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SFBS ServisFirst Bancshares

 

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 MARCH 31, 2020

 

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

             

             For the transition period from _______to_______

 

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

26-0734029

(State or Other Jurisdiction of 

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

2500 Woodcrest Place, Birmingham, Alabama

35209

(Address of Principal Executive Offices)

(Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

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

 

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common stock, par value $.001 per share

SFBS

NASDAQ Global Select Market

 

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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). 

Yes ☒ No ☐

 

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

 

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

 

If an emerging growth company, indicate by check mark if 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 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.

 

ClassOutstanding as of April 27, 2020
Common stock, $.001 par value53,844,009

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION3
        Item 1.Consolidated Financial Statements3
        Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations22
        Item 3.Quantitative and Qualitative Disclosures about Market Risk 34
        Item 4.Controls and Procedures35
   
PART II. OTHER INFORMATION 36
        Item 1.Legal Proceedings36
        Item 1A.Risk Factors36
        Item 2.Unregistered Sales of Equity Securities and Use of Proceeds37
        Item 3.Defaults Upon Senior Securities37
        Item 4. Mine Safety Disclosures37
        Item 5. Other Information37
        Item 6. Exhibits37

 

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. CONSOLIDATED FINANCIAL STATEMENTS

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share amounts)

 
         
  

March 31, 2020

  

December 31, 2019

 
  

(Unaudited)

   (1) 

ASSETS

        

Cash and due from banks

 $80,461  $78,618 

Interest-bearing balances due from depository institutions

  297,943   451,509 

Federal funds sold

  306,127   100,473 

Cash and cash equivalents

  684,531   630,600 

Available for sale debt securities, at fair value

  826,782   759,399 

Held to maturity debt securities (fair value of $250 at March 31, 2020 and December 31, 2019)

  250   250 

Mortgage loans held for sale

  6,747   6,312 

Loans

  7,568,836   7,261,451 

Less allowance for loan losses

  (85,414)  (76,584)

Loans, net

  7,483,422   7,184,867 

Premises and equipment, net

  55,992   56,496 

Accrued interest and dividends receivable

  25,314   26,262 

Deferred tax assets, net

  23,723   25,566 

Other real estate owned and repossessed assets

  7,448   8,178 

Bank owned life insurance contracts

  210,847   209,395 

Goodwill and other identifiable intangible assets

  14,111   14,179 

Other assets

  25,715   26,149 

Total assets

 $9,364,882  $8,947,653 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Liabilities:

        

Deposits:

        

Noninterest-bearing

 $1,925,626  $1,749,879 

Interest-bearing

  5,907,029   5,780,554 

Total deposits

  7,832,655   7,530,433 

Federal funds purchased

  543,623   470,749 

Other borrowings

  64,707   64,703 

Accrued interest payable

  12,399   11,934 

Other liabilities

  29,613   27,152 

Total liabilities

  8,482,997   8,104,971 

Stockholders' equity:

        

Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at March 31, 2020 and December 31, 2019

  -   - 

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,844,009 shares issued and outstanding at March 31, 2020, and 53,623,740 shares issued and outstanding at December 31, 2019

  54   54 

Additional paid-in capital

  221,901   219,766 

Retained earnings

  641,980   616,611 

Accumulated other comprehensive income

  17,448   5,749 

Total stockholders' equity attributable to ServisFirst Bancshares, Inc.

  881,383   842,180 

Noncontrolling interest

  502   502 

Total stockholders' equity

  881,885   842,682 

Total liabilities and stockholders' equity

 $9,364,882  $8,947,653 

 

(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 MARCH 31,

 
  

2020

  

2019

 

Interest income:

        

Interest and fees on loans

 $89,385  $85,524 

Taxable securities

  5,154   3,746 

Nontaxable securities

  233   446 

Federal funds sold

  277   1,219 

Other interest and dividends

  1,718   2,764 

Total interest income

  96,767   93,699 

Interest expense:

        

Deposits

  16,745   22,145 

Borrowed funds

  2,382   2,776 

Total interest expense

  19,127   24,921 

Net interest income

  77,640   68,778 

Provision for loan losses

  13,584   4,885 

Net interest income after provision for loan losses

  64,056   63,893 

Noninterest income:

        

Service charges on deposit accounts

  1,916   1,702 

Mortgage banking

  1,071   575 

Credit cards

  1,765   1,576 

Increase in cash surrender value life insurance

  1,453   762 

Other operating income

  469   329 

Total noninterest income

  6,674   4,944 

Noninterest expense:

        

Salaries and employee benefits

  15,658   14,265 

Equipment and occupancy

  2,400   2,259 

Third party processing and other services

  3,345   2,411 

Professional services

  948   994 

FDIC and other regulatory assessments

  1,332   1,019 

Other real estate owned

  601   22 

Other operating expense

  3,636   4,358 

Total noninterest expense

  27,920   25,328 

Income before income taxes

  42,810   43,509 

Provision for income taxes

  8,032   8,499 

Net income

  34,778   35,010 

Dividends on preferred stock

  -   - 

Net income available to common stockholders

 $34,778  $35,010 

Basic earnings per common share

 $0.65  $0.65 

Diluted earnings per common share

 $0.64  $0.65 

 

See Notes to Consolidated Financial Statements.

 

4

 

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(Unaudited)

 
  

THREE MONTHS ENDED MARCH 31,

 
  

2020

  

2019

 

Net income

 $34,778  $35,010 

Other comprehensive income, net of tax:

        

Unrealized net holding gains arising during period from securities available for sale, net of tax of $3,110 and $1,002 for 2020 and 2019, respectively

  11,699   3,772 

Comprehensive income

 $46,477  $38,782 

 

See Notes to Consolidated Financial Statements.

        

 

 

 

 

 

 

 

 

5

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

(In thousands, except share amounts)

 

(Unaudited)

 
  

Three Months Ended March 31,

 
                      

Accumulated

         
              

Additional

      

Other

      

Total

 
  

Common

  

Preferred

  

Common

  

Paid-in

  

Retained

  

Comprehensive

  

Noncontrolling

  

Stockholders'

 
  

Shares

  

Stock

  

Stock

  

Capital

  

Earnings

  

Income (loss)

  

Interest

  

Equity

 

Balance, January 1, 2019

  53,375,195  $-  $53  $218,521  $500,868  $(4,741) $502  $715,203 

Common dividends declared, $0.15 per share

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

Issue restricted shares pursuant to stock incentives

  2,700   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  117,313   -   -   797   -   -   -   797 

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

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

Stock-based compensation expense

  -   -   -   282   -   -   -   282 

Other comprehensive income, net of tax

  -   -   -   -   -   3,772   -   3,772 

Net income

  -   -   -   -   35,010   -   -   35,010 

Balance, March 31, 2019

  53,495,208  $-  $53  $218,147  $527,853  $(969) $502  $745,586 
                                 

Balance, January 1, 2020

  53,623,740  $-  $54  $219,766  $616,611  $5,749  $502  $842,682 

Common dividends declared, $0.175 per share

  -   -   -   -   (9,409)  -   -   (9,409)

Issue restricted shares pursuant to stock incentives

  15,300   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  204,969   -   -   2,261   -   -   -   2,261 

11,031 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (403)  -   -   -   (403)

Stock-based compensation expense

  -   -   -   277   -   -   -   277 

Other comprehensive income, net of tax

  -   -   -   -   -   11,699   -   11,699 

Net income

  -   -   -   -   34,778   -   -   34,778 

Balance, March 31, 2020

  53,844,009  $-  $54  $221,901  $641,980  $17,448  $502  $881,885 

 

See Notes to Consolidated Financial Statements.

 

 

6

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands) (Unaudited)

 
  

Three Months Ended March 31,

 
  

2020

  

2019

 

OPERATING ACTIVITIES

        

Net income

 $34,778  $35,010 

Adjustments to reconcile net income to net cash provided by

        

Deferred tax (benefit) expense

  (1,267)  1,068 

Provision for loan losses

  13,584   4,885 

Depreciation

  921   917 

Accretion on acquired loans

  -   (91)

Amortization of core deposit intangible

  68   68 

Net amortization of debt securities available for sale

  966   626 

Decrease (increase) in accrued interest and dividends receivable

  948   (2,928)

Stock-based compensation expense

  277   282 

Increase in accrued interest payable

  465   1,095 

Proceeds from sale of mortgage loans held for sale

  36,308   15,581 

Originations of mortgage loans held for sale

  (35,672)  (16,109)

Gain on sale of mortgage loans held for sale

  (1,071)  (575)

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

  (24)  2 

Write down of other real estate owned and repossessed assets

  587   20 

Operating losses of tax credit partnerships

  3   35 

Increase in cash surrender value of life insurance contracts

  (1,453)  (762)

Net change in other assets, liabilities, and other operating activities

  2,814   2,550 

Net cash provided by operating activities

  52,232   41,674 

INVESTMENT ACTIVITIES

        

Purchase of debt securities available for sale

  (80,149)  (65,507)

Proceeds from maturities, calls and paydowns of debt securities available for sale

  26,778   28,469 

Purchase of debt securities held to maturity

  -   (250)

Investment in tax credit partnership and SBIC

  (111)  - 

Increase in loans

  (312,426)  (129,977)

Purchase of premises and equipment

  (417)  (759)

Proceeds from sale of other real estate owned and repossessed assets

  454   48 

Net cash used in investing activities

  (365,871)  (167,976)

FINANCING ACTIVITIES

        

Net increase in non-interest-bearing deposits

  175,747   15,362 

Net increase in interest-bearing deposits

  126,475   152,596 

Net increase in federal funds purchased

  72,874   84,653 

Proceeds from exercise of stock options

  2,261   797 

Taxes paid in net settlement of tax obligation upon exercise of stock options

  (403)  (1,453)

Dividends paid on common stock

  (9,384)  (8,019)

Net cash provided by financing activities

  367,570   243,936 

Net increase in cash and cash equivalents

  53,931   117,634 

Cash and cash equivalents at beginning of period

  630,600   681,895 

Cash and cash equivalents at end of period

 $684,531  $799,529 

SUPPLEMENTAL DISCLOSURE

        

Cash paid for:

        

Interest

 $18,662  $23,826 

Income taxes

  400   1,533 

Income tax refund

  -   (2)

NONCASH TRANSACTIONS

        

Other real estate acquired in settlement of loans

 $287  $381 

Dividends declared

  9,409   8,025 

 

See Notes to Consolidated Financial Statements.        

