ServisFirst Bancshares, Inc. — 2015 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015; quarterly data also reports the three months ended December 31, 2015. ServisFirst is an Alabama-based bank holding company operating 18 full-service offices across Alabama, Florida, Georgia, South Carolina and Tennessee. Its commercial-banking model emphasizes relationship lending, local decision-making and a relatively lean branch network.
The company completed its acquisition of Metro Bancshares on January 31, 2015, entering the Atlanta market. In January 2016, it announced plans to enter Tampa Bay by hiring a regional CEO.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets, year-end | $5.10 billion | $4.10 billion |
| Total loans, year-end | $4.22 billion | $3.36 billion |
| Total deposits, year-end | $4.22 billion | $3.40 billion |
| Stockholders’ equity, year-end | $449.1 million | $407.2 million |
| Net interest income | $162.3 million | $130.6 million |
| Net income | $63.5 million | $52.4 million |
| Net income available to common stockholders | $63.3 million | $51.9 million |
| Diluted earnings per share | $2.39 | $2.09 |
| Net interest margin | 3.75% | 3.68% |
| Efficiency ratio | 42.21% | 40.61% |
- Net interest income rose 24.3%, primarily reflecting a 25.2% increase in average loans. Noninterest income increased 24.4% to $14.0 million, while noninterest expense rose 29.1% to $74.4 million.
- Return on average assets was 1.38% (1.39% in 2014); return on average equity was 14.56% (14.43%). Core diluted EPS, a non-GAAP measure, was $2.46 versus $2.16; core efficiency ratio was 40.73% versus 38.86%.
- Net cash provided by operating activities was $74.4 million. Investing activities used $749.5 million, mainly reflecting loan growth; financing activities provided $729.8 million. Cash and cash equivalents ended the year at $352.2 million.
- Year-end borrowings included $352.4 million of federal funds purchased and $55.6 million of other borrowings, including $20.0 million of 5.5% subordinated notes due 2022 and $34.75 million of 5% subordinated notes due 2025. The company redeemed its $40 million Treasury preferred stock in 2015.
- Liquid assets were $506.9 million, with $180 million of unused federal funds lines available, subject to restrictions and collateral requirements. Net loans were 98.79% of deposits.
- The bank was categorized as well-capitalized. At year-end, its CET1, Tier 1, total capital and leverage ratios were 9.89%, 9.90%, 10.89% and 8.71%, respectively. The consolidated CET1 ratio was 9.72%.
Material changes versus 2014
- Assets increased 24.4%, loans 25.5% net, and deposits 24.3%; the Metro acquisition and continued organic growth contributed to expansion.
- Net income available to common stockholders increased 21.8%. Loan-loss provision rose 25.2% to $12.8 million, primarily due to loan growth.
- Credit indicators were mixed: nonperforming loans fell to $7.8 million, or 0.18% of loans, from $10.1 million, or 0.30%; net charge-offs declined to 0.13% of average loans from 0.17%. However, loans rated Special Mention, Substandard or Doubtful increased to $117.0 million (2.8% of loans) from $77.6 million (2.3%).
- The allowance for loan losses grew to $43.4 million, but declined to 1.03% of gross loans from 1.06%. Impaired loans increased to $33.5 million from $26.7 million.
- Operating expenses included $2.1 million of Metro acquisition costs and $0.5 million for initial reserves on unfunded commitments. Other operating expenses included $4.0 million of write-downs on tax-credit partnership investments, compared with $2.6 million in 2014. Higher tax credits contributed to a lower effective tax rate of 28.61%, versus 29.20%.
Outlook, risks and unusual items
The filing gives no specific earnings, growth or margin guidance. Management described continued organic growth and selective acquisitions as its strategy, with expansion into Tampa Bay announced after year-end. Management said liquidity sources were adequate for anticipated immediate needs and reported the interest-rate gap within internal limits.
- Management characterized the balance sheet as somewhat liability-sensitive. Its model indicated that a 200-basis-point rate increase would reduce economic value of equity by 0.84%; the one-year cumulative gap was negative 8.7% of interest-earning assets. Actual results could differ from model estimates.
- Credit risks include a growing and relatively unseasoned loan portfolio, concentration in real estate lending (51.2% of loans) and local markets (81% of loans assigned to Alabama markets), and borrower and collateral sensitivity to economic conditions. The 10 largest borrowing relationships represented about 5% of total loans in commitments, including unfunded amounts.
- Unfunded commitments included $1.41 billion to extend credit, $62.5 million in credit-card arrangements and $38.2 million in standby letters of credit and financial guarantees. Commitments may expire unused; funded amounts would create additional credit exposure.
- Funding, interest-rate and market risks include reliance on deposits payable on demand, the high loans-to-deposits ratio, deposit competition, and potential changes in securities values and funding costs. The filing also identifies regulatory, cyber-security, technology, key-personnel and natural-disaster risks.
- Non-GAAP “core” results exclude specified acquisition, unfunded-commitment reserve and stock-option-related items. These adjustments are management-defined and are not substitutes for GAAP results.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective at year-end. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the rise in criticized loans and impaired loans leads to higher provisions or charge-offs, and whether the allowance remains adequate as the portfolio seasons.
- How much loan, deposit and earnings growth came from Metro versus organic activity, and the integration and profitability of the Atlanta operation and new-market launches.
- Whether expense growth moderates after acquisition and expansion costs, and how GAAP earnings compare with management’s adjusted core measures.
- Deposit mix, borrowing reliance, unused line availability and the capacity to fund loan commitments while maintaining liquidity and capital buffers.
- Actual net interest income and margin sensitivity as rates change, compared with the company’s static gap and economic-value models.
- The terms, repayment profile and regulatory capital treatment of subordinated notes, and the implications of the bank’s total capital ratio being relatively close to its 10% well-capitalized threshold.