ServisFirst Bancshares, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparative financial results are for FY 2015. The filing also reports unaudited fourth-quarter results. ServisFirst is a Birmingham-based bank holding company operating 19 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee, focused primarily on commercial banking.
Financial performance and position
| Metric | FY 2016 / year-end | FY 2015 / year-end |
|---|---|---|
| Total assets | $6.37 billion | $5.10 billion |
| Total loans | $4.91 billion | $4.22 billion |
| Total deposits | $5.42 billion | $4.22 billion |
| Stockholders’ equity | $522.9 million | $449.1 million |
| Net interest income | $187.1 million | $162.3 million |
| Net income available to common stockholders | $81.4 million | $63.3 million |
| Diluted EPS | $1.52 | $1.20 |
| Net interest margin | 3.42% | 3.75% |
| Return on average assets / equity | 1.42% / 16.64% | 1.38% / 14.56% |
- Net income available to common shareholders rose 28.7%. Net interest income increased 15.3%, supported mainly by loan growth; noninterest income was $18.1 million and noninterest expense was $81.0 million.
- Interest expense increased 45.8%, faster than interest income’s 18.3% increase. Management attributed the decline in net interest margin partly to maintaining higher liquidity. The GAAP efficiency ratio improved to 39.47% from 42.21%.
- Operating cash flow was $98.5 million; investing activities used $861.6 million, principally reflecting loan growth and securities purchases; financing activities provided $1.195 billion, chiefly from deposit growth. Cash and cash equivalents ended at $784.0 million, up from $352.2 million.
- Year-end borrowings included $355.9 million of federal funds purchased and $55.3 million of other borrowings. Other borrowings included $20.0 million of 5.5% subordinated notes due 2022 and $34.75 million of 5% subordinated notes due 2025. The Bank had $378 million in unused federal funds lines.
- Reported liquidity included $1.0 billion of liquid assets and a net-loans-to-deposits ratio of 89.66%. Bank regulatory capital ratios were 10.77% CET1, 10.78% Tier 1, 11.79% total capital and 9.06% leverage; the Bank was categorized as well-capitalized.
- FY 2016 fourth-quarter common net income was $21.7 million and diluted EPS was $0.40, versus $19.7 million and $0.37 in Q4 2015.
Material changes and asset quality
- Assets grew 25.0%, loans 16.5% and deposits 28.3% year over year. The company entered Tampa Bay, Florida, during 2016; loan growth across markets was the primary driver of higher interest income.
- Net charge-offs declined to $4.9 million from $5.1 million, and the net charge-off ratio improved to 0.11% from 0.13%. However, nonperforming loans increased to $16.9 million, or 0.34% of loans, from $7.8 million, or 0.18%. This total includes $10.6 million of nonaccrual loans and $6.3 million of loans 90 days past due but still accruing; one $6.2 million commercial real estate loan in the latter category had a 70% USDA guarantee and was current as of the filing date.
- The allowance for loan losses increased to $51.9 million, or 1.06% of gross loans, from $43.4 million, or 1.03%. Impaired loans rose to $45.6 million from $33.5 million. Management cited loan growth as the principal reason for the higher provision, which was $13.4 million versus $12.8 million.
- Real estate mortgage loans were 51.7% of the loan portfolio; commercial and industrial loans were 40.4%. Approximately 77% of loans were assigned to Alabama markets, creating geographic and real-estate concentration exposure.
Outlook, risks and unusual items
- The filing provides no quantified earnings, growth or margin guidance. Management describes a strategy of organic loan and deposit growth, controlled operating costs, local lending decisions with centralized credit oversight, and selective market expansion or acquisitions.
- Management reports a somewhat liability-sensitive interest-rate position. A 200-basis-point rate increase was modeled to reduce economic value of equity by 1.95%; management cautions that models are static and actual outcomes may differ. Higher deposit costs, slower loan demand, credit deterioration, deposit competition and local economic or weather events are among the disclosed risks.
- Commercial real estate exposure, an expanding and relatively unseasoned loan portfolio, large borrower relationships, and dependence on local markets are notable credit risks. Commitments to extend credit were $1.67 billion; credit-card commitments were $100.7 million and standby letters of credit and guarantees were $41.0 million. These are contingent exposures, not necessarily funded obligations.
- Noninterest income included a $1.4 million gain on sale of fixed assets. FY 2016 income tax expense included a $4.8 million excess tax benefit from early adoption of share-based-payment accounting changes. Noninterest expense included a $1.1 million legal accrual related to pending litigation; the filing separately states that no material legal proceedings were pending and management did not expect routine litigation to have a material effect.
- The company was constructing a new Birmingham headquarters. It declared a two-for-one stock split in December 2016; share and per-share data in the filing reflect the split. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in nonperforming and impaired loans continues, and whether the allowance adequately reflects loss risk as the fast-growing portfolio seasons.
- How loan and deposit growth, rising funding costs and the 3.42% net interest margin affect future earnings and returns.
- The quality and concentration of commercial real estate and commercial-and-industrial exposures, including the large past-due accruing loan and the $212 million-plus commitments to the ten largest borrower relationships.
- The terms, availability and cost of contingent funding and off-balance-sheet commitments, and the impact of regulatory, litigation and headquarters-construction costs.
- Reconcile reported noninterest-income and expense comparisons to the audited statements and confirm the treatment of the fixed-asset gain, tax benefit and legal accrual when assessing recurring earnings.