ServisFirst Bancshares, Inc. - Quarter Report: 2008 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-53149
SERVISFIRST BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of |
26-0734029 (I.R.S. Employer |
|
Incorporation or Organization) | Identification No.) |
(205) 949-0302
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definition of large accelerated
filer, accelerated filer, and small reporting company in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practical date.
Class | Outstanding as of October 31, 2008 | |
Common stock, $.001 par value | 5,113,482 |
Table of Contents
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 28,434 | $ | 15,756 | ||||
Interest bearing balances due from depository institutions |
332 | 34,068 | ||||||
Federal funds sold |
30,022 | 16,598 | ||||||
Cash and cash equivalents |
58,788 | 66,422 | ||||||
Securities available for sale |
90,139 | 87,233 | ||||||
Restricted equity securities |
2,659 | 1,202 | ||||||
Mortgage loans held for sale |
4,060 | 2,463 | ||||||
Loans |
898,826 | 675,281 | ||||||
Less allowance for loan losses |
(10,384 | ) | (7,732 | ) | ||||
Loans, net |
888,442 | 667,549 | ||||||
Premises and equipment, net |
3,884 | 4,176 | ||||||
Accrued interest and dividends receivable |
4,068 | 3,949 | ||||||
Deferred tax assets |
4,075 | 2,432 | ||||||
Other real estate owned |
8,211 | 1,623 | ||||||
Other assets |
582 | 1,201 | ||||||
Total assets |
$ | 1,064,908 | $ | 838,250 | ||||
Liabilities and Shareholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 105,884 | $ | 85,018 | ||||
Interest-bearing |
844,854 | 677,665 | ||||||
Total deposits |
950,738 | 762,683 | ||||||
Other borrowings |
20,000 | 73 | ||||||
Subordinated debentures |
15,052 | | ||||||
Accrued interest payable |
1,190 | 782 | ||||||
Other liabilities |
1,170 | 2,465 | ||||||
Total liabilities |
988,150 | 766,003 | ||||||
Shareholders equity: |
||||||||
Common stock, par value $.001 per share; 15,000,000 shares authorized;
5,113,482 shares issued and outstanding |
5 | 5 | ||||||
Preferred stock, par value $.001 per share; 1,000,000 shares authorized;
No shares outstanding |
| | ||||||
Additional paid-in capital |
64,076 | 63,159 | ||||||
Retained earnings |
13,127 | 8,082 | ||||||
Accumulated other comprehensive income (loss) |
(450 | ) | 1,001 | |||||
Total shareholders equity |
76,758 | 72,247 | ||||||
Total liabilities and shareholders equity |
$ | 1,064,908 | $ | 838,250 | ||||
See Notes to Unaudited Consolidated Financial Statements.
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SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Interest income: |
||||||||||||||||
Interest and fees on loans |
$ | 12,657 | 11,673 | 36,969 | 31,575 | |||||||||||
Taxable securities |
951 | 667 | 2,832 | 1,317 | ||||||||||||
Nontaxable securities |
233 | 180 | 677 | 473 | ||||||||||||
Federal funds sold |
12 | 1,206 | 449 | 3,299 | ||||||||||||
Other interest and dividends |
28 | 17 | 130 | 32 | ||||||||||||
Total interest income |
13,881 | 13,743 | 41,057 | 36,696 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
4,640 | 7,099 | 14,819 | 18,458 | ||||||||||||
Borrowed funds |
364 | | 580 | | ||||||||||||
Total interest expense |
5,004 | 7,099 | 15,399 | 18,458 | ||||||||||||
Net interest income |
8,877 | 6,644 | 25,658 | 18,238 | ||||||||||||
Provision for loan losses |
1,381 | 1,041 | 4,900 | 2,500 | ||||||||||||
Net interest income after
provision for loan losses |
7,496 | 5,603 | 20,758 | 15,738 | ||||||||||||
Noninterest income: |
||||||||||||||||
Service charges on deposit accounts |
358 | 165 | 904 | 382 | ||||||||||||
Other operating income |
314 | 222 | 1,007 | 570 | ||||||||||||
Total noninterest income |
672 | 387 | 1,911 | 952 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Salaries and employee benefits |
2,684 | 2,515 | 7,910 | 6,497 | ||||||||||||
Equipment and occupancy |
546 | 448 | 1,598 | 1,161 | ||||||||||||
Professional services |
254 | 161 | 829 | 388 | ||||||||||||
Other operating expense |
1,977 | 910 | 4,484 | 2,295 | ||||||||||||
Total noninterest expense |
5,461 | 4,034 | 14,821 | 10,341 | ||||||||||||
Income before income taxes |
2,707 | 1,956 | 7,848 | 6,349 | ||||||||||||
Provision for income taxes |
983 | 712 | 2,803 | 2,301 | ||||||||||||
Net income |
$ | 1,724 | 1,244 | 5,045 | 4,048 | |||||||||||
Basic earnings per share |
$ | .34 | .28 | .99 | .90 | |||||||||||
Diluted earnings per share |
$ | .32 | .28 | .95 | .90 |
See Notes to Unaudited Consolidated Financial Statements.
4
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SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income |
$ | 1,724 | 1,244 | 5,045 | 4,048 | |||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized holding gains (losses) arising
during the period from securities available
for sale, net of tax (benefit) of $(177) and
$(643) for the three and nine months ended
September 30, 2008, respectively, and $277
and $(89) for the three and nine months ended
September 30, 2007, respectively |
(344 | ) | 537 | (1,248 | ) | (173 | ) | |||||||||
Unrealized gains(losses) arising during the
period from the derivative, net of tax of $35
for the nine months ended September 30, 2008,
and $113 and $59 for the three and nine
months ended September 30, 2007, respectively |
| 199 | 67 | 100 | ||||||||||||
Reclassification adjustment for net gains
realized on derivatives in net income, net of
tax of $46 and $138 for the three and nine
months ended September 30, 2008, respectively |
(90 | ) | | (270 | ) | | ||||||||||
Other comprehensive income (loss) |
(434 | ) | 736 | (1,451 | ) | (73 | ) | |||||||||
Comprehensive income |
$ | 1,290 | 1,980 | 3,594 | 3,975 | |||||||||||
See Notes to Unaudited Consolidated Financial Statements.
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SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
(In Thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
(In Thousands)
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Shareholders | ||||||||||||||||
Stock | Capital | Earnings | Income (Loss) | Equity | ||||||||||||||||
Balance December 31, 2007 |
$ | 5 | $ | 63,159 | $ | 8,082 | $ | 1,001 | $ | 72,247 | ||||||||||
Other comprehensive loss |
| | | (1,451 | ) | (1,451 | ) | |||||||||||||
Stock based compensation expense |
| 492 | | | 492 | |||||||||||||||
Relative fair value of warrants
issued in connection with
subordinated debentures |
| 425 | | | 425 | |||||||||||||||
Net income |
| | 5,045 | | 5,045 | |||||||||||||||
Balance September 30, 2008 |
$ | 5 | 64,076 | $ | 13,127 | $ | (450 | ) | $ | 76,758 | ||||||||||
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SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)
(In Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)
(In Thousands)
2008 | 2007 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 5,045 | 4,048 | |||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||
Deferred tax benefit |
(818 | ) | (1,125 | ) | ||||
Provision for loan losses |
4,900 | 2,500 | ||||||
Depreciation and amortization |
683 | 441 | ||||||
Net accretion of investments |
(248 | ) | (258 | ) | ||||
Amortized gain on derivative |
408 | | ||||||
Increase in accrued interest and dividends receivable |
(119 | ) | (809 | ) | ||||
Stock compensation expense |
492 | 396 | ||||||
Increase in accrued interest payable |
408 | 245 | ||||||
Proceeds from sale of mortgages held for sale |
60,553 | 39,040 | ||||||
Originations of mortgages held for sale |
(62,149 | ) | (37,716 | ) | ||||
(Gain) loss on sale of other real estate |
172 | (15 | ) | |||||
Net change in other operating activities |
(1,774 | ) | (229 | ) | ||||
Net cash provided by operating activities |
7,553 | 6,518 | ||||||
INVESTING ACTIVITIES |
||||||||
Purchases of securities available for sale |
(11,960 | ) | (65,776 | ) | ||||
Proceeds from maturities/calls, pay downs of securities available for sale |
7,419 | 5,190 | ||||||
Increase in loans |
(233,285 | ) | (139,776 | ) | ||||
Purchase of premises and equipment |
(391 | ) | (1,589 | ) | ||||
Purchase of restricted equity securities |
(1,457 | ) | (397 | ) | ||||
Proceeds from sale of other real estate |
1,505 | 276 | ||||||
Net cash used in investing activities |
(238,169 | ) | (202,072 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net increase in non-interest bearing deposits |
20,866 | 35,029 | ||||||
Net increase in interest bearing deposits |
167,189 | 239,448 | ||||||
Repayment of other borrowings |
(73 | ) | | |||||
Proceeds from other borrowings |
20,000 | | ||||||
Net proceeds from issuance of trust preferred securities |
15,000 | | ||||||
Proceeds from issuance of common shares, net |
| 10,964 | ||||||
Net cash provided by financing activities |
222,982 | 285,441 | ||||||
Net increase (decrease) in cash and cash equivalents |
(7,634 | ) | 89,887 | |||||
Cash and cash equivalents at beginning of period |
66,422 | 53,335 | ||||||
Cash and cash equivalents at end of period |
$ | 58,788 | 143,222 | |||||
See Notes to Unaudited Consolidated Financial Statements.
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SERVISFIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
NOTE 1 GENERAL
The accompanying condensed consolidated financial statements in this report have been prepared in
accordance with the rules and regulations of the Securities and Exchange Commission, including
Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated
financial statements do not include all of the information and footnotes required by U. S.
