UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

 

 

((Mark one)one)

QUARTERLY 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 SEPTEMBER 30, 2017

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     

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

(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] ☒   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] ☒  No [_]


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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [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 28,October 27, 2017
Common stock, $.001 par value52,932,23052,979,310

 

 
 

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION3
 Item 1.Financial Statements3
   Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2627
   Item 3.Quantitative and Qualitative Disclosures about Market Risk41
  Item 4.Controls and Procedures42
    
PART II. OTHER INFORMATION42
   Item 1Legal Proceedings42
  Item 1A.Risk Factors4243
   Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4243
   Item 3.Defaults Upon Senior Securities43
   Item 4. Mine Safety Disclosures43
 Item 5.Other Information43
 Item 6.Exhibits43
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, 2017 December 31, 2016 September 30, 2017 December 31, 2016
 (Unaudited) (1) (Unaudited) (1)
ASSETS                
Cash and due from banks $71,181  $56,855  $79,431  $56,855 
Interest-bearing balances due from depository institutions  134,694   566,707   86,719   566,707 
Federal funds sold  49,443   160,435   182,841   160,435 
Cash and cash equivalents  255,318   783,997   348,991   783,997 
Available for sale debt securities, at fair value  438,808   422,375   435,325   422,375 
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 
Held to maturity debt securities (fair value of $89,329 and $63,302 at September 30, 2017 and December 31, 2016, respectively)  87,399   62,564 
Restricted equity securities  1,037   1,024   1,038   1,024 
Mortgage loans held for sale  5,673   4,675   4,971   4,675 
Loans  5,343,688   4,911,770   5,628,765   4,911,770 
Less allowance for loan losses  (55,059)  (51,893)  (58,459)  (51,893)
Loans, net  5,288,629   4,859,877   5,570,306   4,859,877 
Premises and equipment, net  51,797   40,314   55,104   40,314 
Accrued interest and dividends receivable  16,770   15,801   20,334   15,801 
Deferred tax assets  26,392   27,132   26,326   27,132 
Other real estate owned and repossessed assets  3,891   4,988   3,888   4,988 
Bank owned life insurance contracts  125,896   114,388   126,722   114,388 
Goodwill and other identifiable intangible assets  14,855   14,996   14,787   14,996 
Other assets  21,276   18,317   16,912   18,317 
Total assets $6,329,599  $6,370,448  $6,712,103  $6,370,448 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Liabilities:                
Deposits:                
Noninterest-bearing $1,373,353  $1,281,605  $1,405,965  $1,281,605 
Interest-bearing  4,021,457   4,138,706   4,390,936   4,138,706 
Total deposits  5,394,810   5,420,311   5,796,901   5,420,311 
Federal funds purchased  300,226   355,944   254,880   355,944 
Other borrowings  55,075   55,262   54,975   55,262 
Accrued interest payable  3,513   4,401   4,353   4,401 
Other liabilities  8,889   11,641   10,781   11,641 
Total liabilities  5,762,513   5,847,559   6,121,890   5,847,559 
Stockholders' equity:                
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 
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 September 30, 2017 and December 31, 2016  -   - 
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at September 30, 2017 and December 31, 2016  -   - 
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,970,310 shares issued and outstanding at September 30, 2017, and 52,636,896 shares issued and outstanding at December 31, 2016  53   53 
Additional paid-in capital  217,271   215,932   217,483   215,932 
Retained earnings  348,517   307,151   371,127   307,151 
Accumulated other comprehensive income  743   (624)  1,048   (624)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.  566,584   522,512   589,711   522,512 
Noncontrolling interest  502   377   502   377 
Total stockholders' equity  567,086   522,889   590,213   522,889 
Total liabilities and stockholders' equity $6,329,599  $6,370,448  $6,712,103  $6,370,448 

 

(1) Derived from audited financial statements.

 

See Notes to Consolidated Financial  Statements.

 

 3 
 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

                             

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016 2017 2016 2017 2016
Interest income:                                
Interest and fees on loans $59,912  $49,210  $115,468  $96,457  $63,857  $51,473  $179,325  $147,930 
Taxable securities  2,274   1,238   4,361   2,507   2,288   1,232   6,649   3,739 
Nontaxable securities  752   834   1,517   1,692   729   823   2,246   2,515 
Federal funds sold  287   210   806   283   379   347   1,185   630 
Other interest and dividends  313   558   903   1,072   388   816   1,291   1,888 
Total interest income  63,538   52,050   123,055   102,011   67,641   54,691   190,696   156,702 
Interest expense:                                
Deposits  6,321   4,633   12,303   8,994   7,574   5,358   19,877   14,352 
Borrowed funds  1,650   1,526   3,133   2,947   1,671   1,415   4,804   4,362 
Total interest expense  7,971   6,159   15,436   11,941   9,245   6,773   24,681   18,714 
Net interest income  55,567   45,891   107,619   90,070   58,396   47,918   166,015   137,988 
Provision for loan losses  4,381   3,800   9,367   5,859   4,803   3,464   14,170   9,323 
Net interest income after provision for loan losses  51,186   42,091   98,252   84,211   53,593   44,454   151,845   128,665 
Noninterest income:                                
Service charges on deposit accounts  1,382   1,306   2,736   2,613   1,467   1,367   4,203   3,980 
Mortgage banking  1,064   901   1,963   1,569   978   1,112   2,941   2,681 
Credit card income  1,189   572   2,368   1,041   1,149   1,114   3,517   2,159 
Securities (losses) gains  -   (3)  -   (3)
Securities losses  -   -   -   (3)
Increase in cash surrender value life insurance  785   655   1,509   1,279   825   770   2,334   2,049 
Other operating income  385   416   775   783   371   428   1,146   1,207 
Total noninterest income  4,805   3,847   9,351   7,282   4,790   4,791   14,141   12,073 
Noninterest expenses:                                
Salaries and employee benefits  12,031   10,733   23,744   21,800   12,428   10,958   36,172   32,758 
Equipment and occupancy expense  2,265   2,023   4,505   4,008   1,947   2,100   6,452   6,108 
Professional services  808   999   1,579   1,737   805   1,182   2,384   2,919 
FDIC and other regulatory assessments  1,081   803   2,078   1,553   810   775   2,888   2,328 
OREO expense  56   41   132   490   31   178   163   668 
Other operating expenses  5,634   4,905   11,104   9,206   5,476   4,969   16,580   14,175 
Total noninterest expenses  21,875   19,504   43,142   38,794   21,497   20,162   64,639   58,956 
Income before income taxes  34,116   26,434   64,461   52,699   36,886   29,083   101,347   81,782 
Provision for income taxes  9,952   7,558   17,778   13,867   11,627   8,174   29,405   22,041 
Net income  24,164   18,876   46,683   38,832   25,259   20,909   71,942   59,741 
Preferred stock dividends  31   23   31   23   -   -   31   23 
Net income available to common stockholders $24,133  $18,853  $46,652  $38,809  $25,259  $20,909  $71,911  $59,718 
                                
Basic earnings per common share $0.46  $0.36  $0.88  $0.74  $0.48  $0.40  $1.36  $1.14 
                                
Diluted earnings per common share $0.45  $0.36  $0.86  $0.73  $0.47  $0.39  $1.33  $1.12 

 

See Notes to Consolidated Financial Statements.

 

 4 
 

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

                                   

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016 2017 2016 2017 2016
Net income $24,164  $18,876  $46,683  $38,832  $25,259  $20,909  $71,942  $59,741 
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 (loss), net of tax:                
Unrealized holding gains (losses) arising during period from securities available for sale, net of tax of $165 and $896 for the three and nine months ended September 30, 2017, respectively, and $(415) and $844 for the three and nine months ended September 30, 2016, respectively  305   (771)  1,672   1,583 
Reclassification adjustment for net losses on sale of securities, net of tax of $1 for the nine months ended September 30, 2016  -   -   -   2 
Other comprehensive income, net of tax  374   522   1,367   2,356   305   (771)  1,672   1,585 
Comprehensive income $24,538  $19,398  $48,050  $41,188  $25,564  $20,138  $73,614  $61,326 

 

See Notes to Consolidated Financial Statements.

 

 

 

 5 
 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

(Unaudited)

                                         

 Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Noncontrolling
Interest
 Total
Stockholders'
Equity
 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  $52  $211,546  $234,124  $3,048  $377  $449,147 
Common dividends paid, $0.04 per share  -   -   (2,095)  -   -   (2,095)
Common dividends paid, $0.08 per share  -   -   (4,194)  -   -   (4,194)
Common dividends declared, $.04 per share  -   -   (2,099)  -   -   (2,099)  -   -   (2,106)  -   -   (2,106)
Preferred dividends paid  -   -   (23)  -   -   (23)  -   -   (23)  -   -   (23)
Issue 549,500 shares of common stock upon exercise of stock options  -   2,339   -   -   -   2,339 
Issue 656,500 shares of common stock upon exercise of stock options  -   2,785   -   -   -   2,785 
Stock based compensation expense  -   640   -   -   -   640   -   931   -   -   -   931 
Other comprehensive income, net of tax  -   -   -   2,356   -   2,356   -   -   -   1,585   -   1,585 
Net income  -   -   38,832   -   -   38,832   -   -   59,741   -   -   59,741 
Balance, June 30, 2016 $52  $214,525  $268,739  $5,404  $377  $489,097 
Balance, September 30, 2016 $52  $215,262  $287,542  $4,633  $377  $507,866 
                                                
Balance, December 31, 2016 $53  $215,932  $307,151  $(624) $377  $522,889  $53  $215,932  $307,151  $(624) $377  $522,889 
Common dividends paid, $0.05 per share  -   -   (2,641)  -   -   (2,641)
Common dividends paid, $0.10 per share  -   -   (5,286)  -   -   (5,286)
Common dividends declared, $0.05 per share  -   -   (2,645)  -   -   (2,645)  -   -   (2,649)  -   -   (2,649)
Preferred dividends paid  -   -   (31)  -   -   (31)  -   -   (31)  -   -   (31)
Issue 272,466 shares of common stock upon exercise of stock options  -   717   -   -   -   717 
Issue 328,214 shares of common stock upon exercise of stock options  -   635   -   -   -   635 
Issue 125 shares of REIT preferred stock  -   -   -   -   125   125   -   -   -   -   125   125 
Stock based compensation expense  -   622   -   -   -   622   -   916   -   -   -   916 
Other comprehensive income, net of tax  -   -   -   1,367   -   1,367   -   -   -   1,672   -   1,672 
Net income  -   -   46,683   -   -   46,683   -   -   71,942   -   -   71,942 
Balance, June 30, 2017 $53  $217,271  $348,517  $743  $502  $567,086 
Balance, September 30, 2017 $53  $217,483  $371,127  $1,048  $502  $590,213 

 

See Notes to Consolidated Financial Statements.

