ServisFirst Bancshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless noted. ServisFirst is a bank holding company operating primarily in Alabama and the Florida Panhandle, with a loan production office in Nashville. Its business centers on gathering deposits and making loans.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $29.0 | $24.0 | $82.3 | $68.7 |
| Provision for loan losses | $3.0 | $1.2 | $10.7 | $6.7 |
| Noninterest income | $2.3 | $2.4 | $7.6 | $7.1 |
| Noninterest expense | $12.1 | $11.3 | $35.2 | $30.2 |
| Net income | $10.8 | $9.3 | $29.7 | $25.9 |
| Net income available to common stockholders | $10.7 | $9.2 | $29.4 | $25.6 |
| Diluted EPS | $1.46 | $1.35 | $4.10 | $3.75 |
- At September 30, total assets were $3.40 billion, loans $2.73 billion, deposits $2.92 billion, and stockholders’ equity $276.3 million. Compared with December 31, 2012, assets increased 17.2% as reported by management and deposits increased 16.0%. Loans rose from $2.36 billion to $2.73 billion; that is approximately 15.6% based on the reported balances.
- Net interest income growth principally reflected higher average earning assets. Taxable-equivalent net interest margin was 3.69% for Q3, down from 3.82% a year earlier; for the nine-month period it was 3.84%, up from 3.81%. Interest-earning asset yields declined, while the cost of interest-bearing liabilities also declined.
- Return on average assets was 1.29% for Q3 and 1.30% year to date, versus 1.38% and 1.34%, respectively, in 2012. Return on average common equity was 15.74% and 15.46%, versus 16.64% and 16.22%.
- Cash and cash equivalents were $265.4 million at quarter-end. For the first nine months, operating activities provided $54.3 million, investing activities used $434.3 million, and financing activities provided $464.7 million; cash increased $84.7 million.
- Federal funds purchased were $170.1 million, other borrowings $19.9 million, and trust preferred securities were zero at quarter-end. The bank reported well-capitalized status; its total risk-based capital ratio was 11.45% and Tier 1 leverage ratio 8.94%.
Material changes and credit quality
- Growth in lending and deposits was accompanied by expansion into Mobile, Alabama and continued development in other markets. The Mobile full-service office opened in April 2013; the company also operated 12 full-service offices and a Nashville loan production office.
- Provision expense rose to $3.0 million in Q3 and $10.7 million year to date, which management attributed primarily to higher charge-offs and loan growth. The allowance for loan losses was $28.9 million, or 1.06% of loans, compared with $26.3 million, or 1.11%, at year-end 2012.
- Nonperforming loans declined to $9.4 million (0.34% of loans) from $10.4 million (0.44%) at year-end. However, other real estate owned and repossessed assets increased to $14.3 million from $9.7 million, principally after foreclosure of $7.1 million in assets tied to 30 loans to a large residential builder. Total nonperforming assets were $23.7 million.
- Troubled debt restructurings totaled $8.4 million, down from $12.3 million at year-end. During Q3, three TDR loans to one borrower entered payment default; two were fully charged off and a partial charge-off was taken on the third, leaving a $2.2 million balance in default status.
- Mortgage banking income fell to $0.4 million for Q3 from $0.9 million, and to $2.2 million year to date from $2.7 million, amid fewer mortgage refinancings. Compensation and benefits increased 23% year to date, reflecting staffing and business expansion.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue, or growth guidance. Management said deposit growth remains important and that additional capital will be needed to maintain current growth. It considered existing liquidity adequate for immediate anticipated funding needs.
- At September 30, liquid assets were $395.4 million, and the bank had approximately $125 million of additional borrowing availability through federal funds lines, subject to restrictions and collateral requirements.
- Key stated risks include economic and credit conditions, loan and collateral performance, interest-rate and yield-curve changes, deposit and loan growth, regulation, competition, legal contingencies, and natural disasters in the company’s markets. Management’s interest-rate policy limits modeled net interest margin change to 10% for a 100-basis-point rate change and 15% for a 200-basis-point change; management reported no significant change in sensitivity from year-end 2012.
- Off-balance-sheet commitments totaled $1.084 billion, including $1.014 billion of commitments to extend credit, $30.8 million of credit-card arrangements, and $39.2 million of standby letters of credit. These amounts are not necessarily expected cash outflows because commitments may expire unused.
- The company held a $249,000 reserve for possible mortgage-loan repurchase demands. It settled a client lawsuit for $100,000 in Q2; it reported no other material change in legal proceedings disclosed in its 2012 Form 10-K.
- In March 2013, $15.0 million of mandatorily convertible subordinated debentures converted into 600,000 common shares. A September private placement issued 35,035 shares at $41.50 per share for approximately $1.45 million. The company also invested $10 million in bank-owned life insurance during the nine-month period and $7.9 million in tax-credit partnerships.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The interim financial statements are unaudited, and management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile loan growth percentages: management cites 12.5% in one overview passage and 15.6% year to date elsewhere; the reported balance-sheet figures imply approximately 15.6% growth.
- Assess the credit exposure associated with the residential builder foreclosures, the $2.2 million defaulted TDR, rising OREO, and the increased loan-loss provision.
- Review whether margin pressure from lower asset yields could offset continued balance-sheet growth, and assess sensitivity to interest-rate changes.
- Evaluate the sustainability and funding of loan and deposit growth, including management’s stated need for additional capital and reliance on federal funds purchased and available borrowing lines.
- Review the composition and potential drawdown of the $1.084 billion in off-balance-sheet commitments, as well as mortgage repurchase exposure and the related reserve.