ServisFirst Bancshares, Inc. — Q3 2012 Form 10-Q
Quarter ended September 30, 2012; nine-month results are compared with the same period in 2011. Balance-sheet comparisons are against December 31, 2011. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow amounts are unaudited unless noted.
Business context and reporting period
ServisFirst is a bank holding company operating through ServisFirst Bank, with banking offices in Alabama and Florida and a loan production office in Mobile. Its core business is gathering deposits and making loans. The filing reports consolidated results for the three and nine months ended September 30, 2012.
Key financial metrics
| Metric | Q3 2012 / September 30, 2012 | Comparison |
|---|---|---|
| Total assets | $2,763.2 million | Up 12.3% from year-end 2011 |
| Total loans | $2,161.1 million | Up 18.0% from year-end 2011 |
| Total deposits | $2,409.5 million | Up 12.4% from year-end 2011 |
| Interest income / interest expense | $27.7 million / $3.7 million | Three months ended September 30 |
| Net interest income | $24.0 million | Up 25.1% year over year |
| Provision for loan losses | $1.2 million | Down from $2.7 million |
| Noninterest income / expense | $2.4 million / $11.3 million | Expense up 27.6% year over year |
| Net income / income available to common | $9.3 million / $9.2 million | Common income up 52.5% |
| EPS | Basic $1.53; diluted $1.35 | Prior-year basic $1.03; diluted $0.90 |
| Net interest margin | 3.82% | 3.67% in Q3 2011 |
| Return on average assets / common equity | 1.38% / 16.64% | Prior-year 1.11% / 16.53% |
| Cash and cash equivalents | $255.3 million | Up from $242.9 million at year-end 2011 |
| Stockholders' equity | $225.0 million | Up from $196.3 million at year-end 2011 |
For the nine months ended September 30, net interest income was $68.7 million, provision for loan losses $6.7 million, noninterest income $7.1 million, noninterest expense $30.2 million, net income $25.9 million, and income available to common stockholders $25.6 million. Basic and diluted EPS were $4.28 and $3.75, respectively.
Nine-month operating cash flow was $22.6 million, compared with $24.4 million in 2011. Investing activities used $283.6 million, principally reflecting loan growth; financing activities provided $273.4 million, largely from deposit growth. Cash and cash equivalents increased $12.4 million during the period.
At September 30, federal funds purchased were $91.3 million and trust preferred securities were $30.5 million; other borrowings were zero. Management reported $364.0 million of liquid assets and approximately $130.0 million of unused federal funds lines. The Bank was categorized as well-capitalized; its total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 12.17%, 11.06% and 9.25%, respectively.
Material changes versus comparable periods
- Q3 net income rose 51.6% and common income rose 52.5%; nine-month common income increased 52.8% year over year. Management attributed the earnings improvement primarily to growth in average earning assets and net interest income.
- Loan and deposit balances expanded substantially. Owner-occupied commercial real estate loans increased 25.8% year to date; construction lending remained relatively flat.
- For the first nine months, the taxable-equivalent yield on earning assets fell to 4.43% from 4.65%, while the cost of interest-bearing liabilities declined to 0.80% from 1.05%. The nine-month net interest margin remained 3.81%.
- Q3 noninterest expense rose 27.6%, including higher salaries and employee benefits and increased OREO costs. OREO expense was $1.2 million for Q3, versus $0.1 million a year earlier, reflecting greater write-downs.
- Nonperforming loans declined to $13.2 million from $13.8 million at year-end; nonperforming assets fell to $22.9 million from $26.1 million. However, TDRs increased to $12.0 million from $4.5 million at year-end.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or growth guidance. Management said additional capital will be needed to maintain current growth, while stating that existing liquidity sources are adequate for immediate anticipated funding needs.
- Credit quality remains a key risk. Special Mention, Substandard and Doubtful loans totaled $81.9 million, or 3.8% of loans. Impaired loans were $38.8 million; the allowance for loan losses was $24.6 million, or 1.14% of loans. A $2.8 million group of TDR loans to one borrower defaulted during Q1; collateral was under a letter of intent to sell, but a final contract remained in negotiation. Other TDRs were reported performing under their restructured terms.
- Management cautioned that results may be affected by economic and credit conditions, interest rates, competition, regulation, loan and deposit trends, collateral values, and natural disasters. It noted that estimates for the loan-loss allowance and foreclosed real estate valuations are inherently judgmental.
- On October 9, 2012, the company called for redemption on November 8, 2012 of $15.0 million of 8.5% junior subordinated debentures and the related trust preferred securities, plus accrued amounts. The company also reported paying off a subordinated note in June 2012.
- The company recorded $1.4 million of OREO write-downs for the first nine months. Securities with unrealized losses were not considered other-than-temporarily impaired; management said it did not intend, and was not likely to be required, to sell them before recovery.
- Commitments to extend credit were $821.5 million; credit-card arrangements were $24.4 million and standby letters of credit were $34.8 million. These amounts are not necessarily expected cash requirements. A $194,000 reserve covered mortgage-loan repurchase demands.
- The company reported no material change in previously disclosed risk factors or material legal proceedings. Management concluded disclosure controls were effective as of September 30, 2012.
Important facts for investors to verify
- Whether rapid loan growth is matched by durable deposit funding and sufficient capital, especially given management's stated need for additional capital to sustain growth.
- Subsequent performance and collateral recovery for the defaulted $2.8 million TDR exposure, and the trend in total TDRs and impaired loans.
- Whether the allowance remains adequate as loans grow, and whether OREO write-downs and other credit costs continue to pressure earnings.
- The effects of the November 2012 redemption of the $15.0 million 8.5% debentures on funding costs, liquidity and capital.
- How expense growth, particularly staffing and OREO costs, compares with future revenue growth. The filing provides no formal forward earnings guidance.
- Share-count changes: 6,006,218 common shares were reported outstanding at September 30, versus 6,021,218 as of October 29, 2012.