 

 6 
 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

  (In(In thousands) (Unaudited)

 

 Six Months Ended June 30, Nine Months Ended September 30,
 2017 2016 2017 2016
OPERATING ACTIVITIES                
Net income $46,683  $38,832  $71,942  $59,741 
Adjustments to reconcile net income to net cash provided by                
Deferred tax  4   440   (3,099)  350 
Provision for loan losses  9,367   5,859   14,170   9,323 
Depreciation  1,501   1,480   2,281   2,211 
Accretion on acquired loans  (267)  (624)  (374)  (819)
Amortization of core deposit intangible  141   176   209   257 
Net amortization of debt securities available for sale  1,999   1,288   2,874   2,034 
(Increase) decrease in accrued interest and dividends receivable  (969)  211 
Increase in accrued interest and dividends receivable  (4,533)  (950)
Stock-based compensation expense  622   640   916   931 
(Decrease) increase in accrued interest payable  (888)  507   (48)  1,257 
Proceeds from sale of mortgage loans held for sale  71,518   61,054   105,940   97,868 
Originations of mortgage loans held for sale  (70,553)  (59,169)  (103,295)  (92,964)
Loss on sale of debt securities available for sale  -   3   -   3 
Gain on sale of mortgage loans held for sale  (1,963)  (1,569)  (2,941)  (2,681)
Net (gain) loss on sale of other real estate owned and repossessed assets  (53)  39   (33)  27 
Write down of other real estate owned and repossessed assets  4   397   5   557 
Losses of tax credit partnerships  7   176   42   178 
Increase in cash surrender value of life insurance contracts  (1,509)  (1,279)  (2,334)  (2,049)
Net change in other assets, liabilities, and other operating activities  (9,379)  (7,563)  (551)  (4,633)
Net cash provided by operating activities  46,265   40,898   81,171   70,641 
INVESTMENT ACTIVITIES                
Purchase of debt securities available for sale  (60,627)  (15,119)  (77,567)  (84,106)
Proceeds from sale of debt securities available for sale  -   6,085   -   6,085 
Proceeds from maturities, calls and paydowns of debt securities available for sale  45,325   34,255   65,734   71,425 
Purchase of debt securities held to maturity  (20,786)  (439)  (29,782)  (627)
Proceeds from maturities, calls and paydowns of debt securities held to maturity  4,093   1,203   4,947   2,200 
Purchase of equity securities  (10)  (708)  (10)  (708)
Increase in loans  (438,253)  (325,496)  (724,626)  (443,771)
Purchase of premises and equipment  (12,984)  (5,267)  (17,071)  (7,809)
Purchase of bank-owned life insurance contracts  (10,000)  (10,000)  (10,000)  (20,000)
Expenditures to complete construction of other real estate owned  -   (3)  -   (3)
Proceeds from sale of other real estate owned and repossessed assets  1,547   1,575   1,529   1,648 
Investment in tax credit partnerships  -   (2,491)  -   (2,491)
Net cash used in investing activities  (491,695)  (316,405)  (786,846)  (478,157)
FINANCING ACTIVITIES                
Net increase in non-interest-bearing deposits  91,748   132,201   124,360   216,259 
Net (decrease) increase in interest-bearing deposits  (117,249)  311,706 
Net (decrease) increase in federal funds purchased  (55,718)  68,070 
Net increase in interest-bearing deposits  252,230   640,981 
Net decrease in federal funds purchased  (101,064)  (7,970)
Repayment of Federal Home Loan Bank advances  (200)  (200)  (300)  (300)
Proceeds from sale of preferred stock, net  125   -   125   - 
Proceeds from exercise of stock options and warrants  717   2,339   635   2,785 
Dividends paid on common stock  (2,641)  (2,095)  (5,286)  (4,194)
Dividends paid on preferred stock  (31)  (23)  (31)  (23)
Net cash (used in) provided by financing activities  (83,249)  511,998 
Net cash provided by financing activities  270,669   847,538 
Net (decrease) increase in cash and cash equivalents  (528,679)  236,491   (435,006)  440,022 
Cash and cash equivalents at beginning of period  783,997   352,235   783,997   352,235 
Cash and cash equivalents at end of period $255,318  $588,726  $348,991  $792,257 
SUPPLEMENTAL DISCLOSURE                
Cash paid for:                
Interest $16,324  $11,434  $24,729  $17,457 
Income taxes  22,363   17,546   30,651   22,666 
Income tax refund  (182)  -   (492)  (929)
NONCASH TRANSACTIONS                
Other real estate acquired in settlement of loans $586  $2,036  $586  $2,033 
Internally financed sales of other real estate owned  185   1,157   185   2,161 
Dividends declared  2,645   2,099   2,649   2,106 

 

See Notes to Consolidated Financial Statements.

 

 7 
 

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JuneSeptember 30, 2017

(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, 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 - CASH AND CASH EQUIVALENTS

 

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

 

NOTE 3 - EARNINGS PER COMMON SHARE

 

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

 

 8 
 

 

 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016 2017 2016 2017 2016
 (In Thousands, Except Shares and Per Share Data) (In Thousands, Except Shares and Per Share Data)
Earnings per common share                        
Weighted average common shares outstanding  52,864,761   52,425,726   52,805,378   52,340,390   52,950,644   52,554,918   52,854,332   52,557,910 
Net income available to common stockholders $24,133  $18,853  $46,652  $38,809  $25,259  $20,909  $71,911  $59,718 
Basic earnings per common share $0.46  $0.36  $0.88  $0.74  $0.48  $0.40  $1.36  $1.14 
                                
Weighted average common shares outstanding  52,864,761   52,425,726   52,805,378   52,340,390   52,950,644   52,554,918   52,854,332   52,557,910 
Dilutive effects of assumed conversions and exercise of stock options and warrants  1,235,843   1,026,800   1,311,694   952,684   1,149,028   1,324,410   1,256,580   932,008 
Weighted average common and dilutive potential common shares outstanding  54,100,604   53,452,526   54,117,072   53,293,074   54,099,672   53,879,328   54,110,912   53,489,918 
Net income available to common stockholders $24,133  $18,853  $46,652  $38,809  $25,259  $20,909  $71,911  $59,718 
Diluted earnings per common share $0.45  $0.36  $0.86  $0.73  $0.47  $0.39  $1.33  $1.12 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows:

 

 Amortized
Cost
 Gross
Unrealized
Gain
 Gross
Unrealized
Loss
 Market
Value
 Amortized
Cost
 Gross
Unrealized
Gain
 Gross
Unrealized
Loss
 Market
Value
June 30, 2017 (In Thousands)
September 30, 2017 (In Thousands)
Securities Available for Sale                                
U.S. Treasury and government sponsored agencies $56,778  $419  $(72) $57,125  $56,518  $335  $(75) $56,778 
Mortgage-backed securities  241,613   1,267   (1,609)  241,271   243,465   1,457   (1,179)  243,743 
State and municipal securities  139,273   1,298   (159)  140,412   133,729   1,201   (126)  134,804 
Total  437,664   2,984   (1,840)  438,808   433,712   2,993   (1,380)  435,325 
Securities Held to Maturity                                
Mortgage-backed securities  27,858   303   (224)  27,937   31,165   393   (179)  31,379 
State and municipal securities  5,890   306   -   6,196   5,726   300   -   6,026 
Corporate debt  45,509   890   -   46,399   50,508   1,416   -   51,924 
Total $79,257  $1,499  $(224) $80,532  $87,399  $2,109  $(179) $89,329 
                                
December 31, 2016                                
Securities Available for Sale                                
U.S. Treasury and government sponsored agencies $45,998  $382  $(126) $46,254  $45,998  $382  $(126) $46,254 
Mortgage-backed securities  228,843   1,515   (3,168)  227,190   228,843   1,515   (3,168)  227,190 
State and municipal securities  139,504   1,120   (694)  139,930   139,504   1,120   (694)  139,930 
Corporate debt  8,985   16   -   9,001   8,985   16   -   9,001 
Total  423,330   3,033   (3,988)  422,375   423,330   3,033   (3,988)  422,375 
Securities Held to Maturity                                
Mortgage-backed securities  19,164   321   (245)  19,240   19,164   321   (245)  19,240 
State and municipal securities  5,888   315   (12)  6,191   5,888   315   (12)  6,191 
Corporate debt  37,512   374   (15)  37,871   37,512   374   (15)  37,871 
Total $62,564  $1,010  $(272) $63,302  $62,564  $1,010  $(272) $63,302 

 

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

 

 9 
 

 

 June 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
 Amortized
Cost
 Fair Value Amortized
Cost
 Fair Value Amortized
Cost
 Fair Value Amortized
Cost
 Fair Value
 (In thousands) (In thousands)
Debt securities available for sale                                
Due within one year $11,487  $11,516  $28,270  $28,400  $25,961  $26,035  $28,270  $28,400 
Due from one to five years  155,256   156,552   152,347   153,003   151,842   153,099   152,347   153,003 
Due from five to ten years  28,918   29,082   13,870   13,782   12,054   12,058   13,870   13,782 
Due after ten years  390   387   -   -   390   390   -   - 
Mortgage-backed securities  241,613   241,271   228,843   227,190   243,465   243,743   228,843   227,190 
 $437,664  $438,808  $423,330  $422,375  $433,712  $435,325  $423,330  $422,375 
                                
Debt securities held to maturity                                
Due from one to five years $3,250  $3,266  $250  $250  $3,250  $3,280  $250  $250 
Due from five to ten years  34,246   35,005   34,251   34,617   48,997   50,450   34,251   34,617 
Due after ten years  13,903   14,324   8,899   9,195   3,987   4,220   8,899   9,195 
Mortgage-backed securities  27,858   27,937   19,164   19,240   31,165   31,379   19,164   19,240 
 $79,257  $80,532  $62,564  $63,302  $87,399  $89,329  $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 JuneSeptember 30, 2017 and December 31, 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 JuneSeptember 30, 2017, nine52 of the Company’s 813807 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 JuneSeptember 30, 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
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value
 (In Thousands) (In Thousands)
June 30, 2017                        
September 30, 2017                        
U.S. Treasury and government sponsored agencies $(72) $4,859  $-  $-  $(72) $4,859  $(75) $9,670  $-  $-  $(75) $9,670 
Mortgage-backed securities  (1,813)  144,440   (20)  1,021   (1,833)  145,461   (596)  77,553   (762)  43,721   (1,358)  121,274 
State and municipal securities  (143)  32,820   (16)  1,582   (159)  34,402   (76)  22,069   (50)  7,041   (126)  29,110 
Total $(2,028) $182,119  $(36) $2,603  $(2,064) $184,722  $(747) $109,292  $(812) $50,762  $(1,559) $160,054 
                                                
December 31, 2016                                                
U.S. Treasury and government sponsored agencies $(126) $10,865  $-  $-  $(126) $10,865  $(126) $10,865  $-  $-  $(126) $10,865 
Mortgage-backed securities  (3,413)  174,225   -   -   (3,413)  174,225   (3,413)  174,225   -   -   (3,413)  174,225 
State and municipal securities  (698)  64,502   (8)  1,021   (706)  65,523   (698)  64,502   (8)  1,021   (706)  65,523 
Corporate debt  (15)  3,034   -   -   (15)  3,034   (15)  3,034   -   -   (15)  3,034 
Total $(4,252) $252,626  $(8) $1,021  $(4,260) $253,647  $(4,252) $252,626  $(8) $1,021  $(4,260) $253,647 

 

 10 
 

 

NOTE 5 – LOANS

 

The following table details the Company’s loans at JuneSeptember 30, 2017 and December 31, 2016:

 

 June 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
 (Dollars In Thousands) (Dollars In Thousands)
Commercial, financial and agricultural $2,123,498  $1,982,267  $2,223,910  $1,982,267 
Real estate - construction  395,398   335,085   467,838   335,085 
Real estate - mortgage:                
Owner-occupied commercial  1,272,659   1,171,719   1,323,383   1,171,719 
1-4 family mortgage  565,121   536,805   593,180   536,805 
Other mortgage  931,788   830,683   962,690   830,683 
Subtotal: Real estate - mortgage  2,769,568   2,539,207   2,879,253   2,539,207 
Consumer  55,224   55,211   57,764   55,211 
Total Loans  5,343,688   4,911,770   5,628,765   4,911,770 
Less: Allowance for loan losses  (55,059)  (51,893)  (58,459)  (51,893)
Net Loans $5,288,629  $4,859,877  $5,570,306  $4,859,877 
                
                
Commercial, financial and agricultural  39.74%  40.36%  39.51%  40.36%
Real estate - construction  7.40%  6.82%  8.31%  6.82%
Real estate - mortgage:                
Owner-occupied commercial  23.82%  23.86%  23.51%  23.86%
1-4 family mortgage  10.57%  10.93%  10.54%  10.93%
Other mortgage  17.44%  16.91%  17.10%  16.91%
Subtotal: Real estate - mortgage  51.83%  51.70%  51.15%  51.70%
Consumer  1.03%  1.12%  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 JuneSeptember 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017 Pass Special
Mention
 Substandard Doubtful Total
          
