ServisFirst Bancshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The interim financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context and financial performance
ServisFirst is a bank holding company operating through ServisFirst Bank, with ten full-service offices. Its Pensacola, Florida office opened April 1, 2011. The business primarily gathers deposits and makes loans.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $18.0 | $15.3 | $35.0 | $30.2 |
| Provision for loan losses | $1.5 | $2.5 | $3.7 | $5.1 |
| Noninterest income | $1.8 | $1.0 | $3.1 | $2.1 |
| Noninterest expense | $9.4 | $7.6 | $18.0 | $15.0 |
| Net income | $5.8 | $4.0 | $10.7 | $8.0 |
| Diluted EPS | $0.89 | $0.65 | $1.65 | $1.33 |
Management attributed higher earnings primarily to growth in average earning assets and lower loan-loss provisions. Net income rose 45% in Q2 and 33% for the first half year over year. Taxable-equivalent net interest margin declined to 3.93% from 4.07% in Q2 and to 3.96% from 4.11% for the six-month period. Q2 return on average assets was 1.22% and return on average equity was 17.30%.
Financial position, liquidity and capital
- At June 30, total assets were $2,024.6, up 4.6% from year-end 2010; loans were $1,561.0, up 11.9%; deposits were $1,803.9, up 2.6%.
- Cash and cash equivalents were $197.5, down from $232.0 at year-end. The company reported $317 million of liquid assets, including cash, federal funds sold and unpledged available-for-sale securities, plus approximately $416 million in unused borrowing lines. Management said these sources were adequate for anticipated immediate needs but that additional capital would be needed to sustain current growth.
- Six-month cash flows were $18.1 provided by operations, $127.2 used in investing and $74.6 provided by financing; cash decreased $34.5.
- Other borrowings were $4.9, down from $24.9 at year-end after repayment of two Federal Home Loan Bank advances. Trust preferred securities were $30.5; the company also had a $5.0 subordinated note described in the filing.
- Stockholders’ equity was $181.2, compared with $117.1 at year-end. This included $40.0 of Treasury Series A preferred stock issued under the Small Business Lending Fund and $10.2 net proceeds from a common-stock private placement.
- The company reported the bank as well-capitalized. At June 30, the bank’s total risk-based capital ratio was 14.24%, Tier 1 risk-based ratio 12.70%, and Tier 1 leverage ratio 10.47%.
Material changes and asset quality
- Loan growth was concentrated in commercial lending: commercial, financial and agricultural loans increased to $634.4 from $536.6 at year-end. Construction loans declined to $159.6 from $172.1.
- Nonperforming loans rose to $21.1 from $14.3 at year-end; nonperforming assets increased to $28.1 from $21.3. Management cited $8.3 of new nonaccrual loans tied to two residential land developers. Nonperforming loans were 1.35% of total loans, versus 1.03% at year-end.
- Troubled debt restructurings increased to $5.1 from $2.4; management said all were performing under their modified terms. Other real estate owned was $6.9, approximately flat, while its account count fell from 39 to 29.
- The allowance for loan losses was $19.5, or 1.25% of loans, versus $18.1, or 1.31%, at year-end. The first-half provision fell to $3.7 from $5.1, which management attributed to lower net charge-offs, improved risk ratings and loan paydowns. Management considered the reserve adequate, but said future provisions may be necessary.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management anticipated deposit growth through developing newer markets and organic growth in established markets, while noting the need for additional capital to support current growth.
- Noninterest expense increased, reflecting higher staffing and occupancy costs from expansion, including Pensacola and a new correspondent banking team. The company had 195 full-time equivalent employees, up from 162 a year earlier.
- The company recorded $738,000 in prepayment penalties for early repayment of Federal Home Loan Bank advances. Securities-sale gains were $523,000 in Q2 and $666,000 for the first half, contributing to higher noninterest income.
- Interest-rate risk, credit deterioration, economic conditions, regulatory changes, competition and natural disasters were among the risks identified. Management stated its internal policy limits modeled net interest margin changes to 10% for a 100-basis-point rate change and 15% for a 200-basis-point change.
- Off-balance-sheet commitments to extend credit were $604.9; standby letters of credit were $52.5. These contractual amounts do not necessarily represent future cash requirements because commitments may expire undrawn.
- The Treasury preferred stock’s initial dividend rate was 1%, subject to adjustment based partly on qualified small-business lending; it could rise to 9% if the shares remain outstanding beyond four-and-a-half years. The preferred stock restricts certain junior dividends and other transactions.
- Management reported no material change in previously disclosed risk factors, no material legal proceedings beyond those discussed in the prior annual report, and no subsequent events requiring disclosure. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether rising nonperforming loans, especially exposure to residential land developers and construction lending, lead to additional charge-offs or higher provisions.
- Whether loan growth and expansion produce sustainable earnings as net interest margin contracts and operating expenses rise.
- The effect of the capital raises on common shareholders, including preferred dividends, potential dilution and restrictions on common dividends.
- Whether the reported liquidity and unused borrowing lines remain available under their collateral and other conditions, and whether further capital is needed to support growth.
- How much reported noninterest income depended on securities gains and whether asset-quality improvements supporting lower provisions persist.