 

 

 

 

7

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

 

 

NOTE 1 - GENERAL

 

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2019.

 

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

 

Allowance for Loan Losses

 

The Company was prepared to fully adopt Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326)” as of January 1, 2020 prior to the COVID-19 outbreak and subsequent passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act on March 27, 2020, which provided financial institutions with the option to delay adoption of ASU 2016-13.  The Company has decided to delay its adoption until the earlier of the date on which the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.

 

The allowance for loan losses as of March 31, 2020 is determined under the Company’s incurred loss model. Qualitative adjustments were made to the amount of the allowance to take into effect management’s estimates of the COVID-19 pandemic’s impact on the local and regional markets which the Company operates. Further discussion of the allowance for loan losses is included in Note 5 – Loans.

 

 

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 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.

 

  

Three Months Ended March 31,

 
  

2020

  

2019

 
  

(In Thousands, Except Shares and Per Share Data)

 

Earnings per common share

        

Weighted average common shares outstanding

  53,704,224   53,465,091 

Net income available to common stockholders

 $34,778  $35,010 

Basic earnings per common share

 $0.65  $0.65 
         

Weighted average common shares outstanding

  53,704,224   53,465,091 

Dilutive effects of assumed conversions and exercise of stock options and warrants

  463,190   611,447 

Weighted average common and dilutive potential common shares outstanding

  54,167,414   54,076,538 

Net income available to common stockholders

 $34,778  $35,010 

Diluted earnings per common share

 $0.64  $0.65 

 

8

 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2020 and December 31, 2019 are summarized as follows:

 

  

Amortized Cost

  

Gross Unrealized Gain

  

Gross Unrealized Loss

  

Fair Value

 

March 31, 2020

 

(In Thousands)

 

Available for sale debt securities

                

U.S. Treasury Securities

 $48,956  $826  $-  $49,782 

Government Agency Securities

  18,188   405   -   18,593 

Mortgage-backed securities

  529,126   17,305   -   546,431 

State and municipal securities

  50,989   353   (14)  51,328 

Corporate debt

  157,496   3,652   (500)  160,648 

Total

 $804,755  $22,541  $(514) $826,782 

Held to maturity debt securities

                

State and municipal securities

 $250  $-  $-  $250 

Total

 $250  $-  $-  $250 
                 

December 31, 2019

                

Available for sale debt securities

                

U.S. Treasury Securities

 $48,923  $291  $(4) $49,210 

Government Agency Securities

  18,245   143   (2)  18,386 

Mortgage-backed securities

  470,513   4,859   (1,318)  474,054 

State and municipal securities

  56,951   335   (14)  57,272 

Corporate debt

  157,549   3,098   (170)  160,477 

Total

 $752,181  $8,726  $(1,508) $759,399 

Held to maturity debt securities

                

State and municipal securities

 $250  $-  $-  $250 

Total

 $250  $-  $-  $250 

 

The amortized cost and fair value of debt securities as of March 31, 2020 and December 31, 2019 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.

 

  

March 31, 2020

  

December 31, 2019

 
  

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 
  

(In thousands)

 

Available for sale debt securities

                

Due within one year

 $59,924  $60,306  $58,722  $58,975 

Due from one to five years

  83,414   84,963   90,034   91,005 

Due from five to ten years

  130,876   133,641   129,501   131,914 

Due after ten years

  1,415   1,441   3,411   3,451 

Mortgage-backed securities

  529,126   546,431   470,513   474,054 
  $804,755  $826,782  $752,181  $759,399 
                 

Held to maturity debt securities

                

Due from one to five years

 $250  $250  $250  $250 
  $250  $250  $250  $250 

 

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.

 

9

 

The following table identifies, as of March 31, 2020 and December 31, 2019, 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 March 31, 2020, 4 of the Company’s 678 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 March 31, 2020.  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)

 

March 31, 2020

                        

State and municipal securities

 $(10) $3,582  $(4) $721  $(14) $4,303 

Corporate debt

  (500)  15,478   -   -   (500)  15,478 

Total

 $(510) $19,060  $(4) $721  $(514) $19,781 
                         

December 31, 2019

                        

U.S. Treasury Securities

 $(4) $3,012  $-  $-  $(4) $3,012 

Government Agency Securities

  (2)  266   -   -   (2)  266 

Mortgage-backed securities

  (1,206)  153,330   (112)  24,911   (1,318)  178,241 

State and municipal securities

  (4)  1,900   (10)  2,647   (14)  4,547 

Corporate debt

  (170)  19,981   -   -   (170)  19,981 

Total

 $(1,386) $178,489  $(122) $27,558  $(1,508) $206,047 

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $437.6 million and $389.9 million as of March 31, 2020 and December 31, 2019, respectively.

 

 

NOTE 5 – LOANS

 

The following table details the Company’s loans at March 31, 2020 and December 31, 2019:

 

  

March 31,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars In Thousands)

 

Commercial, financial and agricultural

 $2,771,307  $2,696,210 

Real estate - construction

  548,578   521,392 

Real estate - mortgage:

        

Owner-occupied commercial

  1,678,532   1,587,478 

1-4 family mortgage

  675,870   644,188 

Other mortgage

  1,834,137   1,747,394 

Subtotal: Real estate - mortgage

  4,188,539   3,979,060 

Consumer

  60,412   64,789 

Total Loans

  7,568,836   7,261,451 

Less: Allowance for loan losses

  (85,414)  (76,584)

Net Loans

 $7,483,422  $7,184,867 
         
         

Commercial, financial and agricultural

  36.61

%

  37.13

%

Real estate - construction

  7.25

%

  7.18

%

Real estate - mortgage:

        

Owner-occupied commercial

  22.18

%

  21.86

%

1-4 family mortgage

  8.93

%

  8.87

%

Other mortgage

  24.23

%

  24.07

%

Subtotal: Real estate - mortgage

  55.34

%

  54.80

%

Consumer

  0.80

%

  0.89

%

Total Loans

  100.00

%

  100.00

%

 

10

 

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(s) 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 presently jeopardize debt repayment.  These loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies 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 March 31, 2020 and December 31, 2019 were as follows:

 

      

Special

             

March 31, 2020

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Total

 
                     
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,708,845  $17,902  $44,560  $-  $2,771,307 

Real estate - construction

  542,659   4,136   1,783   -   548,578 

Real estate - mortgage:

                    

Owner-occupied commercial

  1,658,909   11,014   8,609   -   1,678,532 

1-4 family mortgage

  671,407   2,080   2,383   -   675,870 

Other mortgage

  1,824,825   7,557   1,755   -   1,834,137 

Total real estate - mortgage

  4,155,141   20,651   12,747   -   4,188,539 

Consumer

  60,403   -   9   -   60,412 

Total

 $7,467,048  $42,689  $59,099  $-  $7,568,836 
                     
      

Special

             

December 31, 2019

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Total

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,629,487  $46,176  $20,547  $-  $2,696,210 

Real estate - construction

  512,373   4,731   4,288   -   521,392 

Real estate - mortgage:

                    

Owner-occupied commercial

  1,555,283   18,240   13,955   -   1,587,478 

1-4 family mortgage

  639,959   2,787   1,442   -   644,188 

Other mortgage

  1,735,869   10,018   1,507   -   1,747,394 

Total real estate - mortgage

  3,931,111   31,045   16,904   -   3,979,060 

Consumer

  64,789   -   -   -   64,789 

Total

 $7,137,760  $81,952  $41,739  $-  $7,261,451 

 

11

 

Loans by performance status as of March 31, 2020 and December 31, 2019 were as follows:

 

March 31, 2020

 

Performing

  

Nonperforming

  

Total

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,756,132  $15,175  $2,771,307 

Real estate - construction

  546,774   1,804   548,578 

Real estate - mortgage:

            

Owner-occupied commercial

  1,668,297   10,235   1,678,532 

1-4 family mortgage

  674,134   1,736   675,870 

Other mortgage

  1,829,244   4,893   1,834,137 

Total real estate - mortgage

  4,171,675   16,864   4,188,539 

Consumer

  60,387   25   60,412 

Total

 $7,534,968  $33,868  $7,568,836 
             

December 31, 2019

 

Performing

  

Nonperforming

  

Total

 
  

(In Thousands)

 

Commercial, financial

            

and agricultural

 $2,681,280  $14,930  $2,696,210 

Real estate - construction

  519,803   1,589   521,392 

Real estate - mortgage:

            

Owner-occupied commercial

  1,576,652   10,826   1,587,478 

1-4 family mortgage

  641,875   2,313   644,188 

Other mortgage

  1,740,963   6,431   1,747,394 

Total real estate - mortgage

  3,959,490   19,570   3,979,060 

Consumer

  64,766   23   64,789 

Total

 $7,225,339  $36,112  $7,261,451 

 

