UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

sfbs20230331_10qimg001.jpg

 

(Mark one)

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

         

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2023

 

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

   ☐      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)(I.R.S. Employer Identification No.)

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

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

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

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common stock, par value $.001 per share

SFBS

New York Stock Exchange

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

 

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

Yes ☒ No 


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

 

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

 

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

 

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

 

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

 

ClassOutstanding as of October 27, 2017April 28, 2023
Common stock, $.001 par value52,979,31054,282,132

 


 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION3
Item 1.Consolidated Financial Statements3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2724
Item 3.Quantitative and Qualitative Disclosures about Market Risk4137
Item 4.Controls and Procedures4238
  
PART II. OTHER INFORMATION4238
Item 1Legal Proceedings4238
Item 1A.Risk Factors4339
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4339
Item 3.Defaults Upon Senior Securities4339
Item 4.Mine Safety Disclosures4339
Item 5.Other Information4339
Item 6.Exhibits4339

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
2

 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

SERVISFIRST BANCSHARES, INC.

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share amounts)

(In thousands, except share and per share amounts)

 
 
 September 30, 2017 December 31, 2016 

March 31, 2023

 

December 31, 2022

 
 (Unaudited) (1) 

(Unaudited)

   (1) 
ASSETS         
Cash and due from banks $79,431  $56,855  $139,175  $106,317 
Interest-bearing balances due from depository institutions  86,719   566,707  725,318  708,221 
Federal funds sold  182,841   160,435   6,478   1,515 
Cash and cash equivalents  348,991   783,997  870,971  816,053 
Available for sale debt securities, at fair value  435,325   422,375  624,948  644,815 
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 

Held to maturity debt securities (fair value of $937,961 at March 31, 2023 and $935,953 at December 31, 2022)

 1,021,989  1,034,121 
Restricted equity securities  1,038   1,024  7,307  7,734 
Mortgage loans held for sale  4,971   4,675  1,651  1,607 
Loans  5,628,765   4,911,770  11,629,802  11,687,968 
Less allowance for loan losses  (58,459)  (51,893)

Less allowance for credit losses

  (148,965)  (146,297)
Loans, net  5,570,306   4,859,877  11,480,837  11,541,671 
Premises and equipment, net  55,104   40,314  60,093  59,850 
Accrued interest and dividends receivable  20,334   15,801  50,500  48,422 
Deferred tax assets  26,326   27,132 

Deferred tax asset, net

 60,666  60,448 
Other real estate owned and repossessed assets  3,888   4,988  248  248 
Bank owned life insurance contracts  126,722   114,388  289,374  287,752 
Goodwill and other identifiable intangible assets  14,787   14,996  13,615  13,615 
Other assets  16,912   18,317   84,360   79,417 
Total assets $6,712,103  $6,370,448  $14,566,559  $14,595,753 
LIABILITIES AND STOCKHOLDERS' EQUITY         
Liabilities:         
Deposits:         
Noninterest-bearing $1,405,965  $1,281,605  $2,898,736  $3,321,347 
Interest-bearing  4,390,936   4,138,706   8,716,581   8,225,458 
Total deposits  5,796,901   5,420,311  11,615,317  11,546,805 
Federal funds purchased  254,880   355,944  1,480,160  1,618,798 
Other borrowings  54,975   55,262  65,417  64,726 
Accrued interest payable  4,353   4,401  20,541  18,615 
Other liabilities  10,781   11,641   45,307   48,913 
Total liabilities  6,121,890   5,847,559  13,226,742  13,297,857 
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 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 

Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at March 31, 2023 and December 31, 2022

 -  - 

Common stock, par value $0.001 per share; 200,000,000 shares authorized: 54,398,025 shares issued and outstanding at March 31, 2023; and 54,326,527 shares issued and outstanding at December 31, 2022

 54  54 
Additional paid-in capital  217,483   215,932  229,631  229,693 
Retained earnings  371,127   307,151  1,152,681  1,109,902 
Accumulated other comprehensive income  1,048   (624)

Accumulated other comprehensive loss

  (43,049)  (42,253)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.  589,711   522,512  1,339,317  1,297,396 
Noncontrolling interest  502   377   500   500 
Total stockholders' equity  590,213   522,889   1,339,817   1,297,896 
Total liabilities and stockholders' equity $6,712,103  $6,370,448  $14,566,559  $14,595,753 

 

(1) Derived from audited financial statements.

See Notes to Consolidated Financial  Statements.

(1) derived from audited financial statements.

 3 

See Notes to Consolidated Financial Statements.

3

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In thousands, except share and per share amounts)

 

(Unaudited)

 
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Interest income:

        

Interest and fees on loans

 $163,732  $103,105 

Taxable securities

  10,895   8,223 

Nontaxable securities

  21   43 

Federal funds sold

  614   13 

Other interest and dividends

  6,060   1,804 

Total interest income

  181,322   113,188 

Interest expense:

        

Deposits

  55,713   5,843 

Borrowed funds

  17,308   1,623 

Total interest expense

  73,021   7,466 

Net interest income

  108,301   105,722 

Provision for credit losses

  4,197   5,362 

Net interest income after provision for credit losses

  104,104   100,360 

Noninterest income:

        

Service charges on deposit accounts

  1,934   2,142 

Mortgage banking

  442   526 

Credit card income

  1,689   2,372 

Securities losses

  -   (3,335)

Increase in cash surrender value life insurance

  1,621   1,608 

Other operating income

  635   4,635 

Total noninterest income

  6,321   7,948 

Noninterest expense:

        

Salaries and employee benefits

  19,066   18,301 

Equipment and occupancy

  3,435   2,933 

Third party processing and other services

  7,284   5,605 

Professional services

  1,654   992 

FDIC and other regulatory assessments

  1,517   1,132 

Other real estate owned

  6   3 

Other operating expense

  6,702   8,252 

Total noninterest expense

  39,664   37,218 

Income before income taxes

  70,761   71,090 

Provision for income taxes

  12,790   13,477 

Net income

  57,971   57,613 

Dividends on preferred stock

  -   - 

Net income available to common stockholders

 $57,971  $57,613 

Basic earnings per common share

 $1.07  $1.06 

Diluted earnings per common share

 $1.06  $1.06 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

See Notes to Consolidated Financial Statements.

 

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2017 2016 2017 2016
Interest income:                
Interest and fees on loans $63,857  $51,473  $179,325  $147,930 
Taxable securities  2,288   1,232   6,649   3,739 
Nontaxable securities  729   823   2,246   2,515 
Federal funds sold  379   347   1,185   630 
Other interest and dividends  388   816   1,291   1,888 
Total interest income  67,641   54,691   190,696   156,702 
Interest expense:                
Deposits  7,574   5,358   19,877   14,352 
Borrowed funds  1,671   1,415   4,804   4,362 
Total interest expense  9,245   6,773   24,681   18,714 
Net interest income  58,396   47,918   166,015   137,988 
Provision for loan losses  4,803   3,464   14,170   9,323 
Net interest income after provision for loan losses  53,593   44,454   151,845   128,665 
Noninterest income:                
Service charges on deposit accounts  1,467   1,367   4,203   3,980 
Mortgage banking  978   1,112   2,941   2,681 
Credit card income  1,149   1,114   3,517   2,159 
Securities losses  -   -   -   (3)
Increase in cash surrender value life insurance  825   770   2,334   2,049 
Other operating income  371   428   1,146   1,207 
Total noninterest income  4,790   4,791   14,141   12,073 
Noninterest expenses:                
Salaries and employee benefits  12,428   10,958   36,172   32,758 
Equipment and occupancy expense  1,947   2,100   6,452   6,108 
Professional services  805   1,182   2,384   2,919 
FDIC and other regulatory assessments  810   775   2,888   2,328 
OREO expense  31   178   163   668 
Other operating expenses  5,476   4,969   16,580   14,175 
Total noninterest expenses  21,497   20,162   64,639   58,956 
Income before income taxes  36,886   29,083   101,347   81,782 
Provision for income taxes  11,627   8,174   29,405   22,041 
Net income  25,259   20,909   71,942   59,741 
Preferred stock dividends  -   -   31   23 
Net income available to common stockholders $25,259  $20,909  $71,911  $59,718 
                 
Basic earnings per common share $0.48  $0.40  $1.36  $1.14 
                 
Diluted earnings per common share $0.47  $0.39  $1.33  $1.12 
4

See Notes to Consolidated Financial Statements.


4
 

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(Unaudited)

 
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Net income

 $57,971  $57,613 

Other comprehensive loss, net of tax:

        

Unrealized net holding losses arising during period from securities available for sale, net of tax of $(221) and $(7,004) for 2023 and 2022, respectively

  (666)  (26,997)

Amortization of net unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax of $(45) and $(150) for 2023 and 2022, respectively

  (129)  (569)

Reclassification adjustment for net losses on sales of securities, net of tax of $700 for 2022

  -   2,635 

Other comprehensive loss, net of tax

  (796)  (24,931)

Comprehensive income

 $57,175  $32,682 

 

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2017 2016 2017 2016
Net income $25,259  $20,909  $71,942  $59,741 
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  305   (771)  1,672   1,585 
Comprehensive income $25,564  $20,138  $73,614  $61,326 
5

See Notes to Consolidated Financial Statements.


5
 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

(In thousands, except share amounts)

 

(Unaudited)

 
  

Three Months Ended March 31,

 
                      

Accumulated

         
              

Additional

      

Other

      

Total

 
  

Common

  

Preferred

  

Common

  

Paid-in

  

Retained

  

Comprehensive

  

Noncontrolling

  

Stockholders'

 
  

Shares

  

Stock

  

Stock

  

Capital

  

Earnings

  

Income (Loss)

  

Interest

  

Equity

 

Balance, January 1, 2022

  54,227,060  $-  $54  $226,397  $911,008  $14,056  $500  $1,152,015 

Common dividends declared, $0.23 per share

  -   -   -   -   (12,485)  -   -   (12,485)

Dividends on nonvested restricted stock recognized as compensation expense

  -   -   -   -   33   -   -   33 

Issue restricted shares pursuant to stock incentives, net of forfeitures

  26,974   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  28,098   -   -   553   -   -   -   553 

8,402 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (613)  -   -   -   (613)

Stock-based compensation expense

  -   -   -   790   -   -   -   790 

Other comprehensive loss, net of tax

  -   -   -   -   -   (24,931)  -   (24,931)

Net income

  -   -   -   -   57,613   -   -   57,613 

Balance, March 31, 2022

  54,282,132  $-  $54  $227,127  $956,169  $(10,875) $500  $1,172,975 
                                 

Balance, January 1, 2023

  54,326,527   -   54   229,693   1,109,902   (42,253)  500   1,297,896 

Common dividends declared, $0.28 per share

  -   -   -   -   (15,233)  -   -   (15,233)

Dividends on nonvested restricted stock recognized as compensation expense

  -   -   -   -   41   -   -   41 

Issue restricted shares pursuant tostock incentives, net of forfeitures

  20,713   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  50,785   -   -   846   -   -   -   846 

24,215 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (1,716)  -   -   -   (1,716)

Stock-based compensation expense

  -   -   -   808   -   -   -   808 

Other comprehensive loss, net of tax

  -   -   -   -   -   (796)  -   (796)

Net income

  -   -   -   -   57,971   -   -   57,971 

Balance, March 31, 2023

  54,398,025  $-  $54  $229,631  $1,152,681  $(43,049) $500  $1,339,817 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

(Unaudited)

See Notes to Consolidated Financial Statements.