September 30, 2017 Pass Special
Mention
 Substandard Doubtful Total
 (In Thousands) (In Thousands)
Commercial, financial and agricultural $2,051,745  $40,323  $31,430  $-  $2,123,498  $2,144,426  $49,079  $30,405  $-  $2,223,910 
Real estate - construction  384,442   7,582   3,374   -   395,398   457,188   7,367   3,283   -   467,838 
Real estate - mortgage:                                        
Owner-occupied commercial  1,255,649   11,098   5,912   -   1,272,659   1,305,408   11,814   6,161   -   1,323,383 
1-4 family mortgage  559,579   1,256   4,286   -   565,121 
1-4 family mortgage  587,451   1,492   4,237   -   593,180 
Other mortgage  914,552   13,662   3,574   -   931,788   945,548   14,118   3,024   -   962,690 
Total real estate mortgage  2,729,780   26,016   13,772   -   2,769,568   2,838,407   27,424   13,422   -   2,879,253 
Consumer  55,169   55   -   -   55,224   57,672   4   88   -   57,764 
Total $5,221,136  $73,976  $48,576  $-  $5,343,688  $5,497,693  $83,874  $47,198  $-  $5,628,765 

 

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 
 

 

Loans by performance status as of JuneSeptember 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017 Performing Nonperforming Total
September 30, 2017 Performing Nonperforming Total
            
 (In Thousands) (In Thousands)
Commercial, financial and agricultural $2,118,113  $5,385  $2,123,498  $2,216,004  $7,906  $2,223,910 
Real estate - construction  393,021   2,377   395,398   465,553   2,285   467,838 
Real estate - mortgage:                        
Owner-occupied commercial  1,270,411   2,248   1,272,659   1,320,886   2,497   1,323,383 
1-4 family mortgage  564,200   921   565,121   591,544   1,636   593,180 
Other mortgage  931,788   -   931,788   962,260   430   962,690 
Total real estate mortgage  2,766,399   3,169   2,769,568   2,874,690   4,563   2,879,253 
Consumer  55,176   48   55,224   57,656   108   57,764 
Total $5,332,709  $10,979  $5,343,688  $5,613,903  $14,862  $5,628,765 

 

December 31, 2016 Performing Nonperforming Total
       
  (In Thousands)
Commercial, financial and agricultural $1,974,975  $7,292  $1,982,267 
Real estate - construction  331,817   3,268   335,085 
Real estate - mortgage:            
Owner-occupied commercial  1,165,511   6,208   1,171,719 
1-4 family mortgage  536,731   74   536,805 
Other mortgage  830,683   -   830,683 
Total real estate mortgage  2,532,925   6,282   2,539,207 
Consumer  55,166   45   55,211 
Total $4,894,883  $16,887  $4,911,770 

 

 13 
 

 

Loans by past due status as of JuneSeptember 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017 Past Due Status (Accruing Loans)      
September 30, 2017 Past Due Status (Accruing Loans)      
 30-59 Days 60-89 Days 90+ Days Total Past
Due
 Non-Accrual Current Total Loans 30-59 Days 60-89 Days 90+ Days Total Past
Due
 Non-Accrual Current Total Loans
                            
 (In Thousands) (In Thousands)
Commercial, financial and agricultural $6,311  $317  $968  $7,596  $4,417  $2,111,485  $2,123,498  $5,317  $12,081  $2,108  $19,506  $5,798  $2,198,606  $2,223,910 
Real estate - construction  -   -   -   -   2,377   393,021   395,398   997   618   -   1,615   2,285   463,938   467,838 
Real estate - mortgage:                                                        
Owner-occupied commercial  4,498   -   -   4,498   2,248   1,265,913   1,272,659   310   3,354   -   3,664   2,497   1,317,222   1,323,383 
1-4 family mortgage  376   703   -   1,079   921   563,121   565,121   1,132   295   328   1,755   1,308   590,117   593,180 
Other mortgage  980   -   -   980   -   930,808   931,788   -   -   -   -   430   962,260   962,690 
Total real estate - mortgage  5,854   703   -   6,557   3,169   2,759,842   2,769,568   1,442   3,649   328   5,419   4,235   2,869,599   2,879,253 
Consumer  49   8   48   105   -   55,119   55,224   102   13   70   185   38   57,541   57,764 
Total $12,214  $1,028  $1,016  $14,258  $9,963  $5,319,467  $5,343,688  $7,858  $16,361  $2,506  $26,725  $12,356  $5,589,684  $5,628,765 

 

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 5five year history of net charge-offs experienced by pool, with the most recent net charge-off experience given a greater weighting. This results in the expected loss rate per year, adjusted by a qualitative adjustment factor and a years-to-impairment factor, for each pool of loans to derive the total amount of allowance for non-impaired loans.

 

 14 
 

 

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

 

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

 

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

 

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 sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 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 
15

  Commercial
financial and
agricultural
 Real estate -
construction
 Real estate -
mortgage
 Consumer Total
   
  (In Thousands)
  Three Months Ended September 30, 2017
Allowance for loan losses:                    
Balance at June 30, 2017 $29,127  $5,138  $20,392  $402  $55,059 
Charge-offs  (924)  (16)  (550)  (65)  (1,555)
Recoveries  67   12   59   14   152 
Provision  3,431   197   1,065   110   4,803 
Balance at September 30, 2017 $31,701  $5,331  $20,966  $461  $58,459 
   
  Three Months Ended September 30, 2016
Allowance for loan losses:                    
Balance at June 30, 2016 $23,655  $5,279  $17,600  $464  $46,998 
Charge-offs  (1,270)  (79)  (144)  (81)  (1,574)
Recoveries  35   9   1   -   45 
Provision  3,560   (394)  282   16   3,464 
Balance at September 30, 2016 $25,980  $4,815  $17,739  $399  $48,933 
   
  Nine Months Ended September 30, 2017
Allowance for loan losses:                    
Balance at December 31, 2016 $28,872  $5,125  $17,504  $392  $51,893 
Charge-offs  (6,846)  (56)  (922)  (173)  (7,997)
Recoveries  273   42   62   16   393 
Provision  9,402   220   4,322   226   14,170 
Balance at September 30, 2017 $31,701  $5,331  $20,966  $461  $58,459 
                     
  Nine Months Ended September 30, 2016
Allowance for loan losses:                    
Balance at December 31, 2015 $21,495  $5,432  $16,061  $431  $43,419 
Charge-offs  (2,732)  (815)  (335)  (130)  (4,012)
Recoveries  39   64   100   -   203 
Provision  7,178   134   1,913   98   9,323 
Balance at September 30, 2016 $25,980  $4,815  $17,739  $399  $48,933 
                     
  As of September 30, 2017
Allowance for loan losses:                    
Individually Evaluated for Impairment $5,725  $829  $1,892  $50  $8,496 
Collectively Evaluated for Impairment  25,976   4,502   19,074   411   49,963 
                     
Loans:                    
Ending Balance $2,223,910  $467,838  $2,879,253  $57,764  $5,628,765 
Individually Evaluated for Impairment  30,405   3,328   15,789   88   49,610 
Collectively Evaluated for Impairment  2,193,505   464,510   2,863,464   57,676   5,579,155 
   
  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 
 

 

The following table presents details of the Company’s impaired loans as of JuneSeptember 30, 2017 and December 31, 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
 September 30, 2017 For the three months
ended September 30,
2017
 For the nine months
ended September 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
 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) (In Thousands)
With no allowance recorded:                                                        
Commercial, financial and agricultural $6,003  $6,016  $-  $6,213  $66  $6,272  $137  $4,671  $4,671  $-  $4,770  $52  $4,998  $164 
Real estate - construction  46   48   -   49   1   49   2   45   48   -   48   1   49   2 
Real estate - mortgage:                                                        
Owner-occupied commercial  2,398   2,564   -   2,584   37   2,601   76   2,366   2,532   -   2,551   37   2,584   113 
1-4 family mortgage  2,674   2,674   -   2,678   29   2,716   51   1,752   1,752   -   1,756   22   1,781   67 
Other mortgage  732   732   -   733   10   734   21   732   732   -   732   10   733   32 
Total real estate - mortgage  5,804   5,970   -   5,995   76   6,051   148   4,850   5,016   -   5,039   69   5,098   212 
Consumer  -   -   -   -   -   -   -   38   40   -   41   1   42   2 
Total with no allowance recorded  11,853   12,034   -   12,257   143   12,372   287   9,604   9,775   -   9,898   123   10,187   380 
                                                        
With an allowance recorded:                                                        
Commercial, financial and agricultural  25,427   27,127   4,457   27,760   257   27,525   541   25,734   27,719   5,725   26,129   256   27,021   800 
Real estate - construction  3,374   3,374   921   3,374   14   3,374   28   3,283   3,283   829   3,357   14   3,369   42 
Real estate - mortgage:                                                        
Owner-occupied commercial  7,774   7,774   1,205   7,774   55   7,547   134   8,024   8,024   1,512   8,024   75   7,873   217 
1-4 family mortgage  1,613   1,613   260   1,617   20   1,644   42   2,485   2,485   328   2,485   10   2,506   56 
Other mortgage  980   980   314   983   12   990   25   430   980   52   974   (4)  984   21 
Total real estate - mortgage  10,367   10,367   1,779   10,374   87   10,181   201   10,939   11,489   1,892   11,483   81   11,363   294 
Consumer  -   -   -   -   -   -   -   50   50   50   50   1   39   2 
Total with allowance recorded  39,168   40,868   7,157   41,508   358   41,080   770   40,006   42,541   8,496   41,019   352   41,792   1,138 
                                                        
Total Impaired Loans:                                                        
Commercial, financial and agricultural  31,430   33,143   4,457   33,973   323   33,797   678   30,405   32,390   5,725   30,899   308   32,019   964 
Real estate - construction  3,420   3,422   921   3,423   15   3,423   30   3,328   3,331   829   3,405   15   3,418   44 
Real estate - mortgage:                                                        
Owner-occupied commercial  10,172   10,338   1,205   10,358   92   10,148   210   10,390   10,556   1,512   10,575   112   10,457   330 
1-4 family mortgage  4,287   4,287   260   4,295   49   4,360   93   4,237   4,237   328   4,241   32   4,287   123 
Other mortgage  1,712   1,712   314   1,716   22   1,724   46   1,162   1,712   52   1,706   6   1,717   53 
Total real estate - mortgage  16,171   16,337   1,779   16,369   163   16,232   349   15,789   16,505   1,892   16,522   150   16,461   506 
Consumer  -   -   -   -   -   -   -   88   90   50   91   2   81   4 
Total impaired loans $51,021  $52,902  $7,157  $53,765  $501  $53,452  $1,057  $49,610  $52,316  $8,496  $50,917  $475  $51,979  $1,518 

 

 17 
 

  

  December 31, 2016 For the twelve months
ended December 31, 2016
  Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest Income
Recognized in
Period
           
  (In Thousands)
With no allowance recorded:                    
Commercial, financial and agricultural $1,003  $1,003  $-  $992  $64 
Real estate - construction  938   1,802   -   1,159   3 
Real estate - mortgage:                    
Owner-occupied commercial  2,615   2,778   -   2,884   166 
1-4 family mortgage  1,899   1,899   -   1,901   102 
Other mortgage  940   940   -   965   60 
Total real estate - mortgage  5,454   5,617   -   5,750   328 
Consumer  3   5   -   6   - 
Total with no allowance recorded  7,398   8,427   -   7,907   395 
                     
With an allowance recorded:                    
Commercial, financial and agricultural  26,919   31,728   6,607   26,955   1,162 
Real estate - construction  3,376   3,376   923   3,577   68 
Real estate - mortgage:                    
Owner-occupied commercial  6,924   6,924   348   6,934   362 
1-4 family mortgage  972   972   274   313   19 
Other mortgage  -   -   -   -   - 
Total real estate - mortgage  7,896   7,896   622   7,247   381 
Consumer  -   -   -   -   - 
Total with allowance recorded  38,191   43,000   8,152   37,779   1,611 
                     
Total Impaired Loans:                    
Commercial, financial and agricultural  27,922   32,731   6,607   27,947   1,226 
Real estate - construction  4,314   5,178   923   4,736   71 
Real estate - mortgage:                    
Owner-occupied commercial  9,539   9,702   348   9,818   528 
1-4 family mortgage  2,871   2,871   274   2,214   121 
Other mortgage  940   940   -   965   60 
Total real estate - mortgage  13,350   13,513   622   12,997   709 
Consumer  3   5   -   6   - 
Total impaired loans $45,589  $51,427  $8,152  $45,686  $2,006 

 

 18 
 

 

Troubled Debt Restructurings (“TDR”) at JuneSeptember 30, 2017, December 31, 2016 and JuneSeptember 30, 2016 totaled $16.4 million, $7.3 million and $6.8$6.7 million, respectively. At JuneSeptember 30, 2017, the Company had a related allowance for loan losses of $3.1$4.0 million allocated to these TDRs, compared to $2.3 million at December 31, 2016 and $1.0$1.7 million at JuneSeptember 30, 2016. TDR activity by portfolio segment for the three and sixnine months ended JuneSeptember 30, 2017 is presented in the table below.

