Attached files

file filename
EX-32.02 - EXHIBIT 32.02 - ServisFirst Bancshares, Inc.exh_3202.htm
EX-32.01 - EXHIBIT 32.01 - ServisFirst Bancshares, Inc.exh_3201.htm
EX-31.02 - EXHIBIT 31.02 - ServisFirst Bancshares, Inc.exh_3102.htm
EX-31.01 - EXHIBIT 31.01 - ServisFirst Bancshares, Inc.exh_3101.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
   
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 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 26-0734029
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

 

850 Shades Creek Parkway, Birmingham, Alabama      35209     

(Address of Principal Executive Offices)                              (Zip Code)

 

(205) 949-0302

(Registrant's 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 [X] No [_]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the  preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [_]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer [X]   Accelerated filer [_]   Non-accelerated filer [_]   Smaller reporting company [_]   Emerging growth company [_]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [_]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

 

Class Outstanding as of July 28, 2017
Common stock, $.001 par value 52,932,230

 

 
 

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION 3
  Item 1. Financial Statements 3
    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
    Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
   Item 4. Controls and Procedures 42
       
PART II. OTHER INFORMATION 42
    Item 1 Legal Proceedings 42
   Item 1A. Risk Factors 42
    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
    Item 3. Defaults Upon Senior Securities 43
    Item 4.  Mine Safety Disclosures 43
  Item 5. Other Information 43
  Item 6. Exhibits 43
       
EX-31.01 SECTION 302 CERTIFICATION OF THE CEO  
EX-31.02 SECTION 302 CERTIFICATION OF THE CFO  
EX-32.01 SECTION 906 CERTIFICATION OF THE CEO  
EX-32.02 SECTION 906 CERTIFICATION OF THE CFO  

 

 

 2 
 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

               

   June 30, 2017  December 31, 2016
   (Unaudited)  (1)
ASSETS          
Cash and due from banks  $71,181   $56,855 
Interest-bearing balances due from depository institutions   134,694    566,707 
Federal funds sold   49,443    160,435 
Cash and cash equivalents   255,318    783,997 
Available for sale debt securities, at fair value   438,808    422,375 
Held to maturity debt securities (fair value of $80,532 and $63,302 at June 30, 2017 and December 31, 2016, respectively)   79,257    62,564 
Restricted equity securities   1,037    1,024 
Mortgage loans held for sale   5,673    4,675 
Loans   5,343,688    4,911,770 
Less allowance for loan losses   (55,059)   (51,893)
Loans, net   5,288,629    4,859,877 
Premises and equipment, net   51,797    40,314 
Accrued interest and dividends receivable   16,770    15,801 
Deferred tax assets   26,392    27,132 
Other real estate owned and repossessed assets   3,891    4,988 
Bank owned life insurance contracts   125,896    114,388 
Goodwill and other identifiable intangible assets   14,855    14,996 
Other assets   21,276    18,317 
Total assets  $6,329,599   $6,370,448 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Noninterest-bearing  $1,373,353   $1,281,605 
Interest-bearing   4,021,457    4,138,706 
Total deposits   5,394,810    5,420,311 
Federal funds purchased   300,226    355,944 
Other borrowings   55,075    55,262 
Accrued interest payable   3,513    4,401 
Other liabilities   8,889    11,641 
Total liabilities   5,762,513    5,847,559 
Stockholders' equity:          
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $0.001 (liquidation preference $1,000), net of discount; no shares authorized or outstanding at June 30, 2017 and December 31, 2016   -    - 
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2017 and December 31, 2016   -    - 
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,909,362 shares issued and outstanding at June 30, 2017, and 52,636,896 shares issued and outstanding at December 31, 2016   53    53 
Additional paid-in capital   217,271    215,932 
Retained earnings   348,517    307,151 
Accumulated other comprehensive income   743    (624)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.   566,584    522,512 
Noncontrolling interest   502    377 
Total stockholders' equity   567,086    522,889 
Total liabilities and stockholders' equity  $6,329,599   $6,370,448 

 

(1) Derived from audited financial statements.

 

See Notes to Consolidated Financial  Statements.

 

 3 
 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

                             

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2017  2016  2017  2016
Interest income:                    
Interest and fees on loans  $59,912   $49,210   $115,468   $96,457 
Taxable securities   2,274    1,238    4,361    2,507 
Nontaxable securities   752    834    1,517    1,692 
Federal funds sold   287    210    806    283 
Other interest and dividends   313    558    903    1,072 
Total interest income   63,538    52,050    123,055    102,011 
Interest expense:                    
Deposits   6,321    4,633    12,303    8,994 
Borrowed funds   1,650    1,526    3,133    2,947 
Total interest expense   7,971    6,159    15,436    11,941 
Net interest income   55,567    45,891    107,619    90,070 
Provision for loan losses   4,381    3,800    9,367    5,859 
Net interest income after provision for loan losses   51,186    42,091    98,252    84,211 
Noninterest income:                    
Service charges on deposit accounts   1,382    1,306    2,736    2,613 
Mortgage banking   1,064    901    1,963    1,569 
Credit card income   1,189    572    2,368    1,041 
Securities (losses) gains   -    (3)   -    (3)
Increase in cash surrender value life insurance   785    655    1,509    1,279 
Other operating income   385    416    775    783 
Total noninterest income   4,805    3,847    9,351    7,282 
Noninterest expenses:                    
Salaries and employee benefits   12,031    10,733    23,744    21,800 
Equipment and occupancy expense   2,265    2,023    4,505    4,008 
Professional services   808    999    1,579    1,737 
FDIC and other regulatory assessments   1,081    803    2,078    1,553 
OREO expense   56    41    132    490 
Other operating expenses   5,634    4,905    11,104    9,206 
Total noninterest expenses   21,875    19,504    43,142    38,794 
Income before income taxes   34,116    26,434    64,461    52,699 
Provision for income taxes   9,952    7,558    17,778    13,867 
Net income   24,164    18,876    46,683    38,832 
Preferred stock dividends   31    23    31    23 
Net income available to common stockholders  $24,133   $18,853   $46,652   $38,809 
                     
Basic earnings per common share  $0.46   $0.36   $0.88   $0.74 
                     
Diluted earnings per common share  $0.45   $0.36   $0.86   $0.73 

 

See Notes to Consolidated Financial Statements.

 

 4 
 

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

                                   

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2017  2016  2017  2016
Net income  $24,164   $18,876   $46,683   $38,832 
Other comprehensive income, net of tax:                    
Unrealized holding gains arising during period from securities available for sale, net of tax of $201 and $736 for the three and six months ended June 30, 2017, respectively, and $272 and $1,256 for the three and six months ended June 30, 2016, respectively   374    520    1,367    2,354 
Reclassification adjustment for net losses on sale of securities, net of tax of $1 for the three and six months ended June 30, 2016   -    2    -    2 
Other comprehensive income, net of tax   374    522    1,367    2,356 
Comprehensive income  $24,538   $19,398   $48,050   $41,188 

 

See Notes to Consolidated Financial Statements.

 

 

 

 5 
 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

(Unaudited)

                                         

   Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Noncontrolling
Interest
  Total
Stockholders'
Equity
Balance, December 31, 2015  $52   $211,546   $234,124   $3,048   $377   $449,147 
Common dividends paid, $0.04 per share   -    -    (2,095)   -    -    (2,095)
Common dividends declared, $.04 per share   -    -    (2,099)   -    -    (2,099)
Preferred dividends paid   -    -    (23)   -    -    (23)
Issue 549,500 shares of common stock upon exercise of stock options   -    2,339    -    -    -    2,339 
Stock based compensation expense   -    640    -    -    -    640 
Other comprehensive income, net of tax   -    -    -    2,356    -    2,356 
Net income   -    -    38,832    -    -    38,832 
Balance, June 30, 2016  $52   $214,525   $268,739   $5,404   $377   $489,097 
                               
Balance, December 31, 2016  $53   $215,932   $307,151   $(624)  $377   $522,889 
Common dividends paid, $0.05 per share   -    -    (2,641)   -    -    (2,641)
Common dividends declared, $0.05 per share   -    -    (2,645)   -    -    (2,645)
Preferred dividends paid   -    -    (31)   -    -    (31)
Issue 272,466 shares of common stock upon exercise of stock options   -    717    -    -    -    717 
Issue 125 shares of REIT preferred stock   -    -    -    -    125    125 
Stock based compensation expense   -    622    -    -    -    622 
Other comprehensive income, net of tax   -    -    -    1,367    -    1,367 
Net income   -    -    46,683    -    -    46,683 
Balance, June 30, 2017  $53   $217,271   $348,517   $743   $502   $567,086 

 

See Notes to Consolidated Financial Statements.

