ServisFirst Bancshares, Inc. - 10-Q Summary (Q3 2008)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. ServisFirst Bancshares, Inc. is a bank holding company headquartered in Birmingham, Alabama, operating through its wholly-owned subsidiary, ServisFirst Bank. The company operates eight full-service banking offices across the Birmingham-Hoover, Huntsville, Montgomery, and Dothan metropolitan areas. The company is classified as a non-accelerated filer.
Key Financial Metrics
| Metric | Q3 2008 (3 Months) | Q3 2007 (3 Months) | YTD 2008 (9 Months) | YTD 2007 (9 Months) |
|---|---|---|---|---|
| Net Income | $1,724,000 | $1,244,000 | $5,045,000 | $4,048,000 |
| Earnings Per Share (Diluted) | $0.32 | $0.28 | $0.95 | $0.90 |
| Total Assets | $1,064,908,000 | N/A | N/A | N/A |
| Total Loans | $898,826,000 | N/A | N/A | N/A |
| Total Deposits | $950,738,000 | N/A | N/A | N/A |
| Net Interest Income | $8,877,000 | $6,644,000 | $25,658,000 | $18,238,000 |
| Provision for Loan Losses | $1,381,000 | $1,041,000 | $4,900,000 | $2,500,000 |
| Net Interest Margin | 3.66% | 3.76% | 3.80% | 3.88% |
| Cash and Cash Equivalents | $58,788,000 | N/A | N/A | N/A |
Material Changes vs. Prior Period
- Asset Growth: Total assets increased by 27.04% ($226.7 million) compared to December 31, 2007, driven by a 33.10% increase in loans and a 24.66% increase in deposits. This growth is attributed to organic expansion in Birmingham and Huntsville, plus new markets in Montgomery and Dothan.
- Profitability: Net income for the quarter rose 38.59% year-over-year. This was primarily driven by a 33.61% increase in net interest income due to loan growth and a 29.51% decrease in interest expense.
- Expense Increases: Noninterest expenses increased 35.37% for the quarter and 43.32% year-to-date. This was due to personnel additions (139 employees vs. 114 in 2007), new office openings, and significant write-downs on foreclosed real estate ($579,000 in Q3 vs. $7,000 in Q3 2007).
- Asset Quality: Non-performing assets increased significantly to $15.36 million (from $6.09 million at year-end 2007), largely due to the slowdown in the residential real estate market. Impaired loans rose to $14.29 million. The allowance for loan losses increased to $10.38 million (1.16% of loans).
Guidance, Outlook, and Risks
- Capital Injection: In September 2008, the company issued $15 million in trust preferred securities and related junior subordinated debentures at an 8.5% interest rate to strengthen its capital base. This included the issuance of 75,000 warrants.
- Liquidity: The company maintains liquid assets of approximately $105 million and has additional borrowing availability of roughly $195 million through federal funds lines and the Federal Home Loan Bank. Management believes liquidity is adequate but notes the need for additional capital to sustain growth.
- Market Risks: The filing highlights unprecedented market volatility and the impact of the 2008 financial crisis. Risks include the potential failure of the Emergency Economic Stabilization Act (EESA) to stabilize markets, continued deterioration in the housing market, and increased commercial and consumer delinquencies.
- Interest Rate Risk: The company is currently "asset sensitive." Economic Value of Equity (EVE) modeling indicates that a 200 basis point shift in rates would result in a change of approximately 6.2%, well within regulatory guidelines.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing assets and the adequacy of the allowance for loan losses given the 26% concentration in real estate construction loans.
- Real Estate Exposure: Confirm the valuation and disposition timeline for the $8.2 million in Other Real Estate Owned (OREO) and the impact of continued write-downs on future earnings.
- Capital Adequacy: Review the impact of the new $15 million trust preferred issuance on Tier 1 capital ratios and the associated 8.5% interest cost.
- Expense Management: Assess whether the rapid increase in noninterest expenses (driven by expansion and OREO write-downs) is sustainable relative to revenue growth.
- Liquidity Sources: Validate the availability of the $195 million in unused borrowing lines and the stability of the deposit base in a volatile market.