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments necessary to present fairly the consolidated financial position and the
consolidated results of operations for the interim periods have been made. All such adjustments are
of a normal nature. The consolidated results of operations are not necessarily indicative of the
consolidated results of operations which ServisFirst Bancshares, Inc. (the Company) may achieve
for future interim periods or the entire year. For further information, refer to the consolidated
financial statements and footnotes included in the Companys registration statement on Form 10, as
amended, for the year ended December 31, 2007.
All reported amounts are in thousands except share and per share data.
NOTE 2 CASH AND CASH FLOWS
Cash on hand, cash items in process of collection, amounts due from banks, and Federal funds sold
are included in cash and cash equivalents. The following supplemental cash flow information
addresses certain cash payments and noncash transactions for the nine months ended September 30,
2008 and 2007, respectively.
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
(In Thousands) | ||||||||
Interest paid |
$ | 15,807 | 18,703 | |||||
Income taxes paid |
$ | 3,561 | 2,585 | |||||
Transfers of loans to other real estate |
$ | 7,492 | 967 |
NOTE 3 EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted earnings per common share include the
dilutive effect of additional potential common shares issuable under stock options and warrants.
8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In Thousands, Except Share and Per Share Amounts) | ||||||||||||||||
Weighted average common shares outstanding |
$ | 5,113,482 | $ | 4,482,782 | $ | 5,113,482 | $ | 4,477,930 | ||||||||
Net income |
$ | 1,724 | $ | 1,244 | $ | 5,045 | $ | 4,048 | ||||||||
Basic earnings per common share |
$ | .34 | $ | .28 | $ | .99 | $ | .90 | ||||||||
Weighted average common shares outstanding |
5,113,482 | 4,482,782 | 5,113,482 | 4,477,930 | ||||||||||||
Dilutive effects of assumed conversions
and exercises of stock options and
warrants |
230,448 | 11,371 | 225,011 | 30,224 | ||||||||||||
Weighted average common and dilutive
potential common shares outstanding |
5,343,930 | 4,494,153 | 5,338,493 | 4,508,154 | ||||||||||||
Net income |
$ | 1,724 | $ | 1,244 | $ | 5,045 | $ | 4,048 | ||||||||
Diluted earnings per common share |
$ | .32 | $ | .28 | $ | .95 | $ | .90 |
NOTE 4 EMPLOYEE AND DIRECTOR BENEFITS
Stock Options
At September 30, 2008, the Company has stock-based compensation plans, which are described below.
The compensation cost that has been charged against income for the plan was approximately $172,000
and $492,000 for the three and nine months ended September 30, 2008, and $140,000 and $396,000 for
the three and nine months ended September 30, 2007, respectively. Included in stock-based
compensation for 2008 and 2007 is expense recognized related to option and warrants granted in
2005, the fair value of which were determined using a Black-Scholes-Merton valuation model.
Under the Companys 2005 Amended and Restated Stock Option Plan (the Plan), there are 1,025,000
shares authorized for issuance. Option awards are generally granted with an exercise price equal to
the estimated fair market value of the Companys common stock at the date of grant. The maximum
term of the options granted under the plan is ten years.
The Company has granted non-plan options to certain key relationships to purchase up to an
aggregate amount of 55,000 shares of the Companys common stock at between $15.00 and $20.00 per
share for 10 years. These options are non-qualified and not part of the 2005 Amended and Restated
Stock Option Plan.
The Company estimates the fair value of each stock option award using a Black-Scholes-Merton
valuation model that uses the assumptions noted in the following table.
Expected volatilities are based on an index of Alabama traded community banks. The expected term
for options granted is based on the short-cut method and represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within the contractual life
of the option is based on the U. S. treasury yield curve in effect at the time of grant.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, | ||||||||
2008 | 2007 | |||||||
Expected volatility |
21.53 | % | 20.00 | % | ||||
Expected dividends |
.50 | % | .50 | % | ||||
Expected term in years |
7 years | 7 years | ||||||
Risk-free rate |
2.87 | % | 4.56 | % |
The following table summarizes stock option activity during the nine months ended September 30,
2008:
Weighted | Weighted Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual Term | Intrinsic Value | ||||||||||||||
Shares | Price | (years) | (In Thousands) | |||||||||||||
Outstanding January 1, 2008 |
712,500 | $ | 13.12 | 8.43 | $ | 4,905 | ||||||||||
Granted |
98,500 | 24.31 | | | ||||||||||||
Exercised |
| | | | ||||||||||||
Forfeited |
| | | | ||||||||||||
Outstanding at September 30, 2008 |
811,000 | $ | 14.48 | 7.97 | $ | 8,536 | ||||||||||
Exercisable at September 30, 2008 |
61,932 | $ | 11.77 | 7.18 | $ | 819 | ||||||||||
Options for 13,500 shares of the Companys common stock were granted in the first quarter of 2008
at an exercise price of $20 per share and options for 85,000 shares of the Companys common stock
were granted in the third quarter of 2008 at an exercise price of $25 per share. No options granted
during 2008 were exercised as of September 30, 2008.
Stock Warrants
In recognition of the efforts and financial risks undertaken by the Banks organizers in 2005, the
Bank granted warrants to organizers to purchase a total 60,000 shares of common stock at a price of
$10, which was the fair market value of the Banks common stock at the date of the grant. The
warrants vest in equal annual increments over a three-year period commencing on the first
anniversary date of the Banks incorporation and will terminate on the tenth anniversary of the
incorporation date. The total number of warrants outstanding at September 30, 2008 and 2007 was
60,000.
The fair value of each stock warrants granted in 2005 was estimated on the date of grant using a
Black-Scholes-Merton valuation model using the assumptions noted in the following table.
Year Ended | ||||
December 31, | ||||
2005 | ||||
Expected volatility |
20.00 | % | ||
Expected dividends |
0.00 | % | ||
Expected term (in years) |
3 years | |||
Risk-free rate |
3.69 | % |
The company issued warrants for 75,000 shares of common stock at a price of $25 per share in the
third quarter of 2008. These warrants were issued in connection with the trust preferred securities
that are discussed in detail in Note 8 to the financial statements and Recent Events above.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 ADOPTION OF NEW ACCOUNTING INTERPRETATIONS
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 159 The Fair Value Option for Financial Assets and Financial Liabilities Including an
Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by
instrument) will report unrealized gains and losses in earnings at each subsequent reporting date.
The fair value option election is irrevocable unless a new election date occurs. SFAS No. 159
establishes presentation and disclosure requirements to help financial statement users understand
the effect of the entitys election on its earnings, but does not eliminate disclosure requirements
of other financial accounting standards. Assets and liabilities that are measured at fair value
must be displayed on the face of the balance sheet. The Company chose not to elect the fair value
option for its financial assets and financial liabilities existing at January 1, 2008 and did not
elect the fair value option on financial assets and financial liabilities transacted in the nine
months ended September 30, 2008. Therefore, the adoption of SFAS No. 159 had no impact on the
Companys consolidated financial statements.
Effective January 1, 2008, the Company adopted SFAS No. 157 Fair Value Measurements, for financial
assets and financial liabilities and any other assets and liabilities carried at fair value. This
pronouncement defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. On November 14, 2007, FASB issued SFAS 157-2, Effective
Date FASB Statement No. 157. FASB No. 157-2 delays the effective date of Statement No. 157 for
other non-financial assets and non-financial liabilities until fiscal years beginning after
November 15, 2008. The companys adoption of SFAS No. 157 did not have a material effect on the
Companys consolidated financial statements for financial assets and financial liabilities and any
other assets or liabilities carried at fair value.
NOTE 6 RECENT ACCOUNTING PRONOUNCEMENTS
In September 2008, The Financial Accounting Standards Board (FASB) issued FASB Staff Position FSP
FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment
of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date
of FASB Statement No. 161. This FSP amends FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities to require disclosure by sellers of credit derivatives,
including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others to require an additional disclosure about the
current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the
Boards intent about the effective date of FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. Under the FSP, unvested share-based
payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of computing EPS. The FSP
is effective for fiscal years beginning after December 15, 2008, and interim periods within those
years, and is not expected to have a significant impact on the Companys results of operations,
financial condition or liquidity.
In May 2008, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard
(FAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162). Under FAS
162, the GAAP hierarchy will now reside in the accounting literature established by the FASB.
FAS162 identifies the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements in conformity with GAAP. FAS 162 is
effective 60 days following the Secs approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section 411 The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Priciples. FAS 162 will not impact our financial statements.
In March, 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB No. 133. This Statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide enhanced disclosure
about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and
related hedging items are accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedging items affect an entitys financial position,
financial performance, and cash flows. This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this
Statement at the beginning of the Companys fiscal year ending December 31, 2009. The Company has
not determined the effect that the adoption of FAS 161 will have on its financial statement
disclosures.
NOTE 7 FAIR VALUE MEASUREMENT
Effective January 1, 2008, the Company adopted the methods of fair value as described in SFAS No.
157, Fair value Measurements, to value its financial assets and financial liabilities measured at
fair value. As defined in SFAS No. 157, fair value is based on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. In order to increase consistency and comparability in fair value
measurements, SFAS No.157 establishes a fair value hierarchy that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1:
|
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. | |
Level 2:
|
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 3:
|
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible, as well as
considers counterparty credit risk in its assessment of fair value.
