ServisFirst Bancshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. 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 results and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets at year-end | $8.95 billion | $8.01 billion | +11.7% |
| Gross loans at year-end | $7.26 billion | $6.53 billion | +11.1% |
| Deposits at year-end | $7.53 billion | $6.92 billion | +8.9% |
| Stockholders’ equity at year-end | $842.7 million | $715.2 million | +17.8% |
| Net interest income | $287.6 million | $262.7 million | +9.5% |
| Net income available to common stockholders | $149.2 million | $136.9 million | +9.0% |
| Diluted earnings per share | $2.76 | $2.53 | +9.1% |
| Net interest margin | 3.46% | 3.75% | Down 29 basis points |
| Return on average assets / equity | 1.73% / 19.16% | 1.88% / 20.96% | Both lower |
Earnings and costs: Interest income rose 19.7% to $390.8 million, while interest expense rose 61.3% to $103.2 million as deposit costs increased. Provision for loan losses was $22.6 million, up from $21.4 million. Noninterest income grew 23.4% to $24.0 million, led by credit card and mortgage banking income. Noninterest expense increased 11.2% to $102.1 million, including higher compensation and operating costs.
Cash flow: Operating activities provided $164.3 million, compared with $168.3 million in 2018. Investing activities used $988.3 million, principally reflecting $754.5 million of loan growth, securities purchases and $75.0 million invested in bank-owned life insurance. Financing activities provided $772.8 million, mainly from deposit growth and federal funds purchased. Cash and cash equivalents ended at $630.6 million, down from $681.9 million.
Debt and liquidity: Year-end federal funds purchased were $470.7 million; other borrowings were $64.7 million, consisting primarily of subordinated notes due 2025 and 2027. The company reported $1.06 billion of liquid assets and $767 million of unused federal funds lines, subject to restrictions and collateral requirements. The bank was categorized as well-capitalized; its CET1, total risk-based capital and leverage ratios were 11.30%, 12.29% and 9.83%, respectively. Net loans were 95.41% of deposits.
Material changes versus 2018
- Loans, assets and deposits continued to expand; management said all regional markets grew loans during 2019.
- Net interest margin fell to 3.46% from 3.75%. Average yield on earning assets edged up to 4.69%, but average cost of interest-bearing liabilities rose to 1.67% from 1.25%.
- Credit performance weakened: net charge-offs rose to $22.1 million from $12.2 million, and nonperforming loans increased to $36.1 million from $27.8 million (0.50% versus 0.43% of loans). The allowance was $76.6 million, or 1.05% of gross loans, versus $68.6 million at the same coverage ratio.
- Noninterest expense growth outpaced net income growth, and return on assets and return on equity declined despite higher earnings.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no formal earnings, growth or margin guidance. Management described its strategy as organic growth through relationship banking and selective market expansion, with acquisitions a possible supplement.
- CECL: The company planned to adopt the current expected credit loss standard on January 1, 2020. Based on its fourth-quarter parallel run and then-current assumptions, it estimated the allowance could decrease approximately 1%–5% at adoption; this was an estimate, not a reported realized result.
- Unusual items: A $7.4 million payment following termination of Alabama’s Loan Guarantee Program was added to the allowance for loan losses. Formerly covered loans totaled $42.2 million at year-end, including $5.2 million rated Special Mention. A $1.7 million FDIC assessment credit reduced regulatory assessment expense. Adjusted non-GAAP results exclude the FDIC credit; GAAP net income was $149.2 million.
- Credit and concentration risks: Real estate loans represented 54.8% of the portfolio; 68% of loans were assigned to Alabama markets. Management cited local economic, real estate, borrower concentration and collateral risks. The 10 largest borrowing relationships had $405.8 million in commitments, about 6% of total loans.
- Interest-rate and funding risks: Management characterized the interest-rate position as somewhat liability-sensitive; higher deposit costs can pressure margin. Checking and other liquid deposits are largely payable on demand, while loans are less readily liquidated. About 14% of loans were LIBOR-indexed; the company was transitioning new and renewing commercial lending away from LIBOR.
- Other risks: Competition, expansion execution, cybersecurity and third-party systems, regulatory compliance, natural disasters in coastal markets, and the adequacy of loan-loss estimates are discussed. No material legal proceedings were reported.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for loan losses was identified as a critical audit matter because of subjective qualitative-factor estimates.
Most important facts for investors to verify
- Whether elevated charge-offs and nonperforming loans persist, and whether the $76.6 million allowance adequately reflects portfolio risks.
- Actual CECL adoption impact compared with the estimated 1%–5% allowance decrease, including any effects on provisions and regulatory capital.
- Whether deposit pricing stabilizes enough to support net interest margin as interest-bearing funding costs and loan growth evolve.
- Loan and deposit growth quality, particularly real estate exposure, Alabama market concentration and performance of former Loan Guarantee Program credits.
- Liquidity and funding composition, including reliance on demand deposits, federal funds purchased and availability of committed lines.
- Impact of the $75 million bank-owned life insurance purchase, operating-cost growth and the higher quarterly dividend of $0.175 per share announced in October 2019.