ServisFirst Bancshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating 19 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $45.9 | $40.2 | $90.1 | $77.2 |
| Provision for loan losses | $3.8 | $4.1 | $5.9 | $6.5 |
| Noninterest income | $3.8 | $3.4 | $7.3 | $6.4 |
| Noninterest expense | $19.5 | $18.1 | $38.8 | $36.7 |
| Net income | $18.9 | $14.5 | $38.8 | $27.5 |
| Net income available to common stockholders | $18.9 | $14.3 | $38.8 | $27.3 |
| Diluted EPS | $0.71 | $0.54 | $1.46 | $1.04 |
Common net income rose 32.2% in Q2 and 42.1% for the six-month period. Management attributed the increase primarily to growth in average earning assets; H1 results also benefited from a $3.6 million reduction in income tax expense from early adoption of stock-compensation guidance. Q2 return on average assets was 1.37% and return on average common equity was 15.79%; H1 figures were 1.45% and 16.57%, respectively.
Margins: Taxable-equivalent net interest income increased 14.0% in Q2 and 16.5% in H1. Net interest margin declined to 3.51% from 3.88% in Q2 and to 3.54% from 3.84% in H1. Average interest-earning assets grew about 26% in both comparisons, but asset yields fell and funding costs rose. Management cited deposit-rate increases, higher-cost federal funds purchased and elevated liquidity as sources of margin pressure.
Cash flow: For H1, operating activities provided $40.9 million, investing activities used $316.4 million and financing activities provided $512.0 million. Cash and cash equivalents increased $236.5 million to $588.7 million. Loan growth used $325.5 million in investing cash flow; deposit growth and increased federal funds purchased supported financing inflows.
Financial position, liquidity and capital
At June 30, 2016, total assets were $5.646 billion, up 9.8% from year-end 2015; loans were $4.539 billion, up 7.7% from $4.216 billion; and deposits were $4.668 billion, up 10.5% from $4.224 billion. (Management describes the loan and deposit increases as 7.1% and 11.9%, respectively, using rounded figures.) Stockholders’ equity was $489.1 million.
Borrowings included $420.4 million of federal funds purchased and $55.45 million of other borrowings, including $54.75 million of subordinated notes and $0.8 million of Federal Home Loan Bank advances. Management reported $708.8 million of liquid assets and approximately $340 million of unused federal funds lines, and considered funding sources adequate for immediate anticipated needs. Federal funds purchased from correspondent-bank customers increased during the period.
The company reported it was well-capitalized. At June 30, consolidated CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 9.83%, 9.84%, 11.98% and 8.52%, respectively. The Bank’s corresponding ratios were 10.86%, 10.87%, 11.86% and 9.40%.
Material changes and credit quality
- Nonperforming loans declined to $5.2 million, or 0.11% of loans, from $7.8 million, or 0.18%, at December 31, 2015. Nonperforming assets were $9.4 million, down from $13.2 million.
- Impaired loans increased to $45.0 million from $33.5 million at year-end; management attributed the increase mainly to $18.3 million of newly specifically impaired loans, partly offset by paydowns, upgrades, charge-offs and transfers to OREO.
- The allowance for loan losses rose to $47.0 million, 1.04% of loans, from $43.4 million, 1.03%. Special Mention, Substandard and Doubtful loans totaled $129.5 million, or 2.9% of loans, versus $117.0 million, or 2.8%, at year-end.
- Troubled debt restructurings were $6.8 million, down from $7.7 million; no TDR defaults meeting the filing’s definition were reported for the periods discussed.
- Noninterest expense increased 7.5% in Q2. H1 salary and benefit costs rose 12.2%, partly reflecting 12 new sales officers and a 10% increase in full-time equivalent employees. New offices and accelerated depreciation for the planned headquarters move also raised occupancy costs.
Outlook, risks and unusual items
No numerical earnings or margin guidance was provided. Management anticipates sustainable deposit growth, considers current liquidity sources adequate and said it was not aware of trends likely to materially increase or decrease liquidity. The filing notes that actual results may differ due to economic and credit conditions, interest rates, deposit and loan trends, regulation, competition, legal contingencies and natural disasters. Alabama represented 78.6% of loans, creating geographic concentration.
Early adoption of ASU 2016-09 moved excess tax benefits from stock-option and restricted-stock exercises into income tax expense, reducing H1 tax expense by $3.6 million ($1.3 million in Q2 and $2.3 million in Q1). The prior-year H1 comparison included $2.1 million of Metro acquisition expenses and a $0.5 million initial reserve for unfunded commitments; management’s non-GAAP “core” comparison excludes these costs. The filing states that the company is evaluating the expected impact of the new CECL credit-loss standard. Investment-security unrealized losses were attributed by management to interest-rate changes, not issuer credit deterioration; the company did not consider them other-than-temporary impairments.
Off-balance-sheet commitments to extend credit, credit card arrangements and standby letters of credit totaled $1.719 billion. The company had a $0.5 million reserve for these arrangements and a $0.368 million reserve for mortgage-investor repurchase demands. Management reported no material change in previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- How much earnings growth is sustainable after the $3.6 million H1 tax benefit from ASU 2016-09?
- Whether net interest margin continues to compress as funding costs rise and excess liquidity remains elevated.
- Whether impaired loans and criticized/classified exposures lead to higher provisions or charge-offs, despite lower nonperforming loans.
- The stability and cost of deposit funding and correspondent-bank federal funds, alongside the company’s liquidity lines and capital ratios.
- The potential drawdown and credit exposure from $1.719 billion of off-balance-sheet commitments, and the eventual impact of CECL adoption.