UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

 

 

(Mark oneone))

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

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

For the transition period from _______to_______

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

850 Shades Creek Parkway, Birmingham, Alabama      35209     

(Address of Principal Executive Offices)                              (Zip Code)

850 Shades Creek Parkway, Birmingham, Alabama35209
(Address of Principal Executive Offices)(Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

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

 

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

Yes[X] xNo No¨[_]


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

 

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

 

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

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

 

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 July 29, 201628, 2017
Common stock, $.001 par value26,251,94852,932,230

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION3
Item 1.Financial Statements3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2726
Item 3.Quantitative and Qualitative Disclosures about Market Risk4541
Item 4.Controls and Procedures4542
   
PART II. OTHER INFORMATION4642
Item 1Legal Proceedings4642
Item 1A.Risk Factors4642
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4642
Item 3.Defaults Upon Senior Securities4643
Item 4.Mine Safety Disclosures4643
Item 5.Other Information4643
Item 6.Exhibits4643
EX-31.01 SECTION 302 CERTIFICATION OF THE CEO
EX-31.02 SECTION 302 CERTIFICATION OF THE CFO
EX-32.01 SECTION 906 CERTIFICATION OF THE CEO
EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO

EX-31.02 SECTION 302 CERTIFICATION OF THE CFO

EX-32.01 SECTION 906 CERTIFICATION OF THE CEO

EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

 

 2 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

               

 June 30, 2016 December 31, 2015  June 30, 2017 December 31, 2016
 (Unaudited) (1)  (Unaudited) (1)
ASSETS                
Cash and due from banks $54,985  $46,614  $71,181  $56,855 
Interest-bearing balances due from depository institutions  417,703   270,836   134,694   566,707 
Federal funds sold  116,038   34,785   49,443   160,435 
Cash and cash equivalents  588,726   352,235   255,318   783,997 
Available for sale debt securities, at fair value  321,044   342,938   438,808   422,375 
Held to maturity debt securities (fair value of $27,717 and $27,910 at June 30, 2016 and December 31, 2015, respectively)  26,662   27,426 
Held to maturity debt securities (fair value of $80,532 and $63,302 at June 30, 2017 and December 31, 2016, respectively)  79,257   62,564 
Restricted equity securities  5,671   4,954   1,037   1,024 
Mortgage loans held for sale  7,933   8,249   5,673   4,675 
Loans  4,539,338   4,216,375   5,343,688   4,911,770 
Less allowance for loan losses  (46,998)  (43,419)  (55,059)  (51,893)
Loans, net  4,492,340   4,172,956   5,288,629   4,859,877 
Premises and equipment, net  23,221   19,434   51,797   40,314 
Accrued interest and dividends receivable  13,487   13,698   16,770   15,801 
Deferred tax assets  21,710   23,425   26,392   27,132 
Other real estate owned and repossessed assets  4,260   5,392   3,891   4,988 
Bank owned life insurance contracts  102,873   91,594   125,896   114,388 
Goodwill and other identifiable intangible assets  15,154   15,330   14,855   14,996 
Other assets  22,974   17,878   21,276   18,317 
Total assets $5,646,055  $5,095,509  $6,329,599  $6,370,448 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Liabilities:                
Deposits:                
Noninterest-bearing $1,185,668  $1,053,467  $1,373,353  $1,281,605 
Interest-bearing  3,482,127   3,170,421   4,021,457   4,138,706 
Total deposits  4,667,795   4,223,888   5,394,810   5,420,311 
Federal funds purchased  420,430   352,360   300,226   355,944 
Other borrowings  55,450   55,637   55,075   55,262 
Accrued interest payable  2,876   2,369   3,513   4,401 
Other liabilities  10,407   12,108   8,889   11,641 
Total liabilities  5,156,958   4,646,362   5,762,513   5,847,559 
Stockholders' equity:                
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001 (liquidation preference $1,000), net of discount; no shares authorized, no shares issued or outstanding at June 30, 2016; 40,000 shares authorized, no shares issued or outstanding at December 31, 2015  -   - 
Preferred stock, par value $.001 per share; 1,000,000 shares authorized and undesignated at June 30, 2016, and 1,000,000 shares authorized and 960,000 shares undesignated at December 31, 2015  -   - 
Common stock, par value $.001 per share; 100,000,000 shares authorized and 26,251,948 shares issued and outstanding at June 30, 2016, and 50,000,000 authorized and 25,972,698 shares issued and outstanding at December 31, 2015  26   26 
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $0.001 (liquidation preference $1,000), net of discount; no shares authorized or outstanding at June 30, 2017 and December 31, 2016  -   - 
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2017 and December 31, 2016  -   - 
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,909,362 shares issued and outstanding at June 30, 2017, and 52,636,896 shares issued and outstanding at December 31, 2016  53   53 
Additional paid-in capital  214,525   211,546   217,271   215,932 
Retained earnings  268,765   234,150   348,517   307,151 
Accumulated other comprehensive income  5,404   3,048   743   (624)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.  488,720   448,770   566,584   522,512 
Noncontrolling interest  377   377   502   377 
Total stockholders' equity  489,097   449,147   567,086   522,889 
Total liabilities and stockholders' equity $5,646,055  $5,095,509  $6,329,599  $6,370,448 

 

(1) Derived from audited financial statements.

 

See Notes to Consolidated Financial  StatementsStatements.

 

 3 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

                             

 Three Months Ended Six Months Ended 
 June 30, June 30,  Three Months Ended
June 30,		 Six Months Ended
June 30,
 2016 2015 2016 2015  2017 2016 2017 2016
Interest income:                                
Interest and fees on loans $49,210  $42,105  $96,457  $80,751  $59,912  $49,210  $115,468  $96,457 
Taxable securities  1,238   1,104   2,507   2,232   2,274   1,238   4,361   2,507 
Nontaxable securities  834   874   1,692   1,734   752   834   1,517   1,692 
Federal funds sold  210   24   283   101   287   210   806   283 
Other interest and dividends  558   102   1,072   174   313   558   903   1,072 
Total interest income  52,050   44,209   102,011   84,992   63,538   52,050   123,055   102,011 
Interest expense:                                
Deposits  4,633   3,512   8,994   6,782   6,321   4,633   12,303   8,994 
Borrowed funds  1,526   486   2,947   962   1,650   1,526   3,133   2,947 
Total interest expense  6,159   3,998   11,941   7,744   7,971   6,159   15,436   11,941 
Net interest income  45,891   40,211   90,070   77,248   55,567   45,891   107,619   90,070 
Provision for loan losses  3,800   4,062   5,859   6,467   4,381   3,800   9,367   5,859 
Net interest income after provision for loan losses  42,091   36,149   84,211   70,781   51,186   42,091   98,252   84,211 
Noninterest income:                                
Service charges on deposit accounts  1,306   1,276   2,613   2,483   1,382   1,306   2,736   2,613 
Mortgage banking  901   735   1,569   1,189   1,064   901   1,963   1,569 
Credit card income  1,189   572   2,368   1,041 
Securities (losses) gains  (3)  -   (3)  29   -   (3)  -   (3)
Increase in cash surrender value life insurance  655   660   1,279   1,308   785   655   1,509   1,279 
Other operating income  988   759   1,824   1,355   385   416   775   783 
Total noninterest income  3,847   3,430   7,282   6,364   4,805   3,847   9,351   7,282 
Noninterest expenses:                                
Salaries and employee benefits  10,733   10,426   21,800   19,434   12,031   10,733   23,744   21,800 
Equipment and occupancy expense  2,023   1,634   4,008   3,295   2,265   2,023   4,505   4,008 
Professional services  999   665   1,737   1,233   808   999   1,579   1,737 
FDIC and other regulatory assessments  803   626   1,553   1,246   1,081   803   2,078   1,553 
OREO expense  41   289   490   503   56   41   132   490 
Merger expense  -   -   -   2,096 
Other operating expenses  4,905   4,498   9,206   8,939   5,634   4,905   11,104   9,206 
Total noninterest expenses  19,504   18,138   38,794   36,746   21,875   19,504   43,142   38,794 
Income before income taxes  26,434   21,441   52,699   40,399   34,116   26,434   64,461   52,699 
Provision for income taxes  7,558   6,972   13,867   12,875   9,952   7,558   17,778   13,867 
Net income  18,876   14,469   38,832   27,524   24,164   18,876   46,683   38,832 
Preferred stock dividends  23   123   23   223   31   23   31   23 
Net income available to common stockholders $18,853  $14,346  $38,809  $27,301  $24,133  $18,853  $46,652  $38,809 
                                
Basic earnings per common share $0.72  $0.56  $1.48  $1.07  $0.46  $0.36  $0.88  $0.74 
                                
Diluted earnings per common share $0.71  $0.54  $1.46  $1.04  $0.45  $0.36  $0.86  $0.73 

 

See Notes to Consolidated Financial StatementsStatements.

 

 4 

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

                                   

  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2016  2015  2016  2015 
Net income $18,876  $14,469  $38,832  $27,524 
Other comprehensive income (loss), net of tax:                
Unrealized holding gains (losses) arising during period from securities available for sale, net of tax of $272 and $1,256 for the three and six months ended June 30, 2016, respectively, and $399 and $390 for the three and six months ended June 30, 2015, respectively  520   (1,467)  2,354   (722)
Reclassification adjustment for net losses (gains) on sale of securities in net income, net of tax of $1 for the three and six months ended June 30, 2016, and $0 and $10 for three and six months ended June 30, 2015, respectively  2   -   2   (19)
Other comprehensive income (loss), net of tax  522   (1,467)  2,356   (741)
Comprehensive income $19,398  $13,002  $41,188  $26,783 
  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2017 2016 2017 2016
Net income $24,164  $18,876  $46,683  $38,832 
Other comprehensive income, net of tax:                
Unrealized holding gains arising during period from securities available for sale, net of tax of $201 and $736 for the three and six months ended June 30, 2017, respectively, and $272 and $1,256 for the three and six months ended June 30, 2016, respectively  374   520   1,367   2,354 
Reclassification adjustment for net losses on sale of securities, net of tax of $1 for the three and six months ended June 30, 2016  -   2   -   2 
Other comprehensive income, net of tax  374   522   1,367   2,356 
Comprehensive income $24,538  $19,398  $48,050  $41,188 

 

See Notes to Consolidated Financial StatementsStatements.

 

 5 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(In thousands, except share amounts)

(Unaudited)

                                         

  Preferred
Stock		  Common
Stock		  Additional
Paid-in
Capital		  Retained
Earnings		  Accumulated
Other
Comprehensive
Income		  Noncontrolling
Interest		  Total
Stockholders'
Equity		 
Balance, December 31, 2015 $-  $26  $211,546  $234,150  $3,048  $377  $449,147 
Common dividends paid, $0.08 per share  -   -   -   (2,095)  -   -   (2,095)
Common dividends declared, $0.08 per share  -   -   -   (2,099)  -   -   (2,099)
Preferred dividends paid  -   -   -   (23)  -   -   (23)
Issue 274,750 shares of common stock upon exercise of stock options  -   -   2,339   -   -   -   2,339 
Stock-based compensation expense  -   -   640   -   -   -   640 
Other comprehensive income, net of tax  -   -   -   -   2,356   -   2,356 
Net income  -   -   -   38,832   -   -   38,832 
Balance, June 30, 2016 $-  $26  $214,525  $268,765  $5,404  $377  $489,097 
                             
Balance, December 31, 2014 $39,958  $25  $185,397  $177,091  $4,490  $252  $407,213 
Common dividends paid, $0.06 per share  -   -   -   (1,539)  -   -   (1,539)
Common dividends declared, $0.06 per share  -   -   -   (1,550)  -   -   (1,550)
Preferred dividends paid  -   -   -   (223)  -   -   (223)
Issue 636,592 shares of common stock as consideration for Metro Bancshares, Inc. acquisition  -   1   19,355   -   -   -   19,356 
Issue 386,500 shares of common stock upon exercise of stock options  -   -   2,693   -   -   -   2,693 
Excess tax benefit on exercise and vesting of stock options  -   -   1,065   -   -   -   1,065 
Issue 125 shares of REIT preferred stock  -   -   -   -   -   125   125 
Stock-based compensation expense  -   -   564   -   -   -   564 
Other comprehensive income, net of tax  -   -   -   -   (741)  -   (741)
Net income  -   -   -   27,524   -   -   27,524 
Balance, June 30, 2015 $39,958  $26  $209,074  $201,303  $3,749  $377  $454,487 
  Common
Stock		 Additional
Paid-in
Capital		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income		 Noncontrolling
Interest		 Total
Stockholders'
Equity
Balance, December 31, 2015 $52  $211,546  $234,124  $3,048  $377  $449,147 
Common dividends paid, $0.04 per share  -   -   (2,095)  -   -   (2,095)
Common dividends declared, $.04 per share  -   -   (2,099)  -   -   (2,099)
Preferred dividends paid  -   -   (23)  -   -   (23)
Issue 549,500 shares of common stock upon exercise of stock options  -   2,339   -   -   -   2,339 
Stock based compensation expense  -   640   -   -   -   640 
Other comprehensive income, net of tax  -   -   -   2,356   -   2,356 
Net income  -   -   38,832   -   -   38,832 
Balance, June 30, 2016 $52  $214,525  $268,739  $5,404  $377  $489,097 
                         
Balance, December 31, 2016 $53  $215,932  $307,151  $(624) $377  $522,889 
Common dividends paid, $0.05 per share  -   -   (2,641)  -   -   (2,641)
Common dividends declared, $0.05 per share  -   -   (2,645)  -   -   (2,645)
Preferred dividends paid  -   -   (31)  -   -   (31)
Issue 272,466 shares of common stock upon exercise of stock options  -   717   -   -   -   717 
Issue 125 shares of REIT preferred stock  -   -   -   -   125   125 
Stock based compensation expense  -   622   -   -   -   622 
Other comprehensive income, net of tax  -   -   -   1,367   -   1,367 
Net income  -   -   46,683   -   -   46,683 
Balance, June 30, 2017 $53  $217,271  $348,517  $743  $502  $567,086 

 

See Notes to Consolidated Financial StatementsStatements.