 

 6 
 

 

  SERVISFIRST BANCSHARES, INC.

  CONSOLIDATED STATEMENTS OF CASH FLOWS

  (In thousands) (Unaudited)  

 

   Six Months Ended June 30,
   2017  2016
OPERATING ACTIVITIES          
Net income  $46,683   $38,832 
Adjustments to reconcile net income to net cash provided by          
Deferred tax   4    440 
Provision for loan losses   9,367    5,859 
Depreciation   1,501    1,480 
Accretion on acquired loans   (267)   (624)
Amortization of core deposit intangible   141    176 
Net amortization of debt securities available for sale   1,999    1,288 
(Increase) decrease in accrued interest and dividends receivable   (969)   211 
Stock-based compensation expense   622    640 
(Decrease) increase in accrued interest payable   (888)   507 
Proceeds from sale of mortgage loans held for sale   71,518    61,054 
Originations of mortgage loans held for sale   (70,553)   (59,169)
Loss on sale of debt securities available for sale   -    3 
Gain on sale of mortgage loans held for sale   (1,963)   (1,569)
Net (gain) loss on sale of other real estate owned and repossessed assets   (53)   39 
Write down of other real estate owned and repossessed assets   4    397 
Losses of tax credit partnerships   7    176 
Increase in cash surrender value of life insurance contracts   (1,509)   (1,279)
Net change in other assets, liabilities, and other operating activities   (9,379)   (7,563)
Net cash provided by operating activities   46,265    40,898 
INVESTMENT ACTIVITIES          
Purchase of debt securities available for sale   (60,627)   (15,119)
Proceeds from sale of debt securities available for sale   -    6,085 
Proceeds from maturities, calls and paydowns of debt securities available for sale   45,325    34,255 
Purchase of debt securities held to maturity   (20,786)   (439)
Proceeds from maturities, calls and paydowns of debt securities held to maturity   4,093    1,203 
Purchase of equity securities   (10)   (708)
Increase in loans   (438,253)   (325,496)
Purchase of premises and equipment   (12,984)   (5,267)
Purchase of bank-owned life insurance contracts   (10,000)   (10,000)
Expenditures to complete construction of other real estate owned   -    (3)
Proceeds from sale of other real estate owned and repossessed assets   1,547    1,575 
Investment in tax credit partnerships   -    (2,491)
Net cash used in investing activities   (491,695)   (316,405)
FINANCING ACTIVITIES          
Net increase in non-interest-bearing deposits   91,748    132,201 
Net (decrease) increase in interest-bearing deposits   (117,249)   311,706 
Net (decrease) increase in federal funds purchased   (55,718)   68,070 
Repayment of Federal Home Loan Bank advances   (200)   (200)
Proceeds from sale of preferred stock, net   125    - 
Proceeds from exercise of stock options and warrants   717    2,339 
Dividends paid on common stock   (2,641)   (2,095)
Dividends paid on preferred stock   (31)   (23)
Net cash (used in) provided by financing activities   (83,249)   511,998 
Net (decrease) increase in cash and cash equivalents   (528,679)   236,491 
Cash and cash equivalents at beginning of period   783,997    352,235 
Cash and cash equivalents at end of period  $255,318   $588,726 
SUPPLEMENTAL DISCLOSURE          
Cash paid for:          
Interest  $16,324   $11,434 
Income taxes   22,363    17,546 
Income tax refund   (182)   - 
NONCASH TRANSACTIONS          
Other real estate acquired in settlement of loans  $586   $2,036 
Internally financed sales of other real estate owned   185    1,157 
Dividends declared   2,645    2,099 

 

See Notes to Consolidated Financial Statements.

 

 7 
 

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

NOTE 1 - GENERAL

 

The accompanying 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 (“U.S. GAAP”) 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”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2016.

 

On December 20, 2016, the Company effected a two-for-one split of its common stock in the form of a stock dividend. Except where specifically indicated otherwise, all reported amounts in this Form 10-Q have been adjusted to give effect to this stock split.

 

All reported amounts are in thousands except share and per share data.

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

Cash on hand, cash items in process of collection, amounts due from banks, and federal funds sold are included in cash and cash equivalents.

 

NOTE 3 - EARNINGS PER COMMON SHARE

 

Basic earnings per common share are computed by dividing net income available to common stockholders 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. All reported amounts in this Form 10-Q have been adjusted to give effect to the two-for-one stock split discussed above.

 

 8 
 

 

   Three Months Ended June 30,  Six Months Ended June 30,
   2017  2016  2017  2016
   (In Thousands, Except Shares and Per Share Data)
Earnings per common share            
Weighted average common shares outstanding   52,864,761    52,425,726    52,805,378    52,340,390 
Net income available to common stockholders  $24,133   $18,853   $46,652   $38,809 
Basic earnings per common share  $0.46   $0.36   $0.88   $0.74 
                     
Weighted average common shares outstanding   52,864,761    52,425,726    52,805,378    52,340,390 
Dilutive effects of assumed conversions and exercise of stock options and warrants   1,235,843    1,026,800    1,311,694    952,684 
Weighted average common and dilutive potential common shares outstanding   54,100,604    53,452,526    54,117,072    53,293,074 
Net income available to common stockholders  $24,133   $18,853   $46,652   $38,809 
Diluted earnings per common share  $0.45   $0.36   $0.86   $0.73 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2017 and December 31, 2016 are summarized as follows:

 

   Amortized
Cost
  Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Market
Value
June 30, 2017  (In Thousands)
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $56,778   $419   $(72)  $57,125 
Mortgage-backed securities   241,613    1,267    (1,609)   241,271 
State and municipal securities   139,273    1,298    (159)   140,412 
Total   437,664    2,984    (1,840)   438,808 
Securities Held to Maturity                    
Mortgage-backed securities   27,858    303    (224)   27,937 
State and municipal securities   5,890    306    -    6,196 
Corporate debt   45,509    890    -    46,399 
Total  $79,257   $1,499   $(224)  $80,532 
                     
December 31, 2016                    
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $45,998   $382   $(126)  $46,254 
Mortgage-backed securities   228,843    1,515    (3,168)   227,190 
State and municipal securities   139,504    1,120    (694)   139,930 
Corporate debt   8,985    16    -    9,001 
Total   423,330    3,033    (3,988)   422,375 
Securities Held to Maturity                    
Mortgage-backed securities   19,164    321    (245)   19,240 
State and municipal securities   5,888    315    (12)   6,191 
Corporate debt   37,512    374    (15)   37,871 
Total  $62,564   $1,010   $(272)  $63,302 

 

The amortized cost and fair value of debt securities as of June 30, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories along with the other categories of debt securities.

 

 9 
 

 

   June 30, 2017  December 31, 2016
   Amortized
Cost
  Fair Value  Amortized
Cost
  Fair Value
   (In thousands)
Debt securities available for sale                    
Due within one year  $11,487   $11,516   $28,270   $28,400 
Due from one to five years   155,256    156,552    152,347    153,003 
Due from five to ten years   28,918    29,082    13,870    13,782 
Due after ten years   390    387    -    - 
Mortgage-backed securities   241,613    241,271    228,843    227,190 
   $437,664   $438,808   $423,330   $422,375 
                     
Debt securities held to maturity                    
Due from one to five years  $3,250   $3,266   $250   $250 
Due from five to ten years   34,246    35,005    34,251    34,617 
Due after ten years   13,903    14,324    8,899    9,195 
Mortgage-backed securities   27,858    27,937    19,164    19,240 
   $79,257   $80,532   $62,564   $63,302 

 

All mortgage-backed securities are with government-sponsored enterprises (GSEs) such as Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation.