Loans by past due status as of March 31, 2020 and December 31, 2019 were as follows:

 

March 31, 2020

 

Past Due Status (Accruing Loans)

             
              

Total Past

             
  

30-59 Days

  

60-89 Days

  

90+ Days

  

Due

  

Non-Accrual

  

Current

  

Total Loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $1,859  $211  $45  $2,115  $15,130  $2,754,062  $2,771,307 

Real estate - construction

  -   -   -   -   1,804   546,774   548,578 

Real estate - mortgage:

                            

Owner-occupied commercial

  2,389   1,778   -   4,167   10,235   1,664,130   1,678,532 

1-4 family mortgage

  2,191   -   -   2,191   1,736   671,943   675,870 

Other mortgage

  -   -   4,893   4,893   -   1,829,244   1,834,137 

Total real estate - mortgage

  4,580   1,778   4,893   11,251   11,971   4,165,317   4,188,539 

Consumer

  83   31   16   130   9   60,273   60,412 

Total

 $6,522  $2,020  $4,954  $13,496  $28,914  $7,526,426  $7,568,836 

 

December 31, 2019

 

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

 $3,135  $344  $201  $3,680  $14,729  $2,677,801  $2,696,210 

Real estate - construction

  830   -   -   830   1,589   518,973   521,392 

Real estate - mortgage:

                            

Owner-occupied commercial

  917   7,242   -   8,159   10,826   1,568,493   1,587,478 

1-4 family mortgage

  1,638   567   873   3,078   1,440   639,670   644,188 

Other mortgage

  -   -   4,924   4,924   1,507   1,740,963   1,747,394 

Total real estate - mortgage

  2,555   7,809   5,797   16,161   13,773   3,949,126   3,979,060 

Consumer

  35   25   23   83   -   64,706   64,789 

Total

 $6,555  $8,178  $6,021  $20,754  $30,091  $7,210,606  $7,261,451 

 

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.

 

12

 

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

 

Non-Impaired Loans. Non-impaired loans are grouped into the following homogeneous loan pools by loan 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 five 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.

 

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 contractual 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 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 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. Overall macroeconomic conditions and uncertainty due to COVID-19 resulted in an increased provision for loans losses related to external qualitative factors of $6.7 million at March 31, 2020.  

 

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 months ended March 31, 2020 and March 31, 2019.  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

  

Real estate -

  

Real estate -

         
  

agricultural

  

construction

  

mortgage

  

Consumer

  

Total

 
  

(In Thousands)

 
  

Three Months Ended March 31, 2020

 

Allowance for loan losses:

                    

Balance at December 31, 2019

 $43,666  $2,768  $29,653  $497  $76,584 

Charge-offs

  (2,640)  (454)  (1,678)  (58)  (4,830)

Recoveries

  62   1   1   12   76 

Provision

  7,692   1,442   4,384   66   13,584 

Balance at March 31, 2020

 $48,780  $3,757  $32,360  $517  $85,414 
                     
  

Three Months Ended March 31, 2019

 

Allowance for loan losses:

                    

Balance at December 31, 2018

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

Charge-offs

  (3,037)  -   (50)  (218)  (3,305)

Recoveries

  12   1   7   7   27 

Provision

  3,468   72   1,246   99   4,885 

Balance at March 31, 2019

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

As of March 31, 2020

 

Allowance for loan losses:

                    

Individually Evaluated for Impairment

 $8,840  $351  $931  $-  $10,122 

Collectively Evaluated for Impairment

  39,940   3,406   31,429   517   75,292 
                     

Loans:

                    

Ending Balance

 $2,771,307  $548,578  $4,188,539  $60,412  $7,568,836 

Individually Evaluated for Impairment

  44,868   1,834   13,815   9   60,526 

Collectively Evaluated for Impairment

  2,726,439   546,744   4,174,724   60,403   7,508,310 
                     
  

As of December 31, 2019

 

Allowance for loan losses:

                    

Individually Evaluated for Impairment

 $6,085  $86  $3,633  $-  $9,804 

Collectively Evaluated for Impairment

  37,581   2,682   26,020   497   66,780 
                     

Loans:

                    

Ending Balance

 $2,696,210  $521,392  $3,979,060  $64,789  $7,261,451 

Individually Evaluated for Impairment

  20,843   4,320   17,985   -   43,148 

Collectively Evaluated for Impairment

  2,675,367   517,072   3,961,075   64,789   7,218,303 

 

13

 

The following table presents details of the Company’s impaired loans as of March 31, 2020 and December 31, 2019, respectively.  Loans which have been fully charged off do not appear in the table.

 

  

March 31, 2020

 
              

For the three months

 
              

ended March 31, 2020

 
                  

Interest

 
      

Unpaid

      

Average

  

Income

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Recognized

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

in Period

 
  

(In Thousands)

 

With no allowance recorded:

                    

Commercial, financial and agricultural

 $12,360  $12,360  $-  $12,352  $176 

Real estate - construction

  30   34   -   35   - 

Real estate - mortgage:

                    

Owner-occupied commercial

  2,195   2,291   -   2,299   33 

1-4 family mortgage

  717   717   -   735   1 

Other mortgage

  1,701   1,701   -   1,731   18 

Total real estate - mortgage

  4,613   4,709   -   4,765   52 

Consumer

  9   9   -   9   - 

Total with no allowance recorded

  17,012   17,112   -   17,161   228 
                     

With an allowance recorded:

                    

Commercial, financial and agricultural

  32,508   32,775   8,840   33,186   239 

Real estate - construction

  1,804   1,882   351   2,749   - 

Real estate - mortgage:

                    

Owner-occupied commercial

  7,487   12,127   827   12,159   5 

1-4 family mortgage

  1,662   1,822   104   1,526   4 

Other mortgage

  53   53   -   156   2 

Total real estate - mortgage

  9,202   14,002   931   13,841   11 

Consumer

  -   -   -   -   - 

Total with allowance recorded

  43,514   48,659   10,122   49,776   250 
                     

Total Impaired Loans:

                    

Commercial, financial and agricultural

  44,868   45,135   8,840   45,538   415 

Real estate - construction

  1,834   1,916   351   2,784   - 

Real estate - mortgage:

                    

Owner-occupied commercial

  9,682   14,418   827   14,458   38 

1-4 family mortgage

  2,379   2,539   104   2,261   5 

Other mortgage

  1,754   1,754   -   1,887   20 

Total real estate - mortgage

  13,815   18,711   931   18,606   63 

Consumer

  9   9   -   9   - 

Total impaired loans

 $60,526  $65,771  $10,122  $66,937  $478 

 

14

 

  

December 31, 2019

 
              

For the twelve months

 
              

ended December 31, 2019

 
                  

Interest

 
      

Unpaid

      

Average

  

Income

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Recognized

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

In Period

 
  

(In Thousands)

 

With no allowance recorded:

                    

Commercial, financial and agricultural

 $9,015  $10,563  $-  $11,284  $562 

Real estate - construction

  2,731   2,735   -   2,063   126 

Real estate - mortgage:

                    

Owner-occupied commercial

  7,150   7,246   -   7,548   618 

1-4 family mortgage

  287   287   -   289   2 

Total real estate - mortgage

  7,437   7,533   -   7,837   620 

Consumer

  -   -   -   -   - 

Total with no allowance recorded

  19,183   20,831   -   21,184   1,308 
                     

With an allowance recorded:

                    

Commercial, financial and agricultural

  11,828   19,307   6,085   19,714   395 

Real estate - construction

  1,589   1,589   86   1,614   27 

Real estate - mortgage:

                    

Owner-occupied commercial

  7,888   11,028   2,456   13,627   301 

1-4 family mortgage

  1,153   1,153   176   1,157   1 

Other mortgage

  1,507   1,507   1,001   1,468   21 

Total real estate - mortgage

  10,548   13,688   3,633   16,252   323 

Consumer

  -   -   -   -   - 

Total with allowance recorded

  23,965   34,584   9,804   37,580   745 
                     

Total Impaired Loans:

                    

Commercial, financial and agricultural

  20,843   29,870   6,085   30,998   957 

Real estate - construction

  4,320   4,324   86   3,677   153 

Real estate - mortgage:

                    

Owner-occupied commercial

  15,038   18,274   2,456   21,175   919 

1-4 family mortgage

  1,440   1,440   176   1,446   3 

Other mortgage

  1,507   1,507   1,001   1,468   21 

Total real estate - mortgage

  17,985   21,221   3,633   24,089   943 

Total impaired loans

 $43,148  $55,415  $9,804  $58,764  $2,053 

 

As of March 31, 2020, the Company had executed 730 loan modifications with payment deferrals on outstanding loan balances of $574.7 million in connection with the COVID-19 relief provided by the CARES Act.  Of these 730 payment deferrals, 720 were principal only deferrals totaling $547.8 million, five were interest only deferrals totaling $18.3 million and five were principal and interest deferrals totaling $8.6 million.  These deferrals were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020. 

 

Troubled Debt Restructurings (“TDR”) at March 31, 2020, December 31, 2019 and March 31, 2019 totaled $2.4 million, $3.3 million and $12.3 million, respectively.  The portion of those TDRs accruing interest at March 31, 2020, December 31, 2019 and March 31, 2019 totaled $2.4 million, $3.3 million and $2.7 million, respectively.  At March 31, 2020, the Company had a related allowance for loan losses of $223,000 allocated to TDRs, compared to $929,000 million at December 31, 2019 and $2.6 million at March 31, 2019.  One commercial loan totaling $350,000 was newly classified as a TDR and there were no renewals of existing TDRs for the three months ended March 31, 2020.   There were no modifications made to new TDRs or renewals of existing TDRs for the three months ended March 31, 2019.

