ServisFirst Bancshares, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. ServisFirst is a bank holding company operating through ServisFirst Bank, focused on commercial banking in Alabama, the Florida Panhandle and, through a Nashville loan production office, Tennessee.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets | $3.521 billion | $2.906 billion |
| Total loans | $2.859 billion | $2.363 billion |
| Total deposits | $3.020 billion | $2.512 billion |
| Net interest income | $112.5 million | $94.1 million |
| Provision for loan losses | $13.0 million | $9.1 million |
| Net income | $41.6 million | $34.4 million |
| Net income available to common shareholders | $41.2 million | $34.0 million |
| Diluted EPS | $5.69 | $4.99 |
| Net interest margin | 3.80% | 3.80% |
| Efficiency ratio | 38.78% | 41.54% |
| Return on average assets / equity | 1.31% / 15.55% | 1.30% / 15.81% |
Net interest income growth primarily reflected a 26.5% rise in average loans, while lower funding costs also contributed. Interest income increased 15.6%; interest expense declined 8.6%. Noninterest income rose 3.8% to $10.0 million, while noninterest expense increased 10.2% to $47.5 million. Mortgage banking income declined 30.6% amid higher mortgage rates and slower refinancing.
Cash and cash equivalents were $258.4 million at year-end, versus $180.7 million. Cash flow was $74.2 million provided by operations, $571.7 million used in investing activities and $575.2 million provided by financing activities; net cash increased $77.7 million. Lending growth was the main investing cash use, funded principally by deposit growth and other financing.
Year-end liabilities included $3.020 billion of deposits, $174.4 million of federal funds purchased and $19.9 million of 5.5% subordinated notes due 2022. The $15.0 million subordinated debentures converted into common stock in March 2013. Liquid assets, as defined by management, totaled $414.6 million, with about $130 million of unused federal funds lines available. Net loans were 93.66% of deposits. The Bank was categorized as well-capitalized; consolidated total risk-based capital was 11.73% and Tier 1 capital was 10.00%.
Changes versus 2012
- Assets grew 21%, loans 21% and deposits 20%; management attributed earnings growth chiefly to loan expansion across its markets.
- Common net income increased 21%, but provision expense rose 43% and net charge-offs increased to $8.6 million from $4.9 million. Net charge-offs were 0.33% of average loans versus 0.24%.
- Credit indicators were mixed: nonperforming loans fell to $9.7 million, or 0.34% of loans, from $10.4 million, or 0.44%; impaired loans declined to $32.0 million from $37.4 million. Allowance coverage of nonperforming loans increased to 315% from 254%.
- OREO increased to $12.9 million from $9.7 million. Construction-loan charge-offs rose to $4.8 million from $3.1 million, although construction loans rated substandard declined to $9.2 million from $14.4 million.
- Stockholders’ equity increased to $297.2 million, including $15.0 million from conversion of subordinated debentures and $10.3 million from a common-stock placement. The company paid a $0.50-per-share common dividend in December 2013.
Outlook, risks and notable items
The filing provides no quantified earnings or growth guidance. Management described continued organic growth as its strategy, with expansion dependent on suitable banking teams and market economics; it reported no immediate acquisition plans. A quarterly common dividend program was announced for 2014, with the first $0.15-per-share payment scheduled for April 2014, subject to board approval and regulatory constraints.
- Key exposures include commercial and industrial lending (44.7% of loans), real-estate lending, loan seasoning, large borrower concentrations and geographic concentration. About 91% of loans were in Alabama markets; 54% of real-estate-secured loans were stated to be in the primary market area.
- At year-end, troubled debt restructurings totaled $14.2 million. Eleven TDR loans to one borrower, totaling $4.8 million, entered payment default during the fourth quarter; the filing says other year-end TDRs were performing under their modified terms.
- Off-balance-sheet commitments totaled $1.131 billion, including $1.053 billion of commitments to extend credit, $38.1 million in credit-card arrangements and $40.4 million of standby letters of credit and guarantees. Many commitments may not be drawn.
- Interest-rate, liquidity, regulatory and regional economic risks remain material. The company reported a negative one-year cumulative sensitivity gap of 6.9% of earning assets, while its modeled economic value of equity increased 0.29% under a 200-basis-point rate increase. Management cautioned that model results are not forecasts.
- Basel III capital rules were scheduled to begin applying in 2015, with phase-in through 2019. The company noted potential compliance costs and possible effects on capital, earnings and operations.
- Noninterest expense included higher equipment and occupancy costs, partly related to operating an airplane purchased in late 2012, opening the Nashville loan office and expanding the Mobile office.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported no material legal proceedings and no unresolved SEC staff comments.
Fourth-quarter snapshot
For the quarter ended December 31, 2013, net interest income was $30.1 million, provision expense was $2.4 million, net income available to common shareholders was $11.8 million, and diluted EPS was $1.58. In fourth-quarter 2012, the corresponding figures were $25.4 million, $2.4 million, $8.5 million and $1.23.
Important facts for investors to verify
- Track subsequent credit performance, charge-offs, TDR defaults and the adequacy of the $30.7 million loan-loss allowance, particularly given construction lending and rapid portfolio growth.
- Assess deposit stability and funding costs against the 93.66% net-loan-to-deposit ratio, federal funds purchased and the concentration of demandable deposits.
- Review the effect of growth-related expenses and the airplane-related costs on future operating efficiency and earnings.
- Confirm the terms, dividend cost and redemption plans for the $40 million Series A preferred stock; its dividend rate may rise to 9% after December 21, 2015 if it remains outstanding.
- Verify the timing and sustainability of common dividends, which depend on board decisions, Bank dividends and regulatory limits.
- Consider the limited public trading market for the common stock and potential dilution from outstanding options and other equity awards.