Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - STATE BANK FINANCIAL CORP | stbz_exhibit321x2017x10ka.htm |
| EX-31.2 - EXHIBIT 31.2 - STATE BANK FINANCIAL CORP | stbz_exhibit312x2017x10ka.htm |
| EX-31.1 - EXHIBIT 31.1 - STATE BANK FINANCIAL CORP | stbz_exhibit311x2017x10ka.htm |
| EX-23.1 - EXHIBIT 23.1 - STATE BANK FINANCIAL CORP | stbz_exhibit231x2017x10ka-.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No.1
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
Commission file number: 001-35139
STATE BANK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Georgia | 27-1744232 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3399 Peachtree Road, NE, Suite 1900 Atlanta, Georgia | 30326 | |
(Address of principal executive offices) | (Zip Code) | |
404-475-6599
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | The NASDAQ Stock Market LLC |
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 o
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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.
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |
Emerging growth company o | ||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by nonaffiliates of the registrant was approximately $1.0 billion.
The number of shares outstanding of the registrant’s common stock, as of February 22, 2018 was 39,012,378.
DOCUMENTS INCORPORATED BY REFERENCE
None in this Amendment No. 1
Explanatory Note
This Form 10-K/A amends State Bank Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 (the "Original Filing"), as filed with the Securities and Exchange Commission on February 23, 2018 (the "Original Filing Date").
We are filing this 10-K/A solely to amend the reports of Dixon Hughes Goodman LLP ("DHG") titled "Report of Independent Registered Accounting Firm" contained in Item 8 of the Original Filing (collectively, the "Audit Reports"), as follows:
• | to add the shareholders of State Bank Financial Corporation as an addressee of each report; |
• | to reorder certain paragraphs in the report related to DHG’s "Opinion on Internal Control Over Financial Reporting"; and |
• | to revise the first sentence in the report related to DHG’s "Opinion on the Financial Statements" to refer to our "accompanying consolidated statements of financial condition" rather than our "accompanying balance sheets." |
The above-referenced changes to the Audit Reports do not affect DHG's unqualified opinion on our consolidated financial statements or DHG's unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2017.
Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, we have included the entire text of Part II, Item 8 in this 10-K/A.
Part IV, Item 15 has been included to reflect the consent of DHG and new Section 302 and 906 certifications.
No other changes were made to the Original Filing. This 10-K/A speaks as of the Original Filing Date, does not reflect events that may have occurred subsequent to the Original Filing Date and, except as described above, does not modify or update in any way disclosures made in the Original Filing. Furthermore, there have been no changes to the XBRL data filed in Exhibit 101 of the Original Filing.
TABLE OF CONTENTS
PART II
Item 8. Financial Statements and Supplementary Data.
Selected Quarterly Financial Data (Unaudited)
2017 | ||||||||||||||||
Quarterly Periods Ended | ||||||||||||||||
(dollars in thousands, except per share amounts) | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Selected Results of Operations | ||||||||||||||||
Interest income | $ | 63,631 | $ | 47,702 | $ | 49,847 | $ | 47,197 | ||||||||
Interest expense | 5,614 | 3,370 | 3,369 | 3,239 | ||||||||||||
Net interest income | 58,017 | 44,332 | 46,478 | 43,958 | ||||||||||||
Provision for loan and lease losses | 2,848 | 415 | 1,845 | 1,002 | ||||||||||||
Noninterest income | 10,140 | 9,682 | 10,476 | 9,459 | ||||||||||||
Noninterest expense | 40,684 | 31,571 | 31,997 | 34,565 | ||||||||||||
Income before income taxes | 24,625 | 22,028 | 23,112 | 17,850 | ||||||||||||
Income taxes | 19,248 | 7,592 | 7,909 | 6,292 | ||||||||||||
Net income | $ | 5,377 | $ | 14,436 | $ | 15,203 | $ | 11,558 | ||||||||
Common Share Data | ||||||||||||||||
Basic earnings per share | $ | .14 | $ | .37 | $ | .39 | $ | .30 | ||||||||
Diluted earnings per share | $ | .14 | $ | .37 | $ | .39 | $ | .30 | ||||||||
Cash dividends declared per share | $ | .14 | $ | .14 | $ | .14 | $ | .14 | ||||||||
Weighted Average Common Shares Outstanding | ||||||||||||||||
Basic | 38,009,181 | 37,918,753 | 37,896,125 | 37,867,718 | ||||||||||||
Diluted | 38,068,619 | 37,963,141 | 37,942,483 | 37,954,585 | ||||||||||||
Market Data | ||||||||||||||||
High Sales Price | $ | 31.75 | $ | 28.85 | $ | 28.38 | $ | 28.25 | ||||||||
Low Sales Price | $ | 27.56 | $ | 25.41 | $ | 24.65 | $ | 24.16 | ||||||||
Period-end Closing | $ | 29.84 | $ | 28.65 | $ | 27.12 | $ | 26.12 | ||||||||
Average Daily Trading Volume | 100,116 | 84,171 | 112,652 | 116,445 | ||||||||||||
3
Selected Quarterly Financial Data (Unaudited) (Continued)
2016 | ||||||||||||||||
Quarterly Periods Ended | ||||||||||||||||
(dollars in thousands, except per share amounts) | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Selected Results of Operations | ||||||||||||||||
Interest income | $ | 41,777 | $ | 40,629 | $ | 44,093 | $ | 38,758 | ||||||||
Interest expense | 2,631 | 2,504 | 2,371 | 2,113 | ||||||||||||
Net interest income | 39,146 | 38,125 | 41,722 | 36,645 | ||||||||||||
Provision for loan and lease losses | 277 | 88 | 6 | (134 | ) | |||||||||||
Noninterest income | 9,911 | 9,769 | 10,230 | 9,391 | ||||||||||||
Noninterest expense | 32,875 | 28,480 | 30,674 | 28,898 | ||||||||||||
Income before income taxes | 15,905 | 19,326 | 21,272 | 17,272 | ||||||||||||
Income taxes | 5,578 | 6,885 | 7,287 | 6,434 | ||||||||||||
Net income | $ | 10,327 | $ | 12,441 | $ | 13,985 | $ | 10,838 | ||||||||
Common Share Data | ||||||||||||||||
Basic earnings per share | $ | .28 | $ | .34 | $ | .38 | $ | .29 | ||||||||
Diluted earnings per share | $ | .28 | $ | .34 | $ | .37 | $ | .29 | ||||||||
Cash dividends declared per share | $ | .14 | $ | .14 | $ | .14 | $ | .14 | ||||||||
Weighted Average Common Shares Outstanding | ||||||||||||||||
Basic | 35,904,009 | 35,863,183 | 35,822,654 | 36,092,269 | ||||||||||||
Diluted | 36,009,098 | 35,965,948 | 35,923,691 | 36,187,662 | ||||||||||||
Market Data | ||||||||||||||||
High Sales Price | $ | 27.50 | $ | 23.30 | $ | 21.99 | $ | 20.81 | ||||||||
Low Sales Price | $ | 21.15 | $ | 19.77 | $ | 18.65 | $ | 17.34 | ||||||||
Period-end Closing | $ | 26.86 | $ | 22.82 | $ | 20.35 | $ | 19.76 | ||||||||
Average Daily Trading Volume | 109,794 | 63,102 | 88,128 | 129,013 | ||||||||||||
4
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of State Bank Financial Corporation (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, utilizing the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As permitted, management excluded from its assessment of internal control over financial reporting the AloStar Bank of Commerce acquisition made during 2017, which is described in Note 2 to the Consolidated Financial Statements. The total assets and total interest income from this acquisition comprised approximately 15.7% of total consolidated assets at December 31, 2017 and approximately 7.8% of total consolidated interest income for the year ended December 31, 2017. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2017 is effective.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm, Dixon Hughes Goodman LLP, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The report, which expresses an unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2017, is included in this Report on Form 10-K.
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
State Bank Financial Corporation
Opinion on Internal Control Over Financial Reporting
We have audited State Bank Financial Corporation and Subsidiary (the “Company”)’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, State Bank Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of State Bank Financial Corporation as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017, and our report dated February 23, 2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, the scope of management’s assessment of internal control over financial reporting as of December 31, 2017 has excluded AloStar Bank of Commerce acquired on September 30, 2017. Accordingly, we have also excluded AloStar bank of Commerce from the scope of our audit of internal control over financial reporting. AloStar Bank of Commerce comprised approximately 15.7% of total consolidated assets at December 31, 2017 and approximately 7.8% of total consolidated interest income for the year ended December 31, 2017.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
6
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
February 23, 2018
7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
State Bank Financial Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of State Bank Financial Corporation and Subsidiary (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, based on Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2009.
Atlanta, Georgia
February 23, 2018
8
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share amounts)
December 31 | |||||||
2017 | 2016 | ||||||
Assets | |||||||
Cash and amounts due from depository institutions | $ | 17,438 | $ | 13,219 | |||
Interest-bearing deposits in other financial institutions | 211,142 | 132,851 | |||||
Federal funds sold | 2,297 | 3,523 | |||||
Cash and cash equivalents | 230,877 | 149,593 | |||||
Investment securities available-for-sale | 873,970 | 847,178 | |||||
Investment securities held-to-maturity (fair value of $33,351 and $67,435 at 2017 and 2016, respectively) | 32,852 | 67,063 | |||||
Loans | 3,532,193 | 2,814,572 | |||||
Allowance for loan and lease losses | (28,750 | ) | (26,598 | ) | |||
Loans, net | 3,503,443 | 2,787,974 | |||||
Loans held-for-sale (includes loans at fair value of $25,791 and $35,813 at 2017 and 2016, respectively) | 36,211 | 52,169 | |||||
Other real estate owned | 895 | 10,897 | |||||
Premises and equipment, net | 51,794 | 52,056 | |||||
Goodwill | 84,564 | 77,084 | |||||
Other intangibles, net | 11,034 | 12,749 | |||||
SBA servicing rights | 4,069 | 3,477 | |||||
Bank-owned life insurance | 67,313 | 65,371 | |||||
Other assets | 61,560 | 99,248 | |||||
Total assets | $ | 4,958,582 | $ | 4,224,859 | |||
Liabilities and Shareholders' Equity | |||||||
Liabilities: | |||||||
Noninterest-bearing deposits | $ | 1,191,106 | $ | 984,419 | |||
Interest-bearing deposits | 3,052,029 | 2,446,746 | |||||
Total deposits | 4,243,135 | 3,431,165 | |||||
Federal funds purchased and securities sold under agreements to repurchase | 25,209 | 27,673 | |||||
FHLB Borrowings | — | 47,014 | |||||
Notes payable | 398 | 398 | |||||
Other liabilities | 48,289 | 104,976 | |||||
Total liabilities | 4,317,031 | 3,611,226 | |||||
Shareholders' equity: | |||||||
Preferred stock, $1 par value; 2,000,000 shares authorized, no shares issued and outstanding at 2017 and 2016, respectively | — | — | |||||
Common stock, $.01 par value; 100,000,000 shares authorized; 38,992,163 and 38,845,573 shares issued and outstanding at 2017 and 2016, respectively | 390 | 388 | |||||
Additional paid-in capital | 413,583 | 409,736 | |||||
Retained earnings | 230,145 | 205,966 | |||||
Accumulated other comprehensive loss, net of tax | (2,567 | ) | (2,457 | ) | |||
Total shareholders' equity | 641,551 | 613,633 | |||||
Total liabilities and shareholders' equity | $ | 4,958,582 | $ | 4,224,859 | |||
See accompanying notes to consolidated financial statements.
9
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Interest income: | |||||||||||
Loans | $ | 151,258 | $ | 103,024 | $ | 92,938 | |||||
Loan accretion | 34,096 | 43,310 | 49,830 | ||||||||
Investment securities | 22,258 | 18,629 | 15,214 | ||||||||
Deposits with other financial institutions | 766 | 294 | 609 | ||||||||
Total interest income | 208,378 | 165,257 | 158,591 | ||||||||
Interest expense: | |||||||||||
Deposits | 15,059 | 9,331 | 7,673 | ||||||||
FHLB borrowings | 463 | 140 | 3 | ||||||||
Notes payable | 38 | 105 | 210 | ||||||||
Federal funds purchased and repurchase agreements | 32 | 43 | 36 | ||||||||
Total interest expense | 15,592 | 9,619 | 7,922 | ||||||||
Net interest income | 192,786 | 155,638 | 150,669 | ||||||||
Provision for loan and lease losses | 6,110 | 237 | 3,486 | ||||||||
Net interest income after provision for loan and lease losses | 186,676 | 155,401 | 147,183 | ||||||||
Noninterest income: | |||||||||||
Amortization of FDIC receivable for loss share agreements | — | — | (16,488 | ) | |||||||
Service charges on deposits | 6,191 | 5,440 | 5,976 | ||||||||
Mortgage banking income | 11,341 | 12,319 | 11,250 | ||||||||
SBA income | 6,491 | 6,458 | 5,539 | ||||||||
Payroll and insurance income | 6,098 | 5,625 | 4,709 | ||||||||
ATM income | 3,382 | 3,008 | 2,981 | ||||||||
Bank-owned life insurance income | 1,942 | 1,930 | 1,926 | ||||||||
(Loss) gain on sale of investment securities | (1,453 | ) | 489 | 354 | |||||||
Other | 5,765 | 4,032 | 3,864 | ||||||||
Total noninterest income | 39,757 | 39,301 | 20,111 | ||||||||
Noninterest expense: | |||||||||||
Salaries and employee benefits | 91,844 | 78,775 | 83,295 | ||||||||
Occupancy and equipment | 13,372 | 12,169 | 12,432 | ||||||||
Data processing | 10,204 | 8,514 | 9,190 | ||||||||
Legal and professional fees | 4,376 | 4,695 | 5,071 | ||||||||
Merger-related expenses | 5,330 | 3,961 | 1,730 | ||||||||
Marketing | 2,102 | 2,216 | 2,318 | ||||||||
Federal deposit insurance premiums and other regulatory fees | 1,700 | 1,744 | 2,100 | ||||||||
Loan collection costs and OREO activity | (716 | ) | (579 | ) | (1,597 | ) | |||||
Amortization of intangibles | 2,815 | 2,102 | 1,804 | ||||||||
Other | 7,790 | 7,330 | 7,079 | ||||||||
Total noninterest expense | 138,817 | 120,927 | 123,422 | ||||||||
Income before income taxes | 87,616 | 73,775 | 43,872 | ||||||||
Income tax expense | 41,042 | 26,184 | 15,449 | ||||||||
Net income | $ | 46,574 | $ | 47,591 | $ | 28,423 | |||||
Basic earnings per share | $ | 1.20 | $ | 1.29 | $ | .79 | |||||
Diluted earnings per share | $ | 1.19 | $ | 1.28 | $ | .77 | |||||
Cash dividends declared per common share | $ | .56 | $ | .56 | $ | .32 | |||||
Weighted Average Shares Outstanding: | |||||||||||
Basic | 37,923,320 | 35,931,528 | 34,810,855 | ||||||||
Diluted | 37,994,657 | 36,033,643 | 36,042,719 | ||||||||
See accompanying notes to consolidated financial statements.
10
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net income | $ | 46,574 | $ | 47,591 | $ | 28,423 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Net change in unrealized losses | (2,816 | ) | (1,910 | ) | (9,249 | ) | |||||
Amortization of net unrealized losses on securities transferred to held-to-maturity | 196 | (3 | ) | — | |||||||
Amounts reclassified for losses realized and included in earnings | 3,071 | 682 | 192 | ||||||||
Other comprehensive income (loss), before income taxes | 451 | (1,231 | ) | (9,057 | ) | ||||||
Income tax expense (benefit) | 108 | (408 | ) | (3,503 | ) | ||||||
Other comprehensive income (loss), net of income taxes | 343 | (823 | ) | (5,554 | ) | ||||||
Comprehensive income | $ | 46,917 | $ | 46,768 | $ | 22,869 | |||||
See accompanying notes to consolidated financial statements.
11
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except per share amounts)
Warrants | Common | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||
Shares | Stock | ||||||||||||||||||||||||
Balance, December 31, 2014 | 2,581,191 | 32,269,604 | $ | 323 | $ | 297,479 | $ | 162,373 | $ | 3,920 | $ | 464,095 | |||||||||||||
Exercise of stock warrants | (2,408,446 | ) | 1,401,188 | 14 | 533 | — | — | 547 | |||||||||||||||||
Share-based compensation | — | — | — | 3,595 | — | — | 3,595 | ||||||||||||||||||
Restricted stock activity | — | 552,086 | 6 | 50 | (83 | ) | — | (27 | ) | ||||||||||||||||
Issuance of common stock | — | 2,854,970 | 28 | 57,014 | — | — | 57,042 | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (5,554 | ) | (5,554 | ) | ||||||||||||||||
Common stock dividends, $.32 per share | — | — | — | — | (11,631 | ) | — | (11,631 | ) | ||||||||||||||||
Net income | — | — | — | — | 28,423 | — | 28,423 | ||||||||||||||||||
Balance, December 31, 2015 | 172,745 | 37,077,848 | $ | 371 | $ | 358,671 | $ | 179,082 | $ | (1,634 | ) | $ | 536,490 | ||||||||||||
Exercise of stock warrants | (38,833 | ) | 30,180 | — | 200 | — | — | 200 | |||||||||||||||||
Share-based compensation | — | — | — | 3,889 | — | — | 3,889 | ||||||||||||||||||
Repurchase of common stock | — | (270,715 | ) | (3 | ) | (5,125 | ) | — | — | (5,128 | ) | ||||||||||||||
Restricted stock activity | — | 71,016 | 1 | 85 | (26 | ) | — | 60 | |||||||||||||||||
Issuance of common stock | — | 1,937,244 | 19 | 52,016 | — | — | 52,035 | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (823 | ) | (823 | ) | ||||||||||||||||
Common stock dividends, $.56 per share | — | — | — | — | (20,681 | ) | — | (20,681 | ) | ||||||||||||||||
Net income | — | — | — | — | 47,591 | — | 47,591 | ||||||||||||||||||
Balance, December 31, 2016 | 133,912 | 38,845,573 | $ | 388 | $ | 409,736 | $ | 205,966 | $ | (2,457 | ) | $ | 613,633 | ||||||||||||
Exercise of stock warrants | (51,008 | ) | 35,211 | 1 | — | — | — | 1 | |||||||||||||||||
Share-based compensation | — | — | — | 3,791 | — | — | 3,791 | ||||||||||||||||||
Restricted stock activity | — | 90,175 | 1 | (694 | ) | (481 | ) | — | (1,174 | ) | |||||||||||||||
Stock option activity | — | 8,718 | — | 415 | (553 | ) | — | (138 | ) | ||||||||||||||||
Issuance of common stock | — | 12,486 | — | 335 | — | — | 335 | ||||||||||||||||||
Adoption of ASU 2018-02 | 453 | (453 | ) | — | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 343 | 343 | ||||||||||||||||||
Common stock dividends, $.56 per share | — | — | — | — | (21,814 | ) | — | (21,814 | ) | ||||||||||||||||
Net income | — | — | — | — | 46,574 | — | 46,574 | ||||||||||||||||||
Balance, December 31, 2017 | 82,904 | 38,992,163 | $ | 390 | $ | 413,583 | $ | 230,145 | $ | (2,567 | ) | $ | 641,551 | ||||||||||||
See accompanying notes to consolidated financial statements.
12
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows (Dollars in thousands) | |||||||||||
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash Flows from Operating Activities | |||||||||||
Net income | $ | 46,574 | $ | 47,591 | $ | 28,423 | |||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
Depreciation, amortization, and accretion | 11,649 | 11,330 | 11,393 | ||||||||
Provision for loan and lease losses | 6,110 | 237 | 3,486 | ||||||||
Accretion on acquisitions, net | (34,096 | ) | (43,310 | ) | (47,890 | ) | |||||
Gains on sales of other real estate owned | (1,763 | ) | (1,672 | ) | (4,532 | ) | |||||
Writedowns of other real estate owned | 226 | 587 | 969 | ||||||||
Net decrease in FDIC receivable for covered losses | — | — | 6,250 | ||||||||
Funds paid to FDIC | — | — | (1,784 | ) | |||||||
Loss share termination | — | — | 16,959 | ||||||||
Deferred income tax expense (benefit) | 10,632 | 13,045 | (24,828 | ) | |||||||
Proceeds from sales of mortgage loans held-for-sale | 494,920 | 534,597 | 512,466 | ||||||||
Proceeds from sales of SBA loans held-for-sale | 55,541 | 59,081 | 46,512 | ||||||||
Originations of mortgage loans held-for-sale | (472,912 | ) | (509,355 | ) | (508,117 | ) | |||||
Originations of SBA loans held-for-sale | (44,353 | ) | (63,882 | ) | (48,254 | ) | |||||
Mortgage banking activities | (11,341 | ) | (12,319 | ) | (11,250 | ) | |||||
Gains on sales of SBA loans | (5,252 | ) | (5,425 | ) | (4,387 | ) | |||||
Losses (gains) on sales of available-for-sale securities | 1,453 | (489 | ) | (354 | ) | ||||||
Share-based compensation expense | 3,791 | 3,889 | 3,595 | ||||||||
Changes in fair value of SBA servicing rights | 621 | 472 | (40 | ) | |||||||
Changes in other assets and other liabilities, net | 8,027 | (14,657 | ) | (7,402 | ) | ||||||
Net cash provided by (used in) operating activities | 69,827 | 19,720 | (28,785 | ) | |||||||
Cash flows from Investing Activities | |||||||||||
Purchase of investment securities available-for-sale | (382,683 | ) | (298,814 | ) | (648,133 | ) | |||||
Proceeds from sales and calls of investment securities available-for-sale | 233,946 | 113,589 | 364,023 | ||||||||
Proceeds from maturities and paydowns of investment securities available-for-sale | 191,602 | 183,123 | 155,493 | ||||||||
Proceeds from maturities and paydowns of investment securities held-to-maturity | 39,373 | — | — | ||||||||
Purchase of investment securities held-to-maturity | (5,000 | ) | (10,500 | ) | — | ||||||
Loan originations, repayments and resolutions, net | 29,573 | (191,683 | ) | (195,373 | ) | ||||||
Purchases of loans | — | (1,300 | ) | — | |||||||
Net purchases of premises and equipment | (2,260 | ) | (1,747 | ) | (720 | ) | |||||
Proceeds from sales of other real estate owned | 12,349 | 4,987 | 17,608 | ||||||||
Net cash (paid) received in excess of assets and liabilities acquired in purchase business combinations | (137,714 | ) | 3,661 | (14,958 | ) | ||||||
Net cash used in investing activities | (20,814 | ) | (198,684 | ) | (322,060 | ) | |||||
13
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) (Dollars in thousands) | |||||||||||
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash Flows from Financing Activities | |||||||||||
Net increase in noninterest-bearing customer deposits | 104,034 | 83,422 | 168,033 | ||||||||
Net increase (decrease) in interest-bearing customer deposits | 2,335 | 103,519 | (115,408 | ) | |||||||
Proceeds from FHLB advances | 980,000 | 655,000 | 60,000 | ||||||||
Repayments of FHLB advances | (1,027,014 | ) | (655,000 | ) | (60,000 | ) | |||||
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements | (2,464 | ) | (6,457 | ) | 4,591 | ||||||
Payment of contingent consideration | (1,495 | ) | (150 | ) | — | ||||||
Net decrease in notes payable | — | (1,414 | ) | (959 | ) | ||||||
Repurchase of common stock | — | (5,128 | ) | — | |||||||
Issuance of common stock | 1 | 200 | 547 | ||||||||
Stock option activity | (138 | ) | — | — | |||||||
Restricted stock activity | (1,174 | ) | (116 | ) | (124 | ) | |||||
Dividends paid to shareholders | (21,814 | ) | (20,681 | ) | (11,631 | ) | |||||
Net cash provided by financing activities | 32,271 | 153,195 | 45,049 | ||||||||
Net increase (decrease) in cash and cash equivalents | 81,284 | (25,769 | ) | (305,796 | ) | ||||||
Cash and cash equivalents, beginning | 149,593 | 175,362 | 481,158 | ||||||||
Cash and cash equivalents, ending | $ | 230,877 | $ | 149,593 | $ | 175,362 | |||||
Cash Paid During the Period for: | |||||||||||
Interest expense | $ | 14,154 | $ | 7,576 | $ | 7,158 | |||||
Income taxes | 18,960 | 21,815 | 36,170 | ||||||||
Supplemental Disclosure of Noncash Investing and Financing Activities: | |||||||||||
Goodwill and fair value acquisition adjustments | $ | 7,480 | $ | 40,727 | $ | 25,751 | |||||
Unrealized losses (gains) on securities and cash flow hedges, net of tax | 343 | (823 | ) | (5,554 | ) | ||||||
Transfer of investment securities available-for-sale to held-to-maturity | — | 56,595 | — | ||||||||
Transfers of loans to other real estate owned | 1,500 | 3,260 | 9,825 | ||||||||
Transfers of banking premises (from) to other real estate owned | (690 | ) | — | 560 | |||||||
Acquisitions: | |||||||||||
Assets acquired | $ | 909,117 | $ | 484,158 | $ | 529,172 | |||||
Liabilities assumed | 713,663 | 434,398 | 462,050 | ||||||||
Net assets | 195,454 | 49,760 | 67,122 | ||||||||
See accompanying notes to consolidated financial statements.
14
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of State Bank Financial Corporation and Subsidiary (the "Company") include the financial statements of State Bank Financial Corporation and its wholly-owned subsidiary, State Bank and Trust Company (the "Bank" or "State Bank"). All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of prior year amounts have been made to conform with the current year presentations. These reclassifications had no impact on prior years' net income, as previously reported.