 

15

 

 

  

2020

 
      

Pre-

  

Post-

 
      

Modification

  

Modification

 
      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

 
  

Contracts

  

Investment

  

Investment

 
  

(In Thousands)

 

Troubled Debt Restructurings

            

Commercial, financial and agricultural

  1  $350  $350 

Real estate - construction

  -   -   - 

Real estate - mortgage:

            

Owner-occupied commercial

  -   -   - 

1-4 family mortgage

  -   -   - 

Other mortgage

  -   -   - 

Total real estate mortgage

  -   -   - 

Consumer

  -   -   - 
   1  $350  $350 

 

There were no loans which were modified in the previous twelve months (i.e., the twelve months prior to default) that defaulted during the three months ended March 31, 2020.  There were two commercial loans totaling $325,000 which were modified in the previous twelve months which defaulted during the three months ended March 31, 2019.  For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.

 

 

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 years.  At March 31, 2020, the Company had lease right-of-use assets and lease liabilities totaling $12.5 million and $12.6 million, respectively, compared to $12.3 and $13.4 million, respectively at December 31, 2019 which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheet.

 

Maturities of operating lease liabilities as of March 31, 2020 are as follows:

 

  

March 31, 2020

 
  

(In Thousands)

 

2020 (remaining)

 $2,544 

2021

  2,688 

2022

  2,655 

2023

  2,181 

2024

  1,180 

thereafter

  2,570 

Total lease payments

  13,818 

Less: imputed interest

  (1,224)

Present value of operating lease liabilities

 $12,594 

 

As of March 31, 2020, the weighted average remaining term of operating leases is 5.3 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.19%.

 

Operating cash flows related to leases were $852,000 and $781,000 for the three months ended March 31, 2020 and 2019, respectively.

 

16

 

Lease costs during the three months ended March 31, 2020 and 2019 were as follows (in thousands):

 

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Operating lease cost

 $873  $840 

Short-term lease cost

  16   9 

Variable lease cost

  44   38 

Sublease income

  (16)  (6)

Net lease cost

 $917  $881 

 

 

NOTE 7 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At March 31, 2020, the Company had stock incentive plans as described below. The compensation cost that has been charged to earnings for the plans was approximately $276,000 and $282,000 for the three months ended March 31, 2020 and 2019, respectively.

 

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, Non-stock Share Equivalents, Performance Shares or Performance Units.  Both plans allow for the grant of incentive stock options and non-qualified stock options, and option awards are granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plans is ten years.

 

The Company estimates the fair value of each stock option award using a Black-Scholes-Merton valuation model which incorporates the assumptions noted in the following table.  Expected volatilities are based on an index of southeastern United States publicly traded banks. The expected term for options granted is based on the short-cut method and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of grant.

 

  

2019

 

Expected volatility

  40.00

%

Expected dividends

  1.76

%

Expected term (in years)

  6.3 

Risk-free rate

  2.61

%

 

There were no grants of stock options during the three months ended March 31, 2020.  The weighted average grant-date fair value of options granted during the three months ended March 31, 2019 was $12.20.

 

The following table summarizes stock option activity during the three months ended March 31, 2020 and 2019:

 

          

Weighted

     
      

Weighted

  

Average

     
      

Average

  

Remaining

     
      

Exercise

  

Contractual

  

Aggregate

 
  

Shares

  

Price

  

Term (years)

  

Intrinsic Value

 
              

(In Thousands)

 

Three Months Ended March 31, 2020:

                

Outstanding January 1, 2020

  965,248  $15.19   4.9  $21,911 

Granted

  -   -   -   - 

Exercised

  (216,000)  10.47   3.3   4,072 

Forfeited

  (18,000)  30.79   6.9   26 

Outstanding March 31, 2020

  731,248   17.68   5.4  $12,969 
                 

Exercisable March 31, 2020

  210,500  $16.54   5.0  $7,146 
                 

Three Months Ended March 31, 2019:

                

Outstanding January 1, 2019

  1,238,748  $13.02   5.2  $23,355 

Granted

  6,000   34.09   9.8   (2)

Exercised

  (162,500)  4.59   1.7   4,384 

Forfeited

  -   -   -   - 

Outstanding March 31, 2019

  1,082,248   14.41   6.3  $21,318 
                 

Exercisable March 31, 2019

  354,800  $8.40   4.0  $9,356 

 

17

 

As of March 31, 2020, there was $1.1 million of total unrecognized compensation cost related to non-vested stock options.  The cost is expected to be recognized on the straight-line method over the next 1.7 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 March 31, 2020, there was $1.8 million of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 3.0 years of the restricted stock’s vesting period.

 

  

Shares

  

Weighted Average Grant Date Fair Value

 

Three Months Ended March 31, 2020:

        

Non-vested at January 1, 2020

  71,290  $31.53 

Granted

  15,300   39.45 

Vested

  (8,376)  18.64 

Forfeited

  -   - 

Non-vested at March 31, 2020

  78,214   34.46 
         

Three Months Ended March 31, 2019:

        

Non-vested at January 1, 2019

  44,076  $28.94 

Granted

  2,700   34.09 

Vested

  (5,200)  20.31 

Forfeited

  -   - 

Non-vested at March 31, 2019

  41,576   30.35 

 

 

NOTE 8 - DERIVATIVES

 

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis.  When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period.  In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor.  The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives.  The fair values of the Company’s agreements with investors and rate lock commitments to customers as of March 31, 2020 and December 31, 2019 were not material.

 

 

NOTE 9 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In July 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminated, added and modified certain disclosure requirements for fair value measurements. Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 was effective for the Company beginning January 1, 2020. As ASU 2018-13 only revised disclosure requirements, it has no material impact on the Company’s Consolidated Financial Statements.

 

 

NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

18

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), passed by Congress and signed into law by the President on March 27, 2020, gave financial institutions the option to delay adoption of ASU 2016-13. The Company decided to delay its adoption of the Update until the earlier of the date the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective adoption date of January 1, 2020.

 

The Company’s CECL implementation team includes leadership from Accounting, Credit Administration and Risk Management. This group works closely with a third-party software solution vendor providing expertise in CECL modeling techniques to develop expected credit loss estimation models. Loans with similar risk characteristics have been evaluated in pools and, depending on the nature of each identified pool, the Company utilized a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product.

 

CECL parallel comparisons were performed at March 31, 2020 and the Company estimates an increase in its allowance for loan losses under CECL by approximately 10%.  The Company forecasted an immediate reversion to longer term average historical loss experience for the reasonable and supportable forecast due to the current level of uncertainty and unprecedented effect of COVID-19 as well as the corresponding response from the federal government through the CARES Act.  Qualitative factors were adjusted for a higher level of risk associated with economic conditions with a mitigating adjustment for the regulatory environment. 

 

Credit losses for loans that no longer share similar risk characteristics were estimated on an individual basis. Individual evaluations were performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings. Specific allowances were estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

 

The estimation methodology for credit losses on lending-related commitments were similar to the process for estimating credit losses for loans, with the addition of a probability of draw estimate that will be applied to each commitment amount.

 

Based upon the nature and characteristics of our securities portfolios at March 31, 2020, the macroeconomic conditions and forecasts at that date, and other management judgments, the Company does not currently expect to record any allowance for credit losses on available for sale securities.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be effective for a limited time, starting March 12, 2020 through December 31, 2022. The Company has identified a replacement reference rate established by the American Financial Exchange. This rate is based on an active market of daily fund trading among participant banks. The Company will apply the guidance provided by this ASU in transitioning to the new reference rate.

 

 

NOTE 11 - 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. The Company bought two corporate debt securities in a private placement transactions, for which Level 2 inputs are not available.  The Company uses average observable prices of similar corporate securities owned by the Company to value the two securities and are classified in Level 3 of the hierarchy.  The range of values and weighted average value as of March 31, 2020 was 94.5744 to 106.7775 and 102.3865, respectively, observed for the Company’s other similar corporate securities.  The range of values and weighted average value as of December 31, 2019 was 98.7836 to 112.2305 and 102.2648, respectively, observed for the Company’s other similar corporate securities.

 

19

 

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 Accounting Standards Codification (“ASC”) 820-10 and would generally result in a higher value than the exit-price approach.  For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates, and market comparables, adjusted for estimated costs to sell.  Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition.  Such modifications to the appraised values could result in lower valuations of such collateral.  Estimated costs to sell are based on current amounts of disposal costs for similar assets.  These measurements are classified as Level 3 within the valuation hierarchy.  Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. The range of fair value adjustments and weighted average adjustment as of March 31, 2020 was 0% to 50% and 16.6%, respectively.  The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 0% to 30% and 5.6%, respectively.  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 $5.0 million during the three months ended March 31, 2020, and $1.9 million during the three months ended March 31, 2019.

 

Other Real Estate Owned.  Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs.  Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure.  Values are derived from appraisals of underlying collateral and discounted cash flow analysis.  Appraisals are performed by certified and licensed appraisers.  Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis.  In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals.  The range of fair value adjustments and weighted average adjustment as of March 31, 2020 was 5% to 10% and 7.8%, respectively.  The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 5% to 10% and 8.0%, respectively.  These measurements are classified as Level 3 within the valuation hierarchy.  A loss on the sale and write-downs of OREO of $563,000 and $22,000 was recognized during the three months ended March 31, 2020 and 2019, respectively.  These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO.  OREO is classified within Level 3 of the hierarchy.