 

The following table identifies, as of June 30, 2017 and December 31, 2016, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At June 30, 2017, nine of the Company’s 813 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2017. Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

 

   Less Than Twelve Months  Twelve Months or More  Total
   Gross
Unrealized
Losses
  Fair Value  Gross
Unrealized
Losses
  Fair Value  Gross
Unrealized
Losses
  Fair Value
   (In Thousands)
June 30, 2017                              
U.S. Treasury and government sponsored agencies  $(72)  $4,859   $-   $-   $(72)  $4,859 
Mortgage-backed securities   (1,813)   144,440    (20)   1,021    (1,833)   145,461 
State and municipal securities   (143)   32,820    (16)   1,582    (159)   34,402 
Total  $(2,028)  $182,119   $(36)  $2,603   $(2,064)  $184,722 
                               
December 31, 2016                              
U.S. Treasury and government sponsored agencies  $(126)  $10,865   $-   $-   $(126)  $10,865 
Mortgage-backed securities   (3,413)   174,225    -    -    (3,413)   174,225 
State and municipal securities   (698)   64,502    (8)   1,021    (706)   65,523 
Corporate debt   (15)   3,034    -    -    (15)   3,034 
Total  $(4,252)  $252,626   $(8)  $1,021   $(4,260)  $253,647 

 

 10 
 

 

NOTE 5 – LOANS

 

The following table details the Company’s loans at June 30, 2017 and December 31, 2016:

 

   June 30,
2017
  December 31,
2016
   (Dollars In Thousands)
Commercial, financial and agricultural  $2,123,498   $1,982,267 
Real estate - construction   395,398    335,085 
Real estate - mortgage:          
Owner-occupied commercial   1,272,659    1,171,719 
1-4 family mortgage   565,121    536,805 
Other mortgage   931,788    830,683 
Subtotal: Real estate - mortgage   2,769,568    2,539,207 
Consumer   55,224    55,211 
Total Loans   5,343,688    4,911,770 
Less: Allowance for loan losses   (55,059)   (51,893)
Net Loans  $5,288,629   $4,859,877 
           
           
Commercial, financial and agricultural   39.74%   40.36%
Real estate - construction   7.40%   6.82%
Real estate - mortgage:          
Owner-occupied commercial   23.82%   23.86%
1-4 family mortgage   10.57%   10.93%
Other mortgage   17.44%   16.91%
Subtotal: Real estate - mortgage   51.83%   51.70%
Consumer   1.03%   1.12%
Total Loans   100.00%   100.00%

 

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions defined as follows:

 

·Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or obligors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
·Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.
·Substandard – loans that exhibit well-defined weakness or weaknesses that currently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.
·Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

 

 11 
 

 

Loans by credit quality indicator as of June 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017  Pass  Special
Mention
  Substandard  Doubtful  Total
                
   (In Thousands)
Commercial, financial and agricultural  $2,051,745   $40,323   $31,430   $-   $2,123,498 
Real estate - construction   384,442    7,582    3,374    -    395,398 
Real estate - mortgage:                         
Owner-occupied commercial   1,255,649    11,098    5,912    -    1,272,659 
1-4 family mortgage   559,579    1,256    4,286    -    565,121 
Other mortgage   914,552    13,662    3,574    -    931,788 
Total real estate mortgage   2,729,780    26,016    13,772    -    2,769,568 
Consumer   55,169    55    -    -    55,224 
Total  $5,221,136   $73,976   $48,576   $-   $5,343,688 

 

December 31, 2016  Pass  Special
Mention
  Substandard  Doubtful  Total
                
   (In Thousands)
Commercial, financial and agricultural  $1,893,664   $61,035   $27,568   $-   $1,982,267 
Real estate - construction   324,958    5,861    4,266    -    335,085 
Real estate - mortgage:                         
Owner-occupied commercial   1,158,615    6,037    7,067    -    1,171,719 
1-4 family mortgage   531,868    2,065    2,872    -    536,805 
Other mortgage   818,724    11,224    735    -    830,683 
Total real estate mortgage   2,509,207    19,326    10,674    -    2,539,207 
Consumer   55,135    76    -    -    55,211 
Total  $4,782,964   $86,298   $42,508   $-   $4,911,770 

 

 12 
 

 

Loans by performance status as of June 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017  Performing  Nonperforming  Total
          
   (In Thousands)
Commercial, financial and agricultural  $2,118,113   $5,385   $2,123,498 
Real estate - construction   393,021    2,377    395,398 
Real estate - mortgage:               
Owner-occupied commercial   1,270,411    2,248    1,272,659 
1-4 family mortgage   564,200    921    565,121 
Other mortgage   931,788    -    931,788 
Total real estate mortgage   2,766,399    3,169    2,769,568 
Consumer   55,176    48    55,224 
Total  $5,332,709   $10,979   $5,343,688 

 

December 31, 2016  Performing  Nonperforming  Total
          
   (In Thousands)
Commercial, financial and agricultural  $1,974,975   $7,292   $1,982,267 
Real estate - construction   331,817    3,268    335,085 
Real estate - mortgage:               
Owner-occupied commercial   1,165,511    6,208    1,171,719 
1-4 family mortgage   536,731    74    536,805 
Other mortgage   830,683    -    830,683 
Total real estate mortgage   2,532,925    6,282    2,539,207 
Consumer   55,166    45    55,211 
Total  $4,894,883   $16,887   $4,911,770 

 

 13 
 

 

Loans by past due status as of June 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017  Past Due Status (Accruing Loans)         
   30-59 Days  60-89 Days  90+ Days  Total Past
Due
  Non-Accrual  Current  Total Loans
                      
   (In Thousands)
Commercial, financial and agricultural  $6,311   $317   $968   $7,596   $4,417   $2,111,485   $2,123,498 
Real estate - construction   -    -    -    -    2,377    393,021    395,398 
Real estate - mortgage:                                   
Owner-occupied commercial   4,498    -    -    4,498    2,248    1,265,913    1,272,659 
1-4 family mortgage   376    703    -    1,079    921    563,121    565,121 
Other mortgage   980    -    -    980    -    930,808    931,788 
Total real estate - mortgage   5,854    703    -    6,557    3,169    2,759,842    2,769,568 
Consumer   49    8    48    105    -    55,119    55,224 
Total  $12,214   $1,028   $1,016   $14,258   $9,963   $5,319,467   $5,343,688 

 

December 31, 2016  Past Due Status (Accruing Loans)         
   30-59 Days  60-89 Days  90+ Days  Total Past
Due
  Non-Accrual  Current  Total Loans
                      
   (In Thousands)
Commercial, financial and agricultural  $710   $40   $10   $760   $7,282   $1,974,225   $1,982,267 
Real estate - construction   59    -    -    59    3,268    331,758    335,085 
Real estate - mortgage:                                   
Owner-occupied commercial   -    -    6,208    6,208    -    1,165,511    1,171,719 
1-4 family mortgage   160    129    -    289    74    536,442    536,805 
Other mortgage   95    811    -    906    -    829,777    830,683 
Total real estate - mortgage   255    940    6,208    7,403    74    2,531,730    2,539,207 
Consumer   52    17    45    114    -    55,097    55,211 
Total  $1,076   $997   $6,263   $8,336   $10,624   $4,892,810   $4,911,770 

 

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions and other risks inherent in the portfolio. Allowances for impaired loans are generally determined based on collateral values or the present value of the estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for losses on loans. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

 

The methodology utilized for the calculation of the allowance for loan losses is divided into four distinct categories. Those categories include allowances for non-impaired loans (ASC 450), impaired loans (ASC 310), external qualitative factors, and internal qualitative factors. A description of each category of the allowance for loan loss methodology is listed below.

 

Non-Impaired Loans. Non-impaired loans are grouped into homogeneous loan pools by loan type and are the following: commercial and industrial, construction and development, commercial real estate, second lien home equity lines of credit, and all other loans. Each loan pool is stratified by internal risk rating and multiplied by a loss allocation percentage derived from the loan pool historical loss rate. The historical loss rate is based on an age weighted 5 year history of net charge-offs experienced by pool, with the most recent net charge-off experience given a greater weighting. This results in the expected loss rate per year, adjusted by a qualitative adjustment factor and a years-to-impairment factor, for each pool of loans to derive the total amount of allowance for non-impaired loans.

 

 14 
 

 

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the original terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral-dependent. Fair value estimates for specifically impaired collateral-dependent loans are derived from appraised values based on the current market value or “as is” value of the property, normally from recently received and reviewed appraisals. Appraisals are obtained from certified and licensed appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by our credit administration department, and values are adjusted downward to reflect anticipated disposition costs. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated for each impaired loan. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.