 

 Three Months Ended June 30, 2017 Six Months Ended June 30, 2017 Three Months Ended September 30, 2017 Nine Months Ended September 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
 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) (In Thousands)
Troubled Debt Restructurings                                                
Commercial, financial and agricultural  5  $7,205  $7,205   5  $7,205  $7,205   -  $-  $-   5  $7,205  $7,205 
Real estate - construction  1   997   997   1   997   997   -   -   -   1   997   997 
Real estate - mortgage:                                                
Owner-occupied commercial  2   3,664   3,664   2   3,664   3,664   -   -   -   2   3,664   3,664 
1-4 family mortgage  1   850   850   1   850   850   -   -   -   1   850   850 
Other mortgage  -   -   -   -   -   -   -   -   -   -   -   - 
Total real estate mortgage  3   4,514   4,514   3   4,514   4,514   -   -   -   3   4,514   4,514 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
  9  $12,716  $12,716   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 September 30, 2016 Nine Months Ended September 30, 2016
 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
 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) (In Thousands)
Troubled Debt Restructurings                                                
Commercial, financial and agricultural  1  $366  $366   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 
Total real estate mortgage  1   234   234   1   234   234   -   -   -   1   234   234 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
  2  $600  $600   2  $600  $600   -  $-  $-   2  $600  $600 

 

There were no TDRs which defaulted during the three and sixnine months ended JuneSeptember 30, 2017 and 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 JuneSeptember 30, 2017, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

 

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At JuneSeptember 30, 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$294,000 and $622,000$916,000 for the three and sixnine months ended JuneSeptember 30, 2017, respectively, and $297,000$291,000 and $640,000$931,000 for the three and sixnine months ended JuneSeptember 30, 2016.2016, respectively.

 

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

 

 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. These assumptions are highly subjective and changes to them can materially affect the fair value estimate. Expected volatilitiesmarket price volatility and expected term of options are based on an index of southeastern United States publicly traded banks. The expected term for options granted is based on the short-cut methodhistorical data and represents the period of time that options granted are expected to be outstanding.other factors. 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.

 

 2017 2016 2017 2016
Expected volatility  29.00%  29.00%  29.00%  29.00%
Expected dividends  0.44%  0.63%  0.44%  0.64%
Expected term (in years)  6.25   6.25   6.25   6.25 
Risk-free rate  2.09%  1.87%  2.08%  1.86%

 

The weighted average grant-date fair value of options granted during the sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016 was $11.84$11.83 and $11.80,$5.95, respectively.

 

The following table summarizes stock option activity during the sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016:

 

 Shares Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term (years)
 Aggregate
Intrinsic
Value
 Shares Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term (years)
 Aggregate
Intrinsic
Value
       (In Thousands)       (In Thousands)
Six Months Ended June 30, 2017:                
Nine Months Ended September 30, 2017:                
Outstanding at January 1, 2017  2,026,334  $9.00   6.2  $57,636   2,026,334  $9.00   6.2  $57,636 
Granted  51,500   37.95   9.6   (80)  52,500   37.93   9.4   (35)
Exercised  (292,000)  4.98   4.4   9,169   (359,000)  4.97   4.2   11,590 
Forfeited  (32,000)  21.96   8.6   (462)  (32,000)  21.96   8.4   489 
Outstanding at June 30, 2017  1,753,834   10.28   5.9  $45,777 
Outstanding at September 30, 2017  1,687,834   10.51   5.7  $45,136 
                                
Exercisable at June 30, 2017  811,736  $5.20   4.4  $25,303 
Exercisable at September 30, 2017  810,736  $5.22   4.2  $25,971 
                                
Six Months Ended June 30, 2016:                
Nine Months Ended September 30, 2016:                
Outstanding at January 1, 2016  2,498,834  $6.66   6.3  $42,743   2,498,834  $6.66   6.3  $42,743 
Granted  227,000   19.76   9.7   1,120   234,000   19.98   9.5   1,398 
Exercised  (549,500)  4.26   4.4   11,230   (656,500)  4.25   4.2   14,254 
Forfeited  (13,000)  19.41   9.2   69   (13,000)  19.41   9.0   85 
Outstanding at June 30, 2016  2,163,334   8.57   6.6  $38,891 
Outstanding at September 30, 2016  2,063,334   8.86   6.5  $35,277 
                                
Exercisable at June 30, 2016  687,536  $6.09   6.0  $14,989 
Exercisable at September 30, 2016  594,536  $6.45   6.0  $13,901 

 

As of JuneSeptember 30, 2017, there was approximately $2.3$2.1 million of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 2.7 years.

 

Restricted Stock

 

The Company has issued 488,376 shares ofperiodically grants restricted stock to certain officers, of which 368,700awards that vest upon service conditions. Dividend payments are vested.made during the vesting period. 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 JuneSeptember 30, 2017, there was $575,000$543,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.51.2 years of the restricted stock’s vesting period.

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The following table summarizes restricted stock activity during the nine months ended September 30, 2017 and September 30, 2016:

 

  Shares Weighted
Average Grant
Date Fair Value
     
Nine Months Ended September 30, 2017:        
Non-vested at January 1, 2017  118,676  $8.88 
Granted  7,000   38.02 
Vested  (4,200)  15.74 
Forfeited  (800)  15.74 
Non-vested at September 30, 2017  120,676   10.29 
         
Nine Months Ended September 30, 2016:        
Non-vested at January 1, 2016  294,176  $6.44 
Granted  9,000   19.58 
Vested  (178,500)  5.59 
Forfeited  -   - 
Non-vested at September 30, 2016  124,676   8.66 

NOTE 7 - DERIVATIVES

 

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of JuneSeptember 30, 2017 and December 31, 2016 were not material.

 

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NOTE 8 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

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 was permitted. The Company elected to early adopt the provisions of 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. Accordingly, the Company recognized a reduction in its provision for income taxes during the quarter and sixnine months ended JuneSeptember 30, 2017 of $1.4 million and $3.5 million, respectively, compared to $1.2 million and $3.5 million during the quarter and sixnine months ended JuneSeptember 30, 2016, respectively. Prior to the adoption of 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 arebecame 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 resultresults 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.

 

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NOTE 9 - 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), by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company’s revenue has been more significantly weighted towards net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income has not been as significant. The Company has begunis continuing to scopeassess its general ledger revenue itemsstreams and assessreviewing its contracts with customers that are potentially affected by the new guidance including fees on deposits, gains and losses on the sale of other real estate owned, credit and debit card interchange fees, and credit card revenue, to identify its performance obligations and will continuedetermine the potential impact the new guidance is expected to evaluatehave on the impact of adoptionCompany’s consolidated financial statements. However, the Company’s revenue recognition pattern for these revenue streams is not expected to change materially from current practice. In addition, the Company continues to follow implementation issues specific to financial institutions which are still under discussion by the FASB’s Transition Resource Group. The Company is currently planning to adopt the ASU on its noninterest income and on its disclosures.January 1, 2018 utilizing the modified retrospective approach.

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In January 2016, the FASB issued ASU 2016-01,Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-1: (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 evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

 

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 leases many of its banking offices under lease agreements it classifies as operating leases. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases. Additionally, the inclusion of these right-of-use lease assets in our balance sheet will impact our total risk-weighted assets.

 

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.

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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.

 

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NOTE 10 - FAIR VALUE MEASUREMENT

 

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

 

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

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

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

 

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

 

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

 

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$2,660,000 and $5,307,000$7,967,000 during the three and sixnine months ended JuneSeptember 30, 2017, respectively, and $1,634,000$3,544,000 and $2,546,000$6,090,000 during the three and sixnine months ended JuneSeptember 30, 2016, respectively.

23

 

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. A gain on the sale of OREO of $20,000 and $56,000 was recognized for the three and nine months ended September 30, 2017, respectively, and a loss on the sale and write-downs of OREO of $7,000$148,000 and $36,000 was recognized$584,000 for the three and sixnine months ended June 30, 2017, respectively, and $248,000 and $436,000 for the three and six months ended JuneSeptember 30, 2016, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and gains or losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy.

 

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There were no residential real estate loan foreclosures classified as OREO as of JuneSeptember 30, 2017, compared to $189,000 as of December 31, 2016.

 

NoOne residential real estate loans wereloan with a balance of $921,000 was in the process of being foreclosed as of JuneSeptember 30, 2017.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of JuneSeptember 30, 2017 and December 31, 2016:

 

 Fair Value Measurements at June 30, 2017 Using   Fair Value Measurements at September 30, 2017, Using  
 Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs (Level 3)
 Total Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs (Level 3)
 Total
Assets Measured on a Recurring Basis: (In Thousands) (In Thousands)
Available-for-sale securities:                                
U.S. Treasury and government sponsored agencies $-  $57,125  $-  $57,125  $-  $56,778  $-  $56,778 
Mortgage-backed securities  -   241,271   -   241,271   -   243,743   -   243,743 
State and municipal securities  -   140,412   -   140,412   -   134,804   -   134,804 
Total assets at fair value $-  $438,808  $-  $438,808  $-  $435,325  $-  $435,325 

 

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

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The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of JuneSeptember 30, 2017 and December 31, 2016:

 

 Fair Value Measurements at June 30, 2017 Using   Fair Value Measurements at September 30, 2017, Using  
 Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs (Level 3)
 Total Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs (Level 3)
 Total
Assets Measured on a Nonrecurring Basis: (In Thousands) (In Thousands)
Impaired loans $-  $-  $43,864  $43,864  $-  $-  $41,114  $41,114 
Other real estate owned and repossessed assets  -   -   3,891   3,891   -   -   3,888   3,888 
Total assets at fair value $-  $-  $47,755  $47,755  $-  $-  $45,002  $45,002 

 

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

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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.

 

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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.

 

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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.

 

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 JuneSeptember 30, 2017 and December 31, 2016 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, 2017 December 31, 2016 September 30, 2017 December 31, 2016
 Carrying
Amount
 Fair Value Carrying
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 $205,875  $205,875  $623,562  $623,562  $166,150  $166,150  $623,562  $623,562 
                                
Level 2 inputs:                                
Available for sale debt securities  438,808   438,808   422,375   422,375   435,325   435,325   422,375   422,375 
Held to maturity debt securities  33,748   34,133   25,052   25,431   36,891   37,406   25,052   25,431 
Restricted equity securities  1,037   1,037   1,024   1,024   1,038   1,038   1,024   1,024 
Federal funds sold  49,443   49,443   160,435   160,435   182,841   182,841   160,435   160,435 
Mortgage loans held for sale  5,673   5,855   4,675   4,736   4,971   5,033   4,675   4,736 
Bank owned life insurance contracts  125,896   125,896   114,388   114,388   126,722   126,722   114,388   114,388 
                                
Level 3 inputs:                                
Debt securities held to maturity  45,509   46,399   37,512   37,871   50,508   51,923   37,512   37,871 
Loans, net  5,288,629   5,283,824   4,859,877   4,872,689   5,570,306   5,564,250   4,859,877   4,872,689 
                                
Financial liabilities:                                
Level 2 inputs:                                
Deposits $5,394,810  $5,391,665  $5,420,311  $5,417,320  $5,796,901  $5,793,324  $5,420,311  $5,417,320 
Federal funds purchased  300,226   300,226   355,944   355,944   254,880   254,880   355,944   355,944 
Other borrowings  55,075   56,339   55,262   54,203   54,975   56,996   55,262   54,203 

 

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NOTE 11 – SUBSEQUENT EVENTS

 

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

 

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

 

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016.

