ServisFirst Bancshares, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY2016. The filing is an annual report, not a standalone Q4 filing. ServisFirst is a commercial bank holding company operating 20 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee.
Financial performance and condition
| Metric | FY2017 / Dec. 31, 2017 | FY2016 / Dec. 31, 2016 |
|---|---|---|
| Total assets | $7.08 billion | $6.37 billion |
| Total loans | $5.85 billion | $4.91 billion |
| Total deposits | $6.09 billion | $5.42 billion |
| Stockholders’ equity | $607.6 million | $522.9 million |
| Net interest income | $227.4 million | $187.1 million |
| Provision for loan losses | $23.2 million | $13.4 million |
| Net income available to common stockholders | $93.0 million; diluted EPS $1.72 | $81.4 million; diluted EPS $1.52 |
| Net interest margin | 3.68% | 3.42% |
| Net charge-offs / average loans | 0.29% | 0.11% |
| Allowance for loan losses | $59.4 million; 1.02% of gross loans | $51.9 million; 1.06% |
- Interest income was $262.8 million and interest expense $35.3 million. Noninterest income was $19.0 million; noninterest expense was $85.9 million. GAAP efficiency ratio was 34.85%.
- Return on average assets was 1.43% (1.42% in 2016); return on average equity was 16.38% (16.64%). Non-GAAP core net income was $96.3 million and core diluted EPS $1.78; these exclude specified tax-revaluation and headquarters move costs.
- Operating cash flow was $118.5 million. Investing activities used $1.04 billion, principally reflecting $958.0 million of loan growth; financing activities provided $617.4 million. Cash and cash equivalents declined $306.4 million to $477.6 million.
- Year-end borrowings included $301.8 million of federal funds purchased and $64.8 million of other borrowings. Other borrowings included $34.75 million of 5% subordinated notes due 2025 and $30 million of 4.5% subordinated notes due 2027; the company issued the latter and redeemed $20 million of 5.5% notes during 2017.
- Liquid assets totaled $821.5 million, with $468.0 million of unused federal funds lines available subject to restrictions and, in some cases, collateral. Net loans were 95.08% of deposits. The bank was categorized as well-capitalized; year-end bank ratios were 10.45% CET1, 10.45% Tier 1, 11.42% total capital and 9.35% leverage.
Material changes versus FY2016
- Assets increased 11.2%, loans 19.2% and deposits 12.4%; common net income increased 14.2%.
- Net interest income rose 21.5%, driven primarily by 19.3% growth in average loans, alongside higher asset yields. Net interest margin improved from 3.42% to 3.68%; interest expense grew faster than deposits as funding costs increased.
- Loan-loss provision rose 73.4% to $23.2 million. Net charge-offs increased to $15.7 million from $4.9 million, including a $5.8 million charge-off on one commercial relationship. Nonperforming loans nevertheless declined to $10.8 million, or 0.19% of loans, from $16.9 million, or 0.34%.
- Noninterest expense increased 6.1%, chiefly from higher salaries, regulatory assessments and other operating costs. Noninterest income grew 5.2%; credit card income increased 50.1%.
Outlook, commentary, risks and unusual items
- No specific earnings, loan-growth or other financial guidance is provided. Management estimated that, based on current 2018 projections, the new tax law could lower the effective tax rate by approximately 11 percentage points versus the prior law, but noted the outcome depends on future income, expenses and tax-sensitive transactions.
- The Tax Cuts and Jobs Act lowered the federal corporate rate from 35% to 21%. ServisFirst recorded $3.1 million of additional 2017 tax expense to revalue deferred tax assets and liabilities. It also reported $347,000 of headquarters lease termination and moving costs; core measures exclude these items.
- Credit risks include rapid loan growth and an unseasoned portfolio, real-estate and construction exposure, regional concentration, and large borrower relationships. Commercial and industrial loans were about 39% of loans; 75% of loans were assigned to Alabama markets. Troubled debt restructurings increased to $20.6 million from $7.3 million.
- Management described the balance sheet as somewhat liability-sensitive: rising deposit costs could pressure net interest income. The one-year gap ratio was negative 10.7%; the model indicated a 9.5% decline in economic value of equity under a 100-basis-point rate decline and increases under upward-rate scenarios.
- Off-balance-sheet commitments totaled $2.11 billion, including $1.95 billion to extend credit, $128.1 million in credit card arrangements and $41.7 million of standby letters of credit and guarantees. These are contractual amounts, not necessarily expected funding requirements.
- Other risks include deposit competition and liquidity mismatch, cybersecurity and third-party technology dependence, local economic or severe-weather events, regulatory and compliance costs, and potential valuation losses on securities. Management reported no material legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Review the $5.8 million commercial relationship charge-off, elevated 2017 net charge-offs and the adequacy of the $59.4 million allowance as loan growth continues.
- Track credit migration, impaired loans, the increase in TDRs and the concentration of loans in real estate, construction and Alabama markets.
- Assess deposit pricing, funding mix, the 95.08% net-loans-to-deposits ratio, available borrowing lines and the timing or drawdown of unfunded commitments.
- Test sensitivity of net interest income and equity to rate changes, particularly as funding costs rise; compare modeled results with subsequent performance.
- Confirm the deferred-tax-asset revaluation and actual 2018 tax rate against management’s estimate, and distinguish GAAP results from the company’s non-GAAP core measures.
- Monitor capital ratios, subordinated debt costs and maturities, and whether capital and liquidity remain adequate to support continued growth.