ServisFirst Bancshares, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparative results are primarily against FY 2013. The filing also reports unaudited fourth-quarter results. ServisFirst is a Birmingham-based commercial bank holding company operating in Alabama, Florida, and Tennessee.
Business context and financial results
The company follows a relationship-focused commercial banking model, with a limited branch network and local lending decisions supported by centralized credit oversight. At year-end it reported $4.10 billion in assets, $3.36 billion in loans, $3.40 billion in deposits, and $407.2 million in stockholders’ equity.
| Metric | FY 2014 / year-end | FY 2013 / year-end |
|---|---|---|
| Net income | $52.4 million | $41.6 million |
| Net income available to common stockholders | $51.9 million | $41.2 million |
| Diluted earnings per share | $2.09 | $1.90 |
| Net interest income | $130.6 million | $112.5 million |
| Net interest margin | 3.68% | 3.80% |
| Provision for loan losses | $10.3 million | $13.0 million |
| Noninterest expense | $57.6 million | $47.5 million |
| Return on average assets / equity | 1.39% / 14.43% | 1.32% / 15.70% |
Financial position, cash flow, and asset quality
- Assets increased 16.4%; loans grew 17.5% to $3.36 billion and deposits grew 12.5% to $3.40 billion. Commercial and industrial loans were 44.5% of the portfolio; real estate mortgage loans were 47.6%.
- Net cash provided by operating activities was $64.1 million, versus $74.2 million in 2013. Investing activities used $549.1 million, chiefly reflecting $508.0 million of loan growth; financing activities provided $524.0 million. Cash and cash equivalents rose $39.0 million to $297.5 million.
- Year-end liquidity included $402.5 million of liquid assets, as defined by management, plus approximately $160 million of unused federal funds lines. Net loans equaled 97.8% of deposits, up from 93.7%. Management said liquidity was adequate for anticipated near-term needs.
- Federal funds purchased were $264.3 million; other borrowings included $20.0 million of 5.5% subordinated notes due 2022. The company reported no brokered deposits.
- The allowance for loan losses was $35.6 million, or 1.06% of gross loans. Net charge-offs declined to $5.3 million, or 0.17% of average loans, from $8.6 million, or 0.33%. Nonperforming loans were $10.1 million (0.30% of loans), and nonperforming assets were $16.9 million, down from $22.6 million.
- Consolidated total risk-based capital was 13.38%, Tier 1 risk-based capital 11.75%, and leverage 9.91%. The Bank was categorized as well-capitalized by regulators.
Changes, unusual items, and management commentary
- Common-stockholder earnings rose 26.1%, supported primarily by 16.1% growth in net interest income as average loans expanded. The net interest margin declined 12 basis points as lower loan yields outpaced reductions in funding costs.
- Noninterest expense rose 21.3%, including higher staffing and compensation costs, expansion-related spending, and a $2.6 million write-down of tax-credit partnership investments. The efficiency ratio worsened to 40.61% from 38.78%.
- FY 2014 included noncash, non-routine stock-option expenses: approximately $0.7 million from an accounting correction and $1.8 million from accelerated vesting. Management’s non-GAAP “core” measures exclude these items; core diluted EPS was $2.16 versus GAAP diluted EPS of $2.09.
- The effective tax rate fell to 29.20% from 32.85%, primarily due to historic rehabilitation tax credits. Mortgage banking income fell 20% as higher mortgage rates slowed refinancing activity.
- The company completed an IPO in May 2014, raising approximately $52.1 million net, and completed a three-for-one stock split in July. It paid quarterly common dividends during 2014; future payments remain subject to board approval and regulatory limits.
- On January 31, 2015, after the reporting period, ServisFirst acquired Metro Bancshares for 636,720 shares and approximately $20.9 million cash, with stated consideration of approximately $40.3 million. Metro had year-end 2014 assets of about $211 million, loans of $154 million, and deposits of $182 million. Its results are not included in FY 2014. The company also announced plans to establish a presence in Charleston, South Carolina; no formal earnings or financial guidance is provided.
Outlook, risks, and contingencies
Management emphasized continued organic growth and expansion, but provided no quantified forward guidance. Key risks include credit losses and real-estate collateral values, the seasoning of a rapidly grown loan book, borrower and geographic concentration, competition for deposits and loans, and dependence on key bankers. The company noted a liability-sensitive short-term interest-rate position: its one-year cumulative gap was negative 3.9%, implying potential net interest income pressure from rising rates, although its modeled economic value of equity increased 2.87% under a 200-basis-point rate increase. The filing cautions that these models are estimates and actual effects may differ.
Off-balance-sheet credit commitments totaled approximately $1.24 billion, including $1.16 billion of commitments to extend credit, $45.2 million of credit-card arrangements, and $33.3 million of standby letters of credit and guarantees. The company stated that these amounts do not necessarily represent future cash needs. It reported no material legal proceedings. Independent auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track loan growth, criticized and impaired credits, nonperforming assets, charge-offs, and allowance adequacy—particularly in construction lending and larger borrower relationships. The 10 largest borrowing relationships averaged about $20.6 million in total commitments.
- Assess whether deposit growth and funding mix can support loan expansion, given the 97.8% year-end net-loan-to-deposit ratio and increased federal funds purchased.
- Monitor net interest margin, interest-rate sensitivity, and funding costs as rates and deposit competition change.
- Separate recurring expense trends from the stock-option charges and tax-credit partnership write-downs; assess the sustainability of tax credits and reported core measures.
- Evaluate the integration, funding, and expected benefits of the post-year-end Metro acquisition, including the cash consideration and added Atlanta-market exposure.
- Review the terms and dividend-rate step-up of the $40 million Series A preferred stock; the filing states its rate becomes 9% after December 21, 2015 if not redeemed.