 

 6 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(In  (In thousands) (Unaudited)

 

 Six Months Ended June 30,
 2016 2015  2017 2016
OPERATING ACTIVITIES                
Net income $38,832  $27,524  $46,683  $38,832 
Adjustments to reconcile net income to net cash provided by:        
Deferred tax expense  440   87 
Adjustments to reconcile net income to net cash provided by        
Deferred tax  4   440 
Provision for loan losses  5,859   6,467   9,367   5,859 
Depreciation  1,480   1,124   1,501   1,480 
Accretion on acquired loans  (624)  (1,120)  (267)  (624)
Amortization of core deposit intangible  176   180   141   176 
Net amortization of debt securities available for sale  1,288   1,214   1,999   1,288 
Decrease (increase) in accrued interest and dividends receivable  211   (207)
(Increase) decrease in accrued interest and dividends receivable  (969)  211 
Stock-based compensation expense  640   564   622   640 
Increase in accrued interest and dividends payable  507   311 
(Decrease) increase in accrued interest payable  (888)  507 
Proceeds from sale of mortgage loans held for sale  61,054   61,717   71,518   61,054 
Originations of mortgage loans held for sale  (59,169)  (66,266)  (70,553)  (59,169)
Loss (gain) on sale of debt securities available for sale  3   (29)
Loss on sale of debt securities available for sale  -   3 
Gain on sale of mortgage loans held for sale  (1,569)  (1,189)  (1,963)  (1,569)
Net loss on sale of other real estate owned  39   41 
Write down of other real estate owned  397   188 
Operating losses on tax credit and other partnerships  176   76 
Net (gain) loss on sale of other real estate owned and repossessed assets  (53)  39 
Write down of other real estate owned and repossessed assets  4   397 
Losses of tax credit partnerships  7   176 
Increase in cash surrender value of life insurance contracts  (1,279)  (1,308)  (1,509)  (1,279)
Net change in other assets, liabilities, and other operating activities  (7,563)  (4,273)  (9,379)  (7,563)
Net cash provided by operating activities  40,898   25,101   46,265   40,898 
INVESTMENT ACTIVITIES                
Purchase of debt securities available for sale  (15,119)  (17,497)  (60,627)  (15,119)
Proceeds from sale of debt securities available for sale  6,085   16,738   -   6,085 
Proceeds from maturities, calls and paydowns of debt securities available for sale  34,255   20,611   45,325   34,255 
Purchase of debt securities held to maturity  (439)  (202)  (20,786)  (439)
Proceeds from maturities, calls and paydowns of debt securities held to maturity  1,203   534   4,093   1,203 
Purchase of equity securities  (708)  (534)  (10)  (708)
Increase in loans  (325,496)  (357,687)  (438,253)  (325,496)
Purchase of premises and equipment  (5,267)  (441)  (12,984)  (5,267)
Purchase of bank-owned life insurance contracts  (10,000)  -   (10,000)  (10,000)
Expenditures to complete construction of other real estate owned  (3)  (91)  -   (3)
Proceeds from sale of other real estate owned and repossessed assets  1,575   2,665   1,547   1,575 
Investment in tax credit partnerships  (2,491)  -   -   (2,491)
Net cash paid in acquisition of Metro Bancshares, Inc.  -   (12,883)
Net cash used in investing activities  (316,405)  (348,787)  (491,695)  (316,405)
FINANCING ACTIVITIES                
Net increase in noninterest-bearing deposits  132,201   68,839 
Net increase in interest-bearing deposits  311,706   86,379 
Net increase in federal funds purchased  68,070   6,605 
Net increase in non-interest-bearing deposits  91,748   132,201 
Net (decrease) increase in interest-bearing deposits  (117,249)  311,706 
Net (decrease) increase in federal funds purchased  (55,718)  68,070 
Repayment of Federal Home Loan Bank advances  (200)  (200)  (200)  (200)
Proceeds from sale of preferred stock, net  -   125   125   - 
Proceeds from exercise of stock options  2,339   2,693 
Proceeds from exercise of stock options and warrants  717   2,339 
Dividends paid on common stock  (2,095)  (1,539)  (2,641)  (2,095)
Dividends paid on preferred stock  (23)  (223)  (31)  (23)
Net cash provided by financing activities  511,998   162,679 
Net increase (decrease) in cash and cash equivalents  236,491   (161,007)
Cash and cash equivalents at beginning of year  352,235   297,464 
Cash and cash equivalents at end of year $588,726  $136,457 
Net cash (used in) provided by financing activities  (83,249)  511,998 
Net (decrease) increase in cash and cash equivalents  (528,679)  236,491 
Cash and cash equivalents at beginning of period  783,997   352,235 
Cash and cash equivalents at end of period $255,318  $588,726 
SUPPLEMENTAL DISCLOSURE                
Cash paid for:                
Interest $11,434  $7,344  $16,324  $11,434 
Income taxes  17,546   14,855   22,363   17,546 
Income tax refund  (182)  - 
NONCASH TRANSACTIONS                
Other real estate acquired in settlement of loans $2,036  $1,941  $586  $2,036 
Internally financed sales of other real estate owned  1,157   -   185   1,157 
Dividends declared  2,099   1,550   2,645   2,099 
Fair value of assets and liabilities from acquisition:        
Fair value of tangible assets acquired $-  $201,821 
Other intangible assets acquired  -   18,143 
Fair value of liabilities assumed  -   (179,682)
Total merger consideration  -   40,282 

 

See Notes to Consolidated Financial StatementsStatements.

 

 7 

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 20162017

(Unaudited)

 

NOTE 1 - GENERAL

 

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2015.2016.

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

 

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

NOTE 2 - ACQUISITION

 

On January 31, 2015, the Company completed its acquisition of Metro and Metro Bank, its wholly-owned bank subsidiary, for an aggregate of $20.9 million in cash and 636,592 shares of Company common stock. The acquisition of Metro was the Company’s entrance into the greater Atlanta, Georgia area with two added banking offices.

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Metro, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company.

  January 31, 2015 
  As recorded by
Metro		  Fair value
adjustments		    As recorded by
the Company		 
  (In Thousands) 
Assets acquired:              
Cash and cash equivalents $8,543  $-    $8,543 
Debt securities  28,833   (41) a  28,792 
Equity securities  499   -     499 
Loans  152,869   (3,874) b  148,995 
Allowance for loan losses  (1,621)  1,621  b  - 
Premises and equipment, net  7,606   762  c  8,368 
Accrued interest receivable  484   -     484 
Deferred taxes  754   3,153  d  3,907 
Other real estate owned  2,373   (25) e  2,348 
Bank owned life insurance contracts  2,685   -     2,685 
Core deposit intangible  -   2,090  f  2,090��
Other assets  364   -     364 
Total assets acquired $203,389  $3,686    $207,075 
Liabilities assumed:              
Deposits $175,236  $518  g $175,754 
Federal funds purchased  2,175   -     2,175 
Other borrowings  1,400   (4) h  1,396 
Accrued interest payable  89   -     89 
Other liabilities  996   -     996 
Total liabilities assumed $179,896  $514    $180,410 
Net assets acquired $23,493  $3,172    $26,665 
Consideration Paid:              
Cash           $(20,926)
Stock            (19,356)
Total consideration paid            (40,282)
Goodwill           $13,617 

8

Explanation of fair value adjustments:

a-Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired debt securities portfolio.
b-Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses.
c-Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.
d-Adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial statement purposes and their basis for federal income tax purposes.
e-Adjustment reflects the fair value adjustment based on the Company’s evaluation of the other real estate owned acquired.
f-Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.

g- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.

h- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the assumed debt.

The estimated fair value of the purchased credit impaired loans acquired in the Metro transaction on January 31, 2015 was $5.1 million, which amount is immaterial to the Company’s consolidated financial statements.

Pro forma financial information is not provided because such amounts are immaterial to the Company’s consolidated financial statements.

NOTE 32 - 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 43 - EARNINGS PER COMMON SHARE

 

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and warrants. All reported amounts in this Form 10-Q have been adjusted to give effect to the two-for-one stock split discussed above.

 

 98 

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

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2016  2015  2016  2015 
  (In Thousands, Except Shares and Per Share Data) 
Earnings per common share                
Weighted average common shares outstanding  26,212,863   25,715,654   26,170,195   25,507,396 
Net income available to common stockholders $18,853  $14,346  $38,809  $27,301 
Basic earnings per common share $0.72  $0.56  $1.48  $1.07 
                 
Weighted average common shares outstanding  26,212,863   25,715,654   26,170,195   25,507,396 
Dilutive effects of assumed conversions and exercise of stock options  513,400   710,382   476,342   825,131 
Weighted average common and dilutive potential                
common shares outstanding  26,726,263   26,426,036   26,646,537   26,332,527 
Net income available to common stockholders $18,853  $14,346  $38,809  $27,301 
Diluted earnings per common share $0.71  $0.54  $1.46  $1.04 

NOTE 54 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 20162017 and December 31, 20152016 are summarized as follows:

 

   Gross Gross    Amortized
Cost		 Gross
Unrealized
Gain		 Gross
Unrealized
Loss		 Market
Value
June 30, 2017 (In Thousands)
Securities Available for Sale                
U.S. Treasury and government sponsored agencies $56,778  $419  $(72) $57,125 
Mortgage-backed securities  241,613   1,267   (1,609)  241,271 
State and municipal securities  139,273   1,298   (159)  140,412 
Total  437,664   2,984   (1,840)  438,808 
Securities Held to Maturity                
Mortgage-backed securities  27,858   303   (224)  27,937 
State and municipal securities  5,890   306   -   6,196 
Corporate debt  45,509   890   -   46,399 
Total $79,257  $1,499  $(224) $80,532 
 Amortized Unrealized Unrealized Market                 
 Cost Gain Loss Value 
 (In Thousands) 
June 30, 2016                
December 31, 2016                
Securities Available for Sale                                
U.S. Treasury and government sponsored agencies $38,215  $1,101  $-  $39,316  $45,998  $382  $(126) $46,254 
Mortgage-backed securities  125,939   4,014   -   129,953   228,843   1,515   (3,168)  227,190 
State and municipal securities  139,642   3,150   (12)  142,780   139,504   1,120   (694)  139,930 
Corporate debt  8,949   46   -   8,995   8,985   16   -   9,001 
Total  312,745   8,311   (12)  321,044   423,330   3,033   (3,988)  422,375 
Securities Held to Maturity                                
Mortgage-backed securities  20,461   528   -   20,989   19,164   321   (245)  19,240 
State and municipal securities  6,201   527   -   6,728   5,888   315   (12)  6,191 
Total $26,662  $1,055  $-  $27,717 
                
December 31, 2015                
Securities Available for Sale                
U.S. Treasury and government sponsored agencies $44,581  $569  $(141) $45,009 
Mortgage-backed securities  135,363   1,945   (354)  136,954 
State and municipal securities  143,403   2,731   (101)  146,033 
Corporate debt  14,902   67   (27)  14,942   37,512   374   (15)  37,871 
Total  338,249   5,312   (623)  342,938  $62,564  $1,010  $(272) $63,302 
Securities Held to Maturity                
Mortgage-backed securities  21,666   368   (332)  21,702 
State and municipal securities  5,760   449   (1)  6,208 
Total $27,426  $817  $(333) $27,910 

 

The amortized cost and fair value of debt securities as of June 30, 20162017 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.

 

 109 

 

  June 30, 2016  December 31, 2015 
  Amortized
Cost		  Fair Value  Amortized
Cost		  Fair Value 
  (In thousands) 
Debt securities available for sale                
Due within one year $23,287  $23,441  $16,770  $16,868 
Due from one to five years  139,329   142,704   153,880   156,311 
Due from five to ten years  24,190   24,946   32,236   32,805 
Mortgage-backed securities  125,939   129,953   135,363   136,954 
  $312,745  $321,044  $338,249  $342,938 
                 
Debt securities held to maturity                
Due from five to ten years $627  $663  $627  $659 
Due after ten years  5,574   6,065   5,133   5,549 
Mortgage-backed securities  20,461   20,989   21,666   21,702 
  $26,662  $27,717  $27,426  $27,910 

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

 

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

 

The following table identifies, as of June 30, 20162017 and December 31, 2015,2016, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At June 30, 2016, six2017, nine of the Company’s 739813 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2016.2017. Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

 

 Less Than Twelve Months Twelve Months or More Total  Less Than Twelve Months Twelve Months or More Total
 Gross   Gross   Gross    Gross
Unrealized
Losses		 Fair Value Gross
Unrealized
Losses		 Fair Value Gross
Unrealized
Losses		 Fair Value
 Unrealized   Unrealized   Unrealized    (In Thousands)
June 30, 2017                        
U.S. Treasury and government sponsored agencies $(72) $4,859  $-  $-  $(72) $4,859 
Mortgage-backed securities  (1,813)  144,440   (20)  1,021   (1,833)  145,461 
State and municipal securities  (143)  32,820   (16)  1,582   (159)  34,402 
Total $(2,028) $182,119  $(36) $2,603  $(2,064) $184,722 
 Losses Fair Value Losses Fair Value Losses Fair Value                         
 (In Thousands) 
June 30, 2016                        
December 31, 2016                        
U.S. Treasury and government sponsored agencies $-  $-  $-  $-  $-  $-  $(126) $10,865  $-  $-  $(126) $10,865 
Mortgage-backed securities  -   -   -   -   -   -   (3,413)  174,225   -   -   (3,413)  174,225 
State and municipal securities  (8)  4,393   (4)  1,215   (12)  5,608   (698)  64,502   (8)  1,021   (706)  65,523 
Corporate debt  -   -   -   -   -   -   (15)  3,034   -   -   (15)  3,034 
Total $(8) $4,393  $(4) $1,215  $(12) $5,608  $(4,252) $252,626  $(8) $1,021  $(4,260) $253,647 
                        
December 31, 2015                        
U.S. Treasury and government sponsored agencies $(141) $3,886  $-  $-  $(141) $3,886 
Mortgage-backed securities  (354)  56,609   (332)  11,712   (686)  68,321 
State and municipal securities  (55)  15,464   (47)  4,531   (102)  19,995 
Corporate debt  (27)  2,961   -   -   (27)  2,961 
Total $(577) $78,920  $(379) $16,243  $(956) $95,163 

 

 1110 

 

NOTE 65 – LOANS

 

The following table details the Company’s loans at June 30, 20162017 and December 31, 2015:2016:

 

 June 30, December 31, 
 2016 2015  June 30,
2017		 December 31,
2016
 (Dollars In Thousands)  (Dollars In Thousands)
Commercial, financial and agricultural $1,895,870  $1,760,479  $2,123,498  $1,982,267 
Real estate - construction  251,144   243,267   395,398   335,085 
Real estate - mortgage:                
Owner-occupied commercial  1,117,514   1,014,669   1,272,659   1,171,719 
1-4 family mortgage  494,733   444,134   565,121   536,805 
Other mortgage  725,336   698,779   931,788   830,683 
Subtotal: Real estate - mortgage  2,337,583   2,157,582   2,769,568   2,539,207 
Consumer  54,741   55,047   55,224   55,211 
Total Loans  4,539,338   4,216,375   5,343,688   4,911,770 
Less: Allowance for loan losses  (46,998)  (43,419)  (55,059)  (51,893)
Net Loans $4,492,340  $4,172,956  $5,288,629  $4,859,877 
                
                
Commercial, financial and agricultural  41.76%  41.75%  39.74%  40.36%
Real estate - construction  5.53%  5.77%  7.40%  6.82%
Real estate - mortgage:                
Owner-occupied commercial  24.62%  24.07%  23.82%  23.86%
1-4 family mortgage  10.90%  10.53%  10.57%  10.93%
Other mortgage  15.98%  16.57%  17.44%  16.91%
Subtotal: Real estate - mortgage  51.50%  51.17%  51.83%  51.70%
Consumer  1.21%  1.31%  1.03%  1.12%
Total Loans  100.00%  100.00%  100.00%  100.00%

 

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

 

·Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or obligors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

·Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

·Substandard – loans that exhibit well-defined weakness or weaknesses that currently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.

·Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

 

11

Loans by credit quality indicator as of June 30, 20162017 and December 31, 2015were2016 were as follows:

 

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

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

 12 

     Special          
June 30, 2016 Pass  Mention  Substandard  Doubtful  Total 
  (In Thousands) 
Commercial, financial and agricultural $1,819,738  $58,467  $17,665  $-  $1,895,870 
Real estate - construction  239,389   6,833   4,922   -   251,144 
Real estate - mortgage:                    
Owner-occupied commercial  1,095,079   8,466   13,969   -   1,117,514 
1-4 family mortgage  489,905   2,120   2,708   -   494,733 
Other mortgage  711,276   10,902   3,158   -   725,336 
Total real estate mortgage  2,296,260   21,488   19,835   -   2,337,583 
Consumer  54,493   221   27   -   54,741 
Total $4,409,880  $87,009  $42,449  $-  $4,539,338 

     Special          
December 31, 2015 Pass  Mention  Substandard  Doubtful  Total 
  (In Thousands) 
Commercial, financial and agricultural $1,701,591  $47,393  $11,495  $-  $1,760,479 
Real estate - construction  233,046   6,221   4,000   -   243,267 
Real estate - mortgage:                    
Owner-occupied commercial  988,762   18,169   7,738   -   1,014,669 
1-4 family mortgage  437,834   3,301   2,999   -   444,134 
Other mortgage  683,157   11,086   4,536   -   698,779 
Total real estate mortgage  2,109,753   32,556   15,273   -   2,157,582 
Consumer  54,973   42   32   -   55,047 
Total $4,099,363  $86,212  $30,800  $-  $4,216,375 

13

 

Loans by performance status as of June 30, 20162017 and December 31, 2015were2016 were as follows:

 

June 30, 2016 Performing Nonperforming Total 
June 30, 2017 Performing Nonperforming Total
      
 (In Thousands)  (In Thousands)
Commercial, financial and agricultural $1,895,539  $331  $1,895,870  $2,118,113  $5,385  $2,123,498 
Real estate - construction  247,522   3,622   251,144   393,021   2,377   395,398 
Real estate - mortgage:                        
Owner-occupied commercial  1,117,514   -   1,117,514   1,270,411   2,248   1,272,659 
1-4 family mortgage  494,155   578   494,733   564,200   921   565,121 
Other mortgage  724,752   584   725,336   931,788   -   931,788 
Total real estate mortgage  2,336,421   1,162   2,337,583   2,766,399   3,169   2,769,568 
Consumer  54,703   38   54,741   55,176   48   55,224 
Total $4,534,185  $5,153  $4,539,338  $5,332,709  $10,979  $5,343,688 

 

December 31, 2015 Performing Nonperforming Total 
December 31, 2016 Performing Nonperforming Total
      
 (In Thousands)  (In Thousands)
Commercial, financial and agricultural $1,758,561  $1,918  $1,760,479  $1,974,975  $7,292  $1,982,267 
Real estate - construction  239,267   4,000   243,267   331,817   3,268   335,085 
Real estate - mortgage:                        
Owner-occupied commercial  1,014,669   -   1,014,669   1,165,511   6,208   1,171,719 
1-4 family mortgage  443,936   198   444,134   536,731   74   536,805 
Other mortgage  697,160   1,619   698,779   830,683   -   830,683 
Total real estate mortgage  2,155,765   1,817   2,157,582   2,532,925   6,282   2,539,207 
Consumer  55,015   32   55,047   55,166   45   55,211 
Total $4,208,608  $7,767  $4,216,375  $4,894,883  $16,887  $4,911,770 

 

 1413 

 

Loans by past due status as of June 30, 20162017 and December 31, 2015were2016 were as follows:

 

June 30, 2016 Past Due Status (Accruing Loans)       
June 30, 2017 Past Due Status (Accruing Loans)      
       Total Past        30-59 Days 60-89 Days 90+ Days Total Past
Due		 Non-Accrual Current Total Loans
 30-59 Days 60-89 Days 90+ Days Due Non-Accrual Current Total Loans               
 (In Thousands)  (In Thousands)
Commercial, financial and agricultural $1,370  $28  $-  $1,398  $331  $1,894,141  $1,895,870  $6,311  $317  $968  $7,596  $4,417  $2,111,485  $2,123,498 
Real estate - construction  -   -   -   -   3,622   247,522   251,144   -   -   -   -   2,377   393,021   395,398 
Real estate - mortgage:                                                        
Owner-occupied commercial  -   1,461   -   1,461   -   1,116,053   1,117,514   4,498   -   -   4,498   2,248   1,265,913   1,272,659 
1-4 family mortgage  445   61   250   756   328   493,649   494,733   376   703   -   1,079   921   563,121   565,121 
Other mortgage  -   -   162   162   422   724,752   725,336   980   -   -   980   -   930,808   931,788 
Total real estate - mortgage  445   1,522   412   2,379   750   2,334,454   2,337,583   5,854   703   -   6,557   3,169   2,759,842   2,769,568 
Consumer  427   5   11   443   27   54,271   54,741   49   8   48   105   -   55,119   55,224 
Total $2,242  $1,555  $423  $4,220  $4,730  $4,530,388  $4,539,338  $12,214  $1,028  $1,016  $14,258  $9,963  $5,319,467  $5,343,688 
                            
December 31, 2015 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 $50  $35  $-  $85  $1,918  $1,758,476  $1,760,479 
Real estate - construction  198   12   -   210   4,000   239,057   243,267 
Real estate - mortgage:                            
Owner-occupied commercial  -   -   -   -   -   1,014,669   1,014,669 
1-4 family mortgage  -   210   -   210   198   443,726   444,134 
Other mortgage  -   -   -   -   1,619   697,160   698,779 
Total real estate - mortgage  -   210   -   210   1,817   2,155,555   2,157,582 
Consumer  45   6   1   52   31   54,964   55,047 
Total $293  $263  $1  $557  $7,766  $4,208,052  $4,216,375 

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

 

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

 

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

 

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

 

 1514 

 

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

 

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

 

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

 

15

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 20162017 and June 30, 2015.2016. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

 

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

 16 

  Commercial,             
  financial and  Real estate -  Real estate -       
  agricultural  construction  mortgage  Consumer  Total 
  (In Thousands) 
  Three Months Ended June 30, 2016 
Allowance for loan losses:                    
Balance at March 31, 2016 $22,839  $5,005  $16,901  $400  $45,145 
Charge-offs  (1,412)  (355)  (191)  (31)  (1,989)
Recoveries  1   39   2   -   42 
Provision  2,227   590   888   95   3,800 
Balance at June 30, 2016 $23,655  $5,279  $17,600  $464  $46,998 
                     
  Three Months Ended June 30, 2015 
Allowance for loan losses:                    
Balance at March 31, 2015 $16,857  $5,889  $13,546  $1,064  $37,356 
Charge-offs  (1,151)  (93)  (208)  (19)  (1,471)
Recoveries  6   65   2   -   73 
Provision  3,340   (187)  831   78   4,062 
Balance at June 30, 2015 $19,052  $5,674  $14,171  $1,123  $40,020 
                     
  Six Months Ended June 30, 2016 
Allowance for loan losses:                    
Balance at December 31, 2015 $21,495  $5,432  $16,061  $431  $43,419 
Charge-offs  (1,462)  (736)  (191)  (49)  (2,438)
Recoveries  4   55   99   -   158 
Provision  3,618   528   1,631   82   5,859 
Balance at June 30, 2016 $23,655  $5,279  $17,600  $464  $46,998 
                     
  Six Months Ended June 30, 2015 
Allowance for loan losses:                    
Balance at December 31, 2014 $16,079  $6,395  $12,112  $1,043  $35,629 
Charge-offs  (1,228)  (475)  (641)  (24)  (2,368)
Recoveries  25   164   103   -   292 
Provision  4,176   (410)  2,597   104   6,467 
Balance at June 30, 2015 $19,052  $5,674  $14,171  $1,123  $40,020 
                     
  As of June 30, 2016 
Allowance for loan losses:                    
Individually Evaluated for Impairment $2,855  $1,319  $1,675  $27  $5,876 
Collectively Evaluated for Impairment  20,800   3,960   15,925   437   41,122 
                     
Loans:                    
Ending Balance $1,895,870  $251,144  $2,337,583  $54,741  $4,539,338 
Individually Evaluated for Impairment  17,665   4,972   22,371   31   45,039 
Collectively Evaluated for Impairment  1,878,205   246,172   2,315,212   54,710   4,494,299 
                     
  As of December 31, 2015 
Allowance for loan losses:                    
Individually Evaluated for Impairment $2,698  $1,223  $1,730  $32  $5,683 
Collectively Evaluated for Impairment  18,797   4,209   14,331   399   37,736 
                     
Loans:                    
Ending Balance $1,760,479  $243,267  $2,157,582  $55,047  $4,216,375 
Individually Evaluated for Impairment  11,513   4,052   17,880   46   33,491 
Collectively Evaluated for Impairment  1,748,966   239,215   2,139,702   55,001   4,182,884 

 

The following table presents details of the Company’s impaired loans as of June 30, 20162017 and December 31, 2015,2016, respectively. Loans which have been fully charged off do not appear in the tables.

 

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

 17 

 

       For the three months For the six months 
       ended June 30, ended June 30, 
 June 30, 2016 2016 2016 
         Interest   Interest  December 31, 2016 
   Unpaid   Average Income Average Income        For the twelve months
ended December 31, 2016
 Recorded Principal Related Recorded Recognized Recorded Recognized  Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Average
Recorded
Investment		 Interest Income
Recognized in
Period
 Investment Balance Allowance Investment in Period Investment in Period           
 (In Thousands)  (In Thousands)
With no allowance recorded:                                                
Commercial, financial and agricultural $1,438  $1,438  $-  $1,438  $15  $1,442  $30  $1,003  $1,003  $-  $992  $64 
Real estate - construction  1,264   2,466   -   1,267   1   1,774   10   938   1,802   -   1,159   3 
Real estate - mortgage:                                                
Owner-occupied commercial  7,086   7,247   -   7,293   98   7,398   202   2,615   2,778   -   2,884   166 
1-4 family mortgage  1,962   1,988   -   2,047   26   2,056   53   1,899   1,899   -   1,901   102 
Other mortgage  2,928   2,928   -   2,944   40   2,958   81   940   940   -   965   60 
Total real estate - mortgage  11,976   12,163   -   12,284   164   12,412   336   5,454   5,617   -   5,750   328 
Consumer  4   6   -   6   -   5   -   3   5   -   6   - 
Total with no allowance recorded  14,682   16,073   -   14,995   180   15,633   376   7,398   8,427   -   7,907   395 
                                                
With an allowance recorded:                                                
Commercial, financial and agricultural  16,227   19,327   2,855   17,337   218   17,490   498   26,919   31,728   6,607   26,955   1,162 
Real estate - construction  3,708   3,708   1,319   3,708   18   3,694   37   3,376   3,376   923   3,577   68 
Real estate - mortgage:                                                
Owner-occupied commercial  9,420   9,420   1,320   9,350   111   9,336   220   6,924   6,924   348   6,934   362 
1-4 family mortgage  745   745   349   745   4   745   10   972   972   274   313   19 
Other mortgage  230   230   6   233   4   239   8   -   -   -   -   - 
Total real estate - mortgage  10,395   10,395   1,675   10,328   119   10,320   238   7,896   7,896   622   7,247   381 
Consumer  27   27   27   27   -   30   -   -   -   -   -   - 
Total with allowance recorded  30,357   33,457   5,876   31,400   355   31,534   773   38,191   43,000   8,152   37,779   1,611 
                                                
Total Impaired Loans:                                                
Commercial, financial and agricultural  17,665   20,765   2,855   18,775   233   18,932   528   27,922   32,731   6,607   27,947   1,226 
Real estate - construction  4,972   6,174   1,319   4,975   19   5,468   47   4,314   5,178   923   4,736   71 
Real estate - mortgage:                                                
Owner-occupied commercial  16,506   16,667   1,320   16,643   209   16,734   422   9,539   9,702   348   9,818   528 
1-4 family mortgage  2,707   2,733   349   2,792   30   2,801   63   2,871   2,871   274   2,214   121 
Other mortgage  3,158   3,158   6   3,177   44   3,197   89   940   940   -   965   60 
Total real estate - mortgage  22,371   22,558   1,675   22,612   283   22,732   574   13,350   13,513   622   12,997   709 
Consumer  31   33   27   33   -   35   -   3   5   -   6   - 
Total impaired loans $45,039  $49,530  $5,876  $46,395  $535  $47,167  $1,149  $45,589  $51,427  $8,152  $45,686  $2,006 

 

 18 

December 31, 2015
 
     Unpaid     Average  Interest Income 
  Recorded  Principal  Related  Recorded  Recognized in 
  Investment  Balance  Allowance  Investment  Period 
  (In Thousands) 
With no allowance recorded:                    
Commercial, financial and agricultural $478  $487  $-  $482  $24 
Real estate - construction  161   163   -   370   1 
Real estate - mortgage:                    
Owner-occupied commercial  3,980   4,140   -   3,815   214 
1-4 family mortgage  2,396   2,572   -   2,409   147 
Other mortgage  4,079   4,694   -   4,559   222 
Total real estate - mortgage  10,455   11,406   -   10,783   583 
Consumer  14   20   -   18   1 
Total with no allowance recorded  11,108   12,076   -   11,653   609 
                     
With an allowance recorded:                    
Commercial, financial and agricultural  11,035   13,035   2,698   13,882   672 
Real estate - construction  3,891   4,370   1,223   3,920   - 
Real estate - mortgage:                    
Owner-occupied commercial  6,365   6,365   1,328   9,958   568 
1-4 family mortgage  603   603   263   567   19 
Other mortgage  457   457   139   880   17 
Total real estate - mortgage  7,425   7,425   1,730   11,405   604 
Consumer  32   32   32   34   - 
Total with allowance recorded  22,383   24,862   5,683   29,241   1,276 
                     
Total Impaired Loans:                    
Commercial, financial and agricultural  11,513   13,522   2,698   14,364   696 
Real estate - construction  4,052   4,533   1,223   4,290   1 
Real estate - mortgage:                    
Owner-occupied commercial  10,345   10,505   1,328   13,773   782 
1-4 family mortgage  2,999   3,175   263   2,976   166 
Other mortgage  4,536   5,151   139   5,439   239 
Total real estate - mortgage  17,880   18,831   1,730   22,188   1,187 
Consumer  46   52   32   52   1 
Total impaired loans $33,491  $36,938  $5,683  $40,894  $1,885 

 

Troubled Debt Restructurings (“TDR”) at June 30, 2016,2017, December 31, 20152016 and June 30, 20152016 totaled $6.8$16.4 million, $7.7$7.3 million and $8.3$6.8 million, respectively. At June 30, 2016,2017, the Company had a related allowance for loan losses of $1.0$3.1 million allocated to these TDRs, compared to $0.9$2.3 million at December 31, 20152016 and $1.2$1.0 million at June 30, 2015.2016. TDR activity by portfolio segment for the three and six months ended June 30, 20162017 is presented in the table below. There were no modifications made to new TDRs or renewals of existing TDRs for the three and six months ended June 30, 2015.  