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Forward-Looking Statements

 

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

 

Business

 

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

 

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

 

Overview

 

As of JuneSeptember 30, 2017, we had consolidated total assets of $6.33$6.71 billion, a decreasean increase of $40.8$341.7 million, or 0.6%5.4%, from $6.37 billion at December 31, 2016. This decreaseincrease in total assets resulted from a $528.7$717.0 million increase in loans, offset by a $435.0 million decrease in balances held at the Federal Reserve Bank (“FRB”)cash and federal funds sold.cash equivalents. Total loans were $5.34$5.63 billion at JuneSeptember 30, 2017, up $431.9$717.0 million, or 8.8%14.6%, from $4.91 billion at December 31, 2016. Total deposits were $5.39$5.80 billion at JuneSeptember 30, 2017, a decreasean increase of $25.5$376.6 million, or 0.5%6.9%, from $5.42 billion at December 31, 2016.

 

Net income available to common stockholders for the three months ended JuneSeptember 30, 2017 was $24.1$25.3 million, an increase of $5.2$4.4 million, or 27.5%21.1%, from $18.9$20.9 million for the corresponding period in 2016. Basic and diluted earnings per common share were $0.46$0.48 and $0.45,$0.47, respectively, for the three months ended JuneSeptember 30, 2017, compared to basic and diluted earnings per common share of $0.36$0.40 and $0.39, respectively, for the corresponding period in 2016.

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Net income available to common stockholders for the sixnine months ended JuneSeptember 30, 2017 was $46.7$71.9 million, an increase of $7.9$12.2 million, or 20.4%, from $38.8$59.7 million for the corresponding period in 2016. Basic and diluted earnings per common share were $0.88$1.36 and $0.86,$1.33, respectively, for the sixnine months ended JuneSeptember 30, 2017, compared to $0.74$1.14 and $0.73,$1.12, respectively, for the corresponding period in 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, 2016.

 

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Financial Condition

 

Cash and Cash Equivalents

 

At JuneSeptember 30, 2017, we had $49.4$182.8 million in federal funds sold, compared to $160.4 million at December 31, 2016. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At JuneSeptember 30, 2017, we had $133.0$85.2 million in balances at the Federal Reserve, compared to $565.1 million at December 31, 2016. This decrease was a result inof our lower levels of excess liquidity due to loan growth and a slight decrease in depositsfederal funds purchased from our correspondent banks during the first halfnine months of 2017.

 

Debt Securities

 

Debt securities available for sale totaled $438.8$435.3 million at JuneSeptember 30, 2017 and $422.4 million at December 31, 2016. Debt securities held to maturity totaled $79.3$87.4 million at JuneSeptember 30, 2017 and $62.6 million at December 31, 2016. We had pay downs of $24.3$37.6 million on mortgage-backed securities, maturities of $16.7$21.1 million on municipal, agency and corporate securities and calls of $8.2$11.9 million on municipal securities and subordinated notes during the sixnine months ended JuneSeptember 30, 2017. We bought $55.8purchased $72.0 million in mortgage-backed securities, $12.0$13.8 million in municipal securities, $2.9 million in U.S. Treasury securities and $11.0$16.0 million in subordinated notes during the first sixnine months of 2017. SevenNine mortgage-backed securities and fourfive subordinated notes boughtpurchased were classified as held to maturity. All other securities boughtpurchased 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 JuneSeptember 30, 2017 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.

 

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All securities held are traded in liquid markets. As of JuneSeptember 30, 2017, we owned restricted 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$50.5 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 JuneSeptember 30, 2017 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 $285.8$240.5 million and $257.6$223.7 million as of JuneSeptember 30, 2017 and December 31, 2016, respectively.

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Loans

 

We had total loans of $5.34$5.63 billion at JuneSeptember 30, 2017, an increase of $431.9$717.0 million, or 8.8%14.6%, compared to $4.91 billion at December 31, 2016. At JuneSeptember 30, 2017, the percentage of our loans in each of our regions were as follows:

 

  Percentage of Total
Loans in MSA
Birmingham-Hoover, AL MSA  43.142.9%
Dothan, AL MSA9.9%
Huntsville, AL MSA  9.9%
Dothan, AL MSA9.69.7%
Montgomery, AL MSA  7.46.9%
Mobile, AL MSA  6.06.1%
Total Alabama MSAs  76.075.5%
Pensacola-Ferry Pass-Brent, FL MSA  6.56.3%
Tampa-St. Petersburg-Clearwater, FL MSA  1.81.9%
Total Florida MSAs  8.38.2%
Atlanta-Sandy Springs-Roswell, GA MSA  4.14.4%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA  8.58.7%
Charleston-North Charleston, SC MSA  3.13.2%

Premises and Equipment, Net

Premises and equipment increased $14.8 million to $55.1 million at September 30, 2017 compared to $40.3 million at December 31, 2016. This increase is primarily the result of our construction of a new headquarters building in Birmingham, Alabama. Construction began in the first quarter of 2016 and it was placed in service in September 2017. Total cost of the building and contents is approximately $31.0 million.

 

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 JuneSeptember 30, 2017.

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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.

 

June 30, 2017 Amount Percentage of loans
in each category
to total loans
September 30, 2017 Amount Percentage of loans
in each category
to total loans
 (In Thousands) (In Thousands)
Commercial, financial and agricultural $29,127   39.74% $31,701   39.51%
Real estate - construction  5,138   7.40%  5,331   8.31%
Real estate - mortgage  20,392   51.83%  20,966   51.15%
Consumer  402   1.03%  461   1.03%
Total $55,059   100.00% $58,459   100.00%

 

December 31, 2016 Amount Percentage of loans
in each category
to total loans
  (In Thousands)
Commercial, financial and agricultural $28,872   40.36%
Real estate - construction  5,125   6.82%
Real estate - mortgage  17,504   51.70%
Consumer  392   1.12%
Total $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 $5.9$2.0 million to $11.0$14.9 million at JuneSeptember 30, 2017, compared to $16.9 million at December 31, 2016. Of this total, nonaccrual loans were $10.0$12.4 million at JuneSeptember 30, 2017, compared to $10.6 million at December 31, 2016, a decreasean increase of $0.6$1.8 million. Excluding credit card accounts, there was one loanwere three loans 90 or more days past due and still accruing totaling $1.0$2.4 million, compared to two loans totaling $6.2 million at December 31, 2016. Troubled Debt Restructurings (“TDR”) at JuneSeptember 30, 2017 and December 31, 2016 were $16.4 million and $7.3 million, respectively. OneThere were no loans newly classified as TDR for the three months ended September 30, 2017 and one relationship totaling $12.7 million, which includes nine loans of various types, was newly classified as TDR for the three and sixnine months ended JuneSeptember 30, 2017. There were no loans newly classified as TDR for the three and nine months ended September 30, 2016. There were no renewals of existing TDRs for the three months ended September 30, 2016 and two renewals of existing TDRs totaling $600,000 for the three and sixnine months ended JuneSeptember 30, 2016. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.

 

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OREO and repossessed assets decreased to $3.9 million at JuneSeptember 30, 2017, from $5.0 million at December 31, 2016. The total number of OREO and repossessed asset accounts decreased to 9nine at JuneSeptember 30, 2017, compared to 12 at December 31, 2016. The following table summarizes OREO and repossessed asset activity for the sixnine months ended JuneSeptember 30, 2017 and 2016:

 

 Six months ended June 30, Nine months ended September 30,
 2017 2016 2017 2016
 (In thousands) (In thousands)
Balance at beginning of period $4,988  $5,392  $4,988  $5,392 
Transfers from loans and capitalized expenses  586   2,036   586   2,036 
Proceeds from sales  (1,547)  (1,575)  (1,529)  (1,648)
Internally financed sales  (185)  (1,157)  (185)  (2,161)
Write-downs / net gain (loss) on sales  49   (436)  28   (584)
Balance at end of period $3,891  $4,260  $3,888  $3,035 

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The following table summarizes our nonperforming assets and TDRs at JuneSeptember 30, 2017 and December 31, 2016:

 

  June 30, 2017 December 31, 2016
  Balance Number of
Loans
 Balance Number of
Loans
  (Dollar Amounts In Thousands)
Nonaccrual loans:                
Commercial, financial and agricultural $4,417   8  $7,282   13 
Real estate - construction  2,377   3   3,268   5 
Real estate - mortgage:                
Owner-occupied commercial  2,248   2   -   - 
1-4 family mortgage  921   1   74   1 
Other mortgage  -   -   -   - 
Total real estate - mortgage  3,169   3   74   1 
Consumer  -   -   -   - 
Total Nonaccrual loans: $9,963   14  $10,624   19 
                 
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  -   -   -   - 
Other mortgage  -   -   -   - 
Total real estate - mortgage  -   -   6,208   1 
Consumer  48   14   45   10 
Total 90+ days past due and accruing: $1,016   15  $6,263   12 
                 
Total Nonperforming Loans: $10,979   29  $16,887   31 
                 
Plus: Other real estate owned and repossessions  3,891   9   4,988   12 
Total Nonperforming Assets $14,870   38  $21,875   43 
                 
Restructured accruing loans:                
Commercial, financial and agricultural $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  -   -   204   1 
Total real estate - mortgage  4,514   3   204   1 
Consumer  -   -   -   - 
Total restructured accruing loans: $12,716   9  $558   2 
                 
Total Nonperforming assets and restructured accruing loans $27,586   47  $22,433   45 
                 
Ratios:                
Nonperforming loans to total loans  0.21%      0.34%    
Nonperforming assets to total loans plus other real estate owned and repossessions  0.28%      0.44%    
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions  0.52%      0.46%    

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  September 30, 2017 December 31, 2016
  Balance Number of
Loans
 Balance Number of
Loans
  (Dollar Amounts In Thousands)
Nonaccrual loans:                
Commercial, financial and agricultural $5,798   16  $7,282   13 
Real estate - construction  2,285   3   3,268   5 
Real estate - mortgage:                
Owner-occupied commercial  2,497   3   -   - 
1-4 family mortgage  1,308   3   74   1 
Other mortgage  430   3   -   - 
Total real estate - mortgage  4,235   9   74   1 
Consumer  38   1   -   - 
Total Nonaccrual loans: $12,356   29  $10,624   19 
                 
90+ days past due and accruing:                
Commercial, financial and agricultural $2,108   3  $10   1 
Real estate - construction  -   -   -   - 
Real estate - mortgage:                
Owner-occupied commercial  -   -   6,208   1 
1-4 family mortgage  -   -   -   - 
Other mortgage  328   1   -   - 
Total real estate - mortgage  328   1   6,208   1 
Consumer  70   27   45   10 
Total 90+ days past due and accruing: $2,506   31  $6,263   12 
                 
Total Nonperforming Loans: $14,862   60  $16,887   31 
                 
Plus: Other real estate owned and repossessions  3,888   9   4,988   12 
Total Nonperforming Assets $18,750   69  $21,875   43 
                 
Restructured accruing loans:                
Commercial, financial and agricultural $7,189   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  -   -   204   1 
Total real estate - mortgage  4,514   3   204   1 
Consumer  -   -   -   - 
Total restructured accruing loans: $12,700   9  $558   2 
                 
Total Nonperforming assets and restructured accruing loans $31,450   78  $22,433   45 
                 
Ratios:                
Nonperforming loans to total loans  0.26%      0.34%    
Nonperforming assets to total loans plus other real estate owned and repossessions  0.33%      0.44%    
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions  0.56%      0.46%    

 

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.