The following table presents the fair value hierarchy of financial assets and financial liabilities
measured at fair value as of September 30, 2008:
Fair Value Measurement at September 30, 2008 | ||||||||||||||||
(Dollar amounts in thousands) | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets Measured on a Recurring
Basis: |
||||||||||||||||
Available-for-sale securities (1) |
$ | | $ | 90,139 | | $ | 90,139 | |||||||||
Assets measured on a
Nonrecurring Basis: |
||||||||||||||||
Impaired loans |
| | 14,293 | $ | 14,293 | |||||||||||
(1) | The Company chose not to elect the fair value option as prescribed by SFAS No. 159 for its financial assets and financial liabilities that had not been previously carried at fair value. Therefore, certain financial assets and financial liabilities not carried at fair value, such as the Companys investment in the Federal Home Loan Bank are still reported at their carrying values. |
During the first nine months of 2008, the Company recognized losses related to certain assets that
are measured at fair value on a nonrecurring basis (i.e. loans). For the nine months ended
September 30, 2008, $2,325,000 was recognized as specific allocation to the allowance for loan
losses, including $770,000 for the three months ended September 30, 2008.
NOTE 8 SUBORDINATED DEFERRABLE INTEREST DEBENTURES
In August 2008, the Company formed a Delaware statutory trust subsidiary, ServisFirst Capital Trust
I (the Trust), which, on September 2, 2008, issued 15,000 shares of its 8.5% trust preferred
securities to accredited investors for $15,000,000 or $1,000 per share. The Trust simultaneously
issued 463,918 shares of its common securities to the Company for $463,918 or $1.00 per share,
which together with the trust preferred securities, constitutes all of the issued and outstanding
securities of the Trust. The Trust invested the $15,463,918 of the proceeds from the issuance of
the Trusts trust preferred and common securities in the Companys 8.5% junior subordinated
deferrable interest debenture due September 1, 2038 in the principal amount of $15,463,918 (the
Debenture) resulting in a net capital injection into the Company of $15,000,000 (the common
securities are financially immaterial as their issuance merely represents an investment by the
Company into itself in order to establish voting control of the Trust by the Company and to comply
with certain tax regulations). The Debenture bears a fixed rate of interest at 8.5% per annum and
will be subordinate and junior in right of payment to all of the Companys senior debt; provided,
however, the Company will not incur any additional senior debt in excess of 0.5% of the Companys
average assets for the fiscal year
13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
immediately preceding, unless approved by a majority of the holders of the outstanding trust
preferred securities. Interest is payable quarterly in arrears on December 1, March 1, June 1 and
September 1 of each year, commencing December 1, 2008.
Holders of the trust preferred securities are entitled to receive distributions accruing from the
original date of issuance. The distributions are payable quarterly in arrears on December 1, March
1, June 1 and September 1 of each year, commencing December 1, 2008. The distributions accrue at an
annual fixed rate of 8.5%. Payments of distributions on the trust preferred securities will be
deferred in the event interest payments on the Debenture are deferred, which may occur at any time
and from time to time, for up to 20 consecutive quarterly periods. During any deferral period,
the Company may not pay dividends or make certain other distributions or payments as provided for
in the Indenture. If payments are deferred, holders accumulate additional distributions thereon at
8.5%, compounded quarterly, to the extent permitted by law.
The Company guarantees the payment of the distributions on the trust preferred securities under a
Guarantee Agreement (the Guarantee), but only to the extent the Trust has funds legally and
immediately available to make such distributions. The obligations under the Guarantee will be
subordinate and junior in right of payment to all other of the Companys liabilities and will rank
pari passu with the most senior preferred stock issued by the Company, if any.
The trust preferred securities are subject to mandatory redemption upon repayment of the Debenture
at its maturity, September 1, 2038, or its earlier redemption. The Debenture is redeemable by the
Company (i) prior to September 11, 2011, but only in whole, upon the occurrence of a Special Event,
as defined in the Indenture or (ii) in whole or in part on or after September 1, 2011 for any
reason. In the event of the redemption of the trust preferred securities prior to September 1,
2011, the holder of each trust preferred security shall be entitled to $1,050, plus accumulated and
unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment.
In the event of the redemption of the trust preferred securities on or after September 1, 2011, the
holder of each trust preferred security shall be entitled to receive $1,000 plus accumulated and
unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment.
The Company has the right at any time to terminate the Trust and cause the Debenture to be
distributed to the holders of the trust preferred securities in liquidation of the Trust. This
right is optional and wholly within the Companys discretion as set forth in the Indenture.
The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank
regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred
securities having the characteristics of trust preferred securities qualify as minority interests,
which is included in tier 1 capital for bank and financial holding companies. In calculating the
amount of Tier 1 qualifying capital, the trust preferred securities can only be included up to the
amount constituting 25% of total Tier 1 capital elements (including trust preferred securities).
Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining
capital for bank regulatory purposes than if the Company were to issue preferred stock.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company issued a total of 75,000 warrants, each with the right to purchase one
share of the Companys common stock for a purchase price of $25.00. The warrants were issued in
increments of 500 for each $100,000 of trust preferred securities purchased. Each warrant is
exercisable for a period beginning upon its date of issuance and ending upon the later to occur of
either (i) September 1, 2013 or (ii) such date which is sixty (60) days following the date upon
which the Companys common stock becomes listed for trading upon a national securities exchange
as defined under the Securities Exchange Act of 1934, as amended. The Company estimates the fair
value of each warrant using a Black-Scholes-Merton valuation model and determined the fair value
per warrant to be $5.65. This total value of $423,000 was recorded as a discount and reduced the
net book value of the Debenture to $15,052,000 with an offsetting increase to the Companys
additional paid-in capital. The discount will be amortized over a 3 year period.
15
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is designed to provide a better understanding of various
factors relating to the results of operations and financial condition of ServisFirst Bancshares,
Inc. (hereinafter referred to as we, our or us) and its wholly-owned subsidiary, ServisFirst
Bank. This discussion is intended to supplement and highlight information contained in the
accompanying unaudited consolidated financial statements for the three months and nine months ended
September 30, 2008 and September 30, 2007.
Forward Looking Statements
Statements in this document that are not historical facts, including, but not limited to,
statements concerning future operations, results or performance, are hereby identified as forward
looking statements for the purpose of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934 and Section 27A of the Securities Act of 1933. We caution that such forward
looking statements, wherever they occur in this document or in other statements attributable to us
are necessary estimates reflecting the judgment of our senior management and involve a number of
risks and uncertainties that could cause actual results to differ materially from those suggested
by the forward looking statements. Such forward looking statements should, therefore, be
considered in light of various important factors set forth from time to time in our reports and
registration statements filed with the SEC. While it is impossible to list all such factors that
could affect the accuracy of such forward looking statements, some of those factors include:
general economic conditions, especially in the credit markets and in the Southeast; the performance
of the capital markets; changes in interest rates, yield curves and interest rate spread
relationships; changes in accounting and tax principles, policies or guidelines; changes in
legislation or regulatory requirements; changes in the competitive environment in the markets
served by us and changes in our loan portfolio and our deposit base.
Business
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956
headquartered in Birmingham, Alabama. Through our wholly-owned bank subsidiary, we operate eight
full service banking offices located in Jefferson, Shelby, Madison, Montgomery and Houston counties
in the metropolitan statistical areas (hereinafter, and more commonly, referred to as MSAs) of
Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama.
We were originally incorporated as a Delaware corporation in August 2007 for the purpose of
acquiring all of the common stock of ServisFirst Bank, an Alabama banking corporation (separately
referred to herein as the Bank), that was formed on April 28, 2005 and commenced operations on
May 2, 2005. On November 29, 2007, we became the sole shareholder of the Bank by virtue of a plan
of reorganization and agreement of merger pursuant to which a wholly-owned subsidiary formed for
the purpose of the reorganization was merged with and into the Bank with the Bank surviving and
each shareholder of the Bank exchanging their shares of the Banks common stock for an equal number
of shares of our common stock.
16
Table of Contents
We were organized to facilitate the Banks ability to serve its customers requirements for
financial services. The holding company structure provides flexibility for expansion of our banking
business through the possible acquisition of other financial institutions, the provision of
additional banking-related services which the traditional commercial bank may not provide under
present laws and additional financing alternatives such as the issuance of trust preferred
securities. We have no present plans to acquire any operating subsidiaries in addition to the Bank,
but we may make acquisitions in the future if we deem them to be in the best interest of our
stockholders. Any such acquisitions would be subject to applicable regulatory approvals and
requirements. However, we do plan to issue trust preferred securities for the purpose of increasing
our capital base if and when we deem market conditions to be acceptable.
We are headquartered at 3300 Cahaba Road, Suite 300, Birmingham, Alabama 35223 (Jefferson County).
In addition to the Jefferson County headquarters, the Bank currently operates through two offices
in the Birmingham-Hoover, Alabama MSA (one office in Jefferson County and one office in North
Shelby County), two offices in the Huntsville, Alabama MSA (Madison County), two offices in the
Montgomery, Alabama MSA (Montgomery County) and one office in the Dothan, Alabama MSA (Houston
County) which constitute our primary service areas. We also serve certain adjacent areas to our
primary service areas. Our principal business is to accept deposits from the public and to make
loans and other investments. Our principal source of funds for loans and investments are demand,
time, savings, and other deposits (including negotiable orders of withdrawal, or NOW accounts) and
the amortization and prepayment of loans and borrowings. Our principal sources of income are
interest and fees collected on loans, interest and dividends collected on other investments and
service charges. Our principal expenses are interest paid on savings and other deposits (including
NOW accounts), interest paid on our other borrowings, employee compensation, office expenses and
other overhead expenses.
