Business context and reporting period
ServisFirst Bancshares, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2014. The Birmingham-based bank holding company operates ServisFirst Bank, serving Alabama and the Florida Panhandle, with a loan production office in Nashville. Unless noted, dollar amounts below are in millions.
Financial performance and condition
- Earnings: Second-quarter net income was $11.6 million and net income available to common stockholders was $11.5 million, up 19.8% from $9.6 million available to common holders a year earlier. Diluted EPS was $0.46 versus $0.44. First-half net income was $23.3 million; common income was $23.1 million, up 23.5%, and diluted EPS was $0.97 versus $0.88.
- Interest income and margins: Second-quarter net interest income was $32.0 million, up 16.4%; first-half net interest income was $62.8 million, up 17.6%. Taxable-equivalent net interest margin declined to 3.74% from 3.93% in Q2 and to 3.76% from 3.92% for the first half. Management attributed margin pressure to the prolonged low-rate environment and asset yields declining faster than funding costs.
- Other income and expenses: Q2 noninterest income rose 14.2% to $2.9 million, while first-half noninterest income fell 4.8% to $5.1 million, mainly reflecting lower mortgage banking income and no securities gains. Noninterest expense rose 24.6% to $15.4 million in Q2 and 26.0% to $29.1 million for the first half. Reported Q2 and first-half results included non-routine stock-option charges; management reported core net income of $12.7 million for Q2 and $25.0 million for the first half, non-GAAP measures that exclude those charges.
- Loans and credit: Total loans were $3,054 million at June 30, up 6.9% from year-end. The allowance for loan losses was $33.0 million, or 1.08% of loans. Nonperforming loans increased to $13.2 million (0.43% of loans) from $9.7 million (0.34%) at year-end, while nonperforming assets declined to $19.9 million from $22.6 million, largely as OREO fell to $6.7 million from $12.9 million. Troubled debt restructurings were $9.2 million; seven TDR loans totaling $2.2 million to one borrower were in payment default.
- Funding, liquidity and capital: Total assets were $3,763 million, deposits $3,158 million, and stockholders’ equity $380 million. Cash and cash equivalents were $279.9 million. Federal funds purchased were $181.1 million and subordinated notes/other borrowings were $20.0 million. Management reported $129.8 million of liquid assets and approximately $160 million of available federal funds lines. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 12.01%, Tier 1 risk-based ratio 10.95%, and Tier 1 leverage ratio 9.39%.
- Cash flow: For the first half, operating activities provided $38.9 million, investing activities used $218.7 million, and financing activities provided $201.3 million. Cash and cash equivalents increased $21.5 million to $279.9 million.
Material changes and unusual items
- On May 19, 2014, the company completed an IPO of 625,000 pre-split shares, receiving approximately $52.1 million in net proceeds. The filing says there was no material change in the planned use of proceeds.
- The company declared a three-for-one common stock split, distributed July 16, 2014. Reported share and per-share amounts are adjusted for the split.
- Non-routine stock-option expenses totaled $2.5 million for the first half ($1.8 million in Q2), following a correction to the accounting treatment of advisory-board options and acceleration of vesting. Management described the charge as non-cash.
- Other operating expense included a $0.4 million Q2 accrual for a potential lawsuit settlement. The company reported no other material legal proceedings beyond matters previously disclosed.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management said loan and deposit growth supported results, while low interest rates compressed net interest margin. It considered liquidity sources adequate for immediate anticipated funding needs and stated that the allowance was adequate at quarter-end. Forward-looking risks include economic and credit conditions, interest-rate changes, loan and deposit trends, regulatory changes, competition, collateral values, and natural disasters. Management reported no material change in previously disclosed risk factors or interest-rate-risk procedures.
Important facts for investors to verify
- Whether loan growth can continue to offset lower asset yields and net interest margin compression.
- Credit trends behind higher nonperforming loans, including construction exposures and the defaulted TDRs, and the adequacy of the allowance.
- How much expense growth is recurring versus attributable to the non-routine stock-option charges, tax-credit partnership write-downs, and lawsuit accrual.
- The composition and stability of funding, including federal funds purchased, deposit growth, and access to borrowing lines.
- The company’s regulatory capital position and the execution and use of IPO proceeds after the stock split.