 

  Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Noncontrolling
Interest
 Total
Stockholders'
Equity
Balance, December 31, 2015 $52  $211,546  $234,124  $3,048  $377  $449,147 
Common dividends paid, $0.08 per share  -   -   (4,194)  -   -   (4,194)
Common dividends declared, $.04 per share  -   -   (2,106)  -   -   (2,106)
Preferred dividends paid  -   -   (23)  -   -   (23)
Issue 656,500 shares of common stock upon exercise of stock options  -   2,785   -   -   -   2,785 
Stock based compensation expense  -   931   -   -   -   931 
Other comprehensive income, net of tax  -   -   -   1,585   -   1,585 
Net income  -   -   59,741   -   -   59,741 
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 
Common dividends paid, $0.10 per share  -   -   (5,286)  -   -   (5,286)
Common dividends declared, $0.05 per share  -   -   (2,649)  -   -   (2,649)
Preferred dividends paid  -   -   (31)  -   -   (31)
Issue 328,214 shares of common stock upon exercise of stock options  -   635   -   -   -   635 
Issue 125 shares of REIT preferred stock  -   -   -   -   125   125 
Stock based compensation expense  -   916   -   -   -   916 
Other comprehensive income, net of tax  -   -   -   1,672   -   1,672 
Net income  -   -   71,942   -   -   71,942 
Balance, September 30, 2017 $53  $217,483  $371,127  $1,048  $502  $590,213 
6

See Notes to Consolidated Financial Statements.


6
 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands) (Unaudited)

 
  

Three Months Ended March 31,

 
  

2023

  

2022

 

OPERATING ACTIVITIES

        

Net income

 $57,971  $57,613 

Adjustments to reconcile net income to net cash provided by

        

Deferred tax

  49   (5,257)

Provision for credit losses

  4,197   5,362 

Depreciation

  1,071   1,058 

Accretion on acquired loans

  49   32 

Amortization of core deposit intangible

  -   23 

Amortization of investments in tax credit partnerships

  3,345   2,927 

Net amortization of debt securities available for sale

  128   1,376 

(Increase) decrease in accrued interest and dividends receivable

  (2,078)  443 

Stock-based compensation expense

  808   790 

Increase in accrued interest and dividends payable

  1,926   566 

Proceeds from sale of mortgage loans held for sale

  16,320   8,955 

Originations of mortgage loans held for sale

  (15,922)  (7,718)

Loss on sale of securities available for sale

  -   3,335 

Gain on sale of mortgage loans held for sale

  (442)  (526)

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

  -   (1)

Write down of other real estate owned and repossessed assets

  -   6 

Increase in cash surrender value of life insurance contracts

  (1,621)  (1,608)

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

  (10,652)  1,889 

Net cash provided by operating activities

  55,149   69,265 

INVESTMENT ACTIVITIES

        

Purchases of debt securities available for sale

  -   (52,500)

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

  18,853   29,627 

Proceeds from sale of debt securities available for sale

  -   45,394 

Purchases of debt securities held to maturity

  -   (392,622)

Proceeds from maturities, calls and paydowns of debt securities held to maturity

  11,960   21,554 

Purchases of restricted equity securities

  (12,750)  (423)

Proceeds from sale of restricted equity securities

  13,177   - 

Investment in tax credit partnerships and SBIC

  (538)  (65)

Return of capital from tax credit partnerships and SBIC

  -   249 

Decrease (increase) in loans

  56,588   (369,412)

Purchases of premises and equipment

  (1,314)  (666)

Proceeds from sale of other real estate owned and repossessed assets

  -   44 

Net cash provided by (used in) investing activities

  85,976   (718,820)

FINANCING ACTIVITIES

        

Net (decrease) increase in non-interest-bearing deposits

  (422,611)  89,728 

Net increase (decrease) in interest-bearing deposits

  491,123   (133,809)

Net decrease in federal funds purchased

  (138,638)  (72,539)

FHLB advances

  300,000   - 

Repayment of FHLB advances

  (300,000)  - 

Proceeds from exercise of stock options

  846   553 

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

  (1,716)  (613)

Dividends paid on common stock

  (15,211)  (12,472)

Net cash used in financing activities

  (86,207)  (129,152)

Net increase (decrease) in cash and cash equivalents

  54,918   (778,707)

Cash and cash equivalents at beginning of period

  816,053   4,222,096 

Cash and cash equivalents at end of period

 $870,971  $3,443,389 

SUPPLEMENTAL DISCLOSURE

        

Cash paid for:

        

Interest

 $71,095  $6,900 

Income taxes

  1,920   591 

Income tax refund

  -   (142)

NONCASH TRANSACTIONS

        

Other real estate acquired in settlement of loans

 $-  $830 

Dividends on nonvested restricted stock reclassified as compensation expense

  41   33 

Dividends declared

  15,233   12,485 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

See Notes to Consolidated Financial Statements.

 

  Nine Months Ended September 30,
  2017 2016
OPERATING ACTIVITIES        
Net income $71,942  $59,741 
Adjustments to reconcile net income to net cash provided by        
Deferred tax  (3,099)  350 
Provision for loan losses  14,170   9,323 
Depreciation  2,281   2,211 
Accretion on acquired loans  (374)  (819)
Amortization of core deposit intangible  209   257 
Net amortization of debt securities available for sale  2,874   2,034 
Increase in accrued interest and dividends receivable  (4,533)  (950)
Stock-based compensation expense  916   931 
(Decrease) increase in accrued interest payable  (48)  1,257 
Proceeds from sale of mortgage loans held for sale  105,940   97,868 
Originations of mortgage loans held for sale  (103,295)  (92,964)
Loss on sale of debt securities available for sale  -   3 
Gain on sale of mortgage loans held for sale  (2,941)  (2,681)
Net (gain) loss on sale of other real estate owned and repossessed assets  (33)  27 
Write down of other real estate owned and repossessed assets  5   557 
Losses of tax credit partnerships  42   178 
Increase in cash surrender value of life insurance contracts  (2,334)  (2,049)
Net change in other assets, liabilities, and other operating activities  (551)  (4,633)
Net cash provided by operating activities  81,171   70,641 
INVESTMENT ACTIVITIES        
Purchase of debt securities available for sale  (77,567)  (84,106)
Proceeds from sale of debt securities available for sale  -   6,085 
Proceeds from maturities, calls and paydowns of debt securities available for sale  65,734   71,425 
Purchase of debt securities held to maturity  (29,782)  (627)
Proceeds from maturities, calls and paydowns of debt securities held to maturity  4,947   2,200 
Purchase of equity securities  (10)  (708)
Increase in loans  (724,626)  (443,771)
Purchase of premises and equipment  (17,071)  (7,809)
Purchase of bank-owned life insurance contracts  (10,000)  (20,000)
Expenditures to complete construction of other real estate owned  -   (3)
Proceeds from sale of other real estate owned and repossessed assets  1,529   1,648 
Investment in tax credit partnerships  -   (2,491)
Net cash used in investing activities  (786,846)  (478,157)
FINANCING ACTIVITIES        
Net increase in non-interest-bearing deposits  124,360   216,259 
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  (300)  (300)
Proceeds from sale of preferred stock, net  125   - 
Proceeds from exercise of stock options and warrants  635   2,785 
Dividends paid on common stock  (5,286)  (4,194)
Dividends paid on preferred stock  (31)  (23)
Net cash provided by financing activities  270,669   847,538 
Net (decrease) increase in cash and cash equivalents  (435,006)  440,022 
Cash and cash equivalents at beginning of period  783,997   352,235 
Cash and cash equivalents at end of period $348,991  $792,257 
SUPPLEMENTAL DISCLOSURE        
Cash paid for:        
Interest $24,729  $17,457 
Income taxes  30,651   22,666 
Income tax refund  (492)  (929)
NONCASH TRANSACTIONS        
Other real estate acquired in settlement of loans $586  $2,033 
Internally financed sales of other real estate owned  185   2,161 
Dividends declared  2,649   2,106 
7

See Notes to Consolidated Financial Statements.


7

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017March 31, 2023

(Unaudited)

 

NOTE 1 - GENERAL

 

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-XS-X and the instructions for Form 10-Q,10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K10-K for the year ended December 31, 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.2022.

 

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 options. The difference in earnings per share under the two-class method was not significant for the three month period ended March 31, 2023 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.2022, respectively.

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 
  

(In Thousands, Except Shares and Per Share Data)

 

Earnings per common share

        

Weighted average common shares outstanding

  54,360,253   54,263,143 

Net income available to common stockholders

 $57,971  $57,613 

Basic earnings per common share

 $1.07  $1.06 
         

Weighted average common shares outstanding

  54,360,253   54,263,143 

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

  174,229   258,899 

Weighted average common and dilutive potential common shares outstanding

  54,534,482   54,522,042 

Net income available to common stockholders

 $57,971  $57,613 

Diluted earnings per common share

 $1.06  $1.06 

8
8

 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (In Thousands, Except Shares and Per Share Data)
Earnings per common share                
Weighted average common shares outstanding  52,950,644   52,554,918   52,854,332   52,557,910 
Net income available to common stockholders $25,259  $20,909  $71,911  $59,718 
Basic earnings per common share $0.48  $0.40  $1.36  $1.14 
                 
Weighted average common shares outstanding  52,950,644   52,554,918   52,854,332   52,557,910 
Dilutive effects of assumed conversions and exercise of stock options and warrants  1,149,028   1,324,410   1,256,580   932,008 
Weighted average common and dilutive potential common shares outstanding  54,099,672   53,879,328   54,110,912   53,489,918 
Net income available to common stockholders $25,259  $20,909  $71,911  $59,718 
Diluted earnings per common share $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 September 30, 2017 March 31, 2023 and December 31, 2016 2022 are summarized as follows:

 

 Amortized
Cost
 Gross
Unrealized
Gain
 Gross
Unrealized
Loss
 Market
Value
   

Gross

 

Gross

   
September 30, 2017 (In Thousands)
Securities Available for Sale                
U.S. Treasury and government sponsored agencies $56,518  $335  $(75) $56,778 
Mortgage-backed securities  243,465   1,457   (1,179)  243,743 
State and municipal securities  133,729   1,201   (126)  134,804 
Total  433,712   2,993   (1,380)  435,325 
Securities Held to Maturity                
 

Amortized

 

Unrealized

 

Unrealized

 

Market

 
 

Cost

  

Gain

  

Loss

  

Value

 

March 31, 2023

 

(In Thousands)

 

Debt Securities Available for Sale

 

U.S. Treasury Securities

 $3,001  $-  $(11) $2,990 

Government Agency Securities

 4  -  -  4 
Mortgage-backed securities  31,165   393   (179)  31,379  272,070  7  (29,046) 243,031 
State and municipal securities  5,726   300   -   6,026  14,646  2  (1,337) 13,311 
Corporate debt  50,508   1,416   -   51,924   398,676   3   (33,067)  365,612 
Total $87,399  $2,109  $(179) $89,329  $688,397  $12  $(63,461) $624,948 

Debt Securities Held to Maturity

 

U.S. Treasury Securities

 $507,601  $-  $(30,021) $477,580 

Mortgage-backed securities

 506,342  10  (53,190) 453,162 

State and municipal securities

  8,046   -   (827)  7,219 

Total

 $1,021,989  $10  $(84,038) $937,961 
                 
December 31, 2016                
Securities Available for Sale                
U.S. Treasury and government sponsored agencies $45,998  $382  $(126) $46,254 

December 31, 2022

 

Debt Securities Available for Sale

 

U.S. Treasury Securities

 $3,002  $-  $(33) $2,969 

Government Agency Securities

 9  -  -  9 
Mortgage-backed securities  228,843   1,515   (3,168)  227,190  282,480  5  (32,782) 249,703 
State and municipal securities  139,504   1,120   (694)  139,930  15,205  1  (1,597) 13,609 
Corporate debt  8,985   16   -   9,001   406,680   -   (28,155)  378,525 
Total  423,330   3,033   (3,988)  422,375  $707,376  $6  $(62,567) $644,815 
Securities Held to Maturity                

Debt Securities Held to Maturity

 

U.S. Treasury Securities

 $507,151  $-  $(36,197) $470,954 
Mortgage-backed securities  19,164   321   (245)  19,240  518,929  7  (60,960) 457,976 
State and municipal securities  5,888   315   (12)  6,191   8,041   -   (1,018)  7,023 
Corporate debt  37,512   374   (15)  37,871 
Total $62,564  $1,010  $(272) $63,302  $1,034,121  $7  $(98,175) $935,953 

 

The amortized cost and fair value of debt securities as of September 30, 2017 March 31, 2023 and December 31, 2022 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

 September 30, 2017 December 31, 2016 

March 31, 2023

  

December 31, 2022

 
 Amortized
Cost
 Fair Value Amortized
Cost
 Fair Value 

Amortized Cost

  

Market Value

  

Amortized Cost

  

Market Value

 
 (In thousands) 

(In Thousands)

 
Debt securities available for sale                 
Due within one year $25,961  $26,035  $28,270  $28,400  $24,422  $24,042  $24,712  $24,432 
Due from one to five years  151,842   153,099   152,347   153,003  59,243  57,178  58,554  57,092 
Due from five to ten years  12,054   12,058   13,870   13,782  329,662  298,353  338,630  311,100 
Due after ten years  390   390   -   -  3,000  2,344  3,000  2,488 
Mortgage-backed securities  243,465   243,743   228,843   227,190   272,070   243,031   282,480   249,703 
 $433,712  $435,325  $423,330  $422,375  $688,397  $624,948  $707,376  $644,815 
                 
Debt securities held to maturity                 

Due within one year

 $250  $250  $250  $250 
Due from one to five years $3,250  $3,280  $250  $250  386,897  370,166  386,465  366,095 
Due from five to ten years  48,997   50,450   34,251   34,617  128,500  114,383  128,477  111,632 
Due after ten years  3,987   4,220   8,899   9,195  -  -  -  - 
Mortgage-backed securities  31,165   31,379   19,164   19,240   506,342   453,162   518,929   457,976 
 $87,399  $89,329  $62,564  $63,302  $1,021,989  $937,961  $1,034,121  $935,953 

 

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.