 

External Qualitative Factors. The determination of the portion of the allowance for loan losses relating to external qualitative factors is based on consideration of the following factors: gross domestic product growth rate, changes in prime rate, delinquency trends, peer delinquency trends, year-over-year loan growth and state unemployment rate trends. Data for the three most recent periods is utilized in the calculation for each external qualitative component. The factors have a consistent weighted methodology to calculate the amount of allowance due to external qualitative factors.

 

Internal Qualitative Factors. The determination of the portion of the allowance for loan losses relating to internal qualitative factors is based on the consideration of criteria which includes the following: number of extensions and deferrals, single pay and interest only loans, current financial information, credit concentrations and risk grade accuracy. A self-assessment for each of the criteria is made with a consistent weighted methodology used to calculate the amount of allowance required for internal qualitative factors.

 

 

 15 
 

 

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 2017 and June 30, 2016. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

 

   Commercial
financial and
agricultural
  Real estate -
construction
  Real estate -
mortgage
  Consumer  Total
    
   (In Thousands)
   Three Months Ended June 30, 2017
Allowance for loan losses:                         
Balance at March 31, 2017  $28,707   $4,825   $19,962   $398   $53,892 
Charge-offs   (3,067)   (40)   (106)   (33)   (3,246)
Recoveries   16    14    2    -    32 
Provision   3,471    339    534    37    4,381 
Balance at June 30, 2017  $29,127   $5,138   $20,392   $402   $55,059 
     
    Three Months Ended June 30, 2016
Allowance for loan losses:                         
Balance at March 31, 2016  $22,839   $5,005   $16,901   $400   $45,145 
Charge-offs   (1,412)   (355)   (191)   (31)   (1,989)
Recoveries   1    39    2    -    42 
Provision   2,227    590    888    95    3,800 
Balance at June 30, 2016  $23,655   $5,279   $17,600   $464   $46,998 
     
    Six Months Ended June 30, 2017
Allowance for loan losses:                         
Balance at December 31, 2016  $28,872   $5,125   $17,504   $392   $51,893 
Charge-offs   (5,922)   (40)   (372)   (108)   (6,442)
Recoveries   206    30    4    1    241 
Provision   5,971    23    3,256    117    9,367 
Balance at June 30, 2017  $29,127   $5,138   $20,392   $402   $55,059 
     
    Six Months Ended June 30, 2016
Allowance for loan losses:                         
Balance at December 31, 2015  $21,495   $5,432   $16,061   $431   $43,419 
Charge-offs   (1,462)   (736)   (191)   (49)   (2,438)
Recoveries   4    55    99    -    158 
Provision   3,618    528    1,631    82    5,859 
Balance at June 30, 2016  $23,655   $5,279   $17,600   $464   $46,998 
     
    As of June 30, 2017
Allowance for loan losses:                         
Individually Evaluated for Impairment  $4,457   $921   $1,779   $-   $7,157 
Collectively Evaluated for Impairment   24,670    4,217    18,613    402    47,902 
                          
Loans:                         
Ending Balance  $2,123,498   $395,398   $2,769,568   $55,224   $5,343,688 
Individually Evaluated for Impairment   31,430    3,420    16,171    -    51,021 
Collectively Evaluated for Impairment   2,092,068    391,978    2,753,397    55,224    5,292,667 
     
    As of December 31, 2016
Allowance for loan losses:                         
Individually Evaluated for Impairment  $6,607   $923   $622   $-   $8,152 
Collectively Evaluated for Impairment   22,265    4,202    16,882    392    43,741 
                          
Loans:                         
Ending Balance  $1,982,267   $335,085   $2,539,207   $55,211   $4,911,770 
Individually Evaluated for Impairment   27,922    4,314    13,350    3    45,589 
Collectively Evaluated for Impairment   1,954,345    330,771    2,525,857    55,208    4,866,181 

 

 16 
 

 

The following table presents details of the Company’s impaired loans as of June 30, 2017 and December 31, 2016, respectively. Loans which have been fully charged off do not appear in the tables.

 

   June 30, 2017  For the three months
ended June 30,
2017
  For the six months
ended June 30,
2017
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
in Period
  Average
Recorded
Investment
  Interest
Income
Recognized
in Period
                      
   (In Thousands)
With no allowance recorded:                                   
Commercial, financial and agricultural  $6,003   $6,016   $-   $6,213   $66   $6,272   $137 
Real estate - construction   46    48    -    49    1    49    2 
Real estate - mortgage:                                   
Owner-occupied commercial   2,398    2,564    -    2,584    37    2,601    76 
1-4 family mortgage   2,674    2,674    -    2,678    29    2,716    51 
Other mortgage   732    732    -    733    10    734    21 
Total real estate - mortgage   5,804    5,970    -    5,995    76    6,051    148 
Consumer   -    -    -    -    -    -    - 
Total with no allowance recorded   11,853    12,034    -    12,257    143    12,372    287 
                                    
With an allowance recorded:                                   
Commercial, financial and agricultural   25,427    27,127    4,457    27,760    257    27,525    541 
Real estate - construction   3,374    3,374    921    3,374    14    3,374    28 
Real estate - mortgage:                                   
Owner-occupied commercial   7,774    7,774    1,205    7,774    55    7,547    134 
1-4 family mortgage   1,613    1,613    260    1,617    20    1,644    42 
Other mortgage   980    980    314    983    12    990    25 
Total real estate - mortgage   10,367    10,367    1,779    10,374    87    10,181    201 
Consumer   -    -    -    -    -    -    - 
Total with allowance recorded   39,168    40,868    7,157    41,508    358    41,080    770 
                                    
Total Impaired Loans:                                   
Commercial, financial and agricultural   31,430    33,143    4,457    33,973    323    33,797    678 
Real estate - construction   3,420    3,422    921    3,423    15    3,423    30 
Real estate - mortgage:                                   
Owner-occupied commercial   10,172    10,338    1,205    10,358    92    10,148    210 
1-4 family mortgage   4,287    4,287    260    4,295    49    4,360    93 
Other mortgage   1,712    1,712    314    1,716    22    1,724    46 
Total real estate - mortgage   16,171    16,337    1,779    16,369    163    16,232    349 
Consumer   -    -    -    -    -    -    - 
Total impaired loans  $51,021   $52,902   $7,157   $53,765   $501   $53,452   $1,057 

 

 17 
 

 

    December 31, 2016  
            For the twelve months
ended December 31, 2016
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest Income
Recognized in
Period
                
   (In Thousands)
With no allowance recorded:                         
Commercial, financial and agricultural  $1,003   $1,003   $-   $992   $64 
Real estate - construction   938    1,802    -    1,159    3 
Real estate - mortgage:                         
Owner-occupied commercial   2,615    2,778    -    2,884    166 
1-4 family mortgage   1,899    1,899    -    1,901    102 
Other mortgage   940    940    -    965    60 
Total real estate - mortgage   5,454    5,617    -    5,750    328 
Consumer   3    5    -    6    - 
Total with no allowance recorded   7,398    8,427    -    7,907    395 
                          
With an allowance recorded:                         
Commercial, financial and agricultural   26,919    31,728    6,607    26,955    1,162 
Real estate - construction   3,376    3,376    923    3,577    68 
Real estate - mortgage:                         
Owner-occupied commercial   6,924    6,924    348    6,934    362 
1-4 family mortgage   972    972    274    313    19 
Other mortgage   -    -    -    -    - 
Total real estate - mortgage   7,896    7,896    622    7,247    381 
Consumer   -    -    -    -    - 
Total with allowance recorded   38,191    43,000    8,152    37,779    1,611 
                          
Total Impaired Loans:                         
Commercial, financial and agricultural   27,922    32,731    6,607    27,947    1,226 
Real estate - construction   4,314    5,178    923    4,736    71 
Real estate - mortgage:                         
Owner-occupied commercial   9,539    9,702    348    9,818    528 
1-4 family mortgage   2,871    2,871    274    2,214    121 
Other mortgage   940    940    -    965    60 
Total real estate - mortgage   13,350    13,513    622    12,997    709 
Consumer   3    5    -    6    - 
Total impaired loans  $45,589   $51,427   $8,152   $45,686   $2,006 

 

 18 
 

 

Troubled Debt Restructurings (“TDR”) at June 30, 2017, December 31, 2016 and June 30, 2016 totaled $16.4 million, $7.3 million and $6.8 million, respectively. At June 30, 2017, the Company had a related allowance for loan losses of $3.1 million allocated to these TDRs, compared to $2.3 million at December 31, 2016 and $1.0 million at June 30, 2016. TDR activity by portfolio segment for the three and six months ended June 30, 2017 is presented in the table below.

