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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

 

FORM 10-Q

 

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to_______

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

2500 Woodcrest Place, Birmingham, Alabama 35209
(Address of Principal Executive Offices) (Zip Code)

 

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

Title of each class Name of exchange on which registered
Common stock, par value $.001 per share The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No

 

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

Yes ☒   No


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

 

Large accelerated filer ☒      Accelerated filer ☐     Non-accelerated filer ☐     Smaller reporting company ☐     Emerging growth company

 

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

 

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

 

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

 

Class Outstanding as of July 27, 2018
Common stock, $.001 par value 53,164,733

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
  Item 1. Financial Statements 3
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 40
  Item 4. Controls and Procedures 41
       
PART II. OTHER INFORMATION 41
  Item 1 Legal Proceedings 41
  Item 1A. Risk Factors 41
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
  Item 3. Defaults Upon Senior Securities 42
  Item 4. Mine Safety Disclosures 42
  Item 5. Other Information 42
  Item 6. Exhibits 42

 

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO

EX-31.02 SECTION 302 CERTIFICATION OF THE CFO

EX-32.01 SECTION 906 CERTIFICATION OF THE CEO

EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

 

 

 

 

 


 

2

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS   

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   June 30, 2018  December 31, 2017
   (Unaudited)  (1)
ASSETS          
Cash and due from banks  $68,344   $86,213 
Interest-bearing balances due from depository institutions   81,742    151,849 
Federal funds sold   15,585    239,524 
Cash and cash equivalents   165,671    477,586 
Available for sale debt securities, at fair value   583,549    538,080 
Held to maturity debt securities (fair value of $250 at June 30, 2018 and December 31, 2017)   250    250 
Equity securities   993    1,034 
Mortgage loans held for sale   4,605    4,459 
Loans   6,129,649    5,851,261 
Less allowance for loan losses   (64,239)   (59,406)
Loans, net   6,065,410    5,791,855 
Premises and equipment, net   58,299    58,900 
Accrued interest and dividends receivable   21,375    20,661 
Deferred tax assets   11,661    13,022 
Other real estate owned and repossessed assets   5,937    6,701 
Bank owned life insurance contracts   129,082    127,519 
Goodwill and other identifiable intangible assets   14,584    14,719 
Other assets   23,146    27,598 
Total assets  $7,084,562   $7,082,384 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Noninterest-bearing  $1,481,447   $1,440,326 
Interest-bearing   4,604,235    4,651,348 
Total deposits   6,085,682    6,091,674 
Federal funds purchased   262,659    301,797 
Other borrowings   64,648    64,832 
Accrued interest payable   7,222    4,971 
Other liabilities   9,237    11,506 
Total liabilities   6,429,448    6,474,780 
Stockholders' equity:          
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2018 and December 31, 2017   -    - 
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,150,733 shares issued and outstanding at June 30, 2018, and 52,992,586 shares issued and outstanding at December 31, 2017   53    53 
Additional paid-in capital   217,765    217,693 
Retained earnings   443,972    389,554 
Accumulated other comprehensive income   (7,178)   (198)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.   654,612    607,102 
Noncontrolling interest   502    502 
Total stockholders' equity   655,114    607,604 
Total liabilities and stockholders' equity  $7,084,562   $7,082,384 

 

(1) Derived from audited financial statements.

 

See Notes to Consolidated Financial Statements.

 

3

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2018  2017  2018  2017
Interest income:                    
Interest and fees on loans  $73,620   $59,912   $143,294   $115,468 
Taxable securities   3,127    2,274    5,872    4,361 
Nontaxable securities   623    752    1,279    1,517 
Federal funds sold   694    287    1,245    806 
Other interest and dividends   332    313    715    903 
Total interest income   78,396    63,538    152,405    123,055 
Interest expense:                    
Deposits   11,714    6,321    21,335    12,303 
Borrowed funds   2,160    1,650    4,112    3,133 
Total interest expense   13,874    7,971    25,447    15,436 
Net interest income   64,522    55,567    126,958    107,619 
Provision for loan losses   4,121    4,381    8,260    9,367 
Net interest income after provision for loan losses   60,401    51,186    118,698    98,252 
Noninterest income:                    
Service charges on deposit accounts   1,653    1,382    3,238    2,736 
Mortgage banking   789    1,064    1,307    1,963 
Credit card income   1,756    1,189    3,334    2,368 
Securities gains   -    -    4    - 
Increase in cash surrender value life insurance   786    785    1,563    1,509 
Other operating income   475    385    882    775 
Total noninterest income   5,459    4,805    10,328    9,351 
Noninterest expenses:                    
Salaries and employee benefits   13,098    12,031    26,394    23,744 
Equipment and occupancy expense   2,113    2,265    4,067    4,505 
Professional services   924    808    1,729    1,579 
FDIC and other regulatory assessments   1,159    1,081    2,292    2,078 
OREO expense   160    56    476    132 
Other operating expenses   6,556    5,634    12,564    11,104 
Total noninterest expenses   24,010    21,875    47,522    43,142 
Income before income taxes   41,850    34,116    81,504    64,461 
Provision for income taxes   8,310    9,952    15,361    17,778 
Net income   33,540    24,164    66,143    46,683 
Preferred stock dividends   31    31    31    31 
Net income available to common stockholders  $33,509   $24,133   $66,112   $46,652 
                     
Basic earnings per common share  $0.63   $0.46   $1.24   $0.88 
Diluted earnings per common share  $0.62   $0.45   $1.22   $0.86 

 

See Notes to Consolidated Financial Statements.

 

4

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)  

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2018  2017  2018  2017
Net income  $33,540   $24,164   $66,143   $46,683 
Other comprehensive (loss) income, net of tax:                    
Unrealized holding (losses) gains arising during period from securities available for sale, net of (benefit) of $(553) and $(1,858) for the three and six months ended June 30, 2018, respectively, and tax of $201 and $736 for the three and six months ended June 30, 2017, respectively   (2,073)   374    (6,983)   1,367 
Reclassification adjustment for gains on sale of securities, net of tax of $1 for the six months ended June 30, 2018   -    -    3    - 
Other comprehensive (loss) income, net of tax   (2,073)   374    (6,980)   1,367 
Comprehensive income  $31,467   $24,538   $59,163   $48,050 

 

See Notes to Consolidated Financial Statements.

 

 

 

5

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

(Unaudited)  

 

  Preferred
Stock
  Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Noncontrolling
interest
  Total
Stockholders'
Equity
Balance, December 31, 2016  $-   $53   $215,932   $307,151   $(624)  $377   $522,889 
Common dividends paid, $0.05 per share   -    -    -    (2,641)   -    -    (2,641)
Common dividends declared, $0.05 per share   -    -    -    (2,645)   -    -    (2,645)
Preferred dividends paid   -    -    -    (31)   -    -    (31)
Issue 272,466 shares of common stock upon exercise of stock options   -    -    717    -    -    -    717 
Issue 125 shares of REIT preferred stock   -    -    -    -    -    125    125 
Stock-based compensation expense   -    -    622    -    -    -    622 
Other comprehensive income, net of tax   -    -    -    -    1,367    -    1,367 
Net income   -    -    -    46,683    -    -    46,683 
Balance, June 30, 2017  $-   $53   $217,271   $348,517   $743   $502   $567,086 
                                    
Balance, December 31, 2017  $-   $53   $217,693   $389,554   $(198)  $502   $607,604 
Common dividends paid, $0.11 per share   -    -    -    (5,846)   -    -    (5,846)
Common dividends declared, $0.11 per share   -    -    -    (5,848)   -    -    (5,848)
Preferred dividends paid   -    -    -    (31)   -    -    (31)
Issue 145,297 shares of common stock upon exercise of stock options   -    -    860    -    -    -    860 
30,539 shares of common stock withheld in net settlement upon exercise of stock options   -    -    (1,270)   -    -    -    (1,270)
Stock-based compensation expense   -    -    482    -    -    -    482 
Other comprehensive income, net of tax   -    -    -    -    (6,980)   -    (6,980)
Net income   -    -    -    66,143    -    -    66,143 
Balance, June 30, 2018  $-   $53   $217,765   $443,972   $(7,178)  $502   $655,114 

 

See Notes to Consolidated Financial Statements.

