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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to_______

For the transition period from _______to_______

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware26-0734029
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)

2500 Woodcrest Place, Birmingham, Alabama35209
(Address of Principal Executive Offices)(Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $.001 per share

SFBS

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”,filer,” “accelerated filer”,filer,” “non-accelerated filer,” “smaller reporting company”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, 201826, 2019

Common stock, $.001 par value

53,164,733

53,536,482

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

34

 

Item 1.

Financial Statements

34

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2524

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4.

Controls and Procedures

4140

    

PART II. OTHER INFORMATION

41

Item 11.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

4241

Item 3.

Defaults Upon Senior Securities

4241

Item 4.

Mine Safety Disclosures

41

 

Item 4.5.

Mine Safety DisclosuresOther Information

4241

 Item 5.Other Information42

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

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 

June 30, 2019

 

December 31, 2018

 
 (Unaudited) (1) 

(Unaudited)

   (1) 
ASSETS             
Cash and due from banks $68,344  $86,213  $68,841  $97,516 
Interest-bearing balances due from depository institutions  81,742   151,849  409,052  360,534 
Federal funds sold  15,585   239,524   408,289   223,845 
Cash and cash equivalents  165,671   477,586  886,182  681,895 
Available for sale debt securities, at fair value  583,549   538,080  657,971  590,184 
Held to maturity debt securities (fair value of $250 at June 30, 2018 and December 31, 2017)  250   250 
Equity securities  993   1,034 

Held to maturity debt securities (fair value of $250 at June 30, 2019)

 250  - 
Mortgage loans held for sale  4,605   4,459  9,446  120 
Loans  6,129,649   5,851,261  6,967,886  6,533,499 
Less allowance for loan losses  (64,239)  (59,406)  (71,386)  (68,600)
Loans, net  6,065,410   5,791,855  6,896,500  6,464,899 
Premises and equipment, net  58,299   58,900  57,195  57,822 
Accrued interest and dividends receivable  21,375   20,661  26,635  24,070 
Deferred tax assets  11,661   13,022  24,850  27,277 
Other real estate owned and repossessed assets  5,937   6,701  5,649  5,169 
Bank owned life insurance contracts  129,082   127,519  132,189  130,649 
Goodwill and other identifiable intangible assets  14,584   14,719  14,314  14,449 
Other assets  23,146   27,598   29,056   10,848 
Total assets $7,084,562  $7,082,384  $8,740,237  $8,007,382 
LIABILITIES AND STOCKHOLDERS' EQUITY             
Liabilities:             
Deposits:             
Noninterest-bearing $1,481,447  $1,440,326  $1,576,959  $1,557,341 
Interest-bearing  4,604,235   4,651,348   5,827,835   5,358,367 
Total deposits  6,085,682   6,091,674  7,404,794  6,915,708 
Federal funds purchased  262,659   301,797  459,449  288,725 
Other borrowings  64,648   64,832  64,684  64,666 
Accrued interest payable  7,222   4,971  10,930  10,381 
Other liabilities  9,237   11,506   21,423   12,699 
Total liabilities  6,429,448   6,474,780  7,961,280  7,292,179 
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 

Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2019 and December 31, 2018

 -  - 

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,526,882 shares issued and outstanding at June 30, 2019, and 53,375,195 shares issued and outstanding at December 31, 2018

 54  53 
Additional paid-in capital  217,765   217,693  218,658  218,521 
Retained earnings  443,972   389,554  555,425  500,868 
Accumulated other comprehensive income  (7,178)  (198)

Accumulated other comprehensive income (loss)

  4,318   (4,741)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.  654,612   607,102   778,455   714,701 
Noncontrolling interest  502   502   502   502 
Total stockholders' equity  655,114   607,604   778,957   715,203 
Total liabilities and stockholders' equity $7,084,562  $7,082,384  $8,740,237  $8,007,382 

 

(1)

(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, 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 
 2018 2017 2018 2017 

2019

  

2018

  

2019

  

2018

 
Interest income:                         
Interest and fees on loans $73,620  $59,912  $143,294  $115,468  $88,610  $73,620  $174,134  $143,294 
Taxable securities  3,127   2,274   5,872   4,361  4,193  3,127  7,939  5,872 
Nontaxable securities  623   752   1,279   1,517  393  623  839  1,279 
Federal funds sold  694   287   1,245   806  1,998  694  3,217  1,245 
Other interest and dividends  332   313   715   903   2,593   332   5,357   715 
Total interest income  78,396   63,538   152,405   123,055   97,787   78,396   191,486   152,405 
Interest expense:                         
Deposits  11,714   6,321   21,335   12,303  24,240  11,714  46,385  21,335 
Borrowed funds  2,160   1,650   4,112   3,133   3,462   2,160   6,238   4,112 
Total interest expense  13,874   7,971   25,447   15,436   27,702   13,874   52,623   25,447 
Net interest income  64,522   55,567   126,958   107,619  70,085  64,522  138,863  126,958 
Provision for loan losses  4,121   4,381   8,260   9,367   4,884   4,121   9,769   8,260 
Net interest income after provision for loan losses  60,401   51,186   118,698   98,252   65,201   60,401   129,094   118,698 
Noninterest income:                         
Service charges on deposit accounts  1,653   1,382   3,238   2,736  1,786  1,653  3,488  3,238 
Mortgage banking  789   1,064   1,307   1,963  1,087  789  1,662  1,307 
Credit card income  1,756   1,189   3,334   2,368  1,741  1,361  3,317  2,616 
Securities gains  -   -   4   - 

Securities (losses) gains

 (6) -  (6) 4 
Increase in cash surrender value life insurance  786   785   1,563   1,509  778  786  1,540  1,563 
Other operating income  475   385   882   775   392   352   719   629 
Total noninterest income  5,459   4,805   10,328   9,351   5,778   4,941   10,720   9,357 
Noninterest expenses:                         
Salaries and employee benefits  13,098   12,031   26,394   23,744  14,339  13,098  28,604  26,394 
Equipment and occupancy expense  2,113   2,265   4,067   4,505  2,287  2,113  4,546  4,067 
Professional services  924   808   1,729   1,579  1,191  924  2,185  1,729 
FDIC and other regulatory assessments  1,159   1,081   2,292   2,078  1,081  1,159  2,100  2,292 
OREO expense  160   56   476   132  212  160  234  476 
Other operating expenses  6,556   5,634   12,564   11,104   6,912   6,038   13,679   11,593 
Total noninterest expenses  24,010   21,875   47,522   43,142   26,022   23,492   51,348   46,551 
Income before income taxes  41,850   34,116   81,504   64,461  44,957  41,850  88,466  81,504 
Provision for income taxes  8,310   9,952   15,361   17,778   9,324   8,310   17,823   15,361 
Net income  33,540   24,164   66,143   46,683  35,633  33,540  70,643  66,143 
Preferred stock dividends  31   31   31   31   31   31   31   31 
Net income available to common stockholders $33,509  $24,133  $66,112  $46,652  $35,602  $33,509  $70,612  $66,112 
                 
Basic earnings per common share $0.63  $0.46  $1.24  $0.88  $0.67  $0.63  $1.32  $1.24 
Diluted earnings per common share $0.62  $0.45  $1.22  $0.86  $0.66  $0.62  $1.31  $1.22 

 

See Notes to Consolidated Financial Statements.

 


4

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

  

Three Months Ended
June 30,

  

Six Months Ended
June 30,

 
  

2019

  

2018

  

2019

  

2018

 

Net income

 $35,633  $33,540  $70,643  $66,143 

Other comprehensive income (loss), net of tax:

                

Unrealized net holding gains (losses) arising during period from securities available for sale, net of tax of $1,448 and $2,408 for the three and six months ended June 30, 2019, respectively, and net of benefit of $(553) and $(1,858) for the three and six months ended June 30, 2018, respectively

  5,282   (2,073)  9,054   (6,977)

Reclassification adjustment for net loss (gains) on sale of securities, net of tax of $(1) and $1 for 2019 and 2018, respectively

  5   -   5   (3)

Other comprehensive income (loss), net of tax

  5,287   (2,073)  9,059   (6,980)

Comprehensive income

 $40,920  $31,467  $79,702  $59,163 

 

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)  

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		 

Three Months Ended June 30,

 
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 
                             

Preferred

Stock

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income

  

Noncontrolling

interest

  

Total

Stockholders'

Equity

 
Balance, December 31, 2017 $-  $53  $217,693  $389,554  $(198) $502  $607,604 
Common dividends paid, $0.11 per share  -   -   -   (5,846)  -   -   (5,846)

Balance, April 1, 2018

 $-  $53  $217,536  $416,311  $(5,105) $502  $629,297 
Common dividends declared, $0.11 per share  -   -   -   (5,848)  -   -   (5,848) -  -  -  (5,848) -  -  (5,848)
Preferred dividends paid  -   -   -   (31)  -   -   (31) -  -  -  (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)

Issue 1,464 shares of common stock upon exercise of stock options

 -  -  8  -  -  -  8 

536 shares of common stock withheld in net settlement upon exercise of stock options

 -  -  (23) -  -  -  (23)
Stock-based compensation expense  -   -   482   -   -   -   482  -  -  244  -  -  -  244 
Other comprehensive income, net of tax  -   -   -   -   (6,980)  -   (6,980) -  -  -  -  (2,073) -  (2,073)
Net income  -   -   -   66,143   -   -   66,143   -   -   -   33,540   -   -   33,540 
Balance, June 30, 2018 $-  $53  $217,765  $443,972  $(7,178) $502  $655,114  $-  $53  $217,765  $443,972  $(7,178) $502  $655,114 
 

Balance, April 1, 2019

 $-  $53  $218,147  $527,853  $(969) $502  $745,586 

Common dividends declared, $0.15 per share

 -  -  -  (8,030) -  -  (8,030)

Preferred dividends paid

 -  -  -  (31) -  -  (31)

Issue 26,000 shares of common stock upon exercise of stock options

 -  1  305  -  -  -  306 

Stock-based compensation expense

 -  -  206  -  -  -  206 

Other comprehensive loss, net of tax

 -  -  -  -  5,287  -  5,287 

Net income

  -   -   -   35,633   -   -   35,633 

Balance, June 30, 2019

 $-  $54  $218,658  $555,425  $4,318  $502  $778,957 

 

  

Six Months Ended June 30,

 
  

Preferred

Stock

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income

  

Noncontrolling

interest

  

Total

Stockholders'

Equity

 

Balance, January 1, 2018

 $-  $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 
                             

Balance, January 1, 2019

 $-  $53  $218,521  $500,868  $(4,741) $502  $715,203 

Common dividends paid, $0.15 per share

  -   -   -   (8,025)  -   -   (8,025)

Common dividends declared, $0.15 per share

  -   -   -   (8,030)  -   -   (8,030)

Preferred dividends paid

  -   -   -   (31)  -   -   (31)

Issue 143,313 shares of common stock upon exercise of stock options

  -   1   1,102   -   -   -   1,103 

45,187 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   (1,453)  -   -   -   (1,453)

Stock-based compensation expense

  -   -   488   -   -   -   488 

Other comprehensive loss, net of tax

  -   -   -   -   9,059   -   9,059 

Net income

  -   -   -   70,643   -   -   70,643 

Balance, June 30, 2019

 $-  $54  $218,658  $555,425  $4,318  $502  $778,957 

See Notes to Consolidated Financial Statements.