 

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Impaired Loans and Allowance for Loan Losses

 

As of JuneSeptember 30, 2017, we had impaired loans of $51.0$49.6 million, inclusive of nonaccrual loans, an increase of $5.4$4.0 million from $45.6 million as of December 31, 2016. This increase is attributable to $14.7$15.0 million of loans newly classified as specifically impaired, partially offset by charge-offs totaling $4.7$5.6 million, net pay downs of $3.4$4.1 million, loan classification upgrades of $0.6$0.7 million and OREO transfers and repossessions of $0.6 million. We allocated $7.2$8.5 million of our allowance for loan losses at JuneSeptember 30, 2017 to these impaired loans, a decreasean increase of $1.0$0.3 million compared to $8.2 million as of December 31, 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 $51.0$49.6 million of impaired loans reported as of JuneSeptember 30, 2017, $31.4$30.4 million were commercial, financial and agricultural loans, $3.4$3.3 million were real estate construction loans, and $16.2$15.8 million were real estate mortgage loans and $0.1 million were consumer loans.

 

Deposits

 

Total deposits decreased $25.5increased $376.6 million, or 0.5%6.9%, to $5.39$5.80 billion at JuneSeptember 30, 2017 compared to $5.42 billion at December 31, 2016. 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 decreasesomewhat slower growth in our total deposits during the first half ofso far in 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 $300.2$254.9 million and $355.9 million at JuneSeptember 30, 2017 and December 31, 2016, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. Like us, our correspondent bank clients have experienced slower growth in deposits in 2017. The average rate paid on these borrowings was 1.11%1.34% for the quarter ended JuneSeptember 30, 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:

 

·$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
·$400,000300,000 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 JuneSeptember 30, 2017, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $549.7$628.1 million. Additionally, the Bank had additional borrowing availability of approximately $458.0$485.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We believe these sources of funding are adequate to meet immediate anticipated funding needs. 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.

 

32

The following table reflects the contractual maturities of our term liabilities as of JuneSeptember 30, 2017. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

 Payments due by Period Payments due by Period
 Total 1 year or less Over 1 - 3
years
 Over 3 - 5
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 $4,869,053  $-  $-  $-  $-  $5,235,403  $-  $-  $-  $- 
Certificates of deposit (2)  525,757   284,730   157,765   81,335   1,927   561,498   324,179   152,527   83,161   1,631 
Federal funds purchased  300,226   300,226   -   -   -   254,880   254,880   -   -   - 
Subordinated debentures  55,075   400   -   -   54,675   54,975   300   -   -   54,675 
Operating lease commitments  18,677   3,843   6,394   4,107   4,333   16,180   3,101   5,365   3,870   3,844 
Total $5,768,788  $589,199  $164,159  $85,442  $60,935  $6,122,936  $582,460  $157,892  $87,031  $60,150 

 

(1)  Excludes interest.

(2)  Certificates of deposit give customers the right to early withdrawal.  Early withdrawals may be subject to penalties.

The penalty amount depends on the remaining time to maturity at the time of early withdrawal.

 

Capital Adequacy

 

As of JuneSeptember 30, 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 JuneSeptember 30, 2017.

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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 JuneSeptember 30, 2017, December 31, 2016 and JuneSeptember 30, 2016:

 

         To Be Well Capitalized Actual For Capital Adequacy
Purposes
 To Be Well Capitalized
Under Prompt Corrective
Action Provisions
     For Capital Adequacy Under Prompt Corrective Amount Ratio Amount Ratio Amount Ratio
 Actual Purposes Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2017: (Dollars in thousands)
As of September 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  $574,296   9.60% $269,204   4.50%  N/A   N/A 
ServisFirst Bank  603,094   10.63%  255,286   4.50% $368,747   6.50%  629,146   10.52%  269,172   4.50% $388,803   6.50%
Tier 1 Capital to Risk-Weighted Assets:                                                
Consolidated  551,935   9.73%  340,425   6.00%  N/A   N/A   574,798   9.61%  358,938   6.00%  N/A   N/A 
ServisFirst Bank  603,596   10.64%  340,382   6.00%  453,842   8.00%  629,648   10.53%  358,896   6.00%  478,527   8.00%
Total Capital to Risk-Weighted Assets:                                                
Consolidated  662,169   11.67%  453,900   8.00%  N/A   N/A   688,432   11.51%  478,584   8.00%  N/A   N/A 
ServisFirst Bank  659,155   11.62%  453,842   8.00%  567,303   10.00   688,607   11.51%  478,527   8.00%  598,159   10.00 
Tier 1 Capital to Average Assets:                                                
Consolidated  551,935   8.88%  248,732   4.00%  N/A   N/A   574,798   8.91%  257,939   4.00%  N/A   N/A 
ServisFirst Bank  603,596   9.71%  249,293   4.00%  311,616   5.00%  629,648   9.76%  258,498   4.00%  323,123   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  $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%  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   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%  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   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%  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   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%  561,108   9.06%  247,760   4.00%  309,700   5.00%
                                                
As of June 30, 2016:                        
As of September 30, 2016:                        
CET 1 Capital to Risk-Weighted Assets:                                                
Consolidated $469,101   9.83% $214,649   4.50%  N/A   N/A  $488,673   9.91% $221,937   4.50%  N/A   N/A 
ServisFirst Bank  517,987   10.86%  214,615   4.50% $309,999   6.50%  540,233   10.96%  221,902   4.50% $320,525   6.50%
Tier 1 Capital to Risk-Weighted Assets:                                                
Consolidated  469,478   9.84%  286,199   6.00%  N/A   N/A   489,050   9.92%  295,916   6.00%  N/A   N/A 
ServisFirst Bank  518,364   10.87%  286,153   6.00%  381,538   8.00%  540,610   10.96%  295,869   6.00%  394,493   8.00%
Total Capital to Risk-Weighted Assets:                                                
Consolidated  571,627   11.98%  381,598   8.00%  N/A   N/A   593,140   12.03%  394,554   8.00%  N/A   N/A 
ServisFirst Bank  565,862   11.86%  381,538   8.00%  476,922   10.00%  590,043   11.97%  394,493   8.00%  493,116   10.00%
Tier 1 Capital to Average Assets:                                                
Consolidated  469,478   8.52%  220,506   4.00%  N/A   N/A   489,050   8.20%  238,594   4.00%  N/A   N/A 
ServisFirst Bank  518,364   9.40%  220,492   4.00%  275,615   5.00%  540,610   9.06%  238,583   4.00%  298,228   5.00%

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Off-Balance Sheet Arrangements

 

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

 

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of JuneSeptember 30, 2017, we have reserved $500,000 for losses on such off-balance sheet arrangements consistent with guidance in the FRB’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 JuneSeptember 30, 2017 and December 31, 2016 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at JuneSeptember 30, 2017 are as follows:

 

 June 30, 2017 September 30, 2017
 (In Thousands) (In Thousands)
Commitments to extend credit $1,889,718  $1,873,412 
Credit card arrangements  88,337   82,684 
Standby letters of credit  39,710   49,894 
 $2,017,765  $2,005,990 

 

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.

 

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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 JuneSeptember 30, 2017 was $24.2$25.3 million and $24.1 million, respectively, compared to net income and net income available to common stockholders of $18.9$20.9 million for the three months ended JuneSeptember 30, 2016. Net income and net income available to common stockholders for the sixnine months ended JuneSeptember 30, 2017 was $46.7$71.9 million compared to net income and net income available to common stockholders of $38.8$59.7 million for the sixnine months ended JuneSeptember 30, 2016. The increase in net income for the three months ended JuneSeptember 30, 2017 over the same period in 2016 was primarily attributable to a $9.7$10.5 million increase in net interest income resulting from growth in earning assets, andpartially offset by a $1.0$3.4 million increase in non-interest income, led by increased credit card income.tax provision. The increase in net income for the sixnine months ended JuneSeptember 30, 2017 compared to 2016 was primarily the result of a $17.5$28.0 million increase in net interest income resulting from growth in average earning assets and a $2.1$2.0 million increase in non-interest income, led by increased credit card income. Increases in non-interest expense of $2.4Non-interest expenses increased by $1.3 million and $4.3$5.6 million, respectively, for the three and sixnine months ended JuneSeptember 30, 2017 compared to 2016 partially offset increases in income.2016.

 

Basic and diluted net income per common share were $0.46$0.48 and $0.45,$0.47, respectively, for the three months ended JuneSeptember 30, 2017, compared to $0.36$0.40 and $0.36,$0.39, respectively, for the corresponding period in 2016. Basic and diluted net income per common share were $0.88$1.36 and $0.86,$1.33, respectively, for the sixnine months ended JuneSeptember 30, 2017, compared to $0.74$1.14 and $0.73,$1.12, respectively, for the corresponding period in 2016. Return on average assets for the three and sixnine months ended JuneSeptember 30, 2017 was 1.55% and 1.50%1.52%, respectively, compared to 1.37%1.39% and 1.45%1.43%, respectively, for the corresponding periods in 2016. Return on average common stockholders’ equity for the three and sixnine months ended JuneSeptember 30, 2017 was 17.36%17.28% and 17.23%17.24% compared to 15.79%16.66% and 16.57%16.60%, respectively, for the corresponding periods in 2016.

 

Dividend payout ratio for the three and nine months ended September 30, 2017 was 10.71% and 11.29% compared to 10.26% and 10.62%, respectively, for the corresponding periods in 2016. Stockholders’ equity to total assets as of September 30, 2017 and 2016 was 8.79% and 8.46%, respectively.

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 $9.7$8.5 million, or 20.9%17.6%, to $56.1$56.9 million for the three months ended JuneSeptember 30, 2017 compared to $46.4$48.4 million for the corresponding period in 2016, and increased $17.5$28.0 million, or 19.0%20.1%, to $108.6$167.5 million for the sixnine months ended JuneSeptember 30, 2017 compared to $91.9$139.5 million for the corresponding period in 2016. This increase was primarily attributable to growth in average earning assets, which increased $655.1$435.8 million, or 12.3%7.6%, from the secondthird quarter of 2016 to the secondthird quarter of 2017, and $832.0$699.2 million, or 16.1%13.0%, from the sixnine months ended JuneSeptember 30, 2016 to the same period in 2017. The taxable-equivalent yield on interest-earning assets increased to 4.30%4.37% for the three months ended JuneSeptember 30, 2017 from 3.97%3.81% for the corresponding period in 2016, and increased to 4.17%4.23% for the sixnine months ended JuneSeptember 30, 2017 from 4.00%3.93% for the corresponding period in 2016. The yield on loans for the three months ended JuneSeptember 30, 2017 was 4.60%4.66% compared to 4.47% for the corresponding period in 2016, and 4.52%4.58% compared to 4.48%4.47% for the sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016, respectively. The cost of total interest-bearing liabilities increased to 0.74%0.81% for the three months ended JuneSeptember 30, 2017 compared to 0.64% for the corresponding period in 2016, and increased to 0.71%0.74% for the sixnine months ended JuneSeptember 30, 2017 from 0.63% for the corresponding period in 2016. Net interest margin for the three months ended JuneSeptember 30, 2017 was 3.77% compared to 3.51%3.35% for the corresponding period in 2016, and 3.65%3.69% for the sixnine months ended JuneSeptember 30, 2017 compared to 3.54%3.47% for the corresponding period in 2016.