 

6

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

   Six Months Ended June 30,
   2018  2017
OPERATING ACTIVITIES          
Net income  $66,143   $46,683 
Adjustments to reconcile net income to net cash provided by          
Deferred tax expense   1,361    4 
Provision for loan losses   8,260    9,367 
Depreciation   1,679    1,501 
Accretion on acquired loans   (125)   (267)
Amortization of core deposit intangible   135    141 
Net amortization of debt securities available for sale   1,219    1,999 
Increase in accrued interest and dividends receivable   (714)   (969)
Stock-based compensation expense   482    622 
Increase (decrease) in accrued interest payable   2,251    (888)
Proceeds from sale of mortgage loans held for sale   55,342    71,518 
Originations of mortgage loans held for sale   (54,181)   (70,553)
Gain on sale of debt securities available for sale   (4)   - 
Gain on sale of mortgage loans held for sale   (1,307)   (1,963)
Net loss (gain) on sale of other real estate owned and repossessed assets   10    (53)
Write down of other real estate owned and repossessed assets   253    4 
Operating losses of tax credit partnerships   70    7 
Increase in cash surrender value of life insurance contracts   (1,563)   (1,509)
Net change in other assets, liabilities, and other operating activities   (2,238)   (9,379)
Net cash provided by operating activities   77,073    46,265 
INVESTMENT ACTIVITIES          
Purchase of debt securities available for sale   (100,718)   (60,627)
Proceeds from maturities, calls and paydowns of debt securities available for sale   40,484    45,325 
Proceeds from sale of debt securities available for sale   5,100    - 
Purchase of debt securities held to maturity   -    (20,786)
Proceeds from maturities, calls and paydowns of debt securities held to maturity   -    4,093 
Purchase of equity securities   -    (10)
Proceeds from sale of equity securities   30    - 
Increase in loans   (282,441)   (438,253)
Purchase of premises and equipment   (1,078)   (12,984)
Purchase of bank-owned life insurance contracts   -    (10,000)
Proceeds from sale of other real estate owned and repossessed assets   1,252    1,547 
Net cash used in investing activities   (337,371)   (491,695)
FINANCING ACTIVITIES          
Net increase in non-interest-bearing deposits   41,121    91,748 
Net decrease in interest-bearing deposits   (47,113)   (117,249)
Net decrease in federal funds purchased   (39,138)   (55,718)
Repayment of Federal Home Loan Bank advances   (200)   (200)
Proceeds from sale of preferred stock, net   -    125 
Proceeds from exercise of stock options   860    717 
Taxes paid in net settlement of tax obligation upon exercise of stock options   (1,270)   - 
Dividends paid on common stock   (5,846)   (2,641)
Dividends paid on preferred stock   (31)   (31)
Net cash used in financing activities   (51,617)   (83,249)
Net decrease in cash and cash equivalents   (311,915)   (528,679)
Cash and cash equivalents at beginning of period   477,586    783,997 
Cash and cash equivalents at end of period  $165,671   $255,318 
SUPPLEMENTAL DISCLOSURE          
Cash paid for:          
Interest  $23,196   $16,324 
Income taxes   9,465    22,363 
Income tax refund   -    (182)
NONCASH TRANSACTIONS          
Other real estate acquired in settlement of loans  $751   $586 
Internally financed sales of other real estate owned   -    185 
Dividends declared   5,848    2,645 

 

See Notes to Consolidated Financial Statements.

 

7

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

NOTE 1 - GENERAL

 

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2017.

 

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

 

Revenue Recognition

 

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), provides guidance for reporting revenue from the entity’s contracts to provide goods or services to customers. The guidance requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of our revenue-generating transactions are excluded from the scope of ASC 606, including revenue generated from financial instruments, such as securities and loans. Revenue-generating transactions that are within the scope of ASC 606, classified within non-interest income, are described as follows:

 

  Deposit account service charges – represent service fees for monthly activity and maintenance on customer accounts. Attributes can be transaction-based, item-based or time-based. Revenue is recognized when our performance obligation is completed which is generally monthly for maintenance services or when a transaction is processed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

 

  Credit card rewards program membership fees – represent memberships in our credit card rewards program and are paid annually by our cardholders at the time they open an account and on each anniversary. Revenue is recognized ratably over the membership period.

 

Other non-interest income primarily includes income on bank owned life insurance contracts, letter of credit fees and gains on sale of loans held for sale, none of which are within the scope of ASC 606.

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

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

 

NOTE 3 - EARNINGS PER COMMON SHARE

 

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.

 

8

 

   Three Months Ended June 30,  Six Months Ended June 30,
   2018  2017  2018  2017
   (In Thousands, Except Shares and Per Share Data)
Earnings per common share                    
Weighted average common shares outstanding   53,150,142    52,864,761    53,116,420    52,805,378 
Net income available to common stockholders  $33,509   $24,133   $66,112   $46,652 
Basic earnings per common share  $0.63   $0.46   $1.24   $0.88 
                     
Weighted average common shares outstanding   53,150,142    52,864,761    53,116,420    52,805,378 
Dilutive effects of assumed conversions and exercise of stock options and warrants   1,045,881    1,235,843    1,073,326    1,311,694 
Weighted average common and dilutive potential common shares outstanding   54,196,023    54,100,604    54,189,746    54,117,072 
Net income available to common stockholders  $33,509   $24,133   $66,112   $46,652 
Diluted earnings per common share  $0.62   $0.45   $1.22   $0.86 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2018 and December 31, 2017 are summarized as follows:

 

      Gross  Gross   
   Amortized  Unrealized  Unrealized  Market
   Cost  Gain  Loss  Value
June 30, 2018:  (In Thousands)
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $58,072   $4   $(965)  $57,111 
Mortgage-backed securities   322,306    515    (8,390)   314,431 
State and municipal securities   120,885    411    (765)   120,531 
Corporate debt   91,412    730    (666)   91,476 
Total   592,675    1,660    (10,786)   583,549 
Securities Held to Maturity                    
State and municipal securities   250    -    -    250 
Total  $250   $-   $-   $250 
                     
December 31, 2017:                    
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $55,567   $38   $(249)  $55,356 
Mortgage-backed securities   278,177    1,006    (2,685)   276,498 
State and municipal securities   134,641    761    (553)   134,849 
Corporate debt   69,996    1,416    (35)   71,377 
Total   538,381    3,221    (3,522)   538,080 
Securities Held to Maturity                    
State and municipal securities   250    -    -    250 
Total  $250   $-   $-   $250 

 

The amortized cost and fair value of debt securities as of June 30, 2018 and December 31, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories along with the other categories of debt securities.