 

6

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 Six Months Ended June 30, 

Six Months Ended June 30,

 
 2018 2017 

2019

  

2018

 
OPERATING ACTIVITIES             
Net income $66,143  $46,683  $70,643  $66,143 
Adjustments to reconcile net income to net cash provided by             
Deferred tax expense  1,361   4  2,427  1,361 
Provision for loan losses  8,260   9,367  9,769  8,260 
Depreciation  1,679   1,501  1,845  1,679 
Accretion on acquired loans  (125)  (267) (91) (125)
Amortization of core deposit intangible  135   141  135  135 
Net amortization of debt securities available for sale  1,219   1,999  1,304  1,219 
Increase in accrued interest and dividends receivable  (714)  (969) (2,565) (714)
Stock-based compensation expense  482   622  488  482 
Increase (decrease) in accrued interest payable  2,251   (888)

Increase in accrued interest payable

 549  2,251 
Proceeds from sale of mortgage loans held for sale  55,342   71,518  45,543  55,342 
Originations of mortgage loans held for sale  (54,181)  (70,553) (53,207) (54,181)
Gain on sale of debt securities available for sale  (4)  - 

Net loss (gain) on sale of debt securities available for sale

 6  (4)
Gain on sale of mortgage loans held for sale  (1,307)  (1,963) (1,662) (1,307)
Net loss (gain) on sale of other real estate owned and repossessed assets  10   (53)

Net loss on sale of other real estate owned and repossessed assets

 2  10 
Write down of other real estate owned and repossessed assets  253   4  222  253 
Operating losses of tax credit partnerships  70   7  73  70 
Increase in cash surrender value of life insurance contracts  (1,563)  (1,509) (1,540) (1,563)
Net change in other assets, liabilities, and other operating activities  (2,238)  (9,379)  (12,640)  (2,238)
Net cash provided by operating activities  77,073   46,265   61,301   77,073 
INVESTMENT ACTIVITIES             
Purchase of debt securities available for sale  (100,718)  (60,627) (121,590) (100,718)
Proceeds from maturities, calls and paydowns of debt securities available for sale  40,484   45,325  64,611  40,484 
Proceeds from sale of debt securities available for sale  5,100   -  -  5,100 
Purchase of debt securities held to maturity  -   (20,786) (250) - 
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   -  -  30 
Increase in loans  (282,441)  (438,253) (442,031) (282,441)
Purchase of premises and equipment  (1,078)  (12,984) (1,218) (1,078)
Purchase of bank-owned life insurance contracts  -   (10,000)
Proceeds from sale of other real estate owned and repossessed assets  1,252   1,547   48   1,252 
Net cash used in investing activities  (337,371)  (491,695)  (500,430)  (337,371)
FINANCING ACTIVITIES             
Net increase in non-interest-bearing deposits  41,121   91,748  19,618  41,121 
Net decrease in interest-bearing deposits  (47,113)  (117,249)
Net decrease in federal funds purchased  (39,138)  (55,718)

Net increase (decrease) in interest-bearing deposits

 469,468  (47,113)

Net increase (decrease) in federal funds purchased

 170,724  (39,138)
Repayment of Federal Home Loan Bank advances  (200)  (200) -  (200)
Proceeds from sale of preferred stock, net  -   125 
Proceeds from exercise of stock options  860   717  1,102  860 
Taxes paid in net settlement of tax obligation upon exercise of stock options  (1,270)  -  (1,453) (1,270)
Dividends paid on common stock  (5,846)  (2,641) (16,044) (5,846)
Dividends paid on preferred stock  (31)  (31)  (31)  (31)
Net cash used in financing activities  (51,617)  (83,249)
Net decrease in cash and cash equivalents  (311,915)  (528,679)

Net cash provided by (used in) financing activities

  643,384   (51,617)

Net increase (decrease) in cash and cash equivalents

 204,255  (311,915)
Cash and cash equivalents at beginning of period  477,586   783,997   681,895   477,586 
Cash and cash equivalents at end of period $165,671  $255,318  $886,150  $165,671 
SUPPLEMENTAL DISCLOSURE             
Cash paid for:             
Interest $23,196  $16,324  $52,074  $23,196 
Income taxes  9,465   22,363  24,956  9,645 
Income tax refund  -   (182)
NONCASH TRANSACTIONS             
Other real estate acquired in settlement of loans $751  $586  $752  $751 
Internally financed sales of other real estate owned  -   185 
Dividends declared  5,848   2,645  8,030  5,848 

 

See Notes to Consolidated Financial Statements.

 

7

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 20182019

(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-XS-X and the instructions for Form 10-Q,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-K10-K for the year ended December 31, 2017.2018.

 

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.Leases

 

The Company leases certain office space and equipment under operating leases. Accounting Standards Update 2016-02, “Leases (Topic 842)” requires that operating leases in effect as of date of adoption, January 1, 2019 for the Company, be recognized as a liability to make lease payments and as an asset representing the right to use the asset during the lease term, or “lease liability” and “right-of-use asset”, respectively. The lease liability is measured by the present value of remaining lease payments, discounted at the Company’s incremental borrowing rate.

Certain of the leases include one or more renewal options that extend the initial lease term 1 to 5 years. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, a majority of our revenue-generating transactionsrenewals to extend lease terms are excluded fromnot included in the scoperight-of-use assets and lease liabilities as they are not reasonably certain to be exercised. Renewal options are regularly evaluated and when they are reasonably certain to be exercised, are included in lease terms.

None of ASC 606, including revenue generated from financial instruments, suchthe Company’s leases provide an implicit rate. The Company uses its incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The Company has made an accounting policy election to not apply the recognition requirements in ASU 2016-02 to short-term leases. The Company has also elected to use the practical expedients allowed by the new standard as securitiesfollows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and loans. Revenue-generating transactions that are within the scope3) forego an assessment of ASC 606, classified within non-interest income, are described as follows:direct costs for any existing leases.

 

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, 

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 2018 2017 2018 2017 

2019

  

2018

  

2019

  

2018

 
 (In Thousands, Except Shares and Per Share Data) 

(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   53,515,418   53,150,142   53,490,393   53,116,420 
Net income available to common stockholders $33,509  $24,133  $66,112  $46,652  $35,602  $33,509  $70,612  $66,112 
Basic earnings per common share $0.63  $0.46  $1.24  $0.88  $0.67  $0.63  $1.32  $1.24 
                 
Weighted average common shares outstanding  53,150,142   52,864,761   53,116,420   52,805,378  53,515,418  53,150,142  53,490,393  53,116,420 
Dilutive effects of assumed conversions and exercise of stock options and warrants  1,045,881   1,235,843   1,073,326   1,311,694   573,689   1,045,881   592,464   1,073,326 
Weighted average common and dilutive potential common shares outstanding  54,196,023   54,100,604   54,189,746   54,117,072   54,089,107   54,196,023   54,082,857   54,189,746 
Net income available to common stockholders $33,509  $24,133  $66,112  $46,652  $35,602  $33,509  $70,612  $66,112 
Diluted earnings per common share $0.62  $0.45  $1.22  $0.86  $0.66  $0.62  $1.31  $1.22 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2018 2019 and December 31, 2017 2018 are summarized as follows:

 

   Gross Gross   

Amortized

Cost

  

Gross

Unrealized

Gain

  

Gross

Unrealized

Loss

  

Market

Value

 
 Amortized Unrealized Unrealized Market
 Cost Gain Loss Value
June 30, 2018: (In Thousands)

June 30, 2019:

 

(In Thousands)

 
Securities Available for Sale                         
U.S. Treasury and government sponsored agencies $58,072  $4  $(965) $57,111  $74,342  $396  $(31) $74,707 
Mortgage-backed securities  322,306   515   (8,390)  314,431  360,816  3,072  (463) 363,425 
State and municipal securities  120,885   411   (765)  120,531  83,984  387  (60) 84,311 
Corporate debt  91,412   730   (666)  91,476   133,415   2,130   (17)  135,528 
Total  592,675   1,660   (10,786)  583,549  $652,557  $5,985  $(571) $657,971 
Securities Held to Maturity                         
State and municipal securities  250   -   -   250   250   -   -   250 
Total $250  $-  $-  $250  $250  $-  $-  $250 
                 
December 31, 2017:                

December 31, 2018:

         
Securities Available for Sale                         
U.S. Treasury and government sponsored agencies $55,567  $38  $(249) $55,356  $77,534  $78  $(619) $76,993 
Mortgage-backed securities  278,177   1,006   (2,685)  276,498  309,244  591  (5,531) 304,304 
State and municipal securities  134,641   761   (553)  134,849  106,465  208  (679) 105,994 
Corporate debt  69,996   1,416   (35)  71,377   102,982   668   (757)  102,893 
Total  538,381   3,221   (3,522)  538,080  $596,225  $1,545  $(7,586) $590,184 
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 2019 and December 31, 2017 2018 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 

  

June 30, 2019

  

December 31, 2018

 
  

Amortized

Cost

  

Fair Value

  

Amortized

Cost

  

Fair Value

 
  

(In thousands)

 

Debt securities available for sale

                

Due within one year

 $38,284  $38,302  $38,343  $38,225 

Due from one to five years

  144,968   145,841   167,873   166,380 

Due from five to ten years

  103,960   105,819   77,811   78,276 

Due after ten years

  4,529   4,584   2,954   2,999 

Mortgage-backed securities

  360,816   363,425   309,244   304,304 
  $652,557  $657,971  $596,225  $590,184 
                 

Debt securities held to maturity

                

Due from one to five years

 $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 carrying value of debt securities pledged to secure public funds on deposit and for other purposes as required by law as of June 30, 2019 and December 31, 2018 was $334.1 million and $281.9 million, respectively.

The following table identifies, as of June 30, 2018 2019 and December 31, 2017, 2018, 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, 802019, 142 of the Company’s 781726 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. 2019. 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 

  

Less Than Twelve Months

  

Twelve Months or More

  

Total

 
  

Gross

Unrealized

Losses

  

Fair Value

  

Gross

Unrealized

Losses

  

Fair Value

  

Gross

Unrealized

Losses

  

Fair Value

 
  

(In Thousands)

 

June 30, 2019

                        

U.S. Treasury and government sponsored agencies

 $-  $-  $(31) $21,919  $(31) $21,919 

Mortgage-backed securities

  (47)  17,778   (416)  81,383   (463)  99,161 

State and municipal securities

  (9)  1,681   (51)  16,297   (60)  17,978 

Corporate debt

  (17)  3,765   -   -   (17)  3,765 

Total

 $(73) $23,224  $(498) $119,599  $(571) $142,823 
                         

December 31, 2018

                        

U.S. Treasury and government sponsored agencies

 $(8) $1,001  $(611) $50,878  $(619) $51,880 

Mortgage-backed securities

  (539)  67,721   (4,992)  204,260   (5,531)  271,981 

State and municipal securities

  (101)  20,821   (578)  52,190   (679)  73,011 

Corporate debt

  (315)  36,245   (442)  13,474   (757)  49,718 

Total

 $(963) $125,788  $(6,623) $320,802  $(7,586) $446,590 

 

10

NOTE 5 – LOANS

 

The following table details the Company’s loans at June 30, 2018 2019 and December 31, 2017:2018:

 

  

June 30,

2019

  

December 31,

2018

 
  

(Dollars In Thousands)

 

Commercial, financial and agricultural

 $2,633,529  $2,513,225 

Real estate - construction

  603,779   533,192 

Real estate - mortgage:

        

Owner-occupied commercial

  1,538,279   1,463,887 

1-4 family mortgage

  630,963   621,634 

Other mortgage

  1,496,512   1,337,068 

Subtotal: Real estate - mortgage

  3,665,754   3,422,589 

Consumer

  64,824   64,493 

Total Loans

  6,967,886   6,533,499 

Less: Allowance for loan losses

  (71,386)  (68,600)

Net Loans

 $6,896,500  $6,464,899 
         
         

Commercial, financial and agricultural

  37.79

%

  38.47

%

Real estate - construction

  8.67

%

  8.16

%

Real estate - mortgage:

        

Owner-occupied commercial

  22.08

%

  22.41

%

1-4 family mortgage

  9.05

%

  9.51

%

Other mortgage

  21.48

%

  20.46

%

Subtotal: Real estate - mortgage

  52.61

%

  52.39

%

Consumer

  0.93

%

  0.99

%

Total Loans

  100.00

%

  100.00

%

  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

●

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.

 

Loans by credit quality indicator as of June 30, 2018 2019 and December 31, 2017 2018 were as follows:

June 30, 2019

 

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 
                     
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,560,336  $53,434  $19,759  $-  $2,633,529 

Real estate - construction

  596,007   5,802   1,970   -   603,779 

Real estate - mortgage:

                    

Owner-occupied commercial

  1,512,146   11,818   14,315   -   1,538,279 

1-4 family mortgage

  627,829   1,191   1,943   -   630,963 

Other mortgage

  1,472,083   17,904   6,525   -   1,496,512 

Total real estate mortgage

  3,612,058   30,913   22,783   -   3,665,754 

Consumer

  64,775   49   -   -   64,824 

Total

 $6,833,176  $90,198  $44,512  $-  $6,967,886 

 

    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 

December 31, 2018

 

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 
                     
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,447,052  $47,754  $18,419  $-  $2,513,225 

Real estate - construction

  525,021   6,749   1,422   -   533,192 

Real estate - mortgage:

                    

Owner-occupied commercial

  1,431,982   28,547   3,358   -   1,463,887 

1-4 family mortgage

  616,884   2,703   2,047   -   621,634 

Other mortgage

  1,309,101   16,506   11,461   -   1,337,068 

Total real estate mortgage

  3,357,967   47,756   16,866   -   3,422,589 

Consumer

  64,444   -   49   -   64,493 

Total

 $6,394,484  $102,259  $36,756  $-  $6,533,499 

 

12

 

Loans by performance status as of June 30, 2018 2019 and December 31, 2017 2018 were as follows:

 

June 30, 2018 Performing Nonperforming Total

June 30, 2019

 

Performing

  

Nonperforming

  

Total

 
 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $2,338,563  $7,316  $2,345,879  $2,617,692  $15,837  $2,633,529 
Real estate - construction  522,788   -   522,788  603,541  238  603,779 
Real estate - mortgage:                   
Owner-occupied commercial  1,383,210   672   1,383,882  1,534,721  3,558  1,538,279 
1-4 family mortgage  583,130   1,003   584,133  628,494  2,469  630,963 
Other mortgage  1,220,835   5,071   1,225,906   1,486,500   10,012   1,496,512 
Total real estate mortgage  3,187,175   6,746   3,193,921  3,649,715  16,039  3,665,754 
Consumer  67,020   41   67,061   64,799   25   64,824 
Total $6,115,546  $14,103  $6,129,649  $6,935,747  $32,139  $6,967,886 

 

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

December 31, 2018

 

Performing

  

Nonperforming

  

Total

 
             
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,502,117  $11,108  $2,513,225 

Real estate - construction

  532,195   997   533,192 

Real estate - mortgage:

            

Owner-occupied commercial

  1,460,529   3,358   1,463,887 

1-4 family mortgage

  619,465   2,169   621,634 

Other mortgage

  1,327,038   10,030   1,337,068 

Total real estate mortgage

  3,407,032   15,557   3,422,589 

Consumer

  64,385   108   64,493 

Total

 $6,505,729  $27,770  $6,533,499 

 

Loans by past due status as of June 30, 2018 2019 and December 31, 2017 2018 were as follows:

 

June 30, 2019

 

Past Due Status (Accruing Loans)

             
  

30-59 Days

  

60-89 Days

  

90+ Days

  

Total Past

Due

  

Non-Accrual

  

Current

  

Total Loans

 
                             
  

(In Thousands)

 

Commercial, financial and agricultural

 $69  $75  $4,756  $4,900  $11,081  $2,617,548  $2,633,529 

Real estate - construction

  -   -   -   -   238   603,541   603,779 

Real estate - mortgage:

                            

Owner-occupied commercial

  15,350   929   -   16,279   3,558   1,518,442   1,538,279 

1-4 family mortgage

  549   125   528   1,202   1,941   627,820   630,963 

Other mortgage

  1,543   -   4,990   6,533   5,022   1,484,957   1,496,512 

Total real estate - mortgage

  17,442   1,054   5,518   24,014   10,521   3,631,219   3,665,754 

Consumer

  24   4   25   53   -   64,771   64,824 

Total

 $17,535  $1,133  $10,299  $28,967  $21,840  $6,917,079  $6,967,886 

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)    

December 31, 2018

 

Past Due Status (Accruing Loans)

        
       Total Past       

30-59 Days

  

60-89 Days

  

90+ Days

  

Total Past

Due

  

Non-Accrual

  

Current

  

Total Loans

 
 30-59 Days 60-89 Days 90+ Days Due Non-Accrual Current Total Loans 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $1,410  $5,702  $12  $7,124  $9,712  $2,262,530  $2,279,366  $1,222  $48  $605  $1,875  $10,503  $2,500,847  $2,513,225 
Real estate - construction  56   997   -   1,053   -   579,821   580,874  -  1,352  -  1,352  997  530,843  533,192 
Real estate - mortgage:                                           
Owner-occupied commercial  -   3,664   -   3,664   556   1,324,446   1,328,666  412  -  -  412  3,358  1,460,117  1,463,887 
1-4 family mortgage  430   850   -   1,280   459   601,324   603,063  534  235  123  892  2,046  618,696  621,634 
Other mortgage  5,116   -   -   5,116   -   991,963   997,079   1,174   -   5,008   6,182   5,022   1,325,864   1,337,068 
Total real estate - mortgage  5,546   4,514   -   10,060   1,015   2,917,733   2,928,808  2,120  235  5,131  7,486  10,426  3,404,677  3,422,589 
Consumer  131   23   48   202   38   61,973   62,213   58   123   108   289   -   64,204   64,493 
Total $7,143  $11,236  $60  $18,439  $10,765  $5,822,057  $5,851,261  $3,400  $1,758  $5,844  $11,002  $21,926  $6,500,571  $6,533,499 

 

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)450), impaired loans (ASC 310)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:type: 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 implicit in the original loan agreement, 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-yearyear 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 2019 and June 30, 2017. 2018. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

 

  

Commercial,

financial and

agricultural

  

Real estate -

construction

  

Real estate -

mortgage

  

Consumer

  

Total

 
                     
  

(In Thousands)

 
  

Three Months Ended June 30, 2019

 

Allowance for loan losses:

                    

Balance at March 31, 2019

 $39,459  $3,595  $26,711  $442  $70,207 

Charge-offs

  (3,610)  -   (169)  (63)  (3,842)

Recoveries

  117   -   4   16   137 

Provision

  2,743   (176)  2,237   80   4,884 

Balance at June 30, 2019

 $38,709  $3,419  $28,783  $475  $71,386 
                     
  

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 
                     
  

Six Months Ended June 30, 2019

 

Allowance for loan losses:

                    

Balance at December 31, 2018

 $39,016  $3,522  $25,508  $554  $68,600 

Charge-offs

  (6,647)  -   (219)  (281)  (7,147)

Recoveries

  129   1   11   23   164 

Provision

  6,211   (104)  3,483   179   9,769 

Balance at June 30, 2019

 $38,709  $3,419  $28,783  $475  $71,386 
                     
  

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 
                     
  

As of June 30, 2019

 

Allowance for loan losses:

                    

Individually Evaluated for Impairment

 $5,201  $110  $4,805  $-  $10,116 

Collectively Evaluated for Impairment

  33,508   3,309   23,978   475   61,270 
                     

Loans:

                    

Ending Balance

 $2,633,529  $603,779  $3,665,754  $64,824  $6,967,886 

Individually Evaluated for Impairment

  19,783   2,004   23,903   -   45,690 

Collectively Evaluated for Impairment

  2,613,746   601,775   3,641,851   64,824   6,922,196 

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

  

As of December 31, 2018

 

Allowance for loan losses:

                    

Individually Evaluated for Impairment

 $6,066  $126  $1,887  $49  $8,128 

Collectively Evaluated for Impairment

  32,950   3,396   23,621   505   60,472 
                     

Loans:

                    

Ending Balance

 $2,513,225  $533,192  $3,422,589  $64,493  $6,533,499 

Individually Evaluated for Impairment

  18,444   1,461   18,637   49   38,591 

Collectively Evaluated for Impairment

  2,494,781   531,731   3,403,952   64,444   6,494,908 

 

The following table presents details of the Company’s impaired loans as of June 30, 2018 2019 and December 31, 2017, 2018, respectively. Loans which have been fully charged off do not appear in the tables.

 

  

June 30, 2019

  

For the three months

ended June 30,

2019

  

For the six months

ended June 30,

2019

 
  

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest

Income

Recognized

in Period

  

Average

Recorded

Investment

  

Interest

Income

Recognized

in Period

 
                             
  

(In Thousands)

 

With no allowance recorded:

                            

Commercial, financial and agricultural

 $1,769  $1,769  $-  $1,769  $20  $1,769  $52 

Real estate - construction

  416   420   -   420   6   437   13 

Real estate - mortgage:

                            

Owner-occupied commercial

  1,083   1,179   -   1,184   16   1,143   33 

1-4 family mortgage

  472   472   -   475   -   487   - 

Other mortgage

  -   -   -   -   -   -   - 

Total real estate - mortgage

  1,555   1,651   -   1,659   16   1,630   33 

Consumer

  -   -   -   -   -   -   - 

Total with no allowance recorded

  3,740   3,840   -   3,848   42   3,836   98 
                             

With an allowance recorded:

                            

Commercial, financial and agricultural

  18,014   23,761   5,201   20,253   71   21,520   234 

Real estate - construction

  1,588   1,588   110   1,588   20   1,640   40 

Real estate - mortgage:

                            

Owner-occupied commercial

  14,349   14,349   2,402   13,208   207   13,724   425 

1-4 family mortgage

  1,469   1,469   196   1,473   (1)  1,475   1 

Other mortgage

  6,530   6,530   2,207   6,530   23   6,452   44 

Total real estate - mortgage

  22,348   22,348   4,805   21,211   229   21,651   470 

Consumer

  -   -   -   -   -   -   - 

Total with allowance recorded

  41,950   47,697   10,116   43,052   320   44,811   744 
                             

Total Impaired Loans:

                            

Commercial, financial and agricultural

  19,783   25,530   5,201   22,022   91   23,289   286 

Real estate - construction

  2,004   2,008   110   2,008   26   2,077   53 

Real estate - mortgage:

                            

Owner-occupied commercial

  15,432   15,528   2,402   14,392   223   14,867   458 

1-4 family mortgage

  1,941   1,941   196   1,948   (1)  1,962   1 

Other mortgage

  6,530   6,530   2,207   6,530   23   6,452   44 

Total real estate - mortgage

  23,903   23,999   4,805   22,870   245   23,281   503 

Consumer

  -   -   -   -   -   -   - 

Total impaired loans

 $45,690  $51,537  $10,116  $46,900  $362  $48,647  $842 

        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

December 31, 2018

December 31, 2018

 
   Unpaid   Average Interest Income       

For the twelve months

ended December 31, 2018

 
 Recorded Principal Related Recorded Recognized in 

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized in

Period

 
 Investment Balance Allowance Investment Period 
 (In Thousands) 

(In Thousands)

 
With no allowance recorded:                               
Commercial, financial and agricultural $10,036  $16,639  $-  $16,417  $571  $6,064  $6,064  $-  $6,142  $237 
Real estate - construction  574   577   -   663   31  464  467  -  524  28 
Real estate - mortgage:                               
Owner-occupied commercial  2,640   2,806   -   2,875   159  1,763  1,947  -  2,223  120 
1-4 family mortgage  2,262   2,262   -   2,289   93  1,071  1,071  -  1,088  21 
Other mortgage  746   746   -   727   44   5,061   5,061   -   5,133   252 
Total real estate - mortgage  5,648   5,814   -   5,891   296  7,895  8,079  -  8,444  393 
Consumer  38   39   -   42   3   -   -   -   -   - 
Total with no allowance recorded  16,296   23,069   -   23,013   901   14,423   14,610   -   15,110   658 
                     
With an allowance recorded:                               
Commercial, financial and agricultural  16,411   16,992   4,276   17,912   651  12,380  20,141  6,066  15,918  462 
Real estate - construction  997   997   120   997   56  997  997  126  997  31 
Real estate - mortgage:                               
Owner-occupied commercial  3,914   3,914   601   3,801   215  3,358  3,358  99  3,364  105 
1-4 family mortgage  980   980   281   1,113   54  975  975  208  975  30 
Other mortgage  1,862   1,862   281   1,862   80   6,409   6,409   1,580   6,598   217 
Total real estate - mortgage  6,756   6,756   1,163   6,776   349  10,742  10,742  1,887  10,937  352 
Consumer  50   50   50   42   3   49   49   49   49   3 
Total with allowance recorded  24,214   24,795   5,609   25,727   1,059   24,168   31,929   8,128   27,901   848 
                     
Total Impaired Loans:                               
Commercial, financial and agricultural  26,447   33,631   4,276   34,329   1,222  18,444  26,205  6,066  22,060  699 
Real estate - construction  1,571   1,574   120   1,660   87  1,461  1,464  126  1,521  59 
Real estate - mortgage:                               
Owner-occupied commercial  6,554   6,720   601   6,676   374  5,121  5,305  99  5,587  225 
1-4 family mortgage  3,242   3,242   281   3,402   147  2,046  2,046  208  2,063  51 
Other mortgage  2,608   2,608   281   2,589   124   11,470   11,470   1,580   11,731   469 
Total real estate - mortgage  12,404   12,570   1,163   12,667   645  18,637  18,821  1,887  19,381  745 
Consumer  88   89   50   84   6   49   49   49   49   3 
Total impaired loans $40,510  $47,864  $5,609  $48,740  $1,960  $38,591  $46,539  $8,128  $43,011  $1,506 

 

Troubled Debt Restructurings (“TDR”) at June 30, 2019, December 31, 2018 and June 30, 2018 December 31, 2017 and June 30, 2017 totaled $17.3$11.3 million, $20.6$14.6 million and $16.4$17.3 million, respectively. At June 30, 2018, 2019, the Company had a related allowance for loan losses of $3.6$2.0 million allocated to these TDRs, compared to $4.3 million at December 31, 2017 2018 and $3.1$3.6 million at June 30, 2017.2018. TDR activity by portfolio segment for the three and six months ended June 30, 2019 is presented in the table below. 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

  

Three Months Ended June 30, 2019

  

Six Months Ended June 30, 2019

 
  

Number of

Contracts

  

Pre-

Modification

Outstanding

Recorded

Investment

  

Post-

Modification

Outstanding

Recorded

Investment

  

Number of

Contracts

  

Pre-

Modification

Outstanding

Recorded

Investment

  

Post-

Modification

Outstanding

Recorded

Investment

 
  

(In Thousands)

 

Troubled Debt Restructurings

                        

Commercial, financial and agricultural

  1  $2,742  $2,742   1  $2,742  $2,742 

Real estate - construction

  -   -   -   -   -   - 

Real estate - mortgage:

                        

Owner-occupied commercial

  -   -   -   -   -   - 

1-4 family mortgage

  -   -   -   -   -   - 

Other mortgage

  -   -   -   -   -   - 

Total real estate mortgage

  -   -   -   -   -   - 

Consumer

  -   -   -   -   -   - 
   1  $2,742  $2,742   1  $2,742  $2,742 


The following table presents TDRs by portfolio segment for the three and six months ended June 30, 2017 is presented in the table below.

18

  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 TDRs2019 and 2018, and which were modified in the previous twelve months defaulted during the three and six(i.e., twelve months ended June 30, 2017.prior to default). For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of June 30, 2018, 2019, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2019

  

2018

  

2019

  

2018

 
                 
  

(In thousands)

 

Defaulted during the period, where modified in a TDR twelve months prior to default

                

Commercial, financial and agricultural

 $-  $268  $325  $268 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  -   -   -   - 

Other mortgage

  -   -   -   - 

Total real estate mortgage

  -   -   -   - 

Consumer

  -   -   -   - 
  $-  $268  $325  $268 

NOTE 6 - LEASES

The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The leases have remaining terms up to 9.7 years. At June 30, 2019, the Company had lease right-of-use assets and lease liabilities totaling $13.1 million, which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheet.