State Bank and Trust Company was organized as a Georgia-state chartered bank, which opened October 4, 2005. The Bank is primarily regulated by the FDIC and undergoes periodic examinations by this regulatory authority. On July 24, 2009, State Bank and Trust Company closed on investment agreements under which new investors infused $292.1 million, gross (before expenses), of additional capital into the Bank, which resulted in a successor entity. This significant recapitalization resulted in a change of control and a new basis of accounting was applied. At the annual shareholders' meeting held March 11, 2010, approval was granted through proxy vote for the formation of a bank holding company. The required regulatory approval was obtained in July 2010 and the holding company reorganization was completed July 23, 2010.
Between July 24, 2009 and December 31, 2017, the Company successfully completed 17 bank acquisitions totaling $6.0 billion in assets and $5.2 billion in deposits. The acquisitions include the Company's acquisitions of NBG Bancorp, Inc. and S Bankshares, Inc., the holding companies for The National Bank of Georgia and S Bank, respectively, both of which closed on December 31, 2016. The acquisitions also include the Bank's acquisition of AloStar Bank of Commerce, which closed on September 30, 2017.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to prevailing practices within the financial institutions industry. The following is a summary of the significant accounting policies that the Company follows in presenting its consolidated financial statements.
Nature of Business
State Bank Financial Corporation is a bank holding company whose primary business is conducted through 32 full-service branch offices of State Bank and Trust Company, its wholly-owned banking subsidiary. Through the Bank, the Company operates a full service banking business and offers a broad range of commercial and retail banking products to its customers throughout seven of Georgia's eight largest MSAs. The Company is subject to regulations of certain federal and state agencies and is periodically examined by those regulatory agencies.
Basis of Presentation
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates.
Significant estimates include the allowance for loan and lease losses, the valuation of other real estate owned, the amount and timing of expected cash flows from purchased credit impaired loans, the fair value of investment securities and other financial instruments, and the valuation of goodwill.
A substantial portion of the Company's loans are secured by real estate located in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company's loan portfolio is susceptible to changes in the real estate market conditions.
As defined by authoritative guidance, segment disclosures require reporting information about a company's operating segments using a “management approach.” Reportable segments are identified as those revenue-producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments. The Company operates as one reportable segment.
15
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents, as presented in the consolidated financial statements, includes cash on hand, cash items in process of collection, federal funds sold, and interest-bearing deposits with other financial institutions with maturities less than 90 days.
Investments
Management determines the appropriate classifications of investment securities at the time of purchase and reevaluates such designation as needed. At December 31, 2017 and 2016, the Company classified all of its investment securities as either available-for-sale or held-to-maturity. Investment securities available-for-sale are reported at fair value, as determined by independent quotations. Investment securities held-to-maturity represent those securities management has the positive intent and ability to hold to maturity and are reported at amortized cost. Purchase premiums and discounts on investment securities are amortized and accreted to interest income using the effective interest rate method over the remaining lives of the securities, taking into consideration assumed prepayment patterns. Realized gains and losses are derived using the specific identification method for determining the cost of securities sold and are recognized on the trade date.
The Company reclassified certain of its investment securities available-for-sale to held-to-maturity during the year ended December 31, 2016. The difference between book value and fair value at the date of transfer will continue to be reported in a separate component of accumulated other comprehensive income (loss), and will be amortized into income over the remaining life of the securities as an adjustment of yield. The difference between fair value at the date of transfer and par value is being amortized back to par value over the remaining life of the security as an adjustment to yield.
Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In connection with the assessment for other-than-temporary impairment of investment securities, management obtains fair value estimates by independent quotations, assesses current credit ratings and related trends, reviews relevant delinquency and default information, assesses expected cash flows and coverage ratios, assesses the relative strength of credit support from less senior tranches of the securities, reviews average credit score data of underlying mortgages, and assesses other current data. The severity and duration of impairment and the likelihood of potential recovery of impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value.
Unrealized losses, other than those determined to be other-than-temporary, and unrealized gains on available-for-sale are excluded from net income and are reported, net of tax, in other comprehensive income and in accumulated other comprehensive income (loss), a separate component of shareholders' equity. A decline in the market value of any security below cost that is deemed other-than-temporary results in a charge to earnings and the establishment of a new cost basis for that security. At December 31, 2017 and 2016, the Company did not have any securities with other than temporary impairment.
Investment in stock of the Federal Home Loan Bank ("FHLB") is required of every federally insured financial institution which utilizes the FHLB's services. The investment in FHLB stock is included in "other assets" at its original cost basis, as cost approximates fair value since there is no readily determinable market value for such investments given the redemptive provision of the FHLB. The Company acquired Federal Reserve Bank ("FRB") stock in its acquisition of NBG Bancorp, Inc. The investment in FRB stock is included in "other assets" at its original cost basis, as cost approximates fair value since there is no readily determinable market value for such investments.
Organic Loans
Organic loans, defined as loans not purchased in the acquisition of an institution or credit impaired portfolio, are loans management has the intent and ability to hold for the foreseeable future, until maturity, or until payoff. Organic loans are reported at their principal amounts outstanding, net of unearned income, deferred loan fees and origination costs, and unamortized premiums or discounts on purchased participation loans. Interest income is recognized using the simple interest method on the daily balance of the principal amount outstanding. Unearned income, primarily arising from deferred loan fees net of certain origination costs, is recognized as an adjustment of the related loan yield.
16
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past due status is based on the contractual terms of the loan agreement. Generally, the accrual of interest income is discontinued and loans are placed on nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal or when they reach 90 days past due. Interest previously accrued but not collected is reversed against current period interest income when such loans are placed on nonaccrual status. Interest on nonaccrual loans when ultimately collected is recorded as a principal reduction. Nonaccrual loans are returned to accrual status when all principal and interest amounts contractually due are brought current. In addition, the future payments must be reasonably assured along with a period of at least six months of repayment performance by the borrower depending on the contractual payment terms. When it has been determined that a loan cannot be collected in whole or in part, then the uncollectible portion is charged-off.
The Company considers an organic loan impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, loans for which the terms have been modified and for which (i) the borrower is experiencing financial difficulties and (ii) a concession has been granted to the borrower by the Company are considered troubled debt restructurings ("TDRs") and are included in impaired loans. The Company's policy requires that impaired loans be individually evaluated for impairment if either 1) contractual balances are $500,000 and greater or 2) less than $500,000 and 180 day past due or greater. Loans are reviewed for impairment based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or the loan's observable market price, or the fair value of the collateral less disposal costs, as applicable, if the loan is collateral dependent. The Company's policy requires that large pools of smaller balance homogeneous loans, such as consumer, residential and installment loans, be collectively evaluated for impairment by the Company. Impairment losses are included in the allowance for loan and lease losses through a provision charge to earnings. All loans considered impaired are placed on nonaccrual status in accordance with policy. The interest portion of cash receipts on impaired loans are recorded as income when received unless full recovery of principal is in doubt whereby cash received is recorded as a reduction to the Company's recorded investment in the loan.
All organic impaired loans are reviewed at least quarterly. Reviews may be performed more frequently if material information is available before the next scheduled quarterly review. Existing valuations are reviewed to determine if additional discounts or new appraisals are required. The discounts may include the following: length of time to market and sell the property, as well as expected maintenance costs, insurance and taxes and real estate commissions on sale.
Purchased Loans
Purchased non-credit impaired loans ("PNCI loans")
Loans acquired without evidence of deterioration in credit quality since origination, referred to as purchased non-credit impaired loans, are initially recorded at estimated fair value on the acquisition date. Premiums and discounts created when the loans are recorded at their estimated fair values at acquisition are amortized or accreted over the remaining term of the loan as an adjustment to the related loan's yield.
The Company accounts for performing loans acquired in business combinations using the contractual cash flows method whereby premiums and discounts are recognized using the interest method. There is no allowance for loan and lease losses established at the acquisition date for purchased loans. Following the acquisition of these loans, the policies regarding nonaccrual and impaired loan status is consistent with that described above for organic loans. A provision for loan losses is recorded should there be deterioration in these loans subsequent to the acquisition.
Purchased credit impaired loans ("PCI loans")
Purchased credit impaired loans, defined as acquired loans, which at acquisition, management determined it was probable that the Company would be unable to collect all contractual principal and interest payments due, are recorded at fair value at the date of acquisition. The fair values of loans with evidence of credit deterioration are recorded net of a nonaccretable discount and, if appropriate, an accretable discount. The nonaccretable discount, which is excluded from the carrying amount of acquired loans, is the difference between the contractually required payments and the cash flows expected to be collected at acquisition. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized in interest income over the remaining life of the loan when there is reasonable expectation about the amount and timing of such cash flows. The difference between actual prepayments and expected prepayments does not affect the nonaccretable discount. Subsequent decreases to the expected cash flows will result in a provision for loan losses. Subsequent increases in the amount of cash expected to be collected from the borrower results in the reversal of any previously-recorded provision for loan and lease losses and related allowance for loan and lease losses, and then as a prospective increase in the accretable discount on the purchased credit impaired loans.
17
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All loans acquired in failed bank transactions are considered to have evidence of credit deterioration, as limited due diligence is afforded which does not allow a sufficient detailed review to classify the acquired loans into credit deterioration and performing categories.
At the time of acquisition, purchased credit impaired loans are either accounted for as specifically-reviewed or as part of a loan pool. Loan pools are created by grouping loans with similar risk characteristics, the intent being to create homogeneous pools. Loans are grouped into pools based on a combination of various factors including product type, cohort, risk classification and term. Loans remain in the assigned pool until the individual pools have resolved. Gains and losses on individual loans within pools are deferred and retained in the pools until the pool closes, which is either when all the loans are resolved or the pool’s aggregate recorded investment reaches zero.
Allowance for Loan and Lease Losses ("ALLL")
The ALLL represents the amount considered adequate by management to absorb losses inherent in the loan portfolio at the balance sheet date. The ALLL is adjusted through provisions for loan losses charged or credited to operations. The provisions are generated through loss analyses performed on organic loans, estimated additional losses arising on PNCI loans subsequent to acquisition and impairment recognized as a result of decreased expected cash flows on PCI loans due to further credit deterioration since the previous quarterly cash flow re-estimation. The ALLL consists of both specific and general components. Individual loans are charged off against the ALLL when management determines them to be uncollectible. Subsequent recoveries, if any, of loans previously charged-off are credited to the ALLL.
All known and inherent losses that are both probable and reasonable to estimate are recorded. While management utilizes available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance. Such agencies may require adjustments to the ALLL based on their judgment about information available at the time of their examination.
The Company assesses the adequacy of the ALLL quarterly with respect to organic and purchased loans. The assessment begins with a standard evaluation and analysis of the loan portfolio. All loans are consistently graded and monitored for changes in credit risk and possible deterioration in the borrower’s ability to repay the contractual amounts due under the loan agreements.
Allowance for loan and lease losses for organic loans:
The ALLL for organic loans consists of two components:
(1)a specific amount against identified credit exposures where it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreements; and
(2)a general amount based upon historical losses that are then adjusted for qualitative factors representative of various economic indicators and risk characteristics of the loan portfolio.
Management establishes the specific amount by examining impaired loans. The majority of the Company's impaired loans are collateral dependent; therefore, nearly all of the specific allowances are calculated based on the fair value of the collateral less disposal costs, if applicable.
Management establishes the general amount by reviewing the remaining loan portfolio (excluding those impaired loans discussed above) and incorporating allocations based on historical losses. The calculation of the general amount is subjected to qualitative factors that are somewhat subjective. The qualitative testing attempts to correlate the historical loss rates with current economic factors and current risks in the portfolio. The qualitative factors consist of but are not limited to:
(1)economic factors including changes in the local or national economy;
(2)the depth of experience in lending staff, credit administration and internal loan review;
(3)asset quality trends; and
(4)seasoning and growth rate of the portfolio segments.
After assessing the applicable factors, the remaining amount is evaluated based on management's experience and the level of the organic ALLL is compared with historical trends and peer information as a reasonableness test.
18
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for loan and lease losses for purchased loans:
Purchased loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan and lease losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, prepayment risk and liquidity risk.
The Company maintains an ALLL on purchased loans based on credit deterioration subsequent to the acquisition date. For purchased credit impaired loans accounted for under ASC 310-30, management establishes an allowance for credit deterioration subsequent to the date of acquisition by quarterly re-estimating expected cash flows with any decline in expected cash flows recorded as impairment in the provision for loan losses. Impairment is measured as the excess of the recorded investment in a loan over the present value of expected future cash flows discounted at the pre-impairment accounting yield of the loan. For any increases in cash flows expected to be collected, the Company first reverses only previously recorded ALLL, then adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.
For purchased loans that are not deemed impaired at acquisition, also referred to as purchased non-credit impaired loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the asset. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.
Loans Held-for-Sale
Loans held-for-sale include the majority of originated residential mortgage loans and certain Small Business Administration ("SBA") loans, which the Company has the intent and ability to sell.
Mortgage Loans Held-for-Sale
The Company has elected to record mortgage loans held-for-sale at fair value under the fair value option. The fair value of committed residential mortgage loans held-for-sale is determined by outstanding commitments from investors and the fair value of uncommitted loans is based on current delivery prices in the secondary mortgage market. Net origination fees and costs are recognized in earnings at the time of origination for residential mortgage loans held-for-sale.
Gains and losses on mortgage loan sales are recognized based on the difference between the net sales proceeds, including the estimated value associated with servicing assets or liabilities, and the net carrying value of the loans sold. Adjustments to reflect unrealized gains and losses resulting from changes in fair value of residential mortgage loans held-for-sale, as well as realized gains and losses at the sale of the residential mortgage loans, are classified on the consolidated statements of income as noninterest income - mortgage banking income.
The loan sales agreements generally require that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Some of these conditions include underwriting errors or omissions, fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due to deficiencies in the appraisal. In addition to these conditions, our loan sale contracts define a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an Early Payment Default ("EPD"). In the event of an EPD, we are required to return the premium paid by the investor for the loan as well as certain administrative fees, and in certain situations repurchase the loan or indemnify the investor. Any losses related to loans previously sold are charged against our recourse liability for mortgage loans previously sold. The recourse liability is based on historical loss experience adjusted for current information and events when it is probable that a loss will be incurred.
19
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SBA Loans Held-for-Sale
SBA loans held-for-sale are recorded at the lower of cost or market. Any loans subsequently transferred to the held for investment portfolio are transferred at the lower of cost or market at that time. For SBA loans, fair value is determined on an individual loan basis primarily based on loan performance and available market information. Origination fees and costs for SBA loans held-for-sale are capitalized as part of the basis of the loan and are included in the calculation of realized gains and losses upon sale. Gains and losses are classified on the consolidated statements of income as noninterest income - SBA income. All SBA loan sales are executed on a servicing retained basis - refer to SBA Servicing Rights below for more information.
Other Real Estate Owned ("OREO")
Other real estate owned consists of real property (a) acquired through mergers and acquisitions, (b) acquired through foreclosure in satisfaction of loans receivable, and (c) banking premises formerly, but no longer, used for a specific business purpose. Other real estate is distinguished between organic, purchased non-credit impaired, or purchased credit impaired, consistent with the categories, respectively, at time of transfer.
Real property acquired through mergers and acquisitions are recorded at fair value on Day 1 of the acquisition. Real estate acquired through foreclosure of loans, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less costs to sell with any excess in loan balance charged against the allowance for loan and lease losses. Banking premises no longer used for a specific business purposes is transferred into OREO at the lower of its carrying value or fair value, less estimated costs to sell with any excess in carrying value charged to noninterest expense.
For all fair value estimates of the real estate properties, fair value is determined on the basis of current appraisals, comparable sales, current market conditions, and other estimates of value obtained principally from independent sources. Management periodically reviews the carrying value of OREO for subsequent declines in fair value and adjusts the values as appropriate through noninterest expense. Gains or losses recognized on the disposition of the properties are recorded on the consolidated statements of income as "loan collection costs and OREO activity". Costs of improvements to real estate are capitalized, while costs associated with holding the real estate are charged to income.
Prior to termination of the Company's loss share agreements with the FDIC in May 2015, OREO formerly covered under the agreements were reported exclusive of expected reimbursement cash flows from the FDIC. Subsequent adjustments to the estimated recoverable value of the other real estate resulted in a reduction of other real estate and a charge to other expense. The FDIC receivable was increased for the estimated amount to be reimbursed, with a corresponding offsetting amount recorded to other expense. Costs associated with holding the formerly covered other real estate were charged to noninterest expense, net of any expected reimbursements from the FDIC relating to previously covered external expenses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets range from 10 to 39 years for buildings and improvements and 3 to 15 years for furniture, fixtures, and equipment. Costs of improvements are capitalized and depreciated, while operating expenses are charged to current earnings.
Goodwill and Other Intangibles, Net
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill and other intangibles deemed to have an indefinite life are not amortized but instead are subject to review for impairment annually, or more frequently if deemed necessary. Also in connection with business combinations, the Company records core deposit intangibles, representing the value of the acquired core deposit base, and other identifiable intangible assets. Core deposit intangibles and other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives ranging up to 10 years.
20
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SBA Servicing Rights
All sales of SBA loans, consisting of the guaranteed portion, are executed on a servicing retained basis. The standard sale structure under the SBA Secondary Participation Guaranty Agreement provides for the Company to retain a portion of the cash flow from the interest payment received on the loan. This cash flow is commonly known as a servicing spread. For any guaranteed loans sold at a premium, SBA regulations require the lender to keep a minimum 100 basis points in servicing spread which includes a minimum service fee of 40 basis points and a minimum premium protection fee of 60 basis points. The servicing spread is recognized as a servicing asset to the extent the spread exceeds adequate compensation for the servicing function. The fair value of the servicing asset is measured on a recurring basis at the present value of future cash flows using market-based discount assumptions. The future cash flows for each asset are based on their unique characteristics and market-based assumptions for prepayment speeds, default and voluntary prepayments. For non-guaranteed portions of servicing assets, future cash flows are estimated using loan specific assumptions for losses and recoveries. Adjustments to fair value are recorded as a component of "SBA income" on the consolidated statements of income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.
Derivative Instruments and Hedging Activities
Interest Rate Swaps and Caps
The Company enters into derivative financial instruments to manage interest rate risk, facilitate asset/liability management strategies and manage other exposures. These instruments may include interest rate swaps and interest rate caps and floors. All derivative financial instruments are recognized on the consolidated statements of financial condition as other assets or other liabilities, as applicable, at estimated fair value. The Company enters into master netting agreements with counterparties and/or requires collateral to cover exposures. In most cases, counterparties post at a zero threshold regardless of rating.
Interest rate swaps are agreements to exchange interest payments based upon notional amounts. Interest rate swaps subject the Company to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Option contracts involve rights to buy or sell financial instruments on a specified date or over a period at a specified price. These rights do not have to be exercised. Some option contracts such as interest rate caps, involve the exchange of cash based on changes in specified indices. Interest rate caps are contracts to hedge interest rate increases based on a notional amount. Interest rate caps subject the Company to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform.
Derivative financial instruments are designated, based on the exposure being hedged, as either fair value or cash flow hedges. Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item, are recognized in other noninterest income in the period in which the change in fair value occurs. Hedge ineffectiveness is recognized as other noninterest income to the extent the changes in fair value of the derivative do not offset the changes in fair value of the hedged item. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. For cash flow hedge relationships, the effective portion of the gain or loss related to the derivative instrument is recognized as a component of accumulated other comprehensive income (loss). The ineffective portion of the gain or loss related to the derivative instrument, if any, is recognized in earnings as other noninterest income during the period of change. Amounts recorded in accumulated other comprehensive income (loss) are recognized in earnings in the period or periods during which the hedged item impacts earnings.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company formally documents all hedging relationships between hedging instruments and the hedged items, as well as its risk management objective and strategy for entering into various hedge transactions. Methodologies related to hedge effectiveness and ineffectiveness are consistent between similar types of hedge transactions and typically include (i) statistical regression analysis of changes in the cash flows of the actual derivative and a perfectly effective hypothetical derivative, and (ii) statistical regression analysis of changes in the fair values of the actual derivative and the hedged item. The Company performs retrospective and prospective effectiveness testing using quantitative methods and does not assume perfect effectiveness through the matching of critical terms. Assessments of hedge effectiveness and measurements of hedge ineffectiveness are performed at least quarterly for ongoing effectiveness.
Hedge accounting is discontinued prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item, (ii) a derivative expires or is sold, terminated or exercised, (iii) we elect to discontinue the designation of a derivative as a hedge, or (iv) in a cash flow hedge, a derivative is de-designated because it is not probable that a forecasted transaction will occur. If a derivative that qualifies as a fair value or cash flow hedge is terminated or the designation removed, the realized or then unrealized gain or loss is recognized in income over the life of the hedged item (fair value hedge) or in the period in which the hedged item affects earnings (cash flow hedge). Immediate recognition in earnings is required upon sale or extinguishment of the hedged item (fair value hedge) or if it is probable that the hedged cash flows will not occur (cash flow hedge). Derivatives continued to be held after hedge accounting ceases are carried at fair value on the consolidated statements of financial condition with changes in fair value including in earnings.
Mortgage Derivatives
The Company enters derivative financial instruments to manage interest rate risk and pricing risk associated with is mortgage banking activities. These instruments may include interest rate lock commitments and forward commitments. All mortgage derivatives are recognized on the consolidated statements of financial condition as other assets or other liabilities, as applicable, at estimated fair value and are not accounted for as hedges. Interest rate lock commitments are agreements to fund fixed-rate mortgage loans to customers. Forward commitments are agreements to sell fixed-rate mortgage loans to investors. Changes in fair value are recognized as a component of "mortgage banking income" on the consolidated statements of income.
Bank-Owned Life Insurance ("BOLI")
The Company has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value that is probable at settlement. Increases to cash surrender values are recorded as "Bank-owned life insurance income" on the consolidated statements of income. The Company has entered into a split dollar agreement with certain of its executives whereby the executive’s designated beneficiary will receive a portion of the death benefit upon the executive officer’s death. The Company uses the cost of insurance method whereby a liability is recorded relating to the benefit provided that extends to post-retirement periods.
Share-Based Compensation
The Company has an equity compensation plan providing for the grant of equity awards, which is described more fully in Note 16. The Company uses the fair value method of recognizing expense for share-based compensation, whereby compensation cost is measured at the grant date based on the value of the award and is recognized on a straight-line basis over the vesting period. Compensation expense relating to equity awards is reflected in net income as part of "salaries and employee benefits" on the consolidated statements of income.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies by jurisdiction and entity in making this assessment. Interest and penalties related to the Company’s tax positions are recognized as a component of the income tax provision.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income
In addition to net income for the period, comprehensive income for the Company consists of changes in unrealized holding gains and losses on investments classified as available-for-sale, changes in unamortized or unaccreted premiums or discounts on investment securities available-for-sale transferred to held-to-maturity and changes in fair value of the effective portion of derivative financial instruments designated as cash flow hedges. The changes are reported net of income taxes and reclassification adjustments.
Acquisitions
Accounting principles generally accepted in the United States of America ("US GAAP") require that the acquisition method of accounting, formerly referred to as the purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date.
Basic and Diluted Earnings Per Share
Basic earnings per share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Net income attributable to common shareholders is then divided by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. Diluted earnings per share is computed by dividing net income attributable to common shareholders by the total of the weighted average number of shares outstanding plus the dilutive effect of the outstanding options and warrants.
Adoption of New Accounting Standards
ASU 2018-02 — In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow for a reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and the Company elected to early adopt this guidance effective December 31, 2017. The adoption resulted in a reclassification of stranded tax effects of $453,000 from accumulated other comprehensive income (loss) to retained earnings.
ASU 2016-05 — In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted and the amendments can be adopted either on a prospective basis or a modified retrospective basis. The Company adopted the amendments in this ASU effective January 1, 2017. The adoption did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
ASU 2017-12 — On August 28, 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this ASU is to better align a company’s risk management activities and financial reporting for hedging relationships with the economic objectives of those activities, simplify the hedge accounting requirements, and improve the disclosures of hedging arrangements. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
permitted, including adoption in any interim period. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company is still reviewing the impact of adoption of this guidance.
ASU 2017-09 — On May 10, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This Update amends the scope of modification accounting for share-based payment arrangements. It provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation—Stock Compensation. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The guidance is not expected to have a significant impact on the Company's financial position, results of operations or disclosures.
ASU 2017-08 — In March 2017, FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonably estimable. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This update should be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings on the date of adoption. The guidance is not expected to have a significant impact on the Company's financial position, results of operations or disclosures.
ASU 2017-04 — In January 2017, FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.
ASU 2017-01 — In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.
ASU 2016-13 — In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU changed the credit loss model on financial instruments measured at amortized cost, available for sale securities and certain purchased financial instruments. Credit losses on financial instruments measured at amortized cost will be determined using a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. Purchased financial assets with more-than-insignificant credit deterioration since origination ("PCD assets") measured at amortized cost will have an allowance for credit losses established at acquisition as part of the purchase price. Subsequent increases or decreases to the allowance for credit losses on PCD assets will be recognized in the income statement. Interest income should be recognized on PCD assets based on the effective interest rate, determined excluding the discount attributed to credit losses at acquisition. Credit losses relating to available-for-sale debt securities will be recognized through an allowance for credit losses. The amount of the credit loss is limited to the amount by which fair value is below amortized cost of the available-for-sale debt security. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and if early adopted, all provisions must be adopted in the same period. The amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the period adopted. A prospective approach is required for securities with other-than-temporary impairment recognized prior to adoption. The Company is still reviewing the impact of the adoption of this guidance
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and has established a cross-functional implementation team. The Company expects the allowance for credit losses to increase upon adoption with a corresponding adjustment to retained earnings. The ultimate amount of the increase will depend on the portfolio composition, credit quality, economic conditions and reasonable and supportable forecasts at that time.
ASU 2016-02 — In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires the recognition of assets and liabilities arising from the lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects to elect the package of practical expedients that allows it to not reassess whether any expired or existing contracts represent leases, the lease classification of any expired or existing lease and initial direct costs for any existing or expired leases. The Company expects this standard will have a material impact on its financial statements through gross-up of the balance sheet for lease assets and liabilities. However, no material change to lease expense recognition is expected.