 

   June 30, 2018  December 31, 2017
   Amortized
Cost
  Fair Value  Amortized
Cost
  Fair Value
   (In thousands)
Debt securities available for sale                    
Due within one year  $47,313   $47,336   $22,122   $22,172 
Due from one to five years   202,998    201,448    160,773    160,563 
Due from five to ten years   17,584    17,767    73,362    74,684 
Due after ten years   2,474    2,567    3,947    4,163 
Mortgage-backed securities   322,306    314,431    278,177    276,498 
   $592,675   $583,549   $538,381   $538,080 
                     
Debt securities held to maturity                    
Due from one to five years  $250   $250   $250   $250 
   $250   $250   $250   $250 

 

 

9

 

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

 

The following table identifies, as of June 30, 2018 and December 31, 2017, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At June 30, 2018, 80 of the Company’s 781 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2018. Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

 

   Less Than Twelve Months  Twelve Months or More  Total
   Gross     Gross     Gross   
   Unrealized     Unrealized     Unrealized   
   Losses  Fair Value  Losses  Fair Value  Losses  Fair Value
   (In Thousands)
June 30, 2018                              
U.S. Treasury and government sponsored agencies  $(809)  $54,065   $(156)  $2,866   $(965)  $56,931 
Mortgage-backed securities   (5,255)   228,217    (3,135)   67,375    (8,390)   295,592 
State and municipal securities   (602)   66,356    (163)   7,872    (765)   74,228 
Corporate debt   (666)   39,738    -    -    (666)   39,738 
Total  $(7,332)  $388,376   $(3,454)  $78,113   $(10,786)  $466,489 
                               
December 31, 2017                              
U.S. Treasury and government sponsored agencies  $(151)  $33,401   $(98)  $2,926   $(249)  $36,327 
Mortgage-backed securities   (986)   140,432    (1,699)   75,903    (2,685)   216,335 
State and municipal securities   (450)   66,637    (103)   6,648    (553)   73,285 
Corporate debt   (35)   6,955    -    -    (35)   6,955 
Total  $(1,622)  $247,425   $(1,900)  $85,477   $(3,522)  $332,902 

 

 

10

 

NOTE 5 – LOANS

 

The following table details the Company’s loans at June 30, 2018 and December 31, 2017:

 

   June 30,  December 31,
   2018  2017
   (Dollars In Thousands)
Commercial, financial and agricultural  $2,345,879   $2,279,366 
Real estate - construction   522,788    580,874 
Real estate - mortgage:          
Owner-occupied commercial   1,383,882    1,328,666 
1-4 family mortgage   584,133    603,063 
Other mortgage   1,225,906    997,079 
Subtotal: Real estate - mortgage   3,193,921    2,928,808 
Consumer   67,061    62,213 
Total Loans   6,129,649    5,851,261 
Less: Allowance for loan losses   (64,239)   (59,406)
Net Loans  $6,065,410   $5,791,855 
           
Commercial, financial and agricultural   38.27%   38.96%
Real estate - construction   8.53%   9.93%
Real estate - mortgage:          
Owner-occupied commercial   22.58%   22.71%
1-4 family mortgage   9.53%   10.30%
Other mortgage   20.00%   17.04%
Subtotal: Real estate - mortgage   52.11%   50.05%
Consumer   1.09%   1.06%
Total Loans   100.00%   100.00%

 

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

 

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

 

11

 

Loans by credit quality indicator as of June 30, 2018 and December 31, 2017 were as follows:

 

      Special         
June 30, 2018  Pass  Mention  Substandard  Doubtful  Total
   (In Thousands)
Commercial, financial and agricultural  $2,289,789   $36,027   $20,063   $-   $2,345,879 
Real estate - construction   515,543    5,664    1,581    -    522,788 
Real estate - mortgage:                         
Owner-occupied commercial   1,369,814    10,042    4,026    -    1,383,882 
1-4 family mortgage   579,288    1,350    3,495    -    584,133 
Other mortgage   1,203,952    15,497    6,457    -    1,225,906 
Total real estate mortgage   3,153,054    26,889    13,978    -    3,193,921 
Consumer   67,009    3    49    -    67,061 
Total  $6,025,395   $68,583   $35,671   $-   $6,129,649 

 

      Special         
December 31, 2017  Pass  Mention  Substandard  Doubtful  Total
   (In Thousands)
Commercial, financial and agricultural  $2,225,084   $27,835   $26,447   $-   $2,279,366 
Real estate - construction   572,657    6,691    1,526    -    580,874 
Real estate - mortgage:                         
Owner-occupied commercial   1,317,113    7,333    4,220    -    1,328,666 
1-4 family mortgage   598,222    1,599    3,242    -    603,063 
Other mortgage   976,348    18,122    2,609    -    997,079 
Total real estate mortgage   2,891,683    27,054    10,071    -    2,928,808 
Consumer   62,083    42    88    -    62,213 
Total  $5,751,507   $61,622   $38,132   $-   $5,851,261 

 

 

12

 

Loans by performance status as of June 30, 2018 and December 31, 2017 were as follows:

 

June 30, 2018  Performing  Nonperforming  Total
   (In Thousands)
Commercial, financial and agricultural  $2,338,563   $7,316   $2,345,879 
Real estate - construction   522,788    -    522,788 
Real estate - mortgage:               
Owner-occupied commercial   1,383,210    672    1,383,882 
1-4 family mortgage   583,130    1,003    584,133 
Other mortgage   1,220,835    5,071    1,225,906 
Total real estate mortgage   3,187,175    6,746    3,193,921 
Consumer   67,020    41    67,061 
Total  $6,115,546   $14,103   $6,129,649 

 

December 31, 2017  Performing  Nonperforming  Total
   (In Thousands)
Commercial, financial and agricultural  $2,269,642   $9,724   $2,279,366 
Real estate - construction   580,874    -    580,874 
Real estate - mortgage:               
Owner-occupied commercial   1,328,110    556    1,328,666 
1-4 family mortgage   602,604    459    603,063 
Other mortgage   997,079    -    997,079 
Total real estate mortgage   2,927,793    1,015    2,928,808 
Consumer   62,127    86    62,213 
Total  $5,840,436   $10,825   $5,851,261 

 

 

13

 

Loans by past due status as of June 30, 2018 and December 31, 2017 were as follows:

 

June 30, 2018  Past Due Status (Accruing Loans)         
            Total Past         
   30-59 Days  60-89 Days  90+ Days  Due  Non-Accrual  Current  Total Loans
   (In Thousands)
Commercial, financial and agricultural  $7,259   $1,554   $431   $9,244   $6,885   $2,329,750   $2,345,879 
Real estate - construction   2,097    3,182    -    5,279    -    517,509    522,788 
Real estate - mortgage:                                   
Owner-occupied commercial   3,365    591    250    4,206    422    1,379,254    1,383,882 
1-4 family mortgage   919    263    288    1,470    715    581,948    584,133 
Other mortgage   1,203    12,941    5,071    19,215    -    1,206,691    1,225,906 
Total real estate - mortgage   5,487    13,795    5,609    24,891    1,137    3,167,893    3,193,921 
Consumer   316    49    41    406    -    66,655    67,061 
Total  $15,159   $18,580   $6,081   $39,820   $8,022   $6,081,807   $6,129,649 

 