 

There was one residential real estate loan with a balance of $287,000 foreclosed and classified as OREO as of March 31, 2020, compared to one residential real estate loan foreclosure for $103,000 as of December 31, 2019.

 

One residential real estate loan for $600,000 was in the process of being foreclosed as of March 31, 2020 and the residential real estate loan for $287,000 mentioned above was in the process of being foreclosed as of December 31, 2019.

 

The following table presents the Company’s financial assets carried at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.  There were no liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

 

20

 

  

Fair Value Measurements at March 31, 2020 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable Inputs

  

Unobservable

     
  

Assets (Level 1)

  

(Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Recurring Basis:

 

(In Thousands)

 

Available for sale debt securities:

                

U.S. Treasury securities

 $-  $49,782  $-  $49,782 

Government agency securities

  -   18,593   -   18,593 

Mortgage-backed securities

  -   546,431   -   546,431 

State and municipal securities

  -   51,328   -   51,328 

Corporate debt

  -   154,001   6,647   160,648 

Total assets at fair value

 $-  $820,135  $6,647  $826,782 

 

  

Fair Value Measurements at December 31, 2019 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable Inputs

  

Unobservable

     
  

Assets (Level 1)

  

(Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Recurring Basis:

 

(In Thousands)

 

Available for sale debt securities:

                

U.S. Treasury securities

 $-  $49,210  $-  $49,210 

Government agency securities

  -   18,386   -   18,386 

Mortgage-backed securities

  -   474,054   -   474,054 

State and municipal securities

  -   57,272   -   57,272 

Corporate debt

  -   153,881   6,596   160,477 

Total assets at fair value

 $-  $752,803  $6,596  $759,399 

 

The following table presents the Company’s financial assets carried at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019.  There were no liabilities measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019.

 

  

Fair Value Measurements at March 31, 2020 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable

  

Unobservable

     
  

Assets (Level 1)

  

Inputs (Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Impaired loans

 $-  $-  $50,404  $50,404 

Other real estate owned and repossessed assets

  -   -   7,448   7,448 

Total assets at fair value

 $-  $-  $57,852  $57,852 

 

  

Fair Value Measurements at December 31, 2019 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable

  

Unobservable

     
  

Assets (Level 1)

  

Inputs (Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Impaired loans

 $-  $-  $33,344  $33,344 

Other real estate owned

  -   -   8,178   8,178 

Total assets at fair value

 $-  $-  $41,522  $41,522 

 

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.

 

21

 

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis as of March 31, 2020 and December 31, 2019 were as follows:

 

 

 

  

March 31, 2020

  

December 31, 2019

 
  

Carrying

      

Carrying

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
  

(In Thousands)

 

Financial Assets:

                

Level 1 inputs:

                

Cash and cash equivalents

 $378,404  $378,404  $530,127  $530,127 
                 

Level 2 inputs:

                

Federal funds sold

  306,127   306,127   100,473   100,473 

Mortgage loans held for sale

  6,747   6,775   6,302   6,312 
                 

Level 3 Inputs:

                

Held to maturity debt securities

  250   250   250   250 

Loans, net

  7,433,018   7,401,907   7,151,523   7,099,198 
                 

Financial Liabilities:

                

Level 2 inputs:

                

Deposits

 $7,832,655  $7,817,647  $7,530,433  $7,534,984 

Federal funds purchased

  543,623   543,623   470,749   470,749 

Other borrowings

  64,707   64,950   64,703   65,048 

 

 

NOTE 12 – SUBSEQUENT EVENTS

 

In light of the US and global economic crisis brought about by the COVID-19 pandemic, the Company has prioritized assisting its clients through this troubled time.  The CARES Act provides for Payroll Protection Plan (“PPP”) loans to be made by banks to employers with less than 500 employees if they continue to employ their existing workers.  As of April 17, 2020, the Company has funded approximately 3,525 loans for a total amount of $920.3 million for clients under the PPP, and management expects to continue to participate in any extensions of the PPP by the Treasury Department.

 

 

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 balance sheets as of March 31, 2020 and December 31, 2019 and consolidated statements of income for the three months ended March 31, 2020 and March 31, 2019.

 

Forward-Looking Statements

 

Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “could,” “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, but not limited to: the global health and economic crisis precipitated by the COVID-19 outbreak; 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; economic crisis and associated credit issues in industries most impacted by the COVID-19 outbreak, including but not limited to, the restaurant, hospitality and retail sectors; 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. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made.  The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time.

 

22

 

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 20 full-service banking offices located in Alabama, Tampa Bay, Florida, the panhandle of Florida, the greater Atlanta, Georgia metropolitan area, Charleston, South Carolina, and Nashville, Tennessee.  Through the bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions.

 

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

 

Overview

 

As of March 31, 2020, we had consolidated total assets of $9.36 billion, up $417.2 million, or 4.7%, from total assets of $8.95 billion at December 31, 2019.  Total loans were $7.57 billion at March 31, 2020, up $307.4 million, or 4.2%, from $7.26 billion at December 31, 2019. Total deposits were $7.83 billion at March 31, 2020, up $302.2 million, or 4.0%, from $7.53 billion at December 31, 2019.

 

Net income available to common stockholders for the three months ended March 31, 2020 was $34.8 million, down $232,000, or 0.6%, from $35.0 million for the three months ended March 31, 2019.  Basic and diluted earnings per common share were $0.65 and $0.64, respectively, for the three months ended March 31, 2020, compared to $0.65 and  $0.65, respectively, for the corresponding period in 2019.  An increase in net interest income of $8.9 million for the comparative periods contributed to the increase in net income.  Partially offsetting the increase in net interest income were increases in salary expenses, other operating expenses, and provision for loan losses.  Changes in income and expenses are more fully explained in “Results of Operations” below.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to U.S. GAAP and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles, 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, 2019.

 

Financial Condition

 

Cash and Cash Equivalents

 

At March 31, 2020, we had $306.1 million in federal funds sold, compared to $100.5 million at December 31, 2019.  We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest.  At March 31, 2020, we had $67.4 million in balances at the Federal Reserve, compared to $61.9 million at December 31, 2019.  Our increase in federal funds sold were the result of an increase in funds sold on the American Financial Exchange during the first quarter of 2020.

 

Investment Securities

 

Debt securities available for sale totaled $826.8 million at March 31, 2020 and $759.4 million at December 31, 2019.  Investment securities held to maturity totaled $250,000 at March 31, 2020 and December 31, 2019, respectively. We had pay downs of $20.8 million on mortgage-backed securities and calls and maturities of $5.9 million and $245,000 on municipal securities and certificates of deposit, respectively during the first three months of 2020. We bought $80.2 million of mortgage-backed securities during the first three months of 2020.

 

23

 

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 seek to 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, 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.

 

Lower market interest rates resulting from the financial crisis related to the COVID-19 pandemic have caused the market values of most of our investment securities to increase.  Our unrealized gains on investments have increased from $7.2 million as of December 31, 2019 to $22.0 million as of March 31, 2020.

 

The Company does not invest in collateralized debt obligations (“CDOs”). We have $160.6 million of bank holding company subordinated notes.  All such bonds 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 as of March 31, 2020 has a combined average credit rating of AA.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $374.3 million and $389.9 million as of March 31, 2020 and December 31, 2019, respectively.

 

Loans

 

As of March 31, 2020, the Company had executed 730 loan modifications with payment deferrals on outstanding loan balances of $574.7 million in connection with the COVID-19 relief provided by the CARES Act.  Almost all of these were principal only deferrals, were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.  We anticipate continuing payment deferrals as provided by the CARES Act during 2020.

 

We had total loans of $7.57 billion at March 31, 2020, up  $307.4 million, or 4.2%, compared to $7.26 billion at December 31, 2019.  At March 31, 2020, the percentage of our total loans in each of our markets was as follows:

 

  

Percentage of Total Loans in MSA

 

Birmingham, AL

  40.7

%

Huntsville, AL

  8.1

%

Dothan, AL

  8.8

%

Montgomery, AL

  5.5

%

Mobile, AL

  6.0

%

Total Alabama MSAs

  69.1

%

Pensacola, FL

  6.0

%

West Florida (1)

  4.5

%

Total Florida MSAs

  10.5

%

Nashville, TN

  10.2

%

Atlanta, GA

  6.2

%

Charleston, SC

  4.0

%

 

24

 

Asset Quality

 

The Company determined to delay its adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” until the earlier of the date on which the national emergency concerning COVID-19 terminates or December 31, 2020, as outlined in the CARES Act, with an effective retrospective implementation date of January 1, 2020.  Accordingly, the Company will continue to use the incurred loss methodology to calculate the allowance for loan losses until the earlier of either event.

 

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, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level.  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 March 31, 2020.

 

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 March 31, 2020, total loans rated Special Mention, Substandard, and Doubtful were $101.8 million, or 1.3% of total loans, compared to $123.7 million, or 1.7% of total loans, at December 31, 2019. 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, including the economic distress caused by the COVID-19 pandemic 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.