ASU 2016-01 — In January 2016, FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU (i) require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminate the requirement for public business entities to disclose the methods 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, (iv) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) 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, (vi) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) 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 accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is prohibited except for the presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk which may be early adopted. The guidance is not expected to have a significant impact on the Company's financial position, results of operations or disclosures.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers — In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The new guidance, which does not apply to financial instruments, provides that revenue should be recognized for the transfer of goods and services to customers in an amount equal to the consideration it receives or expects to receive. The guidance also includes expanded disclosure requirements that provides comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company currently plans to adopt the guidance using the modified retrospective method and without electing any of the practical expedients available. The Company has performed an analysis of the guidance and it is not expected to have a significant impact on the Company's financial position or results of operations but will increase disclosures of revenue.
NOTE 2: ACQUISITIONS
Acquisition of AloStar Bank of Commerce
On September 30, 2017, State Bank completed its acquisition of AloStar Bank of Commerce ("AloStar"). State Bank Interim Corp., a wholly-owned subsidiary of State Bank, merged with and into AloStar, immediately followed by the merger of AloStar with and into State Bank. Under the terms of the merger agreement, each share of AloStar common stock was converted into the right to receive $24.26 in cash. Total consideration paid was approximately $195.0 million.
The merger of AloStar was accounted for under the acquisition method of accounting. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Goodwill of $7.1 million was generated from the acquisition, none of which is expected to be deductible for income tax purposes.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the assets acquired and liabilities assumed and the consideration payable by the Company at the acquisition date (dollars in thousands):
As Recorded by AloStar Bank of Commerce | Fair Value Adjustments | As Recorded by the Company | |||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | 91,571 | $ | — | $ | 91,571 | |||||
Investment securities available-for-sale | 76,436 | (195 | ) | (a) | 76,241 | ||||||
Loans, net | 728,319 | (9,763 | ) | (b) | 718,556 | ||||||
Core deposit intangible | — | 856 | (c) | 856 | |||||||
Premises and equipment, net | 507 | — | 507 | ||||||||
Other assets | 11,430 | 2,233 | (d) | 13,663 | |||||||
Total assets acquired | $ | 908,263 | $ | (6,869 | ) | $ | 901,394 | ||||
Liabilities | |||||||||||
Deposits: | |||||||||||
Noninterest-bearing | $ | 102,653 | $ | — | $ | 102,653 | |||||
Interest-bearing | 603,069 | (121 | ) | (e) | 602,948 | ||||||
Total deposits | 705,722 | (121 | ) | 705,601 | |||||||
Other liabilities | 7,912 | — | 7,912 | ||||||||
Total liabilities assumed | 713,634 | (121 | ) | 713,513 | |||||||
Net identifiable assets acquired over liabilities assumed | $ | 194,629 | $ | (6,748 | ) | $ | 187,881 | ||||
Goodwill | $ | — | $ | 7,088 | $ | 7,088 | |||||
Net assets acquired over liabilities assumed | $ | 194,629 | $ | 340 | $ | 194,969 | |||||
Consideration: | |||||||||||
Cash consideration | 194,969 | ||||||||||
Fair value of total consideration transferred | $ | 194,969 | |||||||||
Explanation of fair value adjustments
(a) | Adjustment reflects the loss on certain securities that were sold immediately following the closing that was deemed to be a more accurate representation of fair value. |
(b) | Adjustment reflects the fair value adjustment based on the State Bank's evaluation of the acquired loan portfolio and includes the adjustment to eliminate the recorded allowance for loan and lease losses. |
(c) | Adjustment reflects the fair value adjustment to record the estimated core deposit intangible. |
(d) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired other assets. |
(e) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired deposits. |
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents certain pro forma information as if AloStar had been acquired on January 1, 2015 (dollars in thousands, except per share amounts). These results combine the historical results of AloStar in the Company's consolidated statements of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2015. Merger-related costs are not included in the pro forma statements below.
Twelve Months Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Pro Forma | Pro Forma | Pro Forma | |||||||||
Net interest income | $ | 227,257 | $ | 192,035 | $ | 190,497 | |||||
Net income | 58,259 | 57,029 | 38,003 | ||||||||
Earnings per share: | |||||||||||
Basic | $ | 1.50 | $ | 1.54 | $ | 1.06 | |||||
Diluted | 1.49 | 1.54 | 1.03 | ||||||||
The following is a summary of the purchased credit impaired loans acquired in the AloStar transaction on September 30, 2017 (dollars in thousands):
Purchased Credit Impaired Loans | |||
Contractually required principal and interest at acquisition | $ | 108,308 | |
Contractual cash flows not expected to be collected (nonaccretable difference) | (19,093 | ) | |
Expected cash flows at acquisition | 89,215 | ||
Accretable difference | (11,664 | ) | |
Basis in acquired loans at acquisition - estimated fair value | $ | 77,551 | |
On September 30, 2017, the fair value of the purchased non-credit impaired loans acquired in the AloStar transaction was $641.0 million. The gross contractual amounts receivable of the purchased non-credit impaired loans at acquisition was $707.0 million, of which $9.3 million was the amount of contractual cash flows not expected to be collected.
Acquisition of NBG Bancorp, Inc. and The National Bank of Georgia
On December 31, 2016 the Company completed its acquisition of NBG Bancorp, Inc. ("NBG Bancorp"), the holding company for The National Bank of Georgia ("National Bank of Georgia"), a national banking association. NBG Bancorp was immediately merged into the Company followed by the merger of National Bank of Georgia with and into State Bank. Under the terms of the merger agreement, each share of NBG Bancorp, Inc. common stock was converted into the right to receive either $45.45 in cash or 2.1642 shares of the Company's common stock. Elections by NBG Bancorp shareholders were prorated such that 50% of NBG Bancorp's shares were exchanged for cash and 50% were exchanged for Company common stock. The elections by NBG Bancorp's shareholders were made subsequent to merger completion and the final merger consideration was distributed in February 2017. Total consideration paid was approximately $77.9 million, consisting of $34.2 million in cash and $43.7 million in the Company's common stock.
The merger of NBG Bancorp, Inc. was accounted for under the acquisition method of accounting, using pushdown accounting. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Goodwill of $36.6 million was generated from the acquisition, none of which is expected to be deductible for income tax purposes.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the assets acquired and liabilities assumed and the consideration paid by the Company at the acquisition date (dollars in thousands):
As Recorded by NBG Bancorp, Inc. | Fair Value Adjustments | As Recorded by the Company | |||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | 38,146 | $ | (31,158 | ) | (a) | $ | 6,988 | |||
Investment securities available-for-sale | 5,974 | (40 | ) | (b) | 5,934 | ||||||
Loans, net | 348,641 | (3,645 | ) | (c) | 344,996 | ||||||
Loans held-for-sale | 694 | — | 694 | ||||||||
Other real estate owned | 69 | (5 | ) | (d) | 64 | ||||||
Core deposit intangible | — | 3,740 | (e) | 3,740 | |||||||
Premises and equipment, net | 7,943 | (635 | ) | (f) | 7,308 | ||||||
Bank-owned life insurance | 1,499 | — | 1,499 | ||||||||
Other assets | 6,542 | 276 | (g) | 6,818 | |||||||
Total assets acquired | $ | 409,508 | $ | (31,467 | ) | $ | 378,041 | ||||
Liabilities | |||||||||||
Deposits: | |||||||||||
Noninterest-bearing | $ | 58,161 | $ | — | $ | 58,161 | |||||
Interest-bearing | 261,034 | (30,711 | ) | (h) | 230,323 | ||||||
Total deposits | 319,195 | (30,711 | ) | 288,484 | |||||||
FHLB advances | 46,354 | (140 | ) | (i) | 46,214 | ||||||
Other liabilities | 2,067 | — | 2,067 | ||||||||
Total liabilities assumed | 367,616 | (30,851 | ) | 336,765 | |||||||
Net identifiable assets acquired over liabilities assumed | $ | 41,892 | $ | (616 | ) | $ | 41,276 | ||||
Goodwill | $ | — | $ | 36,587 | $ | 36,587 | |||||
Net assets acquired over liabilities assumed | $ | 41,892 | $ | 35,971 | $ | 77,863 | |||||
Consideration: | |||||||||||
State Bank Financial Corporation common shares issued | 1,626,648 | ||||||||||
Purchase price per share of the Company's common stock | $ | 26.86 | |||||||||
Company common stock issued | 43,692 | ||||||||||
Cash exchanged for shares | 34,171 | ||||||||||
Fair value of total consideration transferred | $ | 77,863 | |||||||||
Explanation of fair value adjustments
(a) | Adjustment reflects the elimination of a deposit account The National Bank of Georgia held with State Bank. |
(b) | Adjustment reflects the loss on certain securities that were sold immediately following close that was deemed to be a more accurate representation of fair value. |
(c) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of the acquired loan portfolio and includes the adjustment to eliminate the recorded allowance for loan and lease losses. |
(d) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of the acquired other real estate owned portfolio. |
(e) | Adjustment reflects the fair value adjustment to record the estimated core deposit intangible. |
(f) | Adjustment reflects the fair value adjustment based on appraised values. |
(g) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired other assets. |
(h) | Adjustment reflects the elimination of a deposit account The National Bank of Georgia held with State Bank and the fair value adjustment based on State Bank's evaluation of acquired deposits. |
(i) | Adjustment arises since the rates on acquired FHLB advances were lower than the rates available on similar borrowings. Subsequent to the NBG Bancorp acquisition all FHLB advances were paid off. |
29
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table discloses the impact of the merger with NBG Bancorp, Inc. (excluding the impact of merger-related expenses) from the acquisition date of December 31, 2016 (dollars in thousands, except per share amounts). The table also presents certain pro forma information as if NBG Bancorp, Inc. had been acquired on January 1, 2015. These results combine the historical results of NBG Bancorp, Inc. in the Company's consolidated statements of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2015. Merger-related costs are not included in the pro forma statements below.
Twelve Months Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Pro Forma | Pro Forma | Pro Forma | |||||||||
Net interest income | $ | 192,786 | $ | 173,583 | $ | 170,520 | |||||
Net income | 47,412 | 49,639 | 33,152 | ||||||||
Earnings per share: | |||||||||||
Basic | $ | 1.22 | $ | 1.29 | $ | .88 | |||||
Diluted | 1.22 | 1.28 | .86 | ||||||||
The following is a summary of the purchased credit impaired loans acquired in the NBG Bancorp, Inc. transaction on December 31, 2016 (dollars in thousands):
Purchased Credit Impaired Loans | |||
Contractually required principal and interest at acquisition | $ | 33,584 | |
Contractual cash flows not expected to be collected (nonaccretable difference) | (3,736 | ) | |
Expected cash flows at acquisition | 29,848 | ||
Accretable difference | (2,799 | ) | |
Basis in acquired loans at acquisition - estimated fair value | $ | 27,049 | |
On December 31, 2016, the fair value of the purchased non-credit impaired loans acquired in the NBG Bancorp, Inc. transaction was $317.9 million. The contractual balance of the purchased non-credit impaired loans at acquisition was $350.0 million, of which $4.4 million was the amount of contractual cash flows not expected to be collected.
30
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of S Bankshares, Inc. and S Bank
On December 31, 2016 the Company completed its acquisition of S Bankshares Inc. ("S Bankshares"), the holding company for S Bank, a Georgia state-chartered bank. S Bankshares was immediately merged into the Company followed by the merger of S Bank with and into State Bank. Under the terms of the merger agreement, each share of S Bankshares, Inc. common stock was converted into the right to receive either $56.70 in cash or 2.7444 shares of the Company's common stock. Elections by S Bankshares shareholders were prorated such that 60% of S Bankshares' shares were exchanged for Company common stock and 40% were exchanged for cash. Total consideration paid was approximately $12.6 million, consisting of $4.3 million in cash and $8.3 million in the Company's common stock.
The acquisition of S Bankshares Inc. was accounted for under the acquisition method of accounting, using pushdown accounting. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Goodwill of $4.1 million was generated from the acquisition, none of which is expected to be deductible for income tax purposes.
31
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the assets acquired and liabilities assumed and the consideration paid by the Company at the acquisition date (dollars in thousands):
As Recorded by S Bankshares Inc. | Fair Value Adjustments | As Recorded by the Company | |||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | 954 | $ | — | $ | 954 | |||||
Investment securities available-for-sale | 13,814 | (88 | ) | (a) | 13,726 | ||||||
Loans, net | 81,383 | (2,344 | ) | (b) | 79,039 | ||||||
Other real estate owned | 1,278 | (332 | ) | (c) | 946 | ||||||
Core deposit intangible | — | 1,010 | (d) | 1,010 | |||||||
Premises and equipment, net | 3,132 | 420 | (e) | 3,552 | |||||||
Bank-owned life insurance | 3,124 | — | 3,124 | ||||||||
Other assets | 2,636 | 1,130 | (f) | 3,766 | |||||||
Total assets acquired | $ | 106,321 | $ | (204 | ) | $ | 106,117 | ||||
Liabilities | |||||||||||
Deposits: | |||||||||||
Noninterest-bearing | $ | 16,620 | $ | — | $ | 16,620 | |||||
Interest-bearing | 76,664 | 494 | (g) | 77,158 | |||||||
Total deposits | 93,284 | 494 | 93,778 | ||||||||
Federal funds purchased and securities sold under repurchase agreements | 1,951 | — | 1,951 | ||||||||
FHLB advances | 800 | — | 800 | ||||||||
Other liabilities | 1,104 | — | 1,104 | ||||||||
Total liabilities assumed | 97,139 | 494 | 97,633 | ||||||||
Net identifiable assets acquired over liabilities assumed | $ | 9,182 | $ | (698 | ) | $ | 8,484 | ||||
Goodwill | $ | — | $ | 4,140 | $ | 4,140 | |||||
Net assets acquired over liabilities assumed | $ | 9,182 | $ | 3,442 | $ | 12,624 | |||||
Consideration: | |||||||||||
State Bank Financial Corporation common shares issued | 310,596 | ||||||||||
Purchase price per share of the Company's common stock | $ | 26.86 | |||||||||
Company common stock issued | 8,343 | ||||||||||
Cash exchanged for shares | 4,281 | ||||||||||
Fair value of total consideration transferred | $ | 12,624 | |||||||||
Explanation of fair value adjustments
(a) | Adjustment reflects the loss on certain securities that were sold immediately following close that was deemed to be a more accurate representation of fair value. |
(b) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of the acquired loan portfolio and includes the adjustment to eliminate the recorded allowance for loan and lease losses. |
(c) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of the acquired other real estate owned portfolio. |
(d) | Adjustment reflects the fair value adjustment to record the estimated core deposit intangible. |
(e) | Adjustment reflects the fair value adjustment based on appraised values. |
(f) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired other assets. |
(g) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired deposits. |
32
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table discloses the impact of the merger with S Bankshares Inc. (excluding the impact of merger-related expenses) from the acquisition date of December 31, 2016 (dollars in thousands, except per share amounts). The table also presents certain pro forma information as if S Bankshares Inc. had been acquired on January 1, 2015. These results combine the historical results of S Bankshares Inc. in the Company's consolidated statements of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2015. Merger-related costs are not included in the pro forma statements below.
Twelve Months Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Pro Forma | Pro Forma | Pro Forma | |||||||||
Net interest income | $ | 192,786 | $ | 161,450 | $ | 156,427 | |||||
Net income | 47,031 | 49,325 | 29,179 | ||||||||
Earnings per share: | |||||||||||
Basic | $ | 1.21 | $ | 1.32 | $ | .81 | |||||
Diluted | 1.21 | 1.32 | .78 | ||||||||
The following is a summary of the purchased credit impaired loans acquired in the S Bankshares Inc. transaction on December 31, 2016 (dollars in thousands):
Purchased Credit Impaired Loans | |||
Contractually required principal and interest at acquisition | $ | 15,966 | |
Contractual cash flows not expected to be collected (nonaccretable difference) | (2,805 | ) | |
Expected cash flows at acquisition | 13,161 | ||
Accretable difference | (1,377 | ) | |
Basis in acquired loans at acquisition - estimated fair value | $ | 11,784 | |
On December 31, 2016, the fair value of the purchased non-credit impaired loans acquired in the S Bankshares Inc. transaction was $67.3 million. The contractual balance of the purchased non-credit impaired loans at acquisition was $77.0 million, of which $1.3 million was the amount of contractual cash flows not expected to be collected.
Acquisition of Patriot Capital Corporation's Equipment Finance Group
On October 22, 2015, State Bank announced the purchase of the equipment financing origination platform of Patriot Capital Corporation. The acquisition was not material to the financial results of State Bank. Goodwill of $5.3 million and other intangibles of $2.1 million were recorded in the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
Acquisition of Boyett Agency, LLC
On February 26, 2015, State Bank entered into an Asset Purchase Agreement with Boyett Agency, LLC an independent insurance agency, pursuant to which State Bank acquired substantially all of the assets of Boyett Agency, LLC. The acquisition was not material to the financial results of State Bank. Goodwill of $539,000 and other intangibles of $319,000 were recorded in the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
33
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Georgia-Carolina Bancshares Inc. and First Bank of Georgia
On January 1, 2015, the Company completed its merger with Georgia-Carolina Bancshares, Inc., the holding company for First Bank. In the merger, First Bank, a Georgia-state-chartered bank, became a wholly-owned subsidiary bank of the Company. Under the terms of the merger agreement, each share of Georgia-Carolina Bancshares, Inc. common stock was converted into the right to receive $8.85 in cash and .794 shares of the Company's common stock. Total consideration paid was approximately $88.9 million, consisting of $31.8 million in cash and $57.0 million in the Company's common stock. On July 24, 2015, First Bank merged with and into State Bank.
The merger of Georgia-Carolina Bancshares was accounted for under the acquisition method of accounting, using pushdown accounting. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Goodwill of $19.9 million was generated from the acquisition, none of which is expected to be deductible for income tax purposes.
34
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the assets acquired and liabilities assumed and the consideration paid by the Company at the acquisition date (dollars in thousands):
As Recorded by Georgia-Carolina Bancshares, Inc. | Fair Value Adjustments | As Recorded by the Company | |||||||||
Assets | |||||||||||
Cash and due from banks | $ | 20,873 | $ | — | $ | 20,873 | |||||
Investment securities | 130,218 | 999 | (a) | 131,217 | |||||||
Loans, net | 293,814 | 590 | (b) | 294,404 | |||||||
Loans held-for-sale | 34,956 | — | 34,956 | ||||||||
Other real estate owned | 4,428 | 2,042 | (c) | 6,470 | |||||||
Core deposit intangible | — | 6,710 | (d) | 6,710 | |||||||
Premises and equipment, net | 9,175 | 2,803 | (e) | 11,978 | |||||||
Bank-owned life insurance | 15,414 | — | 15,414 | ||||||||
Other assets | 9,122 | (4,457 | ) | (f) | 4,665 | ||||||
Total assets acquired | $ | 518,000 | $ | 8,687 | $ | 526,687 | |||||
Liabilities | |||||||||||
Deposits: | |||||||||||
Noninterest-bearing | $ | 80,888 | $ | — | $ | 80,888 | |||||
Interest-bearing | 335,889 | 878 | (g) | 336,767 | |||||||
Total deposits | 416,777 | 878 | 417,655 | ||||||||
Securities sold under repurchase agreements | 27,588 | — | 27,588 | ||||||||
Other liabilities | 11,823 | 652 | (h) | 12,475 | |||||||
Total liabilities assumed | 456,188 | 1,530 | 457,718 | ||||||||
Net identifiable assets acquired over liabilities assumed | $ | 61,812 | $ | 7,157 | $ | 68,969 | |||||
Goodwill | $ | — | $ | 19,904 | $ | 19,904 | |||||
Net assets acquired over liabilities assumed | $ | 61,812 | $ | 27,061 | $ | 88,873 | |||||
Consideration: | |||||||||||
State Bank Financial Corporation common shares issued | 2,854,970 | ||||||||||
Purchase price per share of the Company's common stock | $ | 19.98 | |||||||||
Company common stock issued | 57,042 | ||||||||||
Cash exchanged for shares | 31,831 | ||||||||||
Fair value of total consideration transferred | $ | 88,873 | |||||||||
Explanation of fair value adjustments
(a) | Adjustment reflects the gain on certain securities that were sold immediately following close that was deemed to be a more accurate representation of fair value. |
(b) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of the acquired loan portfolio and includes the adjustment to eliminate the recorded allowance for loan and lease losses. |
(c) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of the acquired other real estate owned portfolio. |
(d) | Adjustment reflects the fair value adjustment to record the estimated core deposit intangible. |
(e) | Adjustment reflects the fair value adjustment based on appraised values. |
(f) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired other assets. |
(g) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of acquired deposits. |
(h) | Adjustment reflects the fair value adjustment based on State Bank's evaluation of other liabilities and to record certain liabilities directly attributable to the acquisition. |
35
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table discloses the impact of the merger with Georgia-Carolina Bancshares, Inc. (excluding the impact of merger-related expenses) from the acquisition date of January 1, 2015 through December 31, 2015 (dollars in thousands, except per share amounts). The table also presents certain pro forma information as if Georgia-Carolina Bancshares, Inc. had been acquired on January 1, 2015. These results combine the historical results of Georgia-Carolina Bancshares, Inc. in the Company's consolidated statements of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2015. Merger-related costs of $1.7 million are included in the Company's consolidated statements of income for the year ended December 31, 2015 and are not included in the pro forma statements below.
Twelve Months Ended December 31 | |||
2015 | |||
Pro Forma | |||
Net interest income | $ | 150,677 | |
Net income | 30,153 | ||
Earnings per share: | |||
Basic | $ | .78 | |
Diluted | .75 | ||
The following is a summary of the purchased credit impaired loans acquired in the Georgia-Carolina Bancshares, Inc. transaction on January 1, 2015 (dollars in thousands):
Purchased Credit Impaired Loans | |||
Contractually required principal and interest at acquisition | $ | 3,060 | |
Contractual cash flows not expected to be collected (nonaccretable difference) | (783 | ) | |
Expected cash flows at acquisition | 2,277 | ||
Accretable difference | (317 | ) | |
Basis in acquired loans at acquisition - estimated fair value | $ | 1,960 | |
On January 1, 2015, the fair value of the purchased non-credit impaired loans acquired in the Georgia-Carolina Bancshares, Inc. transaction was $292.4 million. The contractual balance of the purchased non-credit impaired loans at acquisition was $355.0 million, of which $6.4 million was the amount of contractual cash flows not expected to be collected.
36
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: INVESTMENT SECURITIES
The amortized cost and fair value of securities classified as available-for-sale are as follows (dollars in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Investment Securities Available-for-Sale | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||
U.S. Government securities | $ | 70,203 | $ | — | $ | 644 | $ | 69,559 | $ | 89,044 | $ | 70 | $ | 465 | $ | 88,649 | ||||||||||||||||
States and political subdivisions | — | — | — | — | 300 | 1 | — | 301 | ||||||||||||||||||||||||
Residential mortgage-backed securities — nonagency | 115,639 | 3,183 | 112 | 118,710 | 151,519 | 3,129 | 639 | 154,009 | ||||||||||||||||||||||||
Residential mortgage-backed securities — agency | 582,845 | 319 | 7,315 | 575,849 | 533,479 | 548 | 4,725 | 529,302 | ||||||||||||||||||||||||
Corporate securities | 108,661 | 1,299 | 108 | 109,852 | 74,793 | 207 | 83 | 74,917 | ||||||||||||||||||||||||
Total investment securities available-for-sale | $ | 877,348 | $ | 4,801 | $ | 8,179 | $ | 873,970 | $ | 849,135 | $ | 3,955 | $ | 5,912 | $ | 847,178 | ||||||||||||||||
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Investment Securities Held-to-Maturity | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||
Asset-backed securities | $ | 22,692 | $ | 259 | $ | — | $ | 22,951 | $ | 56,804 | $ | 295 | $ | 14 | $ | 57,085 | ||||||||||||||||
Corporate securities | 10,160 | 240 | — | 10,400 | 10,259 | 91 | — | 10,350 | ||||||||||||||||||||||||
Total investment securities held-to-maturity | $ | 32,852 | $ | 499 | $ | — | $ | 33,351 | $ | 67,063 | $ | 386 | $ | 14 | $ | 67,435 | ||||||||||||||||
37
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of available-for-sale debt securities by contractual maturities are summarized in the table below (dollars in thousands):
Debt Securities Available-for-Sale | Distribution of Maturities (1) | |||||||||||||||||||
December 31, 2017 | 1 Year or Less | 1-5 Years | 5-10 Years | After 10 Years | Total | |||||||||||||||
Amortized Cost: | ||||||||||||||||||||
U.S. Government securities | $ | 2,498 | $ | 62,730 | $ | 4,975 | $ | — | $ | 70,203 | ||||||||||
Residential mortgage-backed securities — nonagency | — | — | — | 115,639 | 115,639 | |||||||||||||||
Residential mortgage-backed securities — agency | — | 42,269 | 140,793 | 399,783 | 582,845 | |||||||||||||||
Corporate securities | 21,623 | 71,155 | 14,000 | 1,883 | 108,661 | |||||||||||||||
Total debt securities | $ | 24,121 | $ | 176,154 | $ | 159,768 | $ | 517,305 | $ | 877,348 | ||||||||||
Fair Value: | ||||||||||||||||||||
U.S. Government securities | $ | 2,498 | $ | 62,091 | $ | 4,970 | $ | — | $ | 69,559 | ||||||||||
Residential mortgage-backed securities — nonagency | — | — | — | 118,710 | 118,710 | |||||||||||||||
Residential mortgage-backed securities — agency | — | 41,677 | 138,607 | 395,565 | 575,849 | |||||||||||||||
Corporate securities | 21,632 | 71,538 | 14,571 | 2,111 | 109,852 | |||||||||||||||
Total debt securities | $ | 24,130 | $ | 175,306 | $ | 158,148 | $ | 516,386 | $ | 873,970 | ||||||||||
Debt Securities Held-to-Maturity | Distribution of Maturities (1) | |||||||||||||||||||
December 31, 2017 | 1 Year or Less | 1-5 Years | 5-10 Years | After 10 Years | Total | |||||||||||||||
Amortized Cost: | ||||||||||||||||||||
Asset-backed securities | $ | — | $ | — | $ | 7,192 | $ | 15,500 | $ | 22,692 | ||||||||||
Corporate securities | — | — | 10,160 | — | 10,160 | |||||||||||||||
Total debt securities | $ | — | $ | — | $ | 17,352 | $ | 15,500 | $ | 32,852 | ||||||||||
Fair Value: | ||||||||||||||||||||
Asset-backed securities | $ | — | $ | — | $ | 7,286 | $ | 15,665 | $ | 22,951 | ||||||||||
Corporate securities | — | — | 10,400 | — | 10,400 | |||||||||||||||
Total debt securities | $ | — | $ | — | $ | 17,686 | $ | 15,665 | $ | 33,351 | ||||||||||
(1) Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalties.