December 31, 2017  Past Due Status (Accruing Loans)      
            Total Past         
   30-59 Days  60-89 Days  90+ Days  Due  Non-Accrual  Current  Total Loans
   (In Thousands)
Commercial, financial and agricultural  $1,410   $5,702   $12   $7,124   $9,712   $2,262,530   $2,279,366 
Real estate - construction   56    997    -    1,053    -    579,821    580,874 
Real estate - mortgage:                                   
Owner-occupied commercial   -    3,664    -    3,664    556    1,324,446    1,328,666 
1-4 family mortgage   430    850    -    1,280    459    601,324    603,063 
Other mortgage   5,116    -    -    5,116    -    991,963    997,079 
Total real estate - mortgage   5,546    4,514    -    10,060    1,015    2,917,733    2,928,808 
Consumer   131    23    48    202    38    61,973    62,213 
Total  $7,143   $11,236   $60   $18,439   $10,765   $5,822,057   $5,851,261 

 

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

 

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

 

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

 

14

 

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

 

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

 

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

 

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 2018 and June 30, 2017. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

 

15

 

   Commercial,            
   financial and  Real estate -  Real estate -      
   agricultural  construction  mortgage  Consumer  Total
   (In Thousands)
   Three Months Ended June 30, 2018
Allowance for loan losses:                         
Balance at March 31, 2018  $35,787   $4,138   $21,606   $519   $62,050 
Charge-offs   (1,732)   -    (440)   (47)   (2,219)
Recoveries   173    97    2    15    287 
Provision   1,950    (173)   2,270    74    4,121 
Balance at June 30, 2018  $36,178   $4,062   $23,438   $561   $64,239 
    
   Three Months Ended June 30, 2017
Allowance for loan losses:                         
Balance at March 31, 2017  $28,707   $4,825   $19,962   $398   $53,892 
Charge-offs   (3,067)   (40)   (106)   (33)   (3,246)
Recoveries   16    14    2    -    32 
Provision   3,471    339    534    37    4,381 
Balance at June 30, 2017  $29,127   $5,138   $20,392   $402   $55,059 
    
   Six Months Ended June 30, 2018
Allowance for loan losses:                         
Balance at December 31, 2017  $32,880   $4,989   $21,022   $515   $59,406 
Charge-offs   (2,820)   -    (821)   (135)   (3,776)
Recoveries   177    104    44    24    349 
Provision   5,941    (1,031)   3,193    157    8,260 
Balance at June 30, 2018  $36,178   $4,062   $23,438   $561   $64,239 
    
   Six Months Ended June 30, 2017
Allowance for loan losses:                         
Balance at December 31, 2016  $28,872   $5,125   $17,504   $392   $51,893 
Charge-offs   (5,922)   (40)   (372)   (108)   (6,442)
Recoveries   206    30    4    1    241 
Provision   5,971    23    3,256    117    9,367 
Balance at June 30, 2017  $29,127   $5,138   $20,392   $402   $55,059 
    
   As of June 30, 2018
Allowance for loan losses:                         
Individually Evaluated for Impairment  $5,423   $120   $285   $49   $5,877 
Collectively Evaluated for Impairment   30,755    3,942    23,153    512    58,362 
                          
Loans:                         
Ending Balance  $2,345,879   $522,788   $3,193,921   $67,061   $6,129,649 
Individually Evaluated for Impairment   20,063    1,623    16,240    49    37,975 
Collectively Evaluated for Impairment   2,325,816    521,165    3,177,681    67,012    6,091,674 
    
   As of December 31, 2017
Allowance for loan losses:                         
Individually Evaluated for Impairment  $4,276   $120   $1,163   $50   $5,609 
Collectively Evaluated for Impairment   28,604    4,869    19,859    465    53,797 
                          
Loans:                         
Ending Balance  $2,279,366   $580,874   $2,928,808   $62,213   $5,851,261 
Individually Evaluated for Impairment   26,447    1,571    12,404    88    40,510 
Collectively Evaluated for Impairment   2,252,919    579,303    2,916,404    62,125    5,810,751 

 

 

16

 

The following table presents details of the Company’s impaired loans as of June 30, 2018 and December 31, 2017, respectively. Loans which have been fully charged off do not appear in the tables.

 

            For the three months  For the six months
            ended June 30,  ended June 30,
   June 30, 2018  2018  2018
               Interest     Interest
      Unpaid     Average  Income  Average  Income
   Recorded  Principal  Related  Recorded  Recognized  Recorded  Recognized
   Investment  Balance  Allowance  Investment  in Period  Investment  in Period
   (In Thousands)
With no allowance recorded:                                   
Commercial, financial and agricultural  $4,842   $5,733   $-   $5,257   $53   $5,611   $113 
Real estate - construction   626    629    -    629    8    630    16 
Real estate - mortgage:                                   
Owner-occupied commercial   2,512    2,679    -    2,836    42    2,910    86 
1-4 family mortgage   2,258    2,258    -    2,255    23    2,255    48 
Other mortgage   5,071    5,071    -    5,082    62    5,098    125 
Total real estate - mortgage   9,841    10,008    -    10,173    127    10,263    259 
Consumer   -    -    -    -    -    -    - 
Total with no allowance recorded   15,309    16,370    -    16,059    188    16,504    388 
                                    
With an allowance recorded:                                   
Commercial, financial and agricultural   15,221    22,044    5,423    15,200    121    15,542    245 
Real estate - construction   997    997    120    997    14    997    28 
Real estate - mortgage:                                   
Owner-occupied commercial   3,776    3,776    27    3,775    46    3,775    94 
1-4 family mortgage   1,237    1,237    178    1,240    12    1,240    26 
Other mortgage   1,386    1,386    80    1,540    16    1,700    36 
Total real estate - mortgage   6,399    6,399    285    6,555    74    6,715    156 
Consumer   49    49    49    49    1    49    1 
Total with allowance recorded   22,666    29,489    5,877    22,801    210    23,303    430 
                                    
Total Impaired Loans:                                   
Commercial, financial and agricultural   20,063    27,777    5,423    20,457    174    21,153    358 
Real estate - construction   1,623    1,626    120    1,626    22    1,627    44 
Real estate - mortgage:                                   
Owner-occupied commercial   6,288    6,455    27    6,611    88    6,685    180 
1-4 family mortgage   3,495    3,495    178    3,495    35    3,495    74 
Other mortgage   6,457    6,457    80    6,622    78    6,798    161 
Total real estate - mortgage   16,240    16,407    285    16,728    201    16,978    415 
Consumer   49    49    49    49    1    49    1 
Total impaired loans  $37,975   $45,859   $5,877   $38,860   $398   $39,807   $818 

 

17

 

December 31, 2017
            For the twelve months
            ended December 31, 2017
      Unpaid     Average  Interest Income
   Recorded  Principal  Related  Recorded  Recognized in
   Investment  Balance  Allowance  Investment  Period
   (In Thousands)
With no allowance recorded:                         
Commercial, financial and agricultural  $10,036   $16,639   $-   $16,417   $571 
Real estate - construction   574    577    -    663    31 
Real estate - mortgage:                         
Owner-occupied commercial   2,640    2,806    -    2,875    159 
1-4 family mortgage   2,262    2,262    -    2,289    93 
Other mortgage   746    746    -    727    44 
Total real estate - mortgage   5,648    5,814    -    5,891    296 
Consumer   38    39    -    42    3 
Total with no allowance recorded   16,296    23,069    -    23,013    901 
                          
With an allowance recorded:                         
Commercial, financial and agricultural   16,411    16,992    4,276    17,912    651 
Real estate - construction   997    997    120    997    56 
Real estate - mortgage:                         
Owner-occupied commercial   3,914    3,914    601    3,801    215 
1-4 family mortgage   980    980    281    1,113    54 
Other mortgage   1,862    1,862    281    1,862    80 
Total real estate - mortgage   6,756    6,756    1,163    6,776    349 
Consumer   50    50    50    42    3 
Total with allowance recorded   24,214    24,795    5,609    25,727    1,059 
                          