 

   Three Months Ended June 30, 2017  Six Months Ended June 30, 2017
   Number of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Number of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
   (In Thousands)
Troubled Debt Restructurings                              
Commercial, financial and agricultural   5   $7,205   $7,205    5   $7,205   $7,205 
Real estate - construction   1    997    997    1    997    997 
Real estate - mortgage:                              
Owner-occupied commercial   2    3,664    3,664    2    3,664    3,664 
1-4 family mortgage   1    850    850    1    850    850 
Other mortgage   -    -    -    -    -    - 
Total real estate mortgage   3    4,514    4,514    3    4,514    4,514 
Consumer   -    -    -    -    -    - 
    9   $12,716   $12,716    9   $12,716   $12,716 

 

   Three Months Ended June 30, 2016  Six Months Ended June 30, 2016
   Number of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Number of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
   (In Thousands)
Troubled Debt Restructurings                              
Commercial, financial and agricultural   1   $366   $366    1   $366   $366 
Real estate - construction   -    -    -    -    -    - 
Real estate - mortgage:                              
Owner-occupied commercial   -    -    -    -    -    - 
1-4 family mortgage   -    -    -    -    -    - 
Other mortgage   1    234    234    1    234    234 
Total real estate mortgage   1    234    234    1    234    234 
Consumer   -    -    -    -    -    - 
    2   $600   $600    2   $600   $600 

 

There were no TDRs which defaulted during the three and six months ended June 30, 2017 and 2016, and which were modified in the previous twelve months (i.e., the twelve months prior to default). For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of June 30, 2017, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

 

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At June 30, 2017, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $285,000 and $622,000 for the three and six months ended June 30, 2017 and $297,000 and $640,000 for the three and six months ended June 30, 2016.

 

The Company’s 2005 Amended and Restated Stock Option Plan allows for the grant of stock options to purchase up to 6,150,000 shares of the Company’s common stock. The Company’s 2009 Amended and Restated Stock Incentive Plan authorizes the grant of up to 5,550,000 shares and allows for the issuance of Stock Appreciation Rights, Restricted Stock, Stock Options, Performance Shares or Performance Units. Both plans allow for the grant of incentive stock options and non-qualified stock options, and option awards are granted with an exercise price equal to the market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plans is ten years.

 

 19 
 

 

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 southeastern United States publicly traded 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.

 

   2017  2016
Expected volatility   29.00%   29.00%
Expected dividends   0.44%   0.63%
Expected term (in years)   6.25    6.25 
Risk-free rate   2.09%   1.87%

 

The weighted average grant-date fair value of options granted during the six months ended June 30, 2017 and June 30, 2016 was $11.84 and $11.80, respectively.

 

The following table summarizes stock option activity during the six months ended June 30, 2017 and June 30, 2016:

 

   Shares  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term (years)
  Aggregate
Intrinsic
Value
            (In Thousands)
Six Months Ended June 30, 2017:                    
Outstanding at January 1, 2017   2,026,334   $9.00    6.2   $57,636 
Granted   51,500    37.95    9.6    (80)
Exercised   (292,000)   4.98    4.4    9,169 
Forfeited   (32,000)   21.96    8.6    (462)
Outstanding at June 30, 2017   1,753,834    10.28    5.9   $45,777 
                     
Exercisable at June 30, 2017   811,736   $5.20    4.4   $25,303 
                     
Six Months Ended June 30, 2016:                    
Outstanding at January 1, 2016   2,498,834   $6.66    6.3   $42,743 
Granted   227,000    19.76    9.7    1,120 
Exercised   (549,500)   4.26    4.4    11,230 
Forfeited   (13,000)   19.41    9.2    69 
Outstanding at June 30, 2016   2,163,334    8.57    6.6   $38,891 
                     
Exercisable at June 30, 2016   687,536   $6.09    6.0   $14,989 

 

As of June 30, 2017, there was approximately $2.3 million of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 2.7 years.

 

Restricted Stock

 

The Company has issued 488,376 shares of restricted stock to certain officers, of which 368,700 are vested. The value of restricted stock awards is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2017, there was $575,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.5 years of the restricted stock’s vesting period.

 

NOTE 7 - DERIVATIVES

 

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of June 30, 2017 and December 31, 2016 were not material.

 

 20 
 

 

NOTE 8 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption was permitted. The Company elected to early adopt the provisions of this ASU during the second quarter of 2016, and retrospectively apply the changes in accounting for stock compensation back to the first quarter of 2016. Accordingly, the Company recognized a reduction in its provision for income taxes during the quarter and six months ended June 30, 2017 of $1.4 million and $3.5 million, respectively, compared to $1.2 million and $3.5 million during the quarter and six months ended June 30, 2016, respectively. Prior to the adoption of ASU 2016-09, such tax benefits were recorded as an increase to additional paid-in capital.

 

In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result in the adoption of the equity method. Adoption of this standard has not affected the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period” (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. The Company has enhanced its disclosures regarding the impact recently issued accounting standards adopted in a future period will have on its accounting and disclosures.

 

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU 2014-09, Revenue From Contracts With Customers (Topic 606), by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company’s revenue has been more significantly weighted towards net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income has not been as significant. The Company has begun to scope its general ledger revenue items and assess its contracts with customers to identify its performance obligations and will continue to evaluate the impact of adoption on its noninterest income and on its disclosures.

 

 21 
 

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-1: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company leases many of its banking offices under lease agreements it classifies as operating leases. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of the amendments in this ASU on its consolidated financial statements, and is collecting data that will be needed to produce historical inputs into any models created as a result of adopting this ASU.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this ASU will not impact the Company’s financial statements as it has always amortized premiums to the first call date.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of the amendments in the ASU on the its consolidated financial statements.

 

 22 
 

 

NOTE 10 - FAIR VALUE MEASUREMENT

 

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, 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.

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 and also considers counterparty credit risk in its assessment of fair value.

 

Debt Securities. Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing source regarding their methods of price discovery. Securities measured with these techniques are classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.

 

Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $2,329,000 and $5,307,000 during the three and six months ended June 30, 2017, respectively, and $1,634,000 and $2,546,000 during the three and six months ended June 30, 2016, respectively.

 

Other Real Estate Owned. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO of $7,000 and $36,000 was recognized for the three and six months ended June 30, 2017, respectively, and $248,000 and $436,000 for the three and six months ended June 30, 2016, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy.

 

 23 
 

 

There were no residential real estate loan foreclosures classified as OREO as of June 30, 2017, compared to $189,000 as of December 31, 2016.

 

No residential real estate loans were in the process of being foreclosed as of June 30, 2017.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:

 

   Fair Value Measurements at June 30, 2017 Using   
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Recurring Basis:  (In Thousands)
Available-for-sale securities:                    
U.S. Treasury and government sponsored agencies  $-   $57,125   $-   $57,125 
Mortgage-backed securities   -    241,271    -    241,271 
State and municipal securities   -    140,412    -    140,412 
Total assets at fair value  $-   $438,808   $-   $438,808 

 

   Fair Value Measurements at December 31, 2016 Using   
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Recurring Basis:  (In Thousands)
Available-for-sale securities                    
U.S. Treasury and government sponsored agencies  $-   $46,254   $-   $46,254 
Mortgage-backed securities   -    227,190    -    227,190 
State and municipal securities   -    139,930    -    139,930 
Corporate debt   -    9,001    -    9,001 
Total assets at fair value  $-   $422,375   $-   $422,375 

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016:

 

   Fair Value Measurements at June 30, 2017 Using   
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Nonrecurring Basis:  (In Thousands)
Impaired loans  $-   $-   $43,864   $43,864 
Other real estate owned and repossessed assets   -    -    3,891    3,891 
Total assets at fair value  $-   $-   $47,755   $47,755 

 

   Fair Value Measurements at December 31, 2016 Using   
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Nonrecurring Basis:  (In Thousands)
Impaired loans  $-   $-   $37,437   $37,437 
Other real estate owned and repossessed assets   -    -    4,988    4,988 
Total assets at fair value  $-   $-   $42,425   $42,425 

 

The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

 24 
 

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

 

Cash and due from banks: The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.