38
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide information regarding securities with unrealized losses (dollars in thousands):
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Investment Securities Available-for-Sale | ||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
U.S. Government securities | $ | 46,625 | $ | 364 | $ | 20,436 | $ | 280 | $ | 67,061 | $ | 644 | ||||||||||||
Residential mortgage-backed securities — nonagency | 1,403 | 3 | 6,269 | 109 | 7,672 | 112 | ||||||||||||||||||
Residential mortgage-backed securities — agency | 312,617 | 2,548 | 210,862 | 4,767 | 523,479 | 7,315 | ||||||||||||||||||
Corporate securities | 34,010 | 108 | — | — | 34,010 | 108 | ||||||||||||||||||
Total temporarily impaired securities | $ | 394,655 | $ | 3,023 | $ | 237,567 | $ | 5,156 | $ | 632,222 | $ | 8,179 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
U.S. Government securities | $ | 43,958 | $ | 465 | $ | — | $ | — | $ | 43,958 | $ | 465 | ||||||||||||
Residential mortgage-backed securities — nonagency | 29,403 | 239 | 23,991 | 400 | 53,394 | 639 | ||||||||||||||||||
Residential mortgage-backed securities — agency | 430,490 | 4,484 | 18,795 | 241 | 449,285 | 4,725 | ||||||||||||||||||
Corporate securities | 22,944 | 83 | — | — | 22,944 | 83 | ||||||||||||||||||
Total temporarily impaired securities | $ | 526,795 | $ | 5,271 | $ | 42,786 | $ | 641 | $ | 569,581 | $ | 5,912 | ||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Investment Securities Held-to-Maturity | ||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Asset-backed securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Corporate securities | — | — | — | — | — | — | ||||||||||||||||||
Total temporarily impaired securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Asset-backed securities | $ | 6,486 | $ | 14 | $ | — | $ | — | $ | 6,486 | $ | 14 | ||||||||||||
Corporate securities | — | — | — | — | — | — | ||||||||||||||||||
Total temporarily impaired securities | $ | 6,486 | $ | 14 | $ | — | $ | — | $ | 6,486 | $ | 14 | ||||||||||||
At December 31, 2017, the Company held 129 investment securities that were in an unrealized loss position. Market changes in interest rates and credit spreads may result in temporary unrealized losses as market prices of securities fluctuate. The Company reviews its investment portfolio on a quarterly basis for indications of other than temporary impairment ("OTTI"). The severity and duration of impairment and the likelihood of potential recovery of impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value. More specifically, when analyzing the nonagency portfolio, the Company uses cash flow models that estimate cash flows on security-specific collateral and the transaction structure. Future expected credit losses are determined by using various assumptions, the most significant of which include current default rates, prepayment rates and loss severities. Credit information is available and modeled at the loan level underlying each security during the OTTI analysis; the Company also considers information such as loan to collateral values, FICO scores and geographic considerations, such as home price appreciation or depreciation. These inputs are updated quarterly or as changes occur to ensure that the most current credit and other assumptions are utilized in the analysis. If, based on the analysis, the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are discounted at the security's initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities. At December 31, 2017, there was no intent to sell any of the available-for-sale securities in an unrealized loss position, and it is more likely than not the Company will not be required to sell these securities. Furthermore, the present value of cash flows
39
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expected to be collected exceeded the Company's amortized cost basis of the investment securities; therefore, these securities are not deemed to be other than temporarily impaired.
Sales and calls of securities available-for-sale are summarized in the following table (dollars in thousands):
December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Proceeds from sales and calls | $ | 233,946 | $ | 113,589 | $ | 364,023 | |||||
Gross gains on sales and calls | $ | 122 | $ | 489 | $ | 618 | |||||
Gross losses on sales and calls | (1,575 | ) | — | (264 | ) | ||||||
Net realized gains on sales and calls | $ | (1,453 | ) | $ | 489 | $ | 354 | ||||
The composition of investment securities reflects the strategy of management to maintain an appropriate level of liquidity while providing a relatively stable source of revenue. The securities portfolio may at times be used to mitigate interest rate risk associated with other areas of the balance sheet while also providing a means for the investment of available funds, providing liquidity and supplying investment securities that are required to be pledged as collateral against specific deposits and for other purposes. Investment securities with an aggregate fair value of $116.1 million and $368.3 million at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and repurchase agreements.
NOTE 4: LOANS
Loans, in total, are summarized as follows (dollars in thousands):
December 31 | ||||||||
Total Loans | 2017 | 2016 | ||||||
Construction, land & land development | $ | 451,993 | $ | 567,763 | ||||
Other commercial real estate | 1,255,002 | 1,025,063 | ||||||
Total commercial real estate | 1,706,995 | 1,592,826 | ||||||
Residential real estate | 333,086 | 343,398 | ||||||
Owner-occupied real estate | 399,370 | 395,863 | ||||||
Commercial, financial & agricultural | 973,440 | 368,120 | ||||||
Leases | 52,396 | 71,724 | ||||||
Consumer | 66,906 | 42,641 | ||||||
Total loans | 3,532,193 | 2,814,572 | ||||||
Allowance for loan and lease losses | (28,750 | ) | (26,598 | ) | ||||
Total loans, net | $ | 3,503,443 | $ | 2,787,974 | ||||
40
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Organic loans, which we define as loans not purchased in the acquisition of an institution or credit impaired portfolio, are summarized as follows (dollars in thousands):
December 31 | ||||||||
Organic Loans | 2017 | 2016 | ||||||
Construction, land & land development | $ | 412,540 | $ | 500,018 | ||||
Other commercial real estate | 949,594 | 754,790 | ||||||
Total commercial real estate | 1,362,134 | 1,254,808 | ||||||
Residential real estate | 196,225 | 144,295 | ||||||
Owner-occupied real estate | 260,273 | 256,317 | ||||||
Commercial, financial & agricultural | 430,205 | 327,381 | ||||||
Leases | 52,396 | 71,724 | ||||||
Consumer | 64,610 | 36,039 | ||||||
Total organic loans (1) | 2,365,843 | 2,090,564 | ||||||
Allowance for loan and lease losses | (24,039 | ) | (21,086 | ) | ||||
Total organic loans, net | $ | 2,341,804 | $ | 2,069,478 | ||||
(1) Includes net deferred loan fees that totaled approximately $9.3 million and $7.0 million at December 31, 2017 and 2016, respectively.
Purchased non-credit impaired loans ("PNCI loans"), net of related discounts, are summarized as follows (dollars in thousands):
December 31 | ||||||||
Purchased Non-Credit Impaired Loans | 2017 | 2016 | ||||||
Construction, land & land development | $ | 25,908 | $ | 51,208 | ||||
Other commercial real estate | 218,660 | 209,531 | ||||||
Total commercial real estate | 244,568 | 260,739 | ||||||
Residential real estate | 96,529 | 144,596 | ||||||
Owner-occupied real estate | 118,294 | 115,566 | ||||||
Commercial, financial & agricultural | 529,184 | 36,206 | ||||||
Consumer | 2,161 | 6,255 | ||||||
Total purchased non-credit impaired loans (1) | 990,736 | 563,362 | ||||||
Allowance for loan and lease losses | (995 | ) | (439 | ) | ||||
Total purchased non-credit impaired loans, net | $ | 989,741 | $ | 562,923 | ||||
(1) Includes net discounts that totaled approximately $12.7 million and $10.5 million at December 31, 2017 and 2016, respectively.
41
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchased credit impaired loans ("PCI loans"), net of related discounts, are summarized as follows (dollars in thousands):
December 31 | ||||||||
Purchased Credit Impaired Loans | 2017 | 2016 | ||||||
Construction, land & land development | $ | 13,545 | $ | 16,537 | ||||
Other commercial real estate | 86,748 | 60,742 | ||||||
Total commercial real estate | 100,293 | 77,279 | ||||||
Residential real estate | 40,332 | 54,507 | ||||||
Owner-occupied real estate | 20,803 | 23,980 | ||||||
Commercial, financial & agricultural | 14,051 | 4,533 | ||||||
Consumer | 135 | 347 | ||||||
Total purchased credit impaired loans | 175,614 | 160,646 | ||||||
Allowance for loan and lease losses | (3,716 | ) | (5,073 | ) | ||||
Total purchased credit impaired loans, net | $ | 171,898 | $ | 155,573 | ||||
Changes in the carrying value of net purchased credit impaired loans are presented in the following table (dollars in thousands):
December 31 | ||||||||
Purchased Credit Impaired Loans | 2017 | 2016 | ||||||
Balance, beginning of year | $ | 155,573 | $ | 137,777 | ||||
Accretion of fair value discounts | 34,096 | 43,310 | ||||||
Fair value of acquired loans | 77,551 | 40,133 | ||||||
Reductions in principal balances resulting from repayments, write-offs and foreclosures | (96,679 | ) | (68,372 | ) | ||||
Change in the allowance for loan and lease losses on purchased credit impaired loans | 1,357 | 2,725 | ||||||
Balance, end of year | $ | 171,898 | $ | 155,573 | ||||
Purchased credit impaired loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount of cash expected to be collected from the borrower results in a provision for loan and lease losses and an increase in the allowance for loan and lease losses. Subsequent increases in the amount of cash expected to be collected from the borrower results in the reversal of any previously-recorded provision for loan and lease losses and related allowance for loan and lease losses, and then as a prospective increase in the accretable discount on the purchased credit impaired loans. The accretable discount is accreted into interest income over the estimated life of the related loan on a level yield basis.
Changes in the value of the accretable discount are presented in the following table for the periods presented (dollars in thousands):
December 31 | ||||||||||||
Changes in Accretable Discount | 2017 | 2016 | 2015 | |||||||||
Balance, beginning of year | $ | 69,301 | $ | 86,100 | $ | 120,061 | ||||||
Additions from acquisitions | 11,664 | 5,824 | 317 | |||||||||
Accretion | (34,096 | ) | (43,310 | ) | (49,830 | ) | ||||||
Transfers to accretable discounts and exit events, net | 11,058 | 20,687 | 15,552 | |||||||||
Balance, end of year | $ | 57,927 | $ | 69,301 | $ | 86,100 | ||||||
The accretable discount changes over time as the purchased credit impaired loan portfolios season. The change in the accretable discount is a result of the Company's review and re-estimation of loss assumptions and expected cash flows on acquired loans.
At December 31, 2017 and 2016, loans with a carrying value of $3.1 billion and $2.5 billion, respectively, were pledged for lines of credit with the FHLB and FRB. At December 31, 2017 and 2016, in accordance with Company policy, there were no loans to executive officers, directors and/or their affiliates. At December 31, 2017, consumer mortgage loans secured by residential real estate properties totaling $49,000 were in formal foreclosure proceedings.
42
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The following table summarizes the Company’s loan loss experience on the total loan portfolio as well as the breakdown between the organic, purchased non-credit impaired, and purchased credit impaired portfolios for the periods presented (dollars in thousands):
December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Total Loans | ||||||||||||
Balance, beginning of period | $ | 26,598 | $ | 29,075 | $ | 28,638 | ||||||
Charge-offs | (4,418 | ) | (6,174 | ) | (12,494 | ) | ||||||
Recoveries | 460 | 3,460 | 8,400 | |||||||||
Net charge-offs | (3,958 | ) | (2,714 | ) | (4,094 | ) | ||||||
Provision for loan and lease losses before amount attributable to FDIC loss share agreements | 6,110 | 237 | 4,531 | |||||||||
Amount attributable to FDIC loss share agreements | — | — | (1,045 | ) | ||||||||
Total provision for loan and lease losses charged to operations | 6,110 | 237 | 3,486 | |||||||||
Provision for loan and lease losses recorded through the FDIC loss share receivable | — | — | 1,045 | |||||||||
Balance, end of period | $ | 28,750 | $ | 26,598 | $ | 29,075 | ||||||
Organic Loans | ||||||||||||
Balance, beginning of period | $ | 21,086 | $ | 21,224 | $ | 18,392 | ||||||
Charge-offs | (2,462 | ) | (3,411 | ) | (313 | ) | ||||||
Recoveries | 373 | 223 | 288 | |||||||||
Net charge-offs | (2,089 | ) | (3,188 | ) | (25 | ) | ||||||
Provision for loan and lease losses | 5,042 | 3,050 | 2,857 | |||||||||
Balance, end of period | $ | 24,039 | $ | 21,086 | $ | 21,224 | ||||||
Purchased Non-Credit Impaired Loans | ||||||||||||
Balance, beginning of period | $ | 439 | $ | 53 | $ | — | ||||||
Charge-offs | (670 | ) | (223 | ) | (48 | ) | ||||||
Recoveries | 87 | 63 | 7 | |||||||||
Net charge-offs | (583 | ) | (160 | ) | (41 | ) | ||||||
Provision for loan and lease losses | 1,139 | 546 | 94 | |||||||||
Balance, end of period | $ | 995 | $ | 439 | $ | 53 | ||||||
Purchased Credit Impaired Loans | ||||||||||||
Balance, beginning of period | $ | 5,073 | $ | 7,798 | $ | 10,246 | ||||||
Charge-offs | (1,286 | ) | (2,540 | ) | (12,133 | ) | ||||||
Recoveries | — | 3,174 | 8,105 | |||||||||
Net (charge-offs) recoveries | (1,286 | ) | 634 | (4,028 | ) | |||||||
Provision for loan and lease losses before amount attributable to FDIC loss share agreements | (71 | ) | (3,359 | ) | 1,580 | |||||||
Amount attributable to FDIC loss share agreements | — | — | (1,045 | ) | ||||||||
Total provision for loan and lease losses charged to operations | (71 | ) | (3,359 | ) | 535 | |||||||
Provision for loan and lease losses recorded through the FDIC loss share receivable | — | — | 1,045 | |||||||||
Balance, end of period | $ | 3,716 | $ | 5,073 | $ | 7,798 | ||||||
43
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment and Class Risk Descriptions
Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks associated with segments and classes as described below. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.
Real Estate Loans
Loans secured by real estate are the principal component of our loan portfolio. Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate. Increases in interest rates, decline in occupancy rates, fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower's cash flow, creditworthiness and ability to repay the loan. When we make new real estate loans, we typically obtain a security interest in the real estate, as well as other available credit enhancements, to increase the likelihood of the ultimate repayment of the loan. To control concentration risk, we monitor collateral type concentrations within this portfolio.
In addition to these common risks for the majority of our real estate loans, additional risks are inherent in certain of our classes of real estate loans which are addressed below:
Commercial Real Estate
Commercial real estate loans consist of commercial construction and land development loans and other commercial real estate loans. Commercial construction and land development loans are highly dependent upon the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and lots that our customers are developing. Construction and development loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends upon the ultimate completion of the project and usually on the subsequent lease-up and/or sale of the property. Additionally, deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.
Other commercial real estate loans consist primarily of loans secured by other nonfarm nonresidential properties such as retail, office and hotel/motel and multifamily housing. These loans typically have terms of five years or less, although payments may be structured on a longer amortization basis. We evaluate each borrower on an individual basis and attempt to determine the business risks and credit profile of each borrower. The primary risk associated with loans secured with income-producing property is the inability of that property to produce adequate cash flow to service the debt. High unemployment, generally weak economic conditions and/or an oversupply in the market may result in our customer having difficulty achieving adequate occupancy rates.
Residential Real Estate
Residential real estate loans are typically to individuals and are secured by owner-occupied and investor-owned 1-4 family residential property. We generally originate and hold certain first mortgages and traditional second mortgages, adjustable rate mortgages and home equity lines of credit. We also originate and sell fixed and adjustable rate residential real estate loans in the secondary market. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral.
Owner-Occupied Real Estate
Owner-occupied loans consist of loans secured by nonfarm nonresidential properties, such as office and industrial properties, churches, convenience stores and restaurants occupied by an affiliated tenant. Loan repayment is primarily dependent on the ability of the operating company to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. Adverse changes in the business's results, specifically declines in cash flows, could jeopardize the ability for the loan to be serviced in accordance with the contractual terms.
44
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial, Financial & Agricultural Loans
Commercial, financial and industrial loans include loans to individuals and businesses for commercial purposes in various lines of business, including the manufacturing, professional service, and crop production industries. This segment also includes loans to states and political subdivisions, as well as equipment finance agreements, asset-based loans and lender finance loans. Repayment is primarily dependent on the ability of the borrower to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a borrower's business results are significantly unfavorable versus the original projections, the ability for the loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans may be partially secured by real estate, they are generally considered to have greater collateral risk than first or second mortgages on real estate because these loans may be unsecured or, if they are secured, the value of the non-real estate collateral may be difficult to assess and less marketable than real estate, and the control of the collateral is more at risk.
Leases
Leases include purchased commercial, business purpose and municipal leases. The stream of payments and a first security interest in the collateral is assigned to us. Our lease funding is based on a present value of the lease payments at a discounted interest rate, which is determined based on the credit quality of the lessee, the term of the lease compared to expected useful life, and the type of collateral. Types of collateral include, but are not limited to, medical equipment, rolling stock, franchise restaurant equipment and hardware/software. Servicing of purchased leases is primarily retained by the loan originator, as well as ownership of all residuals, if applicable. Lease financing is underwritten using similar underwriting standards as would be applied to a secured commercial loan requesting high loan-to-value financing. Risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations.
Consumer Loans
The consumer loan portfolio includes loans to individuals for personal, family and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer loans not secured by real estate are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value, and is more difficult to control, than real estate. Consumer loans may be secured by cash value life insurance policies which presents a lower collateral risk than other non-real estate secured consumer loans.
45
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan and lease losses on organic loans is detailed as follows by portfolio segment for the periods presented (dollars in thousands):
Organic Loans | Commercial Real Estate | Residential Real Estate | Owner- Occupied Real Estate | Commercial, Financial & Agricultural | Leases | Consumer | Total | |||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||
Beginning balance | $ | 11,767 | $ | 1,786 | $ | 2,239 | $ | 4,093 | $ | 655 | $ | 546 | $ | 21,086 | ||||||||||||||
Charge-offs | (933 | ) | (61 | ) | — | (380 | ) | (728 | ) | (360 | ) | (2,462 | ) | |||||||||||||||
Recoveries | — | 14 | — | 133 | 182 | 44 | 373 | |||||||||||||||||||||
Provision | 2,203 | 1,070 | (164 | ) | 689 | 520 | 724 | 5,042 | ||||||||||||||||||||
Ending balance | $ | 13,037 | $ | 2,809 | $ | 2,075 | $ | 4,535 | $ | 629 | $ | 954 | $ | 24,039 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Beginning balance | $ | 13,607 | $ | 2,053 | $ | 1,920 | $ | 2,509 | $ | 865 | $ | 270 | $ | 21,224 | ||||||||||||||
Charge-offs | (2,122 | ) | (53 | ) | — | (653 | ) | (486 | ) | (97 | ) | (3,411 | ) | |||||||||||||||
Recoveries | — | 6 | 45 | 154 | 11 | 7 | 223 | |||||||||||||||||||||
Provision | 282 | (220 | ) | 274 | 2,083 | 265 | 366 | 3,050 | ||||||||||||||||||||
Ending balance | $ | 11,767 | $ | 1,786 | $ | 2,239 | $ | 4,093 | $ | 655 | $ | 546 | $ | 21,086 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||
Beginning balance | $ | 13,134 | $ | 1,190 | $ | 1,928 | $ | 1,770 | $ | 262 | $ | 108 | $ | 18,392 | ||||||||||||||
Charge-offs | (3 | ) | — | — | (289 | ) | — | (21 | ) | (313 | ) | |||||||||||||||||
Recoveries | 173 | 10 | — | 98 | — | 7 | 288 | |||||||||||||||||||||
Provision | 303 | 853 | (8 | ) | 930 | 603 | 176 | 2,857 | ||||||||||||||||||||
Ending balance | $ | 13,607 | $ | 2,053 | $ | 1,920 | $ | 2,509 | $ | 865 | $ | 270 | $ | 21,224 | ||||||||||||||
The following table presents the balance of organic loans and the allowance for loan and lease losses based on the method of determining the allowance at the dates indicated (dollars in thousands):
Allowance for Loan and Lease Losses | Loans | |||||||||||||||||||||||
Organic Loans | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Allowance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Loans | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Commercial real estate | $ | — | $ | 13,037 | $ | 13,037 | $ | 3,822 | $ | 1,358,312 | $ | 1,362,134 | ||||||||||||
Residential real estate | — | 2,809 | 2,809 | 49 | 196,176 | 196,225 | ||||||||||||||||||
Owner-occupied real estate | 65 | 2,010 | 2,075 | 808 | 259,465 | 260,273 | ||||||||||||||||||
Commercial, financial & agricultural | 34 | 4,501 | 4,535 | 280 | 429,925 | 430,205 | ||||||||||||||||||
Leases | — | 629 | 629 | — | 52,396 | 52,396 | ||||||||||||||||||
Consumer | — | 954 | 954 | — | 64,610 | 64,610 | ||||||||||||||||||
Total organic loans | $ | 99 | $ | 23,940 | $ | 24,039 | $ | 4,959 | $ | 2,360,884 | $ | 2,365,843 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial real estate | $ | 148 | $ | 11,619 | $ | 11,767 | $ | 4,950 | $ | 1,249,858 | $ | 1,254,808 | ||||||||||||
Residential real estate | — | 1,786 | 1,786 | — | 144,295 | 144,295 | ||||||||||||||||||
Owner-occupied real estate | — | 2,239 | 2,239 | — | 256,317 | 256,317 | ||||||||||||||||||
Commercial, financial & agricultural | 1 | 4,092 | 4,093 | 9 | 327,372 | 327,381 | ||||||||||||||||||
Leases | — | 655 | 655 | — | 71,724 | 71,724 | ||||||||||||||||||
Consumer | — | 546 | 546 | — | 36,039 | 36,039 | ||||||||||||||||||
Total organic loans | $ | 149 | $ | 20,937 | $ | 21,086 | $ | 4,959 | $ | 2,085,605 | $ | 2,090,564 | ||||||||||||
46
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan and lease losses on purchased non-credit impaired loans is detailed as follows by portfolio segment for the periods presented (dollars in thousands):
Purchased Non-Credit Impaired Loans | Commercial Real Estate | Residential Real Estate | Owner- Occupied Real Estate | Commercial, Financial & Agricultural | Consumer | Total | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Beginning balance | $ | 88 | $ | 72 | $ | 44 | $ | 235 | $ | — | $ | 439 | ||||||||||||
Charge-offs | (50 | ) | (7 | ) | (80 | ) | (524 | ) | (9 | ) | (670 | ) | ||||||||||||
Recoveries | 26 | 11 | — | 43 | 7 | 87 | ||||||||||||||||||
Provision | 166 | 588 | 124 | 254 | 7 | 1,139 | ||||||||||||||||||
Ending balance | $ | 230 | $ | 664 | $ | 88 | $ | 8 | $ | 5 | $ | 995 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Beginning balance | $ | — | $ | 53 | $ | — | $ | — | $ | — | $ | 53 | ||||||||||||
Charge-offs | — | (83 | ) | — | (137 | ) | (3 | ) | (223 | ) | ||||||||||||||
Recoveries | — | 45 | — | — | 18 | 63 | ||||||||||||||||||
Provision | 88 | 57 | 44 | 372 | (15 | ) | 546 | |||||||||||||||||
Ending balance | $ | 88 | $ | 72 | $ | 44 | $ | 235 | $ | — | $ | 439 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Beginning balance | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Charge-offs | — | (24 | ) | — | — | (24 | ) | (48 | ) | |||||||||||||||
Recoveries | — | 1 | — | — | 6 | 7 | ||||||||||||||||||
Provision | — | 76 | — | — | 18 | 94 | ||||||||||||||||||
Ending balance | $ | — | $ | 53 | $ | — | $ | — | $ | — | $ | 53 | ||||||||||||
The following table presents the balance of purchased non-credit impaired loans and the allowance for loan and lease losses based on the method of determining the allowance at the date indicated (dollars in thousands).
