ServisFirst Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. ServisFirst is a bank holding company operating through ServisFirst Bank, with 12 full-service offices across Alabama and Florida and a Nashville loan production office. Its Mobile office opened in April 2013.
Financial performance and condition
| Metric | Q2 2013 / June 30, 2013 | Comparable period / change |
|---|---|---|
| Net interest income | $27.5 million | Up 20.1% from Q2 2012 |
| Net interest margin, taxable-equivalent | 3.93% | 3.85% in Q2 2012 |
| Net income | $9.7 million | $8.3 million in Q2 2012 |
| Net income available to common stockholders | $9.6 million | Up 16.5% from Q2 2012 |
| Basic / diluted EPS | $1.38 / $1.33 | $1.38 / $1.21 in Q2 2012 |
| Six-month net income / common income | $18.9 million / $18.7 million | Common income up 14.3% year over year |
| Six-month diluted EPS | $2.64 | $2.41 in 2012 |
| Total assets | $3,140.6 million | Up 8.1% from December 31, 2012 |
| Total loans / deposits | $2,590.2 million / $2,675.0 million | Loans up 9.6%; deposits up 6.5% since year-end |
| Allowance for loan losses | $28.8 million; 1.11% of loans | $26.3 million at year-end; ratio unchanged |
| Cash and cash equivalents | $192.6 million | $180.7 million at year-end |
For the first six months, operating cash flow was $35.0 million, investing cash outflow was $245.5 million, and financing cash inflow was $222.4 million. Loan growth was the main investment cash use.
At June 30, liquid assets, as defined by management, were $296.3 million, with approximately $125 million of additional unused federal funds lines available subject to restrictions and collateral requirements. Federal funds purchased were $175.5 million; other borrowings were $19.9 million, comprising 5.50% subordinated notes due 2022. Total stockholders’ equity was $265.2 million. The Bank was reported as well-capitalized, with total risk-based capital of 11.56%, Tier 1 risk-based capital of 10.48%, and Tier 1 leverage of 9.37%.
Material changes versus comparable periods
- Six-month net interest income rose 19.7% to $53.4 million, mainly reflecting growth in average earning assets. The six-month net interest margin increased to 3.92% from 3.81%, despite lower asset yields; lower funding costs helped.
- Six-month provision for loan losses increased to $7.6 million from $5.5 million, which management attributed to higher net charge-offs and 9.6% year-to-date loan growth.
- Six-month noninterest expense increased 22.2% to $23.1 million, primarily due to staffing, occupancy, and support costs associated with expansion. Full-time equivalent employees increased 20.5% to 265 from 220.
- Nonperforming loans rose to $15.0 million, or 0.58% of loans, from $10.4 million, or 0.44%, at year-end. Impaired loans increased to $46.3 million from $37.4 million.
- Available-for-sale securities declined in fair value to $227.8 million from $233.9 million at year-end; six-month other comprehensive loss was $3.2 million, primarily reflecting unrealized securities losses. Management attributed declines to interest-rate changes, not issuer credit deterioration, and did not consider the securities other-than-temporarily impaired.
- In March 2013, $15 million of mandatory convertible subordinated debentures converted into 600,000 common shares. This reduced subordinated debt and increased common equity.
Outlook, commentary, risks, and unusual items
- No specific earnings, growth, or margin guidance is provided. Management said existing funding sources were adequate for immediate anticipated needs, but additional capital would be needed to maintain current growth.
- Credit quality bears monitoring: $13.5 million of loans to one large residential builder were placed on nonaccrual in Q1. Nonperforming assets were $24.3 million, or 0.93% of loans plus OREO. Troubled debt restructurings totaled $9.4 million; the filing states all TDR loans were performing as agreed at quarter-end.
- Management’s forward-looking risk factors include economic conditions, interest rates and yield curves, competition, regulatory and legislative changes, borrower creditworthiness, collateral values, and natural disasters in its markets. It warns that additional loan-loss provisions may be needed as conditions change.
- Interest-rate risk is managed through quarterly asset-liability analysis. Internal policy limits potential net interest margin changes to 10% for a 100-basis-point rate move and 15% for a 200-basis-point move; the company reported no significant change in sensitivity since year-end.
- Off-balance-sheet credit exposure included $947.0 million of commitments to extend credit, $28.2 million of credit card arrangements, and $38.6 million of standby letters of credit. These amounts do not necessarily represent future funding needs because commitments may expire undrawn.
- The company settled a client lawsuit for $100,000 during Q2. It reported no other material change in disclosed legal proceedings and no material subsequent events requiring disclosure.
Important facts for investors to verify
- Whether the residential-builder exposure and higher nonperforming and impaired loans lead to further charge-offs, provisions, or collateral losses.
- Whether loan and deposit growth can be sustained without additional capital, and how reliance on federal funds purchased evolves.
- Whether expense growth from geographic expansion is matched by revenue growth and operating leverage.
- How interest-rate changes affect net interest margin and the fair value of securities, including the reported unrealized losses.
- The scale and utilization of credit commitments, and whether mortgage repurchase demands remain manageable; the reserve for such demands was $106,000 at quarter-end.