 

Restricted equity securities are comprised entirely of restricted investment in Federal Home Loan Bank stock for membership requirements.

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $834.9 million and $789.3 million as of March 31, 2023 and December 31, 2022, respectively.

9

The following table identifies, as of September 30, 2017 March 31, 2023 and December 31, 2016, 2022, 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.

  

Less Than Twelve Months

  

Twelve Months or More

  

Total

 
  

Gross

      

Gross

      

Gross

     
  

Unrealized

      

Unrealized

      

Unrealized

     
  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

 
  

(In Thousands)

 

March 31, 2023

                        

Debt Securities available for sale

                        

U.S. Treasury Securities

 $-  $-  $(11) $2,990  $(11) $2,990 

Government Agency Securities

  -   4   -   -   -   4 

Mortgage-backed securities

  (364)  8,468   (28,682)  233,956   (29,046)  242,424 

State and municipal securities

  (27)  3,328   (1,310)  9,202   (1,337)  12,530 

Corporate debt

  (8,809)  163,363   (24,258)  189,931   (33,067)  353,294 

Total

 $(9,200) $175,163  $(54,261) $436,079  $(63,461) $611,242 

Debt Securities held to maturity

                        

U.S. Treasury Securities

 $(2,678) $130,640  $(27,343) $346,939  $(30,021) $477,579 

Mortgage-backed securities

  (1,645)  31,827   (51,545)  416,994   (53,190)  448,821 

State and municipal securities

  -   -   (827)  6,969   (827)  6,969 

Total

 $(4,323) $162,467  $(79,715) $770,902  $(84,038) $933,369 

December 31, 2022

                        

Debt Securities available for sale

                        

U.S. Treasury Securities

 $(33) $2,969  $-  $-  $(33) $2,969 

Government Agency Securities

  -   9   -   -   -   9 

Mortgage-backed securities

 $(3,473) $60,234  $(29,309) $189,109  $(32,782) $249,343 

State and municipal securities

  (186)  5,283   (1,411)  7,880   (1,597)  13,163 

Corporate debt

  (18,566)  304,254   (9,589)  63,411   (28,155)  367,666 

Total

 $(22,258) $372,749  $(40,309) $260,400  $(62,567) $633,149 

U.S. Treasury Securities

 $(12,662) $295,383  $(23,537) $175,570  $(36,197) $470,953 

Mortgage-backed securities

  (31,367)  278,746   (29,592)  174,842   (60,960)  453,588 

State and municipal securities

  (544)  4,443   (474)  2,330   (1,018)  6,773 

Total

 $(44,573) $578,572  $(53,603) $352,742  $(98,175) $931,314 

At September 30, 2017, 52 of the Company’s 807March 31, 2023 and 2022, no allowance for credit losses has been recognized on available for sale debt securities had been in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired. This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to available for 12 or more months.sale debt securities. The issuers of these debt securities continue to make timely principal and interest payments under the contractual terms of the securities. The Company does not intend to sell these debt securities and it is more likely than not that the Company will not be required to sell the debt securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securitiesat maturity. The unrealized losses are due to be other-than-temporarily impaired at September 30, 2017. Further, the Company believes any deterioration in value of its current investment securities is attributable to changesincreases in market interest rates over the yields available at the time the debt securities were purchased. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics and notconsiders historical credit qualityloss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the issuer.securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, and (iv) internal forecasts. Historical loss rates associated with securities having similar grades as those in our portfolio have generally not been significant. Furthermore, as of March 31, 2023 and 2022, there were no past due principal or interest payments associated with these securities. Based upon (i) the issuer’s strong bond ratings and (ii) a zero historical loss rate, no allowance for credit losses has been recorded for held-to-maturity State and Municipal Securities as such amount is not material at March 31, 2023 and 2022. All debt securities in an unrealized loss position as of March 31, 2023 continue to perform as scheduled and the Company does not believe there is a possible credit loss or that an allowance for credit loss on these debt securities is necessary.

 

  Less Than Twelve Months Twelve Months or More Total
  Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value
  (In Thousands)
September 30, 2017                        
U.S. Treasury and government sponsored agencies $(75) $9,670  $-  $-  $(75) $9,670 
Mortgage-backed securities  (596)  77,553   (762)  43,721   (1,358)  121,274 
State and municipal securities  (76)  22,069   (50)  7,041   (126)  29,110 
Total $(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 
Mortgage-backed securities  (3,413)  174,225   -   -   (3,413)  174,225 
State and municipal securities  (698)  64,502   (8)  1,021   (706)  65,523 
Corporate debt  (15)  3,034   -   -   (15)  3,034 
Total $(4,252) $252,626  $(8) $1,021  $(4,260) $253,647 

The following table summarizes information about sales of debt securities.

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Sale proceeds

 $-  $45,394 

Gross realized gains

 $-  $- 

Gross realized losses

  -   (3,335)

Net realized losses

 $-  $(3,335)

10
10

 

NOTE 5 LOANS

NOTE 5 The loan portfolio is classified based on the underlying collateral utilized to secure each loan for financial reporting purposes. This classification is consistent with the Quarterly Report of Condition and Income filed by ServisFirst Bank with the Federal Deposit Insurance Corporation (FDIC).

Commercial, financial and agricultural - Includes loans to business enterprises issued for commercial, industrial, agricultural production and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows.

Real estate construction LOANSIncludes loans secured by real estate to finance land development or the construction of industrial, commercial or residential buildings. Repayment is dependent upon the completion and eventual sale, refinance or operation of the related real estate project.

Owner-occupied commercial real estate mortgage – Includes loans secured by nonfarm nonresidential properties for which the primary source of repayment is the cash flow from the ongoing operations conducted by the party that owns the property.

1-4 family real estate mortgage – Includes loans secured by residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower.

Other real estate mortgage – Includes loans secured by nonowner-occupied properties, including office buildings, industrial buildings, warehouses, retail buildings, multifamily residential properties and farmland. Repayment is primarily dependent on income generated from the underlying collateral.

Consumer – Includes loans to individuals not secured by real estate. Repayment is dependent upon the personal cash flow of the borrower.

 

The following table details the Company’s loans at September 30, 2017 March 31, 2023 and December 31, 2016:2022:

 

 

March 31,

 

December 31,

 
 September 30,
2017
 December 31,
2016
 

2023

  

2022

 
 (Dollars In Thousands) 

(Dollars In Thousands)

 
Commercial, financial and agricultural $2,223,910  $1,982,267  $3,081,926  $3,145,317 
Real estate - construction  467,838   335,085  1,469,670  1,532,388 
Real estate - mortgage:         
Owner-occupied commercial  1,323,383   1,171,719  2,243,436  2,199,280 
1-4 family mortgage  593,180   536,805  1,138,645  1,146,831 
Other mortgage  962,690   830,683   3,624,071   3,597,750 
Subtotal: Real estate - mortgage  2,879,253   2,539,207  7,006,152  6,943,861 
Consumer  57,764   55,211   72,054   66,402 
Total Loans  5,628,765   4,911,770   11,629,802   11,687,968 
Less: Allowance for loan losses  (58,459)  (51,893)

Less: Allowance for credit losses

  (148,965)  (146,297)
Net Loans $5,570,306  $4,859,877  $11,480,837  $11,541,671 
         
         
Commercial, financial and agricultural  39.51%  40.36% 26.50

%

 26.91

%

Real estate - construction  8.31%  6.82% 12.64

%

 13.11

%

Real estate - mortgage:         
Owner-occupied commercial  23.51%  23.86% 19.29

%

 18.82

%

1-4 family mortgage  10.54%  10.93% 9.79

%

 9.81

%

Other mortgage  17.10%  16.91%  31.16

%

  30.78

%

Subtotal: Real estate - mortgage  51.15%  51.70% 60.24

%

 59.41

%

Consumer  1.03%  1.12%  0.62

%

  0.57

%

Total Loans  100.00%  100.00%  100.00

%

  100.00

%

 

11

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 loancredit loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loancredit 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 currentlypresently 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.

 

The table below presents loan balances classified by credit quality indicator, loan type and based on year of origination as of March 31, 2023:

  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving

Loans

  

Revolving

lines of

credit

converted

to term

loans

  

Total

 
  

(In Thousands)

 

Commercial, financial and agricultural

                                 

(1-55) Pass

 $160,551  $540,101  $471,521  $208,825  $136,657  $192,509  $1,252,905  $699  $2,963,768 

(6) Special Mention

  -   8,870   5,850   1,953   1,877   4,151   40,868   18   63,588 

(7) Substandard - accruing

  -   291   1,244   376   9,501   28,933   7,007   -   47,352 

(7) Substandard -Non-accrual

  -   697   146   -   -   3,345   3,030   -   7,219 

Total Commercial, financial and agricultural

 $160,551  $549,959  $478,760  $211,154  $148,035  $228,938  $1,303,811  $717  $3,081,926 

Current-period gross charge-offs

  -   616   -   -   -   428   212   -   1,257 
                                     

Real estate - construction

          ��                         

(1-55) Pass

 $37,212  $661,294  $556,953  $105,265  $4,761  $21,591  $77,837  $-  $1,464,913 

(6) Special Mention

  -   2,500   -   -   -   -   -   201   2,701 

(7) Substandard - accruing

  -   -   -   -   -   2,057   -   -   2,057 

Total Real estate - construction

 $37,212  $663,794  $556,953  $105,265  $4,761  $23,647  $77,837  $201  $1,469,670 
                                     

Owner-occupied commercial

                                    

(1-55) Pass

 $28,219  $441,407  $536,773  $353,489  $187,145  $600,679  $63,267  $874  $2,211,853 

(6) Special Mention

  1,496   2,349   856   -   7,909   6,391   1,601   -   20,601 

(7) Substandard - accruing

  -   -   -   -   2,358   5,237   -   -   7,595 

(7) Substandard -Non-accrual

  -   -   -   -   48   3,340   -   -   3,388 

Total Owner-occupied commercial

 $29,715  $443,756  $537,629  $353,489  $197,461  $615,647  $64,867  $874  $2,243,436 

Current-period gross charge-offs

  -   -   -   -   26   -   -   -   26 
                                     

1-4 family mortgage

                                    

(1-55) Pass

 $40,954  $383,389  $253,519  $91,609  $51,728  $80,635  $222,966  $-  $1,124,800 

(6) Special Mention

  -   414   365   808   261   1,576   7,469   -   10,893 

(7) Substandard - accruing

  -   -   -   -   139   516   253   -   908 
(7) Substandard -Non-accrual  -   -   423   405   540   622   54   -   2,044 

Total 1-4 family mortgage

 $40,954  $383,803  $254,307  $92,822  $52,668  $83,349  $230,742  $-  $1,138,645 
                                     

Other mortgage

                                    

(1-55) Pass

 $31,821  $1,075,262  $1,011,383  $515,230  $316,995  $581,406  $75,148  $246  $3,607,491 

