ServisFirst Bancshares, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. ServisFirst is a bank holding company operating through ServisFirst Bank, with 20 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee.
Financial performance and position
Amounts are in millions except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $70.1 | $64.5 | $138.9 | $127.0 |
| Provision for loan losses | $4.9 | $4.1 | $9.8 | $8.3 |
| Noninterest income | $5.8 | $4.9 | $10.7 | $9.4 |
| Noninterest expense | $26.0 | $23.5 | $51.3 | $46.6 |
| Net income available to common stockholders | $35.6 | $33.5 | $70.6 | $66.1 |
| Diluted EPS | $0.66 | $0.62 | $1.31 | $1.22 |
| Net interest margin, taxable-equivalent | 3.44% | 3.82% | 3.50% | 3.81% |
- Q2 common earnings increased 6.2% year over year; first-half common earnings increased 6.8%. Management attributed growth primarily to higher net interest income from increased average earning assets and to increased noninterest income, particularly credit-card income.
- Interest expense rose faster than interest income: Q2 interest expense was $27.7 million versus $13.9 million a year earlier. The cost of interest-bearing liabilities rose to 1.83% from 1.13%, contributing to margin compression despite higher asset yields.
- Return on average assets was 1.69% for Q2 and 1.72% for the first half, down from 1.91% in both 2018 comparable periods. Return on average common equity was 18.72% and 19.06%, respectively, versus 20.89% and 21.13%.
- At June 30, total assets were $8.74 billion, loans $6.97 billion, deposits $7.40 billion, and stockholders’ equity attributable to the company $778.5 million. From December 31, 2018, assets grew 9.2%, loans 6.6%, and deposits 7.1%.
- Cash and cash equivalents were $886.2 million at June 30. For the first six months, operating cash flow was $61.3 million, investing cash outflow $500.4 million, and financing cash inflow $643.4 million. Loan growth used $442.0 million of cash in investing activities.
- Federal funds purchased increased to $459.4 million from $288.7 million at year-end. Other borrowings were $64.7 million, comprising subordinated notes due 2025 and 2027. The filing reports $1.13 billion of liquid assets and approximately $655 million of additional unused federal funds lines.
- The company reported regulatory capital ratios of 10.18% CET1, 10.19% Tier 1 risk-based, 12.02% total risk-based, and 9.00% Tier 1 leverage on a consolidated basis. The Bank was categorized as well-capitalized; reported ratios exceed the stated minimums for well-capitalized status.
Material changes and credit quality
- Q2 taxable-equivalent net interest income increased 8.4%, but net interest margin fell 38 basis points year over year. First-half net interest income increased 9.2%, while margin declined 31 basis points.
- Noninterest income rose 16.9% in Q2 and 14.6% in the first half. Q2 credit-card income increased 27.9%; management cited approximately 35% growth in card purchases. First-half mortgage banking income increased 27.2%, with loan originations for sale up approximately 37%.
- Noninterest expense rose 10.8% in Q2 and 10.3% in the first half. Compensation, professional services, occupancy and other operating costs increased; employee count grew 8% year over year to 495.
- Q2 net charge-offs were $3.7 million, compared with $1.9 million a year earlier. The annualized net charge-off ratio rose to 0.22% from 0.13%. First-half net charge-offs were $7.0 million versus $3.4 million.
- Nonperforming loans increased to $32.1 million, or 0.46% of loans, from $27.8 million, or 0.43%, at year-end. Nonperforming assets were $37.8 million, or 0.54% of loans plus OREO and repossessed assets. Impaired loans were $45.7 million, up from $38.6 million at year-end.
- The allowance for loan losses was $71.4 million, or 1.02% of loans, versus $68.6 million, or 1.05%, at year-end. Special Mention, Substandard and Doubtful loans totaled $134.7 million, or 1.9% of loans, compared with $139.0 million, or 2.1%, at year-end. Management said the allowance was adequate, while noting future provisions may be needed.
- Troubled debt restructurings totaled $11.3 million, down from $14.6 million at year-end. One existing $2.7 million TDR was renewed during the first half; the filing says TDRs resulted from term extensions rather than rate reductions or debt forgiveness.
Outlook, risks and unusual items
- The filing provides no specific earnings, loan-growth, deposit-growth or margin guidance. Management expects sustainable deposit growth through market-share development and organic growth, and believes existing liquidity sources are adequate for anticipated needs.
- Management identifies sensitivity to interest rates, economic conditions and credit markets—particularly in the Southeast—loan collectability and collateral values, deposit and loan trends, regulatory or accounting changes, competition, and natural disasters as risks. It reported no material change in previously disclosed risk factors or interest-rate sensitivity since year-end.
- The company is preparing to adopt CECL, effective for it in 2020. It had engaged a third-party modeling provider and planned parallel runs in the third and fourth quarters of 2019; management could not yet reasonably estimate the adoption impact.
- Operating lease accounting adoption resulted in $14.0 million of right-of-use assets and lease liabilities at January 1, 2019, with no income-statement or cash-flow impact. At June 30, lease assets and liabilities were approximately $13.1 million each.
- Off-balance-sheet commitments to extend credit, credit-card arrangements and standby letters of credit totaled $2.33 billion. The company had a $0.5 million reserve for off-balance-sheet credit losses and a $0.4 million reserve for mortgage-loan repurchase demands.
- Management reported no material legal proceedings, no material changes in risk factors, and effective disclosure controls as of June 30, 2019.
Important facts for investors to verify
- Track whether deposit pricing and funding costs continue to outpace loan-yield growth, and whether net interest margin stabilizes or contracts further.
- Review the trend in net charge-offs, nonperforming and impaired loans, past-due commercial credits, and allowance adequacy as the portfolio expands.
- Assess whether loan growth and the increased reliance on federal funds purchased remain supported by stable deposits and adequate liquidity.
- Monitor expense growth against revenue growth, including staffing, data processing, business development and compliance-related costs.
- Follow CECL model validation, parallel-run results and the eventual transition impact on reserves and capital; the filing gives no estimate of that impact.
- Reconcile reported cash equivalents: the balance sheet lists $886.182 million, while the cash-flow statement lists $886.150 million. The MD&A allowance table also shows total loans of $6,968.886 million, versus $6,967.886 million in the balance sheet and loan note; confirm the intended figures in the filed statements.