Recent Events
In August 2008, we formed a Delaware statutory trust subsidiary, ServisFirst Capital Trust I (the
Trust), which, on September 2, 2008, issued 15,000 shares of its 8.5% trust preferred securities
to accredited investors for $15,000,000 or $1,000 per share. The Trust simultaneously issued
463,918 shares of its common securities to us for $463,918 or $1.00 per share, which together with
the trust preferred securities, constitutes all of the issued and outstanding securities of the
Trust. The Trust invested the $15,463,918 of the proceeds from the issuance of the Trusts trust
preferred and common securities in our 8.5% junior subordinated deferrable interest debenture due
September 1, 2038 in the principal amount of $15,463,918 (the Debenture) resulting in a net
capital injection into our company of $15,000,000 (the common securities are financially immaterial
as their issuance merely represents an investment by us into ourselves in order to establish voting
control of the Trust by us and to comply with certain tax regulations). The Debenture bears a fixed
rate of interest at 8.5% per annum and will be subordinate and junior in right of payment to all of
our senior debt; provided, however, we will not incur any additional senior debt in excess of 0.5%
of our average assets for the fiscal year immediately preceding, unless approved by a majority of
the holders of the outstanding trust preferred securities. Interest is payable quarterly in
arrears on December 1, March 1, June 1 and September 1 of each year, commencing December 1, 2008.
Holders of the trust preferred securities are entitled to receive distributions accruing from the
original date of issuance. The distributions are payable quarterly in arrears on December 1, March
1, June 1 and September 1 of each year, commencing December 1, 2008. The distributions accrue at an
annual fixed rate of 8.5%. Payments of distributions on the trust preferred securities will be
deferred in the event interest payments on the Debenture are
17
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deferred, which may occur at any time and from time to time, for up to 20 consecutive quarterly
periods. During any deferral period, we may not pay dividends or make certain other distributions
or payments as provided for in the Indenture. If payments are deferred, holders accumulate
additional distributions thereon at 8.5%, compounded quarterly, to the extent permitted by law.
The Company guarantees the payment of the distributions on the trust preferred securities under a
Guarantee Agreement (the Guarantee), but only to the extent the Trust has funds legally and
immediately available to make such distributions. The obligations under the Guarantee will be
subordinate and junior in right of payment to all other of the Companys liabilities and will rank
pari passu with the most senior preferred stock issued by the Company, if any.
The trust preferred securities are subject to mandatory redemption upon repayment of the Debenture
at its maturity, September 1, 2038, or its earlier redemption. The Debenture is redeemable by the
Company (i) prior to September 11, 2011, but only in whole, upon the occurrence of a Special Event,
as defined in the Indenture or (ii) in whole or in part on or after September 1, 2011 for any
reason. In the event of the redemption of the trust preferred securities prior to September 1,
2011, the holder of each trust preferred security shall be entitled to $1,050, plus accumulated and
unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment.
In the event of the redemption of the trust preferred securities on or after September 1, 2011, the
holder of each trust preferred security shall be entitled to receive $1,000 plus accumulated and
unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment.
The Company has the right at any time to terminate the Trust and cause the Debenture to be
distributed to the holders of the trust preferred securities in liquidation of the Trust. This
right is optional and wholly within the Companys discretion as set forth in the Indenture.
In addition, we issued a total of 75,000 warrants, each with the right to purchase one share of our
common stock for a purchase price of $25.00. The warrants were issued in increments of 500 for each
$100,000 of trust preferred securities purchased. Each warrant is exercisable for a period
beginning upon its date of issuance and ending upon the later to occur of either (i) September 1,
2013 or (ii) such date which is sixty (60) days following the date upon which our common stock
becomes listed for trading upon a national securities exchange as defined under the Securities
Exchange Act of 1934, as amended. We estimated the fair value of each warrant using a
Black-Scholes-Merton valuation model and determined the fair value per warrant to be $5.65. This
total value of $423,000 was recorded as a discount and reduced the net book value of the debentures
to $15,052,000 with an offsetting increase to our additional paid-in capital. The discount will be
amortized over a 3 year period.
Overview
As of September 30, 2008, we had total consolidated assets of $1,064,908,000 an increase of
$226,658,000 or 27.04% over the $838,250,000 reported at December 31, 2007. Total loans were
$898,826,000 at September 30, 2008, a $223,545,000 or 33.10% increase over the $675,281,000 at
December 31, 2007. Total deposits were $950,738,000 at September 30, 2008, an increase of
$188,055,000 or 24.66% over the $762,683,000 at December 31, 2007. The increase in loans and
deposits was from organic growth in existing offices in Birmingham and Huntsville, Alabama, our
expansion into the Montgomery, Alabama market beginning in 2007 and our expansion into the Dothan,
Alabama market in the third quarter of 2008.
Net income for the quarter ended September 30, 2008 was $1,724,000 an increase of $480,000 or
38.59% compared to the $1,244,000 for the quarter ended September 30, 2007. Basic earnings per
common share were $.34 for the three months ended September 30, 2008 compared with $.28 for the
same period in 2007.
Significant Accounting Policies
Our accounting and financial policies conform to accounting principles generally accepted in the
United States and to general practices within the banking industry. To prepare consolidated
financial statements in conformity with accounting principles generally accepted in the United
States, management makes estimates and assumptions based on available information. These estimates
and assumptions affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses, valuation of foreclosed
real estate and fair value of financial instruments are particularly subject to change.
18
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Financial Condition
Investment Securities
Investment securities available for sale totaled $90,139,000 at September 30, 2008, and $87,233,000
at December 31, 2007. The investment portfolio at September 30, 2008, and December 31, 2007
consisted of the following:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gain | Loss | Market Value | |||||||||||||
(In Thousands) | ||||||||||||||||
As of September 30, 2008: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage backed securities |
$ | 58,533 | $ | 781 | $ | (50 | ) | $ | 59,264 | |||||||
State and municipal securities |
26,729 | 79 | (811 | ) | 25,997 | |||||||||||
Corporate bonds |
5,968 | | (1,090 | ) | 4,878 | |||||||||||
Total |
$ | 91,230 | $ | 860 | $ | (1,951 | ) | $ | 90,139 | |||||||
As of December 31, 2007: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage backed securities |
$ | 62,162 | $ | 471 | $ | (30 | ) | $ | 62,603 | |||||||
State and municipal securities |
24,271 | 374 | (15 | ) | 24,630 | |||||||||||
Total |
$ | 86,433 | $ | 845 | $ | (45 | ) | $ | 87,233 | |||||||
In analyzing an issuers financial condition, management considers whether the securities are
issued by agencies of the federal government, whether downgrades by bond rating agencies has
occurred, and industry analysts reports. As management has the ability to hold debt securities for
the foreseeable future, no declines are deemed to be other than temporary.
The following table shows the amortized cost of our investment securities by their stated maturity
at September 30, 2008.
Less than | One year to | Five years | More than | |||||||||||||||||
one year | five years | to ten years | ten years | Total | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
As of September 30, 2008
|
||||||||||||||||||||
Mortgage backed securities |
$ | | $ | 27,417 | 26,533 | 4,583 | 58,533 | |||||||||||||
State and municipal securities |
| 2,020 | 13,161 | 11,548 | 26,729 | |||||||||||||||
Corporate bonds |
| | 4,033 | 1,935 | 5,968 | |||||||||||||||
Total |
$ | | $ | 29,437 | 43,727 | 18,066 | 91,230 | |||||||||||||
All securities held are traded in liquid markets. As of September 30, 2008, we owned certain
restricted securities from the Federal Home Loan Bank with an aggregate book value and market value
of $2,409,000 and First National Bankers Bank in which we invested $250,000. We had no investments
in any one security, restricted or liquid, in excess of 10% of our stockholders equity.
The banks investment portfolio consists of mortgage-backed pass-thru securities, tax exempt
securities and corporate bonds. The bank does not invest in collateral debt obligations (CDOs).
All tax exempt securities are issued by municipalities within the State of Alabama. All corporate
bonds have a Standard and Poors or Moodys rating of A-1 or better when purchased. The September
30, 2008 total investment portfolio has a combined average credit rating of AA-.
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Table of Contents
At September 30, 2008, we had $30,022,000 in federal funds sold, compared with $16,598,000 at
December 31, 2007.
Loans
We had total loans of $898,826,000 at September 30, 2008 compared to $675,281,000 at December 31,
2007, an increase of $220,895,000 or 33.09%. At September 30, 2008, 61.1% of our loans were in our
Birmingham offices, 27.4% in our Huntsville offices, and 11.5% in our Montgomery offices. The
following table details our loans at September 30, 2008 and December 31, 2007:
September 30, 2008 | December 31, 2007 | |||||||
(In Thousands) | ||||||||
Commercial, financial and agricultural |
$ | 293,381 | $ | 219,684 | ||||
Real estate construction |
233,992 | 195,238 | ||||||
Real estate mortgage: |
||||||||
Owner occupied |
134,810 | 89,014 | ||||||
1-4 family |
106,309 | 64,325 | ||||||
Other |
102,265 | 83,663 | ||||||
Total real estate mortgage |
343,384 | 237,002 | ||||||
Consumer |
28,069 | 23,357 | ||||||
Total loans |
898,826 | 675,281 | ||||||
Less allowance for loan losses |
(10,384 | ) | (7,732 | ) | ||||
Net loans |
$ | 888,442 | $ | 667,549 | ||||
Asset Quality
The allowance for loan losses is established and maintained at levels management deems adequate to
absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio
as of the balance sheet date. In assessing the adequacy of the allowance for loan losses management
considers its evaluation of the loan portfolio, past due loan experience, collateral values,
current economic conditions and other factors considered necessary to maintain the allowance at an
adequate level. Management feels that the allowance is adequate at September 30, 2008.
The following table presents a summary of changes in the allowances for loan losses for the three
and nine months ended September 30, 2008 and 2007, respectively. The largest balance of our
charge-offs are on real estate construction loans. Real estate construction loans represent 26.03%
of our loan portfolio.