Maturities of operating lease liabilities as of June 30, 2019 are as follows:

  

June 30, 2019

 
  

(In Thousands)

 

2019 (remaining)

 $1,582 

2020

  3,197 

2021

  2,584 

2022

  2,606 

2023

  2,185 

thereafter

  3,749 

Total lease payments

  15,903 

Less: imputed interest

  (2,756)

Present value of operating lease liabilities

 $13,147 

As of June 30, 2019, the weighted average remaining term of operating leases is 6.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 5.00%.

Operating cash flows related to leases were $786,000 and $1,563,000 for the three and six months ended June 30, 2019, respectively.

 


Lease costs during the three and six months ended June 30, 2019 were as follows (in thousands):

  

Three Months Ended June 30, 2019

 

Operating lease cost

 $842 

Short-term lease cost

  7 

Variable lease cost

  52 

Sublease income

  (6)

Net lease cost

 $895 

  

Six Months Ended June 30, 2019

 

Operating lease cost

 $1,691 

Short-term lease cost

  13 

Variable lease cost

  102 

Sublease income

  (12)

Net lease cost

 $1,794 

NOTE 67 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At June 30, 2018, theThe Company hadhas a stock-based compensation plans,plan as described below. The compensation cost that has been charged to earnings for the plansplan was approximately $206,000 and $488,000 for the three and six months ended June 30, 2019 and $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, 2017.2018.

 

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 allowThe plan allows 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 plansplan is ten10 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.U.S. Treasury yield curve in effect at the time of grant.

 

 2018 2017 

2019

  

2018

 
Expected volatility  24.13%  29.00% 40.00

%

 24.13

%

Expected dividends  1.06%  0.44% 1.74

%

 1.06

%

Expected term (in years)  6.25   6.25  6.7  6.3 
Risk-free rate  2.67%  2.09% 2.55

%

 2.67

%

 

The weighted average grant-date fair value of options granted during the six months ended June 30, 2019 and June 30, 2018 was $12.60 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 2019 and June 30, 2017:

2018:

 

  

Shares

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term (years)

  

Aggregate

Intrinsic

Value

 
              

(In Thousands)

 

Six Months Ended June 30, 2019:

                

Outstanding at January 1, 2019

  1,238,748  $13.02   5.2  $23,355 

Granted

  10,500   34.44   9.7   (2)

Exercised

  (188,500)  5.58   1.8   5,014 

Forfeited

  (13,000)  29.93   7.4   56 

Outstanding at June 30, 2019

  1,047,748  $14.37   5.3  $21,233 
                 

Exercisable at June 30, 2019

  328,800  $8.13   3.7  $8,964 
                 

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 

      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, 2019, there was approximately $1,695,000$1,374,000 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 2.41.5 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, 2019, there was $811,000$1,316,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.82.9 years of the restricted stock’s vesting period.

 

The following table summarizes restricted stock activity during the six months ended June 30, 2018 2019 and 2017,2018, respectively:

  

Shares

  

Weighted

Average

Grant Date

Fair Value

 

Six Months Ended June 30, 2019:

        

Non-vested at January 1, 2019

  44,076  $38.44 

Granted

  23,474   34.03 

Vested

  (5,200)  20.31 

Forfeited

  (2,500)  38.17 

Non-vested at June 30, 2019

  59,850  $38.95 
         

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 

 

  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 78 - 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-day30-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 2019 and December 31, 2017 2018 were not material.

 

20

NOTE 89 – 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 FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2016-02,Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)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 arewere 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 the Company on 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. 1, 2019. The Company has reviewed its current lessee portfolio and is assessingelected the impactthree practical expedients allowed by the amendments as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the new standardclassification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases. Upon adoption 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, January 1, 2019, the Company anticipates recognizing a rightrecorded right-of-use assets and related lease liabilities of use asset$14.0 million and a lease liability, but it does did not expect the new standard to have a material restate comparative periods. There was no impact on itsthe Company’s consolidated financial statements.statements of income or cash flows. See Note 6 – Leases for additional information.

 

21

 

In June 2016, 2018, the FASB issued ASU 2016-13,2018-07,Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, which only included 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 are now substantially aligned. The ASU superseded Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The Company adopted this ASU effective January 1, 2019. However, the amendments did not have an impact on the Company’s Consolidated Financial Statements because it does not currently have any stock-based payment awards outstanding to nonemployees.

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 were effective for the Company as of January 1, 2019. The amendments in this ASU did not impact the Company’s Consolidated Financial Statements, as it has always amortized premiums to the first call date.

NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)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, theThe amendments in this ASU are effective for the company for fiscal years and interim periods within those fiscal years beginning after December 15, 2019,2019. The Company has established a cross-functional implementation team with later effective dates for non-SEC registrant public companiesassigned roles and other organizations. Earlyresponsibilities, key tasks to complete, and a general timeline to be followed. The team meets regularly to discuss the latest developments and ensure progress is being made on the adoption will be permitted for all organizations for fiscal years and interim periods within those fiscal years beginning after December 15, 2018.plan. The Company has contracted with a third-partythird-party provider to implementfor enhanced modeling techniques that incorporate the loss measurement requirements in these amendments as partand is in the process of finalizing and documenting the methodologies that will be utilized, including challenging estimated credit loss model assumptions and outputs and refining the qualitative framework. The team is also currently developing controls, processes, policies and disclosures in preparation for performing complete parallel runs in the third and fourth quarters of 2019. The Company expects validation of the new model(s) to be completed during the third quarter of 2019. The Company continues to evaluate the impact adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures, and while currently unable to reasonably estimate the impact of adopting the ASU.ASU, the Company expects that the impact of adoption could be significantly influenced by the composition, characteristics and quality of its loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.

 

In March 2017, July 2018, the FASB issued ASU 2017-08,2018-13, ReceivablesFair Value Measurement (Topic 820): Disclosure Framework – 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 amortizedChanges to the earliest call date. The amendments do not require an accounting changeDisclosure Requirements for securities held at a discount;Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the discount continueschanges, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities will be amortizedrequired to maturity. The amendments in thisdisclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU areNo.2018-13 is effective for public business entities for fiscal years,interim and interimannual reporting periods within those fiscal years, beginning after December 15, 2018. Early2019; early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directlyEntities are also allowed to retained earnings aselect early adoption of the beginningeliminated or modified disclosure requirements and delay adoption of the period of adoption. The amendments in thisnew disclosure requirements until their effective date. As ASU No.2018-13 only revises disclosure requirements, it 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 have 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 anmaterial impact on the Company’s consolidated financial statements because it does not have any stock-based payment awards currently outstanding to nonemployees.

Consolidated Financial Statements.

 

NOTE 1011 - 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 820-10820-10 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 $6,568,000 and $8,427,000 during the three and six months ended June 30, 2019, respectively, and $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$202,000 and $353,000$224,000 was recognized for the three and six months ended June 30, 2019, respectively, and $99,000 and $353,000 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$300,000 foreclosed and classified as OREO as of June 30, 2018 compared to none2019. This same loan had a balance of $360,000 as of December 31, 2017.

Management is negotiating2018. The property was sold on July 9, 2019 with a deed in lieu of a foreclosure related to a $360,000 loan as of June 30, 2018.$2,000 loss on sale.

 

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 2019 and December 31, 2017:2018:

 

 Fair Value Measurements at June 30, 2018 Using  
 Quoted Prices in      
 Active Markets Significant Other Significant  
 for Identical Observable Inputs Unobservable   

Fair Value Measurements at June 30, 2019 Using

    
 Assets (Level 1) (Level 2) Inputs (Level 3) Total 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs (Level 3)

  

Total

 
Assets Measured on a Recurring Basis: (In Thousands) 

(In Thousands)

 
Available-for-sale debt securities:                 
U.S. Treasury and government agencies $-  $57,111  $-  $57,111  $-  $74,707  $-  $74,707 
Mortgage-backed securities  -   314,431   -   314,431  -  363,425  -  363,425 
State and municipal securities  -   120,531   -   120,531  -  84,311  -  84,311 
Corporate debt  -   84,951   6,525   91,476   -   128,933   6,595   135,528 
Total assets at fair value $-  $577,024  $6,525  $583,549  $-  $651,376  $6,595  $657,971 

 

 Fair Value Measurements at December 31, 2017 Using  
 Quoted Prices in      
 Active Markets Significant Other Significant  
 for Identical Observable Inputs Unobservable   

Fair Value Measurements at December 31, 2018 Using

    
 Assets (Level 1) (Level 2) Inputs (Level 3) Total 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs (Level 3)

  

Total

 
Assets Measured on a Recurring Basis: (In Thousands) 

(In Thousands)

 
Available-for-sale debt securities:                         
U.S. Treasury and government agencies $-  $55,356  $-  $55,356  $-  $76,993  $-  $76,993 
Mortgage-backed securities  -   276,498   -   276,498  -  304,304  -  304,304 
State and municipal securities  -   134,849   -   134,849  -  105,994  -  105,994 
Corporate debt  -   64,877   6,500   71,377   -   96,375   6,518   102,893 
Total assets at fair value $-  $531,580  $6,500  $538,080  $-  $583,666  $6,518  $590,184 

 

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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 2019 and December 31, 2017:2018:

 

 Fair Value Measurements at June 30, 2018   

Fair Value Measurements at June 30, 2019

    
 Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total 

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) 

(In Thousands)

 
Impaired loans $-  $-  $32,098  $32,098  $-  $-  $35,574  $35,574 
Other real estate owned and repossessed assets  -   -   5,937   5,937   -   -   5,649   5,649 
Total assets at fair value $-  $-  $38,035  $38,035  $-  $-  $41,223  $41,223 

 

 Fair Value Measurements at December 31, 2017   

Fair Value Measurements at December 31, 2018

    
 Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total 

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) 

(In Thousands)

 
Impaired loans $-  $-  $34,901  $34,901  $-  $-  $30,463  $30,463 
Other real estate owned and repossessed assets  -   -   6,701   6,701   -   -   5,169   5,169 
Total assets at fair value $-  $-  $41,602  $41,602  $-  $-  $35,632  $35,632 

 

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

The estimated fair values 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. Securitiesfinancial instruments not 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 theat fair value hierarchy.on a recurring or non-recurring basis as of June 30, 2019 and December 31, 2018 were as follows:

 

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, 2019

  

December 31, 2018

 
  

Carrying

Amount

  

Fair Value

  

Carrying

Amount

  

Fair Value

 
  

(In Thousands)

 

Financial Assets:

                

Level 1 inputs:

                

Cash and due from banks

 $477,893  $477,893  $458,050  $458,050 
                 

Level 2 inputs:

                

Federal funds sold

  408,289   408,289   223,845   223,845 

Mortgage loans held for sale

  9,446   9,446   120   121 
                 

Level 3 inputs:

                

Held to maturity debt securities

  250   250   -   - 

Loans, net

  6,860,926   6,791,540   6,464,899   6,398,604 
                 

Financial liabilities:

                

Level 2 inputs:

                

Deposits

 $7,404,794  $7,407,047  $6,915,708  $6,910,176 

Federal funds purchased

  459,449   459,449   288,725   288,725 

Other borrowings

  64,684   64,624   64,666   64,613 

 

  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, 20182019 and June 30, 2017.2018.

 

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 (the “Exchange Act”) 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.The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time.

 

25

 

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 nineteen20 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,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 of Second Quarter 2019 Results

 

As of June 30, 2018,2019, we had consolidated total assets of $7.085$8.74 billion, roughly flatup $732.9 million, or 9.2%, when compared to consolidated assets of $7.082$8.01 billion at December 31, 2017.2018. Total loans were $6.13$6.97 billion at June 30, 2018,2019, up $278.4$434.4 million, or 4.8%6.6%, from $5.85$6.53 billion at December 31, 2017.2018. Total deposits were $6.09$7.40 billion at June 30, 2018, which was flat2019, up $489.1 million, or 7.1%, from $6.92 billion at December 31, 2017.2018.

 

Net income available to common stockholders for the three months ended June 30, 20182019 was $33.5$35.6 million, an increase of $9.4$2.1 million, or 39.0%6.2%, from $24.1$33.5 million for the corresponding period in 2017.2018. Basic and diluted earnings per common share were $0.63$0.67 and $0.62,$0.66, respectively, for the three months ended June 30, 2018,2019, compared to basic and diluted earnings per common share of $0.46$0.63 and $0.45$0.62 for the corresponding period in 2017.2018.

 

Net income available to common stockholders for the six months ended June 30, 20182019 was $66.1$70.6 million, an increase of $19.4$4.5 million, or 41.5%6.8%, from $46.7$66.1 million for the corresponding period in 2017.2018. Basic and diluted earnings per common share were $1.24$1.32 and $1.22,$1.31, respectively, for the six months ended June 30, 2018,2019, compared to $0.88$1.24 and $0.86,$1.22, respectively, for the corresponding period in 2017.2018.