(6) Special Mention

  -   -   -   -   -   4,456   -   -   4,456 

(7) Substandard - accruing

  -   233   -   -   -   11,385   -   -   11,618 
(7) Substandard -Non-accrual  -   -   -   -   130   376   -   -   506 

Total Other mortgage

 $31,821  $1,075,495  $1,011,383  $515,230  $317,125  $597,623  $75,148  $246  $3,624,071 
                                     

Consumer

                                    
(1-55) Pass $23,355  $6,607  $5,542  $2,697  $1,644  $3,190  $29,007  $-  $72,042 

(6) Special Mention

  -   -   -   -   -   12   -   -   12 

(7) Substandard - accruing

  -   -   -   -   -   -   -   -   - 

Total Consumer

 $23,355  $6,607  $5,542  $2,697  $1,644  $3,202  $29,007  $-  $72,054 

Current-period gross charge-offs

  -   -   -   -   -   -   391   -   391 
                                     

Total Loans

                                    

(1-55) Pass

 $322,112  $3,108,059  $2,835,691  $1,277,114  $698,931  $1,480,009  $1,721,129  $1,819  $11,444,866 

(6) Special Mention

  1,496   14,133   7,070   2,761   10,047   16,586   49,938   219   102,250 

(7) Substandard - accruing

  -   524   1,244   376   11,998   48,128   7,260   -   69,530 
(7) Substandard -Non-accrual  -   697   570   405   718   7,683   3,084   -   13,157 

Total Loans

 $323,608  $3,123,414  $2,844,575  $1,280,656  $721,694  $1,552,406  $1,781,412  $2,038  $11,629,802 

Current-period gross charge-offs

 $-  $616  $-  $-  $26  $428  $603  $-  $1,673 

11
12

Loans by credit quality indicator, loan type and based on year of origination as of September 30, 2017 and December 31, 2016 2022 were as follows:

 

September 30, 2017 Pass Special
Mention
 Substandard Doubtful Total
             

Revolving

   
 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  

Loans

  

Total

 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $2,144,426  $49,079  $30,405  $-  $2,223,910 

Commercial, financial and agricultural

               

Pass

 $691,817  $502,648  $223,096  $144,587  $78,477  $134,893  $1,267,333  $3,042,851 

Special Mention

 6,906  3,737  1,101  1,748  570  898  29,516  44,476 

Substandard

  200   -   379   9,501   16,329   16,595   14,986   57,990 

Total Commercial, financial and agricultural

 $698,923  $506,385  $224,576  $155,836  $95,376  $152,386  $1,311,835  $3,145,317 
 
Real estate - construction  457,188   7,367   3,283   -   467,838  
Real estate - mortgage:                    

Pass

 $618,578  $638,126  $156,834  $15,197  $12,063  $14,847  $72,172  $1,527,817 

Special Mention

 2,500  -  -  -  -  873  -  3,373 

Substandard

  -   -   -   -   1,198   -   -   1,198 

Total Real estate - construction

 $621,078  $638,126  $156,834  $15,197  $13,261  $15,720  $72,172  $1,532,388 
 
Owner-occupied commercial  1,305,408   11,814   6,161   -   1,323,383  

Pass

 $424,321  $496,298  $352,375  $199,987  $157,204  $477,926  $64,152  $2,172,263 

Special Mention

 2,362  -  -  2,723  4,682  6,917  1,687  18,371 

Substandard

  -   -   -   73   -   8,573   -   8,646 

Total Owner-occupied commercial

 $426,683  $496,298  $352,375  $202,783  $161,886  $493,416  $65,839  $2,199,280 
 
1-4 family mortgage  587,451   1,492   4,237   -   593,180  

Pass

 $388,778  $273,515  $93,272  $52,209  $28,999  $57,512  $243,302  $1,137,587 

Special Mention

 315  445  816  375  294  881  2,854  5,980 

Substandard

  -   279   404   648   346   1,224   363   3,264 

Total 1-4 family mortgage

 $389,093  $274,239  $94,492  $53,232  $29,639  $59,617  $246,519  $1,146,831 
 
Other mortgage  945,548   14,118   3,024   -   962,690  
Total real estate mortgage  2,838,407   27,424   13,422   -   2,879,253 

Pass

 $1,027,747  $976,208  $517,392  $380,104  $130,228  $470,699  $75,669  $3,578,047 

Special Mention

 231  -  -  -  -  7,161  -  7,392 

Substandard

  -   -   -   130   4,569   7,612   -   12,311 

Total Other mortgage

 $1,027,978  $976,208  $517,392  $380,234  $134,797  $485,472  $75,669  $3,597,750 
 
Consumer  57,672   4   88   -   57,764  
Total $5,497,693  $83,874  $47,198  $-  $5,628,765 

Pass

 $21,132  $5,845  $4,203  $1,759  $440  $2,988  $30,021  $66,388 

Special Mention

 -  -  -  -  -  14  -  14 

Substandard

  -   -   -   -   -   -   -   - 

Total Consumer

 $21,132  $5,845  $4,203  $1,759  $440  $3,002  $30,021  $66,402 
 

Total Loans

 

Pass

 $3,172,373  $2,892,640  $1,347,172  $793,843  $407,411  $1,158,865  $1,752,649  $11,524,953 

Special Mention

 12,314  4,182  1,917  4,846  5,546  16,744  34,057  79,606 

Substandard

  200   279   783   10,352   22,442   34,004   15,349   83,409 

Total Loans

 $3,184,887  $2,897,101  $1,349,872  $809,041  $435,399  $1,209,613  $1,802,055  $11,687,968 

 

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 
13


12

Loans by performance status as of September 30, 2017 March 31, 2023 and December 31, 2016 2022 were as follows:

 

September 30, 2017 Performing Nonperforming Total
      

March 31, 2023

 

Performing

  

Nonperforming

  

Total

 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $2,216,004  $7,906  $2,223,910  $3,074,568  $7,358  $3,081,926 
Real estate - construction  465,553   2,285   467,838  1,469,670  -  1,469,670 
Real estate - mortgage:             
Owner-occupied commercial  1,320,886   2,497   1,323,383  2,240,048  3,388  2,243,436 
1-4 family mortgage  591,544   1,636   593,180  1,136,601  2,044  1,138,645 
Other mortgage  962,260   430   962,690   3,619,109   4,962   3,624,071 
Total real estate mortgage  2,874,690   4,563   2,879,253 

Total real estate - mortgage

 6,995,758  10,394  7,006,152 
Consumer  57,656   108   57,764   71,973   81   72,054 
Total $5,613,903  $14,862  $5,628,765  $11,611,969  $17,833  $11,629,802 
 

 

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

December 31, 2022

 

Performing

  

Nonperforming

  

Total

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $3,138,014  $7,303  $3,145,317 

Real estate - construction

  1,532,388   -   1,532,388 

Real estate - mortgage:

            

Owner-occupied commercial

  2,195,968   3,312   2,199,280 

1-4 family mortgage

  1,144,713   2,118   1,146,831 

Other mortgage

  3,592,732   5,018   3,597,750 

Total real estate - mortgage

  6,933,413   10,448   6,943,861 

Consumer

  66,312   90   66,402 

Total

 $11,670,127  $17,841  $11,687,968 

 

Loans by past due status as of September 30, 2017 March 31, 2023 and December 31, 2016 2022 were as follows:

 

September 30, 2017 Past Due Status (Accruing Loans)      

March 31, 2023

 

Past Due Status (Accruing Loans)

          
 30-59 Days 60-89 Days 90+ Days Total Past
Due
 Non-Accrual Current Total Loans       

Total Past

 

Total

     

Nonaccrual

 
               

30-59 Days

  

60-89 Days

  

90+ Days

  

Due

  

Nonaccrual

  

Current

  

Total Loans

  

With No ACL

 
 (In Thousands) 

(In Thousands)

   
Commercial, financial and agricultural $5,317  $12,081  $2,108  $19,506  $5,798  $2,198,606  $2,223,910  $1,023  $1,153  $139  $2,315  $7,219  $3,072,392  $3,081,926  $1,014 
Real estate - construction  997   618   -   1,615   2,285   463,938   467,838  -  -  -  -  -  1,469,670  1,469,670  - 
Real estate - mortgage:                             
Owner-occupied commercial  310   3,354   -   3,664   2,497   1,317,222   1,323,383  3,030  370  -  3,400  3,388  2,236,648  2,243,436  3,222 
1-4 family mortgage  1,132   295   328   1,755   1,308   590,117   593,180  5,998  558  -  6,556  2,044  1,130,045  1,138,645  177 
Other mortgage  -   -   -   -   430   962,260   962,690   -   -   4,456   4,456   506   3,619,109   3,624,071   506 
Total real estate - mortgage  1,442   3,649   328   5,419   4,235   2,869,599   2,879,253  9,028  928  4,456  14,412  5,938  6,985,802  7,006,152  3,905 
Consumer  102   13   70   185   38   57,541   57,764   94   64   81   239   -   71,815   72,054   - 
Total $7,858  $16,361  $2,506  $26,725  $12,356  $5,589,684  $5,628,765  $10,145  $2,145  $4,676  $16,966  $13,157  $11,599,679  $11,629,802  $4,919 
 

 

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 
14

 

December 31, 2022

 

Past Due Status (Accruing Loans)

                 
              

Total Past

  

Total

          

Nonaccrual

 
  

30-59 Days

  

60-89 Days

  

90+ Days

  

Due

  

Nonaccrual

  

Current

  

Total Loans

  

With No ACL

 
  

(In Thousands)

     

Commercial, financial and agricultural

 $1,075  $409  $195  $1,679  $7,108  $3,136,530   3,145,317  $3,238 

Real estate - construction

  -   711   -   711   -   1,531,677   1,532,388   - 

Real estate - mortgage:

                                

Owner-occupied commercial

  83   452   -   535   3,312   2,195,433   2,199,280   57 

1-4 family mortgage

  405   580   594   1,579   1,524   1,143,728   1,146,831   491 

Other mortgage

  231   -   4,512   4,743   506   3,592,501   3,597,750   - 

Total real estate - mortgage

  719   1,032   5,106   6,857   5,342   6,931,662   6,943,861   548 

Consumer

  174   128   90   392   -   66,010   66,402   621 

Total

 $1,968  $2,280  $5,391  $9,639  $12,450  $11,665,879   11,687,968  $4,407 

 

Under the current expected credit losses (“CECL”) methodology, the ACL is measured on a collective basis for pools of loans with similar risk characteristics. For loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. For all loan segments collectively evaluated, losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable forecast period losses are reverted to long-term historical averages. The allowance forestimated loan losses is maintained at a level which,for all loan segments are adjusted for changes in management’s judgment, is adequate to absorb credit losses inherentqualitative factors not inherently considered 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.quantitative analyses.

 

The methodology utilizedCompany uses the discounted cash flow (“DCF”) method to estimate ACL 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 homogeneousall loan pools by loan type and are the following:except for commercial and industrial, construction and development, commercial real estate, second lien home equityrevolving lines of credit and credit cards. For all other loans. loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment rate as a loss driver. The Company also utilizes and forecasts GDP growth as a second loss driver for its agricultural and consumer loan pools. Consistent forecasts of the loss drivers are used across the loan segments. At March 31, 2023 and December 31, 2022, the Company utilized a reasonable and supportable forecast period of twelve months followed by a six-month straight-line reversion to long term averages. The Company leveraged economic projections from reputable and independent sources to inform its loss driver forecasts. The Company expects national unemployment to be generally unchanged and national GDP growth rate to improve compared to the December 31, 2022 forecast.

The Company uses a loss-rate method to estimate expected credit losses for its commercial revolving lines of credit and credit card pools.  The commercial revolving lines of credit pool incorporates a probability of default (“PD”) and loss given default (“LGD”) modeling approach.  This approach involves estimating the pool average life and then using historical correlations of default and loss experience over time to calculate the lifetime PD and LGD.  These two inputs are then applied to the outstanding pool balance.  The credit card pool incorporates a remaining life modeling approach, which utilizes an attrition-based method to estimate the remaining life of the pool.  A quarterly average loss rate is then calculated using the Company’s historical loss data. The model reduces the pool balance quarterly on a straight-line basis over the estimated life of the pool. The quarterly loss rate is multiplied by the outstanding balance at each period-end resulting in an estimated loss for each quarter. The sum of estimated loss for all quarters is the total calculated reserve for the pool.  Management has also applied the loss-rate method to C&I lines of credit and to credit cards due to their generally short-term nature.  An expected loss ratio is applied based on internal and peer historical losses.