Allowance for Loan and Lease Losses | Loans | |||||||||||||||||||||||
Purchased Non-Credit Impaired Loans | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Allowance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Loans | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Commercial real estate | $ | — | $ | 230 | $ | 230 | $ | — | $ | 244,568 | $ | 244,568 | ||||||||||||
Residential real estate | — | 664 | 664 | 19 | 96,510 | 96,529 | ||||||||||||||||||
Owner-occupied real estate | — | 88 | 88 | 3,264 | 115,030 | 118,294 | ||||||||||||||||||
Commercial, financial & agricultural | 8 | — | 8 | 1,491 | 527,693 | 529,184 | ||||||||||||||||||
Consumer | — | 5 | 5 | — | 2,161 | 2,161 | ||||||||||||||||||
Total purchased non-credit impaired loans | $ | 8 | $ | 987 | $ | 995 | $ | 4,774 | $ | 985,962 | $ | 990,736 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial real estate | $ | — | $ | 88 | $ | 88 | $ | — | $ | 260,739 | $ | 260,739 | ||||||||||||
Residential real estate | — | 72 | 72 | 157 | 144,439 | 144,596 | ||||||||||||||||||
Owner-occupied real estate | 44 | — | 44 | 1,686 | 113,880 | 115,566 | ||||||||||||||||||
Commercial, financial & agricultural | — | 235 | 235 | 568 | 35,638 | 36,206 | ||||||||||||||||||
Consumer | — | — | — | — | 6,255 | 6,255 | ||||||||||||||||||
Total purchased non-credit impaired loans | $ | 44 | $ | 395 | $ | 439 | $ | 2,411 | $ | 560,951 | $ | 563,362 | ||||||||||||
47
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan and lease losses on purchased credit impaired loans is detailed as follows by portfolio segment for the periods presented (dollars in thousands):
Purchased Credit Impaired Loans | Commercial Real Estate | Residential Real Estate | Owner-Occupied Real Estate | Commercial, Financial & Agricultural | Consumer | Total | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Beginning balance | $ | 2,183 | $ | 1,196 | $ | 1,655 | $ | 38 | $ | 1 | $ | 5,073 | ||||||||||||
Charge-offs | (446 | ) | (140 | ) | (457 | ) | (238 | ) | (5 | ) | (1,286 | ) | ||||||||||||
Recoveries | — | — | — | — | — | — | ||||||||||||||||||
Provision for loan and lease losses before amount attributable to FDIC loss share agreements | (31 | ) | 186 | (480 | ) | 242 | 12 | (71 | ) | |||||||||||||||
Amount attributable to FDIC loss share agreements | — | — | — | — | — | — | ||||||||||||||||||
Total provision for loan and lease losses charged to operations | (31 | ) | 186 | (480 | ) | 242 | 12 | (71 | ) | |||||||||||||||
Provision for loan and lease losses recorded through the FDIC loss share receivable | — | — | — | — | — | — | ||||||||||||||||||
Ending balance | $ | 1,706 | $ | 1,242 | $ | 718 | $ | 42 | $ | 8 | $ | 3,716 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Beginning balance | $ | 3,388 | $ | 1,893 | $ | 2,449 | $ | 60 | $ | 8 | $ | 7,798 | ||||||||||||
Charge-offs | (936 | ) | (977 | ) | (298 | ) | (273 | ) | (56 | ) | (2,540 | ) | ||||||||||||
Recoveries | 2,281 | 401 | 207 | 232 | 53 | 3,174 | ||||||||||||||||||
Provision for loan and lease losses before amount attributable to FDIC loss share agreements | (2,550 | ) | (121 | ) | (703 | ) | 19 | (4 | ) | (3,359 | ) | |||||||||||||
Amount attributable to FDIC loss share agreements | — | — | — | — | — | — | ||||||||||||||||||
Total provision for loan and lease losses charged to operations | (2,550 | ) | (121 | ) | (703 | ) | 19 | (4 | ) | (3,359 | ) | |||||||||||||
Provision for loan and lease losses recorded through the FDIC loss share receivable | — | — | — | — | — | — | ||||||||||||||||||
Ending balance | $ | 2,183 | $ | 1,196 | $ | 1,655 | $ | 38 | $ | 1 | $ | 5,073 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Beginning balance | $ | 5,461 | $ | 2,298 | $ | 1,916 | $ | 567 | $ | 4 | $ | 10,246 | ||||||||||||
Charge-offs | (7,251 | ) | (1,441 | ) | (1,374 | ) | (1,929 | ) | (138 | ) | (12,133 | ) | ||||||||||||
Recoveries | 5,326 | 382 | 1,120 | 1,080 | 197 | 8,105 | ||||||||||||||||||
Provision for loan and lease losses before amount attributable to FDIC loss share agreements | (148 | ) | 654 | 787 | 342 | (55 | ) | 1,580 | ||||||||||||||||
Amount attributable to FDIC loss share agreements | (313 | ) | (182 | ) | (402 | ) | (140 | ) | (8 | ) | (1,045 | ) | ||||||||||||
Total provision for loan and lease losses charged to operations | (461 | ) | 472 | 385 | 202 | (63 | ) | 535 | ||||||||||||||||
Provision for loan and lease losses recorded through the FDIC loss share receivable | 313 | 182 | 402 | 140 | 8 | 1,045 | ||||||||||||||||||
Ending balance | $ | 3,388 | $ | 1,893 | $ | 2,449 | $ | 60 | $ | 8 | $ | 7,798 | ||||||||||||
48
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance of purchased credit impaired loans and the allowance for loan and lease losses based on the method of determining the allowance at the dates indicated (dollars in thousands):
Allowance for Loan and Lease Losses | Loans | |||||||||||||||||||||||
Purchased Credit Impaired Loans | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Allowance | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Loans | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Commercial real estate | $ | 1,052 | $ | 654 | $ | 1,706 | $ | 38,444 | $ | 61,849 | $ | 100,293 | ||||||||||||
Residential real estate | 128 | 1,114 | 1,242 | 3,029 | 37,303 | 40,332 | ||||||||||||||||||
Owner-occupied real estate | 586 | 132 | 718 | 9,483 | 11,320 | 20,803 | ||||||||||||||||||
Commercial, financial & agricultural | 32 | 10 | 42 | 2,318 | 11,733 | 14,051 | ||||||||||||||||||
Consumer | — | 8 | 8 | — | 135 | 135 | ||||||||||||||||||
Total purchased credit impaired loans | $ | 1,798 | $ | 1,918 | $ | 3,716 | $ | 53,274 | $ | 122,340 | $ | 175,614 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial real estate | $ | 760 | $ | 1,423 | $ | 2,183 | $ | 29,387 | $ | 47,892 | $ | 77,279 | ||||||||||||
Residential real estate | 156 | 1,040 | 1,196 | 1,897 | 52,610 | 54,507 | ||||||||||||||||||
Owner-occupied real estate | 1,471 | 184 | 1,655 | 8,376 | 15,604 | 23,980 | ||||||||||||||||||
Commercial, financial & agricultural | 2 | 36 | 38 | 86 | 4,447 | 4,533 | ||||||||||||||||||
Consumer | — | 1 | 1 | 8 | 339 | 347 | ||||||||||||||||||
Total purchased credit impaired loans | $ | 2,389 | $ | 2,684 | $ | 5,073 | $ | 39,754 | $ | 120,892 | $ | 160,646 | ||||||||||||
For each period indicated, a significant portion of the Company's purchased credit impaired loans were past due, including many that were 90 days or more past due; however, such delinquencies were included in the Company's performance expectations in determining the fair values of purchased credit impaired loans at each acquisition and at subsequent valuation dates. All purchased credit impaired loan cash flows and the timing of such cash flows continue to be estimable and probable of collection and thus accretion income continues to be recognized on these assets. As such, the referenced purchased credit impaired loans are not considered nonperforming assets.
49
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans, segregated by class of loans, are presented in the following table (dollars in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Impaired Loans (1): | Unpaid Principal Balance | Recorded Investment | Related Allowance | Unpaid Principal Balance | Recorded Investment | Related Allowance | ||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Construction, land & land development | $ | 82 | $ | 79 | $ | — | $ | 4,565 | $ | 2,933 | $ | — | ||||||||||||
Other commercial real estate | 4,617 | 3,822 | — | 56 | 56 | — | ||||||||||||||||||
Total commercial real estate | 4,699 | 3,901 | — | 4,621 | 2,989 | — | ||||||||||||||||||
Residential real estate | 453 | 456 | — | 388 | 320 | — | ||||||||||||||||||
Owner-occupied real estate | 4,172 | 4,015 | — | 193 | 188 | — | ||||||||||||||||||
Commercial, financial & agricultural | 2,739 | 1,882 | — | 1,335 | 1,128 | — | ||||||||||||||||||
Consumer | 51 | 40 | — | 2 | 2 | — | ||||||||||||||||||
Subtotal | 12,114 | 10,294 | — | 6,539 | 4,627 | — | ||||||||||||||||||
With related allowance recorded: | ||||||||||||||||||||||||
Construction, land & land development | 113 | 112 | 56 | 4,277 | 2,124 | 201 | ||||||||||||||||||
Other commercial real estate | — | — | — | — | — | — | ||||||||||||||||||
Total commercial real estate | 113 | 112 | 56 | 4,277 | 2,124 | 201 | ||||||||||||||||||
Residential real estate | 1,452 | 1,399 | 699 | 891 | 825 | 413 | ||||||||||||||||||
Owner-occupied real estate | 350 | 335 | 125 | 1,706 | 1,687 | 44 | ||||||||||||||||||
Commercial, financial & agricultural | 872 | 821 | 318 | 308 | 298 | 146 | ||||||||||||||||||
Consumer | 83 | 81 | 40 | 55 | 54 | 27 | ||||||||||||||||||
Subtotal | 2,870 | 2,748 | 1,238 | 7,237 | 4,988 | 831 | ||||||||||||||||||
Total impaired loans | $ | 14,984 | $ | 13,042 | $ | 1,238 | $ | 13,776 | $ | 9,615 | $ | 831 | ||||||||||||
(1) Includes loans with SBA guaranteed balances of $5.7 million and $3.0 million at December 31, 2017 and December 31, 2016, respectively.
The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the periods presented (dollars in thousands):
December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||
Impaired Loans: | Average Recorded Investment (1) | Interest Income Recognized (2) | Average Recorded Investment (1) | Interest Income Recognized (2) | Average Recorded Investment (1) | Interest Income Recognized (2) | ||||||||||||||||||
Construction, land & land development | $ | 3,526 | $ | — | $ | 5,824 | $ | — | $ | 3,354 | $ | 75 | ||||||||||||
Other commercial real estate | 2,076 | 8 | 165 | — | 1,106 | 56 | ||||||||||||||||||
Total commercial real estate | 5,602 | 8 | 5,989 | — | 4,460 | 131 | ||||||||||||||||||
Residential real estate | 1,218 | — | 1,641 | — | 818 | 18 | ||||||||||||||||||
Owner-occupied real estate | 3,150 | — | 538 | 3 | 542 | 15 | ||||||||||||||||||
Commercial, financial & agricultural | 2,565 | 1 | 1,670 | 24 | 733 | 20 | ||||||||||||||||||
Consumer | 85 | — | 43 | — | 39 | 1 | ||||||||||||||||||
Total impaired loans | $ | 12,620 | $ | 9 | $ | 9,881 | $ | 27 | $ | 6,592 | $ | 185 | ||||||||||||
(1) The average recorded investment for troubled debt restructurings was $2.8 million, $6.0 million and $3.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(2) The total interest income recognized on troubled debt restructurings was $8,000, $24,000 and $82,000 for the years ended December 31, 2017, 2016, 2015, respectively.
50
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in nonaccrual loans by loan class at the dates indicated (dollars in thousands):
December 31 | ||||||||
Nonaccrual Loans | 2017 | 2016 | ||||||
Construction, land & land development | $ | 191 | $ | 5,057 | ||||
Other commercial real estate | 3,257 | 56 | ||||||
Total commercial real estate | 3,448 | 5,113 | ||||||
Residential real estate | 1,855 | 1,146 | ||||||
Owner-occupied real estate | 4,350 | 1,874 | ||||||
Commercial, financial & agricultural | 2,703 | 1,426 | ||||||
Consumer | 121 | 56 | ||||||
Total nonaccrual loans | $ | 12,477 | $ | 9,615 | ||||
The following table presents an analysis of past due organic loans, by class of loans, at the dates indicated (dollars in thousands):
Organic Loans | 30 - 89 Days Past Due | 90 Days or greater Past Due | Total Past Due | Current | Total Loans | Loans > 90 Days and Accruing | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Construction, land & land development | $ | 487 | $ | 45 | $ | 532 | $ | 412,008 | $ | 412,540 | $ | — | ||||||||||||
Other commercial real estate | — | — | — | 949,594 | 949,594 | — | ||||||||||||||||||
Total commercial real estate | 487 | 45 | 532 | 1,361,602 | 1,362,134 | — | ||||||||||||||||||
Residential real estate | 1,868 | 92 | 1,960 | 194,265 | 196,225 | — | ||||||||||||||||||
Owner-occupied real estate | 474 | 713 | 1,187 | 259,086 | 260,273 | — | ||||||||||||||||||
Commercial, financial & agricultural | 865 | 122 | 987 | 429,218 | 430,205 | — | ||||||||||||||||||
Leases | — | — | — | 52,396 | 52,396 | — | ||||||||||||||||||
Consumer | 67 | 28 | 95 | 64,515 | 64,610 | — | ||||||||||||||||||
Total organic loans | $ | 3,761 | $ | 1,000 | $ | 4,761 | $ | 2,361,082 | $ | 2,365,843 | $ | — | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Construction, land & land development | $ | 49 | $ | 12 | $ | 61 | $ | 499,957 | $ | 500,018 | $ | — | ||||||||||||
Other commercial real estate | — | — | — | 754,790 | 754,790 | — | ||||||||||||||||||
Total commercial real estate | 49 | 12 | 61 | 1,254,747 | 1,254,808 | — | ||||||||||||||||||
Residential real estate | 157 | 118 | 275 | 144,020 | 144,295 | — | ||||||||||||||||||
Owner-occupied real estate | 40 | — | 40 | 256,277 | 256,317 | — | ||||||||||||||||||
Commercial, financial & agricultural | 247 | 283 | 530 | 326,851 | 327,381 | — | ||||||||||||||||||
Leases | — | — | — | 71,724 | 71,724 | — | ||||||||||||||||||
Consumer | 350 | 31 | 381 | 35,658 | 36,039 | — | ||||||||||||||||||
Total organic loans | $ | 843 | $ | 444 | $ | 1,287 | $ | 2,089,277 | $ | 2,090,564 | $ | — | ||||||||||||
51
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents an analysis of past due purchased non-credit impaired loans, by class of loans, at the dates indicated (dollars in thousands):
Purchased Non-Credit Impaired Loans | 30 - 89 Days Past Due | 90 Days or greater Past Due | Total Past Due | Current | Total Loans | Loans > 90 Days and Accruing | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Construction, land & land development | $ | 35 | $ | — | $ | 35 | $ | 25,873 | $ | 25,908 | $ | — | ||||||||||||
Other commercial real estate | — | 45 | 45 | 218,615 | 218,660 | — | ||||||||||||||||||
Total commercial real estate | 35 | 45 | 80 | 244,488 | 244,568 | — | ||||||||||||||||||
Residential real estate | 537 | 126 | 663 | 95,866 | 96,529 | — | ||||||||||||||||||
Owner-occupied real estate | 283 | 1,590 | 1,873 | 116,421 | 118,294 | — | ||||||||||||||||||
Commercial, financial & agricultural | 640 | 628 | 1,268 | 527,916 | 529,184 | — | ||||||||||||||||||
Consumer | 28 | 13 | 41 | 2,120 | 2,161 | — | ||||||||||||||||||
Total purchased non-credit impaired loans | $ | 1,523 | $ | 2,402 | $ | 3,925 | $ | 986,811 | $ | 990,736 | $ | — | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Construction, land & land development | $ | 495 | $ | — | $ | 495 | $ | 50,713 | $ | 51,208 | $ | — | ||||||||||||
Other commercial real estate | 17 | 56 | 73 | 209,458 | 209,531 | — | ||||||||||||||||||
Total commercial real estate | 512 | 56 | 568 | 260,171 | 260,739 | — | ||||||||||||||||||
Residential real estate | 274 | 165 | 439 | 144,157 | 144,596 | — | ||||||||||||||||||
Owner-occupied real estate | 387 | 1,687 | 2,074 | 113,492 | 115,566 | — | ||||||||||||||||||
Commercial & industrial | 144 | 552 | 696 | 35,510 | 36,206 | — | ||||||||||||||||||
Consumer | 38 | 2 | 40 | 6,215 | 6,255 | — | ||||||||||||||||||
Total purchased non-credit impaired loans | $ | 1,355 | $ | 2,462 | $ | 3,817 | $ | 559,545 | $ | 563,362 | $ | — | ||||||||||||
The following table presents an analysis of past due purchased credit impaired loans, by class of loans, at the dates indicated (dollars in thousands):
Purchased Credit Impaired Loans | 30 - 89 Days Past Due | 90 Days or greater Past Due | Total Past Due | Current | Total Loans | |||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Construction, land & land development | $ | 1 | $ | 1,881 | $ | 1,882 | $ | 11,663 | $ | 13,545 | ||||||||||
Other commercial real estate | 363 | 3,303 | 3,666 | 83,082 | 86,748 | |||||||||||||||
Total commercial real estate | 364 | 5,184 | 5,548 | 94,745 | 100,293 | |||||||||||||||
Residential real estate | 1,519 | 1,876 | 3,395 | 36,937 | 40,332 | |||||||||||||||
Owner-occupied real estate | 85 | 786 | 871 | 19,932 | 20,803 | |||||||||||||||
Commercial, financial & agricultural | 201 | 224 | 425 | 13,626 | 14,051 | |||||||||||||||
Consumer | — | 15 | 15 | 120 | 135 | |||||||||||||||
Total purchased credit impaired loans | $ | 2,169 | $ | 8,085 | $ | 10,254 | $ | 165,360 | $ | 175,614 | ||||||||||
December 31, 2016 | ||||||||||||||||||||
Construction, land & land development | $ | 722 | $ | 1,853 | $ | 2,575 | $ | 13,962 | $ | 16,537 | ||||||||||
Other commercial real estate | 346 | 3,148 | 3,494 | 57,248 | 60,742 | |||||||||||||||
Total commercial real estate | 1,068 | 5,001 | 6,069 | 71,210 | 77,279 | |||||||||||||||
Residential real estate | 1,210 | 2,787 | 3,997 | 50,510 | 54,507 | |||||||||||||||
Owner-occupied real estate | 661 | 3,507 | 4,168 | 19,812 | 23,980 | |||||||||||||||
Commercial, financial & agricultural | 29 | 61 | 90 | 4,443 | 4,533 | |||||||||||||||
Consumer | — | 5 | 5 | 342 | 347 | |||||||||||||||
Total purchased credit impaired loans | $ | 2,968 | $ | 11,361 | $ | 14,329 | $ | 146,317 | $ | 160,646 | ||||||||||
52
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Quality Grades:
The Company assigns loans into risk categories based on relevant information about the ability of borrowers to pay their debts, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. A loan’s risk grade is assigned at inception based upon the strength of the repayment sources and reassessed periodically throughout the year. Loans over certain dollar thresholds identified as having weaknesses are subject to more frequent review. In addition, the Company’s internal loan review department provides an ongoing, comprehensive, and independent assessment of credit risk within the Company.
Loans are graded on a scale of 1 to 9. Pass grades are from 1 to 4. Descriptions of the general characteristics of grades 5 and above are as follows:
Watch (Grade 5)—Loans graded Watch are pass credits that have not met performance expectations or that have higher inherent risk characteristics warranting continued supervision and attention.
OAEM (Grade 6)—Loans graded OAEM (other assets especially mentioned) have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. OAEM loans are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.
Substandard (Grade 7)—Loans classified as substandard are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful (Grade 8)—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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.
Loss (Grade 9)—Loans classified as loss are considered uncollectible and have little value to the Company and their continuance as an active relationship is not warranted.
53
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the risk grades of the organic loan portfolio, by class of loans, at the dates indicated (dollars in thousands):
Organic Loans | Pass | Watch | OAEM | Substandard | Doubtful | Total | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Construction, land & land development | $ | 371,358 | $ | 38,939 | $ | 2,086 | $ | 157 | $ | — | $ | 412,540 | ||||||||||||
Other commercial real estate | 920,168 | 22,229 | 3,365 | 3,832 | — | 949,594 | ||||||||||||||||||
Total commercial real estate | 1,291,526 | 61,168 | 5,451 | 3,989 | — | 1,362,134 | ||||||||||||||||||
Residential real estate | 188,918 | 3,668 | 1,488 | 2,151 | — | 196,225 | ||||||||||||||||||
Owner-occupied real estate | 240,987 | 16,891 | 1,067 | 1,328 | — | 260,273 | ||||||||||||||||||
Commercial, financial & agricultural | 421,114 | 7,870 | 123 | 1,098 | — | 430,205 | ||||||||||||||||||
Leases | 47,908 | 4,488 | — | — | — | 52,396 | ||||||||||||||||||
Consumer | 64,361 | 58 | 81 | 110 | — | 64,610 | ||||||||||||||||||
Total organic loans | $ | 2,254,814 | $ | 94,143 | $ | 8,210 | $ | 8,676 | $ | — | $ | 2,365,843 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Construction, land & land development | $ | 470,686 | $ | 24,178 | $ | 97 | $ | 5,057 | $ | — | $ | 500,018 | ||||||||||||
Other commercial real estate | 718,969 | 35,821 | — | — | — | 754,790 | ||||||||||||||||||
Total commercial real estate | 1,189,655 | 59,999 | 97 | 5,057 | — | 1,254,808 | ||||||||||||||||||
Residential real estate | 139,393 | 2,484 | 460 | 1,958 | — | 144,295 | ||||||||||||||||||
Owner-occupied real estate | 237,753 | 14,967 | 3,577 | 20 | — | 256,317 | ||||||||||||||||||
Commercial, financial & agricultural | 325,161 | 920 | 624 | 676 | — | 327,381 | ||||||||||||||||||
Leases | 60,849 | 10,875 | — | — | — | 71,724 | ||||||||||||||||||
Consumer | 35,844 | 47 | 2 | 145 | 1 | 36,039 | ||||||||||||||||||
Total organic loans | $ | 1,988,655 | $ | 89,292 | $ | 4,760 | $ | 7,856 | $ | 1 | $ | 2,090,564 | ||||||||||||
54
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the risk grades of the purchased non-credit impaired loan portfolio, by class of loans, at the dates indicated (dollars in thousands):
Purchased Non-Credit Impaired Loans | Pass | Watch | OAEM | Substandard | Doubtful | Total | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Construction, land & land development | $ | 25,486 | $ | 385 | $ | — | $ | 37 | $ | — | $ | 25,908 | ||||||||||||
Other commercial real estate | 214,916 | 1,341 | 1,825 | 578 | — | 218,660 | ||||||||||||||||||
Total commercial real estate | 240,402 | 1,726 | 1,825 | 615 | — | 244,568 | ||||||||||||||||||
Residential real estate | 92,119 | 2,216 | 791 | 1,369 | 34 | 96,529 | ||||||||||||||||||
Owner-occupied real estate | 110,034 | 3,227 | 1,280 | 3,753 | — | 118,294 | ||||||||||||||||||
Commercial, financial & agricultural | 452,822 | 59,306 | 5,223 | 11,833 | — | 529,184 | ||||||||||||||||||
Consumer | 2,091 | 3 | — | 37 | 30 | 2,161 | ||||||||||||||||||
Total purchased non-credit impaired loans | $ | 897,468 | $ | 66,478 | $ | 9,119 | $ | 17,607 | $ | 64 | $ | 990,736 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Construction, land & land development | $ | 51,208 | $ | — | $ | — | $ | — | $ | — | $ | 51,208 | ||||||||||||
Other commercial real estate | 206,515 | 803 | 2,157 | 56 | — | 209,531 | ||||||||||||||||||
Total commercial real estate | 257,723 | 803 | 2,157 | 56 | — | 260,739 | ||||||||||||||||||
Residential real estate | 142,079 | 1,883 | 314 | 320 | — | 144,596 | ||||||||||||||||||
Owner-occupied real estate | 107,096 | 6,310 | — | 2,160 | — | 115,566 | ||||||||||||||||||
Commercial, financial & agricultural | 34,747 | 310 | 21 | 1,128 | — | 36,206 | ||||||||||||||||||
Consumer | 6,247 | 5 | — | 3 | — | 6,255 | ||||||||||||||||||
Total purchased non-credit impaired loans | $ | 547,892 | $ | 9,311 | $ | 2,492 | $ | 3,667 | $ | — | $ | 563,362 | ||||||||||||
Classifications on purchased credit impaired loans are based upon the borrower's ability to pay the current unpaid principal balance without regard to the net carrying value of the loan on the Company's balance sheet. Because the values shown in the table below are based on each loan's estimated cash flows, any expected losses should be covered by a combination of the specific reserves established in the allowance for loan and lease losses on purchased credit impaired loans plus the discounts to the unpaid principal balances reflected in the recorded investment of each loan.
55
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the risk grades of the purchased credit impaired loan portfolio, by class of loans, at the dates indicated (dollars in thousands):
Purchased Credit Impaired Loans | Pass | Watch | OAEM | Substandard | Doubtful | Total | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Construction, land & land development | $ | 6,677 | $ | 809 | $ | 973 | $ | 5,086 | $ | — | $ | 13,545 | ||||||||||||
Other commercial real estate | 63,210 | 11,998 | 2,361 | 9,179 | — | 86,748 | ||||||||||||||||||
Total commercial real estate | 69,887 | 12,807 | 3,334 | 14,265 | — | 100,293 | ||||||||||||||||||
Residential real estate | 21,706 | 6,419 | 1,590 | 10,504 | 113 | 40,332 | ||||||||||||||||||
Owner-occupied real estate | 7,181 | 4,896 | 818 | 7,908 | — | 20,803 | ||||||||||||||||||
Commercial, financial & agricultural | 2,094 | 211 | 323 | 11,423 | — | 14,051 | ||||||||||||||||||
Consumer | 60 | 28 | 21 | 26 | — | 135 | ||||||||||||||||||
Total purchased credit impaired loans | $ | 100,928 | $ | 24,361 | $ | 6,086 | $ | 44,126 | $ | 113 | $ | 175,614 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Construction, land & land development | $ | 7,798 | $ | 1,150 | $ | 1,416 | $ | 6,173 | $ | — | $ | 16,537 | ||||||||||||
Other commercial real estate | 33,423 | 13,103 | 2,770 | 11,446 | — | 60,742 | ||||||||||||||||||
Total commercial real estate | 41,221 | 14,253 | 4,186 | 17,619 | — | 77,279 | ||||||||||||||||||
Residential real estate | 28,628 | 10,371 | 2,840 | 12,396 | 272 | 54,507 | ||||||||||||||||||
Owner-occupied real estate | 7,736 | 4,884 | 794 | 10,566 | — | 23,980 | ||||||||||||||||||
Commercial, financial & agricultural | 3,381 | 310 | 273 | 569 | — | 4,533 | ||||||||||||||||||
Consumer | 53 | 100 | 173 | 21 | — | 347 | ||||||||||||||||||
Total purchased credit impaired loans | $ | 81,019 | $ | 29,918 | $ | 8,266 | $ | 41,171 | $ | 272 | $ | 160,646 | ||||||||||||
Troubled Debt Restructurings (TDRs)
Total troubled debt restructurings were $1.5 million and $5.0 million at December 31, 2017 and 2016, respectively. There was no related allowance for loan and lease losses at December 31, 2017 and $148,000 at December 31, 2016. At December 31, 2017 and 2016, there were no commitments to extend credit to a borrower with an existing troubled debt restructuring. Purchased credit impaired loans modified post-acquisition are not removed from their accounting pools and accounted for as TDRs, even if those loans would otherwise be deemed TDRs.