 

19

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

 

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

 

There were no TDRs which defaulted during the three and six months ended June 30, 20162017 and 2015,2016, and which were modified in the previous twelve months (i.e., the twelve months prior to default). For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of June 30, 2016,2017, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

NOTE 76 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At June 30, 2016,2017, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $285,000 and $622,000 for the three and six months ended June 30, 2017 and $297,000 and $640,000 for the three and six months ended June 30, 2016 and $263,000 and $564,000 for the three and six months ended June 30, 2015.2016.

 

The Company’s 2005 Amended and Restated Stock Option Plan allows for the grant of stock options to purchase up to 3,075,0006,150,000 shares of the Company’s common stock. The Company’s 2009 Amended and Restated Stock Incentive Plan authorizes the grant of up to 2,775,0005,550,000 shares and allows for the issuance of Stock Appreciation Rights, Restricted Stock, Stock Options, Performance Shares or Performance Units. Both plans allow for the grant of incentive stock options and non-qualified stock options, and option awards are granted with an exercise price equal to the market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plans is ten years.

19

 

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

 

 2016 2015  2017 2016
Expected volatility  29.00%  24.00%  29.00%  29.00%
Expected dividends  0.63%  0.71%  0.44%  0.63%
Expected term (in years)  6.25   6.25   6.25   6.25 
Risk-free rate  1.87%  1.85%  2.09%  1.87%

 

The weighted average grant-date fair value of options granted during the six months ended June 30, 20162017 and June 30, 20152016 was $11.80$11.84 and $8.37,$11.80, respectively.

 

The following table summarizes stock option activity during the six months ended June 30, 20162017 and June 30, 2015:2016:

 

20
  Shares Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contractual
Term (years)		 Aggregate
Intrinsic
Value
        (In Thousands)
Six Months Ended June 30, 2017:                
Outstanding at January 1, 2017  2,026,334  $9.00   6.2  $57,636 
Granted  51,500   37.95   9.6   (80)
Exercised  (292,000)  4.98   4.4   9,169 
Forfeited  (32,000)  21.96   8.6   (462)
Outstanding at June 30, 2017  1,753,834   10.28   5.9  $45,777 
                 
Exercisable at June 30, 2017  811,736  $5.20   4.4  $25,303 
                 
Six Months Ended June 30, 2016:                
Outstanding at January 1, 2016  2,498,834  $6.66   6.3  $42,743 
Granted  227,000   19.76   9.7   1,120 
Exercised  (549,500)  4.26   4.4   11,230 
Forfeited  (13,000)  19.41   9.2   69 
Outstanding at June 30, 2016  2,163,334   8.57   6.6  $38,891 
                 
Exercisable at June 30, 2016  687,536  $6.09   6.0  $14,989 

        Weighted    
     Weighted  Average    
     Average  Remaining  Aggregate 
     Exercise  Contractual  Intrinsic 
  Shares  Price  Term (years)  Value 
           (In Thousands) 
Six Months Ended June 30, 2016:                
Outstanding at January 1, 2016  1,249,417  $13.32   6.3  $42,743 
Granted  113,500   39.52   9.7   1,120 
Exercised  (274,750)  8.51   4.4   11,230 
Forfeited  (6,500)  38.82   9.2   69 
Outstanding at June 30, 2016  1,081,667   17.13   6.6  $34,891 
                 
Exercisable at June 30, 2016  343,768  $12.17   6.0  $14,989 
                 
Six Months Ended June 30, 2015:                
Outstanding at January 1, 2015  1,622,917  $9.38   5.9  $38,256 
Granted  160,000   33.16   9.7   706 
Exercised  (386,500)  6.97   3.2   12,875 
Forfeited  (7,500)  10.00   6.8   207 
Outstanding at June 30, 2015  1,388,917   12.51   6.5  $34,425 
                 
Exercisable at June 30, 2015  272,418  $9.02   4.8  $7,779 

 

As of June 30, 2016,2017, there was approximately $2.6$2.3 million of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 2.52.7 years.

 

Restricted Stock

 

The Company has issued 241,588488,376 shares of restricted stock to certain employees.officers, of which 368,700 are vested. The value of restricted stock awards is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2016,2017, there was $573,000$575,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 2.11.5 years of the restricted stock’s vesting period. During the second quarter of 2015, 7,500 shares of restricted stock were forfeited by one recipient upon his termination from the Company.

 

NOTE 87 - DERIVATIVES

 

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of June 30, 20162017 and December 31, 20152016 were not material.

20

NOTE 98 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03,Simplifying the Presentation of Debt Issuance Costs.Under the ASU, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public entities, the amendments in ASU 2015-03 were effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption was permitted for financial statements that have not been previously issued. The Company early adopted the amendments in ASU 2015-03. As of June 30, 2016, the Company had reported its $34.75 million of 5.00% Subordinated Notes due July 15, 2025 net of unamortized issue costs of $99,000 and recognized $6,000 and $12,000 of amortization in interest expense for the three and six months ended June 30, 2016, respectively.

21

In August 2015, the FASB issued ASU No. 2015-15,Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements: Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting,to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. The SEC staff has announced that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-15 was effective upon issuance for all entities. The Company considers the amendments in this ASU to have no effect on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02,Consolidation (Topic 810): Amendments to the Consolidation Analysis.  The amendments modify the evaluation reporting organizations must perform to determine if certain legal entities should be consolidated as VIEs. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 became effective for interim and annual reporting periods beginning after December 15, 2015. The Company has adopted the provisions these amendments, and they have no impact on the Company’s financial reporting.

In September 2015, the FASB issued ASU 2015-16,Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date.  The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. Adoption of these amendments had no impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption iswas permitted. The Company elected to early adopt the provisions onof this ASU during the second quarter of 2016, and retrospectively apply the changes in accounting for stock compensation back to the first quarter of 2016. In so doing,Accordingly, the Company recognized a $2.3 million reduction in its provision for income taxes induring the first quarter and six months ended June 30, 2017 of $1.4 million and $3.5 million, respectively, compared to $1.2 million and $3.5 million during the quarter and six months ended June 30, 2016, and an additional $1.3 million reduction in its provision for income taxes in the second quarter of 2016, all relatedrespectively. Prior to the exercise and vestingadoption of stock options and restricted stock. Prior to ASU 2016-09, such tax benefits were recorded as an increase to additional paid-in capital.

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

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

NOTE 109 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14,Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU 2014-09,Revenue From Contracts With Customers (Topic 606), issued in May 2014, by one year. ASU 2014-09 is discussed in the Annual Report on Form 10-K for the year ended December 31, 2014. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoptionThe Company’s revenue has been more significantly weighted towards net interest income on financial assets and liabilities, which is permitted asexplicitly excluded from the scope of the date of the original effective date, for interimnew standard, and annual reporting periods beginning after December 15, 2016.noninterest income has not been as significant. The Company is currently evaluatinghas begun to scope its general ledger revenue items and assess its contracts with customers to identify its performance obligations and will continue to evaluate the provisionsimpact of ASU 2015-14adoption on its noninterest income and ASU 2014-09.on its disclosures.

21

 

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

22

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company is currently evaluating the impactleases many of adopting the new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The amendments eliminate the requirement that when an investment qualifies for use of the equity methodbanking offices under lease agreements it classifies as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted.operating leases. The Company is currently evaluating the impact of adoptingthat the amendmentsnew guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts Management currently anticipates recognizing a right-of-use asset and a lease liability associated with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net) (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The amendments in ASU 2016-08 affect the guidance in ASU 2014-09,Revenue from Contracts with Customers (Topic 606), and have similar effective dates and transition requirements (i.e., effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein). The Company is currently evaluating the impact of adopting the new revenue recognition guidance on its consolidated financial statements.long-term operating leases.

 

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

 

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

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

 2322 

 

NOTE 1110 - FAIR VALUE MEASUREMENT

 

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

 

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

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

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

 

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

 

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

 

Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $2,329,000 and $5,307,000 during the three and six months ended June 30, 2017, respectively, and $1,634,000 and $2,546,000 during the three and six months ended June 30, 2016, respectively, and $2,335,000 and $3,636,000 during the three and six months ended June 30, 2015, respectively.

 

Other Real Estate Owned. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the valuation hierarchy. Net lossesA loss on the sale and write-downs of OREO of $248,000$7,000 and $436,000$36,000 was recognized for the three and six months ended June 30, 2016,2017, respectively, and $124,000$248,000 and $229,000$436,000 for the three and six months ended June 30, 2015,2016, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy.

 

Residential

23

There were no residential real estate loan foreclosures classified as OREO totaled $157,000 as of June 30, 2016 and $1,141,0002017, compared to $189,000 as of December 31, 2015.2016.

24

 

No residential real estate loans were in the process of being foreclosed as of June 30, 2016.2017.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 20162017 and December 31, 2015:2016:

 

 Fair Value Measurements at June 30, 2016 Using   
 Quoted Prices in       
 Active Markets Significant Other Significant   
 for Identical Observable Inputs Unobservable   
 Assets (Level 1) (Level 2) Inputs (Level 3) Total  Fair Value Measurements at June 30, 2017 Using  
 (In Thousands)  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total
Assets Measured on a Recurring Basis:                 (In Thousands)
Available-for-sale securities:                                
U.S. Treasury and government sponsored agencies $-  $39,316  $-  $39,316  $-  $57,125  $-  $57,125 
Mortgage-backed securities  -   129,953   -   129,953   -   241,271   -   241,271 
State and municipal securities  -   142,780   -   142,780   -   140,412   -   140,412 
Corporate debt  -   8,995   -   8,995 
Total assets at fair value $-  $321,044  $-  $321,044  $-  $438,808  $-  $438,808 

 

 Fair Value Measurements at December 31, 2015 Using   
 Quoted Prices in       
 Active Markets Significant Other Significant   
 for Identical Observable Inputs Unobservable   
 Assets (Level 1) (Level 2) Inputs (Level 3) Total  Fair Value Measurements at December 31, 2016 Using  
 (In Thousands)  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total
Assets Measured on a Recurring Basis:                 (In Thousands)
Available-for-sale securities                                
U.S. Treasury and government sponsored agencies $-  $45,009  $-  $45,009  $-  $46,254  $-  $46,254 
Mortgage-backed securities  -   136,954   -   136,954   -   227,190   -   227,190 
State and municipal securities  -   146,033   -   146,033   -   139,930   -   139,930 
Corporate debt  -   14,942   -   14,942   -   9,001   -   9,001 
Total assets at fair value $-  $342,938  $-  $342,938  $-  $422,375  $-  $422,375 

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 20162017 and December 31, 2015:

2016:

 

 Fair Value Measurements at June 30, 2016 Using   
 Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total  Fair Value Measurements at June 30, 2017 Using  
 (In Thousands)  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total
Assets Measured on a Nonrecurring Basis:                 (In Thousands)
Impaired loans $-  $-  $39,163  $39,163  $-  $-  $43,864  $43,864 
Other real estate owned and repossessed assets  -   -   4,260   4,260   -   -   3,891   3,891 
Total assets at fair value $-  $-  $43,423  $43,423  $-  $-  $47,755  $47,755 

 

 Fair Value Measurements at December 31, 2015 Using   
 Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total  Fair Value Measurements at December 31, 2016 Using  
 (In Thousands)  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		 Significant Other
Observable Inputs
(Level 2)		 Significant
Unobservable
Inputs (Level 3)		 Total
Assets Measured on a Nonrecurring Basis:                 (In Thousands)
Impaired loans $-  $-  $27,808  $27,808  $-  $-  $37,437  $37,437 
Other real estate owned and repossessed assets  -   -   5,392   5,392   -   -   4,988   4,988 
Total assets at fair value $-  $-  $33,200  $33,200  $-  $-  $42,425  $42,425 

 

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

 

 2524 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

25

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

26

 

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

 

The carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 20162017 and December 31, 20152016 are presented in the following table. This table includes those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.

 

 June 30, 2016 December 31, 2015 
 Carrying   Carrying    June 30, 2017 December 31, 2016
 Amount Fair Value Amount Fair Value  Carrying
Amount		 Fair Value Carrying
Amount		 Fair Value
 (In Thousands)  (In Thousands)
Financial Assets:                                
Level 1 inputs:                                
Cash and due from banks $472,688  $472,688  $317,450  $317,450  $205,875  $205,875  $623,562  $623,562 
                                
Level 2 inputs:                                
Available for sale debt securities  321,044   321,044   342,938   342,938   438,808   438,808   422,375   422,375 
Held to maturity debt securities  26,662   27,717   27,426   27,910   33,748   34,133   25,052   25,431 
Restricted equity securities  5,671   5,671   4,954   4,954   1,037   1,037   1,024   1,024 
Federal funds sold  116,038   116,038   34,785   34,785   49,443   49,443   160,435   160,435 
Mortgage loans held for sale  7,933   8,037   8,249   8,295   5,673   5,855   4,675   4,736 
Bank owned life insurance contracts  102,873   102,873   91,594   91,594   125,896   125,896   114,388   114,388 
                                
Level 3 inputs:                                
Debt securities held to maturity  45,509   46,399   37,512   37,871 
Loans, net  4,492,340   4,509,664   4,172,956   4,179,835   5,288,629   5,283,824   4,859,877   4,872,689 
                                
Financial liabilities:                                
Level 2 inputs:                                
Deposits $4,667,795  $4,669,723  $4,223,888  $4,223,181  $5,394,810  $5,391,665  $5,420,311  $5,417,320 
Federal funds purchased  420,430   420,430   352,360   352,360   300,226   300,226   355,944   355,944 
Other borrowings  55,450   54,240   55,637   52,521   55,075   56,339   55,262   54,203 

NOTE 1211 – SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2016,2017, and events which occurred subsequent to June 30, 20162017 but were not recognized in the financial statements.