 

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, 2017.2018.

 

26

 

Financial Condition

 

Cash and Cash Equivalents

 

At June 30, 2018,2019, we had $15.6$408.3 million in federal funds sold, compared to $239.5$223.8 million at December 31, 2017.2018. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2018,2019, we had $80.2$96.8 million in balances at the Federal Reserve, compared to $150.3$41.9 million at December 31, 2017. This decrease was a result of2018. The balances we keep on deposit at the Federal Reserve will fluctuate depending on our lower levels of excess liquidity duenet funding position and on our ability to loan growth and flat deposits during the first half of 2018.earn higher rates on balances at other correspondent banks.

 

Debt Securities

 

Debt securities available for sale totaled $583.5$658.0 million at June 30, 20182019 and $538.1$590.2 million at December 31, 2017.2018. Investment securities held to maturity totaled $0.3 million at June 30, 2019. We had pay downspaydowns of $25.9$26.9 million on mortgage-backed securities and government agencies, maturities of $10.6$22.8 million on municipal bonds, corporate securities and corporatetreasury securities, and calls of $3.4$6.2 million on municipal securities and subordinated notes during the six months ended June 30, 2018.2019. We purchased $70.9$59.3 million in mortgage-backed securities $27.0and $40.4 million in municipal and corporate securities and $2.9 million of U.S. Treasury and government sponsored agency during the first six months of 2018.2019. For a tabular presentation of debt securities available for sale and held to maturity at June 30, 2019 and December 31, 2018, see “Note 4 – Securities” in our Notes to Consolidated Financial Statements.

 

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, 20182019 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 BankCompany does not invest in collateralized debt obligations (“CDOs”). We have $91.5$135.5 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, 20182019 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$334.1 million and $284.2$291.6 million as of June 30, 20182019 and December 31, 2017,2018, respectively.

27

 

Loans

 

We had total loans of $6.13$6.97 billion at June 30, 2018,2019, an increase of $279.0$434.4 million, or 4.8%6.6%, compared to $5.85$6.53 billion at December 31, 2017.2018. At June 30, 2018,2019, the percentage of our loans in each of our regions were as follows:

 

  

Percentage of Total

Loans in MSA

Birmingham-Hoover, AL MSA

  42.440.9

%

Dothan, AL MSA

9.4

%

Huntsville, AL MSA

8.8

%

Mobile, AL MSA

6.7

%

Montgomery, AL MSA

5.9

%

Total Alabama MSAs

71.7

%

Pensacola-Ferry Pass-Brent, FL MSA

6.2

%

Tampa-St. Petersburg-Clearwater, FL MSA

3.1

%

Total Florida MSAs

  9.3

%

Dothan, AL

Atlanta-Sandy Springs-Roswell, GA MSA

  9.36.2

%

Mobile, AL MSA6.3%
Montgomery, AL MSA6.1%
Total Alabama MSAs73.4%
Pensacola-Ferry Pass-Brent, FL MSA6.3%
Tampa-St. Petersburg-Clearwater, FL MSA2.6%
Total Florida MSAs8.9%
Atlanta-Sandy Springs-Roswell, GA MSA5.0%

Nashville-Davidson-Murfreesboro-Franklin, TN MSA

  9.2

%

Charleston-North Charleston, SC MSA

  3.53.6

%


 

Asset Quality

 

The allowance for loan losses, sometimes referred to as the “ALLL,” 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,ALLL, 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 allowanceALLL at an adequate level. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased. Our management believes that the allowance was adequate at June 30, 2019.

Our management reviews the adequacy of the ALLL on a quarterly basis. The ALLL calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At June 30, 2019, total loans rated Special Mention, Substandard, and Doubtful were $134.7 million, or 1.9% of total loans, compared to $139.0 million, or 2.1% of total loans, at December 31, 2018. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the ALLL to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

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 reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Impaired loans are measured based on the present value of expected future cash flows discounted at the interest rate implicit in the original loan agreement, or, as a practical expedient, 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.

The following table presents a summary of changes in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018:

  

As of and for the Three Months Ended

  

As of and for the Six Months Ended

 
  

June 30,

  

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(Dollars in thousands)

 

Total loans outstanding, net of unearned income

 $6,968,886  $6,129,649  $6,968,886  $6,129,649 

Average loans outstanding, net of unearned income

 $6,789,051  $5,988,623  $6,695,792  $5,936,501 

Allowance for loan losses at beginning of period

  70,207   62,050   68,600   59,406 

Charge-offs:

                

Commercial, financial and agricultural loans

  3,610   1,732   6,647   2,820 

Real estate - mortgage

  169   440   219   821 

Consumer loans

  63   47   281   135 

Total charge-offs

  3,842   2,219   7,147   3,776 

Recoveries:

                

Commercial, financial and agricultural loans

  117   173   129   177 

Real estate - construction

  -   97   1   104 

Real estate - mortgage

  4   2   11   44 

Consumer loans

  16   15   23   24 

Total recoveries

  137   287   164   349 

Net charge-offs

  3,705   1,932   6,983   3,427 

Provision for loan losses

  4,884   4,121   9,769   8,260 

Allowance for loan losses at period end

 $71,386  $64,239  $71,386  $64,239 

Allowance for loan losses to period end loans

  1.02

%

  1.05

%

  1.02

%

  1.05

%

Net charge-offs to average loans

  0.22

%

  0.13

%

  0.21

%

  0.12

%


Management believes that the comprehensive allowance analysis developed by our credit administration group is in compliance with all current regulatory guidelines; however, actual losses could differ from management’s estimates.

 

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.

loans at June 30, 2019 and December 31, 2018:

 

   Percentage of loans
   in each category
June 30, 2018 Amount to total loans

June 30, 2019

 

Amount

  

Percentage of loans

in each category

to total loans

 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $36,178   38.27% $38,709  37.80

%

Real estate - construction  4,062   8.53% 3,419  8.67

%

Real estate - mortgage  23,438   52.11% 28,783  52.62

%

Consumer  561   1.09%  475   0.93

%

Total $64,239   100.00% $71,386   100.00

%

 

   Percentage of loans
   in each category
December 31, 2017 Amount to total loans

December 31, 2018

 

Amount

  

Percentage of loans

in each category

to total loans

 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $32,880   38.96% $39,016  38.47

%

Real estate - construction  4,989   9.93% 3,522  8.16

%

Real estate - mortgage  21,022   50.05% 25,508  52.39

%

Consumer  515   1.06%  554   0.99

%

Total $59,406   100.00% $68,600   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$4.3 million to $14.1$32.1 million at June 30, 2018,2019, compared to $10.8$27.8 million at December 31, 2017.2018. Of this total, nonaccrual loans of $8.0$21.8 million at June 30, 2018,2019, represented a net decrease of $2.8$0.1 million from nonaccrual loans at December 31, 2017.2018. Excluding credit card accounts, there were sixthree loans 90 or more days past due and still accruing totaling $6.0$10.3 million at June 30, 2019, compared to nothree loans totaling $5.7 million at December 31, 2018. This increase in 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$4.8 million which is well-collateralized and is actively in the process of collection.at June 30, 2019. Troubled Debt Restructurings (“TDR”) at June 30, 20182019 and December 31, 20172018 were $17.3$11.3 million and $20.6$14.6 million, respectively. There was one renewal of an existing TDR totaling $2.7 million for the three and six months ended June 30, 2019. There were no loans newly classified as a 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.

 

28

 

OREO and repossessed assets decreasedincreased to $5.9$5.6 million at June 30, 2018,2019, from $6.7$5.2 million at December 31, 2017.2018. The total number of OREO and repossessed asset accounts decreased to 11was 12 at June 30, 2018, compared to 12 at2019 and December 31, 2017.2018, respectively. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 20182019 and 2017:2018:

 

 Six Months Ended June 30, 

Six Months Ended June 30,

 
 2018 2017 

2019

  

2018

 
 (In thousands) 

(In thousands)

 
Balance at beginning of period $6,701  $4,988  $5,169  $6,701 
Transfers from loans and capitalized expenses  751   586  752  751 
Proceeds from sales  (1,252)  (1,547) (48) (1,252)
Internally financed sales  -   (185) -  - 
Write-downs / net gain (loss) on sales  (263)  49   (224)  (263)
Balance at end of period $5,937  $3,891  $5,649  $5,937 

 

The following table summarizes our nonperforming assets and TDRs at June 30, 20182019 and December 31, 2017:2018:

 

 June 30, 2018 December 31, 2017 

June 30, 2019

  

December 31, 2018

 
   Number of   Number of   

Number of

   

Number of

 
 Balance Loans Balance Loans 

Balance

  

Loans

  

Balance

  

Loans

 
 (Dollar Amounts In Thousands) 

(Dollar Amounts In Thousands)

 
Nonaccrual loans:                         
Commercial, financial and agricultural $6,885   16  $9,712   18  $11,081  22  $10,503  16 
Real estate - construction  -   -   -   -  238  1  997  1 
Real estate - mortgage:                         
Owner-occupied commercial  422   2   556   2  3,558  3  3,358  2 
1-4 family mortgage  715   2   459   2  1,941  9  2,046  9 
Other mortgage  -   -   -   -   5,022   1   5,022   1 
Total real estate - mortgage  1,137   4   1,015   4  10,521  13  10,426  12 
Consumer  -   -   38   1   -   -   -   - 
Total Nonaccrual loans: $8,022   20  $10,765   23  $21,840  36  $21,926  29 
                 
90+ days past due and accruing:                         
Commercial, financial and agricultural $431   6  $12   3  $4,756  2  $605  10 
Real estate - construction  -   -   -   -  -  -  -  - 
Real estate - mortgage:                         
Owner-occupied commercial  250   1   -   -  -  -  -  - 
1-4 family mortgage  288   2   -   -  528  1  123  1 
Other mortgage  5,071   1   -   -   4,990   1   5,008   1 
Total real estate - mortgage  5,609   4   -   -  5,518  2  5,131  2 
Consumer  41   14   48   24   25   3   108   28 
Total 90+ days past due and accruing: $6,081   24  $60   27  $10,299  7  $5,844  40 
                 
Total Nonperforming Loans: $14,103   44  $10,825   50  $32,139   43  $27,770   69 
 
Plus: Other real estate owned and repossessions  5,937   11   6,701   12   5,649   12   5,169   12 
Total Nonperforming Assets $20,040   55  $17,526   62  $37,788   55  $32,939   81 
                 
Restructured accruing loans:                         
Commercial, financial and agricultural $10,061   6  $11,438   6  $2,742  1  $3,073  3 
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  $2,742  1  $3,073  3 
 
Total Nonperforming assets and restructured accruing loans $35,612   65  $34,475   72  $40,530   56  $36,012   84 
                 
Ratios:                         
Nonperforming loans to total loans  0.23%      0.19%     0.46

%

    0.43

%

   
Nonperforming assets to total loans plus other real estate owned and repossessions  0.33%      0.30%     0.54

%

    0.50

%

   
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions  0.58%      0.59%     0.58

%

    0.55

%

   

 

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, 2018,2019, we had impaired loans of $38.0$45.7 million inclusive of nonaccrual loans, a decreasean increase of $2.5$7.1 million from $40.5$38.6 million as of December 31, 2017.2018. We allocated $5.9$10.1 million of our allowance for loan losses at June 30, 20182019 to these impaired loans, an increase of $0.3$2.0 million compared to $5.6$8.1 million as of December 31, 2017.June 30, 2018. 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 implicit in the original loan agreement, 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 groupteam performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

Of the $38.0$45.7 million of impaired loans reported as of June 30, 2018, $20.12019, $19.8 million were commercial, financial and agricultural loans, $1.6$2.0 million were real estate construction loans $16.2and $23.9 million were real estate mortgage loans and $0.1 million were consumer loans.

 

Deposits

 

Total deposits were flat at $6.09$7.40 billion at June 30, 2018 compared to2019, an increase of $489.1 million, or 7.1%, over $6.92 billion at December 31, 2017. While we have not experienced growth in our deposits during the first half of 2018, we2018. 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.”

 

The following table summarizes balances of our deposits and the percentage of each type to the total at June 30, 2019 and December 31, 2018:

  

June 30, 2019

  

December 31, 2018

 

Noninterest-bearing demand

 $1,576,959   21.30

%

 $1,557,341   22.52

%

Interest-bearing demand

  5,080,434   68.61

%

  4,624,909   66.88

%

Savings

  54,007   0.73

%

  53,880   0.78

%

Time deposits , $250,000 and under

  271,301   3.66

%

  257,925   3.73

%

Time deposits, over $250,000

  422,093   5.70

%

  421,653   6.10

%

  $7,404,794   100.00

%

 $6,915,708   100.00

%

Other Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $262.7$459.4 million and $301.8$288.7 million at June 30, 20182019 and December 31, 2017,2018, 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%2.51% for the quarter ended June 30, 2018.2019. 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

●

$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, 2018,2019, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $549.7 million.$1.13 billion. Additionally, the Bank had additional borrowing availability of approximately $458.0$655.0 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.

