ServisFirst Bancshares, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited. Amounts below are in millions except per-share data and ratios.
Business context and financial performance
ServisFirst is a bank holding company operating through ServisFirst Bank, with ten full-service offices in Alabama and Florida. The Pensacola office opened in April 2011.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $19.2 | $16.0 | $54.2 | $46.2 |
| Provision for loan losses | $2.7 | $2.5 | $6.5 | $7.6 |
| Noninterest income | $1.8 | $1.3 | $4.9 | $3.5 |
| Noninterest expense | $8.8 | $7.5 | $26.8 | $22.5 |
| Net income | $6.1 | $4.8 | $16.9 | $12.8 |
| Basic / diluted EPS | $1.03 / $0.90 | $0.87 / $0.77 | $2.93 / $2.58 | $2.33 / $2.11 |
| Net interest margin | 3.67% | 3.83% | 3.81% | 4.01% |
For Q3, net income rose 27.8%; for the first nine months it rose 31.3%. Management attributed the improvement principally to growth in average earning assets and higher net interest income. Nine-month provision expense fell year over year, while Q3 provision expense increased. The taxable-equivalent yield on earning assets and net interest margin declined in both comparison periods.
Financial position, cash flow, and capital
- Growth: At September 30, total assets were $2,257.3, up 16.6% from year-end 2010; loans were $1,695.5, up 21.6%; and deposits were $2,011.3, up 14.4%.
- Funding and liquidity: Cash and cash equivalents were $184.7, versus $232.0 at year-end. Management reported $317 million in liquid assets and approximately $416 million of additional borrowing availability, subject to restrictions and collateral requirements. Management said current funding sources were adequate for immediate anticipated needs but that additional capital would be needed to maintain current growth.
- Cash flows, nine months: Operating activities provided $24.4; investing activities used $370.2, principally reflecting $309.5 of loan growth and purchases of securities and bank-owned life insurance; financing activities provided $298.5. Cash and cash equivalents decreased $47.3.
- Debt and funding mix: The balance sheet included $16.4 of federal funds purchased, $4.9 of other borrowings and $30.5 of trust preferred securities. The company repaid two Federal Home Loan Bank advances during the first half of 2011.
- Capital: Stockholders’ equity was $189.5, compared with $117.1 at year-end. The company raised $40 million through Treasury’s Small Business Lending Fund preferred stock and approximately $10.2 million in a common-stock private placement. The Bank reported regulatory capital ratios above “well-capitalized” thresholds.
Asset quality, changes, and unusual items
- Nonperforming loans rose to $18.4 from $14.3 at year-end; nonperforming assets increased to $28.5 from $21.3. Nonaccrual loans included $6.1 of additions associated with six residential builders and land developers. Other real estate owned rose to $10.0 from $7.0, primarily following foreclosures of large land-development properties.
- Impaired loans declined to $42.7 from $51.5. The allowance for loan losses increased to $21.5 from $18.1, equal to 1.27% of loans. Special Mention, Substandard and Doubtful loans totaled $88.9, or 5.2% of loans, versus $98.3, or 7.1%, at year-end.
- Troubled debt restructurings totaled $4.5, versus $2.4 at year-end; the filing says these loans were performing to their restructured terms. No TDR loan modified in the preceding twelve months defaulted during the reported periods.
- Noninterest expense increased, including higher salaries and benefits as staffing expanded from 162 full-time equivalent employees at year-end to 202. The company also recorded $738,000 in prepayment penalties for early repayment of Federal Home Loan Bank advances.
- Available-for-sale securities were $296.8. Management reported two securities in an unrealized-loss position for at least twelve months and did not consider them other-than-temporarily impaired, citing intent and ability to hold and its view that declines reflected interest rates rather than issuer credit deterioration.
Outlook, risks, and other disclosures
The filing provides no specific earnings or growth guidance. Management described plans for sustainable deposit growth through developing newer markets and organic growth in established markets, while noting the need for additional capital to support current growth. Key risks cited include economic and credit conditions, loan collectability and collateral values, interest-rate and yield-curve changes, deposit and loan trends, regulation, competition, and severe weather in the company’s markets.
The $40 million Treasury preferred stock initially carries a 1% annual dividend rate, subject to adjustment based on qualified small-business lending; the rate may rise to 9% if it remains outstanding more than four-and-one-half years. The filing reports no material change to previously disclosed risk factors, no material legal proceedings beyond those disclosed in the prior 10-K, and effective disclosure controls as of September 30, 2011. Management reported no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Track nonperforming loans, OREO and builder/land-development exposures alongside loan growth and reserve coverage.
- Assess whether deposit and capital growth can continue to fund loan expansion, and review the conditions and potential cost of the Treasury preferred stock.
- Monitor net interest margin and asset yields as interest rates and funding costs change.
- Review the reported liquidity sources, including the restrictions and collateral requirements on unused borrowing lines.
- Reconcile nine-month noninterest income: the income statement reports $4.861 million, while one MD&A passage states $4.891 million; the financial-statement figure is used above.