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In Thousands) | ||||||||||||||||
Allowance for loan losses at beginning of
period |
$ | 9,438 | 6,825 | 7,732 | 5,418 | |||||||||||
Charge-offs |
||||||||||||||||
Commercial, financial and agricultural |
(94 | ) | (17 | ) | (95 | ) | (60 | ) | ||||||||
Real estate construction |
(78 | ) | (81 | ) | (1,826 | ) | (81 | ) | ||||||||
Real estate mortgage |
||||||||||||||||
Owner occupied |
| | | | ||||||||||||
1-4 family |
(155 | ) | | (232 | ) | | ||||||||||
Other |
| | | | ||||||||||||
Total real estate mortgage |
(155 | ) | | (232 | ) | | ||||||||||
Consumer |
(108 | ) | | (114 | ) | (10 | ) | |||||||||
Total charge-offs |
(435 | ) | (98 | ) | (2,267 | ) | (151 | ) | ||||||||
Recoveries |
||||||||||||||||
Commercial, financial and industrial |
| 12 | 19 | 12 | ||||||||||||
Real estate construction |
| | | | ||||||||||||
Real estate mortgage |
| | | | ||||||||||||
Owner occupied |
| | | | ||||||||||||
1-4 family |
| | | | ||||||||||||
Other |
| | | | ||||||||||||
Total real estate mortgage |
| | | | ||||||||||||
Consumer |
| | | | ||||||||||||
Total recoveries |
0 | 12 | 19 | 12 | ||||||||||||
Net charge-offs |
(435 | ) | (86 | ) | (2,248 | ) | (139 | ) | ||||||||
Provision for loan losses charged to expense |
1,381 | 1,041 | 4,900 | 2,500 | ||||||||||||
Allowance for loan losses at end of period |
$ | 10,384 | 7,780 | 10,384 | 7,780 | |||||||||||
As a percentage of year to date average loans: |
||||||||||||||||
Annualized charge-offs |
0.20 | % | 0.06 | % | 0.38 | % | 0.04 | % | ||||||||
Annualized provision for loan losses |
0.64 | % | 0.76 | % | 0.83 | % | 0.67 | % |
The following table presents the allocation of the allowance for loan losses for each respective
loan category with the corresponding percent of loans in each category to total loans. The
comprehensive allowance analysis developed by our credit administration group is in compliance with
all current regulatory guidelines.
September 30, | December 31, | |||||||||||||||||||||||
2008 | 2007 | 2007 | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage of | ||||||||||||||||||||||
loans in each | loans in each | loans in each | ||||||||||||||||||||||
category of | category of | category of | ||||||||||||||||||||||
Amount | total loans | Amount | total loans | Amount | total loans | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Commercial, financial
and agricultural |
$ | 1,175 | 32.63 | % | $ | 1,386 | 35.39 | % | $ | 1,714 | 32.53 | % | ||||||||||||
Real estate
construction |
5,334 | 26.05 | % | 5,245 | 32.68 | % | 3,487 | 28.91 | % | |||||||||||||||
Real estate mortgage |
987 | 38.20 | % | 375 | 28.76 | % | 340 | 35.10 | % | |||||||||||||||
Consumer |
51 | 3.12 | % | 108 | 3.17 | % | 12 | 3.46 | % | |||||||||||||||
Other |
2,837 | | 666 | | 2,179 | | ||||||||||||||||||
Total |
$ | 10,384 | 100.00 | % | $ | 7,780 | 100.00 | % | $ | 7,732 | 100.00 | % | ||||||||||||
x |
Non-performing Assets
It is our policy to classify loans as non-accrual when they are past due in principal or interest
payments for more than ninety days or if it is otherwise not reasonable to expect collection of
principal and interest due under the original terms. Exceptions are allowed for ninety day past due
loans when such loans are secured by real estate or negotiable collateral and in the process of
collection. Generally, payments received on non-accrual loans are applied directly to principal.
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As of September 30, 2008, our impaired loans, inclusive of non-accrual loans, totaled $14,293,000
and had associated reserves of approximately $2,192,000. This compares to impaired loans and
associated reserves of $11,612,000 and $1,370,000, respectively at December 31, 2007. A loan is
considered impaired when it is probable, based on current information and events; we will be unable
to collect all principal and interest payments due in accordance with the contractual terms of the
loan agreement. Impaired loans are measured by either the present value of expected future cash
flows discounted at the loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependant. The amount of impairment, if any,
and subsequent changes are included in the allowance for loan losses. Interest on accruing impaired
loans is recognized as long as such loans do not meet the criteria for nonaccrual status.
A summary of nonperforming assets as of September 30, 2008, September 30, 2007 and December 31,
2007 follows:
September 30, 2008 | December 31, 2007 | September 30, 2007 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Non-accrual loans |
$ | 6,663 | 4,284 | 1,449 | ||||||||
Loans 90 days or more past
due and still accruing |
489 | 187 | 5 | |||||||||
All other real estate owned |
8,211 | 1,623 | 1,261 | |||||||||
Total non-performing assets |
$ | 15,363 | 6,094 | 2,715 | ||||||||
The increase in our non-accrual and other real estate owned for the first nine months of 2008 is
directly attributable to the slowdown in the residential real estate market. At September 30, 2008,
total nonperforming assets included finished homes of $8,620,000, residential lots of $3,055,000,
unfinished lots of $1,399,000 and acquisition and development loans of $1,860,000. Our OREO
procedures currently determine disposition value, the value used to place the property into OREO,
based on the most recent fair value appraisal of the property that we have at the time, less
estimated costs to sell the property. Any difference between the disposition value and the loan
balance is charged off. Once the property is in OREO sales efforts begin. Should economic
conditions continue to deteriorate, the continued and growing inability of distressed customers to
service their existing debt could cause higher levels of non-performing loans.
Deposits
Total deposits increased $188,055,000 or 24.66% to $950,738,000 at September 30, 2008 compared to
$762,683,000 reported at December 31, 2007. We believe our deposits will continue to increase in
2008 as a result of our expansion into the Dothan market in 2008, the Montgomery market in 2007 and
expanded customer relationships in the Birmingham and Huntsville markets.
For amounts and rates of our deposits by category, see the table Average Consolidated Balance
Sheets and Net Interest Analysis on a Fully Tax Equivalent Basis under the sub heading Net
Interest Income
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Other Borrowings
On March 19, 2008, we borrowed $20,000,000 from the Federal Home Loan Bank of Atlanta, of which
$10,000,000 bears interest at 2.995%, and is payable on March 19, 2012, and
$10,000,000 bears interest at 3.275%, and is payable on March 19, 2013. As discussed in Note 8 to
the financial statements and Recent Events above, we borrowed $15.0 million through the issuance
of trust preferred securities and the related debentures on September 2, 2008. Both financial
instruments bear an identical annual rate of interest of 8.50% and pay on March 1, June 1,
September 1 and December 1 of each year commencing on December 1, 2008.
Liquidity
Liquidity is defined as our ability to generate sufficient cash to fund current loan demand,
deposit withdrawals, or other cash demands and disbursement needs, and otherwise to operate on an
ongoing basis.
The retention of existing deposits and attraction of new deposit sources through new and
existing customers is critical to our liquidity position. In the event of declines in liquidity due
to a run-off in deposits, we have a liquidity policy and procedure that provides for certain
actions under varying liquidity conditions. These actions include borrowing from existing
correspondent banks, selling or participating loans, and the curtailment of loan commitments and
funding. At September 30, 2008, our liquid assets, represented by cash and due from banks, federal
funds sold and available-for-sale securities, totaled $105 million. Additionally, our subsidiary
bank had additional borrowing availability of approximately $78 million in unused federal funds
lines of credit with regional banks, subject to certain restrictions and collateral requirements,
and had additional borrowing availability of $117 million at the Federal Home Loan Bank of Atlanta
to meet short term funding needs. We believe these sources of funding are adequate to meet
immediate anticipated funding needs, but we will need additional capital to maintain our current
growth. Our management meets on a quarterly basis to review sources and uses of funding to
determine the appropriate strategy to ensure an appropriate level of liquidity. At the current
time, our long-term liquidity needs primarily relate to funds required to support loan originations
and commitments and deposit withdrawals. In addition, we also completed the issuance of $15.0
million of trust preferred securities and related junior subordinated deferrable interest
debenture, each bearing 8.5% per annum on September 2, 2008 as more fully described in Note 8 to
the financial statements and Recent Events above. Our regular sources of funding are from the
growth of our deposit base, repayment of principal and interest on loans, the sale of loans and the
renewal of time deposits.
We are subject to general FDIC guidelines which require a minimum level of liquidity. Management
believes our liquidity ratios meet or exceed these guidelines. Our management is not currently
aware of any trends or demands that are reasonably likely to result in liquidity increasing or
decreasing in any material manner.
The following table reflects the contractual maturities of our term liabilities as of September 30,
2008. The amounts shown do not reflect any early withdrawal or prepayment assumptions.
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Payments due by Period | ||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Less than | 1-3 | 4-5 | More than | |||||||||||||||||
Contractual Obligations (1) | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
Deposits without a stated maturity |
$ | 808,902 | 808,902 | | ||||||||||||||||
Certificates of deposit (2) |
$ | 141,836 | 115,072 | 22,788 | 3,876 | 100 | ||||||||||||||
FHLB borrowings |
$ | 20,000 | 10,000 | 10,000 | | |||||||||||||||
Subordinated debentures |
$ | 15,052 | | | | 15,052 | ||||||||||||||
Operating lease commitments |
$ | 5,971 | 915 | 1,509 | 1,085 | 2,462 | ||||||||||||||
Total |
$ | 991,761 | 924,889 | 34,297 | 14,961 | 17,614 | ||||||||||||||
(1) | Excludes interest | |
(2) | Certificates of deposit give customers the right to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. |
Capital Adequacy
As of September 30, 2008, our most recent notification from the FDIC categorized us as
well-capitalized under the regulatory framework for prompt corrective action. To remain categorized
as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the table below. Our management believes that we are
well-capitalized under the prompt corrective action provisions as of September 30, 2008.
