ServisFirst Bancshares, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless otherwise noted. Financial statements are unaudited. ServisFirst is a bank holding company headquartered in Birmingham, Alabama, operating through ServisFirst Bank.
Financial results and condition
- Growth: Total assets were $4.39 billion, up 7.2%; loans were $3.61 billion, up 7.4%; and deposits were $3.64 billion, up 7.1%. Growth reflects, in part, the January 31 acquisition of Metro Bancshares.
- Earnings: Net income was $13.1 million, up 11.0% from $11.8 million; net income available to common shareholders was $13.0 million, up 11.1%. Basic and diluted EPS were $0.51 and $0.49, versus $0.53 and $0.51. Higher earnings alongside lower EPS reflect increased weighted-average shares.
- Interest income and margins: Net interest income was $37.0 million, up $6.2 million, or about 20%. Average earning assets increased 19.4% to $4.00 billion. Net interest margin remained 3.80%; earning-asset yield declined 3 basis points to 4.18%, while the cost of interest-bearing liabilities fell 3 basis points to 0.52%.
- Other income and expenses: Noninterest income rose 41.5% to $3.1 million. Noninterest expense increased 36.6% to $18.8 million, including $2.1 million in Metro merger costs. Income before taxes was $19.0 million; the effective tax rate was 31.14%.
- Cash flow: Operating cash flow was $10.9 million, versus $18.9 million a year earlier; investing cash outflow was $91.2 million, including $100.5 million of loan growth and $12.9 million net cash paid for Metro; financing cash inflow was $82.5 million. Cash and cash equivalents ended at $299.7 million.
- Capital, debt, and liquidity: Stockholders’ equity was $441.5 million. Consolidated total risk-based capital was 12.70%, Tier 1 risk-based capital 11.17%, and Tier 1 leverage 10.07%; the Bank was categorized as well-capitalized. Federal funds purchased were $280.9 million; other borrowings were $21.3 million, including $20.0 million of subordinated notes. Management reported $350.8 million of liquid assets and approximately $160 million of available correspondent-bank lines, while stating additional capital will be needed to maintain current growth.
Material changes and asset quality
- Metro acquisition added two Atlanta-area banking offices and expanded the company into greater Atlanta. Consideration was $20.9 million cash and 636,592 common shares; preliminary purchase accounting recorded $16.1 million of goodwill and a $2.1 million core deposit intangible. Fair-value adjustments remained preliminary.
- Loans grew by $248.0 million from year-end. Nonperforming loans declined to $8.9 million, or 0.25% of loans, from $10.1 million, or 0.30%. Nonperforming assets were $17.6 million, or 0.49% of loans plus OREO and repossessions.
- Impaired loans increased to $45.2 million from $26.7 million, primarily reflecting three newly impaired commercial relationships totaling $15.9 million and $5.1 million of acquired purchased-credit-impaired loans. Special-mention, substandard, and doubtful loans totaled $94.0 million, or 2.6% of loans, versus $77.6 million, or 2.3%.
- The allowance for loan losses was $37.4 million, or 1.04% of loans, compared with $35.6 million, or 1.06%. The quarter’s provision was $2.4 million. TDRs were $8.3 million, and the filing says all were performing under their restructured terms at quarter-end.
- OREO and repossessed assets increased to $8.6 million from $6.8 million, including assets acquired with Metro and transfers from loans. The portfolio remains geographically concentrated: 85.29% of loans were in Alabama markets.
Outlook, risks, and unusual items
- No numerical earnings or growth guidance was provided. Management cited continued loan growth and expected sustainable deposit growth, but said additional capital would be needed to support the current growth rate.
- Management attributed net interest income growth mainly to higher average earning assets, while noting that low rates and faster declines in loan yields than deposit costs create margin pressure. It reported no significant change in interest-rate sensitivity since year-end.
- Principal stated risks include economic and credit conditions, borrower and collateral quality, interest rates and yield curves, deposit and loan trends, regulation, competition, natural disasters, and legal or administrative contingencies. Previously disclosed risk factors were reported as unchanged.
- Unusual or notable costs include $2.1 million of merger expense and $0.5 million of initial reserves for unfunded loan commitments. Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material subsequent events were identified.
Important facts for investors to verify
- Whether Metro’s acquired assets, preliminary fair-value marks, goodwill, and integration costs develop as expected.
- Whether impaired and criticized loans, OREO, and the allowance for loan losses remain manageable as the loan book expands.
- How loan growth, funding mix, and the need for additional capital affect liquidity, capital ratios, and per-share earnings.
- Whether net interest margin holds up amid the prolonged low-rate environment and the reported pressure on loan yields.
- The sustainability of earnings growth after excluding merger costs and considering higher operating expenses and share dilution.