Total Impaired Loans:                         
Commercial, financial and agricultural   26,447    33,631    4,276    34,329    1,222 
Real estate - construction   1,571    1,574    120    1,660    87 
Real estate - mortgage:                         
Owner-occupied commercial   6,554    6,720    601    6,676    374 
1-4 family mortgage   3,242    3,242    281    3,402    147 
Other mortgage   2,608    2,608    281    2,589    124 
Total real estate - mortgage   12,404    12,570    1,163    12,667    645 
Consumer   88    89    50    84    6 
Total impaired loans  $40,510   $47,864   $5,609   $48,740   $1,960 

 

Troubled Debt Restructurings (“TDR”) at June 30, 2018, December 31, 2017 and June 30, 2017 totaled $17.3 million, $20.6 million and $16.4 million, respectively. At June 30, 2018, the Company had a related allowance for loan losses of $3.6 million allocated to these TDRs, compared to $4.3 million at December 31, 2017 and $3.1 million at June 30, 2017. There were no modifications made to new TDRs or renewals of existing TDRs for the three and six months ended June 30, 2018. TDR activity by portfolio segment for the three and six months ended June 30, 2017 is presented in the table below.

 

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

 

One commercial TDR loan totaling $0.3 million which was modified in the previous twelve months (i.e., twelve months prior to default) defaulted during the three and six months ended June 30, 2018. No TDRs which were modified in the previous twelve months defaulted during the three and six months ended June 30, 2017. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of June 30, 2018, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

 

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At June 30, 2018, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $244,000 and $482,000 for the three and six months ended June 30, 2018 and $285,000 and $622,000 for the three and six months ended June 30, 2017.

 

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

 

The Company estimates the fair value of each stock option award using a Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatilities of the Company’s common stock. The expected term for options granted is based on the short-cut method and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of grant.

 

   2018  2017
Expected volatility   24.13%   29.00%
Expected dividends   1.06%   0.44%
Expected term (in years)   6.25    6.25 
Risk-free rate   2.67%   2.09%

 

The weighted average grant-date fair value of options granted during the six months ended June 30, 2018 and June 30, 2017 was $10.95 and $11.84, respectively.

 

19

 

The following table summarizes stock option activity during the six months ended June 30, 2018 and June 30, 2017:

 

         Weighted   
      Weighted  Average   
      Average  Remaining  Aggregate
      Exercise  Contractual  Intrinsic
   Shares  Price  Term (years)  Value
            (In Thousands)
Six Months Ended June 30, 2018:                    
Outstanding at January 1, 2018   1,666,834   $10.68    5.5   $51,377 
Granted   12,750    41.50    9.7    (9)
Exercised   (175,836)   4.90    3.1    6,317 
Forfeited   (6,000)   19.50    7.7    128 
Outstanding at June 30, 2018   1,497,748    11.58    5.3   $43,787 
                     
Exercisable at June 30, 2018   748,600   $7.34    3.9   $25,811 
                     
Six Months Ended June 30, 2017:                    
Outstanding at January 1, 2017   2,026,334   $9.00    6.2   $57,636 
Granted   51,500    37.95    9.6    (80)
Exercised   (292,000)   4.98    4.4    9,169 
Forfeited   (32,000)   21.96    8.6    (462)
Outstanding at June 30, 2017   1,753,834    10.28    5.9   $45,777 
                     
Exercisable at June 30, 2017   811,736   $5.20    4.4   $25,303 

 

As of June 30, 2018, there was approximately $1,695,000 of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 2.4 years.

 

Restricted Stock

 

The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2018, there was $811,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.8 years of the restricted stock’s vesting period.

 

The following table summarizes restricted stock activity during the six months ended June 30, 2018 and 2017, respectively:

 

   Shares  Weighted
Average Grant
Date Fair
Value
Six Months Ended June 30, 2018:          
Non-vested at January 1, 2018   120,676   $10.29 
Granted   11,850    41.29 
Vested   (61,700)   5.81 
Forfeited   -    - 
Non-vested at June 30, 2018   70,826    19.38 
           
Six Months Ended June 30, 2017:          
Non-vested at January 1, 2017   118,676   $8.88 
Granted   6,000    38.16 
Vested   (4,200)   14.49 
Forfeited   (800)   15.74 
Non-vested at June 30, 2017   119,676    9.94 

 

NOTE 7 - DERIVATIVES

 

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of June 30, 2018 and December 31, 2017 were not material.

 

20

 

NOTE 8 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  The amendments in this ASU require a reclassification from / to accumulated other comprehensive income and to / from retained earnings for stranded tax effects resulting from the change in the newly enacted federal corporate income tax rate.  Consequently, the amendments in this ASU eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017.  The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018 with early adoption allowed.  The Bank elected to early adopt this ASU as of December 31, 2017.  The effect of the adoption of this ASU was to decrease accumulated other comprehensive income by $43,000 with the offset to retained earnings as recorded in the statement of changes in stockholders' equity.  This represents the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and credit card fees, did not change significantly from current practice.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU became effective for the Company on January 1, 2018. Accordingly, the calculation of fair value of the loan portfolio was refined to incorporate exit pricing, but had no material impact on our fair value disclosures. See Note 10 – Fair Value Measurement.

 

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early application of this ASU is permitted for all entities. In January 2018, the FASB issued a proposal to allow an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has reviewed its current lessee portfolio and is assessing the impact of the new standard on its financial statements, related disclosures, systems, and internal controls. The accounting changes are expected to relate primarily to its leased branches and office space which are currently accounted for as operating leases. Based upon leases that were outstanding as of June 30, 2018, the Company anticipates recognizing a right of use asset and a lease liability, but it does not expect the new standard to have a material impact on its consolidated financial statements.

 

21

 

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

 

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

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company will adopt this ASU effective January 1, 2019. The amendments are not expected to have an impact on the Company’s consolidated financial statements because it does not have any stock-based payment awards currently outstanding to nonemployees.

 

NOTE 10 - FAIR VALUE MEASUREMENT

 

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.

 

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

 

22

 

Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $1,543,000 and $3,888,000 during the three and six months ended June 30, 2018, respectively, and $2,329,000 and $5,307,000 during the three and six months ended June 30, 2017, respectively.

 

Other Real Estate Owned and repossessed assets. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure and repossessed assets are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO or repossession are charged to the allowance for loan losses subsequent to foreclosure or repossession. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO and repossessed assets of $99,000 and $353,000 was recognized for the three and six months ended June 30, 2018, respectively, and $83,000 and $53,000 for the three and six months ended June 30, 2017, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO and repossessed assets are classified within Level 3 of the hierarchy.

 

There was one residential real estate loan with a balance of $176,000 foreclosed and classified as OREO as of June 30, 2018 compared to none as of December 31, 2017.