Furthermore, the Alabama Banking Department has required that we maintain a leverage ratio of 8%
for the first three years of our operations until May 2, 2008 and 7% thereafter.
The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking
Departments leverage ratio requirement to be maintained by us for the first three years of our
operations and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of
September 30, 2008, December 31, 2007, and September 30, 2007.
For | To Be Well | |||||||||||||||
Actual | Capital | Capitalized Under | ||||||||||||||
ServisFirst | ServisFirst | Adequacy | Prompt Corrective | |||||||||||||
Bancshares | Bank | Purposes | Action Provisions | |||||||||||||
September 30, 2008 |
||||||||||||||||
Total Capital to Risk Weighted Assets |
11.26 | % | 11.14 | % | 8.00 | % | 10.00 | % | ||||||||
Tier 1 Capital to Risk Weighted Assets |
10.12 | % | 10.00 | % | 4.00 | % | 6.00 | % | ||||||||
Tier 1 Capital to Average Assets |
9.27 | % | 9.16 | % | 4.00 | % | 5.00 | % | ||||||||
December 31, 2007 |
||||||||||||||||
Total Capital to Risk Weighted Assets |
11.22 | % | 11.22 | % | 8.00 | % | 10.00 | % | ||||||||
Tier 1 Capital to Risk Weighted Assets |
10.12 | % | 10.12 | % | 4.00 | % | 6.00 | % | ||||||||
Tier 1 Capital to Average Assets |
8.40 | % | 8.40 | % | 4.00 | % | 5.00 | % | ||||||||
September 30, 2007 |
||||||||||||||||
Total Capital to Risk Weighted Assets |
N/A | 11.91 | % | 8.00 | % | 10.00 | % | |||||||||
Tier 1 Capital to Risk Weighted Assets |
N/A | 10.68 | % | 4.00 | % | 6.00 | % | |||||||||
Tier 1 Capital to Average Assets |
N/A | 9.21 | % | 4.00 | % | 5.00 | % |
Off-balance sheet arrangements
In the normal course of business we are a party to financial instruments with off-balance sheet
risk to meet the financing needs of our customers. These financial instruments include commitments
to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and
financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement we have in those particular financial instruments.
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Our exposure to credit loss in the event of non-performance by the other party to financial
instruments for commitments to extend credit beyond current fundings, credit card arrangements,
standby letters of credit and financial guarantees is represented by the
contractual or notional amount of those instruments. We use the same credit policies in making
commitments and conditional obligations as we do for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at September 30, 2008:
(In Thousands) | ||||
Commitments to extend credit beyond current fundings |
$ | 304,514 | ||
Credit card arrangements |
10,278 | |||
Standby letters of credit and financial guarantees |
18,785 | |||
Total |
$ | 333,577 | ||
Commitments to extend credit beyond current fundings are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Such commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. We evaluate each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by
us upon extension of credit is based on our managements credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of
a customer to a third party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar transactions. All
letters of credit are due within one year or less of the original commitment date. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers.
Derivatives
Prior to 2008 we entered into an interest rate floor with a notional amount of $50 million in order
to fix the minimum interest rate on a corresponding amount of our floating-rate loans. In our
managements opinion, market conditions were appropriate and the interest rate floor was sold in
January 2008 and the related gain of $817,000 has been deferred and will be amortized to income
over the remaining term of the original agreement which would have terminated on June 22, 2009. A
gain of $136,000 and $408,000 was recognized in interest income for the three and nine months ended
September 30, 2008.
Net Income
Net income for the three months ended September 30, 2008 was $1,724,000, compared to net income of
$1,244,000 for the three months ended September 30, 2007. Net income for the nine months ended
September 30, 2008 was $5,045,000, compared to net income of $4,048,000 for the nine months ended
September 30, 2007. The increases in net income are primarily attributable to a significant
increase in net interest income due to significant growth of our deposits and loan portfolio
resulting from significant continued core growth in Birmingham and Huntsville and our expansion
into Montgomery in 2007. These positive effects were partially offset by increases in the provision
for loan losses, to $1,381,000 from $1,040,000 for the three months ended September 30, 2008, and
2007 respectively, and to $4,900,000 from $2,500,000 for the nine months ended September 30, 2008
and 2007, respectively, and
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increases in non-interest expense, to $5,461,000 from $4,034,000 for the three months ended
September 30, 2008 and 2007, respectively, and to $14,821,000 from $10,341,000 for the nine months
ended September 30, 2008 and 2007 respectively. The increase in provision for loan losses was the
result of funding the loan loss reserve to match the growth in the loan portfolio and loan
charge-offs. The increase in non-interest expense was due to an increase in personnel and write
downs related to foreclosed real estate. These write downs totaled $579,000 for the three months
ended September 30, 2008 versus $7,000 for the same period in 2007 and totaled $732,000 for the
nine months ended September 30, 2008 versus $10,000 for the same period in 2007. Basic and diluted
net income per common share were $.34 and $.32, respectively, for the three months ended September
30, 2008, compared to $.28 per common share for both basic and diluted for the three months ended
September 30, 2007. Basic and diluted net income per common share were $.99 and $.95, respectively,
for the nine months ended September 30, 2008, compared to $.90 per common share for both basic and
diluted for the nine months ended September 30, 2007. Return on average assets for the three months
ended September 30, 2008 was .71%, compared to .67% in 2007, and return on average stockholders
equity was 8.99% for the three months ended September 30, 2008, compared to 8.88% in 2007.
Net Interest Income
Net interest income is the difference between the income earned on interest-earning assets and
interest paid on interest-bearing liabilities used to support such assets. The major factors which
affect net interest income are changes in volumes, the yield on interest earning assets and the
cost of interest bearing liabilities. Our managements ability to respond to changes in interest
rates by effective asset-liability management techniques is critical to maintaining the stability
of the net interest margin and the momentum of our primary source of earnings.
Beginning in mid-2004, the Federal Reserve Open Market Committee, or FOMC, increased interest rates 400 basis points through mid-2006 where interest rates remained constant until September 2007 when the FOMC began lowering interest rates in reaction to the affects of the sub-prime credit crisis. Since September 2007, the FOMC has lowered interest rates 275 basis points including an emergency 75 basis point decrease in January 2008, 75 basis points at its March 18, 2008 meeting, and 25 basis points at its April 30, 2008 meeting.
Beginning in mid-2004, the Federal Reserve Open Market Committee, or FOMC, increased interest rates 400 basis points through mid-2006 where interest rates remained constant until September 2007 when the FOMC began lowering interest rates in reaction to the affects of the sub-prime credit crisis. Since September 2007, the FOMC has lowered interest rates 275 basis points including an emergency 75 basis point decrease in January 2008, 75 basis points at its March 18, 2008 meeting, and 25 basis points at its April 30, 2008 meeting.
Net interest income increased $2,233,000, or 33.61%, to $8,877,000 for the three months ended
September 30, 2008 from $6,644,000 for the three months ended September 30, 2007. This was due to
an increase in total interest income of $138,000, or 1.00%, plus a decrease in total interest
expense of $2,095,000 or 29.51%.Net interest income increased $7,420,000, or 40.68%, to $25,658,000
for the nine months ended September 30, 2008 from $18,238,000 for the nine months ended September
30, 2007. This was due to an increase in total interest income of $4,361,000, or 11.88%, plus a
decrease in total interest expense of $3,059,000, or 16.57%. The increase in total interest income
was primarily attributable to loan growth as a consequence of significant continued core growth in
Birmingham and Huntsville and our expansion into Montgomery in 2007.
The following table shows for the three and nine months ended September 30, 2008 and 2007, the
average balances of each principal category of our assets, liabilities and shareholders equity,
and an analysis of net interest revenue. The table is presented on a tax equivalent basis if
applicable.
