ServisFirst Bancshares, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparative figures are for FY 2017. The filing also reports unaudited fourth-quarter results. ServisFirst is a Birmingham-based bank holding company operating across Alabama, Florida, Georgia, South Carolina and Tennessee, focused on commercial banking and relationship-driven loan and deposit growth.
Key financial results
| Metric | FY 2018 / year-end | FY 2017 / year-end |
|---|---|---|
| Total assets | $8.01 billion | $7.08 billion |
| Gross loans | $6.53 billion | $5.85 billion |
| Total deposits | $6.92 billion | $6.09 billion |
| Stockholders’ equity | $715.2 million | $607.6 million |
| Net interest income | $262.7 million | $227.4 million |
| Net income available to common stockholders | $136.9 million | $93.0 million |
| Diluted EPS | $2.53 | $1.72 |
| Net interest margin | 3.75% | 3.68% |
| Return on average assets / equity | 1.88% / 20.96% | 1.43% / 16.38% |
| Efficiency ratio | 32.57% | 34.40% |
FY 2018 revenue and earnings benefited principally from higher loan balances and net interest income, as well as lower income taxes following the Tax Cuts and Jobs Act. Interest expense rose 81.0% to $63.9 million, faster than interest income, which increased 24.3% to $326.6 million. Provision for loan losses declined to $21.4 million from $23.2 million; noninterest expense rose 9.1% to $91.9 million. The effective tax rate fell to 18.89% from 32.22%; FY 2017 included $3.1 million of expense from revaluing deferred tax assets after the tax-law change.
Cash flow and liquidity: Reported operating cash flow was $168.3 million, investing cash use was $754.5 million, and financing cash inflow was $790.5 million. Cash and cash equivalents ended the year at $681.9 million, versus $477.6 million. Management reported $973.7 million of liquid assets and $562.0 million of unused federal funds lines available at year-end, subject to restrictions and collateral requirements.
Funding and capital: Year-end federal funds purchased were $288.7 million; other borrowings were $64.7 million, principally subordinated notes with 5% and 4.5% coupons due in 2025 and 2027. The bank was categorized as well-capitalized. Its year-end CET1, Tier 1, total capital and leverage ratios were 11.03%, 11.04%, 12.03% and 9.89%, respectively.
Material changes and asset quality
- Assets increased 13.1%, loans 11.7% and deposits 13.5% year over year. Loan growth remained the main driver of balance-sheet expansion.
- Net charge-offs fell to $12.2 million, or 0.20% of average loans, from $15.7 million, or 0.29%. The allowance for loan losses rose to $68.6 million, 1.05% of gross loans, from $59.4 million, or 1.02%.
- Credit quality indicators worsened in some respects: nonperforming loans increased to $27.8 million, or 0.43% of loans, from $10.8 million, or 0.19%. Nonaccrual loans were $21.9 million; management attributed much of the increase to a $10.4 million commercial relationship placed on nonaccrual in Q4. Loans rated Special Mention or Substandard totaled $139.0 million, compared with $99.8 million.
- Commercial and industrial loans were 38.5% of the portfolio; real estate mortgage loans were 52.4%. Loans were geographically concentrated, with 73% assigned to Alabama markets and 42% to Birmingham.
- Available-for-sale securities had $596.2 million amortized cost and $590.2 million fair value at year-end. Unrealized losses increased year over year; the filing attributed them primarily to higher market rates, not credit deterioration, and reported no other-than-temporary impairments.
Fourth-quarter results and shareholder matters
In Q4 2018, net income available to common stockholders was $36.2 million and diluted EPS was $0.67. Net interest income was $68.9 million and provision for loan losses was $6.5 million. The board increased the quarterly dividend from $0.11 to $0.15 per share in December 2018; future payments remain subject to board approval and regulatory limits. No share repurchases were reported for Q4.
Outlook, risks and contingencies
- The filing provides no specific earnings, loan-growth or margin guidance. Management described continued organic growth as its strategy and stated that available liquidity was adequate for immediate anticipated funding needs.
- Management described the balance sheet as somewhat liability-sensitive: rising rates may pressure net interest income if deposit costs reprice faster than asset yields. Its one-year cumulative gap was negative 14.15%; modeled economic value of equity increased under upward rate shocks, but decreased under downward shocks. These are model estimates, not forecasts.
- Key risks include credit deterioration, commercial real estate and local-market concentration, interest-rate and deposit-funding competition, liquidity mismatch, economic or weather-related disruption in regional markets, cybersecurity and third-party systems, regulatory change, and the ability to sustain growth and retain key bankers.
- Off-balance-sheet commitments totaled approximately $2.20 billion: $1.99 billion to extend credit, $173.6 million in credit-card arrangements and $40.6 million in standby letters of credit and guarantees. Commitments may not be fully drawn, but create potential credit and funding exposure.
- Adoption of the expected-credit-loss standard (CECL) was planned for 2020; management could not yet reasonably estimate its effect and was developing and testing its model. The company expected to recognize $13–$16 million of right-of-use assets and lease liabilities upon adopting the lease standard in 2019, with an estimated 3-basis-point reduction in capital ratios.
- No material legal proceedings were reported. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and financial-reporting controls.
Most important facts for investors to verify
- Whether the rise in nonperforming loans and criticized/classified balances, particularly the Q4 commercial relationship, leads to further losses or provision expense.
- Whether deposit costs continue to rise faster than loan yields, and how that affects net interest margin and funding needs.
- How much of FY 2018 earnings growth reflects recurring operating performance versus the lower statutory tax rate and tax-related items.
- The expected CECL effect on the allowance, earnings and regulatory capital when adopted.
- The quality, collateral and likely utilization of the $2.20 billion in credit commitments, alongside concentrations in real estate and Alabama markets.
- The effect of unrealized securities losses, dividend restrictions and future capital needs on shareholder returns.