 

Management is negotiating a deed in lieu of a foreclosure related to a $360,000 loan as of June 30, 2018.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:

 

   Fair Value Measurements at June 30, 2018 Using   
   Quoted Prices in         
   Active Markets  Significant Other  Significant   
   for Identical  Observable Inputs  Unobservable   
   Assets (Level 1)  (Level 2)  Inputs (Level 3)  Total
Assets Measured on a Recurring Basis:  (In Thousands)
Available-for-sale debt securities:                    
U.S. Treasury and government agencies  $-   $57,111   $-   $57,111 
Mortgage-backed securities   -    314,431    -    314,431 
State and municipal securities   -    120,531    -    120,531 
Corporate debt   -    84,951    6,525    91,476 
Total assets at fair value  $-   $577,024   $6,525   $583,549 

 

   Fair Value Measurements at December 31, 2017 Using   
   Quoted Prices in         
   Active Markets  Significant Other  Significant   
   for Identical  Observable Inputs  Unobservable   
   Assets (Level 1)  (Level 2)  Inputs (Level 3)  Total
Assets Measured on a Recurring Basis:  (In Thousands)
Available-for-sale debt securities:                    
U.S. Treasury and government agencies  $-   $55,356   $-   $55,356 
Mortgage-backed securities   -    276,498    -    276,498 
State and municipal securities   -    134,849    -    134,849 
Corporate debt   -    64,877    6,500    71,377 
Total assets at fair value  $-   $531,580   $6,500   $538,080 

 

 

23

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017:

 

   Fair Value Measurements at June 30, 2018   
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Nonrecurring Basis:  (In Thousands)
Impaired loans  $-   $-   $32,098   $32,098 
Other real estate owned and repossessed assets   -    -    5,937    5,937 
Total assets at fair value  $-   $-   $38,035   $38,035 

 

   Fair Value Measurements at December 31, 2017   
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Nonrecurring Basis:  (In Thousands)
Impaired loans  $-   $-   $34,901   $34,901 
Other real estate owned and repossessed assets   -    -    6,701    6,701 
Total assets at fair value  $-   $-   $41,602   $41,602 

 

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

 

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

 

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

 

24

 

Equity securities: The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the redemption provision of the investments. Within equity securities, we hold an investment in a fund that qualifies us for Community Reinvestment Act credits. This investment is classified in Level 1 of the fair value hierarchy.

 

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

 

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

 

   June 30, 2018  December 31, 2017
   Carrying     Carrying   
   Amount  Fair Value  Amount  Fair Value
   (In Thousands)
Financial Assets:                    
Level 1 Inputs:                    
Cash and due from banks  $150,086   $150,086   $238,062   $238,062 
                     
Level 2 inputs:                    
Available for sale debt securities   577,024    577,024    531,580    531,580 
Equity securities   993    993    1,034    1,034 
Federal funds sold   15,585    15,585    239,524    239,524 
Mortgage loans held for sale   4,605    4,605    4,459    4,459 
Bank-owned life insurance contracts   129,082    129,082    127,519    127,519 
                     
Level 3 Inputs:                    
Available for sale debt securities   6,525    6,525    6,500    6,500 
Held to maturity debt securities   250    250    250    250 
Loans, net   6,033,312    5,961,354    5,756,954    5,712,441 
                     
Financial liabilities:                    
Level 2 inputs:                    
Deposits  $6,085,682   $6,078,286   $6,091,674   $6,086,085 
Federal funds purchased   262,659    262,659    301,797    301,797 
Other borrowings   64,648    65,677    64,832    65,921 

 

NOTE 11 – SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2018, and events which occurred subsequent to June 30, 2018 but were not recognized in the financial statements.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and six months ended June 30, 2018 and June 30, 2017.

 

Forward-Looking Statements

 

Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including: general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes in our loan portfolio and deposit base; possible changes in laws and regulations and governmental monetary and fiscal policies; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-banks. The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and our other SEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. ServisFirst Bancshares, Inc. assumes no obligation to update or revise any forward-looking statements that are made from time to time.

 

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Business

 

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

 

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

 

Overview

 

As of June 30, 2018, we had consolidated total assets of $7.085 billion, roughly flat when compared to consolidated assets of $7.082 billion at December 31, 2017. Total loans were $6.13 billion at June 30, 2018, up $278.4 million, or 4.8%, from $5.85 billion at December 31, 2017. Total deposits were $6.09 billion at June 30, 2018, which was flat from December 31, 2017.

 

Net income available to common stockholders for the three months ended June 30, 2018 was $33.5 million, an increase of $9.4 million, or 39.0%, from $24.1 million for the corresponding period in 2017. Basic and diluted earnings per common share were $0.63 and $0.62, respectively, for the three months ended June 30, 2018, compared to basic and diluted earnings per common share of $0.46 and $0.45 for the corresponding period in 2017.

 

Net income available to common stockholders for the six months ended June 30, 2018 was $66.1 million, an increase of $19.4 million, or 41.5%, from $46.7 million for the corresponding period in 2017. Basic and diluted earnings per common share were $1.24 and $1.22, respectively, for the six months ended June 30, 2018, compared to $0.88 and $0.86, respectively, for the corresponding period in 2017.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate, deferred taxes, and fair value of financial instruments are particularly subject to change. Information concerning our accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

26

 

Financial Condition

 

Cash and Cash Equivalents

 

At June 30, 2018, we had $15.6 million in federal funds sold, compared to $239.5 million at December 31, 2017. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2018, we had $80.2 million in balances at the Federal Reserve, compared to $150.3 million at December 31, 2017. This decrease was a result of our lower levels of excess liquidity due to loan growth and flat deposits during the first half of 2018.

 

Debt Securities

 

Debt securities available for sale totaled $583.5 million at June 30, 2018 and $538.1 million at December 31, 2017. We had pay downs of $25.9 million on mortgage-backed securities, maturities of $10.6 million on municipal and corporate securities, and calls of $3.4 million on municipal securities and subordinated notes during the six months ended June 30, 2018. We purchased $70.9 million in mortgage-backed securities, $27.0 million in municipal and corporate securities and $2.9 million of U.S. Treasury and government sponsored agency during the first six months of 2018.

 

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

 

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at June 30, 2018 are interest-rate driven, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash charges to earnings in one or more future periods.

 

All securities held are traded in liquid markets. As of June 30, 2018, we owned restricted securities of First National Bankers Bank with an aggregate book value and market value of $0.4 million. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity.

 

The Bank does not invest in collateralized debt obligations (“CDOs”). We have $91.5 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Bond Rating Agency at the time of our investment in them. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at June 30, 2018 has a combined average credit rating of AA.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes was $285.5 million and $284.2 million as of June 30, 2018 and December 31, 2017, respectively.

 

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Loans

 

We had total loans of $6.13 billion at June 30, 2018, an increase of $279.0 million, or 4.8%, compared to $5.85 billion at December 31, 2017. At June 30, 2018, the percentage of our loans in each of our regions were as follows:

 

   Percentage of Total
Loans in MSA
Birmingham-Hoover, AL MSA   42.4%
Huntsville, AL MSA   9.3%
Dothan, AL MSA   9.3%
Mobile, AL MSA   6.3%
Montgomery, AL MSA   6.1%
Total Alabama MSAs   73.4%
Pensacola-Ferry Pass-Brent, FL MSA   6.3%
Tampa-St. Petersburg-Clearwater, FL MSA   2.6%
Total Florida MSAs   8.9%
Atlanta-Sandy Springs-Roswell, GA MSA   5.0%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA   9.2%
Charleston-North Charleston, SC MSA   3.5%

 

Asset Quality

 

The allowance for loan losses is established and maintained at levels management deems adequate to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. In assessing the adequacy of the allowance for loan losses, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level. Our management believes that the allowance was adequate at June 30, 2018.