 

The following table reflects the contractual maturities of our term liabilities as of June 30, 2019. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

  

Payments due by Period

 
  

Total

  

1 year or less

  

Over 1 - 3

years

  

Over 3 - 5

years

  

Over 5 years

 
  

(In Thousands)

 

Contractual Obligations (1)

                    
                     

Deposits without a stated maturity

 $6,711,400  $-  $-  $-  $- 

Certificates of deposit (2)

  693,394   410,494   190,148   92,740   12 

Federal funds purchased

  459,449   459,449   -   -   - 

Subordinated debentures

  64,750   -   -   -   64,750 

Operating lease commitments

  15,903   3,183   5,476   4,150   3,094 

Total

 $7,944,896  $873,126  $195,624  $96,890  $67,856 

(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

Total stockholders’ equity attributable to us at June 30, 2019 was $778.5 million, or 8.9% of total assets. At December 31, 2018, total stockholders’ equity attributable to us was $714.7 million, or 8.9% of total assets.

As of June 30, 2019, 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.

The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, beginning January 1, 2016 and became fully effective on January 1, 2019. As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer.


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, not including the capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of June 30, 2019, December 31, 2018 and June 30, 2018:

                  

To Be Well Capitalized

 
          

For Capital Adequacy

  

Under Prompt Corrective

 
  

Actual

  

Purposes

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of June 30, 2019:

 

(Dollars in Thousands)

 

CET 1 Capital to Risk-Weighted Assets:

                        

Consolidated

 $759,998   10.18

%

 $335,955   4.50

%

  N/A   N/A 

ServisFirst Bank

  823,912   11.04

%

  335,942   4.50

%

 $485,249   6.50

%

Tier 1 Capital to Risk-Weighted Assets:

                        

Consolidated

  760,500   10.19

%

  447,940   6.00

%

  N/A   N/A 

ServisFirst Bank

  824,414   11.04

%

  447,922   6.00

%

  597,230   8.00

%

Total Capital to Risk-Weighted Assets:

                        

Consolidated

  897,070   12.02

%

  597,254   8.00

%

  N/A   N/A 

ServisFirst Bank

  896,300   12.01

%

  597,230   8.00

%

  746,537   10.00 

Tier 1 Capital to Average Assets:

                        

Consolidated

  760,500   9.00

%

  338,030   4.00

%

  N/A   N/A 

ServisFirst Bank

  824,414   9.76

%

  338,016   4.00

%

  422,520   5.00

%

                         

As of December 31, 2018:

                        

CET 1 Capital to Risk-Weighted Assets:

                        

Consolidated

 $705,203   10.12

%

 $313,564   4.50

%

  N/A   N/A 

ServisFirst Bank

  768,614   11.03

%

  313,554   4.50

%

 $452,911   6.50

%

Tier 1 Capital to Risk-Weighted Assets:

                        

Consolidated

  705,705   10.13

%

  418,086   6.00

%

  N/A   N/A 

ServisFirst Bank

  769,116   11.04

%

  418,071   6.00

%

  557,428   8.00

%

Total Capital to Risk-Weighted Assets:

                        

Consolidated

  839,471   12.05

%

  557,448   8.00

%

  N/A   N/A 

ServisFirst Bank

  867,715   12.03

%

  557,428   8.00

%

  696,786   10.00

%

Tier 1 Capital to Average Assets:

                        

Consolidated

  705,705   9.07

%

  311,214   4.00

%

  N/A   N/A 

ServisFirst Bank

  769,116   9.89

%

  311,206   4.00

%

  389,007   5.00

%

                         

As of June 30, 2018:

                        

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

%

We are a legal entity separate and distinct from the Bank.bank. Our principal source of cash flow, including cash flow to pay dividends to our stockholders, is dividends the Bankbank pays to us as the Bank’sbank’s sole shareholder. Statutory and regulatory limitations apply to the Bank’sbank’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’sbank’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’sbank’s surplus currently exceeds 20% of its capital). Moreover, our Bankbank 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 Bankbank in any calendar year will exceed the total of (i) the Bank’sbank’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’sbank’s surplus without the prior written approval of the Superintendent.

 

The following table reflectsbank’s payment of dividends may also be affected or limited by other factors, such as the contractual maturitiesrequirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of our term liabilities as1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out 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 disclosedcurrent operating earnings. If, in the table below. Our management believesopinion of the federal banking regulators, the bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulators could require, after notice and a hearing, that we are well-capitalized under the prompt corrective action provisions as of June 30, 2018.

31

The following table sets forth (i)bank stop or refrain from engaging in 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:questioned practice.

          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%

32

 

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, 2018,2019, 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, 20182019 and December 31, 20172018 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at June 30, 2019 and December 31, 2018 are as follows:

 

 June 30, 2018 

June 30, 2019

  

December 31, 2018

 
 (In Thousands) 

(In Thousands)

 

(In Thousands)

 
Commitments to extend credit $1,957,118  $2,055,219  $1,985,801 
Credit card arrangements  115,667  223,683  173,613 
Standby letters of credit  31,834   51,965   40,590 
 $2,104,619  $2,330,867  $2,200,004 

 

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, 20182019 was $33.5$35.6 million compared to net income and net income available to common stockholders of $24.2 and $24.1$33.5 million, respectively, for the three months ended June 30, 2017.2018. Net income and net income available to common stockholders for the six months ended June 30, 20182019 was $66.1$70.6 million compared to net income and net income available to common stockholders of $46.7$66.1 million for the six months ended June 30, 2017.2018. The increase in net income for the three months ended June 30, 20182019 over the same period in 20172018 was primarily attributable to a $8.9$13.8 million increase in net interest income resulting from growtha $1.37 billion increase in average earning assets, and a $0.7$0.8 million increase in non-interest income, led by increased credit card income. The same key drivers contributed to the increase in net income for the six months ended June 30, 20182019 compared to 2017 was primarily the result of2018 resulting in a $19.3$11.9 million increase in net interest income resulting from growthon a $1.27 billion increase in average earning assets, and a $0.9$1.4 million increase in non-interest income, led by increased credit card income. Increases in non-interest expense of $2.1$2.5 million and $4.4$4.8 million and increases in income tax expense of $1.0 million and $2.5 million, respectively, for the three and six months ended June 30, 20182019 compared to 20172018 partially offset increases in income.

33

 

Basic and diluted net income per common share were $0.63$0.67 and $0.62,$0.66, respectively, for the three months ended June 30, 2018,2019, compared to $0.46$0.63 and $0.45,$0.62, respectively, for the corresponding period in 2017.2018. Basic and diluted net income per common share were $1.24$1.32 and $1.22,$1.31, respectively, for the six months ended June 30, 2018,2019, compared to $0.88$1.24 and $0.86,$1.22, respectively, for the corresponding period in 2017.2018. Return on average assets for the three and six months ended June 30, 20182019 was 1.91%1.69% and 1.72%, respectively, compared to 1.55% and 1.50%, respectively,1.91% for both of the corresponding periods in 2017.2018. Return on average common stockholders’ equity for the three and six months ended June 30, 20182019 was 18.72% and 19.06% compared to 20.89% and 21.13% compared to 17.36% and 17.23%, respectively, for the corresponding periods in 2017.2018.

 

Net Interest Income and Net Interest Margin Analysis

 

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$5.4 million, or 15.3%8.4%, to $64.7$70.1 million for the three months ended June 30, 20182019 compared to $56.1$64.7 million for the corresponding period in 2017,2018, and increased $18.7$11.7 million, or 17.2%9.2%, to $127.3$138.9 million for the six months ended June 30, 20182019 compared to $108.6$127.3 million for the corresponding period in 2017.2018. This increase was primarily attributable to growth in average earning assets, which increased $824.4 million,$1.37 billion, or 13.8%20.3%, from the second quarter of 20172018 to the second quarter of 2018,2019, and $728.8 million,$1.27 billion, or 12.1%18.9%, from the six months ended June 30, 20172018 to the same period in 2018.2019. The taxable-equivalent yield on interest-earning assets increased to 4.64%4.80% for the three months ended June 30, 20182019 from 4.30%4.64% for the corresponding period in 2017,2018, and increased to 4.57%4.82% for the six months ended June 30, 20182019 from 4.17%4.57% for the corresponding period in 2017.2018. The yield on loans for the three months ended June 30, 20182019 was 4.93%5.23% compared to 4.60%4.93% for the corresponding period in 2017,2018, and 4.87%5.24% compared to 4.55%4.87% for the six months ended June 30, 20182019 and June 30, 2017,2018, respectively. The cost of total interest-bearing liabilities increased to 1.13%1.83% for the three months ended June 30, 20182019 compared to 0.74%1.13% for the corresponding period in 2017,2018, and increased to 1.04%1.78% for the six months ended June 30, 20182019 from 0.71%1.04% for the corresponding period in 2017.2018. Net interest margin for the three months ended June 30, 20182019 was 3.82%3.44% compared to 3.77%3.82% for the corresponding period in 2017,2018, and 3.81%3.50% for the six months ended June 30, 20182019 compared to 3.65%3.81% for the corresponding period in 2017.2018.


 

The following tables show, for the three and six months ended June 30, 20182019 and June 30, 2017,2018, 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:

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)

 

34

  

2019

  

2018

 
      

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

 $6,756,927  $88,280   5.24

%

 $5,958,377  $73,326   4.94

%

Tax-exempt (3)

  32,124   307   3.83   30,246   297   3.94 

Total loans, net of unearned income

  6,789,051   88,587   5.23   5,988,623   73,623   4.93 

Mortgage loans held for sale

  5,208   50   3.85   3,770   40   4.26 

Investment securities:

                        

Taxable

  565,491   4,192   2.97   475,777   3,127   2.63 

Tax-exempt (3)

  77,364   406   2.10   112,145   729   2.60 

Total investment securities (4)

  642,855   4,598   2.86   587,922   3,856   2.62 

Federal funds sold

  323,714   1,998   2.48   141,915   694   1.96 

Interest-bearing balances with banks

  411,481   2,593   2.53   73,714   332   1.81 

Total interest-earning assets

 $8,172,309  $97,826   4.80  $6,795,944  $78,545   4.64 

Non-interest-earning assets:

                        

Cash and due from banks

  76,988           68,190         

Net fixed assets and equipment

  58,607           59,262         

Allowance for loan losses, accrued interest and other assets

  156,264           130,607         

Total assets

 $8,464,168          $7,054,003         
                         

Liabilities and stockholders' equity:

                     

Interest-bearing liabilities:

                        

Interest-bearing demand deposits

 $909,847  $2,004   0.88

%

 $827,540  $1,147   0.56

%

Savings deposits

  54,391   77   0.57   54,842   47   0.34 

Money market accounts

  3,932,459   18,418   1.88   3,089,595   8,498   1.10 

Time deposits

  694,414   3,741   2.16   596,450   2,022   1.36 

Total interest-bearing deposits

  5,591,111   24,240   1.74   4,568,427   11,714   1.03 

Federal funds purchased

  418,486   2,681   2.57   295,309   1,378   1.87 

Other borrowings

  64,680   781   4.84   64,699   782   4.85 

Total interest-bearing liabilities

 $6,074,277  $27,702   1.83

%

 $4,928,435  $13,874   1.13

%

Non-interest-bearing liabilities:

                        

Non-interest-bearing demand deposits

  1,591,722           1,469,194         

Other liabilities

  35,161           13,079         

Stockholders' equity

  763,742           650,641         

Accumulated other comprehensive loss

  (734)          (7,346)        

Total liabilities and stockholders' equity

 $8,464,168          $7,054,003         

Net interest income

     $70,124          $64,671     

Net interest spread

          2.97

%

          3.51

%

Net interest margin

          3.44

%

          3.82

%

 

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   389,505   2,274   2.34 
Tax-exempt (3)  112,145   729   2.60   133,590   1,129   3.38 
Total investment securities (4)  587,922   3,856   2.62   523,095   3,403   2.60 
Federal funds sold  141,915   694   1.96   98,598   287   1.17 
Equity securities  1,022   3   1.18   1,030   27   10.51 
Interest-bearing balances with banks  73,714   329   1.79   109,909   286   1.04 
Total interest-earning assets $6,796,966  $78,545   4.64% $5,972,545  $64,074   4.30%
Non-interest-earning assets:                        
Cash and due from banks  68,190           68,894         
Net fixed assets and equipment  59,262           49,813         
Allowance for loan losses, accrued interest and other assets  129,585           143,286         
Total assets $7,054,003           6,234,538         
                         
Liabilities and stockholders' equity:                        
Interest-bearing liabilities:                        
Interest-bearing demand deposits $827,540  $1,147   0.56% $779,916  $767   0.39%
Savings deposits  54,842   47   0.34   48,150   36   0.30 
Money market accounts  3,089,595   8,498   1.10   2,567,817   4,097   0.64 
Time deposits  596,450   2,022   1.36   537,220   1,421   1.06 
Total interest-bearing deposits  4,568,427   11,714   1.03   3,933,103   6,321   0.64 
Federal funds purchased  295,309   1,378   1.87   336,344   933   1.11 
Other borrowings  64,699   782   4.85   55,130   717   5.22 
Total interest-bearing liabilities $4,928,435  $13,874   1.13% $4,324,577  $7,971   0.74%
Non-interest-bearing liabilities:                        
Non-interest-bearing demand deposits  1,469,194           1,338,514         
Other liabilities  13,079           13,739         
Stockholders' equity  650,641           556,521         
Accumulated other comprehensive (loss) income  (7,346)          1,187         
Total liabilities and stockholders' equity $7,054,003          $6,234,538         
Net interest income     $64,671          $56,103     
Net interest spread          3.51%          3.56%
Net interest margin          3.82%          3.77%

(1)

Non-accrual loans are included in average loan balances in all periods.  Loan fees of $990$914 and $851$990 are included in interest income in the second quarter of 2019 and 2018, and 2017, respectively.