Each loan pool is stratified by internal risk rating and multiplied by a loss allocation percentage derived from the loan pool historical loss rate. The historical loss rate is based on an age weighted five year history of net charge-offs experienced by pool, with the most recent net charge-off experience given a greater weighting. This resultsadjusted for qualitative factors not inherently considered in the expected loss rate per year, adjusted by aquantitative analyses. The qualitative adjustment factoradjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and a years-to-impairment factor, for each poolvolume of loans, to derive the total amountstaff experience, changes in volume and trends of allowance for non-impaired loans.problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions.

 

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 scheduledInherent risks in the loan agreement. Impaired loans are measuredportfolio will differ based on the present valuetype 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, reducedloan. Specific risk characteristics by costs to sell on a discounted basis, is used if a loan is collateral-dependent. Fair value estimates for specifically impaired collateral-dependent loansportfolio segment 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.listed below:

 

External Qualitative FactorsCommercial and industrial. The determinationloans include risks associated with borrower’s cash flow, debt service coverage and management’s expertise. These loans are subject to the risk that the Company may have difficulty converting collateral to a liquid asset if necessary, as well as risks associated with degree of the portionspecialization, mobility and general collectability in a default situation. These commercial loans may be subject to many different types of the allowance for loan losses relating to external qualitative factors is based on consideration of the following factors: gross domestic product growth rate,risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and 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.interest rates.

 

Internal Qualitative FactorsReal estate construction. The determinationloans include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the portionproposed project. Construction lending is also subject to risks associated with sub-market dynamics, including population, employment trends and household income. During times of economic stress, this type of loan has typically had a greater degree of risk than other loan types.

15

Real estate mortgageloans consist of loans secured by commercial and residential real estate. Commercial real estate lending is dependent upon successful management, marketing and expense supervision necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to a single borrower. Residential real estate lending risks are generally less significant than those of other loans. Real estate lending risks include fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems.

Consumer loans carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans but less risky than commercial loans. Risk of default is usually determined by the well-being of the allowance for loan losses relating to internal qualitative factorslocal economies. During times of economic stress, there is based onusually some level of job loss both nationally and locally, which directly affects 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 eachability of the criteria is made with a consistent weighted methodology usedconsumer to calculate the amount of allowance required for internal qualitative factors.repay debt.

 

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowanceACL, segregated by loan type, for the three months ended March 31, 2023 and March 31, 2022.

  

Commercial,

                 
  

financial and

  

Real estate -

  

Real estate -

         
  

agricultural

  

construction

  

mortgage

  

Consumer

  

Total

 
  

(In Thousands)

 
  

Three Months Ended March 31, 2023

 

Allowance for credit losses:

                    

Balance at January 1, 2023

 $42,830  $42,889  $58,652  $1,926  $146,297 

Charge-offs

  (1,257)  -   (26)  (390)  (1,673)

Recoveries

  128   3   1   11   143 

Provision

  1,193   (2,409)  4,530   883   4,197 

Balance at March 31, 2023

 $42,895  $40,483  $63,157  $2,430  $148,965 

  

Three Months Ended March 31, 2022

 

Allowance for credit losses:

                    

Balance at January 1, 2022

 $41,869  $26,994  $45,829  $1,968  $116,660 

Charge-offs

  (2,574)  -   (27)  (75)  (2,676)

Recoveries

  105   -   12   -   117 

Provision

  2,017   827   2,734   (216)  5,362 

Balance at March 31, 2022

 $41,417  $27,821  $48,548  $1,677  $119,463 

We maintain an ACL on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The ACL is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a drawdown on the commitment. The ACL on unfunded loan commitments is classified as a liability account on the Consolidated Balance Sheets within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The ACL on unfunded commitments was $575,000 at March 31, 2023 and $575,000 at December 31, 2022. The provision expense for unfunded commitments for the three months ended March 31, 2023 and 2022 was zero and $300,000, respectively.

Loans that no longer share similar risk characteristics with collectively evaluated pools are estimated on an individual basis. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows:

      

Accounts

              

ACL

 

March 31, 2023

 

Real Estate

  

Receivable

  

Equipment

  

Other

  

Total

  

Allocation

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $21,757  $7,468  $831  $24,524  $54,580  $10,558 

Real estate - construction

  872   -   -   1,184   2,056   5 

Real estate - mortgage:

                        

Owner-occupied commercial

  10,935   -   -   48   10,983   207 

1-4 family mortgage

  3,746   -   -   -   3,746   291 

Other mortgage

  11,258   -   -   -   11,258   76 

Total real estate - mortgage

  25,939   -   -   48   25,987   574 

Consumer

  -   -   -   -   -   - 

Total

 $48,568  $7,468  $831  $25,756  $82,623  $11,137 

16

 
      

Accounts

              

ACL

 

December 31, 2022

 

Real Estate

  

Receivable

  

Equipment

  

Other

  

Total

  

Allocation

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $20,061  $12,092  $837  $24,998  $57,988  $9,910 

Real estate - construction

  -   -   -   1,198   1,198   7 

Real estate - mortgage:

                        

Owner-occupied commercial

  8,573   -   -   74   8,647   154 

1-4 family mortgage

  3,260   -   -   -   3,260   316 

Other mortgage

  12,311   -   -   -   12,311   - 

Total real estate - mortgage

  24,144   -   -   74   24,218   470 

Consumer

  -   -   -   -   -   - 

Total

 $44,205  $12,092  $837  $26,270  $83,404  $10,387 

On March 22, 2020, an Interagency Statement was issued by banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring (“TDR”) as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act 2021, which extended the period established by Section 4013 of the CARES Act to the earlier of January 1, 2022 or the date that is 60 days after the date on which the national COVID-19 emergency terminates. In accordance with such guidance, the Bank offered short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

The Bank adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of TDRs and enhanced disclosures for loan lossesmodifications to borrowers experiencing financial difficulty.

The table below details the amortized cost basis at the end of the reporting period for loans made to borrowers experiencing financial difficulty that were modified during the three and nine months ended September 30, 2017 and September 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.March 31,2023:

 

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
      

Payment Deferral

         
  

Term

  

and Term

      

Percentage of

 
  

Extensions

  

Extensions

  

Total

  

Total Loans

 
  

(In Thousands)

 
                 

Commercial, financial and agricultural

 $39,978  $-  $39,978   0.34

%

Real estate - construction

  200   -   200   -

%

Owner-occupied commercial

  9,215   701   9,916   0.09

%

1-4 family mortgage

  214   -   214   -

%

Other mortgage

  11,254   359   11,613   0.10

%

Total

 $60,861  $1,060  $61,921   0.53

%

 

The following table presents detailssummarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the Company’s impairedthree months ended March 31, 2023:

  Term  

Total Payment

 
  

Extensions

 

Deferral

 
  

(In months)

 

(In Thousands)

 

Commercial, financial and agricultural

 3to12 $- 

Real estate - construction

  6   - 

Owner-occupied commercial

 3to18  49 

1-4 family mortgage

  3   - 

Other mortgage

 3to36  59 

17

No loans modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, were past due greater than 30 days or on non-accrual as of September 30, 2017 and DecemberMarch 31, 2016, respectively. Loans which have been fully charged off do not appear2023. As of March 31, 2023, we had commitments to lend $17.7 million in additional funds to borrowers experiencing financial difficulty that were modified during the tables.first quarter of 2023.

 

  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
               
  (In Thousands)
With no allowance recorded:                            
Commercial, financial and agricultural $4,671  $4,671  $-  $4,770  $52  $4,998  $164 
Real estate - construction  45   48   -   48   1   49   2 
Real estate - mortgage:                            
Owner-occupied commercial  2,366   2,532   -   2,551   37   2,584   113 
1-4 family mortgage  1,752   1,752   -   1,756   22   1,781   67 
Other mortgage  732   732   -   732   10   733   32 
Total real estate - mortgage  4,850   5,016   -   5,039   69   5,098   212 
Consumer  38   40   -   41   1   42   2 
Total with no allowance recorded  9,604   9,775   -   9,898   123   10,187   380 
                             
With an allowance recorded:                            
Commercial, financial and agricultural  25,734   27,719   5,725   26,129   256   27,021   800 
Real estate - construction  3,283   3,283   829   3,357   14   3,369   42 
Real estate - mortgage:                            
Owner-occupied commercial  8,024   8,024   1,512   8,024   75   7,873   217 
1-4 family mortgage  2,485   2,485   328   2,485   10   2,506   56 
Other mortgage  430   980   52   974   (4)  984   21 
Total real estate - mortgage  10,939   11,489   1,892   11,483   81   11,363   294 
Consumer  50   50   50   50   1   39   2 
Total with allowance recorded  40,006   42,541   8,496   41,019   352   41,792   1,138 
                             
Total Impaired Loans:                            
Commercial, financial and agricultural  30,405   32,390   5,725   30,899   308   32,019   964 
Real estate - construction  3,328   3,331   829   3,405   15   3,418   44 
Real estate - mortgage:                            
Owner-occupied commercial  10,390   10,556   1,512   10,575   112   10,457   330 
1-4 family mortgage  4,237   4,237   328   4,241   32   4,287   123 
Other mortgage  1,162   1,712   52   1,706   6   1,717   53 
Total real estate - mortgage  15,789   16,505   1,892   16,522   150   16,461   506 
Consumer  88   90   50   91   2   81   4 
Total impaired loans $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 September 30, 2017, DecemberAs of March 31, 2016 and September 30, 2016 totaled $16.4 million, $7.3 million and $6.7 million, respectively. At September 30, 2017, 2023, the Company had a related allowance for loan losses of $4.0 million allocateddid not have any loans made to these TDRs, compared to $2.3 million at December 31, 2016 and $1.7 million at September 30, 2016. TDR activity by portfolio segment for the three and nine months ended September 30, 2017 is presented in the table below.

  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
  (In Thousands)
Troubled Debt Restructurings                        
Commercial, financial and agricultural  -  $-  $-   5  $7,205  $7,205 
Real estate - construction  -   -   -   1   997   997 
Real estate - mortgage:                        
Owner-occupied commercial  -   -   -   2   3,664   3,664 
1-4 family mortgage  -   -   -   1   850   850 
Other mortgage  -   -   -   -   -   - 
Total real estate mortgage  -   -   -   3   4,514   4,514 
Consumer  -   -   -   -   -   - 
   -  $-  $-   9  $12,716  $12,716 

  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
  (In Thousands)
Troubled Debt Restructurings                        
Commercial, financial and agricultural  -  $-  $-   1  $366  $366 
Real estate - construction  -   -   -   -   -   - 
Real estate - mortgage:                        
Owner-occupied commercial  -   -   -   -   -   - 
1-4 family mortgage  -   -   -   -   -   - 
Other mortgage  -   -   -   1   234   234 
Total real estate mortgage  -   -   -   1   234   234 
Consumer  -   -   -   -   -   - 
   -  $-  $-   2  $600  $600 

Thereborrowers experiencing financial difficulty that were no TDRs which defaultedmodified during the three and nine months ended September 30, 2017 and 2016, and which were modified in the previous twelve months (i.e., the twelve months prior to default).first quarter of 2023 that subsequently defaulted. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of September 30, 2017, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

 

TDRs at December 31, 2022 and March 31, 2022 totaled $2.5 million and $2.5 million, respectively.  The portion of those TDRs accruing interest at December 31, 2022 and March 31, 2022 totaled $431,000 and $426,000, respectively.  There were no modifications made to new TDRs or renewals of existing TDRs for the three months ended March 31, 2022

NOTE 6 LEASES

The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The leases have remaining terms up to 9 years. At March 31, 2023, the Company had lease right-of-use assets and lease liabilities totaling $19.8 million and $20.7 million, respectively, compared to $18.8 million and $19.6 million, respectively at December 31, 2022 which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheets.