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Table of Contents
Average Consolidated Balance Sheet and Net Interest Analysis on a Fully Tax Equivalent Basis
Three Months Ended September 30, | ||||||||||||||||||||||||
2008 | 2007 | |||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
(Dollar Amounts In Thousands) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans, net of unearned income (1) |
$ | 864,523 | 12,620 | 5.79 | % | 552,696 | 11,644 | 8.36 | % | |||||||||||||||
Mortgage loans held for sale |
2,416 | 37 | 6.07 | % | 2,310 | 29 | 5.06 | % | ||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
Taxable |
67,759 | 951 | 5.61 | % | 48,148 | 667 | 5.54 | % | ||||||||||||||||
Tax-exempt (2) (3) |
23,661 | 335 | 5.67 | % | 18,329 | 259 | 5.66 | % | ||||||||||||||||
Total investment securities (3) |
91,420 | 1,286 | 5.62 | % | 66,477 | 926 | 5.57 | % | ||||||||||||||||
Federal funds sold |
2,190 | 12 | 2.18 | % | 93,983 | 1,206 | 5.13 | % | ||||||||||||||||
Restricted equity securities |
2,659 | 26 | 3.83 | % | 1,201 | 17 | 5.35 | % | ||||||||||||||||
Interest bearing balances with banks |
13 | 0 | 3.88 | % | 53 | 0 | 5.98 | % | ||||||||||||||||
Total interest-earning assets |
963,221 | 13,981 | 5.72 | % | 716,720 | 13,822 | 7.73 | % | ||||||||||||||||
Non-interest earning assets |
||||||||||||||||||||||||
Cash and due from banks |
21,524 | 15,305 | ||||||||||||||||||||||
Net fixed assets |
3,928 | 3,505 | ||||||||||||||||||||||
Allowance for loan losses, accrued
interest and other assets |
5,782 | (778 | ) | |||||||||||||||||||||
Total assets |
$ | 994,455 | 734,752 | |||||||||||||||||||||
Liabilities and stockholders equity: |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest bearing demand deposits |
$ | 92,480 | 387 | 1.66 | % | 38,686 | 302 | 3.10 | % | |||||||||||||||
Savings deposits |
443 | 1 | 0.57 | % | 176 | | 1.72 | % | ||||||||||||||||
Money market accounts |
540,314 | 2,810 | 2.06 | % | 490,379 | 6,095 | 4.93 | % | ||||||||||||||||
Time deposits |
147,918 | 1,443 | 3.87 | % | 54,974 | 702 | 5.06 | % | ||||||||||||||||
Federal funds purchased |
13,695 | 88 | 2.55 | % | | | | |||||||||||||||||
Other borrowed funds |
24,945 | 275 | 4.38 | % | | | | |||||||||||||||||
Total interest- bearing Liabilities |
819,795 | 5,004 | 2.46 | % | 584,215 | 7,099 | 4.82 | % | ||||||||||||||||
Non-interest liabilities |
||||||||||||||||||||||||
Non-interest bearing demand deposits |
95,634 | 91,551 | ||||||||||||||||||||||
Other liabilities |
2,736 | 3,384 | ||||||||||||||||||||||
Stockholders equity |
76,290 | 55,602 | ||||||||||||||||||||||
Total liabilities and Stockholders equity |
$ | 994,455 | 734,752 | |||||||||||||||||||||
Net interest spread |
3.26 | % | 2.91 | % | ||||||||||||||||||||
Net interest margin |
3.66 | % | 3.76 | % |
(1) | Non-accrual loans are included in average loan balances in all years. Loan fees of $145,000 and $379,000 are included in interest income in 2008 and 2007, respectively. | |
(2) | Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 34%. | |
(3) | Unrealized gains (losses) of ($216,000) and ($1,008,000) are excluded from the yield calculation in 2008 and 2007, respectively. |
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Table of Contents
Average Consolidated Balance Sheet and Net Interest Analysis on a Fully Tax Equivalent Basis
(Dollar Amounts In Thousands)
(Dollar Amounts In Thousands)
Nine Months Ended September 30, | ||||||||||||||||||||||||
2008 | 2007 | |||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans, net of unearned income(1) |
$ | 790,918 | 36,858 | 6.21 | % | 499,631 | 31,486 | 8.43 | % | |||||||||||||||
Mortgage loans held for sale |
2,562 | 111 | 5.79 | % | 1,763 | 89 | 6.73 | % | ||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
Taxable |
67,268 | 2,831 | 5.61 | % | 31,925 | 1,317 | 5.50 | % | ||||||||||||||||
Tax-exempt (2)(3) |
22,961 | 973 | 5.65 | % | 15,991 | 677 | 5.67 | % | ||||||||||||||||
Total investment securities (3) |
90,229 | 3,804 | 5.62 | % | 47,916 | 1,994 | 5.63 | % | ||||||||||||||||
Federal funds sold |
23,502 | 449 | 2.55 | % | 85,508 | 3,299 | 5.14 | % | ||||||||||||||||
Restricted equity securities |
2,230 | 79 | 4.70 | % | 1,079 | 32 | 3.84 | % | ||||||||||||||||
Interest bearing balances with banks |
1,742 | 53 | 4.04 | % | 39 | 0 | 2.96 | % | ||||||||||||||||
Total interest-earning assets |
911,183 | 41,353 | 6.05 | % | 635,936 | 36,899 | 7.76 | % | ||||||||||||||||
Non-interest earning assets |
||||||||||||||||||||||||
Cash and due from banks |
19,743 | 13,809 | ||||||||||||||||||||||
Net fixed assets |
4,027 | 3,096 | ||||||||||||||||||||||
Allowance for loan losses, accrued
interest and other assets |
4,354 | (588 | ) | |||||||||||||||||||||
Total assets |
$ | 939,307 | 652,253 | |||||||||||||||||||||
Liabilities and stockholders equity: |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest bearing demand deposits |
$ | 85,275 | 1,101 | 1.72 | % | 39,596 | 822 | 2.77 | % | |||||||||||||||
Savings deposits |
417 | 2 | .68 | % | 192 | 2 | 1.60 | % | ||||||||||||||||
Money market accounts |
537,217 | 9,682 | 2.40 | % | 422,158 | 15,686 | 4.97 | % | ||||||||||||||||
Time deposits |
127,757 | 4,034 | 4.21 | % | 50,784 | 1,948 | 5.13 | % | ||||||||||||||||
Federal funds purchased |
6,272 | 118 | 2.51 | % | | | | |||||||||||||||||
Other borrowings |
16,127 | 462 | 3.81 | % | | | | |||||||||||||||||
Total interest- bearing Liabilities |
773,065 | 15,399 | 2.65 | % | 512,730 | 18,458 | 4.81 | % | ||||||||||||||||
Non-interest liabilities
|
||||||||||||||||||||||||
Non-interest bearing demand deposits |
86,537 | 82,031 | ||||||||||||||||||||||
Other liabilities |
4,535 | 2,923 | ||||||||||||||||||||||
Stockholders equity |
75,170 | 54,569 | ||||||||||||||||||||||
Total liabilities and Stockholders equity |
$ | 939,307 | 652,253 | |||||||||||||||||||||
Net interest spread |
3.40 | % | 2.95 | % | ||||||||||||||||||||
Net interest margin |
3.80 | % | 3.88 | % |
(1) | Non-accrual loans are included in average loan balances in all years. Loan fees of $761,000 and $1,062,000 are included in interest income in 2008 and 2007, respectively. | |
(2) | Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 34%. | |
(3) | Unrealized gains (losses) of $986,000 and $(479,000) are excluded from the yield calculation in 2008 and 2007, respectively. |
Provision for Loan Losses
The provision expense for loan losses represents the amount determined by management to be
necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses
in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a
quarterly basis. The allowance for loan losses calculation is segregated into various segments that
include classified loans, loans with specific allocations and pass rated loans. A pass rated loan
is generally characterized by a very low to average risk of default and in which management
perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with
loan officers having the primary responsibility for assigning risk grades and for the timely
reporting of changes in the risk grades. These processes, and the assigned risk grades, and the
criticized and classified loans in the portfolio are segregated into the following regulatory
classifications: Special Mention, Substandard, Doubtful or Loss. Impaired loans are reviewed
specifically and separately under Statement of Financial Accounting Standards (SFAS) Statement
No. 114 to determine the appropriate reserve allocation. Our management compares the investment in
an impaired loan with the present value of expected future cash flow discounted at the loans
effective interest rate, the loans observable market price or the fair value of the collateral, if
the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages
assigned to non-rated loans are based on historical charge-off experience adjusted for other risk
factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan
portfolio, our management considers historical loss experience based on volume and types of loans,
trends in classifications, volume and trends in delinquencies and non-accruals, economic conditions
and other pertinent information. Based on future evaluations, additional provisions for loan losses
may be necessary to maintain the allowance for loan losses at an appropriate level.
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Table of Contents
The provision for loan losses was $4,900,000 for the nine months ended September 30, 2008, an
increase of $2,400,000 in comparison to $2,500,000 in 2007. Our management continues to maintain a
proactive approach to credit risk management as the economy experiences cycles and as we continue
to grow. Nonperforming loans increased to $7,152,000, or .80%, of total loans at September 30, 2008
from $4,471,000 or 0.66%, of total loans at December 31, 2007, and impaired loans increased to
$14,293,000 at September 30, 2008 compared to $11,612,000 at December 31, 2007. As a percentage of
total loans, impaired loans decreased to 1.59% at September 30, 2008 versus 1.72% at December 31,
2007. The allowance for loan losses totaled $10,384,000, or 1.16%, of loans, net of unearned
income, at September 30, 2008, compared to $7,732,000, or 1.15%, of loans, net of unearned income,
at December 31, 2007.
Noninterest Income
Noninterest income totaled $672,000 for the three months ended September 30, 2008, an increase of
$285,000, or 73.64% compared to the same period in 2007. For the nine months ended September 30,
2008, noninterest income totaled $1,911,000, an increase of $959,000, or 100.74% compared to the
same period in 2007.
Income from mortgage banking operations for the three months ended September 30, 2008 was $217,000,
an increase of $49,000 or 29.58% from $168,000 for the three months ended September 30, 2007.
Income from mortgage banking operations for the nine months ended September 30, 2008 was $733,000,
an increase of $295,000 or 67.20% from $439,000 for the nine months ended September 30, 2007. These
increases are due to increased origination activity in 2008. Income from customer service charges
and fees for the three months ended September 30, 2008 increased $193,000, or 116.97%, to $358,000
from $165,000 for the three months ended September 2007. Income from customer service charges and
fees for the nine months ended September 30, 2008 increased $522,000, or 136.65%, to $904,000 from
$382,000 for the nine months ended September 30, 2007. The increase is primarily due to an increase
in transaction accounts from 2007 to 2008. Merchant service fees were $130,000 for the three months
ended September 2008 an increase of $73,000 or 128.82% compared to $57,000 for the three months
ended September 30, 2007. Merchant service fees were $340,000 for the nine months ended September
30, 2008 an increase of $215,000 or 172.00 % compared to 125,000 for the nine months ended
September 30, 2007.
Noninterest Expense
Noninterest expense totaled $5,461,000 for the three months ended September 30, 2008, an increase
of $1,427,000, or 35.37% compared to the same period in 2007. For the nine months ended September
30, 2008, noninterest expense totaled $14,821,000, an increase of $4,480,000, or 43.32% compared to
the same period in 2007.
