ServisFirst Bancshares, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The interim consolidated financial statements are unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context
ServisFirst is a bank holding company operating through ServisFirst Bank, with 19 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee. Its core business is commercial and consumer lending funded primarily by customer deposits.
Financial performance and condition
| Metric | Q2 2018 / June 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net income available to common shareholders | $33.5; diluted EPS $0.62 | Q2 2017: $24.1; diluted EPS $0.45 |
| Six-month net income available to common shareholders | $66.1; diluted EPS $1.22 | First half 2017: $46.7; diluted EPS $0.86 |
| Net interest income | Q2: $64.5 GAAP; $64.7 taxable-equivalent. First half: $127.0 GAAP; $127.3 taxable-equivalent | Q2 2017: $55.6 GAAP; $56.1 taxable-equivalent. First half 2017: $107.6 GAAP; $108.6 taxable-equivalent |
| Net interest margin | Q2: 3.82%; first half: 3.81% | Q2 2017: 3.77%; first half 2017: 3.65% |
| Noninterest income / expense | Q2: $5.5 / $24.0. First half: $10.3 / $47.5 | Q2 2017: $4.8 / $21.9. First half 2017: $9.4 / $43.1 |
| Return on average assets / common equity | Q2: 1.91% / 20.89%; first half: 1.91% / 21.13% | Q2 2017: 1.55% / 17.36%; first half 2017: 1.50% / 17.23% |
| Total assets | $7,084.6 | December 31, 2017: $7,082.4 |
| Total loans / deposits | $6,129.6 / $6,085.7 | December 31, 2017: $5,851.3 / $6,091.7 |
| Allowance for loan losses | $64.2, or 1.05% of loans | December 31, 2017: $59.4, or 1.02% |
| Cash and cash equivalents | $165.7 | December 31, 2017: $477.6 |
| Borrowings | $327.3: $262.7 federal funds purchased and $64.6 other borrowings | December 31, 2017: $366.6 |
| Stockholders’ equity | $655.1 | December 31, 2017: $607.6 |
For the six months ended June 30, operating cash flow was $77.1, investing cash outflow was $337.4 and financing cash outflow was $51.6. Cash and cash equivalents declined by $311.9, mainly as the company funded loan growth and investment-security purchases while deposits were nearly flat.
Q2 provision for loan losses was $4.1, versus $4.4 a year earlier; first-half provision was $8.3, versus $9.4. Net charge-offs were 0.13% of average loans in Q2 and 0.12% for the first half, each 12 basis points below the comparable 2017 period. The effective tax rate was 19.9% in Q2 and 18.9% in the first half, down from 29.2% and 27.6%, respectively, in 2017.
The Bank was categorized as well-capitalized. At June 30, its CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 11.06%, 11.07%, 12.08% and 10.11%, respectively.
Material changes versus comparable periods
- Q2 net income available to common shareholders rose 39.0%; first-half income rose 41.5%. Management attributed the gains mainly to higher net interest income from growth in earning assets, plus increased credit-card income.
- Loans increased 4.8% from year-end to $6.13 billion, while deposits were essentially flat. Management noted that loan growth and flat deposits reduced excess liquidity.
- Average earning assets grew 13.8% year over year in Q2. Higher loan yields and asset growth lifted net interest income, while the cost of interest-bearing liabilities also increased: to 1.13% in Q2 from 0.74% a year earlier.
- Credit-card income increased 47.7% in Q2, with card purchases up approximately 22%. Mortgage-banking income declined 25.8%, reflecting lower originations and slower refinance activity.
- Noninterest expense rose 9.8% in Q2 and 10.2% for the first half. Higher salaries, other operating costs and regulatory assessments were partially offset by lower equipment and occupancy expense.
- Nonperforming loans increased to $14.1 million, or 0.23% of loans, from $10.8 million, or 0.19%, at year-end. The increase in loans 90 days past due and still accruing primarily reflected one $5.1 million commercial real-estate mortgage loan that management described as well-collateralized and under active collection.
- Available-for-sale securities had $10.8 million of gross unrealized losses at June 30, compared with $3.5 million at year-end. The filing attributes the declines to interest rates, not issuer credit quality; year-to-date other comprehensive loss was $7.0 million.
Outlook, risks and contingencies
The filing provides no specific earnings, growth or margin guidance. Management anticipates long-term sustainable deposit growth through developing newer markets and organic growth in mature markets, and stated that available liquidity sources are adequate for anticipated funding needs. Liquid assets were $549.7 million, with approximately $458.0 million of additional unused federal-funds borrowing availability, subject to restrictions and collateral requirements.
Key risks identified include economic and credit conditions, interest-rate and yield-curve changes, deposit and loan trends, customer creditworthiness and collateral values, regulatory or tax changes, competition, and natural disasters in the company’s markets. Management reported no material change in previously disclosed risk factors or interest-rate sensitivity policies. It said the portfolio’s unrealized security losses were interest-rate driven and that it did not expect to need to sell the securities before recovery, but noted future impairment charges remain possible.
Off-balance-sheet commitments to extend credit, credit-card arrangements and standby letters of credit totaled $2.105 billion; the company had a $0.5 million reserve for related losses. A separate $0.4 million reserve covered mortgage-loan investor repurchase demands. TDRs totaled $17.3 million, with $3.6 million of related allowance; no new or renewed TDRs were reported in the first half. One previously modified $0.3 million commercial TDR defaulted during the period. Management reported no material legal proceedings. Disclosure controls were concluded to be effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth can continue without outpacing deposit growth, and how the resulting funding mix affects liquidity and funding costs.
- Trends in nonperforming and past-due loans, especially the $5.1 million commercial real-estate loan, and subsequent collection or repayment outcomes.
- Whether the allowance remains adequate as loans grow and criticized loans totaled $104.3 million, or 1.7% of loans.
- How rising deposit costs and interest rates affect net interest margin and the value of available-for-sale securities.
- Whether growth in credit-card income and other fee income offsets weaker mortgage-banking income and higher operating expenses.
- Future capital, liquidity and credit-loss impacts of the $2.105 billion in off-balance-sheet commitments and pending adoption of the expected-credit-loss standard.