 

  

As of and for the Three Months Ended

 
  

March 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Total loans outstanding, net of unearned income

 $7,568,836  $6,659,908 

Average loans outstanding, net of unearned income

 $7,361,149  $6,601,497 

Allowance for loan losses at beginning of period

  76,584   68,600 

Charge-offs:

        

Commercial, financial and agricultural loans

  2,640   3,037 

Real estate - construction

  454   - 

Real estate - mortgage

  1,678   50 

Consumer loans

  58   218 

Total charge-offs

  4,830   3,305 

Recoveries:

        

Commercial, financial and agricultural loans

  62   12 

Real estate - construction

  1   1 

Real estate - mortgage

  1   7 

Consumer loans

  12   7 

Total recoveries

  76   27 

Net charge-offs

  4,754   3,278 

Provision for loan losses

  13,584   4,885 

Allowance for loan losses at period end

 $85,414  $70,207 

Allowance for loan losses to period end loans

  1.13

%

  1.05

%

Net charge-offs to average loans

  0.26

%

  0.20

%

 

25

 

      

Percentage

 
      

of loans in

 
      

each

 
      

category to

 

March 31, 2020

 

Amount

  

total loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $48,780   36.61

%

Real estate - construction

  3,757   7.25

%

Real estate - mortgage

  32,360   55.34

%

Consumer

  517   0.80

%

Total

 $85,414   100.00

%

 

      

Percentage

 
      

of loans in

 
      

each

 
      

category to

 

December 31, 2019

 

Amount

  

total loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $43,666   37.13

%

Real estate - construction

  2,768   7.18

%

Real estate - mortgage

  29,653   54.80

%

Consumer

  497   0.89

%

Total

 $76,584   100.00

%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased to $33.9 million at March 31, 2020 compared to $36.1 million at December 31, 2019.  Of this total, nonaccrual loans of $28.9 million at March 31, 2020 represented a net decrease of $1.2 million from nonaccrual loans at December 31, 2019.  Excluding credit card accounts, there was one loan 90 or more days past due and still accruing totaling $4.9 million at March 31, 2020, compared to one loan totaling $5.0 million at December 31, 2019.  Troubled Debt Restructurings (“TDR”) at March 31, 2020 and December 31, 2019 were $2.4 million and $3.3 million, respectively.  There was one loan newly classified as a TDR totaling $350,000 and no renewals of existing TDRs for the three months ended March 31, 2020.  There were no modifications made to new TDRs or renewals of existing TDRs for the three months ended March 31, 2019.

 

OREO and repossessed assets decreased to $7.5 million at March 31, 2020, from $8.2 million at December 31, 2019.  The following table summarizes OREO and repossessed asset activity for the three months ended March 31, 2020 and 2019:

 

  

Three months ended March 31,

 
  

2020

  

2019

 
  

(In thousands)

 

Balance at beginning of period

 $8,178  $5,169 

Transfers from loans and capitalized expenses

  287   381 

Proceeds from sales

  (454)  (48)

Write-downs / net gain (loss) on sales

  (563)  (22)

Balance at end of period

 $7,448  $5,480 

 

26

 

The following table summarizes our nonperforming assets and TDRs at March 31, 2020 and December 31, 2019:

 

  

March 31, 2020

  

December 31, 2019

 
      

Number of

      

Number of

 
  

Balance

  

Loans

  

Balance

  

Loans

 
  

(Dollar Amounts In Thousands)

 

Nonaccrual loans:

                

Commercial, financial and agricultural

 $15,130   26  $14,729   29 

Real estate - construction

  1,804   4   1,588   2 

Real estate - mortgage:

                

Owner-occupied commercial

  10,235   5   10,826   3 

1-4 family mortgage

  1,736   9   1,440   5 

Other mortgage

  -   -   1,507   1 

Total real estate - mortgage

  11,971   14   13,773   9 

Consumer

  9   1   -   - 

Total Nonaccrual loans:

 $28,914   45  $30,090   40 
                 

90+ days past due and accruing:

                

Commercial, financial and agricultural

 $45   3  $201   3 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  -   -   873   5 

Other mortgage

  4,893   1   4,924   1 

Total real estate - mortgage

  4,893   1   5,797   6 

Consumer

  16   4   23   8 

Total 90+ days past due and accruing:

 $4,954   8  $6,021   17 
                 

Total Nonperforming Loans:

 $33,868   53  $36,111   57 
                 

Plus: Other real estate owned and repossessions

  7,448   10   8,178   12 

Total Nonperforming Assets

 $41,316   63  $44,289   69 
                 

Restructured accruing loans:

                

Commercial, financial and agricultural

 $975   3  $625   2 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  -   -   -   - 

Other mortgage

  -   -   -   - 

Total real estate - mortgage

  -   -   -   - 

Consumer

  -   -   -   - 

Total restructured accruing loans:

 $975   3  $625   2 

Total Nonperforming assets and restructured accruing loans

 $42,291   66  $44,914   71 
                 

Ratios:

                

Nonperforming loans to total loans

  0.45

%

      0.50

%

    

Nonperforming assets to total loans plus other real estate owned and repossessions

  0.55

%

      0.61

%

    

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

  0.56

%

      0.62

%

    

 

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.  We have adjusted our policy to continue the accrual of interest on loans which we have executed payment deferrals on in connection with the CARES Act.  These deferrals are generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

 

27

 

Impaired Loans and Allowance for Loan Losses

 

As of March 31, 2020, we had impaired loans of $60.5 million inclusive of nonaccrual loans, an increase of $17.4 million from $43.1 million as of December 31, 2019.  This increase is primarily attributable to one commercial relationship classified as impaired at March 31, 2020, totaling $20.0 million.  We allocated $10.1 million of our allowance for loan losses at March 31, 2020 to these impaired loans, an increase of $0.3 million compared to $9.8 million as of December 31, 2019. 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 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 loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration team performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans. 

 

Of the $60.5 million of impaired loans reported as of March 31, 2020, $44.9 million were commercial, financial and agricultural loans, $1.8 million were real estate – construction loans, $13.8 million were real estate - mortgage loans and $9,000 were consumer loans.

 

Deposits

 

Total deposits increased by $302.0 million to $7.83 billion at March 31, 2020 compared to $7.53 billion at December 31, 2019.  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 Consolidated Balance Sheets and Net Interest Analysis on a Fully Taxable-equivalent Basis” under the subheading “Net Interest Income” below.

 

The following table summarizes balances of our deposits and the percentage of each type to the total at March 31, 2020 and December 31, 2019.

 

  

March 31, 2020

  

December 31, 2019

 

Non-interest-bearing demand

 $1,925,626   24.58

%

 $1,749,879   23.24

%

Interest-bearing

  5,064,699   64.66

%

  4,986,155   66.21

%

Savings

  67,434   0.86

%

  65,808   0.87

%

Time deposits, $250,000 and under

  281,085   3.59

%

  267,259   3.55

%

Time deposits, over $250,000

  493,811   6.30

%

  461,332   6.13

%

  $7,832,655   100.00

%

 $7,530,433   100.00

%

 

Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable.  We had $543.6 million and $470.7 million at March 31, 2020 and December 31, 2019, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 0.20% for the quarter ended March 31, 2020.  Other borrowings consist of the following:

 

 

$34.78 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.

 

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 was 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 March 31, 2020, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $1.2 billion.  Additionally, the Bank had borrowing availability of approximately $772.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We believe these sources of funding are adequate to meet immediate anticipated funding needs, but we may need additional funding if we are able to maintain our current growth rate into the future.

 

28

 

We anticipate the need for short-term funding of PPP loans and have applied with the Federal Reserve Bank of Atlanta to participate in their PPP Liquidity Facility (“PPPLF”).  The PPPLF will allow us to use PPP loans as collateral to borrow funds from the FRB-Atlanta at a rate of 0.35% for a certain period of time.  We currently anticipate that the vast majority of the loans we make through the PPP will be totally forgiven by the SBA by the end of the second quarter of 2020, or soon thereafter.

 

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, 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 “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. However, uncertainties brought about by the COVID-19 pandemic may adversely affect our ability to obtain funding or may increase the cost of funding.

 

The following table reflects the contractual maturities of our term liabilities as of March 31, 2020. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

  

Payments due by Period

 
                     
  

Total

  

1 year or less

  

1 - 3 years

  

3 - 5 years

  

Over 5 years

 
  

(In Thousands)

 

Contractual Obligations (1)

                    
                     

Deposits without a stated maturity

 $6,957,760  $-  $-  $-  $- 

Certificates of deposit (2)

  874,895   459,095   340,605   75,195   - 

Federal funds purchased

  543,623   543,623   -   -   - 

Subordinated notes payable

  64,707   -   -   -   64,707 

Operating lease commitments

  12,593   2,872   4,747   2,781   2,193 

Total

 $8,453,578  $1,005,590  $345,352  $77,976  $66,900 

 

(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 March 31, 2020, 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 common equity Tier 1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of March 31, 2020.

