ServisFirst Bancshares, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. ServisFirst is a bank holding company operating through ServisFirst Bank, with 18 offices across Alabama, Georgia, South Carolina, Tennessee and the Florida panhandle.
Financial performance and position
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $41.9 | $33.3 | $119.1 | $96.1 |
| Provision for loan losses | $3.1 | $2.7 | $9.5 | $7.5 |
| Noninterest income | $3.8 | $3.0 | $10.4 | $8.1 |
| Noninterest expense | $18.3 | $15.3 | $55.3 | $44.5 |
| Net income | $16.3 | $14.0 | $43.8 | $37.3 |
| Net income available to common stockholders | $16.2 | $13.9 | $43.5 | $37.0 |
| Diluted EPS | $0.61 | $0.54 | $1.65 | $1.51 |
| Net interest margin, taxable-equivalent | 3.77% | 3.65% | 3.82% | 3.72% |
| Return on average assets | 1.38% | 1.45% | 1.32% | 1.37% |
At September 30, 2015, total assets were $4.77 billion, loans $4.04 billion, deposits $4.04 billion, and stockholders’ equity $431.2 million. Compared with December 31, 2014, assets rose 17.1%, loans 20.6%, and deposits 17.6%. Cash and cash equivalents were $242.7 million, down from $297.5 million. Federal funds purchased were $228.4 million; other borrowings were $55.7 million, including $34.75 million of 5% subordinated notes issued in July.
For the first nine months, operating cash flow was $50.1 million, investing cash flow was negative $533.6 million, and financing cash flow was $428.7 million. Cash and cash equivalents decreased $54.8 million over the period.
Regulatory capital ratios at September 30 included consolidated total capital to risk-weighted assets of 9.59%, Tier 1 risk-based capital of 9.60%, and Tier 1 leverage of 11.89%. The company reported that it was well-capitalized under applicable prompt corrective action rules.
Material changes and drivers
- Common-stockholder net income increased 16.5% in Q3 and 17.6% for the nine-month period. Management attributed the gains principally to higher net interest income from growth in average earning assets.
- Taxable-equivalent net interest income increased 25.4% in Q3 and 23.8% year to date. Q3 average earning assets rose 21.6% year over year; net interest margin improved to 3.77% from 3.65%.
- The January 31 acquisition of Metro Bancshares brought the company into the greater Atlanta market, added two offices and contributed to balance-sheet growth. The company recorded $2.1 million of merger expense in Q1 and $15.9 million of goodwill.
- Expense growth partly offset revenue gains: nine-month noninterest expense rose 24.4%, including higher staffing and expansion costs, Metro-related costs, and a $0.5 million initial reserve for unfunded commitments. Q3 expenses included no merger expense.
- Loan-loss provision increased year to date, principally due to loan growth. The allowance was $42.6 million, or 1.05% of loans, versus $35.6 million, or 1.06%, at year-end. Special-mention, substandard and doubtful loans increased to $133.0 million from $77.6 million.
Outlook, risks and unusual items
- Outlook: The filing provides no specific earnings, growth or margin guidance. Management said it anticipated sustainable deposit growth and considered available funding sources adequate for immediate anticipated needs.
- Credit risk: Nonperforming loans were $10.4 million, or 0.26% of loans, versus $10.1 million, or 0.30%, at year-end. Impaired loans rose to $37.4 million from $26.7 million. TDRs were $8.3 million; no new or renewed TDRs were reported for the 2015 quarter or nine-month period.
- Liquidity and commitments: Management cited approximately $180 million of unused federal funds lines, subject to restrictions and collateral requirements. Off-balance-sheet commitments totaled $1.45 billion, including $1.36 billion to extend credit; the company held a $0.5 million reserve for unfunded commitments.
- Other contingencies: The mortgage-loan repurchase reserve was $76,000. The company reported no material change in previously disclosed legal proceedings or risk factors.
- Market and operating risks: Results may be affected by interest rates, credit quality, economic conditions in the Southeast, competition, regulation, and the ability to retain deposits. Management reported no significant change in interest-rate sensitivity since year-end.
- One-time items and comparability: Year-to-date results included Metro merger expense and the unfunded-commitment reserve. The 2014 comparison included $2.5 million of non-routine stock-option expense. Management’s “core” measures are non-GAAP and should be considered alongside GAAP results.
Most important facts for investors to verify
- Whether rapid loan and deposit growth, including Metro’s contribution, continues and supports earnings without weakening underwriting or funding costs.
- Trends in criticized and impaired loans, charge-offs, nonperforming assets, and the adequacy of the allowance as the portfolio expands.
- Whether margin gains persist as interest rates and deposit pricing change, and how the new subordinated notes affect funding costs and capital.
- The quality and sustainability of earnings after acquisition-related and other non-routine items, including the assumptions behind management’s non-GAAP “core” measures.
- Liquidity available after considering pledged securities, borrowing-line restrictions, deposit behavior, and the potential drawdown of customer commitments.