(2)

Accretion

Net accretion on acquired loan discounts of $53 and $124 areis included in interest income in the second quarter of 2018 and 2017, respectively.2018.

(3)

Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21% for the second quarter.

(4)

Unrealized losses of 2018$985 and 35% for the second quarter of 2017.

(4)Unrealized (losses) gains of $(9,354) and $1,824$9,354 are excluded from the yield calculation in the second quarter of 2019 and 2018, and 2017, respectively.

 


  

For the Three Months Ended June 30,

 
  

2019 Compared to 2018 Increase (Decrease) in Interest

Income and Expense Due to Changes in:

 
  

Volume

  

Rate

  

Total

 
  

(In Thousands)

 

Interest-earning assets:

            

Loans, net of unearned income

            

Taxable

 $9,140  $5,814  $14,954 

Tax-exempt

  11   (1)  10 

Total loans, net of unearned income

  9,151   5,813   14,964 

Mortgages held for sale

  13   (3)  10 

Debt securities:

            

Taxable

  588   477   1,065 

Tax-exempt

  (206)  (117)  (323)

Total debt securities

  382   360   742 

Federal funds sold

  1,063   241   1,304 

Interest-bearing balances with banks

  2,067   194   2,261 

Total interest-earning assets

  12,676   6,605   19,281 
             

Interest-bearing liabilities:

            

Interest-bearing demand deposits

  118   739   857 

Savings

  -   30   30 

Money market accounts

  2,670   7,250   9,920 

Time deposits

  358   1,361   1,719 

Total interest-bearing deposits

  3,146   9,380   12,526 

Federal funds purchased

  662   641   1,303 

Other borrowed funds

  -   (1)  (1)

Total interest-bearing liabilities

  3,808   10,020   13,828 

Increase in net interest income

 $8,868  $(3,415) $5,453 

 

35

  For the Three Months Ended June 30,
  2018 Compared to 2017 Increase (Decrease) in Interest
Income and Expense Due to Changes in:
  Volume Rate Total
  (In Thousands)
Interest-earning assets:            
Loans, net of unearned income            
Taxable $9,205  $4,613  $13,818 
Tax-exempt  (119)  (89)  (208)
Total loans, net of unearned income  9,086   4,524   13,610 
Mortgages held for sale  (23)  5   (18)
Debt securities:            
Taxable  544   309   853 
Tax-exempt  (164)  (236)  (400)
Total debt securities  380   73   453 
Federal funds sold  160   247   407 
Equity securities  -   (24)  (24)
Interest-bearing balances with banks  (115)  158   43 
Total interest-earning assets  9,488   4,983   14,471 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  49   331   380 
Savings  5   6   11 
Money market accounts  965   3,436   4,401 
Time deposits  169   432   601 
Total interest-bearing deposits  1,188   4,205   5,393 
Federal funds purchased  (126)  571   445 
Other borrowed funds  118   (53)  65 
Total interest-bearing liabilities  1,180   4,723   5,903 
Increase in net interest income $8,308  $260  $8,568 

OurIncreases in average rates paid on interest-bearing deposits drive unfavorable rate component change while growth in loans, non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change.

 

36

 

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Six Months Ended June 30,

(In thousands, except Average Yields and Rates)

 

 2018 2017 

2019

  

2018

 
   Interest     Interest     

Interest

     

Interest

   
 Average Earned / Average Average Earned / Average 

Average

 

Earned /

 

Average

 

Average

 

Earned /

 

Average

 
 Balance Paid Yield / Rate Balance Paid Yield / Rate 

Balance

  

Paid

  

Yield / Rate

  

Balance

  

Paid

  

Yield / Rate

 
Assets:                                     
Interest-earning assets:                                     
Loans, net of unearned income (1)(2)                                     
Taxable $5,903,216  $142,648   4.87% $5,085,468  $114,791   4.55% $6,664,437  $173,515  5.25

%

 $5,903,216  $142,648  4.87

%

Tax-exempt (3)  33,285   662   3.98   34,271   822   4.80   31,355   592   3.78   33,285   662   3.98 
Total loans, net of unearned income  5,936,501   143,310   4.87   5,119,739   115,613   4.55  6,695,792  174,107  5.24  5,936,501  143,310  4.87 
Mortgage loans held for sale  3,734   81   4.37   5,798   115   4.00  3,421  76  4.48  3,734  81  4.37 
Investment securities:                                     
Taxable  455,873   5,872   2.58   378,985   4,361   2.30  542,351  7,939  2.93  455,873  5,872  2.58 
Tax-exempt (3)  116,185   1,500   2.58   133,087   2,274   3.42   82,423   870   2.11   116,185   1,500   2.58 
Total investment securities (4)  572,058   7,372   2.58   512,072   6,635   2.59  624,774  8,809  2.82  572,058  7,372  2.58 
Federal funds sold  136,722   1,245   1.84   166,154   806   0.98  258,564  3,217  2.51  136,722  1,245  1.84 
Equity securities  1,026   6   1.18   1,030   31   6.07 
Interest-bearing balances with banks  84,801   709   1.69   202,265   872   0.87   424,841   5,357   2.54   84,801   715   1.70 
Total interest-earning assets $6,734,842  $152,723   4.57% $6,007,058  $124,072   4.17% $8,007,392  $191,566  4.82

%

 $6,733,816  $152,723  4.57

%

Non-interest-earning assets:                                     
Cash and due from banks  68,249           64,321          75,592       68,249      
Net fixed assets and equipment  59,484           47,290          58,729       59,484      
Allowance for loan losses, accrued interest and other assets  135,099           140,796           153,120        136,125      
Total assets $6,997,674          $6,259,465          $8,294,833       $6,997,674      
                         
Liabilities and stockholders' equity:                                     
Interest-bearing liabilities:                                     
Interest-bearing demand deposits $863,227  $2,290   0.53% $784,569  $1,499   0.39% $926,176  $4,007  0.87

%

 $863,227  $2,290  0.53

%

Savings deposits  54,059   88   0.33   49,299   76   0.31  54,239  149  0.55  54,059  88  0.33 
Money market accounts  3,058,558   15,209   1.00   2,630,672   7,973   0.61  3,845,792  34,932  1.83  3,058,558  15,209  1.00 
Time deposits (5)  586,708   3,748   1.29   533,630   2,755   1.04 

Time deposits

  696,682   7,297   2.11   586,708   3,748   1.29 
Total interest-bearing deposits  4,562,552   21,335   0.94   3,998,170   12,303   0.62  5,522,889  46,385  1.69  4,562,552  21,335  0.94 
Federal funds purchased  296,175   2,550   1.74   347,981   1,699   0.98  366,029  4,676  2.58  296,175  2,550  1.74 
Other borrowings  64,752   1,562   4.86   55,184   1,434   5.24   64,675   1,562   4.87   64,752   1,562   4.86 
Total interest-bearing liabilities $4,923,479  $25,447   1.04% $4,401,335  $15,436   0.71% $5,953,593  $52,623  1.78

%

 $4,923,479  $25,447  1.04

%

Non-interest-bearing liabilities:                                     
Non-interest-bearing demand deposits  1,429,426           1,297,578          1,558,783       1,429,426      
Other liabilities  13,863           14,417          35,275       13,863      
Stockholders' equity  636,137           545,936          749,754       636,137      
Accumulated other comprehensive (loss) income  (5,231)          199         

Accumulated other comprehensive (loss)

  (2,572)       (5,231)     
Total liabilities and stockholders' equity $6,997,674          $6,259,465          $8,294,833       $6,997,674      
Net interest income     $127,276          $108,636         $138,943       $127,276    
Net interest spread          3.53%          3.46%      3.04

%

      3.53

%

Net interest margin          3.81%          3.65%      3.50

%

      3.81

%

 

(1)

Non-accrual loans are included in average loan balances in all periods.  Loan fees of $1,739$1,887 and $1,626$1,739 are included in interest income in 2019 and 2018, and 2017, respectively.

(2)

Accretion on acquired loan discounts of $125$91 and $267$125 are included in interest income in 2019 and 2018, and 2017, respectively.

(3)

Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21% in 2018.

(4)

Unrealized losses of $3,311 and 35% in 2017.

(4)Unrealized (losses) gains of $(6,677) and $304$6,677 are excluded from the yield calculation in 2019 and 2018, and 2017, respectively.
(5)Accretion on acquired CD premiums of $32 are included in interest expense in 2017.

 


  

For the Six Months Ended June 30,

 
  

2019 Compared to 2018 Increase (Decrease) in Interest

Income and Expense Due to Changes in:

 
  

Volume

  

Rate

  

Total

 
  

(In Thousands)

 

Interest-earning assets:

            

Loans, net of unearned income

            

Taxable

 $19,284  $11,583  $30,867 

Tax-exempt

  (37)  (33)  (70)

Total loans, net of unearned income

  19,247   11,550   30,797 

Mortgages held for sale

  (7)  2   (5)

Debt securities:

            

Taxable

  1,202   865   2,067 

Tax-exempt

  (387)  (243)  (630)

Total debt securities

  815   622   1,437 

Federal funds sold

  1,398   574   1,972 

Interest-bearing balances with banks

  4,132   510   4,642 

Total interest-earning assets

  25,585   13,258   38,843 
             

Interest-bearing liabilities:

            

Interest-bearing demand deposits

  178   1,539   1,717 

Savings

  -   61   61 

Money market accounts

  4,683   15,040   19,723 

Time deposits

  805   2,744   3,549 

Total interest-bearing deposits

  5,666   19,384   25,050 

Federal funds purchased

  696   1,430   2,126 

Other borrowed funds

  (2)  2   - 

Total interest-bearing liabilities

  6,360   20,816   27,176 

Increase in net interest income

 $19,225  $(7,558) $11,667 

 

37

  For the Six Months Ended June 30,
  2018 Compared to 2017 Increase (Decrease) in Interest
Income and Expense Due to Changes in:
  Volume Rate Total
  (In Thousands)
Interest-earning assets:      
Loans, net of unearned income            
Taxable $19,363  $8,494  $27,857 
Tax-exempt  (23)  (137)  (160)
Total loans, net of unearned income  19,340   8,357   27,697 
Mortgages held for sale  (44)  10   (34)
Debt securities:            
Taxable  951   560   1,511 
Tax-exempt  (265)  (509)  (774)
Total debt securities  686   51   737 
Federal funds sold  (164)  603   439 
Equity securities  -   (25)  (25)
Interest-bearing balances with banks  (688)  525   (163)
Total interest-earning assets  19,130   9,521   28,651 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  162   629   791 
Savings  8   4   12 
Money market accounts  1,465   5,771   7,236 
Time deposits  293   700   993 
Total interest-bearing deposits  1,928   7,104   9,032 
Federal funds purchased  (285)  1,136   851 
Other borrowed funds  236   (108)  128 
Total interest-bearing liabilities  1,879   8,132   10,011 
Increase in net interest income $17,251  $1,389  $18,640 

OurIncreases in the average rates paid on interest-bearing deposits drive unfavorable rate component change while growth in loans, non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change.

 

Provision for Loan Losses

 

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades andwas $4.9 million for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. Atthree months ended June 30, 2018, total loans rated Special Mention, Substandard, and Doubtful were $104.32019, an increase of $0.8 million or 1.7% of total loans, compared to $99.8 million, or 1.7% of total loans, at December 31, 2017. Impaired loans are reviewed specifically and separately to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

The provision for loan losses wasfrom $4.1 million for the three months ended June 30, 2018, a decrease of $0.3 million from $4.4and was $9.8 million for the threesix months ended June 30, 2017, and was2019, a $1.5 million increase compared to $8.3 million for the six months ended June 30, 2018, a $1.1 million decrease2018. Net credit charge-offs to quarter-to-date average loans increased nine basis points to 0.22% for the second quarter of 2019 compared to $9.4 million0.13% for the corresponding period in 2018 and increased nine basis points to 0.21% for the six months ended June 30, 2017. Net credit charge-offs to quarter-to-date average loans decreased 12 basis points to 0.13% for the second quarter of 20182019 compared to 0.25%0.12% for the corresponding period in 2017 and decreased 12 basis points to 0.12% for the six months ended June 30, 2018 compared to 0.24% for the corresponding period in 2017.2018. Nonperforming loans increased to $32.1 million, or 0.46% of total loans, at June 30, 2019 from $27.8 million, or 0.43% of total loans, at December 31, 2018, and were $14.1 million, or 0.23% of total loans, at June 30, 2018 from $10.82018. Impaired loans increased to $45.7 million, or 0.19%0.66% of total loans, at June 30, 2019, compared to $38.6 million, or 0.59% of total loans, at December 31, 2017, and were higher than $11.0 million, or 0.21% of total loans, at June 30, 2017. Impaired loans decreased to $38.0 million, or 0.62% of total loans, at June 30, 2018, compared to $40.5 million, or 0.69% of total loans, at December 31, 2017.2018. The allowance for loan losses totaled $64.2$70.2 million, or 1.05%1.02% of total loans, net of unearned income, at June 30, 2018,2019, compared to $59.4$68.6 million, or 1.02%1.05% of loans, net of unearned income, at December 31, 2017.2018.