56
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information on troubled debt restructured loans that were modified during the periods presented (dollars in thousands):
December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
TDR Additions (1) | Number of Contracts | Pre-Modification Recorded Investment | Post-Modification Recorded Investment | Number of Contracts | Pre-Modification Recorded Investment | Post-Modification Recorded Investment | Number of Contracts | Pre-Modification Recorded Investment | Post-Modification Recorded Investment | ||||||||||||||||||||||||
Construction, land & land development | — | $ | — | $ | — | 1 | $ | 4,168 | $ | 4,168 | — | $ | — | $ | — | ||||||||||||||||||
Other commercial real estate | 1 | 569 | 569 | — | — | — | — | — | — | ||||||||||||||||||||||||
Total commercial real estate | 1 | 569 | 569 | 1 | 4,168 | 4,168 | — | — | — | ||||||||||||||||||||||||
Residential real estate | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Owner-occupied real estate | 1 | 884 | 884 | — | — | — | — | — | — | ||||||||||||||||||||||||
Commercial, financial & agricultural | — | — | — | — | — | — | 1 | 577 | 577 | ||||||||||||||||||||||||
Total modifications | 2 | $ | 1,453 | $ | 1,453 | 1 | $ | 4,168 | $ | 4,168 | 1 | $ | 577 | $ | 577 | ||||||||||||||||||
(1) The pre-modification and post-modification recorded investments represent amounts at the date of loan modifications. Since the modifications on these loans have been only interest rate concessions and payment term extensions, not principal reductions, the pre-modification and post-modification recorded investment amounts are the same.
During the years ended December 31, 2017, 2016, and 2015, there were no TDRs that subsequently defaulted within twelve months of their modification dates.
NOTE 6: PREMISES & EQUIPMENT
Premises and equipment are summarized as follows (dollars in thousands):
December 31 | |||||||
2017 | 2016 | ||||||
Land | $ | 14,849 | $ | 14,632 | |||
Buildings and improvements | 38,742 | 37,856 | |||||
Furniture, fixtures, and equipment | 18,939 | 16,961 | |||||
Construction in progress | 550 | 426 | |||||
Premises and equipment, gross | 73,080 | 69,875 | |||||
Accumulated depreciation | (21,286 | ) | (17,819 | ) | |||
Premises and equipment, net | $ | 51,794 | $ | 52,056 | |||
Depreciation expense for premises and equipment was $3.7 million, $3.5 million, and $3.8 million for the years ended December 31, 2017, 2016, and 2015, respectively.
57
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
The Company has various operating leases on office locations with lease terms that range up to 8 years. These noncancelable operating leases are subject to renewal options and some leases provide for periodic rate adjustments according to the terms of the agreements.
Future minimum lease commitments under all noncancelable operating leases with terms of one year or more, excluding any renewal options, are as follows (dollars in thousands):
Years Ended December 31 | Future Lease Commitments | |||
2018 | $ | 4,627 | ||
2019 | 3,347 | |||
2020 | 3,261 | |||
2021 | 2,980 | |||
2022 | 3,049 | |||
Thereafter | 3,518 | |||
Total (1) | $ | 20,782 | ||
(1) The total future minimum lease commitments have not been reduced by minimum sublease rentals of $3.4 million due in the future from noncancelable subleases.
Rent expense was $3.5 million, $3.2 million, and $3.1 million, for the years ended December 31, 2017, 2016, and 2015, respectively.
NOTE 7: GOODWILL & OTHER INTANGIBLE ASSETS
Changes to the carrying amounts of goodwill and identifiable intangible assets are presented in the table below (dollars in thousands):
December 31 | ||||||||
2017 | 2016 | |||||||
Goodwill | ||||||||
Balance, beginning of year | $ | 77,084 | $ | 36,357 | ||||
Goodwill attributable to acquisitions | 7,480 | 40,727 | ||||||
Balance, end of year | 84,564 | 77,084 | ||||||
Core deposit and other intangibles | ||||||||
Balance, beginning of year | 21,660 | 16,910 | ||||||
Core deposit and other intangibles attributable to acquisitions | 1,100 | 4,750 | ||||||
Accumulated amortization | (11,726 | ) | (8,911 | ) | ||||
Balance, end of year | 11,034 | 12,749 | ||||||
Total goodwill and other intangibles | $ | 95,598 | $ | 89,833 | ||||
The Company evaluates goodwill for impairment on at least an annual basis and more frequently if an event occurs or circumstances indicate carrying value exceeds fair value. At December 31, 2017, the Company performed a qualitative assessment to determine if it was more likely than not that the fair value exceeded carrying value. The qualitative assessment indicated that it was more likely than not that the fair value exceeded its carrying value, resulting in no impairment.
Amortization expense of $2.8 million, $2.1 million, and $1.8 million was recorded on total intangibles for the years ended December 31, 2017, 2016, and 2015, respectively.
58
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense for core deposit and other intangibles for the next five years is expected to be as follows (dollars in thousands):
Years Ended December 31 | Core Deposit and Other Intangibles Amortization Expense | |||
2018 | $ | 2,575 | ||
2019 | 2,492 | |||
2020 | 2,107 | |||
2021 | 1,778 | |||
2022 | 1,704 | |||
Thereafter | 378 | |||
Total amortization expense | $ | 11,034 | ||
NOTE 8: SBA SERVICING RIGHTS
All sales of SBA loans, consisting of the guaranteed portion, are executed on a servicing retained basis. These loans, which are partially guaranteed by the SBA, are generally secured by business property such as real estate, inventory, equipment, and accounts receivable. During the years ended December 31, 2017, 2016 and 2015 the Company sold SBA loans with unpaid principal balances totaling $50.3 million, $53.7 million and $42.1 million, respectively, and recognized $5.3 million, $5.4 million and $4.4 million, respectively, in gains on the loan sales. The Company retains the related loan servicing rights and receives servicing fees on the sold loans. Both the servicing fees and the gains on sales of loans are recorded in SBA income on the consolidated statements of income. SBA servicing fees totaled $1.7 million, $1.3 million and $978,000 for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, the Company serviced SBA loans for others with unpaid principal balances totaling $185.6 million and $142.1 million, respectively.
The table below summarizes the activity in the SBA servicing rights asset for the period presented (dollars in thousands):
December 31 | ||||||||||||
SBA Servicing Rights | 2017 | 2016 | 2015 | |||||||||
Balance, beginning of year | $ | 3,477 | $ | 2,626 | $ | 1,516 | ||||||
Additions | 1,213 | 1,323 | 1,070 | |||||||||
Fair value adjustments | (621 | ) | (472 | ) | 40 | |||||||
Balance, end of year | $ | 4,069 | $ | 3,477 | $ | 2,626 | ||||||
A summary of the key characteristics, inputs and economic assumptions used to estimate the fair value of the Company's SBA servicing rights asset are as follows (dollars in thousands):
December 31 | ||||||||||
SBA Servicing Rights | 2017 | 2016 | ||||||||
Fair value | $ | 4,069 | $ | 3,477 | ||||||
Weighted average discount rate | 12.9 | % | 12.8 | % | ||||||
Decline in fair value due to a 100 basis point adverse change | $ | (140 | ) | $ | (122 | ) | ||||
Decline in fair value due to a 200 basis point adverse change | (272 | ) | (236 | ) | ||||||
Prepayment speed | 9.1 | % | 8.0 | % | ||||||
Decline in fair value due to a 10% adverse change | $ | (141 | ) | $ | (108 | ) | ||||
Decline in fair value due to a 20% adverse change | (275 | ) | (210 | ) | ||||||
Weighted average remaining life (years) | 6.7 | 7.1 | ||||||||
The risk inherent in the SBA servicing rights asset includes prepayments at different rates than anticipated or resolution of loans at dates not consistent with the estimated expected lives. These events would cause the value of the servicing asset to decline at a faster or slower rate than originally anticipated.
59
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about the SBA loans serviced by the Company at and for the periods presented is as follows (dollars in thousands):
December 31, 2017 | ||||||||||||||||
SBA Loans Serviced | Unpaid Principal Balance | 30 - 89 Days Past Due | 90 Days or Greater Past Due | Net Charge-offs for the year ended December 31, 2017 | ||||||||||||
Serviced for others | $ | 185,557 | $ | 1,555 | $ | — | $ | — | ||||||||
Held-for-sale | 10,420 | — | — | — | ||||||||||||
Held-for-investment | 153,810 | 2,508 | 6,627 | 684 | ||||||||||||
Total SBA loans serviced | $ | 349,787 | $ | 4,063 | $ | 6,627 | $ | 684 | ||||||||
December 31, 2016 | ||||||||||||||||
SBA Loans Serviced | Unpaid Principal Balance | 30 - 89 Days Past Due | 90 Days or Greater Past Due | Net Charge-offs for the year ended December 31, 2016 | ||||||||||||
Serviced for others | $ | 142,069 | $ | 522 | $ | — | $ | — | ||||||||
Held-for-sale | 16,356 | — | — | — | ||||||||||||
Held-for-investment | 144,351 | 220 | 5,580 | 1,986 | ||||||||||||
Total SBA loans serviced | $ | 302,776 | $ | 742 | $ | 5,580 | $ | 1,986 | ||||||||
NOTE 9: FDIC RECEIVABLE FOR LOSS SHARE AGREEMENTS
On May 21, 2015, State Bank entered into an agreement with the FDIC to terminate loss share coverage on all 12 of its FDIC-assisted acquisitions which occurred in 2009, 2010, and 2011. The termination resulted in the elimination of both the FDIC receivable for loss share agreements and the associated clawback liability.
The following table presents a summary of the calculation of the loss recognized as a result of the termination of the FDIC loss share agreements, including the clawback provisions and settlement of historic loss share and expense reimbursement claims (dollars in thousands):
For the Year Ended | |||
December 31, 2015 | |||
Cash paid to the FDIC to settle loss share agreements | $ | (3,100 | ) |
FDIC loss share receivable | (16,959 | ) | |
FDIC clawback payable | 5,511 | ||
Loss on termination of FDIC loss share | (14,548 | ) | |
Net amortization of FDIC receivable for loss share agreements during the period | (1,940 | ) | |
Amortization of FDIC receivable for loss share agreements | $ | (16,488 | ) |
60
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table documents changes in the carrying value of the FDIC receivable for loss share agreements relating to purchased credit impaired loans and acquired other real estate owned previously covered under loss share agreements with the FDIC for the periods indicated (dollars in thousands):
For the Year Ended December 31 | ||||
FDIC receivable for loss share agreements | 2015 | |||
Balance, beginning of year | $ | 22,320 | ||
Provision for loan and lease losses attributable to FDIC for loss share agreements | 1,045 | |||
Wires sent (received) | 1,784 | |||
Net recoveries | (6,627 | ) | ||
Amortization | (1,940 | ) | ||
External expenses qualifying under loss share agreements | 377 | |||
Termination of FDIC loss share | (16,959 | ) | ||
Balance, end of year | $ | — | ||
NOTE 10: DEPOSITS
Deposits are summarized as follows (dollars in thousands):
December 31 | |||||||
2017 | 2016 | ||||||
Noninterest-bearing demand deposits | $ | 1,191,106 | $ | 984,419 | |||
Interest-bearing transaction accounts | 688,150 | 664,350 | |||||
Savings and money market deposits | 1,626,238 | 1,292,867 | |||||
Time deposits less than $250,000 | 560,529 | 388,164 | |||||
Time deposits $250,000 or greater | 154,604 | 78,685 | |||||
Brokered and wholesale time deposits | 22,508 | 22,680 | |||||
Total deposits | $ | 4,243,135 | $ | 3,431,165 | |||
Overdrawn deposit accounts reclassified as loans were $393,000 and $390,000 at December 31, 2017 and 2016, respectively.
The scheduled maturities of time, brokered, and wholesale deposits were as follows (dollars in thousands):
December 31, 2017 | |||
2018 | $ | 576,143 | |
2019 | 96,001 | ||
2020 | 47,314 | ||
2021 | 10,776 | ||
2022 | 7,407 | ||
Total time, brokered, and wholesale deposits | $ | 737,641 | |
The Company had $18.2 million in brokered deposits at December 31, 2017, and had $14.3 million in brokered deposits at December 31, 2016.
61
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company utilizes securities sold under repurchase agreements to facilitate the needs of our customers. Securities sold under repurchase agreements consist of balances in the transaction accounts of commercial customers swept nightly to an overnight investment account and are collateralized with investment securities having a market value no less than the balance borrowed. The agreements bear interest rates determined by the Company. The investment securities pledged are subject to market fluctuations as well as prepayments of principal. The Company monitors the risk of the fair value of its pledged collateral falling below the balance of the repurchase agreements on a daily basis and may be required to provide additional collateral. Securities pledged as collateral are maintained with our safekeeping agent.
At December 31, 2017 and 2016, securities sold under repurchase agreements were $25.2 million and $25.7 million, respectively. These securities sold under repurchase agreements had a weighted average interest rate of .12% for both periods, all of which mature on an overnight and continuous basis. At December 31, 2017 and 2016, investment securities pledged for the outstanding repurchase agreements consisted of U.S. government sponsored agency mortgage-backed securities.
The Company assumed $2.0 million in federal funds purchased at December 31, 2016 through its acquisition of S Bankshares. These federal funds purchased carried a rate of 1.25% at December 31, 2016 and were paid off in January of 2017. At December 31, 2017, the Company had no federal funds purchased.
NOTE 12: OTHER BORROWINGS
The Company has several participation agreements with various provisions regarding collateral position, pricing and other matters where the junior participation interests were sold. The terms of the agreements do not convey proportionate ownership rights with equal priority to each participating interest and entitle the Company to receive principal and interest payments before other participating interest holders. Given the participations sold do not qualify as participating interests, they do not qualify for sale treatment in accordance with generally accepted accounting principles. As a result, the Company recorded the transactions as secured borrowings. The balance of the secured borrowings was $398,000 at December 31, 2017 and 2016, respectively. The loans are recorded at their gross balances outstanding and are included in organic loans on the consolidated statements of financial condition.
The Company assumed $47.0 million in FHLB borrowings at December 31, 2016 through its acquisitions of NBG Bancorp and S Bankshares. These borrowings were paid off in January of 2017. At December 31, 2017, the Company had no FHLB borrowings.
NOTE 13: DERIVATIVES INSTRUMENTS & HEDGING ACTIVITIES
Interest Rate Swaps and Caps
Risk Management Objective of Interest Rate Swaps and Caps
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments to add stability to interest income or expense and to manage its exposure to movements in interest rates. The Company does not use derivatives for trading or speculative purposes and only enters into transactions that have a qualifying hedging relationship. The Company's hedging strategies involving interest rate derivatives are classified as either Fair Value Hedges or Cash Flow Hedges, depending upon the rate characteristic of the hedged item.
Fair Value Hedge: As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of the derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge.
Cash Flow Hedge: Cash flows related to floating-rate assets and liabilities will fluctuate with changes in an underlying rate index. When effectively hedged, the increases or decreases in cash flows related to the floating rate asset or liability will generally be offset by changes in cash flows of the derivative instrument designated as a hedge. This strategy is referred to as a cash flow hedge.
62
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit and Collateral Risks for Interest Rate Swaps and Caps
The Company manages credit exposure on interest rate swap and cap transactions by entering in bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. Refer to Note 14, Balance Sheet Offsetting, for more information on collateral pledged and received under these agreements.
The Company’s agreements with its interest rate swap and cap counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivative counterparties also include provisions that if not met, could result in the Company being declared in default. If the Company were to be declared in default, the counterparty could terminate the derivative positions and the Company and the counterparty would be required to settle their obligations under the agreements. At December 31, 2017, the Company had no derivatives in a net liability position under these agreements.
Mortgage Derivatives
Risk Management Objective of Mortgage Lending Activities
The Company also maintains a risk management program to manage interest rate risk and pricing risk associated with its mortgage lending activities. The risk management program includes the use of forward contracts and other derivatives that are recorded in the financial statements at fair value and are used to offset changes in value of the mortgage inventory due to changes in market interest rates. As a normal part of our operations, we enter into derivative contracts to economically hedge risks associated with overall price risk related to interest rate lock commitments ("IRLCs") and mortgage loans held-for-sale for which the fair value option has been elected. Fair value changes occur as a result of interest rate movements as well as changes in the value of the associated servicing. Derivative instruments used include forward sale commitments and IRLCs.
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of mortgage loans in order to economically hedge the effect of changes in interest rates resulting from interest rate lock commitments.
Credit and Collateral Risks for Mortgage Lending Activities
The Company’s underlying risks are primarily related to interest rates and forward sales commitments entered into as part of its mortgage banking activities. Forward sales commitments are contracts for the delayed delivery or net settlement of an underlying instrument, such as a mortgage loan, in which the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. These hedges are used to preserve the Company’s position relative to future sales of mortgage loans to third parties in an effort to minimize the volatility of the expected gain on sale from changes in interest rate and the associated pricing changes.
Derivative Fair Values
The table below presents the fair values of the Company's derivatives at the dates indicated (dollars in thousands):
Asset Derivatives (1) | Liability Derivatives (1) | |||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||
Derivatives Designated as Hedging Instruments | ||||||||||||||||
Interest rate swaps and caps | $ | 2,011 | $ | 1,774 | $ | 116 | $ | 641 | ||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||
Interest rate swaps | $ | — | $ | 19 | $ | — | $ | 85 | ||||||||
Mortgage derivatives | 616 | 1,362 | 238 | 459 | ||||||||||||
(1) All asset derivatives are located in "Other Assets" on the consolidated statements of financial condition and all liability derivatives are located in "Other Liabilities" on the consolidated statements of financial condition.
63
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives Designated as Hedging Instruments
Fair Value Hedges
The Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps, designated as fair value hedges, involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount. The gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. At December 31, 2017, the Company had 84 interest rate swaps with an aggregate notional amount of $141.9 million, designated as fair value hedges associated with the Company's fixed rate loan program.
The table below presents the effect of the Company's derivatives in fair value hedging relationships for the periods presented (dollars in thousands):
December 31 | ||||||||||||||
Interest Rate Products | Location | 2017 | 2016 | 2015 | ||||||||||
Amount of gain (loss) recognized in income on derivatives | Noninterest income | $ | 1,007 | $ | 1,863 | $ | (956 | ) | ||||||
Amount of (loss) gain recognized in income on hedged items | Noninterest income | (1,057 | ) | (1,680 | ) | 815 | ||||||||
Total net (loss) gain recognized in income on fair value hedge ineffectiveness | $ | (50 | ) | $ | 183 | $ | (141 | ) | ||||||
The Company recognized net (losses) gains of $(50,000), $183,000, and $(141,000) during the years ended December 31, 2017, 2016, and 2015, respectively, related to hedge ineffectiveness on the fair value swaps. The Company also recognized a net reduction in interest income of $912,000, $1.8 million, and $2.3 million for the years ended December 31, 2017, 2016, and 2015, respectively, related to the fair value hedges, which includes net settlements on derivatives and any amortization adjustment of the basis in the hedged items. Terminations of derivatives and related hedged items for interest rate swap agreements prior to their original maturity date resulted in the recognition of net losses of $65,000, $118,000, and $492,000 in interest income for the years ended December 31, 2017, 2016, and 2015, respectively, related to the unamortized basis in the hedged items.
Cash Flow Hedges
The Company uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps, designated as cash flow hedges, involve the payment of a premium to a counterparty based on the notional size and cap strike rate. The Company's current cash flow hedges are for the purpose of capping the interest rates paid on deposits, which protects the Company in a rising rate environment. The caps were purchased during the first quarter of 2013 to hedge the variable cash outflows associated with these liabilities; they originally had a five-year life and notional value of $200.0 million.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of derivatives that qualify as cash flow hedges is recognized directly in earnings. No hedge ineffectiveness was recognized on the Company's cash flow hedges during the years ended December 31, 2017, 2016, or 2015.
Amounts reported in AOCI related to derivatives are reclassified to interest expense as the interest rate cap premium is amortized over the life of the cap. During the next twelve months, $88,000 is expected to be reclassified as a decrease to net interest income.
64
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the effect of the Company's derivatives in cash flow hedging relationships for the periods presented (dollars in thousands):
December 31 | ||||||||||||||
Interest Rate Products | Location | 2017 | 2016 | 2015 | ||||||||||
Amount of gain (loss) recognized in income on derivatives (effective portion) | OCI | $ | 58 | $ | (714 | ) | $ | (2,294 | ) | |||||
Amount of loss reclassified from AOCI into income (effective portion) | Interest expense | 1,618 | 1,171 | 546 | ||||||||||
Total loss recognized in consolidated statements of comprehensive income | $ | (1,560 | ) | $ | (1,885 | ) | $ | (2,840 | ) | |||||
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps
At December 31, 2017, the Company had no interest rate swaps that were not designated as fair value hedges associated with the Company's fixed rate loan program. The income statement effect from the derivatives not designated as hedging instruments was net losses of $124,000, $51,000, and $147,000 during the years ended December 31, 2017, 2016, and 2015 respectively.
Mortgage Derivatives
Mortgage derivative fair value assets and liabilities are recorded in "Other Assets" and "Other Liabilities", respectively, on the consolidated statements of financial condition. At December 31, 2017, the fair value of mortgage derivative assets was $616,000 and the fair value of mortgage derivative liabilities was $238,000. At December 31, 2016, the fair value of mortgage derivative assets was $1.4 million and the fair value of mortgage derivative liabilities was $459,000.
At December 31, 2017, the Company had approximately $36.3 million of interest rate lock commitments and $55.8 million of forward commitments for the future delivery of residential mortgage loans. The net gain (loss) related to interest rate lock commitments used for risk management was $78,000, $(280,000) and $347,000 for the years ended December 31, 2017, 2016, and 2015, respectively. The net (loss) gain for forward commitments related to these mortgage loans was $(603,000), $819,000, and $(34,000) for the years ended December 31, 2017, 2016, and 2015, respectively.
The table below presents the effect of the Company's derivatives not designated as hedging instruments for the periods presented (dollars in thousands):
December 31 | ||||||||||||||
Interest Rate Products | Location | 2017 | 2016 | 2015 | ||||||||||
Amount of gain (loss) recognized in income on interest rate lock commitments | Noninterest income | $ | 78 | $ | (280 | ) | $ | 347 | ||||||
Amount of (loss) gain recognized in income on forward commitments | Noninterest income | (603 | ) | 819 | (34 | ) | ||||||||
Amount of loss recognized in income on interest rate swaps | Noninterest income | (124 | ) | (51 | ) | (147 | ) | |||||||
Amount of (loss) gain recognized in income on derivatives not designated as hedging instruments | $ | (649 | ) | $ | 488 | $ | 166 | |||||||
NOTE 14: BALANCE SHEET OFFSETTING
Certain financial instruments, including repurchase agreements and derivatives (interest rate swaps and caps), may be eligible for offset in the consolidated statements of financial condition and/or subject to master netting arrangements or similar agreements; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.
65
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents information about the Company’s financial instruments that are eligible for offset in the consolidated statements of financial condition at the dates presented (dollars in thousands):
Gross Amounts Recognized | Gross Amounts Offset on the Statement of Financial Condition | Net Amounts Presented on the Statement of Financial Condition | Gross Amounts Not Offset on the Statement of Financial Condition | Net Amount | ||||||||||||||||||||
Financial Instruments | Collateral Received/Posted (1) | |||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Offsetting Derivative Assets | ||||||||||||||||||||||||
Interest rate swaps and caps | $ | 2,011 | $ | — | $ | 2,011 | $ | (116 | ) | $ | (1,895 | ) | $ | — | ||||||||||
Offsetting Derivative Liabilities | ||||||||||||||||||||||||
Interest rate swaps and caps | $ | 116 | $ | — | $ | 116 | $ | (116 | ) | $ | — | $ | — | |||||||||||
Repurchase agreements | 25,209 | — | 25,209 | — | (25,209 | ) | — | |||||||||||||||||
Total liabilities | $ | 25,325 | $ | — | $ | 25,325 | $ | (116 | ) | $ | (25,209 | ) | $ | — | ||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Offsetting Derivative Assets | ||||||||||||||||||||||||
Interest rate swaps and caps | $ | 1,793 | $ | — | $ | 1,793 | $ | (718 | ) | $ | (1,075 | ) | $ | — | ||||||||||
Offsetting Derivative Liabilities | ||||||||||||||||||||||||
Interest rate swaps and caps | $ | 726 | $ | — | $ | 726 | $ | (718 | ) | $ | — | $ | 8 | |||||||||||
Repurchase agreements | 25,722 | — | 25,722 | — | (25,722 | ) | — | |||||||||||||||||
Total liabilities | $ | 26,448 | $ | — | $ | 26,448 | $ | (718 | ) | $ | (25,722 | ) | $ | 8 | ||||||||||
(1) The application of collateral cannot reduce the net amount below zero; therefore, excess collateral received/posted is not reflected in this table. All positions are fully collateralized.