Maturities of operating lease liabilities are as follows:

  

March 31, 2023

 
  

(In Thousands)

 

2023 (remaining)

 $3,864 

2024

  3,768 

2025

  3,672 

2026

  3,066 

2027

  2,588 

thereafter

  6,079 

Total lease payments

  23,037 

Less: imputed interest

  (2,339)

Present value of operating lease liabilities

 $20,698 

As of March 31, 2023, the weighted average remaining term of operating leases was 6.3 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.95%.

Operating cash flows related to leases were $1.2 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.

Lease costs during the three months ended March 31, 2023 and 2022 were as follows (in thousands):

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Operating lease cost

 $1,230  $1,043 

Variable lease cost

  191   148 

Sublease income

  (8)  (24)

Net lease cost

 $1,413  $1,167 

18

NOTE 7 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock OptionsIncentive Plan

 

At September 30, 2017, March 31, 2023, the Company had stock-based compensation plans,a stock incentive plan as described below. The compensation cost that has been charged to earnings for the plansplan was approximately $294,000$808,000 and $916,000$790,000 for the three and nine months ended September 30, 2017, respectively, March 31, 2023 and $291,000 and $931,000 for the three and nine months ended September 30, 2016,2022, 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, Non-stock Share Equivalents, Performance Shares or Performance Units. Both plans allowThe plan allows for the grant of incentive stock options and non-qualified stock options, and option awards are granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plansplan is ten years.

19

 

The Company estimates the fair value of each stock option award using a Black-Scholes-Merton valuation model that useswhich incorporates the assumptions noted in the following table. These assumptions are highly subjective and changes to them can materially affect the fair value estimate. Expected market price volatility and expected term of optionsvolatilities are based on historical datathe Company’s trading price history. The expected term for options granted is based on the short-cut method and other factors.represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S.U.S. Treasury yield curve in effect at the time of grant.

 

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

The weighted average grant-date fair valueThere were no grants of stock options granted during the nine months ended September 30, 2017first quarters of 2023 and September 30, 2016 was $11.83 and $5.95, respectively.2022.

 

The following table summarizes stock option activity during the ninethree months ended September 30, 2017 March 31, 2023 and September 30, 2016:2022:

 

  Shares Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term (years)
 Aggregate
Intrinsic
Value
        (In Thousands)
Nine Months Ended September 30, 2017:                
Outstanding at January 1, 2017  2,026,334  $9.00   6.2  $57,636 
Granted  52,500   37.93   9.4   (35)
Exercised  (359,000)  4.97   4.2   11,590 
Forfeited  (32,000)  21.96   8.4   489 
Outstanding at September 30, 2017  1,687,834   10.51   5.7  $45,136 
                 
Exercisable at September 30, 2017  810,736  $5.22   4.2  $25,971 
                 
Nine Months Ended September 30, 2016:                
Outstanding at January 1, 2016  2,498,834  $6.66   6.3  $42,743 
Granted  234,000   19.98   9.5   1,398 
Exercised  (656,500)  4.25   4.2   14,254 
Forfeited  (13,000)  19.41   9.0   85 
Outstanding at September 30, 2016  2,063,334   8.86   6.5  $35,277 
                 
Exercisable at September 30, 2016  594,536  $6.45   6.0  $13,901 
          

Weighted

     
      

Weighted

  

Average

     
      

Average

  

Remaining

     
      

Exercise

  

Contractual

  

Aggregate

 
  

Shares

  

Price

  

Term (years)

  

Intrinsic Value

 
              

(In Thousands)

 

Three Months Ended March 31, 2023:

                

Outstanding January 1, 2023

  280,000  $19.43   3.0  $14,088 

Exercised

  (75,000)  10.80   0.9   3,288 

Outstanding March 31, 2023

  205,000  $22.59   3.4  $7,428 
                 

Exercisable March 31, 2023

  152,000  $17.28   2.2  $5,859 
                 

Three Months Ended March 31, 2022:

                

Outstanding January 1, 2022

  353,250  $19.28   3.8  $23,525 

Exercised

  (36,500)  18.65   3.1   2,677 

Outstanding March 31, 2022

  316,750  $19.35   3.7  $24,446 
                 

Exercisable March 31, 2022

  255,000  $14.79   2.8  $20,056 

 

As of September 30, 2017, March 31, 2023, there was approximately $2.1 million$159,000 of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 2.7 years.1.0 year.

 

Restricted Stock and Performance Shares

 

The Company periodically grants restricted stock awards that vest upon time-based service conditions. Dividend payments are made during the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of September 30, 2017, March 31, 2023, there was $543,000$5.3 million of total unrecognized compensation cost related to non-vested time-based restricted stock. The cost is expected to be recognized evenly over the remaining 1.22.2 years of the restricted stock’s vesting period.

 

20
19

The Company periodically grants performance shares that give plan participants the opportunity to earn between 0% and 150% of the number of performance shares granted based on achieving certain performance metrics. The number of performance shares earned is determined by reference to the Company’s total shareholder return relative to a peer group of other publicly traded banks and bank holding companies during the performance period. The performance period is generally three years beginning on January 1st of the year of the grant. The fair value of performance shares is determined using a Monte Carlo simulation model on the grant date. As of March 31, 2023, there was $1.2 million of total unrecognized compensation cost related to non-vested performance shares. As of March 31, 2023, non-vested performance shares had a weighted average remaining time to vest of 1.8 years.

  

Restricted Stock

  

Performance Shares

 
  

Shares

  

Weighted Average Grant Date Fair Value

  

Shares

  

Weighted Average Grant Date Fair Value

 

Three Months Ended March 31, 2023:

                

Non-vested at January 1, 2023

  141,580  $56.39   23,852  $54.16 

Granted

  27,258   69.83   8,091   70.29 

Vested

  (17,521)  48.32   -   - 

Forfeited

  (6,545)  69.90   -   - 

Non-vested at March 31, 2023

  144,772  $59.29   31,943  $58.25 
                 

Three Months Ended March 31, 2022:

                

Non-vested at January 1, 2022

  127,602  $42.27   12,437  $37.05 

Granted

  27,851   84.67   6,557   74.52 

Vested

  (9,612)  42.23   -   - 

Forfeited

  (877)  40.72   -   - 

Non-vested at March 31, 2022

  144,964  $50.43   18,994  $49.99 

NOTE 8 - DERIVATIVES

 

The following table summarizes restricted stock activity duringCompany periodically enters into derivative contracts to manage exposures to movements in interest rates. The Company purchased an interest rate cap in Mayof2020 to limit exposures to increases in interest rates. The interest rate cap is not designated as a hedging instrument but rather as a stand-alone derivative. The interest rate cap has an original term of 3 years, a notional amount of $300 million and is tied to the nine months ended September 30, 2017one-month LIBOR rate with a strike rate of 0.50%. The fair value of the interest rate cap is carried on the consolidated balance sheet in other assets 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 - DERIVATIVESthe change in fair value is recognized in noninterest income each quarter. At March 31, 2023 the interest rate cap had a fair value of $1.2 million and remaining term of one month.

 

The Company has entered into agreementsforward loan sale commitments with secondary market investors to deliver loans on a “best efforts delivery” basis.basis, which do not meet the definition of a derivative instrument. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of September 30, 2017 March 31, 2023 and December 31, 2016 2022 were not material.

NOTE 8 9 RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02,Financial InstrumentsCredit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminate the accounting guidance for TDR recognition in Subtopic 310-40,Receivables Trouble Debt Restructurings by Creditors by entities that have adopted ASU 2016-13,Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. For public business entities, the amendments require disclosure of current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The Company adopted ASU 2022-02 effective January 1, 2023 on a prospective basis. Adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.

NOTE 10 RECENT ACCOUNTING PRONOUNCEMENTS

In March 2023, the FASB issued ASU 2016-09,2023-02, 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 nine months ended September 30, 2017 of $1.4 million and $3.5 million, respectively, compared to $1.2 million and $3.5 million during the quarter and nine months ended September 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 – EquityInvestments-Equity Method and Joint Ventures (Topic 323), Simplifying323): Accounting for Investments in Tax Credit Structures Using the TransitionProportional Amortization Method. These amendments allow entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the Equity Methodrelated income tax credits. The ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of Accounting. The amendments eliminate the requirement that when an investment qualifies for usecapital with a better understanding 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 periodsreturns from investments 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 qualifiedare made primarily for the equity methodpurpose of accounting recognize through earnings the unrealized holding gain or loss in accumulatedreceiving income tax credits and other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments became 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 results in the adoption of the equity method. Adoption of this standard has not affected the consolidated financial statements.

In January 2017, the FASB issuedtax benefits. 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.

21

NOTE 9 2023- 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 guidance02 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 is continuing to assess its revenue streams and reviewing 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 determine the potential impact the new guidance is expected to have on the Company’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 January 1, 2018 utilizing the modified retrospective approach.

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, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company is evaluatingassessing its tax credit investments for whether they qualify for proportional amortization treatment and plans to adopt the provisions of this ASU to determineamendments soon after. The Company does not currently believe the potential impact the new standardamendments will have a material impact on the Company’sits 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.

20

 

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.

22
 

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.

NOTE 1011 - FAIR VALUE MEASUREMENT

 

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

 

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

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

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

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 SecuritiesSecurities. . 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 sourceservice 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, as in the case of certain corporate securities, these securities are classified in Level 3 of the hierarchy.

 

Impaired Derivative instruments. The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate curves, adjusted for counterparty credit risk. These measurements are classified as level 2 within the valuation hierarchy.

Loans Individually Evaluated. . Impaired loansLoans individually evaluated are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loansLoans individually evaluated are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loansLoans individually evaluated are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.individually evaluation. A portion of the allowance for loan lossesACL is allocated to impaired loans individually evaluated if the value of such loans is deemed to be less than the unpaid balance. Impaired loansThe range of fair value adjustments and weighted average adjustment as of March 31, 2023 was 0% to 90% and 14.9%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2022 was 0% to 82% and 19.5% respectively. Loans individually evaluated 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 impairedwrite-down individually evaluated loans that are measured at fair value on a nonrecurring basis was $2,660,000 and $7,967,000$-.- million during the three and nine months ended September 30, 2017, respectively, March 31, 2023, and $3,544,000 and $6,090,000$3.0 million during the three and nine months ended September 30, 2016, respectively.March 31, 2022.

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 lossesACL subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. The range of fair value adjustments and weighted average adjustment as of March 31, 2023 was 0% to 100% and 53.3%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2022 was 0% to 100% and 53.3%, respectively. 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 lossThere were no losses on the sale and write-downs of $148,000 and $584,000 forOREO during the three and nine months ended September 30, 2016, respectively. March 31, 2023, compared to $6,000 during the three months ended March 31, 2022. 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.

 

21

There were two residential real estate loans with an aggregate balance of $248,000 foreclosed and classified as OREO as of March 31, 2023 and December 31, 2022.

Two residential real estate loans for $190,000 were in the process of foreclosure as of March 31, 2023. There were no residential real estate loan foreclosures classified as OREO as of September 30, 2017, compared to $189,000 as of December 31, 2016.

One residential real estate loan with a balance of $921,000that was in the process of being foreclosed as of September 30, 2017.December 31, 2022.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of September 30, 2017 March 31, 2023 and December 31, 2016:2022. There were no liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.

