Business context and reporting period
ServisFirst Bancshares, Inc., a bank holding company operating through ServisFirst Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2013. It serves markets in Alabama and Florida and reported that its Mobile, Alabama location was expected to open as a full-service banking office in April 2013. Unless stated otherwise, dollar amounts below are in millions.
Financial results and position
- Earnings: Net income was $9.3 million, up 12.0% from $8.3 million in Q1 2012. Net income available to common shareholders was $9.2 million; basic and diluted EPS were $1.44 and $1.31, versus $1.37 and $1.20, respectively.
- Revenue and margins: Net interest income was $25.9 million, compared with $21.7 million. Taxable-equivalent net interest income rose 19.0% to $26.3 million, primarily on higher average earning assets. Net interest margin improved to 3.92% from 3.76%; asset yield was nearly flat at 4.41%, while the cost of interest-bearing liabilities fell to 0.64% from 0.84%. Noninterest income increased 21.7% to $2.8 million.
- Expenses and returns: Noninterest expense increased 20.0% to $10.8 million, reflecting expansion and higher personnel, occupancy, OREO, and other operating costs. Return on average assets was 1.31% versus 1.33%; return on average equity was 15.20% versus 16.31%.
- Balance sheet: Total assets were $2,861.8 million, versus $2,906.3 million at year-end 2012. Loans grew 4.2% to $2,462.2 million; deposits declined to $2,423.5 million from $2,511.6 million. Available-for-sale securities were $229.4 million and held-to-maturity securities were $32.7 million.
- Credit quality: Nonperforming loans rose to $24.3 million from $10.4 million; nonperforming assets were $32.4 million versus $20.1 million. Management attributed the principal increase to $13.5 million of residential construction and development loans placed on nonaccrual. The allowance for loan losses was $27.7 million, or 1.12% of loans, versus $26.3 million, or 1.11%, at year-end. The quarterly provision was $4.3 million, compared with $2.4 million; net charge-offs were approximately $2.9 million.
- Cash flow and liquidity: Operating cash flow was $21.2 million; investing activities used $103.6 million and financing activities used $51.0 million. Cash and cash equivalents fell by $133.4 million to $47.3 million. Management reported $145.1 million of liquid assets and approximately $130.0 million of additional borrowing availability, subject to restrictions and collateral requirements.
- Borrowings and capital: Federal funds purchased were $153.9 million, up from $117.1 million; other borrowings were $19.9 million. The $15.0 million mandatorily convertible subordinated debentures converted into 600,000 common shares during the quarter. The Bank was categorized as well-capitalized; its total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 11.71%, 10.62%, and 9.42%, respectively.
Material changes versus the prior comparable period
- Higher average earning assets supported stronger net interest income, although loan yield declined to 4.64% from 5.03%.
- Net income and EPS increased, while ROA and ROE edged lower. Operating expenses grew faster than earnings.
- Credit indicators weakened sequentially: nonperforming loans and impaired loans rose, particularly in residential construction and development exposures. OREO declined to $8.1 million from $9.7 million.
- Deposits declined from year-end, while federal funds purchased increased. The conversion of subordinated debentures eliminated that balance-sheet liability and increased common shares outstanding.
Outlook, management commentary, risks and unusual items
- The filing provides no numerical earnings or growth guidance. Management anticipated long-term sustainable deposit growth through market development and organic growth, but stated that additional capital would be needed to maintain current growth.
- Management considered the allowance adequate, while noting that future provisions may be needed as credit conditions and portfolio performance evolve. All TDRs were described as performing under restructured terms except three loans to one borrower that had defaulted in Q1 2012; no TDR loans had entered default since then.
- Key stated risks include economic and credit conditions, customer creditworthiness and collateral values, interest-rate and yield-curve changes, deposit and loan trends, regulation, competition, and legal or administrative contingencies. Management reported no significant change in interest-rate sensitivity since year-end; internal policy limits modeled net interest margin change to 10% for a 100-basis-point rate move and 15% for a 200-basis-point move.
- Mortgage loan repurchase demands were described as manageable; there were no investor repurchase requests in Q1 2013. The reserve for such demands was $224,000. The filing reported no material change in previously disclosed legal proceedings or risk factors, and no subsequent events requiring disclosure.
- Unusual credit and valuation items included $3.9 million of impairment charges related to impaired loans measured at fair value and $308,000 of OREO write-downs and disposal losses during the quarter. The interim financial statements are unaudited and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Performance and collateral outlook for the residential builder exposures that drove the increase in nonaccrual and impaired loans; related charge-offs and allowance adequacy.
- Deposit retention, the increased use of federal funds purchased, and the availability and conditions attached to the stated borrowing lines.
- Whether loan growth can be funded while maintaining liquidity and capital, given management’s statement that additional capital is needed to sustain current growth.
- Drivers of expense growth and the sustainability of earnings gains, including the effects of lower loan yields, reduced funding costs, and one-time securities gains.
- The impact of the 600,000-share debt conversion and other potential dilution, including outstanding options and warrants.