 

Debt securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 securities include highly liquid government securities such as U.S. treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on prices obtained from independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing service regarding their methods of price discovery. Securities measured with these techniques are classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities. In cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the fair value hierarchy.

 

Equity securities: Fair values for other investments are considered to be their cost as they are redeemed at par value.

 

Federal funds sold: The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.

 

Mortgage loans held for sale: Loans are committed to be delivered to investors on a “best efforts delivery” basis within 30 days of origination. Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values.

 

Bank owned life insurance contracts: The carrying amounts in the statements of condition approximate these assets’ fair value.

 

Loans, net: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The method of estimating fair value does not incorporate the exit-price concept of fair value as prescribed by ASC 820 and generally produces a higher value than an exit-price approach. The measurement of the fair value of loans is classified within Level 3 of the fair value hierarchy.

 

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation using interest rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposits do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. Measurements of the fair value of certificates of deposit are classified within Level 2 of the fair value hierarchy.

 

Federal funds purchased: The carrying amounts in the statements of condition approximate these assets’ fair value.

 

 25 
 

 

Other borrowings: The fair values of other borrowings are estimated using a discounted cash flow analysis, based on interest rates currently being offered on the best alternative debt available at the measurement date. These measurements are classified as Level 2 in the fair value hierarchy.

 

Loan commitments: The fair values of the Company’s off-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company’s other off-balance-sheet financial instruments consists of non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

 

The carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2017 and December 31, 2016 are presented in the following table. This table includes those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.

 

   June 30, 2017  December 31, 2016
   Carrying
Amount
  Fair Value  Carrying
Amount
  Fair Value
   (In Thousands)
Financial Assets:                    
Level 1 inputs:                    
Cash and due from banks  $205,875   $205,875   $623,562   $623,562 
                     
Level 2 inputs:                    
Available for sale debt securities   438,808    438,808    422,375    422,375 
Held to maturity debt securities   33,748    34,133    25,052    25,431 
Restricted equity securities   1,037    1,037    1,024    1,024 
Federal funds sold   49,443    49,443    160,435    160,435 
Mortgage loans held for sale   5,673    5,855    4,675    4,736 
Bank owned life insurance contracts   125,896    125,896    114,388    114,388 
                     
Level 3 inputs:                    
Debt securities held to maturity   45,509    46,399    37,512    37,871 
Loans, net   5,288,629    5,283,824    4,859,877    4,872,689 
                     
Financial liabilities:                    
Level 2 inputs:                    
Deposits  $5,394,810   $5,391,665   $5,420,311   $5,417,320 
Federal funds purchased   300,226    300,226    355,944    355,944 
Other borrowings   55,075    56,339    55,262    54,203 

 

NOTE 11 – SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2017, and events which occurred subsequent to June 30, 2017 but were not recognized in the financial statements.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF 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. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and six months ended June 30, 2017 and June 30, 2016.

 

 26 
 

 

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. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s 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 factors that could affect the accuracy of such forward-looking statements, including: 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 our loan portfolio and deposit base; possible changes in laws and regulations and governmental monetary and fiscal policies; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-banks. The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and our other SEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. ServisFirst Bancshares, Inc. assumes no obligation to update or revise any forward-looking statements that are made from time to time.

 

Business

 

We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through nineteen full-service banking offices located in Alabama, Tampa Bay, Florida, the panhandle of Florida, the greater Atlanta, Georgia metropolitan area, Charleston, South Carolina, and Nashville, Tennessee. Through the bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions.

 

Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings, and other deposits. 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, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.

 

Overview

 

As of June 30, 2017, we had consolidated total assets of $6.33 billion, a decrease of $40.8 million, or 0.6%, from $6.37 billion at December 31, 2016. This decrease in total assets resulted from a $528.7 million decrease in balances held at the Federal Reserve Bank (“FRB”) and federal funds sold. Total loans were $5.34 billion at June 30, 2017, up $431.9 million, or 8.8%, from $4.91 billion at December 31, 2016. Total deposits were $5.39 billion at June 30, 2017, a decrease of $25.5 million, or 0.5%, from $5.42 billion at December 31, 2016.

 

Net income available to common stockholders for the three months ended June 30, 2017 was $24.1 million, an increase of $5.2 million, or 27.5%, from $18.9 million for the corresponding period in 2016. Basic and diluted earnings per common share were $0.46 and $0.45, respectively, for the three months ended June 30, 2017, compared to basic and diluted earnings per common share of $0.36 for the corresponding period in 2016.

 

Net income available to common stockholders for the six months ended June 30, 2017 was $46.7 million, an increase of $7.9 million, or 20.4%, from $38.8 million for the corresponding period in 2016. Basic and diluted earnings per common share were $0.88 and $0.86, respectively, for the six months ended June 30, 2017, compared to $0.74 and $0.73, respectively, for the corresponding period in 2016.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. GAAP, 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, deferred taxes, and fair value of financial instruments are particularly subject to change. Information concerning our accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

 27 
 

 

Financial Condition

 

Cash and Cash Equivalents

 

At June 30, 2017, we had $49.4 million in federal funds sold, compared to $160.4 million at December 31, 2016. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2017, we had $133.0 million in balances at the Federal Reserve, compared to $565.1 million at December 31, 2016. This decrease was a result in our lower levels of excess liquidity due to loan growth and a slight decrease in deposits during the first half of 2017.

 

Debt Securities

 

Debt securities available for sale totaled $438.8 million at June 30, 2017 and $422.4 million at December 31, 2016. Debt securities held to maturity totaled $79.3 million at June 30, 2017 and $62.6 million at December 31, 2016. We had pay downs of $24.3 million on mortgage-backed securities, maturities of $16.7 million on municipal and corporate securities, and calls of $8.2 million on municipal securities and subordinated notes during the six months ended June 30, 2017. We bought $55.8 million in mortgage-backed securities, $12.0 million in municipal securities, $2.9 million in U.S. Treasury securities and $11.0 million in subordinated notes during the first six months of 2017. Seven mortgage-backed securities and four subordinated notes bought were classified as held to maturity. All other securities bought are classified as available for sale.

 

The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer term securities purchased to generate level income for us over periods of interest rate fluctuations.

 

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at June 30, 2017 are interest-rate driven, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash charges to earnings in one or more future periods.

 

All securities held are traded in liquid markets. As of June 30, 2017, we owned restricted securities of First National Bankers Bank with an aggregate book value and market value of $0.4 million, securities of a fund that invests in Community Reinvestment Act-qualifying real estate with a book value and market value of $0.5 million, and securities of a bank holding company in Georgia with a book value and market value of $0.1 million. Upon termination of our membership in the Federal Home Loan Bank of Atlanta during the fourth quarter of 2016, we redeemed all but approximately $30,000 of our FHLB restricted stock. This remaining restricted stock in the FHLB is a required holding as long as our principal reducing advances are outstanding. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity.

 

The Bank does not invest in collateralized debt obligations (“CDOs”). We have $45.5 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Rating Agency at the time of our investment in them. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at June 30, 2017 has a combined average credit rating of AA.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $285.8 million and $257.6 million as of June 30, 2017 and December 31, 2016, respectively.

 

 28 
 

 

Loans

 

We had total loans of $5.34 billion at June 30, 2017, an increase of $431.9 million, or 8.8%, compared to $4.91 billion at December 31, 2016. At June 30, 2017, the percentage of our loans in each of our regions were as follows:

 

   Percentage of Total
Loans in MSA
Birmingham-Hoover, AL MSA   43.1%
Huntsville, AL MSA   9.9%
Dothan, AL MSA   9.6%
Montgomery, AL MSA   7.4%
Mobile, AL MSA   6.0%
Total Alabama MSAs   76.0%
Pensacola-Ferry Pass-Brent, FL MSA   6.5%
Tampa-St. Petersburg-Clearwater, FL MSA   1.8%
Total Florida MSAs   8.3%
Atlanta-Sandy Springs-Roswell, GA MSA   4.1%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA   8.5%
Charleston-North Charleston, SC MSA   3.1%

 

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. Our management believes that the allowance was adequate at June 30, 2017.

