ServisFirst Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. Unless stated otherwise, amounts are U.S. dollars; financial statement figures are in millions (converted from the filing’s thousands).
Business context and results
ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating through ServisFirst Bank across Alabama and selected markets in Florida, Georgia, South Carolina and Tennessee. Its core activities are commercial banking, including lending, deposits and related services.
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Interest income | $101.1m | $84.1m | +$17.1m |
| Net interest income | $73.0m | $66.9m | +$6.1m |
| Provision for loan losses | $7.0m | $6.6m | +$0.4m |
| Noninterest income | $6.2m | $5.1m | +$1.1m |
| Noninterest expense | $25.2m | $22.6m | +$2.5m |
| Net income | $37.6m | $34.6m | +8.7% |
| Diluted EPS | $0.69 | $0.64 | +$0.05 |
For the nine months ended September 30, 2019, net income was $108.2m versus $100.7m; diluted EPS was $2.00 versus $1.86. Taxable-equivalent net interest income was $212.0m, up 9.1%. The filing does not present a conventional total-revenue measure; reported interest and noninterest income are shown above.
Financial position, liquidity and capital
- At September 30, 2019, total assets were $9.01bn, up 12.5% from December 31, 2018. Loans were $7.02bn, up 7.5%; deposits were $7.72bn, up 11.7%.
- Cash and cash equivalents were $1.05bn. Management reported $1.37bn of liquid assets and approximately $732m in additional federal funds borrowing availability, subject to restrictions and collateral requirements.
- Federal funds purchased were $370.2m and other borrowings were $64.7m, including $64.75m of subordinated notes. Total stockholders’ equity was $810.5m; equity attributable to the Company was $810.0m, or 9.0% of assets.
- The Bank was categorized as well-capitalized. Its September 30, 2019 regulatory ratios included 11.21% CET1, 11.22% Tier 1 risk-based capital, 12.24% total risk-based capital and 9.59% Tier 1 leverage.
- For the first nine months, operating cash flow was $102.8m, investing cash outflow was $611.8m, and financing cash inflow was $873.8m. Cash and cash equivalents increased $364.8m to $1.05bn.
Margins, growth and material changes
- Q3 net interest margin was 3.36%, down from 3.77% a year earlier; nine-month margin was 3.45%, versus 3.80%. Management attributed the pressure to funding costs rising faster than asset yields. Q3 cost of interest-bearing liabilities increased to 1.73% from 1.33%; the loan yield rose to 5.17% from 5.03%.
- Growth in average earning assets—up 22.4% year over year in Q3—supported higher net interest income, while the rate component reduced that benefit. The Federal Reserve cut its target rate by a total of 50 basis points during Q3; management said it was reducing rates paid on interest-bearing deposits.
- Q3 noninterest income growth was led by mortgage banking and credit card income. Mortgage banking income rose 68.9% and credit card income rose 32.1% year over year. For nine months, noninterest income increased 17.4%.
- Noninterest expense rose 11.2% in Q3 and 10.6% for nine months. Salaries and benefits increased 18.6% in Q3, alongside employee growth from 460 to 506 year over year; data processing and Federal Reserve service charges also contributed to higher costs.
- Return on average assets was 1.67% in Q3 and 1.70% for nine months, below 1.87% and 1.90%, respectively, in the comparable 2018 periods. Return on average common equity also declined year over year.
Credit quality, unusual items and outlook
- Nonperforming loans rose to $41.0m, or 0.58% of loans, from $27.8m, or 0.43%, at year-end 2018. Nonaccrual loans were $35.7m. Management identified an $11.6m rural healthcare loan placed on nonaccrual in Q3.
- Net charge-offs were $8.6m in Q3; the annualized ratio to average loans increased to 0.49% from 0.25% a year earlier. The allowance for loan losses was $77.2m, or 1.10% of loans, versus $68.6m, or 1.05%, at December 31, 2018.
- A state Loan Guarantee Program terminated in Q3. The Company recorded a $7.4m payment into the allowance for loans formerly covered by the program. At quarter-end, 72 such loans totaled $44.3m; the filing reports $5.2m as Special Mention and $1.3m as Substandard.
- A $1.7m FDIC Small Bank Assessment Credit reduced Q3 regulatory assessment expense; Q3 reported FDIC and other regulatory assessments were a $0.3m credit. This benefited reported expenses and should be considered when evaluating underlying cost trends.
- The Company adopted lease accounting on January 1, 2019, recording $15.6m of right-of-use assets and lease liabilities with no income-statement or cash-flow impact. At September 30, lease assets were $12.3m and liabilities $12.4m.
- The Company was preparing to adopt the CECL credit-loss standard, effective for it in 2020, but could not reasonably estimate the impact. Management planned a parallel model run and independent validation in Q4 2019.
- No specific earnings or growth guidance was provided. Management said current liquidity sources were adequate and it was not aware of trends reasonably likely to materially increase or decrease liquidity. The filing cites economic, interest-rate, credit, competition, regulatory and disaster risks; it reports no material change to previously disclosed risk factors and no material pending legal proceedings.
Important facts for investors to verify
- Whether higher nonperforming loans, charge-offs and the healthcare credit exposure lead to further provisions or deterioration in credit metrics.
- The recoverability and reserve adequacy of the $44.3m portfolio formerly covered by the terminated state guarantee program, and the assumptions behind the $7.4m allowance allocation.
- Whether deposit repricing can ease funding-cost pressure and stabilize net interest margin after the Federal Reserve rate cuts.
- How much reported expense growth reflects continuing staffing and operating costs versus the temporary FDIC assessment credit.
- The eventual CECL adoption effect on the allowance, capital and earnings; management had not yet quantified it.
- That reported cash-flow growth was supported substantially by deposit growth and increased federal funds purchased, while loan growth continued to use investing cash.