ServisFirst Bancshares, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The interim financial statements are unaudited; dollar amounts below are in millions except per-share data and ratios. Unless stated otherwise, comparisons are with 2013 for income and cash-flow items and December 31, 2013 for balance-sheet items.
Business context and financial performance
ServisFirst is a bank holding company headquartered in Birmingham, Alabama. Through ServisFirst Bank, it provides commercial banking services across Alabama and the Florida panhandle, with a loan production office in Nashville. Growth in lending and deposits, together with the May 2014 initial public offering, expanded the balance sheet.
- Q3 earnings: Net income was $14.0 million, up 29.5% from $10.8 million; net income available to common shareholders was $13.9 million, up 29.8%. Basic and diluted EPS were $0.56 and $0.54, versus $0.51 and $0.49.
- Nine-month earnings: Net income was $37.3 million, up 25.5%; income available to common shareholders was $37.0 million, up 25.7%. Basic and diluted EPS were $1.57 and $1.51, versus $1.45 and $1.37.
- Interest income and margins: Q3 net interest income was $33.3 million, up 15.0%; nine-month net interest income was $96.1 million, up 16.8%. Taxable-equivalent net interest margin was 3.65% in Q3 and 3.72% year to date, compared with 3.69% and 3.84%. Management attributed margin pressure to the prolonged low-rate environment; asset growth, especially loan growth, drove higher net interest income.
- Other income and expenses: Q3 noninterest income was $3.0 million, up 32.5%, and nine-month income was $8.1 million, up 6.3%. Noninterest expense rose 26.9% in Q3 to $15.3 million and 26.3% year to date to $44.5 million. Nine-month expenses included $2.5 million of noncash charges related to advisory-board stock options, $2.1 million of tax-credit partnership write-downs, and a $0.5 million lawsuit settlement.
- Returns: Q3 and nine-month return on average assets were 1.45% and 1.37%, respectively; return on average common equity was 15.89% and 16.17%. Management reported nine-month core net income of $39.0 million and core diluted EPS of $1.57, excluding the after-tax effect of the stock-option charges.
Financial position, credit, and liquidity
- Balance-sheet growth: Total assets were $3.95 billion, up 12.3% from $3.52 billion at year-end 2013. Loans were $3.16 billion, up 10.5%; deposits were $3.35 billion, up 11.0%. Noninterest-bearing deposits were $794.6 million. Available-for-sale securities were $302.3 million and held-to-maturity securities were $30.0 million.
- Cash flow: Cash and cash equivalents ended the nine-month period at $344.0 million, up $85.6 million. Operating activities provided $42.1 million, versus $54.3 million in 2013; investing used $350.0 million, versus $434.3 million; financing provided $393.5 million, versus $464.7 million. Financing included deposit growth and $52.1 million of net IPO proceeds.
- Credit quality and reserves: The allowance for loan losses was $34.4 million, or 1.09% of loans, versus $30.7 million, or 1.07%, at year-end. The nine-month provision was $7.5 million, down from $10.7 million; annualized net charge-offs were 0.17%, versus 0.42%. Nonperforming loans increased to $17.3 million (0.55% of loans) from $9.7 million (0.34%); management said a $4.3 million loan placed on nonaccrual in Q3 accounted for most of the increase. Nonperforming assets were $24.2 million, or 0.76% of loans plus OREO, compared with $22.6 million, or 0.79%, at year-end. OREO and repossessed assets declined to $6.9 million from $12.9 million.
- Allowance methodology: In Q3, the company increased the weight given to external and internal qualitative factors, adding $2.1 million to the allowance relative to June 30. Management considered the allowance adequate, but noted that future provisions may be needed. TDRs totaled $7.9 million, down from $14.2 million at year-end.
- Borrowings and liquidity: Federal funds purchased were $178.2 million and other borrowings were $20.0 million, consisting of 5.50% subordinated notes due in 2022. The average rate on federal funds purchased was 0.28% in Q3. Management reported $131.4 million of liquid assets and approximately $160 million of unused federal-funds lines, and considered funding adequate for anticipated needs.
- Capital: The Bank was categorized as well-capitalized. At September 30, its total risk-based capital ratio was 12.09%, Tier 1 risk-based ratio 11.02%, and Tier 1 leverage ratio 9.34%. Consolidated ratios were 13.71%, 12.02%, and 10.18%, respectively.
Material changes, outlook, and risks
- Compared with 2013, earnings benefited from higher net interest income and lower loan-loss provisions. Lower asset yields and margin compression, alongside rising operating costs, partly offset those gains. Loan yields and the overall yield on interest-earning assets declined year over year.
- Management provided no specific earnings or financial guidance. It expects to pursue sustainable deposit growth and identifies loan originations and commitments and deposit withdrawals as key longer-term liquidity needs.
- On October 20, 2014, after quarter-end, the company agreed to acquire Metro Bancshares, Inc. for 636,720 ServisFirst shares and approximately $22.8 million in cash, subject to approvals and customary conditions. The parties anticipated closing in Q1 2015; completion was not assured.
- The May 2014 IPO raised approximately $52.1 million net. The filing said none of the proceeds had been applied through October 29, 2014. The common stock underwent a three-for-one split in July; reported share and per-share amounts reflect the split.
- Other items to note include the noncash advisory-board stock-option accounting correction and accelerated vesting, tax-credit partnership write-downs, the lawsuit settlement, and a $308,000 reserve for mortgage-loan repurchase demands. The company reported no material change in previously disclosed risk factors or legal proceedings and stated that disclosure controls were effective.
- Key risks identified include economic and credit conditions in the Southeast, interest-rate and yield-curve changes, borrower creditworthiness and collateral values, regulation, competition, and natural disasters in its markets. Management reported no significant change in interest-rate sensitivity since year-end.
Important facts for investors to verify
- Whether higher nonperforming loans and the Q3 qualitative-factor increase in the allowance lead to additional credit costs or further deterioration in loan performance.
- Whether loan and deposit growth can continue without further pressure on net interest margin, which declined year over year.
- How much of the increase in operating expenses is recurring, particularly staffing, incentive compensation, professional services, and tax-credit investment costs; distinguish GAAP results from management’s non-GAAP “core” measures.
- Whether Metro Bancshares’ acquisition receives required shareholder and regulatory approvals, closes on the anticipated timetable, and meets its stated terms.
- The deployment of IPO proceeds, capital and liquidity needs as the balance sheet grows, and the potential effects of the $1.23 billion in disclosed credit commitments, credit-card arrangements, and standby letters of credit.