tax expense, partly offset by higher operating expenses.
- Taxable-equivalent net interest income increased 19.2%, supported by a $630.0 million increase in average earning assets and higher asset yields. The average yield on earning assets rose to 4.51% from 4.03%; the cost of interest-bearing liabilities increased to 0.95% from 0.68%.
- Noninterest income grew 7.1%. Credit-card income increased 33.8% to $1.6 million and deposit service charges increased 17.1% to $1.6 million; mortgage banking income fell 42.4% to $0.5 million.
- Noninterest expense increased 10.6% to $23.5 million. Salaries and benefits rose 13.5% to $13.3 million, while OREO expense increased to $0.3 million, including property write-downs. The company reported 437 employees, up from 417 a year earlier.
- The effective tax rate declined to 17.8% from 25.8%, reflecting the lower federal corporate tax rate and excess tax benefits from equity awards.
- Available-for-sale securities had $9.0 million of gross unrealized losses at quarter-end versus $3.5 million at year-end 2017. Q1 other comprehensive loss was $4.9 million, largely from securities valuation changes.
Outlook, risks, contingencies, and unusual items
The filing provides no quantified earnings, loan-growth, or margin guidance. Management expects to pursue sustainable deposit growth and said current liquidity sources are adequate for immediate anticipated funding needs, while noting that additional funding could be needed if the current growth rate is maintained. Management reported no significant change in interest-rate sensitivity since year-end and described internal limits for net-interest-margin sensitivity of 10% for a 100-basis-point rate change and 15% for a 200-basis-point change.
- Credit quality: nonperforming loans were $9.9 million, or 0.17% of loans, down from $10.8 million, or 0.19%, at year-end. Impaired loans increased to $42.6 million from $40.5 million. The allowance for loan losses was $62.1 million, or 1.05% of loans. Troubled debt restructurings were $18.8 million, down from $20.6 million at year-end.
- Funding and liquidity: deposits declined $114.3 million during the quarter, while federal funds purchased increased $24.6 million. Liquidity depends in part on retaining deposits and access to correspondent-bank borrowing lines.
- Off-balance-sheet exposure: commitments to extend credit were $1,960.9 million; credit-card arrangements were $108.5 million; and standby letters of credit were $47.3 million. These contractual amounts are not necessarily expected cash requirements. The company recorded a $0.5 million reserve for off-balance-sheet arrangements and a $0.368 million reserve for mortgage-loan repurchase demands.
- Market and portfolio risks include interest-rate changes, deposit competition and retention, credit deterioration, collateral valuations, economic conditions in the Southeast, regulatory or tax changes, and securities-value declines. Management said it did not intend to sell securities in unrealized-loss positions and did not expect to be required to sell before recovery; it attributed the losses to market rates rather than issuer credit deterioration.
- Accounting changes: adoption of revenue-recognition guidance had no material impact. The company is preparing for the expected credit-loss standard (CECL), effective for SEC filers for fiscal years beginning after December 15, 2019, and anticipates balance-sheet recognition of right-of-use assets and lease liabilities under the lease standard.
- Management reported no material change in previously disclosed risk factors, no material change in disclosed legal proceedings, and no subsequent event requiring recognition or disclosure. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether loan growth and stronger net interest margin persist as deposit balances declined and funding costs increased.
- Whether the rise in unrealized securities losses and accumulated other comprehensive loss affects reported equity or liquidity if securities are sold.
- Trends in impaired loans, criticized/classified loans, delinquencies, charge-offs, and the adequacy of the allowance as the portfolio expands.
- The durability of earnings growth after higher salary, regulatory, OREO, and other operating costs, and the effects of tax benefits on the effective tax rate.
- Actual draws on the $2.1 billion of off-balance-sheet credit arrangements, available borrowing lines, and any mortgage repurchase demands.
- Future effects of CECL and lease-standard adoption; the filing does not quantify their expected financial impact.