ServisFirst Bancshares, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated statements; amounts below are in millions unless stated otherwise. ServisFirst is an Alabama-based bank holding company operating through ServisFirst Bank, with offices in Alabama and the Florida Panhandle and a loan production office in Nashville.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Total interest income | $34.3 | $29.2 in Q1 2013 |
| Net interest income | $30.8 | $25.9 in Q1 2013 |
| Provision for loan losses | $2.3 | $4.3 in Q1 2013 |
| Net income | $11.8; $11.7 attributable to common stockholders | $9.3; $9.2 attributable to common stockholders in Q1 2013 |
| Basic / diluted EPS | $1.58 / $1.52 | $1.44 / $1.31 in Q1 2013 |
| Net interest margin, taxable-equivalent | 3.80% | 3.92% in Q1 2013 |
| Return on average assets / equity | 1.36% / 15.63% | 1.31% / 15.20% in Q1 2013 |
| Total assets | $3,572.9 | $3,520.7 at December 31, 2013 |
| Total loans / net loans | $2,937.8 / $2,906.1 | $2,858.9 / $2,828.2 at December 31, 2013 |
| Total deposits | $3,031.0 | $3,019.6 at December 31, 2013 |
| Cash and cash equivalents | $222.5 | $258.4 at December 31, 2013 |
| Stockholders’ equity | $312.3 | $297.2 at December 31, 2013 |
Operating cash flow was $18.9 million, investing cash flow was negative $89.6 million, and financing cash flow was positive $34.8 million. Cash and cash equivalents declined $35.9 million during the quarter, principally as loan growth used cash. The allowance for loan losses was $31.7 million, or 1.08% of loans.
Interest expense was $3.4 million versus $3.3 million a year earlier. Management reported taxable-equivalent net interest income of $31.4 million, up 19%, as average earning assets grew 23% to $3.35 billion. Asset yield declined 20 basis points to 4.21%; the cost of interest-bearing liabilities fell to 0.55% from 0.64%, while net interest margin narrowed 12 basis points.
Noninterest income was $2.2 million, down 21.4% year over year, mainly from lower mortgage banking revenue. Noninterest expense rose 26.9% to $13.7 million, including higher staffing and expansion costs and a $703,000 non-routine stock-option accounting correction.
Material changes and credit quality
- Net income increased 27.4% as reported by management, mainly due to higher net interest income and a $2.0 million lower loan-loss provision. Loan growth and expansion also contributed to higher expenses.
- Loans rose 2.8% and deposits 0.4% from year-end. Loan mix remained concentrated in commercial and real estate lending; 90.58% of loans were in Alabama markets.
- Nonperforming loans fell to $9.2 million from $9.7 million at year-end; nonperforming assets declined to $18.9 million from $22.6 million. Other real estate owned and repossessed assets decreased to $9.8 million from $12.9 million.
- Impaired loans increased to $34.2 million from $32.0 million at year-end. Troubled debt restructurings (TDRs) totaled $13.5 million, including ten loans to one borrower totaling $4.1 million in payment default. The filing says other TDRs were performing as agreed.
- Loans rated Special Mention or Substandard totaled $102.9 million; the filing’s discussion gives this as 3.5% of loans. Charge-offs were $1.3 million, compared with $2.9 million in Q1 2013.
Liquidity, capital, outlook, and risks
- Management reported $358.6 million of liquid assets, defined as cash and due from banks, federal funds sold, and unpledged available-for-sale securities, plus approximately $130 million of unused federal funds lines. Management considered near-term funding sources adequate, but stated that additional capital would be needed to maintain current growth.
- Federal funds purchased were $195.8 million; other borrowings were $19.9 million, comprising 5.50% subordinated notes due November 2022. The Bank was categorized as well-capitalized. At March 31, the Bank’s total risk-based, Tier 1 risk-based, and leverage ratios were 11.83%, 10.78%, and 9.28%, respectively.
- No numerical earnings or operating guidance was provided. Management anticipated sustainable deposit growth and described ongoing expansion in newer markets. Its outlook is subject to loan demand, deposit growth, funding needs, credit performance, interest rates, regulation, competition, and economic conditions.
- Interest-rate risk is monitored through quarterly analysis; company policy seeks to limit net interest margin changes to 10% for a 100-basis-point rate change and 15% for a 200-basis-point change. Management reported no significant change in sensitivity from year-end.
- Off-balance-sheet credit commitments totaled $1.18 billion, including $1.11 billion to extend credit. Mortgage repurchase reserve was $278,000; no investor repurchase requests were reported in Q1.
- After quarter-end, the compensation committee approved accelerating vesting of 35,000 advisory-board options, linked to entering an underwriting agreement for a filed S-1 offering or deciding not to proceed. Management said the resulting accounting item would be noncash. The filing reports no subsequent events requiring recognition or disclosure and no material change in previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Whether growth can be funded sustainably: management said additional capital is needed to maintain current growth, despite reported liquidity and capital ratios.
- Credit trends beneath the aggregate improvement, especially the $4.1 million defaulted TDR exposure to one borrower, growth in impaired loans, and construction and residential construction exposures.
- Whether margin pressure persists as asset yields decline, and how loan growth and deposit mix affect funding costs and liquidity.
- The full effect and timing of the stock-option accounting correction and accelerated vesting, including any relationship to the proposed S-1 offering.
- Allowance adequacy and valuation judgments for impaired loans and foreclosed assets; these depend on management estimates and collateral values.
- How much of the $1.18 billion in commitments may be drawn and the potential effects of interest-rate, economic, regulatory, and market changes.