ServisFirst Bancshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. The interim 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 condition
- Profit: Net income was $35.0 million, up 7.4% from $32.6 million in Q1 2018. Basic and diluted EPS were both $0.65, versus $0.61 and $0.60, respectively. Return on average assets was 1.75% (1.91% prior year); return on average equity was 19.42% (21.40%).
- Interest income and margins: Interest income was $93.7 million, versus $74.0 million. Net interest income was $68.8 million, up from $62.4 million. Taxable-equivalent net interest margin declined 25 basis points to 3.56%; asset yield rose to 4.85% from 4.51%, while the cost of interest-bearing liabilities increased to 1.73% from 0.95%.
- Other income and expenses: Noninterest income rose 11.9% to $4.9 million. Noninterest expense increased 9.8% to $25.3 million. Provision for loan losses was $4.9 million, up from $4.1 million; income tax expense was $8.5 million and the effective tax rate was 19.5%.
- Assets and lending: Total assets were $8.31 billion, compared with $8.01 billion. Loans were $6.66 billion, up $126.4 million, or 1.9%; available-for-sale securities were $631.7 million. The allowance for loan losses was $70.2 million, approximately 1.05% of loans.
- Deposits and funding: Deposits were $7.08 billion, up $168.0 million. Federal funds purchased were $373.4 million; other borrowings, primarily subordinated notes, were $64.7 million. The company reported $799.5 million in cash and cash equivalents.
- Cash flow: Operating activities provided $41.7 million. Investing activities used $168.0 million, principally reflecting $130.0 million of loan growth and net securities purchases. Financing activities provided $243.9 million, including deposit growth and increased federal funds purchased. Cash and cash equivalents increased $117.6 million during the quarter.
- Capital and liquidity: Consolidated CET1 and total risk-based capital ratios were 10.30% and 12.21%; management reported the bank as well-capitalized. Management cited $1.2 billion of liquid assets and approximately $567 million of unused federal-funds lines, subject to restrictions and collateral requirements.
Material changes versus comparable periods
- Net income increased 7.4% year over year, with growth in net interest income and noninterest income partly offset by higher operating costs, loan-loss provision and taxes.
- Average earning assets increased 17.5% year over year. Loan yield improved, but higher deposit and borrowing costs outpaced the rise in loan yields, reducing net interest margin.
- Nonperforming loans were $27.2 million, or 0.41% of loans, down from $27.8 million, or 0.43%, at year-end 2018; they were above $9.9 million, or 0.17%, a year earlier. Nonperforming assets were $32.7 million, or 0.49% of loans plus OREO and repossessions.
- Q1 net charge-offs were 0.20% of average loans, versus 0.10% in Q1 2018. Special-mention and substandard loans totaled $133.3 million, or 2.0% of loans, compared with $139.0 million, or 2.1%, at year-end.
- Adoption of the new lease standard on January 1, 2019 added $15.3 million of right-of-use assets and lease liabilities; quarter-end balances were $14.7 million. The company said adoption did not affect income or cash flows.
Outlook, commentary and risks
- The filing provides no specific earnings, loan-growth or margin guidance. Management expects long-term deposit growth through market-share gains and organic growth, and says liquidity is adequate for anticipated immediate funding needs; additional funding may be needed if the current growth rate continues.
- Management said the allowance was adequate at quarter-end, while noting future provisions may be necessary. The company is preparing for CECL, effective for it in 2020, and planned model testing during 2019.
- Principal disclosed risks include economic and credit conditions, changes in interest rates and yield curves, deposit and loan trends, competition, regulation, legal contingencies, collateral values and natural disasters in its markets. Management reported no significant change in interest-rate sensitivity since year-end and no material change in previously disclosed risk factors.
- Investment securities had $3.6 million of gross unrealized losses at March 31; management attributed declines to market rates rather than credit deterioration and said it did not intend, and was not likely to be required, to sell before recovery. Off-balance-sheet commitments to extend credit were $2.01 billion; total commitments, credit-card arrangements and standby letters of credit were $2.28 billion. Reserves were $0.5 million for off-balance-sheet arrangements and $0.4 million for mortgage repurchase demands.
- Management reported no material change in legal proceedings disclosed in the 2018 Form 10-K. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- The MD&A overview contains apparent balance-sheet inconsistencies: it says assets increased by $30.0 million, although the balance sheets show an increase of approximately $303.5 million; it also describes deposits as $0.37 billion and $0.29 billion, while the balance sheets show $7.08 billion and $6.92 billion. Confirm against the filed statements and XBRL.
- Reconcile the MD&A’s stated $70.7 million allowance with the balance-sheet and allowance-table amount of $70.207 million.
- Track funding costs and net interest margin as deposit costs rose materially faster than asset yields, and assess deposit mix and reliance on federal funds purchased.
- Monitor credit quality, charge-offs, nonperforming loans, impaired loans and allowance adequacy, particularly against continued loan growth.
- Review CECL implementation and the sensitivity of earnings and capital to interest rates, credit conditions, and growth-related liquidity needs.