NOTE 15: STOCK WARRANTS
The Company has outstanding warrants purchased by current and former executive officers, directors and certain members of senior management. Warrant holders have the right to purchase one share of the Company's common stock at strike prices ranging from $5.00 to $11.21 per share through the ten-year contractual period. The warrants were fully exercisable as of the purchase date. During 2017 and 2016, no new warrants were issued.
The following table represents the activity related to stock warrants:
December 31 | |||||||||||||
2017 | 2016 | ||||||||||||
Number of Warrants | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | ||||||||||
Outstanding warrants at beginning of year | 133,912 | $ | 9.37 | 172,745 | $ | 9.52 | |||||||
Exercised | (51,008 | ) | 8.43 | (38,833 | ) | 10.05 | |||||||
Outstanding warrants at end of year | 82,904 | $ | 9.95 | 133,912 | $ | 9.37 | |||||||
NOTE 16: SHARE-BASED COMPENSATION
The Company maintains an incentive compensation plan that includes share-based compensation. The State Bank Financial Corporation 2011 Omnibus Equity Compensation Plan (the "Plan") was approved by the Company's shareholders in 2011 and authorizes up to 3,160,000 shares of stock for issuance in accordance with the Plan terms. The Plan provides for the granting of Incentive Stock Options, Non-Qualified Stock Options, Performance Awards, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Bonus Stock and Stock Awards, or any combination of the foregoing, as the Independent Directors Committee serving as the Compensation Committee determines is best suited to the circumstances of the particular individual.
66
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Awards
Option awards are granted with an exercise price equal to or greater than the market price of the Company's common stock at the date of grant. The options include a vesting period, usually three years, and a ten-year contractual period. Certain option grants provide for accelerated vesting if there is a change in control of the Company or certain other conditions are met, as defined in the Plan document. At all times during the term of the Plan, the Company shall retain the number of shares required to satisfy option exercises as authorized and unissued shares in the Company's treasury. Currently, the Company has a sufficient number of shares allocated to satisfy expected share option exercises.
During the periods ended December 31, 2016 and 2015 there was no stock option activity. There was no compensation expense recognized related to stock options for the years ended December 31, 2017, 2016 or 2015, as all options were vested in 2013.
The following table represents a summary of the activity related to stock options:
December 31, 2017 | ||||||||||||||
Number of Options | Weighted Average Exercise Price ($) | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value ($000) | |||||||||||
Outstanding options, beginning of year | 28,918 | $ | 14.37 | 4.6 | 361 | |||||||||
Exercised | (28,918 | ) | 14.37 | — | 378 | |||||||||
Outstanding options, end of year | — | $ | — | — | $ | — | ||||||||
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2017. This amount changes based on changes in the market value of the Company’s stock. The intrinsic value of options exercised during 2017 was $378,000.
Restricted Stock Awards
The Company has issued both time-based and performance-based shares of restricted stock to certain officers and independent directors under the Plan. The Plan allows for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The holders of the restricted stock receive dividends, if applicable, and have the right to vote the shares. The fair value of the restricted stock awarded under the Plan is recorded as unearned share-based compensation.
The unearned compensation related to time-based shares of restricted stock is amortized to compensation expense over the vesting period, generally five years. The total share-based compensation expense for these awards is determined based on the market price of the Company's common stock at the date of grant applied to the total number of shares granted and is amortized over the vesting period.
The performance-based shares of restricted stock entitle the recipient to receive shares of the Company’s common stock upon the achievement of performance goals that are specified in the award agreement over a specified performance period. The unearned compensation related to performance-based shares of restricted stock is amortized to compensation expense over the vesting period, generally ten years. The total share-based compensation expense for these awards is determined based on the market price of the Company's common stock at the date of grant applied to the total number of shares granted and is amortized over the vesting period. During 2015, the Company issued 558,000 performance-based shares of restricted stock with a ten year performance period, of which 92,000 were subsequently forfeited. There were no performance shares granted during the years ended December 31, 2017 and 2016.
Compensation expense recognized in the Company's consolidated statements of income for restricted stock was $3.8 million, $3.9 million and $3.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. The total recognized tax benefit related to the share-based compensation was $2.5 million, $1.8 million and $1.4 million for 2017, 2016 and 2015, respectively. Total unrecognized compensation cost related to unvested share-based compensation was $10.5 million at December 31, 2017 and is expected to be recognized over a weighted-average period of 3.4 years.
67
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents a summary of the unvested restricted stock award activity:
December 31, 2017 | ||||||
Shares | Weighted Average Grant Date Fair Value | |||||
Balance, beginning of year | 1,006,052 | $ | 18.28 | |||
Granted | 146,254 | 27.10 | ||||
Forfeited | (13,583 | ) | 19.95 | |||
Earned and issued | (161,061 | ) | 16.89 | |||
Balance, end of year | 977,662 | $ | 19.80 | |||
Restricted stock awards of 146,254 shares, 85,575 shares, and 664,706 shares, respectively, were granted during 2017, 2016 and 2015 with a weighted-average grant date fair value of $27.10, $19.81 and $19.33, respectively.
NOTE 17: EMPLOYEE BENEFIT PLAN
The Company offers a defined contribution 401(k) Profit Sharing Plan (the "401(k) Plan”) that covers substantially all employees meeting certain eligibility requirements. The 401(k) Plan allows employees to make pre-tax or Roth after-tax salary deferrals to the 401(k) Plan and the Company matches these employee contributions on a basis equal to a uniform percentage of the salary deferrals. During 2017, 2016 and 2015, the Company matched employee contributions dollar-for-dollar up to 5% of eligible compensation, subject to 401(k) Plan and regulatory limits. Participants receive matching contributions the first quarter after completing three months of service and matching contributions made after January 1, 2013 are fully vested, regardless of years of service. Compensation expense related to the 401(k) Plan totaled $2.6 million, $2.3 million, and $2.2 million in 2017, 2016 and 2015, respectively.
NOTE 18: REGULATORY MATTERS
Regulatory Capital Requirements
The Company and State Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and State Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and State Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Measures of regulatory capital are an important tool used by regulators to monitor the financial health of financial institutions. The primary quantitative measures used to gauge capital adequacy are the Common Equity Tier 1, Tier 1, Total Capital Ratios to risk-weighted assets (risk-based capital ratios) and the ratio of Tier 1 capital to average total assets (leverage ratio). Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Company and State Bank.
Beginning on January 1, 2015, the Company and State Bank became subject to the provisions of the Basel III final rule that governs the regulatory capital calculation, including transitional, or phase-in, provisions. The methods for calculating the risk-based capital ratios will change as the provisions of the Basel III final rule related to the numerator (capital) and denominator (risk-weighted assets) are fully phased in on January 1, 2019. The ongoing methodological changes will result in differences in the reported capital ratios from one reporting period to the next that are independent of applicable changes in the capital base, asset composition, off-balance sheet exposures or risk profile.
Beginning on January 1, 2016, the Company and State Bank must maintain a capital conservation buffer to avoid restrictions on capital distributions or discretionary bonus payments. This buffer must consist solely of Common Equity Tier 1 Capital, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital) in addition to the minimum risk-based capital requirements. The capital conservation buffer required for 2017 is common equity equal to 1.25% of risk-weighted assets and will increase by .625% per year until reaching 2.5% beginning January 1, 2019.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The minimum regulatory capital ratios and ratios to be considered well-capitalized under prompt corrective action provisions at the dates indicated are presented in the table below:
December 31, 2017 | December 31, 2016 | |||||||
Capital Ratio Requirements | Minimum Requirement | Well-capitalized (1) | Minimum Requirement | Well-capitalized (1) | ||||
Common Equity Tier 1 Capital (CET1) | 4.50% | 6.50% | 4.50% | 6.50% | ||||
Tier 1 Capital | 6.00% | 8.00% | 6.00% | 8.00% | ||||
Total Capital | 8.00% | 10.00% | 8.00% | 10.00% | ||||
Tier 1 Leverage | 4.00% | 5.00% | 4.00% | 5.00% | ||||
(1) The prompt corrective action provisions are only applicable at the bank level.
At December 31, 2017 and 2016, the Company and State Bank exceeded all regulatory capital adequacy requirements to which they were subject.
The Company's regulatory ratios at the dates indicated are presented in the table below (dollars in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||
Actual | Required | Actual | Required | |||||||||||||||||||
Amount | Ratio | Minimum Amount | Amount | Ratio | Minimum Amount | |||||||||||||||||
Company | ||||||||||||||||||||||
CET1 Capital | $ | 547,822 | 12.61 | % | $ | 195,433 | $ | 526,282 | 14.78 | % | $ | 160,258 | ||||||||||
Tier 1 Capital | 547,822 | 12.61 | % | 260,578 | 526,282 | 14.78 | % | 213,678 | ||||||||||||||
Total Capital | 576,572 | 13.28 | % | 347,437 | 552,880 | 15.52 | % | 284,904 | ||||||||||||||
Tier 1 Leverage | 547,822 | 11.24 | % | 194,924 | 526,282 | 14.90 | % | 141,273 | ||||||||||||||
State Bank's regulatory ratios at the dates indicated are presented in the table below (dollars in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||
Actual | Required | Actual | Required | |||||||||||||||||||||||||||
Amount | Ratio | Minimum Amount | Well Capitalized Amount | Amount | Ratio | Minimum Amount | Well Capitalized Amount | |||||||||||||||||||||||
State Bank | ||||||||||||||||||||||||||||||
CET1 Capital | $ | 481,135 | 11.10 | % | $ | 194,972 | $ | 281,626 | $ | 463,164 | 13.06 | % | $ | 159,535 | $ | 230,440 | ||||||||||||||
Tier 1 Capital | 481,135 | 11.10 | % | 259,962 | 346,617 | 463,164 | 13.06 | % | 212,714 | 283,618 | ||||||||||||||||||||
Total Capital | 509,885 | 11.77 | % | 346,617 | 433,271 | 489,762 | 13.81 | % | 283,618 | 354,523 | ||||||||||||||||||||
Tier 1 Leverage | 481,135 | 9.90 | % | 194,429 | 243,037 | 463,164 | 13.18 | % | 140,572 | 175,715 | ||||||||||||||||||||
Regulatory Restrictions on Dividends
Regulatory policy statements provide that generally bank holding companies should pay dividends only out of current operating earnings and that the level of dividends must be consistent with current and expected capital requirements. Dividends received from State Bank have been the primary source of funds available for the declaration and payment of dividends to the Company's common shareholders.
Federal and state banking laws and regulations restrict the amount of dividends State Bank may distribute without prior regulatory approval. At December 31, 2017, State Bank had no capacity to pay dividends to the Company without prior regulatory approval.
69
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2017, the Company had $55.1 million in cash and due from bank accounts, which can be used for additional capital as needed by the subsidiary bank, payment of holding company expenses, payment of dividends to shareholders or for other corporate purposes.
Other Regulatory Matters
The Company had required reserve balances at the Federal Reserve Bank of $29.6 million and $16.2 million at December 31, 2017 and 2016, respectively.
NOTE 19: COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In order to meet the financing needs of its customers, the Company maintains financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit, interest rate and/or liquidity risk. Such financial instruments are recorded when they are funded and the related fees are generally recognized when collected.
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed maturity dates or other termination clauses with required fee payments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The amount of collateral required, if deemed necessary upon extension of credit, is determined on a case by case basis by management through credit evaluation of the customer.
Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, the Company's credit policies govern the issuance of standby letters of credit.
The Company's exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments.
A summary of the Company's commitments is as follows (dollars in thousands):
December 31 | |||||||
2017 | 2016 | ||||||
Commitments to extend credit: | |||||||
Fixed | $ | 65,117 | $ | 63,166 | |||
Variable | 914,524 | 608,176 | |||||
Letters of credit: | |||||||
Fixed | 5,978 | 6,985 | |||||
Variable | 11,428 | 3,239 | |||||
Total commitments | $ | 997,047 | $ | 681,566 | |||
The fixed rate loan commitments have maturities ranging from one month to thirteen years. Management takes appropriate actions to mitigate interest rate risk associated with these fixed rate commitments through various measures including, but not limited to, the use of derivative financial instruments.
Contingent Liabilities
Mortgage loan sales agreements contain covenants that may, in limited circumstances, require the Company to repurchase or indemnify the investors for losses or costs related to the loans the Company has sold. As a result of the potential recourse provisions, the Company established a recourse liability for mortgage loans held-for-sale. The recourse liability was $297,000 and $306,000 at December 31, 2017 and 2016, respectively.
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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Furthermore, in the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements.
NOTE 20: FAIR VALUE
Overview
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Financial Accounting Standards Board's Accounting Standards Codification Topic 820 ("ASC 820") Fair Value Measurements and Disclosures establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).
Fair Value Hierarchy
Level 1
Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2
Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.
Level 3
Valuation is generated from techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's valuation process. For the years ended December 31, 2017 and 2016, there were no transfers between levels.
Fair Value Option
ASC 820 allows companies to report selected financial assets and liabilities at fair value using the fair value option. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately on the balance sheet. The Company records mortgage loans held-for-sale at fair value under the fair value option, which allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to hedge them without the burden of complying with the requirements for hedge accounting. See Note 1, Summary of Significant Accounting Policies.
Financial Assets and Financial Liabilities Measured on a Recurring Basis
71
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the following methods and assumptions in estimating the fair value of its financial assets and financial liabilities on a recurring basis:
Investment Securities Available-for-Sale
At December 31, 2017, the Company's investment portfolio primarily consisted of U.S. government agency mortgage-backed securities, nonagency mortgage-backed securities, U.S. government securities, municipal securities, asset-backed securities, and corporate securities. Fair values for U.S. Treasury and equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges utilizing Level 1 inputs. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. The fair value of other securities classified as available-for-sale are determined using widely accepted valuation techniques including matrix pricing and broker-quote-based applications. Inputs may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other relevant items. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. From time to time, the Company validates the appropriateness of the valuations provided by the independent pricing service to prices obtained from an additional third party or prices derived using internal models.
Hedged Loans
Loans involved in fair value hedges are recorded at fair value on a recurring basis. The estimated fair value is determined using Level 2 inputs consistent with the valuation methodology for interest rate swaps discussed below. The Company does not record other loans held for investment at fair value on a recurring basis.
Mortgage Loans Held-for-Sale
Mortgage loans held-for-sale are recorded at fair value on a recurring basis. The estimated fair value is determined using Level 2 inputs based on observable data such as the existing forward commitment terms or the current market value of similar loans. After origination and prior to sale, the mortgage loans held-for-sale accrue interest income, recorded in "interest income" on the consolidated statements of income, based on the contractual terms of the loans. Refer to Note 1, Summary of Significant Accounting Policies, for more information on the accounting for mortgage loans held-for-sale.
At December 31, 2017 and 2016, the aggregate fair value of the mortgage loans held-for-sale was $25.8 million and $35.8 million, respectively. At December 31, 2017 and 2016, the contractual balance including accrued interest was $25.2 million and $35.6 million, respectively, with a fair value mark totaling $544,000 and $209,000, respectively. None of the loans were 90 days or more past due or on nonaccrual at December 31, 2017 or 2016. The gain (loss) recognized for the change in fair value of the mortgage loans held-for-sale, included in "mortgage banking income" on the consolidated statements of income, was $334,000, $(757,000) and $182,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Derivative Financial Instruments
Swaps and Caps
The Company uses interest rate swaps to provide longer-term fixed rate funding to its customers and interest rate caps to mitigate the interest rate risk on its variable rate liabilities. The majority of these derivatives are traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract. Therefore, these derivative contracts are classified as Level 2. The Company utilizes an independent third party valuation company to validate the dealer prices. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are considered to have been derived utilizing Level 3 inputs.
The Company evaluates the credit risk of its counterparties as well as that of the Company. The Company has considered factors such as the likelihood of default by the Company and its counterparties, its net exposures, and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting arrangements, as well as considering the amount of collateral securing the position. The Company reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to adjust the exposure. The Company also utilizes this approach to estimate its own credit risk on
72
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
derivative liability positions. To date, the Company has not realized any losses due to a counterparty's inability to pay any net uncollateralized position.
Mortgage Derivatives
Mortgage derivatives include interest rate lock commitments to originate residential mortgage loans held-for-sale. The Company relies on an internal valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held-for-sale. The model groups the interest rate lock commitments by interest rate and term, applies an estimated pull-through rate based on historical experience, and then multiplies by quoted investor prices which were determined to be reasonably applicable to the loan commitment group based on interest rate, term, and rate lock expiration date of the loan commitment group. While there are Level 2 and 3 inputs used in the valuation model, the Company has determined that the majority of the inputs significant in the valuation of the interest rate lock commitments fall within Level 3 of the fair value hierarchy. Changes in the fair values of these derivatives are included in "mortgage banking income" on the consolidated statements of income.
Mortgage derivatives also include forward commitments to sell residential mortgage loans to various investors when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitment to fund loans. The Company also relies on an internal valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available (Level 2). Changes in the fair values of these derivatives are included in "mortgage banking income" on the consolidated statements of income.
SBA Servicing Rights
The Company has the rights to service a portfolio of SBA loans. The SBA servicing rights are measured at fair value when loans are sold on a servicing retained basis. The servicing rights are subsequently measured at fair value on a recurring basis utilizing Level 3 inputs. Management uses a model operated and maintained by a third party to calculate the present value of future cash flows using the third party's market-based assumptions. The future cash flows for each asset are based on the asset's unique characteristics and the third party's market-based assumptions for prepayment speeds, default and voluntary prepayments. For non-guaranteed portions of servicing assets, future cash flows are estimated using loan specific assumptions for losses and recoveries. Adjustments to fair value are recorded as a component of "SBA income" on the consolidated statements of income.
73
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the financial assets and financial liabilities measured at fair value on a recurring basis at the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
December 31, 2017 | Quoted Market Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Assets: | ||||||||||||||||
U.S. Government securities | $ | — | $ | 69,559 | $ | — | $ | 69,559 | ||||||||
Residential mortgage-backed securities — nonagency | — | 118,710 | — | 118,710 | ||||||||||||
Residential mortgage-backed securities — agency | — | 575,849 | — | 575,849 | ||||||||||||
Corporate securities | — | 109,852 | — | 109,852 | ||||||||||||
Hedged loans | — | 139,391 | — | 139,391 | ||||||||||||
Mortgage loans held-for-sale | — | 25,791 | — | 25,791 | ||||||||||||
Mortgage derivatives | — | 101 | 515 | 616 | ||||||||||||
Interest rate swaps and caps | — | 2,011 | — | 2,011 | ||||||||||||
SBA servicing rights | — | — | 4,069 | 4,069 | ||||||||||||
Total recurring assets at fair value | $ | — | $ | 1,041,264 | $ | 4,584 | $ | 1,045,848 | ||||||||
Liabilities: | ||||||||||||||||
Interest rate swaps and caps | $ | — | $ | 116 | $ | — | $ | 116 | ||||||||
Mortgage derivatives | — | 38 | 200 | 238 | ||||||||||||
Total recurring liabilities at fair value | $ | — | $ | 154 | $ | 200 | $ | 354 | ||||||||
December 31, 2016 | Quoted Market Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Assets: | ||||||||||||||||
U.S. Government securities | $ | — | $ | 88,649 | $ | — | $ | 88,649 | ||||||||
States and political subdivisions | — | 301 | — | 301 | ||||||||||||
Residential mortgage-backed securities — nonagency | — | 154,009 | — | 154,009 | ||||||||||||
Residential mortgage-backed securities — agency | — | 529,302 | — | 529,302 | ||||||||||||
Corporate securities | — | 74,917 | — | 74,917 | ||||||||||||
Hedged loans | — | 167,165 | — | 167,165 | ||||||||||||
Mortgage loans held-for-sale | — | 35,813 | — | 35,813 | ||||||||||||
Mortgage derivatives | — | 663 | 699 | 1,362 | ||||||||||||
Interest rate swaps and caps | — | 1,793 | — | 1,793 | ||||||||||||
SBA servicing rights | — | — | 3,477 | 3,477 | ||||||||||||
Total recurring assets at fair value | $ | — | $ | 1,052,612 | $ | 4,176 | $ | 1,056,788 | ||||||||
Liabilities: | ||||||||||||||||
Interest rate swaps and caps | $ | — | $ | 726 | $ | — | $ | 726 | ||||||||
Mortgage derivatives | — | 14 | 445 | 459 | ||||||||||||
Total recurring liabilities at fair value | $ | — | $ | 740 | $ | 445 | $ | 1,185 | ||||||||
74
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the periods presented (dollars in thousands):
December 31 | ||||||||||||
SBA Servicing Rights | 2017 | 2016 | 2015 | |||||||||
Balance, beginning of year | $ | 3,477 | $ | 2,626 | $ | 1,516 | ||||||
Additions | 1,213 | 1,323 | 1,070 | |||||||||
Fair value adjustments (1) | (621 | ) | (472 | ) | 40 | |||||||
Balance, end of year | $ | 4,069 | $ | 3,477 | $ | 2,626 | ||||||
(1) Fair value adjustments are recorded as a component of "SBA income" on the consolidated statements of income.
December 31 | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Mortgage Derivatives | Other Assets | Other Liabilities | Other Assets | Other Liabilities | Other Assets | Other Liabilities | ||||||||||||||||||
Balance, beginning of year | $ | 699 | $ | 445 | $ | 651 | $ | 361 | $ | — | $ | — | ||||||||||||
Acquired | — | — | — | — | 272 | 135 | ||||||||||||||||||
Issuances (1) | 2,058 | 1,367 | 2,529 | 2,041 | 1,934 | 1,500 | ||||||||||||||||||
Settlements and closed loans (1) | (2,242 | ) | (1,612 | ) | (2,481 | ) | (1,957 | ) | (1,555 | ) | (1,274 | ) | ||||||||||||
Balance, end of year | $ | 515 | $ | 200 | $ | 699 | $ | 445 | $ | 651 | $ | 361 | ||||||||||||
(1) Total gain (loss) on the change in fair value, recorded as a component of "mortgage banking income" on the consolidated statements of income was $61,000, $(36,000) and $153,000, respectively for the years ended December 31, 2017, 2016 and 2015.
Financial Assets Measured on a Nonrecurring Basis
The Company uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:
Impaired Loans
Loans, excluding purchased credit impaired loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The fair values of impaired loans are measured on a nonrecurring basis and are based on the underlying collateral value of each loan if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs that are based on observable market data such as an appraisal. Updated appraisals are obtained on at least an annual basis. Level 3 inputs are based on the Company's customized discounting criteria when management determines the fair value of the collateral is further impaired.
The following table presents financial assets measured at fair value on a nonrecurring basis at the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
Quoted Market Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
December 31, 2017 | |||||||||||||||
Impaired loans | $ | — | $ | — | $ | 11,804 | $ | 11,804 | |||||||
Total nonrecurring assets at fair value | $ | — | $ | — | $ | 11,804 | $ | 11,804 | |||||||
December 31, 2016 | |||||||||||||||
Impaired loans | $ | — | $ | — | $ | 8,784 | $ | 8,784 | |||||||
Total nonrecurring assets at fair value | $ | — | $ | — | $ | 8,784 | $ | 8,784 | |||||||
75
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans, excluding purchased credit impaired loans, that are measured for impairment using the fair value of collateral for collateral dependent loans had recorded investments of $13.0 million and $9.6 million with respective valuation allowances of $1.2 million and $831,000 at December 31, 2017 and 2016, respectively.
Nonfinancial Assets Measured on a Nonrecurring Basis
The Company uses the following methods and assumptions in estimating the fair values of its nonfinancial assets on a nonrecurring basis:
Other Real Estate Owned
Other real estate owned ("OREO") consists of real estate acquired through foreclosure or a deed in lieu of foreclosure in satisfaction of a loan, OREO acquired in a business acquisition, and banking premises no longer used for a specific business purpose. Real estate obtained in satisfaction of a loan is initially recorded at the lower of the principal investment in the loan or the fair value of the collateral less estimated costs to sell at the time of foreclosure with any excess in loan balance charged against the allowance for loan and lease losses. OREO acquired in a business acquisition is recorded at fair value on Day 1 of the acquisition. Banking premises no longer used for a specific business purpose is transferred into OREO at the lower of its carrying value or fair value less estimated costs to sell with any excess in the carrying value charged to noninterest expense. For all fair value estimates of the real estate properties, management considers a number of factors such as appraised values, estimated selling prices, and current market conditions, resulting in a Level 3 classification. Management periodically reviews the carrying value of OREO for impairment and adjusts the values as appropriate through noninterest expense.
The following table presents nonfinancial assets measured at fair value on a nonrecurring basis at the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
Quoted Market Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
December 31, 2017 | |||||||||||||||
Other real estate owned | $ | — | $ | — | $ | 1,204 | $ | 1,204 | |||||||
December 31, 2016 | |||||||||||||||
Other real estate owned | $ | — | $ | — | $ | 13,292 | $ | 13,292 | |||||||
The following table is a reconciliation of the fair value measurement of other real estate owned disclosed in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, to the amount recorded on the consolidated statements of financial condition (dollars in thousands):
December 31 | ||||||||
Other Real Estate Owned | 2017 | 2016 | ||||||
Other real estate owned at fair value | $ | 1,204 | $ | 13,292 | ||||
Estimated selling costs and other adjustments | (309 | ) | (2,395 | ) | ||||
Other real estate owned | $ | 895 | $ | 10,897 | ||||
76
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unobservable Inputs for Level 3 Fair Value Measurements
The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at the dates indicated (dollars in thousands):
December 31, 2017 | Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||
SBA servicing rights | $ | 4,069 | Discounted cash flows | Discount rate | 10% - 22% (13%) | |||||
Prepayment speed | 4% - 13% (9%) | |||||||||
Mortgage derivatives - asset | $ | 515 | Pricing model | Pull-through rate | 84% | |||||
Mortgage derivatives - liability | $ | 200 | Pricing model | Pull-through rate | 84% | |||||
Impaired loans - collateral dependent | $ | 11,804 | Third party appraisal | Management discount for property type and recent market volatility | 0% - 50% (9%) | |||||
Other real estate owned | $ | 1,204 | Third party appraisal | Management discount for property type and recent market volatility | 0% - 33% (12%) | |||||
December 31, 2016 | Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||
SBA servicing rights | $ | 3,477 | Discounted cash flows | Discount rate | 9% - 18% (13%) | |||||
Prepayment speed | 3% - 11% (8%) | |||||||||
Mortgage derivatives - asset | $ | 699 | Pricing model | Pull-through rate | 84% | |||||
Mortgage derivatives - liability | $ | 445 | Pricing model | Pull-through rate | 84% | |||||
Impaired loans - collateral dependent | $ | 8,784 | Third party appraisal | Management discount for property type and recent market volatility | 0% - 50% (9%) | |||||
Other real estate owned | $ | 13,292 | Third party appraisal | Management discount for property type and recent market volatility | 0% - 68% (16%) | |||||
77
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Assets and Financial Liabilities
The following table includes the estimated fair value of the Company's financial assets and financial liabilities (dollars in thousands). The methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies; however, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts at December 31, 2017 and 2016.