 

 

Fair Value Measurements at March 31, 2023 Using

    
 

Quoted Prices in

       
 

Active Markets

 

Significant Other

 

Significant

   
 Fair Value Measurements at September 30, 2017, Using   

for Identical

 

Observable Inputs

 

Unobservable

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

Assets (Level 1)

  

(Level 2)

  

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 $-  $56,778  $-  $56,778 

Available for sale debt securities:

 

U.S. Treasury securities

 $2,990  $-  $-  $2,990 

Government agency securities

 -  4  -  4 
Mortgage-backed securities  -   243,743   -   243,743  -  243,031  -  243,031 
State and municipal securities  -   134,804   -   134,804  -  13,311  -  13,311 

Corporate debt

  -   358,752   6,860   365,612 

Total available-for-sale debt securities

 2,990  615,098  6,860  624,948 

Interest rate cap derivative

  -   1,181   -   1,181 
Total assets at fair value $-  $435,325  $-  $435,325  $2,990  $616,279  $6,860  $626,129 

  

Fair Value Measurements at December 31, 2022 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable Inputs

  

Unobservable

     
  

Assets (Level 1)

  

(Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Recurring Basis:

 

(In Thousands)

 

Available for sale debt securities:

                

U.S. Treasury securities

 $2,969  $-  $-  $2,969 

Government agency securities

  -   9   -   9 

Mortgage-backed securities

  -   249,703   -   249,703 

State and municipal securities

  -   13,609   -   13,609 

Corporate debt

  -   367,665   10,860   378,525 

Total available-for-sale debt securities

  2,969   630,986   10,860   644,815 

Interest rate cap derivative

  -   4,201   -   4,201 

Total assets at fair value

 $2,969  $635,187  $10,860  $649,016 

 

  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
Assets Measured on a Recurring Basis: (In Thousands)
Available-for-sale securities                
U.S. Treasury and government sponsored agencies $-  $46,254  $-  $46,254 
Mortgage-backed securities  -   227,190   -   227,190 
State and municipal securities  -   139,930   -   139,930 
Corporate debt  -   9,001   -   9,001 
Total assets at fair value $-  $422,375  $-  $422,375 
22


24

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of September 30, 2017 March 31, 2023 and December 31, 2016:2022. There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022.

 

 

Fair Value Measurements at March 31, 2023 Using

    
 

Quoted Prices in

       
 

Active Markets

 

Significant Other

 

Significant

   
 Fair Value Measurements at September 30, 2017, Using   

for Identical

 

Observable

 

Unobservable

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

Assets (Level 1)

  

Inputs (Level 2)

  

Inputs (Level 3)

  

Total

 
Assets Measured on a Nonrecurring Basis: (In Thousands) 

(In Thousands)

 
Impaired loans $-  $-  $41,114  $41,114 

Loans individually evaluated

 $-  $-  $71,486  $71,486 
Other real estate owned and repossessed assets  -   -   3,888   3,888   -   -   248   248 
Total assets at fair value $-  $-  $45,002  $45,002  $-  $-  $71,734  $71,734 

 

 

Fair Value Measurements at December 31, 2022 Using

    
 

Quoted Prices in

       
 

Active Markets

 

Significant Other

 

Significant

   
 Fair Value Measurements at December 31, 2016, Using   

for Identical

 

Observable

 

Unobservable

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

Assets (Level 1)

  

Inputs (Level 2)

  

Inputs (Level 3)

  

Total

 
Assets Measured on a Nonrecurring Basis: (In Thousands) 

(In Thousands)

 
Impaired loans $-  $-  $37,437  $37,437 
Other real estate owned and repossessed assets  -   -   4,988   4,988 

Loans individually evaluated

 $-  $-  $73,017  $73,017 

Other real estate owned

  -   -   248   248 
Total assets at fair value $-  $-  $42,425  $42,425  $-  $-  $73,265  $73,265 

There were no liabilities measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022.

In the case of the debt securities portfolio, the Company monitors the portfolio to ascertain when transfers between levels have been affected. For the three months ended March 31, 2023, there was one transfer out of level 3 into level 2.

The table below includes a rollforward of the balance sheet amounts for the period ended March 31, 2023 and March 31, 2022 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology:

  

For the period ended March 31,

 
  

2023

  

2022

 
  

Available-for-sale Securities

  

Available-for-sale Securities

 
  

(In Thousands)

 

Fair value, beginning of period

 $10,860  $16,992 

Transfers into Level 3

  -   - 

Total realized gains included in income

  -   - 

Changes in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at period-end

  160   (343)

Purchases

  -   - 

Transfers out of Level 3

  (4,160)  (5,149)

Fair value, end of period

 $6,860  $11,500 

 

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.

 

23

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.

25

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.

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 September 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 or non-recurring basis or nonrecurring basis.as of March 31, 2023 and December 31, 2022 were as follows:

 

  September 30, 2017 December 31, 2016
  Carrying
Amount
 Fair Value Carrying
Amount
 Fair Value
  (In Thousands)
Financial Assets:                
Level 1 inputs:                
Cash and due from banks $166,150  $166,150  $623,562  $623,562 
                 
Level 2 inputs:                
Available for sale debt securities  435,325   435,325   422,375   422,375 
Held to maturity debt securities  36,891   37,406   25,052   25,431 
Restricted equity securities  1,038   1,038   1,024   1,024 
Federal funds sold  182,841   182,841   160,435   160,435 
Mortgage loans held for sale  4,971   5,033   4,675   4,736 
Bank owned life insurance contracts  126,722   126,722   114,388   114,388 
                 
Level 3 inputs:                
Debt securities held to maturity  50,508   51,923   37,512   37,871 
Loans, net  5,570,306   5,564,250   4,859,877   4,872,689 
                 
Financial liabilities:                
Level 2 inputs:                
Deposits $5,796,901  $5,793,324  $5,420,311  $5,417,320 
Federal funds purchased  254,880   254,880   355,944   355,944 
Other borrowings  54,975   56,996   55,262   54,203 
  

March 31, 2023

  

December 31, 2022

 
  

Carrying

      

Carrying

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
  

(In Thousands)

 

Financial Assets:

                

Level 1 Inputs:

                

Cash and cash equivalents

 $864,493  $864,493  $814,538  $814,538 

Held to maturity U.S. Treasury securities

  507,601   477,580   507,601   470,954 
                 

Level 2 Inputs:

                

Federal funds sold

  6,478   6,478   1,515   1,515 

Held to maturity debt securites

  506,342   453,162   526,720   464,749 

Mortgage loans held for sale

  1,651   1,642   1,607   1,604 

Restricted equity securities

  7,307   7,307   7,734   7,734 
                 

Level 3 Inputs:

                

Held to maturity debt securites

  250   250   250   250 

Loans, net

  11,480,837   11,145,529   11,541,671   11,265,517 
                 

Financial Liabilities:

                

Level 2 Inputs:

                

Deposits

 $11,615,317  $11,602,610  $11,546,805  $11,529,647 

Federal funds purchased

  1,480,160   1,480,160   1,618,798   1,618,798 
Other borrowings  65,417   57,340   64,726   57,101 

 

26
 

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 September 30, 2017, and events which occurred subsequent to September 30, 2017 but were not recognized in the financial statements.

ITEM 2. MANAGEMENT’SMANAGEMENTS 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-ownedwholly owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statementsbalance sheets as of March 31, 2023 and December 31, 2022 and consolidated statements of income for the three and nine months ended September 30, 2017March 31, 2023 and September 30, 2016.March 31, 2022.

 

Forward-Looking Statements

 

Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “could,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including:including, but not limited to: the global health and economic crisis precipitated by the COVID-19 outbreak; general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships;relationships, including in light of the continuing high rate of domestic inflation; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes in our loan portfolio and deposit base; economic crisis and associated credit issues in industries most impacted by the COVID-19 outbreak; 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.statements. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. ServisFirst Bancshares, Inc.The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time.

 

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,North and South Carolina, and Nashville, Tennessee. We also operate loan production offices in Florida. 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.

24

 

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.

 

First quarter highlights

Diluted earnings per common share of $1.06 for the first quarter of 2023.

Return on assets increased from 1.53% to 1.63% year-over-year.

Book value per share grew from $21.61 to $24.63, or 14%, year-over-year.

Deposit balances grew $69 million during the first quarter of 2023 while the deposit pipeline increased by $244 million, or 51%.

Bank level Tier 1 capital to average assets increased from 8.08% to 9.91% year-over-year.

Overview

 

As of September 30, 2017,March 31, 2023, we had consolidated total assets of $6.71$14.57 billion, an increase of $341.7down $29.2 million, or 5.4%0.2%, from $6.37total assets of $14.60 billion at December 31, 2016. This increase in total assets resulted from a $717.0 million increase in loans, offset by a $435.0 million decrease in cash and cash equivalents.2022. Total loans were $5.63$11.63 billion at September 30, 2017, up $717.0March 31, 2023, down $58.2 million, or 14.6%0.5%, from $4.91$11.69 billion at December 31, 2016.2022. Total deposits were $5.80$11.62 billion at September 30, 2017, an increase of $376.6March 31, 2023, up $68.5 million, or 6.9%0.6%, from $5.42$11.55 billion at December 31, 2016.2022.

 

Net income available to common stockholders for the three months ended September 30, 2017March 31, 2023 was $25.3$58.0 million, an increase of $4.4 million,up $358,000, or 21.1%0.6%, from $20.9$57.6 million for the corresponding period in 2016.three months ended March 31, 2022. Basic and diluted earnings per common share were $0.48$1.07 and $0.47,$1.06, respectively, for the three months ended September 30, 2017,March 31, 2023, compared to basic and diluted earnings per common share of $0.40 and $0.39, respectively,$1.06 for both in the corresponding period in 2016.2022. Changes in income and expenses are more fully explained in “Results of Operations” below.

 

27

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

Critical Accounting PoliciesPerformance Ratios

 

The accounting and financial policiesfollowing table presents selected ratios 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 futureour 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-Koperations for the fiscal yearthree months ended DecemberMarch 31, 2016.2023, and 2022.

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Return on average assets

  1.63

%

  1.53

%

Return on average stockholders' equity

  17.83

%

  20.09

%

Dividend payout ratio

  26.34

%

  21.77

%

Net interest margin (1)

  3.15

%

  2.89

%

Efficiency ratio (2)

  34.60

%

  32.74

%

Average stockholders' equity to average total assets

  9.16

%

  7.61

%

(1) Net interest margin in the net yield on interest earning assets and is the difference between the interest yield earned on  interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.

(2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.

 

Financial Condition

 

Cash and Cash Equivalents

 

At September 30, 2017,March 31, 2023, we had $182.8$6.5 million in federal funds sold, compared to $160.4$1.5 million at December 31, 2016.2022. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At September 30, 2017,March 31, 2023, we had $85.2$713.6 million in balances at the Federal Reserve, compared to $565.1$693.8 million at December 31, 2016. This decrease was a result of our lower levels of excess liquidity due to loan growth and a decrease in federal funds purchased from our correspondent banks during the first nine months of 2017.2022.

 

DebtInvestment Securities

 

Debt securities available for sale totaled $435.3$624.9 million at September 30, 2017March 31, 2023 and $422.4$644.8 million at December 31, 2016. Debt2022. Investment securities held to maturity totaled $87.4 million$1.02 billion at September 30, 2017March 31, 2023 and $62.6 million$1.03 billion at  December 31, 2016.2022. We had pay downspaydowns of $37.6$22.3 million on mortgage-backed securities, maturities of $21.1$3.6 million on U.S. government agencies, mortgage-backed securities, municipal agencybonds, corporate securities, and corporateTreasury securities, and calls of $11.9$5.0 million on municipalcorporate securities and subordinated notes during the ninethree months ended September 30, 2017.March 31, 2023.  We recognized a $3.3 million loss on the sale of $45.4 million in available for sale debt securities during the first quarter of 2022.  We purchased $72.0$190.6 million in mortgage-backed securities, $13.8$52.5 million in municipalcorporate securities, $2.9and $197.1 million in U.S.US Treasury securities and $16.0 million in subordinated notes during the first ninethree months of 2017. Nine mortgage-backed2022. For a tabular presentation of debt securities available for sale and five subordinated notes purchased were classified as held to maturity. All other securities purchased are classified as available for sale.maturity at March 31, 2023 and December 31, 2022, see “Note 4 – Securities” in our Notes to Consolidated Financial Statements.

25

 

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

28

All securities held are traded in liquid markets. As of September 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 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 BankCompany does not invest in collateralized debt obligations (“CDOs”). We have $50.5As of March 31, 2023, we had $398.7 million of bank holding company subordinated notes. All of these notesIf rated, all such bonds were rated BBB or better by Kroll Bond Rating Agency at the time of our investment in them.initial investment. 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 September 30, 2017 has a combined average credit rating of AA.AA as of March 31, 2023.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $240.5$834.9 million and $223.7$789.3 million as of September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively.