 

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

 

      Percentage of loans
      in each category
June 30, 2018  Amount  to total loans
   (In Thousands)
Commercial, financial and agricultural  $36,178    38.27%
Real estate - construction   4,062    8.53%
Real estate - mortgage   23,438    52.11%
Consumer   561    1.09%
Total  $64,239    100.00%

 

      Percentage of loans
      in each category
December 31, 2017  Amount  to total loans
   (In Thousands)
Commercial, financial and agricultural  $32,880    38.96%
Real estate - construction   4,989    9.93%
Real estate - mortgage   21,022    50.05%
Consumer   515    1.06%
Total  $59,406    100.00%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased $3.3 million to $14.1 million at June 30, 2018, compared to $10.8 million at December 31, 2017. Of this total, nonaccrual loans of $8.0 million at June 30, 2018, represented a net decrease of $2.8 million from nonaccrual loans at December 31, 2017. Excluding credit card accounts, there were six loans 90 or more days past due and still accruing totaling $6.0 million, compared to no loans 90 or more days past due and still accruing at December 31, 2017. This increase primarily relates to one commercial real estate mortgage loan totaling $5.1 million which is well-collateralized and is actively in the process of collection. Troubled Debt Restructurings (“TDR”) at June 30, 2018 and December 31, 2017 were $17.3 million and $20.6 million, respectively. There were no loans newly classified as TDR or renewals of existing TDRs for the three and six months ended June 30, 2018. One relationship totaling $12.7 million, which includes nine loans of various types, was newly classified as TDR for the three and six months ended June 30, 2017. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.

 

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OREO and repossessed assets decreased to $5.9 million at June 30, 2018, from $6.7 million at December 31, 2017. The total number of OREO and repossessed asset accounts decreased to 11 at June 30, 2018, compared to 12 at December 31, 2017. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2018 and 2017:

 

   Six Months Ended June 30,
   2018  2017
   (In thousands)
Balance at beginning of period  $6,701   $4,988 
Transfers from loans and capitalized expenses   751    586 
Proceeds from sales   (1,252)   (1,547)
Internally financed sales   -    (185)
Write-downs / net gain (loss) on sales   (263)   49 
Balance at end of period  $5,937   $3,891 

 

The following table summarizes our nonperforming assets and TDRs at June 30, 2018 and December 31, 2017:

 

   June 30, 2018  December 31, 2017
      Number of     Number of
   Balance  Loans  Balance  Loans
   (Dollar Amounts In Thousands)
Nonaccrual loans:                    
Commercial, financial and agricultural  $6,885    16   $9,712    18 
Real estate - construction   -    -    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   422    2    556    2 
1-4 family mortgage   715    2    459    2 
Other mortgage   -    -    -    - 
Total real estate - mortgage   1,137    4    1,015    4 
Consumer   -    -    38    1 
Total Nonaccrual loans:  $8,022    20   $10,765    23 
                     
90+ days past due and accruing:                    
Commercial, financial and agricultural  $431    6   $12    3 
Real estate - construction   -    -    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   250    1    -    - 
1-4 family mortgage   288    2    -    - 
Other mortgage   5,071    1    -    - 
Total real estate - mortgage   5,609    4    -    - 
Consumer   41    14    48    24 
Total 90+ days past due and accruing:  $6,081    24   $60    27 
                     
Total Nonperforming Loans:  $14,103    44   $10,825    50 
Plus: Other real estate owned and repossessions   5,937    11    6,701    12 
Total Nonperforming Assets  $20,040    55   $17,526    62 
                     
Restructured accruing loans:                    
Commercial, financial and agricultural  $10,061    6   $11,438    6 
Real estate - construction   997    1    997    1 
Real estate - mortgage:                    
Owner-occupied commercial   3,664    2    3,664    2 
1-4 family mortgage   850    1    850    1 
Other mortgage   -    -    -    - 
Total real estate - mortgage   4,514    3    4,514    3 
Consumer   -    -    -    - 
Total restructured accruing loans:  $15,572    10   $16,949    10 
Total Nonperforming assets and restructured accruing loans  $35,612    65   $34,475    72 
                     
Ratios:                    
Nonperforming loans to total loans   0.23%        0.19%     
Nonperforming assets to total loans plus other real estate owned and repossessions   0.33%        0.30%     
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions   0.58%        0.59%     

 

 

29

 

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

 

Impaired Loans and Allowance for Loan Losses

 

As of June 30, 2018, we had impaired loans of $38.0 million, inclusive of nonaccrual loans, a decrease of $2.5 million from $40.5 million as of December 31, 2017. We allocated $5.9 million of our allowance for loan losses at June 30, 2018 to these impaired loans, an increase of $0.3 million compared to $5.6 million as of December 31, 2017. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of impairment, if any, and subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

Of the $38.0 million of impaired loans reported as of June 30, 2018, $20.1 million were commercial, financial and agricultural loans, $1.6 million were real estate construction loans, $16.2 million were real estate mortgage loans and $0.1 million were consumer loans.

 

Deposits

 

Total deposits were flat at $6.09 billion at June 30, 2018 compared to December 31, 2017. While we have not experienced growth in our deposits during the first half of 2018, we anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in our mature markets.

 

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

 

Other Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $262.7 million and $301.8 million at June 30, 2018 and December 31, 2017, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 1.87% for the quarter ended June 30, 2018. Other borrowings consist of the following:

 

$34.75 million of 5% Subordinated Notes due July 15, 2025, which were issued in a private placement in July 2015 and pay interest semi-annually; and
$30.0 million of 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually.

 

Liquidity

 

Liquidity is defined as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, and other cash demands and disbursement needs, and otherwise to operate on an ongoing basis.

 

30

 

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At June 30, 2018, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $549.7 million. Additionally, the Bank had additional borrowing availability of approximately $458.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We believe these sources of funding are adequate to meet our anticipated funding needs. Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Other Borrowings”.

 

We are subject to general FDIC guidelines that require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity materially increasing or decreasing.

 

We are a legal entity separate and distinct from the Bank. Our principal source of cash flow, including cash flow to pay dividends to our stockholders, is dividends the Bank pays to us as the Bank’s sole shareholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us as well as to our payment of dividends to our stockholders. The requirement that a bank holding company must serve as a source of strength to its subsidiary banks also results in the position of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its stockholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Delaware corporate law.

 

The Alabama Banking Department also regulates the Bank’s dividend payments. Under Alabama law, a state-chartered bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its capital (our Bank’s surplus currently exceeds 20% of its capital). Moreover, our Bank is also required by Alabama law to obtain the prior approval of the Superintendent of Banks (“Superintendent”) for its payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (i) the Bank’s net earnings (as defined by statute) for that year, plus (ii) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, no dividends, withdrawals or transfers may be made from the Bank’s surplus without the prior written approval of the Superintendent.

 

The following table reflects the contractual maturities of our term liabilities as of June 30, 2018. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

   Payments due by Period
         Over 1 - 3  Over 3 - 5   
   Total  1 year or less  years  years  Over 5 years
   (In Thousands)
Contractual Obligations (1)                         
                          
Deposits without a stated maturity  $5,482,366   $-   $-   $-   $- 
Certificates of deposit (2)   603,316    369,661    152,230    81,374    51 
Federal funds purchased   262,659    262,659    -    -    - 
Subordinated debentures   64,648    -    -    -    64,648 
Operating lease commitments   19,533    3,418    6,356    5,120    4,639 
Total  $6,432,522   $635,738   $158,586   $86,494   $69,338 

 

(1)Excludes interest.
(2)Certificates of deposit give customers the right to early withdrawal.  Early withdrawals may be subject to penalties.  The penalty amount depends on the remaining time to maturity at the time of early withdrawal.