 

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of March 31, 2020, December 31, 2019 and March 31, 2019:

 

  

Actual

  

For Capital Adequacy Purposes

  

To Be Well Capitalized Under Prompt Corrective Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of March 31, 2020:

                        

CET 1 Capital to Risk Weighted Assets:

                        

Consolidated

 $731,864   10.30

%

 $319,875   4.50

%

  N/A   N/A 

ServisFirst Bank

  796,506   11.21

%

  319,851   4.50

%

 $462,007   6.50

%

Tier 1 Capital to Risk Weighted Assets:

                        

Consolidated

  732,366   10.30

%

  426,500   6.00

%

  N/A   N/A 

ServisFirst Bank

  797,008   11.21

%

  426,468   6.00

%

  568,624   8.00

%

Total Capital to Risk Weighted Assets:

                        

Consolidated

  867,748   12.21

%

  568,667   8.00

%

  N/A   N/A 

ServisFirst Bank

  838,216   12.21

%

  568,624   8.00

%

  710,780   10.00

%

Tier 1 Capital to Average Assets:

                        

Consolidated

  732,366   9.03

%

  324,553   4.00

%

  N/A   N/A 

ServisFirst Bank

  797,008   9.82

%

  324,537   4.00

%

  405,671   5.00

%

                         

As of December 31, 2019:

                        

CET 1 Capital to Risk Weighted Assets:

                        

Consolidated

 $822,396   10.50

%

 $342,283   4.50

%

  N/A   N/A 

ServisFirst Bank

  885,172   11.30

%

  342,269   4.50

%

 $494,389   6.50

%

Tier 1 Capital to Risk Weighted Assets:

                        

Consolidated

  822,896   10.50

%

  456,377   6.00

%

  N/A   N/A 

ServisFirst Bank

  885,674   11.31

%

  456,359   6.00

%

  608,479   8.00

%

Total Capital to Risk Weighted Assets:

                        

Consolidated

  964,683   12.31

%

  608,502   8.00

%

  N/A   N/A 

ServisFirst Bank

  962,758   12.29

%

  608,479   8.00

%

  760,598   10.00

%

Tier 1 Capital to Average Assets:

                        

Consolidated

  822,896   9.13

%

  356,012   4.00

%

  N/A   N/A 

ServisFirst Bank

  885,674   9.83

%

  355,998   4.00

%

  444,997   5.00

%

                         

As of March 31, 2019:

                        

CET 1 Capital to Risk Weighted Assets:

                        

Consolidated

 $731,864   10.30

%

 $319,875   4.50

%

  N/A   N/A 

ServisFirst Bank

  796,506   11.21

%

  319,851   4.50

%

 $462,007   6.50

%

Tier 1 Capital to Risk Weighted Assets:

                        

Consolidated

  732,366   10.30

%

  426,500   6.00

%

  N/A   N/A 

ServisFirst Bank

  797,008   11.21

%

  426,468   6.00

%

  568,624   8.00

%

Total Capital to Risk Weighted Assets:

                        

Consolidated

  867,748   12.21

%

  568,667   8.00

%

  N/A   N/A 

ServisFirst Bank

  838,216   12.21

%

  568,624   8.00

%

  710,780   10.00

%

Tier 1 Capital to Average Assets:

                        

Consolidated

  732,366   9.03

%

  324,553   4.00

%

  N/A   N/A 

ServisFirst Bank

  797,008   9.82

%

  324,537   4.00

%

  405,671   5.00

%

 

29

 

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 March 31, 2020, we had reserves of $0.5 million for losses on such off-balance sheet arrangements consistent with guidance in the Federal Reserve Bank’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 March 31, 2020 and December 31, 2019 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at March 31, 2020 are as follows:

 

  

March 31, 2020

 
  

(In Thousands)

 

Commitments to extend credit

 $2,265,133 

Credit card arrangements

  247,976 

Standby letters of credit

  73,135 
  $2,586,244 

 

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.

 

30

 

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.

 

Results of Operations

 

Summary of Net Income  

 

Net income and net income available to common stockholders for the three months ended March 31, 2020 was  $34.8 million compared to  $35.0 million for the three months ended March 31, 2019.  The decrease in net income was primarily attributable to a $8.7 million increase in provision for loan losses during the three months ended March 31, 2020 over the amount provided during the same period in 2019.  Total noninterest expenses increased by $2.6 million during the three months ended March 31, 2020 compared to expenses during the same period in 2019. Net interest income increased by $8.9 million during the three months ended March 31, 2020 compared to the same period in 2019, mostly the result of growth in total average earning assets and lower interest rates paid on interest-bearing deposits.

 

Basic and diluted net income per common share were $0.65 and $0.64, respectively, for the three months ended March 31, 2020, compared to $0.65, for both, for the corresponding period in 2019.  Return on average assets for the three months ended March 31, 2020 was 1.54% compared to 1.75% for the corresponding period in 2019, and return on average stockholders’ equity for the three months ended March 31, 2020 was 16.23% compared to 19.42% for the corresponding period in 2019.

 

Net Interest Income

 

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

 

Taxable-equivalent net interest income increased  $8.9 million, or 12.9%, to  $77.7 million for the three months ended March 31, 2020 compared to $68.8 million for the corresponding period in 2019.  This increase was primarily attributable to a $894.1 million increase in average earning assets, or 11.4%, year over year.  The taxable-equivalent yield on interest-earning assets decreased from 4.85% to 4.46% year over year. The yield on loans for the three months ended March 31, 2020 was 4.88% compared to 5.25% for the corresponding period in 2019.  The cost of total interest-bearing liabilities decreased to 1.19% for the three months ended March 31, 2020 from 1.73% for the corresponding period in 2019. Net interest margin for the three months ended March 31, 2020 increased 2 basis points to 3.58% from 3.56% for the corresponding period in 2019.

 

The following table shows, for the three months ended March 31, 2020 and March 31, 2019, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue.  The accompanying table reflects 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. Both tables are presented on a taxable-equivalent basis where applicable:

 

 

31

 

 

Average Consolidated Balance Sheets and Net Interest Analysis

 

On a Fully Taxable-Equivalent Basis

 

For the Three Months Ended March 31,

 

(Dollar Amounts In Thousands)

 
  

2020

  

2019

 
      

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

 $7,328,594  $89,076   4.89

%

 $6,570,920  $85,233   5.26

%

Tax-exempt (3)

  32,555   327   4.04   30,577   287   3.81 

Total loans, net of unearned income

  7,361,149   89,403   4.88   6,601,497   85,520   5.25 

Mortgage loans held for sale

  4,282   23   2.16   1,614   26   6.53 

Investment securities:

                        

Taxable

  750,413   5,154   2.75   518,955   3,746   2.89 

Tax-exempt (3)

  44,029   257   2.33   87,537   464   2.12 

Total investment securities (4)

  794,442   5,411   2.72   606,492   4,210   2.78 

Federal funds sold

  105,423   277   1.06   192,690   1,219   2.57 

Interest-bearing balances with banks

  469,199   1,718   1.47   438,099   2,764   2.56 

Total interest-earning assets

 $8,734,495  $96,832   4.46

%

 $7,840,392  $93,739   4.85

%

Non-interest-earning assets:

                        

Cash and due from banks

  66,140           74,430         

Net premises and equipment

  58,066           58,852         

Allowance for loan losses, accrued interest and other assets

  241,479           149,941         

Total assets

 $9,100,180          $8,123,615         
                         
                         

Liabilities and stockholders' equity:

                        

Interest-bearing liabilities:

                        

Interest-bearing demand deposits

 $956,803  $1,346   0.57

%

 $942,686  $2,003   0.86

%

Savings deposits

  67,380   84   0.50   54,086   73   0.55 

Money market accounts

  4,061,286   11,127   1.10   3,758,162   16,513   1.78 

Time deposits

  805,924   4,188   2.09   698,976   3,556   2.06 

Total interest-bearing deposits

  5,891,393   16,745   1.14   5,453,910   22,145   1.65 

Federal funds purchased

  492,638   1,601   1.31   312,989   1,995   2.59 

Other borrowings

  64,707   781   4.85   64,671   781   4.90 

Total interest-bearing liabilities

 $6,448,738  $19,127   1.19

%

 $5,831,570  $24,921   1.73

%

Non-interest-bearing liabilities:

                        

Non-interest-bearing demand deposits

  1,749,671           1,524,502         

Other liabilities

  39,801           36,362         

Stockholders' equity

  853,800           735,611         

Accumulated other comprehensive income (loss)

  8,170           (4,430)        

Total liabilities and stockholders' equity

 $9,100,180          $8,123,615         

Net interest income

     $77,705          $68,818     

Net interest spread

          3.27

%

          3.12

%

Net interest margin

          3.58

%

          3.56

%

                      

(1)

 

Non-accrual loans are included in average loan balances in all periods.  Loan fees of $1,281 and $973 are included in interest income in the first quarter of 2020 and 2019, respectively.

(2)

 

Net accretion on acquired loan discounts of $84 is included in interest income in the first quarter of 2019.

(3)

 

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

(4)

 

Unrealized gains (losses) of $10,282 and $(5,664) are excluded from the yield calculation in the first quarter of 2020 and 2019, respectively.

 

32

 

  

For the Three Months Ended March 31,

 
  

2020 Compared to 2019 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

 $9,917  $(6,074) $3,843 

Tax-exempt

  21   19   40 

Total loans, net of unearned income

  9,938   (6,055)  3,883 

Mortgages held for sale

  23   (26)  (3)

Debt securities:

            

Taxable

  1,628   (220)  1,408 

Tax-exempt

  (247)  40   (207)

Total debt securities

  1,381   (180)  1,201 

Federal funds sold

  (410)  (532)  (942)

Interest-bearing balances with banks

  189   (1,235)  (1,046)

Total interest-earning assets

  11,121   (8,028)  3,093 
             

Interest-bearing liabilities:

            

Interest-bearing demand deposits

  30   (687)  (657)

Savings

  17   (6)  11 

Money market accounts

  1,278   (6,664)  (5,386)

Time deposits

  582   50   632 

Total interest-bearing deposits

  1,907   (7,307)  (5,400)

Federal funds purchased

  857   (1,251)  (394)

Other borrowed funds

  -   -   - 

Total interest-bearing liabilities

  2,764   (8,558)  (5,794)

Increase in net interest income

 $8,357  $530  $8,887 

 

Our growth in loans continues to drive favorable volume component change and overall change. The rate component was favorable as average rates paid on interest-bearing liabilities decreased 54 basis points while loan yields decreased 37 basis points. We repriced our deposits downward following the Federal Reserve’s rate cuts during the second half of 2019. Growth in non-interest-bearing deposits and equity also contributed to the increase in net interest revenue during the three months ended March 31, 2020 compared to the same period in 2019.

