ServisFirst Bancshares, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The interim financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and financial position
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Its bank subsidiary operated 19 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee, providing commercial banking, lending, deposit, mortgage and correspondent banking services.
- At September 30, 2016, total assets were $6.00 billion, up 17.6% from December 31, 2015. Loans were $4.66 billion, up 11.9%, and deposits were $5.08 billion, up 21.4%.
- Stockholders’ equity totaled $507.9 million. Cash and cash equivalents were $792.3 million, including $181.6 million of federal funds sold; management attributed elevated Federal Reserve balances to excess liquidity from deposit growth.
- Borrowings included $344.4 million of federal funds purchased and $55.4 million of other borrowings. Other borrowings included $20.0 million of 5.50% subordinated notes due 2022, $34.75 million of 5.00% subordinated notes due 2025, and $0.7 million of FHLB advances.
Results, profitability and cash flow
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | $54.7 million | $46.5 million | $156.7 million | $131.5 million |
| Net interest income | $47.9 million | $41.9 million | $138.0 million | $119.1 million |
| Provision for loan losses | $3.5 million | $3.1 million | $9.3 million | $9.5 million |
| Noninterest income | $4.8 million | $3.7 million | $12.1 million | $10.1 million |
| Noninterest expense | $20.2 million | $18.2 million | $59.0 million | $55.0 million |
| Net income | $20.9 million | $16.3 million | $59.7 million | $43.8 million |
| Diluted EPS | $0.78 | $0.61 | $2.23 | $1.65 |
- Taxable-equivalent net interest income increased 14.2% in Q3 and 15.6% year to date, primarily from growth in average earning assets. Net interest margin declined to 3.35% from 3.77% in Q3 and to 3.47% from 3.82% year to date.
- Management cited higher liquidity balances, a prolonged low-rate environment and rising deposit and borrowing costs as factors compressing margin. The average yield on loans was 4.48% in Q3, while the cost of total interest-bearing liabilities rose to 0.64% from 0.57%.
- Return on average assets was 1.39% for Q3 and 1.43% year to date; return on average common equity was 16.66% and 16.60%, respectively.
- Operating cash flow was $70.6 million for the first nine months; investing cash flow was negative $478.2 million and financing cash flow was positive $847.5 million. Cash and cash equivalents increased $440.0 million to $792.3 million.
Changes versus comparable periods
- Net income available to common shareholders rose 29.0% in Q3 and 37.2% year to date. Growth in net interest income was the principal driver, aided year to date by a $4.7 million tax benefit from early adoption of stock-compensation accounting guidance.
- Noninterest income increased 28.2% in Q3 and 19.5% year to date. Management highlighted higher mortgage banking and credit card income; credit card spending volume and account count grew 58% and 62%, respectively, year over year.
- Noninterest expense rose 10.5% in Q3 and 7.2% year to date. Higher staffing, occupancy, professional services and operating costs contributed. 2015 comparisons included $2.1 million of Metro merger expense and $0.5 million of initial reserves for unfunded commitments; these items were absent in 2016.
- Total assets and deposits expanded substantially, while the increase in cash and Federal Reserve balances reflected deposit growth outpacing immediate loan deployment.
Asset quality, liquidity, capital and risks
- The allowance for loan losses was $48.9 million, or 1.05% of loans, versus $43.4 million, or 1.03%, at year-end 2015. Nonperforming loans decreased to $6.7 million (0.14% of loans) from $7.8 million (0.18%); nonperforming assets were $9.7 million (0.21% of loans plus OREO), down from $13.2 million (0.31%).
- Impaired loans increased to $78.6 million from $33.5 million at year-end. Four secured relationships totaling $35.1 million were downgraded to substandard in Q3; one relationship required a specific impairment reserve of $504,000. Management said these long-term secured relationships were expected to be repaid in the ordinary course and expected losses to be minimal.
- Total past-due loans rose to approximately $33.0 million from $0.6 million at year-end, primarily long-term secured credit relationships. Management anticipated ordinary repayment. TDRs totaled $6.7 million, down from $7.7 million; the company reported no TDR defaults during the periods presented.
- Management reported $947.4 million of liquid assets, approximately $345 million of unused federal funds lines, and a new $25 million revolving facility with NexBank, undrawn at quarter-end. It said available funding sources were adequate for immediate anticipated needs.
- The company and bank were categorized as well-capitalized. At September 30, consolidated CET1, total risk-based capital and Tier 1 leverage ratios were 9.91%, 12.03% and 8.20%, respectively; the bank’s respective ratios were 10.96%, 11.97% and 9.06%.
- Off-balance-sheet commitments to extend credit were $1.591 billion; credit card arrangements were $97.4 million and standby letters of credit were $40.6 million. The company had a $500,000 reserve for losses on off-balance-sheet arrangements and a $368,000 reserve for mortgage investor repurchase demands.
- Professional-services expense included accruals for pending legal matters: $0.4 million in Q3 and $0.8 million year to date. The filing said there were no material changes to previously disclosed legal matters and no material changes to previously disclosed risk factors.
Outlook and unusual items
The filing provides no quantified earnings, growth or margin guidance. Management expected sustainable deposit growth and said long-term liquidity needs principally related to loan originations, commitments and deposit withdrawals. Forward-looking risks include economic and credit conditions, interest rates and yield curves, customer creditworthiness and collateral values, regulatory or tax changes, competition, and natural disasters in the company’s markets.
Early adoption of ASU 2016-09 reduced income tax expense by $1.2 million in Q3 and $4.7 million year to date for excess tax benefits on stock awards; previously, such benefits were recorded in additional paid-in capital. The company also accelerated depreciation on headquarters leasehold improvements ahead of an anticipated move to a new Birmingham headquarters in the second half of 2017. Management concluded disclosure controls were effective as of September 30, 2016 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the elevated past-due and impaired loan balances resolve as management expects, and whether additional loan-loss provisions or charge-offs are needed.
- Whether strong deposit growth can be deployed profitably without continued excess liquidity and further net interest margin compression.
- The durability of earnings growth after separating core operating performance from the $4.7 million year-to-date tax benefit and the nonrecurring 2015 comparison items.
- Potential exposure from pending legal matters, mortgage repurchase claims and the $1.7 billion of off-balance-sheet credit-related commitments.
- Future capital and liquidity trends, including the effects of loan growth, funding costs and the company’s new revolving credit facility.