 

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

 

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 20162017 and June 30, 2015.2016.

26

 

Forward-Looking Statements

 

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

 

27

Business

 

We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through nineteen full-service banking offices located in Alabama, Tampa Bay, Florida, the panhandle of Florida, the greater Atlanta, Georgia metropolitan area, Charleston, South Carolina, and Nashville, Tennessee. Through the Bank,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 (including negotiable orders of withdrawal, or NOW accounts).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, (including NOW accounts), interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses and income taxes.expenses.

 

Overview

 

As of June 30, 2016,2017, we had consolidated total assets of $5.6$6.33 billion, an increasea decrease of $0.5 billion,$40.8 million, or 9.8%0.6%, from $5.1$6.37 billion at December 31, 2015.2016. This decrease in total assets resulted from a $528.7 million decrease in balances held at the Federal Reserve Bank (“FRB”) and federal funds sold. Total loans were $4.5$5.34 billion at June 30, 2016,2017, up $0.3 billion,$431.9 million, or 7.1%8.8%, from $4.2$4.91 billion at December 31, 2015.2016. Total deposits were $4.7$5.39 billion at June 30, 2016, an increase2017, a decrease of $0.5 billion,$25.5 million, or 11.9%0.5%, from $4.2$5.42 billion at December 31, 2015.2016.

 

Net income available to common stockholders for the three months ended June 30, 20162017 was $18.9$24.1 million, an increase of $4.6$5.2 million, or 32.2%27.5%, from $14.3$18.9 million for the corresponding period in 2015.2016. Basic and diluted earnings per common share were $0.72$0.46 and $0.71,$0.45, respectively, for the three months ended June 30, 2016,2017, compared to $0.56basic and $0.54, respectively,diluted earnings per common share of $0.36 for the corresponding period in 2015.2016.

 

Net income available to common stockholders for the six months ended June 30, 20162017 was $38.8$46.7 million, an increase of $11.5$7.9 million, or 42.1%20.4%, from $27.3$38.8 million for the corresponding period in 2015.2016. Basic and diluted earnings per common share were $1.48$0.88 and $1.46,$0.86, respectively, for the six months ended June 30, 2016,2017, compared to $1.07$0.74 and $1.04,$0.73, respectively, for the corresponding period in 2015.2016.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate, deferred taxes, and fair value of financial instruments are particularly subject to change. Information concerning our accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016.

 

 2827 

 

Financial Condition

 

Cash and Cash Equivalents

 

At June 30, 2016,2017, we had $116.0$49.4 million in federal funds sold, compared to $34.8$160.4 million at December 31, 2015.2016. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2016,2017, we had $416.2$133.0 million in balances at the Federal Reserve, compared to $269.4$565.1 million at December 31, 2015.2016. This increasedecrease was a result in balances at the Federal Reserve areour lower levels of excess liquidity due to excess liquidity resulting fromloan growth and a slight decrease in deposits and increases in federal funds purchased from our correspondent banks during the first half of 2016.2017.

 

Debt Securities

 

Debt securities available for sale totaled $321.0$438.8 million at June 30, 20162017 and $342.9$422.4 million at December 31, 2015.2016. Debt securities held to maturity totaled $26.7$79.3 million at June 30, 20162017 and $27.4$62.6 million at December 31, 2015. We sold two corporate bonds for total aggregate proceeds of $6.0 million and one municipal bond for proceeds of $0.1 million.2016. We had pay downs of $14.5$24.3 million on mortgage-backed securities, maturities of $16.7 million on municipal and maturitiescorporate securities, and calls of $21.0$8.2 million in government agencyon municipal securities and municipal securitiessubordinated notes during the six months ended June 30, 2016.2017. We bought $4.3$55.8 million in mortgage-backed securities, $9.1$12.0 million in municipal securities, and $2.2$2.9 million in small business investment company (SBIC) debenturesU.S. Treasury securities and $11.0 million in subordinated notes during the first six months of 2016. One of the municipal2017. Seven mortgage-backed securities and four subordinated notes bought iswere classified as held to maturity. All other securities bought are classified as available for sale.

 

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

 

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at June 30, 20162017 are interest-rate driven, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash charges to earnings in one or more future periods.

 

All securities held are traded in liquid markets. As of June 30, 2016,2017, we owned restricted securities of the Federal Home Loan Bank with an aggregate book value and market value of $4.7 million, securities of First National Bankers Bank with an aggregate book value and market value of $0.4 million, securities of a fund that invests in Community Reinvestment Act-qualifying real estate with a book value and market value of $0.5 million, and securities of a bank holding company in Georgia with a book value and market value of $0.1 million. Upon termination of our membership in the Federal Home Loan Bank of Atlanta during the fourth quarter of 2016, we redeemed all but approximately $30,000 of our FHLB restricted stock. This remaining restricted stock in the FHLB is a required holding as long as our principal reducing advances are outstanding. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity.

 

The Bank does not invest in collateralized debt obligations (“CDOs”). We have $45.5 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Rating Agency at the time of our investment in them. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at June 30, 20162017 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 $257.6$285.8 million and $245.5$257.6 million as of June 30, 20162017 and December 31, 2015,2016, respectively.

28

 

Loans

 

We had total loans of $4.5$5.34 billion at June 30, 2016,2017, an increase of $0.3 billion,$431.9 million, or 7.1%8.8%, compared to $4.2$4.91 billion at December 31, 2015.2016. At June 30, 2016,2017, the percentage of our loans in each of our regions were as follows:

 

29

  Percentage of Total
Loans in MSA
Birmingham-Hoover, AL MSA  44.943.1%
Huntsville, AL MSA  9.9%
Dothan, AL MSA  9.89.6%
Montgomery, AL MSA  8.07.4%
Mobile, AL MSA  6.0%
Total Alabama MSAs  78.676.0%
Pensacola-Ferry Pass-Brent, FL MSA  7.16.5%
Tampa-St. Petersburg-Clearwater, FL MSA  0.31.8%
Total Florida MSAs  7.48.3%
Atlanta-Sandy Springs-Roswell, GA MSA  3.84.1%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA  7.98.5%
Charleston-North Charleston, SC MSA  2.33.1%

 

Asset Quality

 

The allowance for loan losses is established and maintained at levels management deems adequate to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. In assessing the adequacy of the allowance for loan losses, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level. Our management believes that the allowance was adequate at June 30, 2016.2017.

 

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

 

   Percentage of loans 
   in each category 
June 30, 2016 Amount to total loans 
June 30, 2017 Amount Percentage of loans
in each category
to total loans
 (In Thousands)  (In Thousands)
Commercial, financial and agricultural $23,655   41.76% $29,127   39.74%
Real estate - construction  5,279   5.53%  5,138   7.40%
Real estate - mortgage  17,600   51.50%  20,392   51.83%
Consumer  464   1.21%  402   1.03%
Total $46,998   100.00% $55,059   100.00%

 

   Percentage of loans 
   in each category 
December 31, 2015 Amount to total loans 
December 31, 2016 Amount Percentage of loans
in each category
to total loans
 (In Thousands)  (In Thousands)
Commercial, financial and agricultural $21,495   41.75% $28,872   40.36%
Real estate - construction  5,432   5.77%  5,125   6.82%
Real estate - mortgage  16,061   51.17%  17,504   51.70%
Consumer  431   1.31%  392   1.12%
Total $43,419   100.00% $51,893   100.00%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased $2.7$5.9 million to $5.1$11.0 million at June 30, 2016,2017, compared to $7.8$16.9 million at December 31, 2015.2016. Of this total, nonaccrual loans were $4.7$10.0 million at June 30, 2016,2017, compared to $7.8$10.6 million at December 31, 2015,2016, a decrease of $3.1$0.6 million. There were seven loans 90 or more days past due and still accruing totaling $423,000 at June 30, 2016, compared toExcluding credit card accounts, there was one loan 90 or more days past due and still accruing totaling $1,000,$1.0 million, compared to two loans totaling $6.2 million at December 31, 2015.2016. Troubled Debt Restructurings (“TDR”) at June 30, 20162017 and December 31, 20152016 were $6.8$16.4 million and $7.7$7.3 million, respectively. One relationship totaling $12.7 million, which includes nine loans of various types, was newly classified as TDR for the three and six months ended June 30, 2017. There were no loans newly classified as TDR and two renewals of existing TDRs totaling $600,000 for the three and six months ended June 30, 2016. There were no loans newly classified as a TDRThese TDRs are the result of term extensions rather than interest rate reductions or renewalsforgiveness of existing TDRs for the three and six months ended June 30, 2015.debt.

 

 3029 

 

OREO and repossessed assets decreased to $4.3$3.9 million at June 30, 2016,2017, from $5.4$5.0 million at December 31, 2015.2016. The total number of OREO and repossessed asset accounts decreased to 109 at June 30, 2016,2017, compared to 1812 at December 31, 2015.2016. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 20162017 and 2015:2016:

 

 Six months ended June 30,  Six months ended June 30,
 2016 2015  2017 2016
 (In thousands)  (In thousands)
Balance at beginning of period $5,392  $6,840  $4,988  $5,392 
OREO acquired - Metro  -   2,348 
Transfers from loans and capitalized expenses  2,036   1,941   586   2,036 
Proceeds from sales  (1,575)  (2,665)  (1,547)  (1,575)
Internally financed sales  (1,157)  -   (185)  (1,157)
Write-downs / net loss on sales  (436)  (229)
Write-downs / net gain (loss) on sales  49   (436)
Balance at end of period $4,260  $8,235  $3,891  $4,260 

 

The following table summarizes our nonperforming assets and TDRs at June 30, 20162017 and December 31, 2015:2016:

 

 June 30, 2016  December 31, 2015 
    Number of     Number of  June 30, 2017 December 31, 2016
 Balance  Loans  Balance  Loans  Balance Number of
Loans		 Balance Number of
Loans
 (Dollar Amounts In Thousands)  (Dollar Amounts In Thousands)
Nonaccrual loans:                                
Commercial, financial and agricultural $331   4  $1,918   7  $4,417   8  $7,282   13 
Real estate - construction  3,622   8   4,000   7   2,377   3   3,268   5 
Real estate - mortgage:                                
Owner-occupied commercial  -   -   -   -   2,248   2   -   - 
1-4 family mortgage  328   4   198   2   921   1   74   1 
Other mortgage  422   2   1,619   5   -   -   -   - 
Total real estate - mortgage  750   6   1,817   7   3,169   3   74   1 
Consumer  27   1   31   1   -   -   -   - 
Total Nonaccrual loans: $4,730   19  $7,766   22  $9,963   14  $10,624   19 
                                
90+ days past due and accruing:                
90+ days past due and accruing:                
Commercial, financial and agricultural $-   -  $-   -  $968   1  $10   1 
Real estate - construction  -   -   -   -   -   -   -   - 
Real estate - mortgage:                                
Owner-occupied commercial  -   -   -   -   -   -   6,208   1 
1-4 family mortgage  250   2   -   -   -   -   -   - 
Other mortgage  162   1   -   -   -   -   -   - 
Total real estate - mortgage  412   3   -   -   -   -   6,208   1 
Consumer  11   4   1   1   48   14   45   10 
Total 90+ days past due and accruing: $423   7  $1   1  $1,016   15  $6,263   12 
                                
Total Nonperforming Loans: $5,153   26  $7,767   23  $10,979   29  $16,887   31 
                                
Plus: Other real estate owned and repossessions  4,260   10   5,392   18   3,891   9   4,988   12 
Total Nonperforming Assets $9,413   36  $13,159   41  $14,870   38  $21,875   43 
                                
Restructured accruing loans:                                
Commercial, financial and agricultural $6,523   8  $6,618   8  $7,205   5  $354   1 
Real estate - construction  -   -   -   -   997   1   -   - 
Real estate - mortgage:                                
Owner-occupied commercial  -   -   -   -   3,664   2   -   - 
1-4 family mortgage  -   -   -   -   850   1   -   - 
Other mortgage  230   1   253   1   -   -   204   1 
Total real estate - mortgage  230   1   253   1   4,514   3   204   1 
Consumer  -   -   -   -   -   -   -   - 
Total restructured accruing loans: $6,753   9  $6,871   9  $12,716   9  $558   2 
                                
Total Nonperforming assets and restructured accruing loans $16,166   45  $20,030   50  $27,586   47  $22,433   45 
                                
Ratios:                                
Nonperforming loans to total loans  0.11%      0.18%      0.21%      0.34%    
Nonperforming assets to total loans plus other real estate owned and repossessions  0.21%      0.31%      0.28%      0.44%    
Nonperforming assets plus restructured accruing loans to total loans plus                
other real estate owned and repossessions  0.36%      0.47%    
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions  0.52%      0.46%    

 

 3130 

 

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

 

Impaired Loans and Allowance for Loan Losses

 

As of June 30, 2016,2017, we had impaired loans of $45.0$51.0 million, inclusive of nonaccrual loans, an increase of $11.5$5.4 million from $33.5$45.6 million as of December 31, 2015.2016. This increase is attributable to $14.7 million of loans totaling $18.3 million newly classified as specifically impaired, partially offset by charge-offs totaling $4.7 million, net loan pay downs andof $3.4 million, loan classification upgrades of $3.7 million, loan charge-offs of $2.1$0.6 million and OREO transfers and repossessions of $1.0$0.6 million. We allocated $5.9$7.2 million of our allowance for loan losses at June 30, 20162017 to these impaired loans, an increasea decrease of $0.2$1.0 million compared to $5.7$8.2 million as of December 31, 2015.2016. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of impairment, if any, and subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

Of the $45.0$51.0 million of impaired loans reported as of June 30, 2016, $17.72017, $31.4 million were commercial, financial and agricultural loans, $5.0$3.4 million were real estate construction loans and $22.4$16.2 million were real estate mortgage loans.

 

Deposits

 

Total deposits increased $0.5 billion,decreased $25.5 million, or 11.9%0.5%, to $4.7$5.39 billion at June 30, 20162017 compared to $4.2$5.42 billion at December 31, 2015. We2016. This overall decrease is attributable to some large deposits moving out of the bank resulting from our refusal to increase rates paid on them. While we have experienced a decrease in our total deposits during the first half of 2017, we anticipate long-term sustainable growth in deposits through continued development of market share in our regions.

