Servisfirst Bancshares, Inc. annual report, FY2012

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ServisFirst Bancshares, Inc. — 2012 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2012, filed March 12, 2013. ServisFirst is a bank holding company operating through ServisFirst Bank, with 11 full-service offices in Alabama and Florida and a loan production office in Mobile. At year-end, the Company reported $2.91 billion in assets, $2.36 billion in loans, $2.51 billion in deposits and $233.3 million in stockholders’ equity. In January 2012, it formed a consolidated subsidiary structure that includes a REIT holding participations in certain Bank-originated loans.

Financial performance and position

  • Revenue and earnings: Net interest income rose 24.9% to $94.1 million. Net income increased 47.0% to $34.4 million; net income available to common stockholders was $34.0 million. Basic and diluted earnings per common share were $5.68 and $4.99, respectively.
  • Margins and returns: Net interest margin was 3.80%, versus 3.79% in 2011. Return on average assets was 1.30%, up from 1.11%; return on average equity was 15.81%, up from 14.73%. The efficiency ratio improved to 41.54% from 45.54%.
  • Noninterest items: Noninterest income rose 39.2% to $9.6 million, including $3.6 million in mortgage banking income and $1.6 million from growth in bank-owned life insurance cash value. Noninterest expense increased 15.1% to $43.1 million, including $2.7 million of OREO expense, up from $0.8 million.
  • Credit quality: Provision for loan losses was $9.1 million. Net charge-offs were $4.9 million, or 0.24% of average loans, compared with $5.0 million and 0.32% in 2011. Nonperforming loans were $10.4 million (0.44% of loans), down from $13.8 million (0.75%). The allowance was $26.3 million, or 1.11% of gross loans. Impaired loans totaled $37.4 million; troubled debt restructurings were $12.3 million, up from $4.5 million.
  • Growth and funding: Assets increased 18.1%, loans 29.1% and deposits 17.1% year over year. Noninterest-bearing deposits were 21.71% of total deposits, up from 16.96%. Net loans to deposits rose to 93.05% from 84.37%.
  • Cash flow: Operating activities provided $41.2 million, versus $24.3 million in 2011. Investing activities used $509.8 million, principally reflecting $540.0 million of loan growth. Financing activities provided $406.4 million. Cash and cash equivalents decreased $62.2 million to $180.7 million.
  • Liquidity and debt: Management reported $414.6 million in liquid assets and approximately $130 million in unused federal funds lines, subject to restrictions and collateral requirements. Year-end liabilities included $117.1 million of federal funds purchased, $19.9 million of 5.5% subordinated notes due 2022 and $15.1 million of subordinated debentures. The Company issued $20 million of 5.5% notes and redeemed $15 million of 8.5% debentures in 2012; it also repaid a $5 million 8.25% note.
  • Capital: The Bank was classified as well-capitalized. Bank total risk-based capital was 11.66%, Tier 1 risk-based capital 10.58% and leverage ratio 9.03%. Consolidated ratios were 11.78%, 9.89% and 8.43%, respectively.

Material changes versus 2011

  • Loan growth, including in newer markets, drove higher interest income and net interest income; average loans increased 29.3%. Interest expense fell 7.3%, while the average yield on earning assets declined to 4.39% from 4.58% and the average funding cost fell to 0.77% from 1.00%.
  • Net income increased to $34.4 million from $23.4 million, while noninterest expenses also rose, primarily due to staffing and expansion. OREO write-downs and related costs were a notable expense increase.
  • Credit indicators generally improved: nonperforming loans and net charge-off rates declined, although impaired loans remained roughly flat and TDR balances increased materially.
  • Investment securities declined to $259.8 million in carrying value from $309.0 million. Cash and cash equivalents also declined, while deposits and loans grew substantially.
  • Stockholders’ equity rose to $233.3 million from $196.3 million. The Company paid its first common dividend, $0.50 per share, on December 31, 2012.

Outlook, risks, contingencies and unusual items

The filing provides no quantified earnings or growth guidance. Management said continued growth would require additional capital over the longer term; it believed available capital was sufficient for immediate growth plans. Management also described continued emphasis on organic loan and deposit growth, local decision-making and core deposit funding.

  • Key risks include concentrated lending and operations in Alabama and the Florida panhandle; exposure to commercial and industrial, commercial real estate and construction lending; local economic or natural-disaster shocks; and the possibility that loan-loss assumptions prove inadequate. The Birmingham market held 53% of loans, and Alabama markets accounted for 93%.
  • Interest-rate changes may affect net interest income, loan demand, prepayments and securities values. The one-year cumulative gap was negative 2.2% of earning assets; management’s model indicated a 5.10% increase in economic value of equity under a 200-basis-point rate increase. These are model estimates, not forecasts.
  • Commitments and other off-balance-sheet credit arrangements totaled $922.5 million: $860.4 million of commitments to extend credit, $25.7 million of credit-card arrangements and $36.4 million of standby letters of credit and financial guarantees. Amounts may not be drawn in full.
  • OREO was $9.7 million at year-end. OREO expense increased due to write-downs of residential development properties. A $2.8 million group of restructured loans entered payment default during 2012; the collateral was subject to a letter of intent to sell, with a final contract still under negotiation.
  • Regulatory changes, including prospective Basel III capital and liquidity requirements and Dodd-Frank implementation, could raise compliance costs or affect earnings and capital. The filing states that final rules and their effects were uncertain at the time.
  • The common stock had no public trading market. Management reported no current plans for further common dividends in the near future, although preferred dividends continued. The Bank’s deposits were FDIC-insured; common stock is not an insured deposit.
  • No material legal proceedings were reported. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Most important facts for investors to verify

  • Whether loan and deposit growth can continue without weakening underwriting standards, liquidity or capital.
  • The composition and performance of impaired loans, TDRs, construction credits and OREO, including the outcome of the defaulted restructured loans and related collateral sale.
  • Whether the $26.3 million allowance remains adequate as the loan portfolio expands and credit conditions change.
  • The sustainability of earnings growth, including mortgage banking income, bank-owned life insurance income, expense growth and net interest margin sensitivity.
  • The timing and terms of the mandatory conversion of the $15 million trust preferred securities, scheduled for March 2013, and its potential effect on diluted shares and capital.
  • Future capital and liquidity needs, regulatory requirements, and the practical implications of the absence of a public market for the common stock.