ServisFirst Bancshares, Inc. — Q3 2017 Form 10-Q
Quarter ended September 30, 2017; financial statements are unaudited. Amounts are in millions except per-share data. Comparisons are year over year unless otherwise noted.
Business context and reporting period
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Its bank subsidiary operates 19 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee, providing commercial banking, lending, deposit, electronic banking and related services.
Financial performance and condition
| Metric | Q3 2017 / September 30 | Comparison |
|---|---|---|
| Net interest income | $58.4 | +$10.5, or about 21.9%, from Q3 2016 |
| Taxable-equivalent net interest income | $56.9 | +$8.5, or 17.6%, from Q3 2016 |
| Net income available to common shareholders | $25.3; diluted EPS $0.47 | +$4.4, or 21.1%; diluted EPS was $0.39 |
| Net interest margin | 3.77% | 3.35% in Q3 2016 |
| Return on average assets / common equity | 1.55% / 17.28% | 1.39% / 16.66% in Q3 2016 |
| Total assets | $6,712.1 | +$341.7, or 5.4%, from December 31, 2016 |
| Total loans / deposits | $5,628.8 / $5,796.9 | Loans +14.6%; deposits +6.9% from December 31, 2016 |
| Cash and cash equivalents | $349.0 | Down $435.0 from December 31, 2016 |
| Federal funds purchased / other borrowings | $254.9 / $55.0 | Federal funds purchased down from $355.9 at year-end |
| Stockholders’ equity | $590.2 | Equity-to-assets ratio 8.79% |
For the nine months ended September 30, net income was $71.9, up 20.4%, and diluted EPS was $1.33 versus $1.12. Taxable-equivalent net interest income rose 20.1% to $167.5; the nine-month net interest margin was 3.69% versus 3.47%.
Nine-month cash flows: operating activities provided $81.2 versus $70.6 in 2016; investing activities used $786.8 versus $478.2; financing activities provided $270.7 versus $847.5. Cash and cash equivalents declined by $435.0 during the period, principally as loan growth absorbed liquidity. Management reported $628.1 of liquid assets and approximately $485.0 of available correspondent-bank federal funds lines, subject to restrictions and collateral requirements.
The Bank was categorized as well-capitalized. At September 30, its total risk-based capital ratio was 11.51%, Tier 1 risk-based ratio 10.53%, and Tier 1 leverage ratio 9.76%.
Material changes versus comparable periods
- Q3 net interest income increased mainly because of growth in earning assets; average earning assets rose 7.6% year over year. Loan yield increased to 4.66%, while the cost of interest-bearing liabilities increased to 0.81% from 0.64%.
- Q3 noninterest income was essentially unchanged at $4.8. Nine-month noninterest income rose 17.1% to $14.1, led by credit-card income, up 62.9%.
- Noninterest expense increased 6.6% in Q3 to $21.5 and 9.6% for nine months to $64.6. Higher salaries and benefits, regulatory assessments and other operating costs were partly offset by lower professional-services and OREO expense.
- The provision for loan losses was $4.8 in Q3 and $14.2 for nine months, versus $3.5 and $9.3, respectively, in 2016.
- Nonperforming loans declined to $14.9, or 0.26% of loans, from $16.9, or 0.34%, at year-end; however, nonaccrual loans rose to $12.4 from $10.6. Nonperforming assets were $18.8 versus $21.9 at year-end.
- Troubled debt restructurings increased to $16.4 from $7.3 at year-end. The nine-month additions included a $12.7 relationship; the filing says these restructurings involved term extensions, not rate reductions or debt forgiveness.
Management commentary, outlook and risks
Management attributed earnings growth chiefly to loan and earning-asset growth and improved asset yields. It noted that rising Federal Reserve rates had supported asset yields, while deposit pricing costs were increasing and being monitored. Management described deposit growth as somewhat slower in 2017 but anticipated long-term sustainable growth; no quantified earnings or balance-sheet guidance was provided.
Management considered the allowance adequate. It was $58.5, or 1.04% of loans, at quarter-end. The filing identifies credit quality, collateral values, economic conditions, loan growth, interest rates, deposit retention and competition as important uncertainties. Loan exposure is concentrated geographically, with 75.5% in Alabama MSAs. Management also cites potential effects from natural disasters in its markets, regulatory changes and broader economic and market conditions.
Other notable items: the new Birmingham headquarters entered service in September 2017; building and contents cost approximately $31.0. Q3 and nine-month income-tax expense was $11.6 and $29.4, respectively; effective tax rates were 31.5% and 29.0%. The filing reports no material change to previously disclosed risk factors, no material legal proceedings known to management, and no significant change in interest-rate sensitivity since year-end. The company was evaluating several accounting standards, including CECL, which was scheduled to take effect for the company after 2019.
Important facts for investors to verify
- Whether strong loan growth can continue to be funded by deposits without materially reducing liquidity or requiring more costly funding.
- Whether deposit costs continue to rise faster than loan yields, and how that affects net interest margin.
- Credit migration and loss trends, especially nonaccrual loans, impaired loans, the increased TDR balance and the adequacy of the allowance as the portfolio expands.
- The sustainability of earnings growth after accounting for higher provisions, operating costs, tax effects and stock-based compensation benefits.
- Capital and liquidity capacity, including the availability and conditions attached to correspondent-bank borrowing lines and the effect of future growth or regulatory requirements.