ServisFirst Bancshares, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context and reporting period
ServisFirst is a bank holding company operating through ServisFirst Bank, with 16 full-service offices in Alabama, Georgia, South Carolina and Florida’s panhandle, plus a Nashville loan production office. The company completed its acquisition of Metro Bancshares on January 31, 2015, entering the Atlanta market and adding two banking offices. Accordingly, 2015 comparisons include Metro after the acquisition date.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $40.2; taxable-equivalent $40.7 | Q2 2014: $32.0; taxable-equivalent $32.4 |
| Net income | $14.5 | Q2 2014: $11.6 |
| Net income available to common stockholders | $14.3; basic EPS $0.56, diluted EPS $0.54 | Q2 2014: $11.5; basic EPS $0.49, diluted EPS $0.46 |
| Net interest margin | 3.88% | Q2 2014: 3.74% |
| Total assets | $4,492.5 | December 31, 2014: $4,098.7 |
| Total loans | $3,863.7 | December 31, 2014: $3,359.9 |
| Total deposits | $3,729.1 | December 31, 2014: $3,398.2 |
| Cash and cash equivalents | $136.5 | December 31, 2014: $297.5 |
| Total stockholders’ equity | $454.5 | December 31, 2014: $407.2 |
- For the six months ended June 30, net income was $27.5 versus $23.3 in 2014; common earnings were $27.3 versus $23.1. Diluted EPS was $1.04 versus $0.97.
- Six-month net interest income was $77.2 versus $62.8; taxable-equivalent net interest income was $78.2 versus $63.7. Taxable-equivalent net interest margin was 3.84% versus 3.76%.
- Six-month operating cash flow was $24.0 versus $38.9. Investing activities used $348.8, primarily reflecting $357.7 of loan growth and acquisition-related cash use; financing activities provided $163.7. Cash and cash equivalents declined by $161.0 during the period.
- At June 30, federal funds purchased were $273.1 and other borrowings were $21.0, including $20.0 of subordinated notes and $1.0 of FHLB advances. The bank reported regulatory capital ratios above applicable well-capitalized thresholds.
Material changes versus comparable periods
- Q2 net income available to common stockholders rose 24.3%; six-month common earnings rose 18.2%. Management attributed earnings growth principally to higher net interest income from growth in average earning assets and loans.
- Loans increased 14.7% and deposits increased 8.8% from year-end 2014. Total assets rose 9.8%, with Metro contributing to balance-sheet growth.
- Provision for loan losses increased to $4.1 in Q2 from $2.4, and to $6.5 for the six months from $4.8. Noninterest expense rose 18.1% in Q2 and 26.8% for the six months; first-half 2015 included $2.1 of Metro merger expense.
- Asset quality was mixed: nonperforming loans fell to $8.7 from $10.1 at year-end, but impaired loans increased to $47.1 from $26.7. Special Mention, Substandard and Doubtful loans rose to $115.7, or 3.0% of loans, from $77.6, or 2.3%.
Outlook, management commentary, risks and unusual items
- No specific earnings or growth guidance is provided. Management expects continued long-term deposit growth and considers current funding sources adequate for anticipated immediate needs.
- Liquidity comprised $228.9 of cash, federal funds sold and unpledged available-for-sale securities, plus approximately $180.0 of unused correspondent-bank federal funds lines, subject to restrictions and collateral requirements. Management reported no known trends likely to materially change liquidity.
- Credit risks include loan growth, increased impaired and criticized loans, collateral valuation uncertainty and potential additional provisions. Nonperforming assets were $16.9; OREO and repossessed assets increased to $8.2 from $6.8 at year-end. Management said the allowance was adequate; it stood at $40.0, or 1.04% of loans.
- Metro purchase accounting remains preliminary; fair-value adjustments and recorded goodwill of $16.2 may change. The company recorded $18.1 of goodwill and identifiable intangible assets in connection with the acquisition, including a core deposit intangible amortized over seven years.
- On July 15, 2015, after quarter-end, the company issued $34.75 of 5.00% subordinated notes due 2025, intended to qualify as Tier 2 capital. It intends to use net proceeds to redeem its $40.0 Series A preferred stock. Notes cannot be prepaid before July 15, 2020.
- Other items include a $0.5 reserve for unfunded loan commitments, $61,000 reserved for mortgage investor repurchase demands, and $1.8 of unrealized losses on available-for-sale securities. Management attributed securities impairments to market interest rates and did not consider them other-than-temporary.
- Forward-looking results remain exposed to economic and credit conditions, interest-rate and yield-curve changes, competition, regulatory and legal developments, borrower creditworthiness, collateral values and natural disasters in the company’s markets. The filing reports no material change in previously disclosed risk factors and no material legal proceedings beyond those previously disclosed.
- The filing presents differing rounded figures for six-month “core” net income: the MD&A overview states $29.1 versus $24.7, while the reconciliation reports $29.291 versus $24.955. This non-GAAP presentation should be checked against the filing’s definitions and reconciliation.
Most important facts for investors to verify
- Whether the rise in impaired and criticized loans leads to higher charge-offs, nonperforming loans or provision expense; review the $17.7 of newly impaired commercial relationships identified by management.
- How much reported earnings growth reflects sustainable loan and deposit growth versus Metro acquisition effects, loan discount accretion and nonroutine costs.
- The final Metro purchase accounting, including goodwill, loan marks and subsequent fair-value adjustments.
- Liquidity and funding reliance, including use and availability of federal funds lines, and the effect of the post-quarter subordinated-note issuance and planned preferred-stock redemption on capital and interest expense.
- The stated inconsistency in six-month core net income figures and the precise adjustments used for non-GAAP measures.