38

 

Noninterest Income

 

Noninterest income totaled $5.5$5.8 million for the three months ended June 30, 2018,2019, an increase of $0.7 million,$837,000, or 13.6%17%, compared to the corresponding period in 2017,2018, and totaled $10.3$10.7 million for the six months ended June 30, 2018,2019, an increase of $1.0$1.4 million, or 10.6%14.6%, compared to the corresponding period in 2017.2018. Mortgage banking income decreased $275,000,increased $298,000, or 25.8%37.8%, to $0.8$1.1 million for the three months ended June 30, 20182019 compared to $1.1 million$789,000 for the same period in 2017,2018, and decreased $0.7 million,increased $355,000, or 33.4%27.2%, to $1.3$1.7 million for the six months ended June 30, 20182019 compared to $2.0$1.3 million for the same period in 2017.2018. The number of loans originated for sale during the second quarterfirst half of 2018 decreased2019 increased approximately 10%37% when compared to the same quarterperiod in 2017 on slower refinance activity.2018. Credit card income increased $0.6$380,000 to $1.7 million for the three months ended June 30, 2018 from $1.22019 compared to $1.3 million for the same period in 2017,2018, and increased $701,000 to $3.3 million for the six months ended June 30, 20182019 compared to $2.4$2.6 million for the same period in 2017.2018. The amount of purchases on cards increased by approximately 22%35% during the second quarter of 20182019 compared to the second quarter of 2017.2018.

 


Noninterest Expense

 

Noninterest expense totaled $24.0$26.0 million for the three months ended June 30, 2018,2019, an increase of $2.1$2.5 million, or 9.8%10.8%, compared to $21.9$23.5 million for the same period in 2017,2018, and totaled $47.5$51.3 million for the six months ended June 30, 2018,2019, an increase of $4.4$4.8 million, or 10.2%10.3%, compared to $43.1$46.5 million for the same period in 2017.2018.

 

Details of expenses are as follows:

 

Salary and benefit expense increased $1.1 million, or 8.9%, to $13.1 million for the three months ended June 30, 2018 from $12.0 million for the same period in 2017, and increased $2.7 million, or 11.2%, to $26.4 million for the six months ended June 30, 2018 from $23.7 million for the same period in 2017. Total employees increased from 433 as of June 30, 2017 to 459 as of June 30, 2018, or 6.0%.

●

Salary and benefit expense increased $1.2 million, or 9.5%, to $14.3 million for the three months ended June 30, 2019 from $13.1 million for the same period in 2018, and increased $2.2 million, or 8.4%, to $28.6 million for the six months ended June 30, 2019 from $26.4 million for the same period in 2018. Total employees increased from 459 as of June 30, 2018 to 495 as of June 30, 2019, or 8%.

 

Equipment and occupancy expense decreased $0.2 million, or 6.7%, to $2.1 million for the three months ended June 30, 2018 from $2.3 million for the corresponding period in 2017, and decreased $0.4 million, or 9.7%, to $4.1 million from $4.5 million for the six months ended June 30, 2018 compared to the corresponding period in 2017. A decrease in rental payments more than offset increased depreciation expense resulting from our fourth quarter 2017 move from our previous headquarters building, which was leased, to our new headquarters building, which is owned.

●

Equipment and occupancy expense increased $174,000, or 8.2%, to $2.3 million for the three months ended June 30, 2019 from $2.1 million for the corresponding period in 2018, and increased $479,000, or 11.8%, to $4.5 million from $4.1 million for the six months ended June 30, 2019 compared to the corresponding period in 2018.

 

Professional services expense increased $0.1 million to $0.9 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $0.2 million to $1.7 million for the six months ended June 30, 2018 compared to the same period in 2017. This increase was primarily the result of increases in internal audit fees.

●

Professional services expense increased $267,000, or 28.9%, to $1.2 million for the three months ended June 30, 2019 compared to the same period in 2018, and increased $456,000, or 26.4%, to $2.2 million for the six months ended June 30, 2019 compared to the same period in 2018. Increases were primarily the result of increased audit fee and compliance consulting expense.

 

FDIC and other regulatory assessments increased $0.1 million to $1.2 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $0.2 million to $2.3 million for the six months ended June 30, 2018 compared to the same period in 2017. Asset growth drives up our assessment base.

●

FDIC and other regulatory assessments decreased $78,000 to $1.1 million for the three months ended June 30, 2019 compared to the same period in 2018, and decreased $192,000 to $2.1 million for the six months ended June 30, 2019 compared to the same period in 2018. Decreases in assessment rates and the termination of the FICO assessment have more than offset our growth in net average assets, which is our assessment base.

 

OREO expense increased $0.1 million to $0.2 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $0.3 million to $0.5 million for the six months ended June 30, 2018 compared to the same period in 2017. We incurred some costs to excavate raw land in our Atlanta market in preparation to sell it.

●

OREO expense increased $52,000 to $212,000 for the three months ended June 30, 2019 compared to the same period in 2018, and decreased $242,000 to $234,000 for the six months ended June 30, 2019 compared to $476,000 for the same period in 2018. In 2018, we incurred some costs to excavate raw land in our Atlanta market in preparation for sale and also wrote down the value of a commercial building in Birmingham based on a recent appraisal.

 

Other operating expenses increased $0.9 million to $6.6 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $1.5 million to $12.6 million for the six months ended June 30, 2018 compared to the same period in 2017. Disputed debit card transaction write-offs, increases in data processing costs and increases in bank service charges related to our correspondent banking activities contributed to the increase in other operating expenses.

●

Other operating expenses increased $874,000, or 14.5%, to $6.9 million for the three months ended June 30, 2019 compared to the same period in 2018, and increased $2.1 million, or 18.0%, to $13.7 million for the six months ended June 30, 2019 compared to the same period in 2018. Increases in data processing expenses, business development expenses and Federal Reserve Bank service charges contributed to this increase in other operating expenses.

 

The following table presents our non-interest income and non-interest expense for the three and six month periods ending June 30, 20182019 compared to the same periods in 2017.2018.

 

39

  

Three Months Ended June 30,

          

Six Months Ended June 30,

         
  

2019

  

2018

  

$ change

  

% change

  

2019

  

2018

  

$ change

  

% change

 

Non-interest income:

                                

Service charges on deposit accounts

 $1,786  $1,653  $133   8.0

%

 $3,488  $3,238  $250   7.7

%

Mortgage banking

  1,087   789   298   37.8

%

  1,662   1,307   355   27.2

%

Credit card income

  1,741   1,361   380   27.9

%

  3,317   2,616   701   26.8

%

Securities gains

  (6)  -   (6)  NM   (6)  4   (10)  NM 

Increase in cash surrender value life insurance

  778   786   (8)  (1.0

)%

  1,540   1,563   (23)  (1.5

)%

Other operating income

  392   352   40   11.4

%

  719   629   90   14.3

%

Total non-interest income

 $5,778  $4,941  $837   16.9

%

 $10,720  $9,357  $1,363   14.6

%

                                 

Non-interest expense:

                                

Salaries and employee benefits

 $14,339  $13,098  $1,241   9.5

%

 $28,604  $26,394  $2,210   8.4

%

Equipment and occupancy expense

  2,287   2,113   174   8.2

%

  4,546   4,067   479   11.8

%

Professional services

  1,191   924   267   28.9

%

  2,185   1,729   456   26.4

%

FDIC and other regulatory assessments

  1,081   1,159   (78)  (6.7

)%

  2,100   2,292   (192)  (8.4

)%

OREO expense

  212   160   52   32.5

%

  234   476   (242)  (50.8

)%

Other operating expense

  6,912   6,038   874   14.5

%

  13,679   11,593   2,086   18.0

%

Total non-interest expense

 $26,022  $23,492  $2,530   10.8

%

 $51,348  $46,551  $4,797   10.3

%

 

 

  Three Months Ended June 30,     Six Months Ended June 30,    
  2018 2017 $ change % change 2018 2017 $ change % change
Non-interest income:                                
Service charges on deposit accounts $1,653  $1,382  $271   19.6% $3,238  $2,736  $502   18.3%
Mortgage banking  789   1,064   (275)  (25.8)%  1,307   1,963   (656)  (33.4)%
Credit card income  1,756   1,189   567   47.7%  3,334   2,368   966   40.8%
Securities gains  -   -   -   -%  4   -   4   400.0%
Increase in cash surrender value life insurance  786   785   1   0.1%  1,563   1,509   54   3.6%
Other operating income  475   385   90   23.4%  882   775   107   13.8%
Total non-interest income $5,459  $4,805  $654   13.6% $10,328  $9,351  $977   10.4%
                                 
Non-interest expense:                                
Salaries and employee benefits $13,098  $12,031  $1,067   8.9% $26,394  $23,744  $2,650   11.2%
Equipment and occupancy expense  2,113   2,265   (152)  (6.7)%  4,067   4,505   (438)  (9.7)%
Professional services  924   808   116   14.4%  1,729   1,579   150   9.5%
FDIC and other regulatory assessments  1,159   1,081   78   7.2%  2,292   2,078   214   10.3%
OREO expense  160   56   104   185.7%  476   132   344   260.6%
Other operating expense  6,556   5,634   922   16.4%  12,564   11,104   1,460   13.1%
Total non-interest expense $24,010  $21,875  $2,135   9.8% $47,522  $43,142  $4,380   10.2%

 


Income Tax Expense

 

Income tax expense was $8.3$9.3 million for the three months ended June 30, 2018 versus $10.02019 compared to $8.3 million for the same period in 2017,2018, and was $15.4$17.8 million for the six months ended June 30, 20182019 compared to $17.8$15.4 million for the same period in 2017. Lower corporate income tax rates resulting from the passage of the Tax Cuts and Jobs Act in December 2017 has resulted in lower effective tax rates.2018. Our effective tax rate for the three and six months ended June 30, 20182019 was 19.9%20.7% and 18.9%20.2%, respectively, compared to 29.2%19.9% and 27.6%18.9% for the corresponding periods in 2017,2018, respectively. We recognized excess tax benefits as a credit to our income tax expense from the exercise and vesting of stock options and restricted stock during the three and six months ended June 30, 20182019 of $186,000 and $958,000, respectively, compared to $457,000 and $1.9 million, respectively, compared to $1.4 million and $3.5 million during the three and six months ended June 30, 2017,2018, respectively. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance.

 

We own real estate investment trusts for the purpose of holding and managing participations in residential mortgages and commercial real estate loans originated by the Bank. The trusts are wholly-owned subsidiaries of a trust holding company, which in turn is an indirect wholly-owned subsidiary of the Bank. The trusts earn interest income on the loans they hold and incur operating expenses related to their activities. They pay their net earnings, in the form of dividends, to the Bank, which receives a deduction for state income taxes.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Like all financial institutions, we are subject to market risk from changes in interest rates. Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short-term rates may be rising while longer-term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates.

 

To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall or remain the same. Our asset-liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next 12 months. The asset-liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors.

 

40

The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap”, which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2017,2018, and there have been no material changes to our sensitivity to changes in interest rates since December 31, 2017,2018, as disclosed in our Annual Report on Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

CEO and CFO Certification.

 

Appearing as exhibits to this report are Certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). The Certifications are required to be made by Rule 13a-14 or Rule 15d-14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).1934. This item contains the information about the evaluation that is referred to in the Certifications, and the information set forth below in this Item 4 should be read in conjunction with the Certifications for a more complete understanding of the Certifications.

 


Evaluation of Disclosure Controls and Procedures.



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.



We conducted an evaluation (the "Evaluation") of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of June 30, 2018.2019. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2018,2019, our disclosure controls and procedures are effective to ensure that material information relating to ServisFirst Bancshares, Inc.the Company. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

 

Changes in Internal Control Over Financial Reporting



There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time we may be a party to various legal proceedings arising in the ordinary course of business. Management does not believe the Company or the Bank is currently a party to any material legal proceedings.

 

ITEM 1A. RISK FACTORS

 

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in the Form 10-K. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part 1, Item 2 above.

41

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.


 

ITEM 6. EXHIBITS

 

Exhibit:

 

Description

31.01

 

Certification of principal executive officer pursuant to Rule 13a-14(a).

31.02

 

Certification of principal financial officer pursuant to Rule 13a-14(a).

32.01

 

Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.

32.02

 

Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.

101.INS

101.CAL

 XBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

 

*denotes compensatory plan or arrangement

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

SERVISFIRST BANCSHARES, INC.

   

Date: July 31, 201830, 2019

By

By 

/s/ Thomas A. Broughton  III

  

Thomas A. Broughton III

  

President and Chief Executive Officer

   

Date: July 31, 201830, 2019

By 

By 

/s/ William M. Foshee

  

William M. Foshee

  

Chief Financial Officer

 

 

42