 

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

 

Other Borrowings

 

Our borrowings consist of federal funds purchased, subordinated notes payable and Federal Home Loan Bank advances. We had $423.4$300.2 million and $352.4$355.9 million at June 30, 20162017 and December 31, 2015,2016, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 0.64%1.11% for the quarter ended June 30, 2016.2017, which has increased during the past three quarters due to increases in the FRB’s targeted federal funds rate. Other borrowings consist of the following:

32

 

·$20.0 million of 5.50% Subordinated Notes due November 9, 2022, which were issued in a private placement in November 2012,
·$34.75 million of 5% Subordinated Notes due July 15, 2025, which were issued in a private placement in July 2015, and
·$800,000400,000 of principal reducing advances from the Federal Home Loan Bank of Atlanta, which have an interest rate of 0.75% and require quarterly principal payments of $100,000 until maturity on May 22, 2018.

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Liquidity

 

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

 

 The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At June 30, 2016,2017, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $708.8$549.7 million. Additionally, the Bank had additional borrowing availability of approximately $340.0$458.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We added a new line for $20.0 million during the second quarter of 2016. We believe these sources of funding are adequate to meet immediate anticipated funding needs. Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Other Borrowings”.

 

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

 

The following table reflects the contractual maturities of our term liabilities as of June 30, 2016.2017. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

 Payments due by Period 
     Over 1 - 3 Over 3 - 5    Payments due by Period
 Total 1 year or less years years Over 5 years  Total 1 year or less Over 1 - 3
years		 Over 3 - 5
years		 Over 5 years
 (In Thousands)  (In Thousands)
Contractual Obligations (1)                                        
                                        
Deposits without a stated maturity $4,166,813  $-  $-  $-  $-  $4,869,053  $-  $-  $-  $- 
Certificates of deposit (2)  500,982   291,789   151,291   57,545   357   525,757   284,730   157,765   81,335   1,927 
Federal funds purchased  420,430   420,430   -   -   -   300,226   300,226   -   -   - 
Subordinated debentures  55,450   400   400   -   54,650   55,075   400   -   -   54,675 
Operating lease commitments  19,257   3,533   6,505   4,319   4,900   18,677   3,843   6,394   4,107   4,333 
Total $5,162,932  $716,152  $158,196  $61,864  $59,907  $5,768,788  $589,199  $164,159  $85,442  $60,935 

 

(1)  Excludes interestinterest.

(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.

 

33

Capital Adequacy

 

As of June 30, 2016,2017, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of June 30, 2016.2017.

 

We issued subordinated notes payable in the aggregate amount of $34.75 million on July 15, 2015. The notes qualify as Tier 2 Capital. We used the proceeds from the issuance of the notes to redeem our Senior Non-Cumulative Perpetual Preferred Stock, Series A, issued to the United States Department of the Treasury on June 21, 2011.

In July 2013, the Federal Reserve announced its approval of a final rule to implement the regulatory capital reforms developed by the Basel Committee on Banking Supervision (“Basel III”), among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The new rules became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization will also be required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer will be required to consist solely of common equity Tier 1, and the buffer will apply to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, beginning January 1, 2016 and becoming fully effective on January 1, 2019, and will ultimately consist of an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets.

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The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of June 30, 2016,2017, December 31, 20152016 and June 30, 2015:2016:

 

              To Be Well Capitalized 
        For Capital Adequacy  Under Prompt Corrective 
  Actual  Purposes  Action Provisions 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars in thousands) 
As of June 30, 2016:   
CET 1 Capital to Risk-Weighted Assets:                        
Consolidated $469,101   9.83% $214,649   4.50%  N/A   N/A 
ServisFirst Bank  517,987   10.86%  214,615   4.50% $309,999   6.50%
Tier 1 Capital to Risk-Weighted Assets:                        
Consolidated  469,478   9.84%  286,199   6.00%  N/A   N/A 
ServisFirst Bank  518,364   10.87%  286,153   6.00%  381,538   8.00%
Total Capital to Risk-Weighted Assets:                        
Consolidated  571,627   11.98%  381,598   8.00%  N/A   N/A 
ServisFirst Bank  565,862   11.86%  381,538   8.00%  476,922   10.00 
Tier 1 Capital to Average Assets:                        
Consolidated  469,478   8.52%  220,506   4.00%  N/A   N/A 
ServisFirst Bank  518,364   9.40%  220,492   4.00%  275,615   5.00%
                         
As of December 31, 2015:                        
CET 1 Capital to Risk-Weighted Assets:                        
Consolidated $431,642   9.72% $199,836   4.50%  N/A   N/A 
ServisFirst Bank  439,279   9.89%  199,806   4.50% $288,608   6.50%
Tier 1 Capital to Risk-Weighted Assets:                        
Consolidated  432,019   9.73%  266,448   6.00%  N/A   N/A 
ServisFirst Bank  439,656   9.90%  266,407   6.00%  355,210   8.00%
Total Capital to Risk-Weighted Assets:                        
Consolidated  530,688   11.95%  355,264   8.00%  N/A   N/A 
ServisFirst Bank  483,575   10.89%  355,210   8.00%  444,012   10.00%
Tier 1 Capital to Average Assets:                        
Consolidated  432,019   8.55%  202,043   4.00%  N/A   N/A 
ServisFirst Bank  439,656   8.71%  202,023   4.00%  252,529   5.00%
                         
As of June 30, 2015:                        
CET 1 Capital to Risk-Weighted Assets:                        
Consolidated $393,735   9.60% $184,637   4.50%  N/A   N/A 
ServisFirst Bank  406,302   9.91%  184,569   4.50% $266,599   6.50%
Tier 1 Capital to Risk-Weighted Assets:                        
Consolidated  434,070   10.58%  246,182   6.00%  N/A   N/A 
ServisFirst Bank  406,679   9.92%  246,092   6.00%  328,122   8.00%
Total Capital to Risk-Weighted Assets:                        
Consolidated  493,909   12.04%  328,243   8.00%  N/A   N/A 
ServisFirst Bank  446,699   10.89%  328,122   8.00%  410,153   10.00%
Tier 1 Capital to Average Assets:                        
Consolidated  434,070   9.88%  175,725   4.00%  N/A   N/A 
ServisFirst Bank  406,679   9.26%  175,683   4.00%  219,604   5.00%

34

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

 

Off-Balance Sheet Arrangements

 

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

 

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of June 30, 2016,2017, we have reserved $500,000 for losses on such off-balance sheet arrangements consistent with guidance in the Federal Reserve Bank’sFRB’s Interagency Policy Statement SR 06-17.

33

 

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers. We had a reserve of $368,000 as of June 30, 20162017 and $91,000 as of December 31, 20152016 for the settlement of any repurchase demands by investors. In December 2014, we repurchased one loan with a principal balance of $292,000 from an investor due to a loan-to-value (“LTV”) exception. We resold this loan during the second quarter of 2016, and such sales proceeds were posted back into this reserve account.

 

Financial instruments whose contract amounts represent credit risk at June 30, 20162017 are as follows:

 

 June 30, 2016  June 30, 2017
 (In Thousands)  (In Thousands)
Commitments to extend credit $1,586,425  $1,889,718 
Credit card arrangements  88,678   88,337 
Standby letters of credit  43,900   39,710 
 $1,719,003  $2,017,765 

 

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

 

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

 

35

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

 

Results of Operations

 

Summary of Net Income

 

Net income and net income available to common stockholders for the three months ended June 30, 20162017 was $18.9$24.2 million and $24.1 million, respectively, compared to net income and net income available to common stockholders of $14.5$18.9 million for the three months ended June 30, 2015.2016. Net income and net income available to common stockholders for the six months ended June 30, 20162017 was $38.8$46.7 million compared to net income and net income available to common stockholders of $27.5$38.8 million for the six months ended June 30, 2015. Core net income for the six months ended June 30, 2015 was $29.3 million. Core net income excludes the impact of non-routine expenses during the comparative periods, as more fully discussed in “Noninterest Expense” below. For a reconciliation of these non-GAAP measures to the most comparable GAAP measure, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” below.2016. The increase in net income for the three months ended June 30, 2017 over the same period in 2016 compared to 2015 was primarily the result of an $5.7attributable to a $9.7 million increase in net interest income as a result ofresulting from growth in average earning assets offset byand a $1.3$1.0 million increase in noninterest expense. We recognized a $1.3 millionnon-interest income, led by increased credit to our income tax expense during the three months ended June 30, 2016 as a result of early adopting ASU 2016-09. See further details of the adoption of this new accounting rule in “Income Tax Expense” below.card income. The increase in net income for the six months ended June 30, 20162017 compared to 20152016 was primarily the result of a $12.9$17.5 million increase in net interest income as a result ofresulting from growth in average earning assets and a $3.6 million reduction in our income tax expense as a result of adopting ASU 2016-09, offset by a $2.0$2.1 million increase in noninterest expense.non-interest income, led by increased credit card income. Increases in non-interest expense of $2.4 million and $4.3 million, respectively, for the three and six months ended June 30, 2017 compared to 2016 partially offset increases in income.

 

Basic and diluted net income per common share were $0.72$0.46 and $0.71,$0.45, respectively, for the three months ended June 30, 2016,2017, compared to $0.56$0.36 and $0.54,$0.36, respectively, for the corresponding period in 2015.2016. Basic and diluted net income per common share were $1.48$0.88 and $1.46,$0.86, respectively, for the six months ended June 30, 2016,2017, compared to $1.07$0.74 and $1.04,$0.73, respectively, for the corresponding period in 2015. Core basic and diluted earnings per share were $1.14 and $1.10, respectively, for the six months ended June 30, 2015.2016. Return on average assets for the three and six months ended June 30, 20162017 was 1.37%1.55% and 1.45%1.50%, respectively, compared to 1.31%1.37% and 1.29%1.45%, respectively, for the corresponding periods in 2015. Core return on average assets for the six months ended June 30, 2015 was 1.37%.2016. Return on average common stockholders’ equity for the three and six months ended June 30, 20162017 was 17.36% and 17.23% compared to 15.79% and 16.57% compared to 14.06% and 13.81%, respectively, for the corresponding periods in 2015. Core return on average common stockholders’ equity for the six months ended June 30, 2015 was 14.70%.2016.

34

 

Net Interest Income

 

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

 

Taxable-equivalent net interest income increased $5.7$9.7 million, or 14.0%20.9%, to $46.4$56.1 million for the three months ended June 30, 20162017 compared to $40.7$46.4 million for the corresponding period in 2015,2016, and increased $12.9$17.5 million, or 16.5%19.0%, to $91.1$108.6 million for the six months ended June 30, 20162017 compared to $78.2$91.9 million for the corresponding period in 2015.2016. This increase was primarily attributable to growth in average earning assets, which increased $1.1 billion,$655.1 million, or 26.2%12.3%, from the second quarter of 20152016 to the second quarter of 2016,2017, and $1.1 billion,$832.0 million, or 26.8%16.1%, from the six months ended June 30, 20152016 to the same period in 2016.2017. The taxable-equivalent yield on interest-earning assets decreasedincreased to 3.97%4.30% for the three months ended June 30, 20162017 from 4.26%3.97% for the corresponding period in 2015,2016, and decreasedincreased to 4.00%4.17% for the six months ended June 30, 20162017 from 4.22%4.00% for the corresponding period in 2015.2016. The yield on loans for the three months ended June 30, 20162017 was 4.47%4.60% compared to 4.51%4.47% for the corresponding period in 2015,2016, and 4.48%4.52% compared to 4.49%4.48% for the six months ended June 30, 20162017 and June 30, 2015,2016, respectively. Loan fees included in the yield calculation increased to $530,000 for the three months ended June 30, 2016 from $292,000 for the corresponding period in 2015, and increased to $939,000 for the six months ended June 30, 2016 from $510,000 for the corresponding period in 2015. The cost of total interest-bearing liabilities increased to 0.64%0.74% for the three months ended June 30, 20162017 compared to 0.53%0.64% for the corresponding period in 2015,2016, and increased to 0.63%0.71% for the six months ended June 30, 20162017 from 0.52%0.63% for the corresponding period in 2015. Increased balances in federal funds purchased from banks who are customers of our correspondent banking division contributed to this increase in cost of funds. We introduced a new 30-day term federal funds product which has a higher rate than the over-night rate we have historically offered.2016. Net interest margin for the three months ended June 30, 20162017 was 3.51%3.77% compared to 3.88%3.51% for the corresponding period in 2015,2016, and 3.54%3.65% for the six months ended June 30, 20162017 compared to 3.84%3.54% for the corresponding period in 2015.2016.

36

 

The following tables show, for the three and six months ended June 30, 20162017 and June 30, 2015,2016, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

 

 3735 

 

Average Consolidated Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended June 30, 2016

(In thousands, except Average Yields and 2015

(Dollar Amounts In Thousands)Rates)

                                           

 2016 2015  2017 2016
   Interest Average   Interest Average    Interest Average   Interest Average
 Average Earned / Yield / Average Earned / Yield /  Average Earned / Yield / Average Earned / Yield /
 Balance Paid Rate Balance Paid Rate  Balance Paid Rate Balance Paid Rate
Assets:                                                
Interest-earning assets:                                                
Loans, net of unearned income (1)(2)                                                
Taxable $4,406,107  $49,015   4.47% $3,731,699  $41,949   4.51% $5,192,812  $59,508   4.60% $4,406,107  $49,015   4.47%
Tax-exempt (2)  16,315   184   4.51   10,005   125   5.00 
Tax-exempt (3)  41,143   505   4.92   16,315   184   4.54 
Total loans, net of unearned income  4,422,422   49,199   4.47   3,741,704   42,074   4.51   5,233,955   60,013   4.60   4,422,422   49,199   4.47 
Mortgage loans held for sale  7,323   66   3.62   12,718   70   2.21   5,958   58   3.90   7,323   66   3.62 
Investment securities:                                                
Taxable  208,113   1,238   2.38   193,848   1,105   2.28   389,505   2,274   2.34   208,113   1,238   2.38 
Tax-exempt (2)  135,954   1,269   3.73   136,104   1,337   3.93 
Tax-exempt (3)  133,590   1,129   3.38   135,954   1,269   3.73 
Total investment securities (3)(4)  344,067   2,507   2.91   329,952   2,442   2.96   523,095   3,403   2.60   344,067   2,507   2.91 
Federal funds sold  144,206   210   0.59   26,638   24   0.36   98,598   287   1.17   144,206   210   0.59 
Restricted equity securities  5,659   51   3.62   4,953   39   3.16   1,030   27   10.51   5,659   51   3.62 
Interest-bearing balances with banks  393,782   507   0.52   97,482   62   0.26   109,909   286   1.04   393,782   507   0.52 
Total interest-earning assets $5,317,459  $52,540   3.97% $4,213,447  $44,711   4.26% $5,972,545  $64,074   4.30% $5,317,459  $52,540   3.97%
Non-interest-earning assets:                                                
Cash and due from banks  65,318           58,347           68,894           65,318         
Net fixed assets and equipment  23,241           16,323           49,813           23,241         
Allowance for loan losses, accrued interest and other assets  127,640           129,233           143,286           127,640         
Total assets $5,533,658           4,417,350          $6,234,538           5,533,658         
                                                