35

 

The following tables show, for the three and sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 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:

 

35

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended JuneSeptember 30,

(In thousands, except Average Yields and Rates)

                                           

 2017 2016
   Interest Average   Interest Average
 Average Earned / Yield / Average Earned / Yield / 2017 2016
 Balance Paid Rate Balance Paid Rate Average
Balance
 Interest
Earned /
Paid
 Average
Yield /
 Rate
 Average
Balance
 Interest
Earned /
Paid
 Average
Yield /
 Rate
Assets:                                                
Interest-earning assets:                                                
Loans, net of unearned income (1)(2)                                                
Taxable $5,192,812  $59,508   4.60% $4,406,107  $49,015   4.47% $5,407,109  $63,519   4.66% $4,554,900  $51,233   4.47%
Tax-exempt (3)  41,143   505   4.92   16,315   184   4.54   33,357   435   5.17   21,939   241   4.37 
Total loans, net of unearned income  5,233,955   60,013   4.60   4,422,422   49,199   4.47   5,440,466   63,954   4.66   4,576,839   51,474   4.47 
Mortgage loans held for sale  5,958   58   3.90   7,323   66   3.62   4,862   43   3.51   6,724   64   3.79 
Investment securities:                                                
Taxable  389,505   2,274   2.34   208,113   1,238   2.38   385,431   2,287   2.37   224,825   1,232   2.19 
Tax-exempt (3)  133,590   1,129   3.38   135,954   1,269   3.73   131,478   1,097   3.34   135,272   1,262   3.73 
Total investment securities (4)  523,095   3,403   2.60   344,067   2,507   2.91   516,909   3,384   2.62   360,097   2,494   2.77 
Federal funds sold  98,598   287   1.17   144,206   210   0.59   111,175   378   1.35   217,158   347   0.64 
Restricted equity securities  1,030   27   10.51   5,659   51   3.62   1,030   9   3.47   5,658   57   4.01 
Interest-bearing balances with banks  109,909   286   1.04   393,782   507   0.52   118,510   379   1.27   590,675   759   0.51 
Total interest-earning assets $5,972,545  $64,074   4.30% $5,317,459  $52,540   3.97% $6,192,952  $68,147   4.37% $5,757,151  $55,195   3.81%
Non-interest-earning assets:                                                
Cash and due from banks  68,894           65,318           65,457           58,809         
Net fixed assets and equipment  49,813           23,241           54,727           25,000         
Allowance for loan losses, accrued interest and other assets  143,286           127,640           151,786           145,804         
Total assets $6,234,538           5,533,658          $6,464,922           5,986,764         
                                                
Liabilities and stockholders' equity:                                                
Interest-bearing liabilities:                                                
Interest-bearing demand deposits $779,916  $767   0.39% $691,776  $614   0.36% $800,437  $849   0.42% $696,100  $644   0.37%
Savings deposits  48,150   36   0.30   41,546   31   0.30   48,313   37   0.30   43,569   33   0.30 
Money market accounts  2,567,817   4,097   0.64   2,105,420   2,736   0.52   2,774,061   5,170   0.74   2,471,829   3,387   0.55 
Time deposits (5)  537,220   1,421   1.06   498,151   1,252   1.01   546,020   1,518   1.10   519,653   1,294   0.99 
Total interest-bearing deposits  3,933,103   6,321   0.64   3,336,893   4,633   0.56   4,168,831   7,574   0.72   3,731,151   5,358   0.57 
Federal funds purchased  336,344   933   1.11   505,076   808   0.64   282,806   954   1.34   436,415   698   0.64 
Other borrowings  55,130   717   5.22   55,521   718   5.20   55,034   717   5.17   55,410   717   5.15 
Total interest-bearing liabilities $4,324,577  $7,971   0.74% $3,897,490  $6,159   0.64% $4,506,671  $9,245   0.81% $4,222,976  $6,773   0.64%
Non-interest-bearing liabilities:                                                
Non-interest-bearing demand                        
deposits  1,338,514           1,142,541         
Non-interest-bearing demand deposits  1,363,207           1,250,139         
Other liabilities  13,739           13,301           15,070           14,376         
Stockholders' equity  556,521           475,917           578,626           494,248         
Unrealized gains on securities and derivatives  1,187           4,409           1,348           5,025         
Total liabilities and stockholders' equity $6,234,538          $5,533,658          $6,464,922          $5,986,764         
Net interest income     $56,103          $46,381          $58,902          $48,422     
Net interest spread          3.56%          3.33%          3.56%          3.17%
Net interest margin          3.77%          3.51%          3.77%          3.35%

 

(1)Non-accrual loans are included in average loan balances in all periods.  Loan fees of $851,000$749,000 and $530,000$653,000 are included in interest income in 2017 and 2016, respectively.
(2)Accretion on acquired loan discounts of $124,000$107,000 and $334,000$194,000 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)Unrealized gains of $1,824,000$2,072,000 and $6,772,000$7,730,000 are excluded from the yield calculation in 2017 and 2016, respectively.
(5)Accretion on acquired CD premiums of $0 and $48,000 are included in interest in 2017 and 2016, respectively.

 

 36 
 

 

 For the Three Months Ended June 30, For the Three Months Ended September 30,
 2017 Compared to 2016 Increase (Decrease) in Interest
Income and Expense Due to Changes in:
 2017 Compared to 2016 Increase (Decrease) in Interest
Income and Expense Due to Changes in:
 Volume Rate Total Volume Rate Total
 (In Thousands) (In Thousands)
Interest-earning assets:                        
Loans, net of unearned income                        
Taxable $9,100  $1,393  $10,493  $10,054  $2,232  $12,286 
Tax-exempt  304   17   321   144   50   194 
Total loans, net of unearned income  9,404   1,269   10,814   10,198   2,282   12,480 
Mortgages held for sale  (13)  5   (8)  (16)  (5)  (21)
Debt securities:                      
Taxable  1,062   (26)  1,036   949   106   1,055 
Tax-exempt  (21)  (119)  (140)  (34)  (131)  (165)
Total debt securities  1,041   (145)  896   915   (25)  890 
Federal funds sold  (83)  160   77   (227)  258   31 
Restricted equity securities  (66)  42   (24)  (41)  (7)  (48)
Interest-bearing balances with banks  (520)  299   (221)  (923)  543   (380)
Total interest-earning assets  9,763   1,771   11,534   9,906   3,046   12,952 
                        
Interest-bearing liabilities:                        
Interest-bearing demand deposits  83   70   153   105   100   205 
Savings  5   -   5   4   -   4 
Money market accounts  673   688   1,361   455   1,328   1,783 
Time deposits  104   65   169   69   155   224 
Total interest-bearing deposits  865   823   1,688   633   1,583   2,216 
Federal funds purchased  (332)  457   125   (311)  567   256 
Other borrowed funds  (4)  3   (1)  (4)  4   - 
Total interest-bearing liabilities  529   1,283   1,812   318   2,154   2,472 
Increase in net interest income $9,234  $488  $9,722  $9,588  $892  $10,480 

 

Our growth in loans, non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change. Also, 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 increased more than rates paid on deposits. More recently, increases in rates paid on deposits has contributed an unfavorable rate variance when compared to prior quarters in 2017. Management continues to closely monitor pricing of deposit accounts in an effort to control interest expense.

 

 37 
 

 

Average Consolidated Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the SixNine Months Ended JuneSeptember 30,

(In thousands, except Average Yields and Rates)

                                           

 2017 2016
   Interest     Interest  
 Average Earned / Average Average Earned / Average 2017 2016
 Balance Paid Yield / Rate Balance Paid Yield / Rate Average
Balance
 Interest
Earned /
 Paid
 Average
Yield / Rate
 Average
Balance
 Interest
Earned /
 Paid
 Average
Yield / Rate
Assets:                                                
Interest-earning assets:                                                
Loans, net of unearned income (1)(2)                                                
Taxable $5,085,468  $114,791   4.55% $4,318,082  $96,096   4.48% $5,193,860  $178,311   4.59% $4,398,894  $147,328   4.47%
Tax-exempt (3)  34,271   822   4.80   13,298   327   4.95   33,963   1,257   4.93   16,200   573   4.72 
Total loans, net of unearned income  5,119,739   115,613   4.52   4,331,380   96,423   4.48   5,227,823   179,568   4.58   4,415,094   147,901   4.47 
Mortgage loans held for sale  5,798   115   4.00   6,704   136   4.08   5,483   158   3.85   6,710   200   3.98 
Investment securities:                                                
Taxable  378,985   4,361   2.30   214,918   2,505   2.33   381,157   6,646   2.32   216,947   3,739   2.30 
Tax-exempt (3)  133,087   2,274   3.42   136,858   2,618   3.83   132,545   3,373   3.39   136,326   3,845   3.76 
Total investment securities (4)  512,072   6,635   2.59   351,776   5,123   2.91   513,702   10,019   2.60   353,273   7,584   2.86 
Federal funds sold  166,154   806   0.98   96,298   283   0.59   147,626   1,185   1.07   136,879   630   0.61 
Restricted equity securities  1,030   31   6.07   5,310   98   3.71   1,030   39   5.06   5,427   154   3.79 
Interest-bearing balances with banks  202,265   872   0.87   383,548   974   0.51   174,040   1,252   0.96   453,087   1,734   0.51 
Total interest-earning assets $6,007,058  $124,072   4.17% $5,175,016  $103,037   4.00% $6,069,704  $192,221   4.23% $5,370,470  $158,203   3.93%
Non-interest-earning assets:                                                
Cash and due from banks  64,321           63,460           64,704           61,906         
Net fixed assets and equipment  47,290           22,132           49,796           23,095         
Allowance for loan losses, accrued interest and other assets  140,796           127,066           144,499           133,357         
Total assets $6,259,465          $5,387,674          $6,328,703          $5,588,828         
                                                
Liabilities and stockholders' equity:                                                
Interest-bearing liabilities:                                                
Interest-bearing demand deposits $784,569  $1,499   0.39% $678,407  $1,194   0.35% $789,916  $2,348   0.40% $684,348  $1,838   0.36%
Savings deposits  49,299   76   0.31   41,301   61   0.30   48,967   113   0.31   42,062   95   0.30 
Money market accounts  2,630,672   7,973   0.61   2,036,579   5,226   0.52   2,678,993   13,143   0.66   2,186,703   8,612   0.53 
Time deposits (5)  533,630   2,755   1.04   502,878   2,513   1.00   537,806   4,273   1.06   508,510   3,807   1.00 
Total interest-bearing deposits  3,998,170   12,303   0.62   3,259,165   8,994   0.55   4,055,682   19,877   0.66   3,421,623   14,352   0.56 
Federal funds purchased  347,981   1,699   0.98   479,187   1,512   0.63   326,017   2,653   1.09   460,844   2,210   0.64 
Other borrowings  55,184   1,434   5.24   55,576   1,435   5.19   55,134   2,150   5.21   55,520   2,152   5.18 
Total interest-bearing liabilities $4,401,335  $15,436   0.71% $3,793,928  $11,941   0.63% $4,436,833  $24,680   0.74% $3,937,987  $18,714   0.63%
Non-interest-bearing liabilities:                                                
Non-interest-bearing demand deposits  1,297,578           1,110,076           1,319,695           1,157,106         
Other liabilities  14,417           12,747           14,637           13,250         
Stockholders' equity  545,936           466,569           556,952           475,905         
Unrealized gains on securities and derivatives  199           4,354           586           4,580         
Total liabilities and stockholders' equity $6,259,465          $5,387,674          $6,328,703          $5,588,828         
Net interest income     $108,636          $91,096          $167,541          $139,489     
Net interest spread          3.46%          3.37%          3.49%          3.30%
Net interest margin          3.65%          3.54%          3.69%          3.47%
                        

 

(1)Non-accrual loans are included in average loan balances in all periods.  Loan fees of $1,626,000$2,376,000 and $939,000$1,574,000 are included in interest income in 2017 and 2016, respectively.
(2)Accretion on acquired loan discounts of $267,000$374,000 and $624,000$819,000 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)Unrealized gains of $304,000 and $6,694,000 are excluded from the yield calculation in 2017 and 2016, respectively.
(5)Accretion on acquired CD premiums of $32,000 and $140,000$189,000 are included in interest in 2017 and 2016, respectively.

 

 38 
 

 

  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 

  For the Nine Months Ended September 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 $26,839  $4,144  $30,983 
Tax-exempt  655   29   684 
Total loans, net of unearned income  27,494   4,173   31,667 
 Mortgages held for sale  (36)  (6)  (42)
Debt securities:            
Taxable  2,852   55   2,907 
Tax-exempt  (106)  (366)  (472)
Total debt securities  2,746   (311)  2,435 
 Federal funds sold  52   503   555 
 Restricted equity securities  (154)  39   (115)
 Interest-bearing balances with banks  (1,454)  972   (482)
Total interest-earning assets  28,648   5,370   34,018 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  298   212   510 
Savings  16   2   18 
Money market accounts  2,150   2,381   4,531 
Time deposits  220   246   466 
Total interest-bearing deposits  2,684   2,841   5,525 
Federal funds purchased  (780)  1,223   443 
Other borrowed funds  (18)  16   (2)
Total interest-bearing liabilities  1,886   4,080   5,966 
Increase in net interest income $26,762  $1,290  $28,052 

 

Our growth in loans, non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change. Also, 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.component because yields on loans have increased more than rates paid on deposits.

