ServisFirst Bancshares, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless noted. The interim financial statements are unaudited.
Business context and financial performance
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Its wholly owned bank provides commercial banking through 19 offices across Alabama, Florida, Georgia, South Carolina and Tennessee.
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Interest income | $59.5 million | $50.0 million in Q1 2016 |
| Net interest income | $52.1 million | $44.2 million in Q1 2016; up 17.8% |
| Net income | $22.5 million | $20.0 million in Q1 2016; up 12.5% |
| EPS | $0.43 basic; $0.42 diluted | $0.38 basic and diluted in Q1 2016 |
| Net interest margin | 3.53% | 3.57% in Q1 2016 |
| Return on average assets / equity | 1.45% / 17.09% | 1.53% / 17.39% in Q1 2016 |
| Operating cash flow | $29.2 million | $27.3 million in Q1 2016 |
Taxable-equivalent net interest income was $52.5 million, up 17.4% year over year. Management attributed the increase mainly to growth in average interest-earning assets of $1.01 billion, or 20.1%; the average yield on those assets was 4.03% in both periods. Higher deposit costs contributed to margin compression.
Financial condition, liquidity and capital
- Total assets were $6.34 billion, down 0.5% from year-end. Loans rose 4.9% to $5.15 billion; deposits declined 1.1% to $5.36 billion.
- Cash and cash equivalents were $465.6 million, down from $784.0 million. Net cash used in investing was $290.0 million, primarily reflecting $243.6 million of loan growth; financing activities used $57.6 million.
- Federal funds purchased were $358.2 million; other borrowings were $55.2 million, including $54.75 million of subordinated notes and $0.5 million of Federal Home Loan Bank advances. These figures exclude deposits.
- Management reported $772.5 million of liquid assets and approximately $473 million of unused federal funds lines, subject to restrictions and collateral requirements. It considered liquidity adequate for immediate anticipated needs, but noted additional funding could be needed to sustain current growth.
- The company reported consolidated capital ratios of 9.67% CET1, 9.68% Tier 1 risk-based, 11.66% total risk-based and 8.46% Tier 1 leverage. The bank was categorized as well-capitalized.
Material changes, credit quality and other notable items
- Noninterest income increased 32.3% to $4.5 million, including higher mortgage banking and other operating income. Noninterest expense rose 10.2% to $21.3 million, reflecting expansion, staffing, occupancy, regulatory assessments and other operating costs.
- The provision for loan losses increased to $5.0 million from $2.1 million. Net charge-offs were 0.24% of average loans, versus 0.03% in Q1 2016. The allowance was $53.9 million, or 1.05% of loans.
- Nonperforming loans declined to $12.1 million, or 0.23% of loans, from $16.9 million at year-end; nonperforming assets were $17.2 million. Impaired loans were $43.0 million. Special Mention, Substandard and Doubtful loans totaled $117.9 million, or 2.3% of loans.
- Common dividends declared were $0.05 per share. Stock-based compensation tax benefits reduced income tax expense by $2.1 million in Q1 2017; the effective tax rate was 25.8%.
- The company recognized a $0.5 million reserve for losses on off-balance-sheet arrangements. Commitments to extend credit were $1.74 billion; credit card arrangements and standby letters of credit brought total disclosed commitments to $1.88 billion. A separate $368,000 reserve covered mortgage investor repurchase demands.
- Management cited interest-rate risk, credit quality and collateral values, economic conditions, competition, regulation, and possible natural disasters among factors that could cause results to differ from forward-looking statements. No material change in previously disclosed risk factors or material legal proceedings was reported. No subsequent events requiring disclosure were identified.
Guidance and outlook
The filing provides no specific earnings or financial guidance. Management anticipated continued deposit growth through market development and organic growth, and stated that liquidity may require additional funding if the current growth rate continues. The company was evaluating the effects of several forthcoming accounting standards, including expected credit loss and lease accounting requirements.
Key facts for investors to verify
- Whether loan growth can be funded sustainably given lower deposits and reduced cash balances, including reliance on federal funds purchased and available credit lines.
- Whether net interest margin pressure persists as deposit costs rise relative to loan yields.
- Whether the higher loan-loss provision and charge-offs signal further deterioration, particularly in commercial and real estate exposures.
- How expansion-related expenses, headquarters construction and new-market development affect efficiency and earnings.
- The potential utilization and loss exposure associated with $1.88 billion of commitments, the off-balance-sheet reserve and mortgage repurchase obligations.
- How much reported earnings benefited from stock-based compensation tax benefits and whether future tax expense is comparable.