ServisFirst Bancshares, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Financial performance
- Q2 net income available to common shareholders was $24.1 million, up 27.5% year over year; diluted EPS was $0.45 versus $0.36. For the first half, net income available to common shareholders was $46.7 million, up 20.4%; diluted EPS was $0.86 versus $0.73.
- Net interest income was $55.6 million for Q2 and $107.6 million for the first half, increases of 21.1% and 19.5%, respectively. On a taxable-equivalent basis, net interest margin was 3.77% in Q2 versus 3.51%, and 3.65% for the first half versus 3.54%.
- Noninterest income rose 24.9% to $4.8 million in Q2 and 28.4% to $9.4 million in the first half, led by credit card income. Noninterest expense increased 12.2% to $21.9 million in Q2 and 11.2% to $43.1 million in the first half.
- Provision for loan losses was $4.4 million in Q2 and $9.4 million in the first half, compared with $3.8 million and $5.9 million, respectively, in 2016.
- Cash flow: Operating activities provided $46.3 million for the first half, versus $40.9 million. Investing activities used $491.7 million, primarily reflecting $438.3 million of loan growth; financing activities used $83.2 million. Cash and cash equivalents declined $528.7 million to $255.3 million.
Financial position, liquidity and credit
- Total assets were $6.33 billion at June 30, down 0.6% from year-end 2016. Loans increased 8.8% to $5.34 billion; deposits decreased 0.5% to $5.39 billion.
- Noninterest-bearing deposits increased to $1.37 billion from $1.28 billion, while interest-bearing deposits declined to $4.02 billion from $4.14 billion. Management attributed the overall deposit decline partly to large depositors moving funds after the Bank declined to raise rates.
- Liquid assets, defined by the Company as cash, federal funds sold and unpledged available-for-sale securities, totaled $549.7 million. The Bank also reported approximately $458 million of unused correspondent-bank federal funds lines, subject to restrictions and collateral requirements.
- Funding and debt: Federal funds purchased were $300.2 million, down from $355.9 million at year-end. Other borrowings were $55.1 million, including $54.75 million of subordinated notes and $0.4 million of FHLB advances. The average rate on federal funds purchased was 1.11% in Q2.
- Credit quality: Nonperforming loans declined to $11.0 million (0.21% of loans) from $16.9 million (0.34%) at year-end; nonperforming assets were $14.9 million versus $21.9 million. Impaired loans increased to $51.0 million from $45.6 million. The allowance for loan losses was $55.1 million, or 1.03% of loans, versus $51.9 million, or 1.06%.
- Troubled debt restructurings totaled $16.4 million, versus $7.3 million at year-end. One relationship totaling $12.7 million was newly classified as a TDR; the filing says TDR modifications were term extensions and none defaulted during the reported periods.
- Capital: 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 10.63%, 10.64%, 11.62% and 9.71%, respectively.
Changes, outlook and risks
- Earnings growth was driven mainly by higher net interest income from growth in average earning assets, particularly loans, plus increased credit card income. Q2 average earning assets rose 12.3% year over year; the loan yield was 4.60% versus 4.47%.
- Interest expense and funding costs increased: the cost of total interest-bearing liabilities was 0.74% in Q2 versus 0.64%. Management said recent Federal Reserve rate increases supported net interest income because loan yields rose more than deposit rates.
- Management stated it anticipates sustainable long-term deposit growth and believes available funding sources are adequate for immediate anticipated needs. The filing provides no specific earnings, loan-growth or margin guidance.
- Key risks include credit deterioration, loan and deposit trends, interest-rate and yield-curve movements, competition, economic conditions in the Southeast, regulation, and natural disasters. Alabama represented 76.0% of loans. Management reported no material changes to previously disclosed risk factors or interest-rate-risk sensitivity.
- Notable items: excess tax benefits from stock awards reduced income tax provision by $1.4 million in Q2 and $3.5 million in the first half. The company is evaluating future accounting changes, including CECL, which was scheduled to become effective for SEC filers for periods beginning after December 15, 2019. Management reported no material legal proceedings; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rapid loan growth can be sustained without weakening underwriting, and how the increase in impaired loans and TDRs develops.
- Whether deposit trends and the movement from interest-bearing to noninterest-bearing balances continue, and whether funding costs rise faster than asset yields.
- The sustainability of credit card income growth and the pace of expense growth, including staffing, regulatory assessments and new facilities.
- Liquidity and funding availability under stress, including the restrictions on unused credit lines and reliance on correspondent federal funds.
- The future allowance impact of CECL adoption and any changes in the Company’s credit-loss estimates.