Noninterest expense increased for the three months and nine months ended September 30, 2008 over
the corresponding periods in 2007 primarily due to our continued growth and expansion which has
resulted in the addition of personnel and the opening of new offices in Montgomery and Dothan and
our reorganization into a holding company. Salaries and employee benefits increased $169,000, or
6.72%, to $2,684,000 for the three months ended September 30, 2008, compared to $2,515,000 in 2007.
Salaries and employee benefits increased $1,413,000, or 21.75%, to $7,910,000 for the nine months
ended September 30, 2008, compared to $6,497,000 in 2007. These increases are primarily the result
of our
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increased employee base to 139 employees at September 30, 2008 from 114 at September 30, 2007.
Also, write downs related to foreclosed real estate totaled $732,000 for the nine months ended
September 30, 2008 versus $10,000 for the same period in 2007. Write downs related to foreclosed
real estate totaled $579,000 for the three months ended September 30, 2008 versus $7,000 for the
same period in 2007.
Income Tax Expense
Income tax expense was $2,803,000 for the nine months ended September 30, 2008 versus $2,301,000
for the same period in 2007. Our effective tax rates for the nine months ended 2008 and 2007 were
35.72% and 36.24%, respectively. Income tax expense was $983,000 for the three months ended
September 30, 2008 versus $712,000 for the same period in 2007. Our effective tax rates for the
three months ended September 30, 2008 and 2007 were 36.31% and 36.40%, respectively. Our primary
permanent differences are related to FAS 123(R) option expenses and tax-free income. Barring
legislative tax changes, we anticipate our effective tax rate to remain consistent with preceding
years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Like all financial institutions, we are subject to market risk from changes in interest rates.
Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of
rate sensitive assets and rate sensitive liabilities. If rates are rising, and the level of rate
sensitive liabilities exceeds the level of rate sensitive assets, the net interest margin will be
negatively impacted. Conversely, if rates are falling, and the level of rate sensitive liabilities
is greater than the level of rate sensitive assets, the impact on the net interest margin will be
favorable. Managing interest rate risk is further complicated by the fact that all rates do not
change at the same pace, in other words, short term rates may be rising while longer term rates
remain stable. In addition, different types of rate sensitive assets and rate sensitive liabilities
react differently to changes in rates.
To manage interest rate risk, we must take a position on the expected future trend of interest
rates. Rates may rise, fall, or remain the same. Our asset liability committee develops its view of
future rate trends and strives to manage rate risk within a targeted range by monitoring economic
indicators, examining the views of economists and other experts, and understanding the current
status of our balance sheet. Our annual budget reflects the anticipated rate environment for the
next twelve months. The asset liability committee conducts a quarterly analysis of the rate
sensitivity position and reports its results to our board of directors.
The asset liability committee uses a computer model to analyze the maturities of rate sensitive
assets and liabilities. The model measures the gap which is defined as the difference between the
dollar amount of rate sensitive assets repricing during a period and the volume of rate sensitive
liabilities repricing during the same period. The gap is also expressed as the ratio of rate
sensitive assets divided by rate sensitive liabilities. If the ratio is greater than one, the
dollar value of assets exceeds the dollar value of liabilities; the balance sheet is asset
sensitive. Conversely, if the value of liabilities exceeds the value of assets, the ratio is less
than one and the balance sheet is liability sensitive. Our internal policy requires management to
maintain the gap such that net interest margins will not change more than 10% if interest rates
change 100 basis points or more than 15% if interest rates change 200 basis points. As of September
30, 2008, our gap was within such ranges.
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The interest rate risk model that defines the gap position also performs a rate shock test of the
balance sheet. The rate shock procedure measures the impact on the economic value of equity (EVE)
which is a measure of long term interest rate risk. EVE is the difference between the market value
of our assets and the liabilities and is our liquidation value. In this analysis, the model
calculates the discounted cash flow or market value of each category on the balance sheet. The
percent change in EVE is a measure of the volatility of risk. Regulatory guidelines specify a
maximum change of 30% for a 200 basis points rate change. At September 30, 2008, the percent change
at plus or minus 200 basis points is well within that range at 6.27% and 6.20%, respectively.
The chart below identifies the EVE impact of a shift in rates of 100 and 200 basis points in either
direction.
Economic Value of Equity Under Rate Shock
At September 30, 2008
At September 30, 2008
-200bps | -100bps | 0bps | +100bps | +200bps | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Economic value of equity |
$ | 83,642 | 78,455 | 76,758 | 79,388 | 84,696 | ||||||||||||||
Actual dollar change |
$ | 5,187 | 1,697 | 0 | 2,630 | 5,308 | ||||||||||||||
Percent change |
6.20 | % | 2.16 | % | 0.00 | % | 3.31 | % | 6.27 | % |
The EVE rate shock shows that the EVE would increase in both a rising and declining rate
environment. The EVE simulation model is a static model which provides information only at a
certain point in time. For example, in a rising rate environment, the model does not take into
account actions which management might take to change the impact of rising rates on us. Given that
limitation, it is still useful is assessing the impact of an unanticipated movement in interest
rates.
The above analysis may not on its own be an entirely accurate indicator of how net interest income
or EVE will be affected by changes in interest rates. Income associated with interest earning
assets and costs associated with interest bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in interest rates may
have a significant impact on net interest income. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market rates, while interest rates on other
types may lag behind changes in general market rates. Our asset liability committee develops its
view of future rate trends by monitoring economic indicators, examining the views of economists and
other experts, and understanding the current status of our balance sheet and conducts a quarterly
analysis of the rate sensitivity position. The results of the analysis are reported to our board of
directors.
ITEM 4. CONTROLS AND PROCEDURES
CEO and CFO Certification
Appearing as exhibits to this report are Certifications of our Chief Executive Officer (CEO) and
our Chief Financial Officer (CFO). The Certifications are required to be made by Rule 13a-14
under the Securities Exchange Act of 1934, as amended. This item contains the information about the
evaluation that is referred to in the Certifications, and the information set
forth below in this Item 4 should be read in conjunction with the Certifications for a more
complete understanding of the Certifications.
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Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives.
We conducted an evaluation (the Evaluation) of the effectiveness of the design and operation of
our disclosure controls and procedures under the supervision and with the participation of our
management, including our CEO and CFO, as of September 30, 2008. Based upon the Evaluation, our CEO
and CFO have concluded that, as of September 30, 2008, our disclosure controls and procedures are
effective to ensure that material information relating us and our subsidiaries is made known to
management, including the CEO and CFO, particularly during the period when our periodic reports are
being prepared.
There have not been any changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter
to which this report relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we may be a party to various legal proceedings arising in the ordinary course of
business. We believe that there are no proceedings threatened or pending against us at this time.
ITEM 1A. RISK FACTORS
Our business is influenced by many factors that are difficult to predict, involve uncertainties
that may materially affect actual results and are often beyond our control. We have identified a
number of these risk factors in our registration statement on Form 10, as amended, which should be taken into consideration when reviewing the information
contained in this report. Given the recent economic downturn, we are including supplemental risk
factors to those set forth in the Form 10. For other factors that may cause actual results to
differ materially from those indicated in any forward-looking statement or projection contained in
this report, see Forward-Looking Statements under Part 1, Item 2 above.
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There can be no assurance that recently enacted legislation authorizing the U.S. government to
purchase large amounts of illiquid mortgages and mortgage-backed securities from financial
institutions will help stabilize the U.S. financial system.
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of
2008 (the EESA). The legislation was the result of a proposal by Treasury Secretary Henry Paulson
to the U.S. Congress on September 20, 2008 in response to the financial crises affecting the
banking system and financial markets and going concern threats to investment banks and other
financial institutions. Pursuant to the EESA, the U.S. Treasury will have the authority to, among
other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain
other financial instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. There can be no assurance, however, as to the
actual impact that the EESA will have on the financial markets, including the extreme levels of
volatility and limited credit availability currently being experienced. The failure of the EESA to
help stabilize the financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common stock.
Difficult market conditions have adversely affected our industry.
Given the significance of our business in the United States, we are particularly exposed to
downturns in the U.S. economy. Dramatic declines in the housing market over the past year, with
falling home prices and increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of mortgage loans and resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities as well as major
commercial and investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative and cash securities, in turn, have caused
many financial institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and institutional investors have
reduced or ceased providing funding to borrowers, including to other financial institutions. This
market turmoil and tightening of credit have led to an increased level of commercial and consumer
delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of
business activity generally. The resulting economic pressure on consumers and lack of confidence in
the financial markets may adversely affect our business, financial condition and results of
operations. We do not expect that the difficult conditions in the financial markets are likely to
improve in the near future. A worsening of these conditions would
likely exacerbate any adverse
effects of these difficult market conditions on us and others in the financial institutions
industry.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than
12 months. In recent weeks, the volatility and disruption has reached unprecedented levels. In some
cases, the markets have produced downward pressure on stock prices and credit availability for
certain issuers without regard to those issuers underlying financial strength. If current levels
of market disruption and volatility continue or worsen, there can be no assurance
that we will not experience an adverse effect, which may be material, on our ability to access
capital and on our business, financial condition and results of operations.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We had no unregistered sales of equity securities during the third quarter of 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits:
31.1 Certification of principal executive officer pursuant to Rule 13a-14(a).
31.2 Certification of principal financial officer pursuant to Rule 13a-14(a).
32.1 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.2 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned there unto duly authorized.
Date: October 31, 2008 | SERVISFIRST BANCSHARES, INC. |
|||
By: | /s/ Thomas A. Broughton, III | |||
President and Chief Executive Officer | ||||
Date: October 31, 2008 | By: | /s/ William M. Foshee | ||
William M. Foshee | ||||
Chief Financial Officer |
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