 

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 JuneSeptember 30, 2017, total loans rated Special Mention, Substandard, and Doubtful were $122.6$131.1 million, or 2.3% of total loans, compared to $128.8 million, or 2.6% of total loans, at December 31, 2016. Impaired loans are reviewed specifically and separately to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

 

The provision for loan losses was $4.4$4.8 million for the three months ended JuneSeptember 30, 2017, an increase of $0.6$1.3 million from $3.8$3.5 million for the three months ended JuneSeptember 30, 2016, and was $9.4$14.2 million for the sixnine months ended JuneSeptember 30, 2017, a $3.5$4.9 million increase compared to $5.9$9.3 million for the sixnine months ended JuneSeptember 30, 2016. Nonperforming loans decreased to $11.0$14.9 million, or 0.21%0.26% of total loans, at JuneSeptember 30, 2017 from $16.9 million, or 0.34% of total loans, at December 31, 2016, but were higher than $5.2$6.7 million, or 0.11%0.14% of total loans, at JuneSeptember 30, 2016. Impaired loans increased to $51.0$49.6 million, or 0.94%0.88% of total loans, at JuneSeptember 30, 2017, compared to $45.6 million, or 0.93% of total loans, at December 31, 2016. The allowance for loan losses totaled $55.1$58.5 million, or 1.03%1.04% of total loans, net of unearned income, at JuneSeptember 30, 2017, compared to $51.9 million, or 1.06% of loans, net of unearned income, at December 31, 2016.

 

 39 
 

 

Noninterest Income

 

Noninterest income totaledwas flat at $4.8 million for the three months ended JuneSeptember 30, 2017 an increase of $1.0 million, or 12.2%, compared to the corresponding period in 2016, and totaled $9.4$14.1 million for the sixnine months ended JuneSeptember 30, 2017, an increase of $2.1$2.0 million, or 28.4%16.5%, compared to the corresponding period in 2016. Mortgage banking income increased $0.2decreased $0.1 million, or 18.1%9.1%, to $1.1$1.0 million for the three months ended JuneSeptember 30, 2017 compared to $0.9$1.1 million for the same period in 2016, and increased $0.4$0.2 million, or 25.1%7.4%, to $2.0$2.9 million for the sixnine months ended JuneSeptember 30, 2017 compared to $1.6$2.7 million for the same period in 2016, resulting from increases in average profit margins per loan originated.2016. Credit card income increased $0.6was flat at $1.1 million for the three months ended JuneSeptember 30, 2017 from $0.6 million forcompared to the same period in 2016, and increased $1.3 million, or 59.1%, to $2.4$3.5 million for the sixnine months ended JuneSeptember 30, 2017 compared to $1.0$2.2 million for the same period in 2016. Flat credit card income for the comparative quarters was the result of higher accruals for rebates and awards on credit card accounts during the third quarter of 2017. The number of credit card accounts increased 22%35.7% from JuneSeptember 30, 2016 to September 30, 2017 and the volume of purchases on cards increased 127%58.5% from the quarter ended JuneSeptember 30, 2016 to the quarter ended JuneSeptember 30, 2017.

 

Noninterest Expense

 

Noninterest expense totaled $21.9$21.5 million for the three months ended JuneSeptember 30, 2017, an increase of $2.4$1.3 million, or 12.2%6.4%, compared to $19.5$20.2 million for the same period in 2016, and totaled $43.1$64.6 million for the sixnine months ended JuneSeptember 30, 2017, an increase of $4.3$5.6 million, or 11.2%9.5%, compared to $38.8$59.0 million for the same period in 2016.

 

Details of expenses are as follows:

 

·Salary and benefit expense increased $1.3$1.5 million, or 12.1%13.4%, to $12.0$12.4 million for the three months ended JuneSeptember 30, 2017 from $10.7$11.0 million for the same period in 2016, and increased $1.9$3.4 million, or 8.9%10.4%, to $23.7$36.2 million for the sixnine months ended JuneSeptember 30, 2017 from $21.8$32.8 million for the same period in 2016. Total employees increased from 417416 as of JuneSeptember 30, 2016 to 433438 as of JuneSeptember 30, 2017, or 3.8%5.3%. Merit increases, cost of living adjustments, and medical benefit cost increases also contributed to the 2017 overall increased salary and benefits expense.

 

·Occupancy expense increaseddecreased $0.2 million, or 12.0%7.3%, to $2.3$1.9 million for the three months ended JuneSeptember 30, 2017 from $2.0$2.1 million for the corresponding period in 2016, and increased $0.5$0.3 million, or 12.4%5.6%, to $4.5$6.4 million from $4.0 million forduring the sixnine months ended JuneSeptember 30, 2017 compared tofrom $6.1 million during the corresponding period in 2016. We leased a new main office 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 region, starting in late 2016, a replacement of a previous smaller location with less visibility.

 

·Professional services expense decreased $0.4 million, or 31.9%, to $0.8 million for the three months ended September 30, 2017 from $1.2 million for the corresponding period in 2016, and decreased $0.5 million, or 18.3%, to $2.4 million from $2.9 million for the nine months ended September 30, 2017. Legal fees related to pending litigation during 2016 drove higher expenses in the previous year’s comparative periods.

·Federal deposit insurance and other regulatory assessments increased $0.3 million to $1.1were flat at $0.8 million for the three months ended JuneSeptember 30, 2017 compared to the same period in 2016, and increased $0.5$0.6 million to $2.1$2.9 million for the sixnine months ended JuneSeptember 30, 2017 compared to the same period in 2016. ThisThe increase in the nine-month comparative periods is driven by asset growth and a change in the assessment rate calculation enacted by the FDIC starting in the third quarter of 2016.

 

·OREO expenses decreased to $31,000 for the three months ended September 30, 2017 from $0.2 million for the corresponding period in 2016, and decreased $0.5 million, or 75.6%, to $0.2 million from $0.7 million for the nine months ended September 30, 2017. Fewer properties in OREO and less activity lead to the drop in expenses. We continue to actively manage and maintain our OREO properties to minimize potential losses until they are sold.

·Other operating expenses increased $0.7$0.5 million to $5.6$5.5 million for the three months ended JuneSeptember 30, 2017 compared to the same period in 2016, and increased $1.9$2.4 million to $11.1$16.6 million for the sixnine months ended JuneSeptember 30, 2017 compared to the same period in 2016. State sales taxes paid for the construction of our new headquarters building in Birmingham, Alabama and higher credit card processing expenses each contributed $0.1 million and $0.3$0.4 million of thisthe increase for the three and sixnine month comparative periods. Credit card processingIncreased transaction volume drove increased loan expenses ($0.6 million), increased bybank service charges ($0.1 million) and increased travel expenses ($0.1 million). We incurred a $0.2 million and $0.3 million forincrease in non-credit losses during the three and six month comparative periods.nine months ended September 30, 2017 compared to the same period in 2016.

 

 40 
 

 

The following table presents our non-interest income and non-interest expense for the three and sixnine month periods ending JuneSeptember 30, 2017 compared to the same periods in 2016.

 

 Three Months Ended
June 30,
     Six Months Ended
June 30,
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
    
 2017 2016 $ change % change 2017 2016 $ change % change 2017 2016 $ change % change 2017 2016 $ change % change
Non-interest income:                                                                
Service charges on deposit accounts $1,382  $1,306  $76   5.8% $2,736  $2,613  $123   4.7% $1,467  $1,367  $100   7.3% $4,203  $3,980  $223   5.6%
Mortgage banking  1,064   901   163   18.1%  1,963   1,569   394   25.1%  978   1,112   (134)  (12.1)%  2,941   2,681   260   9.7%
Credit card income  1,189   572   617   107.9%  2,368   1,041   1,327   127.5%  1,149   1,116   33   3.0%  3,517   2,159   1,358   62.9%
Securities gains  -   (3)  3   NM   -   (3)  3   NM   -   -   -   NM   -   (3)  3   NM 
Increase in cash surrender value life insurance  785   655   130   19.8%  1,509   1,279   230   18.0%  825   770   55   7.1%  2,334   2,049   285   13.9%
Other operating income  385   416   (31)  (7.5)%  775   783   (8)  (1.0)%  371   426   (55)  (12.9)%  1,146   1,207   (61)  (5.1)%
Total non-interest income $4,805  $3,847  $958   24.9% $9,351  $7,282  $2,069   28.4% $4,790  $4,791  $(1)  -% $14,141  $12,073  $2,068   17.1%
                                                                
Non-interest expense:                                                                
Salaries and employee benefits  12,031   10,733   1,298   12.1%  23,744   21,800   1,944   8.9%  12,428   10,958   1,470   13.4%  36,172   32,758   3,414   10.4%
Equipment and occupancy expense  2,265   2,023   242   12.0%  4,505   4,008   497   12.4%  1,947   2,100   (153)  (7.3)%  6,452   6,108   344   5.6%
Professional services  808   999   (191)  (19.1)%  1,579   1,737   (158)  (9.1)%  805   1,182   (377)  (31.9)%  2,384   2,919   (535)  (18.3)%
FDIC and other regulatory assessments  1,081   803   278   34.6%  2,078   1,553   525   33.8%  810   775   35   4.5%  2,888   2,328   560   24.1%
OREO expense  56   41   15   36.6%  132   490   (358)  (73.1)%  31   178   (147)  (82.6)%  163   668   (505)  (75.6)%
Other operating expense  5,634   4,905   729   14.9%  11,104   9,206   1,898   20.6%  5,476   4,969   507   10.2%  16,580   14,175   2,405   17.0%
Total non-interest expense $21,875  $19,504  $2,371   12.2% $43,142  $38,794  $4,348   11.2% $21,497  $20,162  $1,335   6.6% $64,639  $58,956  $5,683   9.6%

 

Income Tax Expense

 

Income tax expense was $10.0$11.6 million for the three months ended JuneSeptember 30, 2017 versus $7.6compared to $8.2 million for the same period in 2016, and was $17.8$29.4 million for the sixnine months ended JuneSeptember 30, 2017 compared to $13.9$22.0 million for the same period in 2016. Our effective tax rate for the three and sixnine months ended JuneSeptember 30, 2017 was 29.2%31.5% and 27.6%29.0%, respectively, compared to 28.6%28.1% and 26.3%27.0% for the corresponding periods in 2016, respectively. We recognized a reduction in provision for income taxes resulting from excess tax benefits from the exercise and vesting of stock options and restricted stock during the three and sixnine months ended JuneSeptember 30, 2017 of $1.4$0.8 million and $3.5$4.3 million, respectively, compared to $1.2 million and $3.5$4.7 million during the quarterthree and sixnine months ended JuneSeptember 30, 2016, respectively. Lower excess tax benefits from the exercise of stock options and lower Alabama state sales taxes, which we can deduct from our Alabama corporate income taxes, during the third quarter of 2017 contributed to the higher effective tax rate when compared to the same quarter in 2016. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance.

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

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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, 2016, and there are no significant changes to our sensitivity to changes in interest rates since December 31, 2016 as disclosed in our Annual Report on Form 10-K.

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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 JuneSeptember 30, 2017. Based upon the Evaluation, our CEO and CFO have concluded that, as of JuneSeptember 30, 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.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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, 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.

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

 

None.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit:  Description
31.01 Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02 Certification of principal financial officer pursuant to Rule 13a-14(a).
32.01 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
101.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

 

 

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 1,October 31, 2017By/s/ Thomas A. Broughton  III 
  Thomas A. Broughton III 
  President and Chief Executive Officer
    
Date: August 1,October 31, 2017By/s/ William M. Foshee 
  William M. Foshee  
  Chief Financial Officer

 

 

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