 

The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percentage of loans in each category to total loans. Management believes that the comprehensive allowance analysis developed by our credit administration group is in compliance with all current regulatory guidelines.

 

June 30, 2017  Amount  Percentage of loans
in each category
to total loans
   (In Thousands)
Commercial, financial and agricultural  $29,127    39.74%
Real estate - construction   5,138    7.40%
Real estate - mortgage   20,392    51.83%
Consumer   402    1.03%
Total  $55,059    100.00%

 

December 31, 2016  Amount  Percentage of loans
in each category
to total loans
   (In Thousands)
Commercial, financial and agricultural  $28,872    40.36%
Real estate - construction   5,125    6.82%
Real estate - mortgage   17,504    51.70%
Consumer   392    1.12%
Total  $51,893    100.00%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased $5.9 million to $11.0 million at June 30, 2017, compared to $16.9 million at December 31, 2016. Of this total, nonaccrual loans were $10.0 million at June 30, 2017, compared to $10.6 million at December 31, 2016, a decrease of $0.6 million. Excluding credit card accounts, there was one loan 90 or more days past due and still accruing totaling $1.0 million, compared to two loans totaling $6.2 million at December 31, 2016. Troubled Debt Restructurings (“TDR”) at June 30, 2017 and December 31, 2016 were $16.4 million and $7.3 million, respectively. One relationship totaling $12.7 million, which includes nine loans of various types, was newly classified as TDR for the three and six months ended June 30, 2017. There were no loans newly classified as TDR and two renewals of existing TDRs totaling $600,000 for the three and six months ended June 30, 2016. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.

 

 29 
 

 

OREO and repossessed assets decreased to $3.9 million at June 30, 2017, from $5.0 million at December 31, 2016. The total number of OREO and repossessed asset accounts decreased to 9 at June 30, 2017, compared to 12 at December 31, 2016. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2017 and 2016:

 

   Six months ended June 30,
   2017  2016
   (In thousands)
Balance at beginning of period  $4,988   $5,392 
Transfers from loans and capitalized expenses   586    2,036 
Proceeds from sales   (1,547)   (1,575)
Internally financed sales   (185)   (1,157)
Write-downs / net gain (loss) on sales   49    (436)
Balance at end of period  $3,891   $4,260 

 

The following table summarizes our nonperforming assets and TDRs at June 30, 2017 and December 31, 2016:

 

   June 30, 2017  December 31, 2016
   Balance  Number of
Loans
  Balance  Number of
Loans
   (Dollar Amounts In Thousands)
Nonaccrual loans:                    
Commercial, financial and agricultural  $4,417    8   $7,282    13 
Real estate - construction   2,377    3    3,268    5 
Real estate - mortgage:                    
Owner-occupied commercial   2,248    2    -    - 
1-4 family mortgage   921    1    74    1 
Other mortgage   -    -    -    - 
Total real estate - mortgage   3,169    3    74    1 
Consumer   -    -    -    - 
Total Nonaccrual loans:  $9,963    14   $10,624    19 
                     
90+ days past due and accruing:                    
Commercial, financial and agricultural  $968    1   $10    1 
Real estate - construction   -    -    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   -    -    6,208    1 
1-4 family mortgage   -    -    -    - 
Other mortgage   -    -    -    - 
Total real estate - mortgage   -    -    6,208    1 
Consumer   48    14    45    10 
Total 90+ days past due and accruing:  $1,016    15   $6,263    12 
                     
Total Nonperforming Loans:  $10,979    29   $16,887    31 
                     
Plus: Other real estate owned and repossessions   3,891    9    4,988    12 
Total Nonperforming Assets  $14,870    38   $21,875    43 
                     
Restructured accruing loans:                    
Commercial, financial and agricultural  $7,205    5   $354    1 
Real estate - construction   997    1    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   3,664    2    -    - 
1-4 family mortgage   850    1    -    - 
Other mortgage   -    -    204    1 
Total real estate - mortgage   4,514    3    204    1 
Consumer   -    -    -    - 
Total restructured accruing loans:  $12,716    9   $558    2 
                     
Total Nonperforming assets and restructured accruing loans  $27,586    47   $22,433    45 
                     
Ratios:                    
Nonperforming loans to total loans   0.21%        0.34%     
Nonperforming assets to total loans plus other real estate owned and repossessions   0.28%        0.44%     
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions   0.52%        0.46%     

 

 30 
 

 

The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for loan losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.

 

Impaired Loans and Allowance for Loan Losses

 

As of June 30, 2017, we had impaired loans of $51.0 million, inclusive of nonaccrual loans, an increase of $5.4 million from $45.6 million as of December 31, 2016. This increase is attributable to $14.7 million of loans newly classified as specifically impaired, partially offset by charge-offs totaling $4.7 million, net pay downs of $3.4 million, loan classification upgrades of $0.6 million and OREO transfers and repossessions of $0.6 million. We allocated $7.2 million of our allowance for loan losses at June 30, 2017 to these impaired loans, a decrease of $1.0 million compared to $8.2 million as of December 31, 2016. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. 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. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

Of the $51.0 million of impaired loans reported as of June 30, 2017, $31.4 million were commercial, financial and agricultural loans, $3.4 million were real estate construction loans and $16.2 million were real estate mortgage loans.

 

Deposits

 

Total deposits decreased $25.5 million, or 0.5%, to $5.39 billion at June 30, 2017 compared to $5.42 billion at December 31, 2016. This overall decrease is attributable to some large deposits moving out of the bank resulting from our refusal to increase rates paid on them. While we have experienced a decrease in our total deposits during the first half of 2017, we anticipate long-term sustainable growth in deposits through continued development of market share in our regions.

 

For amounts and rates of our deposits by category, see the table “Average Consolidated Balance Sheets and Net Interest Analysis on a Fully Taxable-equivalent Basis” under the subheading “Net Interest Income.”

 

Other Borrowings

 

Our borrowings consist of federal funds purchased, subordinated notes payable and Federal Home Loan Bank advances. We had $300.2 million and $355.9 million at June 30, 2017 and December 31, 2016, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 1.11% for the quarter ended June 30, 2017, which has increased during the past three quarters due to increases in the FRB’s targeted federal funds rate. Other borrowings consist of the following:

 

·$20.0 million of 5.50% Subordinated Notes due November 9, 2022, which were issued in a private placement in November 2012,
·$34.75 million of 5% Subordinated Notes due July 15, 2025, which were issued in a private placement in July 2015, and
·$400,000 of principal reducing advances from the Federal Home Loan Bank of Atlanta, which have an interest rate of 0.75% and require quarterly principal payments of $100,000 until maturity on May 22, 2018.

 

 31 
 

 

Liquidity

 

Liquidity is defined as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, and 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. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At June 30, 2017, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $549.7 million. Additionally, the Bank had additional borrowing availability of approximately $458.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We believe these sources of funding are adequate to meet immediate anticipated funding needs. 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. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Other Borrowings”.

 

We are subject to general FDIC guidelines that 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 materially increasing or decreasing.

 

The following table reflects the contractual maturities of our term liabilities as of June 30, 2017. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

   Payments due by Period
   Total  1 year or less  Over 1 - 3
years
  Over 3 - 5
years
  Over 5 years
   (In Thousands)
Contractual Obligations (1)                         
                          
Deposits without a stated maturity  $4,869,053   $-   $-   $-   $- 
Certificates of deposit (2)   525,757    284,730    157,765    81,335    1,927 
Federal funds purchased   300,226    300,226    -    -    - 
Subordinated debentures   55,075    400    -    -    54,675 
Operating lease commitments   18,677    3,843    6,394    4,107    4,333 
Total  $5,768,788   $589,199   $164,159   $85,442   $60,935 

 

(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 June 30, 2017, 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 June 30, 2017.

