Servisfirst Bancshares, Inc. quarterly report, Q1 FY2016

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ServisFirst Bancshares, Inc. — Q1 2016 Form 10-Q

Business context and reporting period

Unaudited results cover the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015, unless otherwise noted. ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating 19 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee. The filing reports consolidated results with its wholly owned bank subsidiary.

Financial results and key metrics

  • Earnings: Net income was $17.6 million, up 35.2% from $13.1 million in Q1 2015; net income available to common shareholders was $17.6 million versus $13.0 million. Basic and diluted EPS were $0.68 and $0.66, compared with $0.51 and $0.49.
  • Interest income and margins: Interest income increased to $50.0 million from $40.8 million. GAAP net interest income was $44.2 million versus $37.0 million; on a taxable-equivalent basis it was $44.7 million, up 19.2%. Net interest margin compressed to 3.57% from 3.80%, as the yield on earning assets fell 15 basis points to 4.03% and the cost of interest-bearing liabilities rose to 0.63% from 0.52%.
  • Other income and costs: Noninterest income was $3.7 million, up 21.1%. Noninterest expense was $19.6 million, up 4.4% year over year; excluding $2.1 million of Metro merger costs in Q1 2015, expense increased 17.4%, reflecting business expansion and staffing.
  • Profitability: Return on average assets was 1.35% versus 1.26%; return on average stockholders’ equity was 15.38% versus 12.38%. The effective tax rate was 32.80%, up from 31.14%.
  • Balance sheet and growth: Total assets were $5.38 billion, up 5.6% from year-end. Loans rose 3.0% to $4.34 billion and deposits rose 2.7% to $4.34 billion. Stockholders’ equity was $470.9 million, compared with $449.1 million.
  • Credit quality and reserves: The allowance for loan losses was $45.1 million, or 1.04% of loans, versus $43.4 million, or 1.03%, at year-end; Q1 provision was $2.1 million. Nonperforming loans decreased to $6.6 million from $7.8 million, and nonperforming assets to $10.6 million from $13.2 million. However, impaired loans increased to $50.6 million from $33.5 million. Troubled debt restructurings were $6.8 million, and the filing says all were performing to their restructured terms.
  • Cash flow and liquidity: Operating cash flow was $25.0 million; investing used $115.7 million, primarily reflecting $124.6 million of loan growth; financing provided $264.1 million. Cash and cash equivalents increased $173.4 million to $525.6 million. Management reported $629.8 million of liquid assets, including unpledged available-for-sale securities, and approximately $320 million of unused federal funds lines, subject to restrictions and collateral requirements.
  • Funding and capital: Deposits totaled $4.34 billion. Federal funds purchased rose to $497.9 million from $352.4 million; other borrowings were $55.5 million, including subordinated notes. The company reported consolidated CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios of 9.90%, 9.91%, 12.12% and 8.65%, respectively, and stated that the bank was well-capitalized under prompt corrective action rules.

Material changes versus comparable periods

  • Profit growth was driven chiefly by higher net interest income and earning-asset growth: average earning assets were $5.03 billion, up 25.8% year over year. Management also cited growth in noninterest-bearing deposits.
  • Funding costs rose faster than asset yields in some categories, compressing net interest margin by 23 basis points. Management attributed the pressure to the prolonged low-rate environment and higher deposit rates.
  • Loan growth was broad, but credit indicators were mixed: nonperforming loans improved, while specifically impaired loans rose materially. Special-mention and substandard loans totaled $117.3 million, or 2.7% of loans, versus $117.0 million, or 2.8%, at year-end.
  • Staffing and operating costs increased as the company expanded; full-time-equivalent employees rose to 387 from 347 a year earlier. Q1 2015 included Metro merger expense and a $0.5 million initial reserve for unfunded commitments, affecting year-over-year expense comparisons.

Outlook, risks, contingencies and unusual items

  • The filing gives no specific earnings, loan-growth or margin guidance. Management said it anticipates sustainable deposit growth and believes current liquidity sources are adequate for immediate anticipated funding needs, while noting that continued growth could require additional funding.
  • Key stated risks include economic and credit conditions, especially in the Southeast; interest-rate and yield-curve changes; loan and deposit growth; customer creditworthiness and collateral values; regulation; competition; and natural disasters. Management said there had been no material changes to previously disclosed risk factors or interest-rate-risk policies and no significant change in rate sensitivity since year-end.
  • Off-balance-sheet credit exposure included $1.48 billion of commitments to extend credit, $77.3 million of credit-card arrangements and $32.8 million of standby letters of credit. The company established a $0.5 million reserve for unfunded commitments. Mortgage repurchase representations and warranties had a $96,000 reserve at March 31, 2016.
  • Management reported no subsequent events requiring recognition or disclosure and no material change in previously disclosed legal proceedings. Securities with unrealized losses were not considered other-than-temporarily impaired; management said it did not intend to sell them and did not expect to be required to sell before recovery.
  • Forward-looking statements are subject to the risks listed above and in the company’s 2015 Form 10-K. The interim financial statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results.

Most important facts for investors to verify

  1. Whether loan growth converts into sustainable earnings without further net-interest-margin compression as deposit and wholesale funding costs change.
  2. The composition, collateral, migration and subsequent performance of the $50.6 million of impaired loans, and the adequacy of the allowance given its increase from year-end.
  3. The sustainability and cost of funding growth, including the increase in federal funds purchased and management’s liquidity sources and contingency plans.
  4. Whether hiring, new offices and other expansion costs produce expected revenue growth, particularly in newer markets; assess reported results alongside the 2015 merger and reserve-adjusted comparisons.
  5. Regulatory capital headroom, the effect of the capital conservation buffer, and potential losses or funding needs from the substantial unfunded loan commitments and other off-balance-sheet exposures.