 

Capital Adequacy

 

As of June 30, 2018, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of June 30, 2018.

 

31

 

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of June 30, 2018, December 31, 2017 and June 30, 2017:

 

               To Be Well Capitalized
         For Capital Adequacy  Under Prompt Corrective
   Actual  Purposes  Action Provisions
   Amount  Ratio  Amount  Ratio  Amount  Ratio
As of June 30, 2018:  (Dollars in thousands)
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $647,449    10.08%  $289,164    4.50%   N/A    N/A 
ServisFirst Bank   710,665    11.06%   289,131    4.50%  $417,634    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   647,951    10.08%   385,552    6.00%   N/A    N/A 
ServisFirst Bank   711,167    11.07%   385,508    6.00%   514,011    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   777,338    12.10%   514,070    8.00%   N/A    N/A 
ServisFirst Bank   775,906    12.08%   514,011    8.00%   642,514    10.00 
Tier 1 Capital to Average Assets:                              
Consolidated   647,951    9.21%   281,293    4.00%   N/A    N/A 
ServisFirst Bank   711,167    10.11%   281,271    4.00%   351,589    5.00%
                               
As of December 31, 2017:                              
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $593,111    9.51%  $280,553    4.50%   N/A    N/A 
ServisFirst Bank   651,201    10.45%   280,523    4.50%  $405,199    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   593,613    9.52%   374,070    6.00%   N/A    N/A 
ServisFirst Bank   651,703    10.45%   374,030    6.00%   498,707    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   718,151    11.52%   498,760    8.00%   N/A    N/A 
ServisFirst Bank   711,609    11.42%   498,707    8.00%   623,384    10.00%
Tier 1 Capital to Average Assets:                              
Consolidated   593,613    8.51%   278,970    4.00%   N/A    N/A 
ServisFirst Bank   651,703    9.35%   278,954    4.00%   348,693    5.00%
                               
As of June 30, 2017:                              
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $551,433    9.72%  $255,319    4.50%   N/A    N/A 
ServisFirst Bank   603,094    10.63%   255,286    4.50%  $368,747    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   551,935    9.73%   340,425    6.00%   N/A    N/A 
ServisFirst Bank   603,596    10.64%   340,382    6.00%   453,842    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   662,169    11.67%   453,900    8.00%   N/A    N/A 
ServisFirst Bank   659,155    11.62%   453,842    8.00%   567,303    10.00%
Tier 1 Capital to Average Assets:                              
Consolidated   551,935    8.88%   248,732    4.00%   N/A    N/A 
ServisFirst Bank   603,596    9.71%   249,293    4.00%   311,616    5.00%

 

 

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Off-Balance Sheet Arrangements

 

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in our balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.

 

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of June 30, 2018, we have reserved $0.5 million for losses on such off-balance sheet arrangements consistent with guidance in the FRB’s Interagency Policy Statement SR 06-17.

 

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers. We had a reserve of $0.4 million as of June 30, 2018 and December 31, 2017 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at June 30, 2018 are as follows:

 

   June 30, 2018
   (In Thousands)
Commitments to extend credit  $1,957,118 
Credit card arrangements   115,667 
Standby letters of credit   31,834 
   $2,104,619 

 

Commitments to extend credit beyond current funded amounts are agreements to lend to a customer as long as there is no violation of any condition established in the applicable loan agreement. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by us upon extension of credit is based on our management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. All letters of credit are due within one year or less of the original commitment date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

 

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

 

Results of Operations

 

Summary of Net Income

 

Net income and net income available to common stockholders for the three months ended June 30, 2018 was $33.5 million compared to net income and net income available to common stockholders of $24.2 and $24.1 million, respectively, for the three months ended June 30, 2017. Net income and net income available to common stockholders for the six months ended June 30, 2018 was $66.1 million compared to net income and net income available to common stockholders of $46.7 million for the six months ended June 30, 2017. The increase in net income for the three months ended June 30, 2018 over the same period in 2017 was primarily attributable to a $8.9 million increase in net interest income resulting from growth in earning assets and a $0.7 million increase in non-interest income, led by increased credit card income. The increase in net income for the six months ended June 30, 2018 compared to 2017 was primarily the result of a $19.3 million increase in net interest income resulting from growth in average earning assets and a $0.9 million increase in non-interest income, led by increased credit card income. Increases in non-interest expense of $2.1 million and $4.4 million, respectively, for the three and six months ended June 30, 2018 compared to 2017 partially offset increases in income.

 

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Basic and diluted net income per common share were $0.63 and $0.62, respectively, for the three months ended June 30, 2018, compared to $0.46 and $0.45, respectively, for the corresponding period in 2017. Basic and diluted net income per common share were $1.24 and $1.22, respectively, for the six months ended June 30, 2018, compared to $0.88 and $0.86, respectively, for the corresponding period in 2017. Return on average assets for the three and six months ended June 30, 2018 was 1.91% compared to 1.55% and 1.50%, respectively, for the corresponding periods in 2017. Return on average common stockholders’ equity for the three and six months ended June 30, 2018 was 20.89% and 21.13% compared to 17.36% and 17.23%, respectively, for the corresponding periods in 2017.

 

Net Interest Income

 

Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. The major factors which affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.

 

Taxable-equivalent net interest income increased $8.6 million, or 15.3%, to $64.7 million for the three months ended June 30, 2018 compared to $56.1 million for the corresponding period in 2017, and increased $18.7 million, or 17.2%, to $127.3 million for the six months ended June 30, 2018 compared to $108.6 million for the corresponding period in 2017. This increase was primarily attributable to growth in average earning assets, which increased $824.4 million, or 13.8%, from the second quarter of 2017 to the second quarter of 2018, and $728.8 million, or 12.1%, from the six months ended June 30, 2017 to the same period in 2018. The taxable-equivalent yield on interest-earning assets increased to 4.64% for the three months ended June 30, 2018 from 4.30% for the corresponding period in 2017, and increased to 4.57% for the six months ended June 30, 2018 from 4.17% for the corresponding period in 2017. The yield on loans for the three months ended June 30, 2018 was 4.93% compared to 4.60% for the corresponding period in 2017, and 4.87% compared to 4.55% for the six months ended June 30, 2018 and June 30, 2017, respectively. The cost of total interest-bearing liabilities increased to 1.13% for the three months ended June 30, 2018 compared to 0.74% for the corresponding period in 2017, and increased to 1.04% for the six months ended June 30, 2018 from 0.71% for the corresponding period in 2017. Net interest margin for the three months ended June 30, 2018 was 3.82% compared to 3.77% for the corresponding period in 2017, and 3.81% for the six months ended June 30, 2018 compared to 3.65% for the corresponding period in 2017.

 

The following tables show, for the three and six months ended June 30, 2018 and June 30, 2017, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

 

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Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended June 30,

(In thousands, except Average Yields and Rates)

 

   2018  2017
      Interest  Average     Interest  Average
   Average  Earned /  Yield /  Average  Earned /  Yield /
   Balance  Paid  Rate  Balance  Paid  Rate
Assets:                  
Interest-earning assets:                              
Loans, net of unearned income (1)(2)                              
Taxable  $5,958,377   $73,326    4.94%  $5,192,812   $59,508    4.60%
Tax-exempt (3)   30,246    297    3.94    41,143    505    4.92 
Total loans, net of unearned income   5,988,623    73,623    4.93    5,233,955    60,013    4.60 
Mortgage loans held for sale   3,770    40    4.26    5,958    58    3.90 
Investment securities:                              
Taxable   475,777    3,127    2.63