 

 32 
 

 

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of June 30, 2017, December 31, 2016 and June 30, 2016:

 

               To Be Well Capitalized
         For Capital Adequacy  Under Prompt Corrective
   Actual  Purposes  Action Provisions
   Amount  Ratio  Amount  Ratio  Amount  Ratio
As of June 30, 2017:  (Dollars in thousands)
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $551,433    9.72%  $255,319    4.50%   N/A    N/A 
ServisFirst Bank   603,094    10.63%   255,286    4.50%  $368,747    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   551,935    9.73%   340,425    6.00%   N/A    N/A 
ServisFirst Bank   603,596    10.64%   340,382    6.00%   453,842    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   662,169    11.67%   453,900    8.00%   N/A    N/A 
ServisFirst Bank   659,155    11.62%   453,842    8.00%   567,303    10.00 
Tier 1 Capital to Average Assets:                              
Consolidated   551,935    8.88%   248,732    4.00%   N/A    N/A 
ServisFirst Bank   603,596    9.71%   249,293    4.00%   311,616    5.00%
                               
As of December 31, 2016:                              
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $508,982    9.78%  $234,262    4.50%   N/A    N/A 
ServisFirst Bank   560,731    10.77%   234,232    4.50%  $338,335    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   509,359    9.78%   312,350    6.00%   N/A    N/A 
ServisFirst Bank   561,108    10.78%   312,309    6.00%   416,413    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   616,415    11.84%   416,467    8.00%   N/A    N/A 
ServisFirst Bank   613,501    11.79%   416,413    8.00%   520,516    10.00%
Tier 1 Capital to Average Assets:                              
Consolidated   509,359    8.22%   247,777    4.00%   N/A    N/A 
ServisFirst Bank   561,108    9.06%   247,760    4.00%   309,700    5.00%
                               
As of June 30, 2016:                              
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $469,101    9.83%  $214,649    4.50%   N/A    N/A 
ServisFirst Bank   517,987    10.86%   214,615    4.50%  $309,999    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   469,478    9.84%   286,199    6.00%   N/A    N/A 
ServisFirst Bank   518,364    10.87%   286,153    6.00%   381,538    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   571,627    11.98%   381,598    8.00%   N/A    N/A 
ServisFirst Bank   565,862    11.86%   381,538    8.00%   476,922    10.00%
Tier 1 Capital to Average Assets:                              
Consolidated   469,478    8.52%   220,506    4.00%   N/A    N/A 
ServisFirst Bank   518,364    9.40%   220,492    4.00%   275,615    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 our balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.

 

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments 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. As of June 30, 2017, we have reserved $500,000 for losses on such off-balance sheet arrangements consistent with guidance in the FRB’s Interagency Policy Statement SR 06-17.

 

 33 
 

 

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers. We had a reserve of $368,000 as of June 30, 2017 and December 31, 2016 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at June 30, 2017 are as follows:

 

   June 30, 2017
   (In Thousands)
Commitments to extend credit  $1,889,718 
Credit card arrangements   88,337 
Standby letters of credit   39,710 
   $2,017,765 

 

Commitments to extend credit beyond current funded amounts are agreements to lend to a customer as long as there is no violation of any condition established in the applicable loan agreement. 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 customer’s 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 management’s 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.

 

Federal funds lines of credit are uncommitted lines issued to downstream correspondent banks for the purpose of providing liquidity to them. The lines are unsecured, and we have no obligation to sell federal funds to the correspondent, nor does the correspondent have any obligation to request or accept purchases of federal funds from us.

 

Results of Operations

 

Summary of Net Income

 

Net income and net income available to common stockholders for the three months ended June 30, 2017 was $24.2 million and $24.1 million, respectively, compared to net income and net income available to common stockholders of $18.9 million for the three months ended June 30, 2016. Net income and net income available to common stockholders for the six months ended June 30, 2017 was $46.7 million compared to net income and net income available to common stockholders of $38.8 million for the six months ended June 30, 2016. The increase in net income for the three months ended June 30, 2017 over the same period in 2016 was primarily attributable to a $9.7 million increase in net interest income resulting from growth in earning assets and a $1.0 million increase in non-interest income, led by increased credit card income. The increase in net income for the six months ended June 30, 2017 compared to 2016 was primarily the result of a $17.5 million increase in net interest income resulting from growth in average earning assets and a $2.1 million increase in non-interest income, led by increased credit card income. Increases in non-interest expense of $2.4 million and $4.3 million, respectively, for the three and six months ended June 30, 2017 compared to 2016 partially offset increases in income.

 

Basic and diluted net income per common share were $0.46 and $0.45, respectively, for the three months ended June 30, 2017, compared to $0.36 and $0.36, respectively, for the corresponding period in 2016. Basic and diluted net income per common share were $0.88 and $0.86, respectively, for the six months ended June 30, 2017, compared to $0.74 and $0.73, respectively, for the corresponding period in 2016. Return on average assets for the three and six months ended June 30, 2017 was 1.55% and 1.50%, respectively, compared to 1.37% and 1.45%, respectively, for the corresponding periods in 2016. Return on average common stockholders’ equity for the three and six months ended June 30, 2017 was 17.36% and 17.23% compared to 15.79% and 16.57%, respectively, for the corresponding periods in 2016.

 

 34 
 

 

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 management’s 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.

 

Taxable-equivalent net interest income increased $9.7 million, or 20.9%, to $56.1 million for the three months ended June 30, 2017 compared to $46.4 million for the corresponding period in 2016, and increased $17.5 million, or 19.0%, to $108.6 million for the six months ended June 30, 2017 compared to $91.9 million for the corresponding period in 2016. This increase was primarily attributable to growth in average earning assets, which increased $655.1 million, or 12.3%, from the second quarter of 2016 to the second quarter of 2017, and $832.0 million, or 16.1%, from the six months ended June 30, 2016 to the same period in 2017. The taxable-equivalent yield on interest-earning assets increased to 4.30% for the three months ended June 30, 2017 from 3.97% for the corresponding period in 2016, and increased to 4.17% for the six months ended June 30, 2017 from 4.00% for the corresponding period in 2016. The yield on loans for the three months ended June 30, 2017 was 4.60% compared to 4.47% for the corresponding period in 2016, and 4.52% compared to 4.48% for the six months ended June 30, 2017 and June 30, 2016, respectively. The cost of total interest-bearing liabilities increased to 0.74% for the three months ended June 30, 2017 compared to 0.64% for the corresponding period in 2016, and increased to 0.71% for the six months ended June 30, 2017 from 0.63% for the corresponding period in 2016. Net interest margin for the three months ended June 30, 2017 was 3.77% compared to 3.51% for the corresponding period in 2016, and 3.65% for the six months ended June 30, 2017 compared to 3.54% for the corresponding period in 2016.

 

The following tables show, for the three and six months ended June 30, 2017 and June 30, 2016, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

 

 35 
 

 

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended June 30,

(In thousands, except Average Yields and Rates)

                                           

   2017   2016
      Interest  Average     Interest  Average
   Average  Earned /  Yield /  Average  Earned /  Yield /
   Balance  Paid  Rate  Balance  Paid  Rate
Assets:                              
Interest-earning assets:                              
Loans, net of unearned income (1)(2)                              
Taxable  $5,192,812   $59,508    4.60%  $4,406,107   $49,015    4.47%
Tax-exempt (3)   41,143    505    4.92    16,315    184    4.54 
Total loans, net of unearned income   5,233,955    60,013    4.60    4,422,422    49,199    4.47 
Mortgage loans held for sale   5,958    58    3.90    7,323    66    3.62 
Investment securities:                              
Taxable   389,505    2,274    2.34    208,113    1,238    2.38 
Tax-exempt (3)   133,590    1,129    3.38    135,954    1,269    3.73 
Total investment securities (4)   523,095    3,403    2.60    344,067    2,507    2.91 
Federal funds sold   98,598    287    1.17    144,206    210    0.59 
Restricted equity securities   1,030    27    10.51    5,659    51    3.62 
Interest-bearing balances with banks   109,909    286    1.04    393,782    507    0.52 
Total interest-earning assets  $5,972,545   $64,074    4.30%  $5,317,459   $52,540    3.97%
Non-interest-earning assets:                              
Cash and due from banks   68,894              65,318           
Net fixed assets and equipment   49,813              23,241           
Allowance for loan losses, accrued interest and other assets   143,286              127,640           
Total assets  $6,234,538              5,533,658           
                               
Liabilities and stockholders' equity:                              
Interest-bearing liabilities:                              
Interest-bearing demand deposits  $779,916   $767    0.39%  $691,776   $614    0.36%
Savings deposits   48,150    36    0.30    41,546    31    0.30