 

Provision for Loan Losses

 

The provision for loan losses was $13.6 million for the three months ended March 31, 2020, an increase of $8.7 million from $4.9 million for the three months ended March 31, 2019.  Net credit charge-offs to quarter-to-date average loans were 0.26% for the first quarter of 2019, a 10 basis point decrease compared to 0.36% for the fourth quarter of 2019 and a 6 basis point increase compared to 0.20% for the first quarter of 2019.  Nonperforming loans decreased to $2.2 million to $33.9 million, or 0.45% of total loans, at March 31, 2020 from $36.1 million, or 0.50% of total loans, at December 31, 2019, and were higher than $27.2 million, or 0.41% of total loans, at March 31, 2019. Impaired loans increased to $60.5 million, or 0.80% of total loans, at March 31, 2020, compared to $43.1 million, or 0.59% of total loans, at December 31, 2019.  We have evaluated risk factors related to macroeconomic conditions and uncertainty due to COVID-19 which resulted in additional reserve for loan losses related to external factors of $6.7 million at March 31, 2020.  The allowance for loan losses totaled $85.4 million, or 1.13% of total loans, net of unearned income, at March 31, 2020, compared to $70.2 million, or 1.05% of loans, net of unearned income, at December 31, 2019. 

 

Noninterest Income

 

Noninterest income totaled $6.7 million for the three months ended March 31, 2020, an increase of $1.7 million compared to the corresponding period in 2019. Service charges on deposit accounts increased $0.2 million to $1.9 million during the three months ended March 31, 2020 from $1.7 million during the corresponding period in 2019.  The number of transaction deposit accounts increased 14.6% from March 31, 2019 to March 31, 2020.  Credit card income increased $0.2 million to $1.8 million during the three months ended March 31, 2020 compared to $1.6 million during the corresponding period in 2019.  Spending on credit cards increased 29% for the same comparative period. Higher award payout rates offset increased interchange income on credit cards. Income associated with the cash surrender value of bank-owned life insurance increased $691,000 to $1.5 million during the three months ended March 31, 2020 compared to $762,000 during the corresponding period in 2019. We purchased $75.0 million in additional bank-owned life insurance contracts during the second half of 2019.

 

33

 

Noninterest Expense 

 

Noninterest expense totaled $27.9 million for the three months ended March 31, 2020, an increase of $2.6 million compared to $25.3 million for the corresponding period in 2019.

 

Details of expenses are as follows:

 

 

Salary and employee benefit expense increased $1.4 million to $15.7 million for the three months ended March 31, 2020 from $14.3 million for the corresponding period in 2019.  We had 492 total employees as of March 31, 2020 compared to 485 as of March 31, 2019, a 1% increase. We will incur additional compensation expenses associated with processing and booking PPP loans during the second quarter of 2020.  Such added expenses will be more than offset by the fees received on the PPP loans.

 

 

Equipment and occupancy expense increased $141,000 to $2.4 million for the three months ended March 31, 2020 from $2.3 million for the corresponding period in 2019.  We have incurred some additional equipment expenses associated with initiating our pandemic plan.  While we believe these expenses are immaterial, we cannot be sure that additional expenses will not be incurred if the impacts of the pandemic extend over a longer period of time.

 

 

Third party processing and other services increased $934,000 to $3.4 million for the three months ended March 31, 2020 from $2.4 million for the corresponding period in 2019. Increases in the number of transaction deposit accounts contributed to an increase in data processing expenses and an increase in the number of correspondent banking accounts and number of transactions in those accounts contributed to increased service charges from the Federal Reserve Bank of Atlanta.

 

 

Professional services decreased $66,000 to $928,000 for the three months ended March 31, 2020 from $994,000 for the corresponding period in 2019.

 

 

FDIC insurance assessments increased $313,000 to $1.3 million for the three months ended March 31, 2020 from $1.0 million for the corresponding period in 2019.  Our assessment base increased by 16% year-over-year.

 

 

Expenses related to other real estate owned increased to $601,000 for the three months ended March 31, 2020 from $22,000 for the corresponding period in 2019. This increase was the result of write-downs in value of property based on updated appraisals related to one foreclosed loan relationship in our Nashville region.

 

 

Other operating expenses decreased $702,000 to $3.7 million for the three months ended March 31, 2020 from $4.4 million for the corresponding period in 2019. Write-downs in tax credit investments decreased significantly as our New Market Tax Credit partnerships terminated at the end of 2019. Decreases in travel and entertainment expenses also contributed to the operating expense.  We will likely experience decreased travel and entertainment expenses during the second quarter of 2020 as we continue to limit our person-to-person contact with our clients and prospects during the pandemic.

 

Changes in our non-interest income and expenses, including percentage changes, are detailed in the following table:

 

  

Three Months Ended March 31,

         
  

2020

  

2019

  

$ change

  

% change

 
  

(Dollars In Thousands)

     

Noninterest income:

                

Service charges on deposit accounts

 $1,916  $1,702  $214   12.6

%

Mortgage banking

  1,071   575   496   86.3

%

Credit cards

  1,765   1,576   189   12.0

%

Increase in cash surrender value life insurance

  1,453   762   691   90.7

%

Other operating income

  469   329   140   42.6

%

Total noninterest income

 $6,674  $4,944  $1,730   35.0

%

                 

Noninterest expense:

                

Salaries and employee benefits

 $15,658  $14,265  $1,393   9.8

%

Equipment and occupancy

  2,400   2,259   141   6.2

%

Third party processing and other services

  3,345   2,411   934   38.7

%

Professional services

  948   994   (46)  (4.6

%)

FDIC and other regulatory assessments

  1,332   1,019   313   30.7

%

Other real estate owned

  601   22   579   2,631.8

%

Other operating expense

  3,636   4,358   (722)  (16.6

%)

Total noninterest expense

 $27,920  $25,328  $2,592   10.2

%

 

34

 

Income Tax Expense

 

Income tax expense was $8.0 million for the three months ended March 31, 2020 versus $8.5 million for the same period in 2019. Our effective tax rate for the three months ended March 31, 2020 was 18.76%, compared to 19.53% for the corresponding period in 2019.  We recognized excess tax benefits as a credit to our income tax expense from the exercise of stock options and vesting of restricted stock of $1.1 million in the first quarter of 2020, compared to $772,000 in the first quarter of 2019.  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 invested in an additional $75.0 million of bank-owned life insurance contracts during the second half of 2019.

 

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 (“ALCO”) 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 risks that our balance sheet is exposed to. Our annual budget reflects the anticipated rate environment for the next 12 months.

 

The ALCO employs modeling techniques such as net interest income simulations and economic value of equity simulations to determine what amount of the Bank’s net interest income is at risk given different movements in market interest rates. Simulations assume gradual and instantaneous (shocks) movements in market interest rates of up and down 100, 200, 300 and 400 basis points, when practicable.  A set of Benchmark and optional scenarios are ran and results are compared to base model results to measure sensitivity to movements in market interest rates.  The ALCO establishes limits for the amount of negative change in net interest margin in the first year, second year and two-year cumulative time horizon.  Current policy limits for the 100 and 200 basis point scenarios in the first and second year is -10% and -15%, respectively, and for the two-year cumulative is -15%.  The ALCO conducts a quarterly analysis of the rate sensitivity position, reviews established limits, and reports its results to our board of directors.  As of March 31, 2020, there have been no significant changes to our sensitivity to changes in interest rates since December 31, 2019. However, market disruptions brought about by the COVID-19 pandemic may adversely affect our sensitivity to market interest rates.  We could experience an increase in the cost of funding our balance sheet.  We could also experience increased pricing competition for our existing loans or future borrower prospects, which could decrease rates earned on our earning assets.

 

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 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.

 

35

 

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 March 31, 2020. Based upon the Evaluation, our CEO and CFO have concluded that, as of March 31, 2020, our disclosure controls and procedures are effective to ensure that material information relating to ServisFirst Bancshares, Inc. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

 

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. 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 except as disclosed in Item 3, “Legal Proceedings”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and there has been no material change in any matter described therein.

 

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, 2019, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of:

 

The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

 

Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus.  Such measures have included travel bans and restrictions, curfews, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in the near future.

 

The outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our customers or business partners, including but not limited to:

 

 

Credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;

 

 

Possible business disruptions experienced by our vendors and business partners in carrying out work that supports our operations;

 

 

Heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic; and,

 

 

Operational failures due to changes in our normal business practices necessitated by our internal measures to protect our employees and government-mandated measures intended to slow the spread of the virus.

 

36

 

These factors may exist for an extended period of time and may continue to adversely affect our business, financial condition and operations even after the COVID-19 outbreak has subsided.

 

The extent to which the pandemic impacts our business, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.  Additionally, future outbreaks of COVID-19, or other viruses, may occur.

 

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole.  Therefore, the risk factors discussed in our Annual Report on Form 10-K could be heightened, changed or be added to in the future.  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.

 

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

 

(a) Exhibit:

 31.01Certification of principal executive officer pursuant to Rule 13a-14(a).
 31.02Certification of principal financial officer pursuant to Rule 13a-14(a).
 32.01Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
 32.02Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
 101.SCHXBRL Taxonomy Extension Schema Document
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
 101.LABXBRL Taxonomy Extension Label Linkbase Document
 101.PREXBRL Taxonomy Extension Presentation Linkbase Document
 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*denotes compensatory plan or arrangement

 

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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: April 30, 2020By/s/ Thomas A. Broughton III
  Thomas A. Broughton III
  President and Chief Executive Officer
   
Date: April 30, 2020By  /s/ William M. Foshee
  William M. Foshee
  Chief Financial Officer

                                                                               

 

 

 

 

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