Liabilities and stockholders' equity:                                                
Interest-bearing liabilities:                                                
Interest-bearing demand deposits $691,776  $614   0.36% $579,650  $397   0.27% $779,916  $767   0.39% $691,776  $614   0.36%
Savings deposits  41,546   31   0.30   37,697   26   0.28   48,150   36   0.30   41,546   31   0.30 
Money market accounts  2,105,420   2,736   0.52   1,653,708   1,837   0.45   2,567,817   4,097   0.64   2,105,420   2,736   0.52 
Time deposits(5)  498,151   1,252   1.01   480,140   1,252   1.05   537,220   1,421   1.06   498,151   1,252   1.01 
Total interest-bearing deposits  3,336,893   4,633   0.56   2,751,195   3,512   0.51   3,933,103   6,321   0.64   3,336,893   4,633   0.56 
Federal funds purchased  505,076   808   0.64   275,888   200   0.29   336,344   933   1.11   505,076   808   0.64 
Other borrowings  55,521   718   5.20   21,238   286   5.40   55,130   717   5.22   55,521   718   5.20 
Total interest-bearing liabilities $3,897,490  $6,159   0.64% $3,048,321  $3,998   0.53% $4,324,577  $7,971   0.74% $3,897,490  $6,159   0.64%
Non-interest-bearing liabilities:                                                
Non-interest-bearing demand deposits  1,142,541           908,020         
Non-interest-bearing demand                        
deposits  1,338,514           1,142,541         
Other liabilities  13,301           11,793           13,739           13,301         
Stockholders' equity  475,917           444,302           556,521           475,917         
Unrealized gains on securities and derivatives  4,409           4,914           1,187           4,409         
Total liabilities and stockholders' equity $5,533,658          $4,417,350          $6,234,538          $5,533,658         
Net interest income     $46,381          $40,713          $56,103          $46,381     
Net interest spread          3.33%          3.73%          3.56%          3.33%
Net interest margin          3.51%          3.88%          3.77%          3.51%

 

(1)Non-accrual loans are included in average loan balances in all periods.  Loan fees of $530,000$851,000 and $292,000$530,000 are included in interest income in 20162017 and 2015,2016, respectively.
(2)(2)Accretion on acquired loan discounts of $124,000 and $334,000 are included in interest income in 2017 and 2016, respectively.
(3)Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(4)(3)Net unrealizedUnrealized gains of $6,772,000$1,824,000 and $7,009,000$6,772,000 are excluded from the yield calculation in 2017 and 2016, respectively.
(5)Accretion on acquired CD premiums of $0 and 2015,$48,000 are included in interest in 2017 and 2016, respectively.

 3836 

 

  For the Three Months Ended June 30, 
  2016 Compared to 2015 
  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 $7,395  $(329) $7,066 
Tax-exempt  72   (13)  59 
Total loans, net of unearned income  7,467   (342)  7,125 
Mortgages held for sale  (38)  34   (4)
Debt securities:  -   -   - 
Taxable  82   51   133 
Tax-exempt  (1)  (67)  (68)
Total debt securities  81   (16)  65 
Federal funds sold  163   23   186 
Restricted equity securities  6   6   12 
Interest-bearing balances with banks  332   113   445 
Total interest-earning assets  8,011   (182)  7,829 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  85   132   217 
Savings  3   2   5 
Money market accounts  550   349   899 
Time deposits  44   (44)  - 
Total interest-bearing deposits  682   439   1,121 
Federal funds purchased  247   361   608 
Other borrowed funds  443   (11)  432 
Total interest-bearing liabilities  1,372   789   2,161 
Increase in net interest income $6,639  $(971) $5,668 

  For the Three Months Ended June 30,
  2017 Compared to 2016 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 $9,100  $1,393  $10,493 
Tax-exempt  304   17   321 
Total loans, net of unearned income  9,404   1,269   10,814 
Mortgages held for sale  (13)  5   (8)
Debt securities:          
Taxable  1,062   (26)  1,036 
Tax-exempt  (21)  (119)  (140)
Total debt securities  1,041   (145)  896 
Federal funds sold  (83)  160   77 
Restricted equity securities  (66)  42   (24)
Interest-bearing balances with banks  (520)  299   (221)
Total interest-earning assets  9,763   1,771   11,534 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  83   70   153 
Savings  5   -   5 
Money market accounts  673   688   1,361 
Time deposits  104   65   169 
Total interest-bearing deposits  865   823   1,688 
Federal funds purchased  (332)  457   125 
Other borrowed funds  (4)  3   (1)
Total interest-bearing liabilities  529   1,283   1,812 
Increase in net interest income $9,234  $488  $9,722 

 

Our growth in loans, and non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change. However, we have experienced an unfavorableAlso, the recent increases in the Federal Reserve Bank’s target federal funds rate has contributed to a favorable variance relating to the interest rate component because yields on loans have remained flat whileincreased more than rates paid on deposits have increased. Accordingly, the prolonged low interest rate environment has resulted in a compression of the net interest margin percentage.deposits.

 

 3937 

 

Average Consolidated Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Six Months Ended June 30, 2016

(In thousands, except Average Yields and 2015

(Dollar Amounts In Thousands)Rates)

                                           

 2016 2015  2017 2016
   Interest     Interest      Interest     Interest  
 Average Earned / Average Average Earned / Average  Average Earned / Average Average Earned / Average
 Balance Paid Yield / Rate Balance Paid Yield / Rate  Balance Paid Yield / Rate Balance Paid Yield / Rate
Assets:                                                
Interest-earning assets:                                                
Loans, net of unearned income (1)(2)                                                
Taxable $4,318,082  $96,096   4.48% $3,612,691  $80,472   4.49% $5,085,468  $114,791   4.55% $4,318,082  $96,096   4.48%
Tax-exempt (2)  13,298   327   4.92   10,092   252   4.99 
Tax-exempt (3)  34,271   822   4.80   13,298   327   4.95 
Total loans, net of unearned income  4,331,380   96,423   4.48   3,622,783   80,724   4.49   5,119,739   115,613   4.52   4,331,380   96,423   4.48 
Mortgage loans held for sale  6,704   136   4.08   9,817   106   2.18   5,798   115   4.00   6,704   136   4.08 
Investment securities:                                                
Taxable  214,918   2,505   2.33   195,678   2,231   2.28   378,985   4,361   2.30   214,918   2,505   2.33 
Tax-exempt (2)  136,858   2,618   3.83   133,068   2,638   3.96 
Tax-exempt (3)  133,087   2,274   3.42   136,858   2,618   3.83 
Total investment securities (3)(4)  351,776   5,123   2.91   328,746   4,869   2.96   512,072   6,635   2.59   351,776   5,123   2.91 
Federal funds sold  96,298   283   0.59   33,003   49   0.30   166,154   806   0.98   96,298   283   0.59 
Restricted equity securities  5,310   98   3.71   4,638   74   3.22   1,030   31   6.07   5,310   98   3.71 
Interest-bearing balances with banks  383,548   974   0.51   109,881   152   0.28   202,265   872   0.87   383,548   974   0.51 
Total interest-earning assets $5,175,016  $103,037   4.00% $4,108,868  $85,974   4.22% $6,007,058  $124,072   4.17% $5,175,016  $103,037   4.00%
Non-interest-earning assets:                                                
Cash and due from banks  63,460           58,762           64,321           63,460         
Net fixed assets and equipment  22,132           15,091           47,290           22,132         
Allowance for loan losses, accrued interest and other assets  127,066           125,057           140,796           127,066         
Total assets $5,387,674          $4,307,778          $6,259,465          $5,387,674         
                                                
Liabilities and stockholders' equity:                                                
Interest-bearing liabilities:                                                
Interest-bearing demand deposits $678,407  $1,194   0.35% $566,682  $762   0.27% $784,569  $1,499   0.39% $678,407  $1,194   0.35%
Savings deposits  41,301   61   0.30   36,917   52   0.28   49,299   76   0.31   41,301   61   0.30 
Money market accounts  2,036,579   5,226   0.52   1,636,426   3,619   0.45   2,630,672   7,973   0.61   2,036,579   5,226   0.52 
Time deposits(5)  502,878   2,513   1.00   463,206   2,349   1.02   533,630   2,755   1.04   502,878   2,513   1.00 
Total interest-bearing deposits  3,259,165   8,994   0.55   2,703,231   6,782   0.51   3,998,170   12,303   0.62   3,259,165   8,994   0.55 
Federal funds purchased  479,187   1,512   0.63   273,233   391   0.29   347,981   1,699   0.98   479,187   1,512   0.63 
Other borrowings  55,576   1,435   5.19   21,050   571   5.47   55,184   1,434   5.24   55,576   1,435   5.19 
Total interest-bearing liabilities $3,793,928  $11,941   0.63% $2,997,514  $7,744   0.52% $4,401,335  $15,436   0.71% $3,793,928  $11,941   0.63%
Non-interest-bearing liabilities:                                                
Non-interest-bearing demand deposits  1,110,076           860,908           1,297,578           1,110,076         
Other liabilities  12,747           10,720           14,417           12,747         
Stockholders' equity  466,569           433,633           545,936           466,569         
Unrealized gains on securities and derivatives  4,354           5,003           199           4,354         
Total liabilities and stockholders' equity $5,387,674          $4,307,778          $6,259,465          $5,387,674         
Net interest income     $91,096          $78,230          $108,636          $91,096     
Net interest spread          3.37%          3.70%          3.46%          3.37%
Net interest margin          3.54%          3.84%          3.65%          3.54%
                        

 

(1)Non-accrual loans are included in average loan balances in all periods.  Loan fees of $939,000$1,626,000 and $510,000$939,000 are included in interest income in 20162017 and 2015,2016, respectively.
(2)(2)Accretion on acquired loan discounts of $267,000 and $624,000 are included in interest income in 2017 and 2016, respectively.
(3)Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(4)(3)Net unrealizedUnrealized gains of $6,694,000$304,000 and $6,993,000$6,694,000 are excluded from the yield calculation in 2017 and 2016, respectively.
(5)Accretion on acquired CD premiums of $32,000 and 2015,$140,000 are included in interest in 2017 and 2016, respectively.

 4038 

 

  For the Six Months Ended June 30, 
  2016 Compared to 2015 
  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 $15,919  $(295) $15,624 
Tax-exempt  80   (5)  75 
Total loans, net of unearned income  15,999   (300)  15,699 
Mortgages held for sale  (42)  72   30 
Debt securities:            
Taxable  228   46   274 
Tax-exempt  77   (97)  (20)
Total debt securities  305   (51)  254 
Federal funds sold  155   79   234 
Restricted equity securities  12   12   24 
Interest-bearing balances with banks  616   206   822 
Total interest-earning assets  17,045   18   17,063 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  170   262   432 
Savings  7   2   9 
Money market accounts  978   629   1,607 
Time deposits  204   (40)  164 
Total interest-bearing deposits  1,359   853   2,212 
Federal funds purchased  433   688   1,121 
Other borrowed funds  894   (30)  864 
Total interest-bearing liabilities  2,686   1,511   4,197 
Increase in net interest income $14,359  $(1,493) $12,866 

  For the Six Months Ended June 30,
  2017 Compared to 2016 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 $17,054  $1,641  $18,695 
Tax-exempt  502   (7)  495 
Total loans, net of unearned income  17,556   1,634   19,190 
Mortgages held for sale  (18)  (3)  (21)
Debt securities:            
Taxable  1,881   (25)  1,856 
Tax-exempt  (72)  (272)  (344)
Total debt securities  1,809   (297)  1,512 
Federal funds sold  275   248   523 
Restricted equity securities  (107)  40   (67)
Interest-bearing balances with banks  (590)  488   (102)
Total interest-earning assets  18,925   2,110   21,035 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  195   110   305 
Savings  12   3   15 
Money market accounts  1,683   1,064   2,747 
Time deposits  152   90   242 
Total interest-bearing deposits  2,042   1,267   3,309 
Federal funds purchased  (490)  677   187 
Other borrowed funds  (12)  11   (1)
Total interest-bearing liabilities  1,540   1,955   3,495 
Increase in net interest income $17,385  $155  $17,540 

 

Our growth in loans, and non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change. However, we have experienced an unfavorableAlso, the recent increases in the Federal Reserve Bank’s target federal funds rate has contributed to a favorable variance relating to the interest rate component because yields on loans have remained flat while rates paid on deposits have increased. Accordingly, the prolonged low interest rate environment has resulted in a compression of the net interest margin percentage. Growth in non-interest bearing deposits has also contributed to our growth in net interest income. Maintenance of higher levels of liquidity has also decreased the net interest margin in the 2016 period compared to 2015.component.

 

Provision for Loan Losses

 

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At June 30, 2016,2017, total loans rated Special Mention, Substandard, and Doubtful were $129.5$122.6 million, or 2.9%2.3% of total loans, compared to $117.0$128.8 million, or 2.8%2.6% of total loans, at December 31, 2015.2016. Impaired loans are reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

 

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The provision for loan losses was $4.4 million for the three months ended June 30, 2017, an increase of $0.6 million from $3.8 million for the three months ended June 30, 2016, a decrease of $0.3 million from $4.1and was $9.4 million for the threesix months ended June 30, 2015, and was2017, a $3.5 million increase compared to $5.9 million for the six months ended June 30, 2016, a $0.6 million decrease, compared to $6.5 million for the six months ended June 30, 2015.2016. Nonperforming loans decreased to $11.0 million, or 0.21% of total loans, at June 30, 2017 from $16.9 million, or 0.34% of total loans, at December 31, 2016, but were higher than $5.2 million, or 0.11% of total loans, at June 30, 2016 from $7.82016. Impaired loans increased to $51.0 million, or 0.18%0.94% of total loans, at June 30, 2017, compared to $45.6 million, or 0.93% of total loans, at December 31, 2015, and were also lower than $8.7 million, or 0.22% of total loans, at June 30, 2015. Impaired loans increased to $45.0 million, or 0.99% of total loans, at June 30, 2016, compared to $33.5 million, or 0.80% of total loans, at December 31, 2015.2016. The allowance for loan losses totaled $47.0$55.1 million, or 1.04%1.03% of total loans, net of unearned income, at June 30, 2016,2017, compared to $43.4$51.9 million, or 1.03%1.06% of loans, net of unearned income, at December 31, 2015.2016.

