ServisFirst Bancshares, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results, compared with Q1 2011. Balance-sheet changes are compared with December 31, 2011. The company operates a community bank through 10 full-service offices in Alabama and Florida.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable / prior period |
|---|---|---|
| Total assets | $2.531 billion | $2.461 billion at Dec. 31, 2011 |
| Total loans | $1.919 billion | $1.831 billion at Dec. 31, 2011 |
| Total deposits | $2.189 billion | $2.144 billion at Dec. 31, 2011 |
| Net interest income | $21.738 million | $16.976 million in Q1 2011 |
| Net interest income, taxable-equivalent | $22.088 million | $17.299 million in Q1 2011 |
| Noninterest income | $2.269 million | $1.271 million in Q1 2011 |
| Noninterest expense | $9.031 million | $8.597 million in Q1 2011 |
| Net income | $8.256 million; $8.156 million available to common stockholders after preferred dividends | $4.871 million in Q1 2011 |
| Common EPS | $1.37 basic; $1.20 diluted | $0.88 basic; $0.77 diluted in Q1 2011 |
| Net interest margin | 3.76% | 3.86% in Q1 2011 |
| Return on average assets / equity | 1.33% / 16.31% | 1.06% / 16.50% in Q1 2011 |
Loan growth was 4.8% from year-end, with reported growth across mature markets and nearly 24% growth in Pensacola. Deposits grew 2.1%. The allowance for loan losses was $23.662 million, or 1.23% of loans; provision expense was $2.383 million. Nonperforming loans were $15.389 million (0.80% of loans), and other real estate owned was $11.637 million.
Cash flow and liquidity: Operating activities provided $18.462 million; investing activities used $92.892 million, largely reflecting loan growth; financing activities provided $59.970 million. Cash and cash equivalents declined $14.460 million to $228.473 million. Management reported $333.5 million of liquid assets and approximately $125 million of additional unused federal funds lines, subject to restrictions and collateral requirements.
Debt and capital: At March 31, federal funds purchased were $93.385 million, other borrowings $4.958 million, and trust preferred securities $30.514 million. The company also reported a $5 million subordinated note due June 2016. The Bank was reported as well-capitalized; its total risk-based capital ratio was 12.68%, Tier 1 risk-based ratio 11.26%, and Tier 1 leverage ratio 9.17%. The company’s corresponding consolidated ratios were 12.81%, 11.38%, and 9.26%.
Material changes and notable items
- Net income rose 67.4% year over year. Management attributed the increase principally to higher net interest income, supported by a 29.8% increase in average interest-earning assets, and higher noninterest income.
- Asset yields and net interest margin declined: taxable-equivalent asset yield fell to 4.42% from 4.75%, and margin to 3.76% from 3.86%. Lower funding costs partly offset the decline; the cost of interest-bearing liabilities fell to 0.84% from 1.08%.
- Noninterest income increased 78.5%, including mortgage banking income of $972,000 versus $351,000, credit card income of $222,000 versus $7,000, and $390,000 from increased cash surrender value of bank-owned life insurance.
- Noninterest expense increased 5.0%, with salaries and benefits up $951,000 (22.6%) as staffing grew to 214 full-time equivalents from 189. Lower FDIC assessments and the absence of a prior-year $256,000 prepayment penalty partly offset higher costs.
- Nonperforming loans increased from $13.772 million at year-end, mainly due to additional owner-occupied commercial real estate exposure. TDRs rose to $8.3 million from $4.5 million; three TDR loans to one borrower totaling $2.8 million defaulted during the quarter. Management said other TDRs were performing as agreed.
- Management reported no securities deemed other-than-temporarily impaired. Unrealized securities losses were attributed primarily to market-rate changes, and the company said it did not intend, and was not more likely than not required, to sell the securities before recovery.
Outlook, risks, and contingencies
The filing gives no specific earnings or growth guidance. Management said it expects sustainable deposit growth from newer and mature markets, believes current liquidity sources can meet immediate anticipated funding needs, and noted that additional capital will be needed to maintain current growth. It reported no material change in market-risk sensitivity or risk factors from the prior annual report.
Key exposures include credit quality and collateral valuations, especially construction and real estate loans; interest-rate and net-interest-margin sensitivity; competition and economic conditions in the Southeast; deposit retention and funding needs; and regulatory or legal changes. Off-balance-sheet commitments totaled $860.310 million, including $800.461 million of commitments to extend credit and $38.458 million of standby letters of credit; the filing notes these amounts do not necessarily represent future cash requirements. Mortgage-loan repurchase demands were described as manageable, with no related expense in either Q1 2012 or Q1 2011. No material legal proceedings or subsequent events requiring disclosure were reported.
The $40 million Treasury Small Business Lending Fund preferred investment carries a dividend rate linked to qualified small-business lending, with rates potentially increasing over time and fixing at 9% if outstanding beyond four and a half years. Preferred dividends have priority over common dividends and other restrictions apply.
Important facts for investors to verify
- Whether recent loan growth—particularly in Pensacola and commercial real estate—can be sustained without weakening underwriting or increasing losses.
- Developments in nonperforming loans, impaired loans, TDR performance and defaults, and whether the $23.662 million allowance remains adequate.
- Whether margin pressure from lower asset yields persists and how funding costs and interest-rate changes affect earnings.
- Funding and capital needs if loan growth continues, including use of federal funds purchased and the terms and potential future cost of the Treasury preferred stock.
- Durability of mortgage banking and credit-card income and the impact of expansion-related staffing and operating costs.