December 31, 2017 | December 31, 2016 | ||||||||||||||||
Fair Value Hierarchy Level | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Assets: | |||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 230,877 | $ | 230,877 | $ | 149,593 | $ | 149,593 | ||||||||
Investment securities available-for-sale | Level 2 | 873,970 | 873,970 | 847,178 | 847,178 | ||||||||||||
Investment securities held-to-maturity | Level 2 & 3 | 32,852 | 33,351 | 67,063 | 67,435 | ||||||||||||
Loans held-for-sale | Level 2 | 36,211 | 37,580 | 52,169 | 53,770 | ||||||||||||
Loans, net | Level 2 & 3 | 3,503,443 | 3,513,057 | 2,787,974 | 2,820,484 | ||||||||||||
Other real estate owned | Level 3 | 895 | 1,204 | 10,897 | 13,292 | ||||||||||||
Interest rate swaps and caps | Level 2 | 2,011 | 2,011 | 1,793 | 1,793 | ||||||||||||
Mortgage derivatives | Levels 2 & 3 | 616 | 616 | 1,362 | 1,362 | ||||||||||||
SBA servicing rights | Level 3 | 4,069 | 4,069 | 3,477 | 3,477 | ||||||||||||
Accrued interest receivable | Level 2 | 14,906 | 14,906 | 10,210 | 10,210 | ||||||||||||
Federal Home Loan Bank stock | Level 3 | 4,651 | 4,651 | 5,680 | 5,680 | ||||||||||||
Liabilities: | |||||||||||||||||
Deposits | Level 2 | $ | 4,243,135 | $ | 4,237,883 | $ | 3,431,165 | $ | 3,430,405 | ||||||||
Federal funds purchased and securities sold under agreements to repurchase | Level 2 | 25,209 | 25,209 | 27,673 | 27,673 | ||||||||||||
FHLB Borrowings | Level 2 | — | — | 47,014 | 47,014 | ||||||||||||
Notes payable | Level 2 | 398 | 398 | 398 | 398 | ||||||||||||
Interest rate swaps and caps | Level 2 | 116 | 116 | 726 | 726 | ||||||||||||
Mortgage derivatives | Levels 2 & 3 | 238 | 238 | 459 | 459 | ||||||||||||
Accrued interest payable | Level 2 | 3,750 | 3,750 | 2,312 | 2,312 | ||||||||||||
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of these instruments.
Investment Securities Held-to-Maturity
Fair values are determined using quoted market prices or dealer quotes in the same manner as investment securities available-for-sale.
Organic and Purchased Non-Credit Impaired Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturities using estimated market discount rates that reflect observable market information incorporating the credit, liquidity, yield, and other risks inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.
78
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchased Credit Impaired Loans
Purchased credit impaired loans are recorded at fair value at the date of acquisition. The fair values of loans with evidence of credit deterioration are recorded net of a nonaccretable discount and an accretable discount. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases to the expected cash flows results in a reversal of the provision for loan and lease losses to the extent of prior changes or a reclassification of the difference from the nonaccretable to accretable discount with a positive impact on the accretable discount.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts are a reasonable estimate of fair values.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock, classified as a restricted equity security, is considered a Level 3 asset as little or no market activity exists for the security; therefore, the security's value is not market observable and is carried at original cost basis as cost approximates fair value.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing deposits, and savings and money market deposits, is equal to the amount payable on demand. The fair value of time deposits is estimated by discounting the expected life. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Securities Sold Under Repurchase Agreements
The fair value of federal funds purchased and securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings.
FHLB Borrowings
The carrying amount approximates fair value because of the short maturity of these instruments.
Notes Payable
Notes payable are variable rate subordinated debt for which performance is based on the underlying notes receivable interest rates adjust according to market value; therefore, the carrying amount approximates fair value.
79
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21: INCOME TAXES
The components of income tax expense were as follows (dollars in thousands):
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Current tax provision: | |||||||||||
Federal | $ | 27,484 | $ | 12,599 | $ | 35,151 | |||||
State | 2,926 | 540 | 5,126 | ||||||||
Total current tax provision | 30,410 | 13,139 | 40,277 | ||||||||
Deferred tax provision: | |||||||||||
Federal | 10,010 | 10,958 | (20,831 | ) | |||||||
State | 622 | 2,087 | (3,997 | ) | |||||||
Total deferred tax provision | 10,632 | 13,045 | (24,828 | ) | |||||||
Total income tax provision | $ | 41,042 | $ | 26,184 | $ | 15,449 | |||||
Income tax expense differed from amounts computed by applying the Federal statutory rate of 35% to income before income taxes due to the following factors (dollars in thousands):
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Federal taxes at statutory rate | $ | 30,666 | $ | 25,821 | $ | 15,355 | |||||
Increase (reduction) in income taxes resulting from: | |||||||||||
State taxes, net of federal benefit | 2,306 | 1,708 | 734 | ||||||||
Tax-exempt interest | (361 | ) | (355 | ) | (357 | ) | |||||
Bank-owned life insurance income | (680 | ) | (675 | ) | (674 | ) | |||||
Tax rate change - Tax Cuts and Jobs Act of 2017 | 8,106 | — | — | ||||||||
Merger election | 2,545 | — | — | ||||||||
Stock based compensation | (904 | ) | (255 | ) | — | ||||||
Other | (636 | ) | (60 | ) | 391 | ||||||
Income tax expense | $ | 41,042 | $ | 26,184 | $ | 15,449 | |||||
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. Among other things, the new law establishes a new, flat corporate federal statutory income tax rate of 21% effective January 1, 2018. At the enactment date, the Company revalued its deferred tax assets and liabilities based upon the newly enacted statutory rate of 21%, which is the rate at which these assets and liabilities are expected to reverse, and recognized provisional tax expense of $8.1 million. The ultimate impact of the Tax Cuts and Jobs Act may differ from this provisional amount due to changes in management's interpretations and assumptions, as well as additional regulatory guidance that may be issued. The provisional amount is expected to be finalized when the 2017 federal tax return is filed in 2018. The Company elected to treat its acquisition of AloStar as an acquisition of assets rather than an acquisition of stock for tax purposes. This election resulted in tax expense of $2.5 million to remeasure the deferred tax assets and liabilities related to the acquisition.
80
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset included in other assets in the accompanying consolidated statement of financial condition are as follows (dollars in thousands):
December 31 | |||||||
2017 | 2016 | ||||||
Deferred tax assets | |||||||
Allowance for loan and lease losses | $ | 7,274 | $ | 10,288 | |||
Net operating losses and credit carryforward | 4,125 | 6,649 | |||||
Accrued compensation | 4,046 | 5,585 | |||||
Tax basis difference on acquired assets | 2,864 | 6,407 | |||||
Other real estate owned | 128 | 497 | |||||
Unrealized losses on cash flow hedges | 22 | 682 | |||||
Estimated loss on acquired failed bank assets | 2,646 | 6,327 | |||||
Unrealized losses on securities available-for-sale | 843 | 834 | |||||
Other | 1,125 | 538 | |||||
Total deferred tax assets | 23,073 | 37,807 | |||||
Deferred tax liabilities | |||||||
Intangible asset basis difference | $ | (4,427 | ) | $ | (7,163 | ) | |
Premises and equipment | (1,598 | ) | (2,406 | ) | |||
Other | (1,472 | ) | (989 | ) | |||
Total deferred tax liabilities | (7,497 | ) | (10,558 | ) | |||
Net Deferred Tax Asset | $ | 15,576 | $ | 27,249 | |||
Based on management’s belief that it is more likely than not that all net deferred tax asset benefits will be realized, there was no valuation allowance at either December 31, 2017 or 2016. At December 31, 2017 and 2016, the Company had Federal and State tax net operating loss carryforwards, related to the Bank of Atlanta and S Bank acquisitions, of approximately $16.3 million and $17.2 million, respectively. The loss carryforwards can be deducted annually from future taxable income through 2036, subject to an annual limitation of approximately $1.0 million. Currently, tax years 2014 to present are open for examination by Federal and State taxing authorities.
NOTE 22: EARNINGS PER SHARE
The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is calculated using the two-class method. Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock compensation awards and warrants. There were no anti-dilutive securities excluded from the computation of earnings per share in the periods presented.
81
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share have been computed based on the following weighted average number of common shares outstanding (dollars in thousands, except per share data):
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Numerator: | |||||||||||
Net income per consolidated statements of income | $ | 46,574 | $ | 47,591 | $ | 28,423 | |||||
Net income allocated to participating securities | (1,222 | ) | (1,303 | ) | (783 | ) | |||||
Net income allocated to common stock | $ | 45,352 | $ | 46,288 | $ | 27,640 | |||||
Basic earnings per share computation: | |||||||||||
Net income allocated to common stock | $ | 45,352 | $ | 46,288 | $ | 27,640 | |||||
Weighted average common shares outstanding, including shares considered participating securities | 38,945,515 | 36,942,866 | 35,796,497 | ||||||||
Less: Average participating securities | (1,022,195 | ) | (1,011,338 | ) | (985,642 | ) | |||||
Weighted average shares | 37,923,320 | 35,931,528 | 34,810,855 | ||||||||
Basic earnings per share | $ | 1.20 | $ | 1.29 | $ | .79 | |||||
Diluted earnings per share computation: | |||||||||||
Net income allocated to common stock | $ | 45,352 | $ | 46,288 | $ | 27,640 | |||||
Weighted average common shares outstanding for basic earnings per share | 37,923,320 | 35,931,528 | 34,810,855 | ||||||||
Weighted average dilutive grants | 71,337 | 102,115 | 1,231,864 | ||||||||
Weighted average shares and dilutive potential common shares | 37,994,657 | 36,033,643 | 36,042,719 | ||||||||
Diluted earnings per share | $ | 1.19 | $ | 1.28 | $ | .77 | |||||
82
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, or AOCI, is reported as a component of shareholders' equity. AOCI can include, among other items, unrealized holding gains and losses on investment securities available-for-sale, unrealized gains and losses on investment securities available-for-sale transferred to held-to-maturity and gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges. The components of AOCI are reported net of related tax effects.
The components of AOCI and changes in those components are as follows (dollars in thousands):
Investment Securities Available-for-Sale | Held-to-Maturity Securities Transferred from Available-for-Sale | Cash Flow Hedges (Effective Portion) | Total | |||||||||||||
Balance, December 31, 2014 | $ | 4,210 | $ | — | $ | (290 | ) | $ | 3,920 | |||||||
Other comprehensive loss before income taxes: | ||||||||||||||||
Net change in unrealized losses | (6,955 | ) | — | (2,294 | ) | (9,249 | ) | |||||||||
Amounts reclassified for net (gains) losses realized and included in earnings | (354 | ) | — | 546 | 192 | |||||||||||
Income tax benefit | (2,827 | ) | — | (676 | ) | (3,503 | ) | |||||||||
Balance, December 31, 2015 | $ | (272 | ) | $ | — | $ | (1,362 | ) | $ | (1,634 | ) | |||||
Other comprehensive loss before income taxes: | ||||||||||||||||
Net change in unrealized losses | (1,196 | ) | — | (714 | ) | (1,910 | ) | |||||||||
Amounts reclassified for net (gains) losses realized and included in earnings | (489 | ) | — | 1,171 | 682 | |||||||||||
Transfer of net unrealized loss from available-for-sale to held-to-maturity | 172 | (172 | ) | — | — | |||||||||||
Amortization of net unrealized losses on securities transferred to-held-to-maturity | — | (3 | ) | — | (3 | ) | ||||||||||
Income tax (benefit) expense | (585 | ) | — | 177 | (408 | ) | ||||||||||
Balance, December 31, 2016 | $ | (1,200 | ) | $ | (175 | ) | $ | (1,082 | ) | $ | (2,457 | ) | ||||
Other comprehensive loss before income taxes: | ||||||||||||||||
Net change in unrealized (losses) gains | (2,874 | ) | — | 58 | (2,816 | ) | ||||||||||
Amounts reclassified for net losses realized and included in earnings | 1,453 | — | 1,618 | 3,071 | ||||||||||||
Amortization of net unrealized losses on securities transferred to held-to-maturity | — | 196 | — | 196 | ||||||||||||
Adoption of ASU 2018-02 | (442 | ) | — | (11 | ) | (453 | ) | |||||||||
Income tax (benefit) expense | (540 | ) | — | 648 | 108 | |||||||||||
Balance, December 31, 2017 | $ | (2,523 | ) | $ | 21 | $ | (65 | ) | $ | (2,567 | ) | |||||
83
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications from AOCI into income for the periods presented are as follows (dollars in thousands):
December 31 | ||||||||||||
Reclassifications from AOCI into income and affected line items on Consolidated Statements of Income | 2017 | 2016 | 2015 | |||||||||
Investment securities available-for-sale | ||||||||||||
(Loss) gain on sale of investment securities | $ | (1,453 | ) | $ | 489 | $ | 354 | |||||
Income tax benefit (expense) | 558 | (189 | ) | (137 | ) | |||||||
Net income | $ | (895 | ) | $ | 300 | $ | 217 | |||||
Cash flow hedges (effective portion) | ||||||||||||
Interest expense on deposits | $ | (1,618 | ) | $ | (1,171 | ) | $ | (546 | ) | |||
Income tax benefit | 621 | 453 | 211 | |||||||||
Net income | $ | (997 | ) | $ | (718 | ) | $ | (335 | ) | |||
NOTE 24: CONDENSED FINANCIAL INFORMATION OF STATE BANK FINANCIAL CORPORATION (PARENT COMPANY ONLY FINANCIAL STATEMENTS)
Condensed Statements of Financial Condition | |||||||
(Dollars in thousands) | |||||||
December 31 | |||||||
2017 | 2016 | ||||||
Assets | |||||||
Cash and due from banks | $ | 55,099 | $ | 79,129 | |||
Securities available-for-sale | 1,515 | 1,546 | |||||
Securities held-to-maturity | 10,161 | 10,259 | |||||
Investment in subsidiary | 574,769 | 550,346 | |||||
Other assets | 939 | 8,082 | |||||
Total assets | $ | 642,483 | $ | 649,362 | |||
Liabilities | |||||||
Other liabilities | $ | 932 | $ | 35,729 | |||
Total liabilities | 932 | 35,729 | |||||
Shareholders' equity | 641,551 | 613,633 | |||||
Total liabilities and shareholders' equity | $ | 642,483 | $ | 649,362 | |||
84
STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Income | |||||||||||
(Dollars in thousands) | |||||||||||
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Interest income: | |||||||||||
Interest income | $ | 934 | $ | 940 | $ | 57 | |||||
Net interest income | 934 | 940 | 57 | ||||||||
Noninterest income: | |||||||||||
Dividends from subsidiary | 24,400 | 58,000 | 17,900 | ||||||||
Other income | 416 | 243 | 3,125 | ||||||||
Total noninterest income | 24,816 | 58,243 | 21,025 | ||||||||
Noninterest expense: | |||||||||||
Salaries and employee benefits | 1,425 | 2,246 | 7,537 | ||||||||
Other noninterest expense | 1,807 | 1,485 | 4,685 | ||||||||
Total noninterest expense | 3,232 | 3,731 | 12,222 | ||||||||
Income before income tax and equity in undistributed net income of subsidiary | 22,518 | 55,452 | 8,860 | ||||||||
Income tax benefit | (374 | ) | (1,306 | ) | (3,413 | ) | |||||
Income before equity in undistributed net income of subsidiary | 22,892 | 56,758 | 12,273 | ||||||||
Equity in earnings of subsidiary greater than (less than) dividends received | 23,682 | (9,167 | ) | 16,150 | |||||||
Net income | $ | 46,574 | $ | 47,591 | $ | 28,423 | |||||
Condensed Statements of Cash Flows | |||||||||||
(Dollars in thousands) | |||||||||||
Years Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 46,574 | $ | 47,591 | $ | 28,423 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
Undistributed earnings of subsidiary (greater than) less than dividends received | (23,682 | ) | 9,167 | (16,150 | ) | ||||||
Share-based compensation expense | 3,791 | 3,889 | 3,595 | ||||||||
Other, net | 6,622 | (2,771 | ) | (2,059 | ) | ||||||
Net cash provided by operating activities | 33,305 | 57,876 | 13,809 | ||||||||
Cash flows from investing activities: | |||||||||||
Cash consideration paid, net of cash received for bank acquisitions | (34,171 | ) | (3,685 | ) | (25,884 | ) | |||||
Purchase of investment securities available-for-sale | — | — | (11,758 | ) | |||||||
Other | (39 | ) | — | — | |||||||
Net cash used in investing activities | (34,210 | ) | (3,685 | ) | (37,642 | ) | |||||
Cash flows from financing activities: | |||||||||||
Issuance of common stock | 1 | 200 | 547 | ||||||||
Repurchase of common stock | — | (5,128 | ) | — | |||||||
Restricted stock activity | (1,312 | ) | (116 | ) | (27 | ) | |||||
Dividends paid | (21,814 | ) | (20,681 | ) | (11,631 | ) | |||||
Net cash used in financing activities | (23,125 | ) | (25,725 | ) | (11,111 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (24,030 | ) | 28,466 | (34,944 | ) | ||||||
Cash and cash equivalents, beginning | 79,129 | 50,663 | 85,607 | ||||||||
Cash and cash equivalents, ending | $ | 55,099 | $ | 79,129 | $ | 50,663 | |||||
85
PART IV
Item 15. Exhibits, Financial Statement Schedules.
A list of financial statements filed herewith is contained in Part II, Item 8, "Financial Statements and Supplementary Data," above of this Annual Report on Form 10-K and is incorporated by reference herein. The financial statement schedules have been omitted because they are not required, not applicable or the information has been included in our consolidated financial statements.
Exhibit No. | Document | |
Purchase and Assumption Agreement dated as of July 24, 2009 among the Federal Deposit Insurance Corporation, Receiver of Security Bank of Bibb County, Macon Georgia; Security Bank of Gwinnett County, Suwanee, Georgia; Security Bank of Houston County, Perry, Georgia; Security Bank of Jones County, Gray, Georgia; Security Bank of North Fulton, Alpharetta, Georgia; Security Bank of North Metro, Woodstock, Georgia, State Bank and Trust Company and the Federal Deposit Insurance Corporation acting in its corporate capacity (incorporated by reference to Exhibit 2.1 of Amendment No. 5 to our registration statement on Form 10 filed on March 4, 2011)^ | ||
Purchase and Assumption Agreement dated as of December 4, 2009 among the Federal Deposit Insurance Corporation, Receiver of The Buckhead Community Bank, Atlanta, Georgia, State Bank and Trust Company and the Federal Deposit Insurance Corporation acting in its corporate capacity (incorporated by reference to Exhibit 2.2 of Amendment No. 5 to our registration statement on Form 10 filed on March 4, 2011)^ | ||
Purchase and Assumption Agreement dated as of December 4, 2009 among the Federal Deposit Insurance Corporation, Receiver of First Security National Bank, Norcross, Georgia, State Bank and Trust Company and the Federal Deposit Insurance Corporation acting in its corporate capacity (incorporated by reference to Exhibit 2.3 of Amendment No. 5 to our registration statement on Form 10 filed on March 4, 2011) | ||
Plan of Reorganization and Share Exchange dated January 27, 2010 (incorporated by reference to Exhibit 2.4 of our registration statement on Form 10 filed on October 29, 2010) | ||
Purchase and Assumption Agreement dated as of July 30, 2010 among the Federal Deposit Insurance Corporation, Receiver of NorthWest Bank and Trust, Acworth, Georgia, State Bank and Trust Company and the Federal Deposit Insurance Corporation acting in its corporate capacity (incorporated by reference to Exhibit 2.5 of Amendment No. 5 to our registration statement on Form 10 filed on March 4, 2011)^ | ||
Purchase and Assumption Agreement dated as of December 17, 2010 among the Federal Deposit Insurance Corporation, Receiver of United Americas Bank, N.A., Atlanta, Georgia, State Bank and Trust Company and the Federal Deposit Insurance Corporation acting in its corporate capacity (incorporated by reference to Exhibit 2.6 of Amendment No. 5 to our registration statement on Form 10 filed on March 4, 2011)^ | ||
Agreement and Plan of Merger between State Bank Financial Corporation and Georgia-Carolina Bancshares, Inc. dated June 23, 2014 (incorporated by reference to Exhibit 2.7 of the Company’s Registration Statement on Form S-4 (File Number 333-198707) filed on September 12, 2014 and attached as Annex A to proxy statement/ prospectus contained in the Registration Statement).^ | ||
Agreement and Plan of Merger by and among State Bank Financial Corporation, State Bank and Trust Company, AloStar Bank of Commerce and State Bank Interim Corp. dated June 15, 2017 (incorporated by reference to Exhibit 2.1 to State Bank Financial Corporation's Current Report on Form 8-K filed on June 15, 2017)^ | ||
Amended and Restated Articles of Incorporation of State Bank Financial Corporation (incorporated by reference to Exhibit 3.1 of our registration statement on Form 10 filed on October 29, 2010) | ||
Bylaws of State Bank Financial Corporation (incorporated by reference to Exhibit 3.2 of our registration statement on Form 10 filed on October 29, 2010) | ||
4.1 | ||
Form of certificate of common stock (incorporated by reference to Exhibit 4.2 of our registration statement on Form 10 filed on October 29, 2010) | ||
* | State Bank Financial Corporation's 2011 Omnibus Equity Compensation Plan as adopted by the board of directors on January 26, 2011 (incorporated by reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the period ended June 30, 2011) | |
* | Restricted Stock Agreement dated September 1, 2011 by and among Joseph W. Evans and State Bank Financial Corporation (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on September 8, 2011) | |
* | Form of Restricted Stock Agreement dated September 1, 2011 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September 8, 2011) | |
* | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to State Bank Financial Corporation's Current Report on Form 8-K filed on September 21, 2012) | |
* | Summary of Director Compensation (previously filed as Exhibit 10.5 to the Original Filing) | |
86
Exhibit No. | Document | |
* | Form of Director Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed on August 8, 2014) | |
* | First Amendment to State Bank Financial Corporation 2011 Omnibus Equity Compensation Plan (incorporated by reference to Exhibit 10.33 of our Annual Report on Form 10-K filed on March 14, 2014) | |
* | Offer Letter by and among, First Bank of Georgia, State Bank Financial Corporation and Remer Y. Brinson, III, dated June 23, 2014 (incorporated by reference to Exhibit 10.34 of our registration statement on Form S-4 filed on September 12, 2014) | |
* | Separation Agreement by and between First Bank of Georgia and Remer Y. Brinson, III, dated June 23, 2014 (incorporated by reference to Exhibit 10.35 of our registration statement on Form S-4 filed on September 12, 2014) | |
* | Offer Letter dated October 14, 2014, by and among State Bank and Trust Company, State Bank Financial Corporation and Sheila Ray (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on October 15, 2014) | |
* | Separation Agreement dated October 14, 2014, by and among Sheila Ray and State Bank and Trust Company (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on October 15, 2014) | |
* | Amended and Restated Employment Agreement dated December 31, 2014, by and among J. Thomas Wiley, State Bank Financial Corporation, and State Bank and Trust Company (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on January 2, 2015) | |
* | Amended and Restated Employment Agreement dated December 31, 2014, by and among Kim M. Childers, State Bank Financial Corporation, and State Bank and Trust Company (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on January 2, 2015) | |
* | Executive Officer Annual Cash Incentive Plan for State Bank Financial Corporation (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed February 17, 2015) | |
* | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed February 17, 2015) | |
* | Second Amended and Restated Employment Agreement dated April 26, 2017, by and among Joseph W. Evans, State Bank Financial Corporation and State Bank and Trust Company (incorporated by reference to Exhibit 10.1 to State Bank Financial Corporation's Current Report on Form 8-K filed on May 1, 2017) | |
Subsidiaries of State Bank Financial Corporation (previously filed as Exhibit 21.1 to the Original Filing) | ||
# | Consent of Independent Registered Public Accounting Firm - Dixon Hughes Goodman LLP | |
Power of Attorney (contained on the signature page of the Original Filing) | ||
# | Rule 13a-14(a) Certification of the Chief Executive Officer | |
# | Rule 13a-14(a) Certification of the Chief Financial Officer | |
# | Section 1350 Certifications | |
101 | The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition at December 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015, (iv) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements. (previously filed as Exhibit 101 to the Original Filing) | |
*Management compensatory plan or arrangement.
^Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish supplementally a copy of any omitted schedule or similar attachment to the SEC upon request.
#Filed herewith.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STATE BANK FINANCIAL CORPORATION | |||
Date: | March 2, 2018 | By: | /s/ J. Thomas Wiley, Jr. |
J. Thomas Wiley, Jr. | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
88
EXHIBIT INDEX
89