39

 

Noninterest Income

 

Noninterest income totaled $3.8$4.8 million for the three months ended June 30, 2016,2017, an increase of $0.4$1.0 million, or 11.7%12.2%, compared to the corresponding period in 2015,2016, and totaled $7.3$9.4 million for the six months ended June 30, 2016,2017, an increase of $0.9$2.1 million, or 14.1%28.4%, compared to the corresponding period in 2015. Service charges on deposit accounts were relatively flat at $1.32016. Mortgage banking income increased $0.2 million, or 18.1%, to $1.1 million for the three months ended June 30, 2017 compared to $0.9 million for the same period in 2016, and 2015, and only increased by $0.1$0.4 million, or 25.1%, to $2.6$2.0 million for the six months ended June 30, 20162017 compared to $2.5$1.6 million for the same period in 2015. Mortgage banking2016, resulting from increases in average profit margins per loan originated. Credit card income increased $0.2 million, or 28.6%, to $0.9$0.6 million for the three months ended June 30, 2016 compared to $0.72017 from $0.6 million for the same period in 2015,2016, and increased $0.4 million, or 33.3%, to $1.6$2.4 million for the six months ended June 30, 20162017 compared to $1.2$1.0 million for the same period in 2015. This increase resulted2016. The number of credit card accounts increased 22% from improved operations, translatingJune 30, 2016 to increased net gains2017 and the volume of purchases on sales. Income from credit cards increased to $0.7 million for127% from the three monthsquarter ended June 30, 2016 from $0.5 million forto the same period in 2015, and increased to $1.2 million for the six monthsquarter ended June 30, 2016 compared to $0.8 million for the same period in 2015.2017.

 

Noninterest Expense

 

Noninterest expense totaled $19.5$21.9 million for the three months ended June 30, 2016,2017, an increase of $1.4$2.4 million, or 7.7%12.2%, compared to $18.1$19.5 million for the same period in 2015,2016, and totaled $38.8$43.1 million for the six months ended June 30, 2016,2017, an increase of $2.1$4.3 million, or 5.7%11.2%, compared to $36.7$38.8 million for the same period in 2015.2016.

 

Details of expenses are as follows:

 

·Salary and benefit expense increased $0.3$1.3 million, or 2.9%12.1%, to $10.7$12.0 million for the three months ended June 30, 20162017 from $10.4$10.7 million for the same period in 2015,2016, and increased $2.4$1.9 million, or 12.2%8.9%, to $21.8$23.7 million for the six months ended June 30, 20162017 from $19.4$21.8 million for the same period in 2015. Twelve new sales officers were added during the six months ended2016. Total employees increased from 417 as of June 30, 2016 with sevento 433 as of these comprising our team in the Tampa Bay area of Florida, our newest region. We had 408 full-time equivalent employees at June 30, 2016 compared to 371 at June 30, 2015, a 10.0% increase.2017, or 3.8%.

 

·Occupancy expense increased $0.4$0.2 million, or 23.8%12.0%, to $2.0$2.3 million for the three months ended June 30, 20162017 from $1.6$2.0 million for the corresponding period in 2015,2016, and increased $0.7$0.5 million, or 21.6%12.4%, to $4.0$4.5 million from $3.3$4.0 million for the six months ended June 30, 20162017 compared to the corresponding period in 2015. New2016. We leased a new main offices were openedoffice building in our Tampa Bay, Florida region starting in early 2017 which was a replacement of our previous loan production office in Pasco County. We also leased a new main office in our Mobile, Alabama Charleston, South Carolina and Nashville, Tennessee regions during the first quarterregion starting in late 2016, a replacement of 2016. Also, we accelerated depreciation of leasehold improvements for our headquarters building in Birmingham, Alabama to coincidea previous smaller location with the date we move into our new headquarters building, which we anticipate will be in the second half of 2017.less visibility.

 

·Federal deposit insurance and other regulatory assessments increased $0.2$0.3 million to $0.8$1.1 million for the three months ended June 30, 20162017 compared to the same period in 2015,2016, and increased $0.3$0.5 million to $1.6$2.1 million for the six months ended June 30, 20162017 compared to the same period in 2015.2016. This increase is driven by asset growth in deposits.

·Expenses on other real estate owned decreased from $0.3 million for the three months ended June 30, 2015 to less than $0.1 million for the three months ended June 30, 2016.

·Merger expenses related to the acquisition of Metroand a change in the firstassessment rate calculation enacted by the FDIC starting in the third quarter of 2015 were $2.1 million.2016.

 

·Other operating expenses increased $0.4$0.7 million to $4.9$5.6 million for the three months ended June 30, 20162017 compared to the same period in 2015,2016, and increased $0.3$1.9 million to $9.2$11.1 million for the six months ended June 30, 20162017 compared to the same period in 2015. Increases2016. State sales taxes paid for the construction of our new headquarters building in Federal Reserve Bank service charges ofBirmingham, Alabama contributed $0.1 million and $0.3 million of this increase for the three and six month comparative periods. Credit card processing expenses increased by $0.2 million and $0.3 million for the three and six months ended June 30, 2016 when compared to the corresponding periods in 2015 are the result of increased clearing services for correspondent bank clients. Expenses relating to our growth in loans and expansion into new regions also contributed to the increased other operating expenses in the 2016month comparative periods. During the first quarter of 2015, we recognized $0.5 million in other expense as an initial funding of reserves for unfunded loan commitments. Without this one-time initial funding of reserves, other operating expenses would have increased by $0.8 million, or 9.5% from the six months ended June 30, 2015 to the same period this year.

 

 4240 

 

The following table presents our non-interest income and non-interest expense for the three and six month periods ending June 30, 20162017 compared to the same periods in 2015.2016.

 

 Three Months Ended June 30,     Six Months Ended June 30,      Three Months Ended
June 30,		     Six Months Ended
June 30,		    
 2016 2015 $ change % change 2016 2015 $ change % change  2017 2016 $ change % change 2017 2016 $ change % change
Non-interest income:                                                                
Service charges on deposit accounts $1,306  $1,276  $30   2.4% $2,613  $2,483  $130   5.2% $1,382  $1,306  $76   5.8% $2,736  $2,613  $123   4.7%
Mortgage banking  901   735   166   22.6%  1,569   1,189   380   32.0%  1,064   901   163   18.1%  1,963   1,569   394   25.1%
Securities (losses) gains  (3)  -   (3)  NM   (3)  29   (32)  NM 
Credit card income  1,189   572   617   107.9%  2,368   1,041   1,327   127.5%
Securities gains  -   (3)  3   NM   -   (3)  3   NM 
Increase in cash surrender value life insurance  655   660   (5)  (0.8)%  1,279   1,308   (29)  (2.2)%  785   655   130   19.8%  1,509   1,279   230   18.0%
Other operating income  988   759   229   30.2%  1,824   1,355   469   34.6%  385   416   (31)  (7.5)%  775   783   (8)  (1.0)%
Total non-interest income $3,847  $3,430  $417   12.2% $7,282  $6,364  $918   14.4% $4,805  $3,847  $958   24.9% $9,351  $7,282  $2,069   28.4%
                                                                
Non-interest expense:                                                                
Salaries and employee benefits $10,733  $10,426  $307   2.9% $21,800  $19,434  $2,366   12.2%  12,031   10,733   1,298   12.1%  23,744   21,800   1,944   8.9%
Equipment and occupancy expense  2,023   1,634   389   23.8%  4,008   3,295   713   21.6%  2,265   2,023   242   12.0%  4,505   4,008   497   12.4%
Professional services  999   665   334   50.2%  1,737   1,233   504   40.9%  808   999   (191)  (19.1)%  1,579   1,737   (158)  (9.1)%
FDIC and other regulatory assessments  803   626   177   28.3%  1,553   1,246   307   24.6%  1,081   803   278   34.6%  2,078   1,553   525   33.8%
OREO expense  41   289   (248)  (85.8)%  490   503   (13)  (2.6)%  56   41   15   36.6%  132   490   (358)  (73.1)%
Merger expense  -   -   -   NM   -   2,096   (2,096)  NM 
Other operating expense  4,905   4,498   407   9.0%  9,206   8,939   267   3.0%  5,634   4,905   729   14.9%  11,104   9,206   1,898   20.6%
Total non-interest expense $19,504  $18,138  $1,366   7.5% $38,794  $36,746  $2,048   5.6% $21,875  $19,504  $2,371   12.2% $43,142  $38,794  $4,348   11.2%

 

Income Tax Expense

 

Income tax expense was $7.6$10.0 million for the three months ended June 30, 2016 compared to $7.02017 versus $7.6 million for the same period in 2015,2016, and was $13.9$17.8 million for the six months ended June 30, 20162017 compared to $12.9$13.9 million for the same period in 2015.2016. Our effective tax rate for the three and six months ended June 30, 20162017 was 28.59%29.2% and 26.31%27.6%, respectively, compared to 32.52%28.6% and 31.87%, respectively,26.3% for the corresponding periods in 2015. In the second quarter of 2016, we early adopted the amendments in Accounting Standards Update 2016-09.respectively. We recognized excess tax benefits as a credit to ourreduction in provision for income tax expensetaxes resulting from the exercise and vesting of stock options and restricted stock of $1.3 million in the second quarter of 2016 and retrospectively recognized excess tax benefits from the exercise and vesting of stock options and restricted stock during the three and six months ended June 30, 2017 of $2.3$1.4 million inand $3.5 million, respectively, compared to $1.2 million and $3.5 million during the first quarter of 2016. Previously under generally accepted accounting principles, such credits were reflected within additional paid-in capital.and six months ended June 30, 2016, respectively. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance and incentive stock option expenses.insurance.

 

We own real estate investment trusts for the purpose of holding and managing participations in residential mortgages and commercial real estate loans originated by the Bank. The trusts are majority-ownedwholly-owned subsidiaries of a trust holding company, which in turn is aan 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.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

As discussed in more detail in the section titled “Noninterest Expense,” we recorded expenses of $2.1 million for the first quarter of 2015 related to the acquisition of Metro and the merger of Metro Bank with and into the Bank, and recorded an expense of $0.5 million resulting from the initial funding of reserves for unfunded loan commitments as of March 31, 2015, consistent with guidance provided in the Federal Reserve Bank’s Inter-agency Policy Statement SR 06-17. The non-GAAP financial measures included in this quarterly report on Form 10-Q of our results for the six months ended June 30, 2015 are “core net income,” “core net income available to common stockholders,” “core diluted earnings per share,” “core return on average assets” and “core return on average common stockholders’ equity.” Each of these five core financial measures excludes the impact of the merger expenses and the initial funding of the reserve for unfunded loan commitments. None of the other periods included in this quarterly report on Form 10-Q are affected by such non-routine expenses.

43

“Core net income” is defined as net income, adjusted by the net effect of the non-routine expense.

“Core net income available to common stockholders” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense.

“Core diluted earnings per share” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense, divided by weighted average diluted shares outstanding.

“Core return on average assets” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average total assets.

“Core return of average common stockholders’ equity” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average common stockholders’ equity.

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that these non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies, including those in our industry, use. The following reconciliation table provides a more detailed analysis of the non-GAAP financial measures as of and for the six month period ended June 30, 2015. Dollars are in thousands, except share and per share data.

  For the Six Months
Ended June 30,
2015		 
Return on average assets - GAAP  1.29%
Net income - GAAP $27,524 
Adjustments:    
Merger expenses - Metro Bancshares, Inc.  2,096 
Initial reserve for unfunded loan commitments  500 
Tax (benefit) of adjustments  (829)
Core net income - non-GAAP $29,291 
Average assets - GAAP $4,307,778 
Core return on average assets - non-GAAP  1.37%
     
Return on average common stockholders' equity - GAAP  13.81%
Net income available to common stockholders - GAAP $27,301 
Adjustments:    
Merger expenses - Metro Bancshares, Inc.  2,096 
Initial reserve for unfunded loan commitments  500 
Tax (benefit) of adjustments  (829)
Core net income available to common stockholders - non-GAAP $29,068 
Average common stockholders' equity - GAAP $398,678 
Core return on average common stockholders' equity - non-GAAP  14.70%
     
Basic earnings per common share  - GAAP  1.07%
Weighted average common shares outstanding, basic - GAAP  25,507,396 
Core basic earnings per common share  - non-GAAP  1.14%
     
Diluted earnings per common share - GAAP  1.04%
Weighted average common shares outstanding, diluted - GAAP  26,332,527 
Core diluted earnings per common share - non-GAAP  1.10%

44

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap”, which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2015,2016, and there are no significant changes to our sensitivity to changes in interest rates since December 31, 20152016 as disclosed in our Annual Report on Form 10-K.

41

 

ITEM 4. CONTROLS AND PROCEDURES

 

CEO and CFO Certification.

 

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

 

Evaluation of Disclosure Controls and Procedures.


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


We conducted an evaluation (the "Evaluation") of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of June 30, 2016.2017. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2016,2017, 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.

 

45

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. We areManagement 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, 2015, and there has been no material change in any matter described therein.proceedings.

 

ITEM 1A. RISK FACTORS

 

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2016, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in the Form 10-K. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part 1, Item 2 above.

 

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

 

On May 13, 2014, the Company’s registration statement on Form S-1 (File No. 333-193401), which related to the Company’s initial public offering, was declared effective by the SEC. Under that registration statement, we registered and sold an aggregate of 1,875,000 shares of common stock at a price to the public of $30.333 per share, generating gross offering proceeds of approximately $56.9 million. The net proceeds of the sale of such shares, after underwriting commissions and offering expenses, were approximately $52.1 million. There has been no material change in the planned use of proceeds from the initial public offering as described in the final prospectus filed with the SEC on May 14, 2014 under Rule 424(b) of the Securities Act of 1933, as amended. We applied approximately $20.9 million of the proceeds from the initial public offering toward the acquisition of Metro Bank on January 31, 2015. We contributed approximately $36.0 million of offering proceeds to the Bank in the form of additional paid in capital during the second quarter of 2016, in anticipation of additional capital needs related to the Federal Deposit Insurance Corporation’s (FDIC) proposed revised calculation of FDIC assessments, which will take effect the quarter after its Deposit Insurance Fund (DIF) reserve ratio has reached 1.15%.None.

42

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit: Description
3.131.01 Third Certificate of Amendment to the Certificate of Incorporation of ServisFirst Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 24, 2016).
3.2Certificate of Elimination of the Senior Non-Cumulative Perpetual Preferred Stock, Series A of ServisFirst Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K/A filed on June 28, 2016).
3.3Restated Certificate of Incorporation of ServisFirst Bancshares, Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed on June 24, 2016).
31.01Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02 Certification of principal financial officer pursuant to Rule 13a-14(a).
32.01 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document

46

 

 

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: August 2, 20161, 2017By/s/ Thomas A. Broughton  III
  Thomas A. Broughton III
  President and Chief Executive Officer
   
Date: August 2, 20161, 2017By/s/ William M. Foshee
  William M. Foshee
  Chief Financial Officer.01, Doc:

47Officer 

43