 

Loans

 

We had total loans of $5.63$11.63 billion at September 30, 2017, an increase of $717.0March 31, 2023, down $58.2 million, or 14.6%0.5%, compared to $4.91$11.69 billion at December 31, 2016. At September 30, 2017, the percentage of our loans in each of our regions were as follows:2022.

 

Percentage of Total
Loans in MSA
Birmingham-Hoover, AL MSA42.9%
Dothan, AL MSA9.9%
Huntsville, AL MSA9.7%
Montgomery, AL MSA6.9%
Mobile, AL MSA6.1%
Total Alabama MSAs75.5%
Pensacola-Ferry Pass-Brent, FL MSA6.3%
Tampa-St. Petersburg-Clearwater, FL MSA1.9%
Total Florida MSAs8.2%
Atlanta-Sandy Springs-Roswell, GA MSA4.4%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA8.7%
Charleston-North Charleston, SC MSA3.2%

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 lossesCompany assesses the adequacy of its ACL at the end of each calendar quarter. The level of ACL is establishedbased on the Company’s evaluation of historical default and maintained at levels management deems adequate to absorb anticipated credit losses from identifiedloss experience, current and otherwiseprojected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, portfolio asthe estimated value of the balance sheet date. In assessing the adequacy of the allowance for loan losses, management considers its evaluationany underlying collateral, composition of the loan portfolio past due loanand other relevant factors. The ACL is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. We believe the ACL is adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio.

Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience collateral values,estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic conditions andenvironment among other factors considered necessaryfactors. See “Note 1 – General” in the Notes to maintain the allowance at an adequate level. Our management believes that the allowance was adequate at September 30, 2017.Consolidated Financial Statements included in Item 1. Consolidated Financial Statements elsewhere in this report.

 

29
26

 

The following table presents the allocation of the allowance for loanexpected credit losses for each respective loan categorypool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions.

Expected credit losses for loans that no longer share similar risk characteristics with the corresponding percentagecollectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, modified loans, and for periods prior to the adoption of ASU 2022-02 modified loans in each category to total loans. Management believes thatclassified as TDRs. Specific allocations of the comprehensive allowance analysis developed by ourACL for credit administration group is in compliance with all current regulatory guidelines.losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

 

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

As of and for the Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 
  

(Dollars in thousands)

 

Total loans outstanding, net of unearned income

 $11,629,802  $9,898,957 

Average loans outstanding, net of unearned income

 $11,651,417  $9,646,679 

Allowance for credit losses at beginning of period

  146,297   116,660 

Charge-offs:

        

Commercial, financial and agricultural loans

  1,257   2,574 

Real estate - construction

  -   - 

Real estate - mortgage

  26   27 

Consumer loans

  390   75 

Total charge-offs

  1,673   2,676 

Recoveries:

        

Commercial, financial and agricultural loans

  128   105 

Real estate - construction

  3   - 

Real estate - mortgage

  1   - 

Consumer loans

  11   12 

Total recoveries

  143   117 

Net charge-offs

  1,530   2,559 

Provision for credit losses

  4,197   5,362 

Allowance for credit losses at period end

 $148,965  $119,463 

Allowance for credit losses to period end loans

  1.28

%

  1.21

%

Net charge-offs to average loans

  0.05

%

  0.11

%

 

December 31, 2016 Amount Percentage of loans
in each category
to total loans
   

Percentage

 
   

of loans in

 
   

each

 
   

category to

 

March 31, 2023

 

Amount

  

total loans

 
 (In Thousands) 

(In Thousands)

 
Commercial, financial and agricultural $28,872   40.36% $42,895  26.50

%

Real estate - construction  5,125   6.82% 40,483  12.64

%

Real estate - mortgage  17,504   51.70% 63,157  60.24

%

Consumer  392   1.12%  2,430   0.62

%

Total $51,893   100.00% $148,965   100.00

%

      

Percentage

 
      

of loans in

 
      

each

 
      

category to

 

December 31, 2022

 

Amount

  

total loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $42,830   26.91

%

Real estate - construction

  42,889   13.11

%

Real estate - mortgage

  58,652   59.42

%

Consumer

  1,926   0.57

%

Total

 $146,297   100.01

%

27

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased $2.0 million to $14.9remained flat at $17.8 million at September 30, 2017, compared to $16.9 million atMarch 31, 2023 and December 31, 2016.2022, respectively. Of this total, nonaccrual loans were $12.4of $13.2 million at September 30, 2017, compared to $10.6 millionMarch 31, 2023 represented a net increase of $707,000 from nonaccrual loans at December 31, 2016, an increase of $1.8 million.2022.  Excluding credit card accounts, there were threesix loans 90 or more days past due and still accruing totaling $2.4$5.1 million at March 31, 2023, compared to twoone loans totaling $6.2$4.6 million at December 31, 2016. Troubled Debt Restructurings (“TDR”) at September 30, 2017 and December 31, 20162022. Loans made to borrowers experiencing financial difficulty that were $16.4 million and $7.3 million, respectively. There were no loans newly classified as TDR formodified during the three months ended September 30, 2017March 31, 2023 were $61.9 million. TDRs at December 31, 2022, and one relationship totaling $12.7March 31, 2022 were $2.5 million which includes nine loans of various types, was newly classified as TDR for the nine months ended September 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 nine months ended September 30, 2016. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.$2.1 million, respectively.

 

OREO and repossessed assets decreased to $3.9 million$248,000 at September 30, 2017,March 31, 2023, from $5.0$2.0 million at December 31, 2016. The total number of OREO and repossessed asset accounts decreased to nine at September 30, 2017, compared to 12 at December 31, 2016.2022. The following table summarizes OREO and repossessed asset activity for the ninethree months September 30, 2017ended March 31, 2023 and 2016:2022:

 

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

30
  

Three months ended March 31,

 
  

2023

  

2022

 
  

(In thousands)

 

Balance at beginning of period

 $248  $1,208 

Transfers from loans and capitalized expenses

  -   830 

Proceeds from sales

  -   (44)

Write-downs / net gain (loss) on sales

  -   (5)

Balance at end of period

 $248  $1,989 

 

The following table summarizes our nonperforming assets and TDRs at September 30, 2017March 31, 2023 and December 31, 2016:2022:

 

 

March 31, 2023

  

December 31, 2022

 
 September 30, 2017 December 31, 2016   

Number of

   

Number of

 
 Balance Number of
Loans
 Balance Number of
Loans
 

Balance

  

Loans

  

Balance

  

Loans

 
 (Dollar Amounts In Thousands) 

(Dollar Amounts In Thousands)

 
Nonaccrual loans:                 
Commercial, financial and agricultural $5,798   16  $7,282   13  $7,219  22  $7,108  18 
Real estate - construction  2,285   3   3,268   5  -  -  -  - 
Real estate - mortgage:                 
Owner-occupied commercial  2,497   3   -   -  3,388  3  3,312  3 
1-4 family mortgage  1,308   3   74   1  2,044  20  1,524  16 
Other mortgage  430   3   -   -   506   2   506   2 
Total real estate - mortgage  4,235   9   74   1  5,938  25  5,342  21 
Consumer  38   1   -   -   -   -   -   - 
Total Nonaccrual loans: $12,356   29  $10,624   19  $13,157   47  $12,450   39 
                 
90+ days past due and accruing:                 
Commercial, financial and agricultural $2,108   3  $10   1  $146  22  $195  26 
Real estate - construction  -   -   -   -  -  -  -  - 
Real estate - mortgage:                 
Owner-occupied commercial  -   -   6,208   1  -  -  -  - 
1-4 family mortgage  -   -   -   -  -  5  594  5 
Other mortgage  328   1   -   -   4,456   1   4,512   1 
Total real estate - mortgage  328   1   6,208   1  4,456  6  5,106  6 
Consumer  70   27   45   10   81   31   90   44 
Total 90+ days past due and accruing: $2,506   31  $6,263   12  $4,683   59  $5,391   76 
                 
Total Nonperforming Loans: $14,862   60  $16,887   31  $17,840  106  $17,841  115 
                 
Plus: Other real estate owned and repossessions  3,888   9   4,988   12   248   2   248   2 
Total Nonperforming Assets $18,750   69  $21,875   43  $18,089   108  $18,089   117 
                 
Restructured accruing loans:                 
Commercial, financial and agricultural $7,189   5  $354   1  $-  -  $2,480  5 
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  $-   -  $2,480   5 
                
Total Nonperforming assets and restructured accruing loans $31,450   78  $22,433   45  $18,089   108  $20,569   122 
                 
Ratios:                 
Nonperforming loans to total loans  0.26%      0.34%     0.15

%

    0.15

%

   
Nonperforming assets to total loans plus other real estate owned and repossessions  0.33%      0.44%     0.16

%

    0.15

%

   
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions  0.56%      0.46%     0.16

%

    0.18

%

   

28

 

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 lossesACL to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.

 

31

Impaired LoansIn keeping with this guidance from regulators, the bank offered short-term modifications made in response to COVID-19 to borrowers who were current and Allowance for Loan Losses

otherwise not past due. Should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of September 30, 2017,March 31, 2023, we had impaired loanscarried $2.4 million of $49.6accrued interest income on deferrals made to COVID-19 affected borrowers compared to $2.4 million inclusive of nonaccrual loans, an increase of $4.0 million from $45.6 million as ofat December 31, 2016. This increase is attributable to $15.0 million of loans newly classified as specifically impaired, partially offset by charge-offs totaling $5.6 million, net pay downs of $4.1 million, loan classification upgrades of $0.7 million and OREO transfers and repossessions of $0.6 million. We allocated $8.5 million of our allowance for loan losses at September 30, 2017 to these impaired loans, an increase of $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 $49.6 million of impaired loans reported as of September 30, 2017, $30.4 million were commercial, financial and agricultural loans, $3.3 million were real estate construction loans, $15.8 million were real estate mortgage loans and $0.1 million were consumer loans.2022.

 

Deposits

 

TotalWe rely on increasing our deposit base to fund loan and other asset growth. Each of our markets is highly competitive. We compete for local deposits by offering attractive products with competitive rates. We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network. Our management’s strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. We have promoted electronic banking services by providing them without charge and by offering in-bank customer training. Despite a decrease in non-interest bearing deposits, our total deposits increased $376.6by $68.5 million or 6.9%, to $5.80$11.62 billion at September 30, 2017March 31, 2023 compared to $5.42$11.55 billion at December 31, 2016. While we have experienced somewhat slower growth in our deposits so far in 2017, we2022.  We anticipate long-term sustainable growth in deposits through continued development of market share in our regions.less mature markets and through organic growth in our mature markets.

 

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

 

Other The following table summarizes balances of our deposits and the percentage of each type to the total at March 31, 2023 and December 31, 2022.

  

March 31, 2023

  

December 31, 2022

 

Non-interest-bearing demand

 $2,898,736   24.96

%

 $3,321,347   28.76

%

Interest-bearing demand

  1,762,583   15.17

%

  1,861,496   16.12

%

Money market

  5,998,057   51.64

%

  5,362,705   46.44

%

Savings

  131,016   1.13

%

  138,450   1.20

%

Time deposits, $250,000 and under

  261,118   2.25

%

  239,772   2.08

%

Time deposits, over $250,000

  563,807   4.85

%

  573,035   4.96

%

Brokered time deposits

  -   -

%

  50,000   0.43

%

  $11,615,317   100.00

%

 $11,546,805   100.00

%

At March 31, 2023 and December 31, 2022, we estimate that we had approximately $6.9 billion and $7.0 billion, respectively, in uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit.

29

The following table presents the maturities of our time deposits in excess of insurance limit as of March 31, 2023.

  

Portion of time deposits in excess of insurance limit

 
  

March 31, 2023

 

Time deposits otherwise uninsured with a maturity of:

 

(In Thousands)

 
     

3 months or less

 $75,443 

Over 3 months through 6 months

  57,907 

Over 6 months through 12 months

  83,621 

Over 12 months

  110,666 

Total

 $327,637 

The uninsured deposit data for 2023 and 2022 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable and Federal Home Loan Bank advances.payable. We had $254.9 million$1.48 billion and $355.9 million$1.64 billion at September 30, 2017March 31, 2023 and December 31, 2016,2022, 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 1.34%4.67% for the quarter ended September 30, 2017, which has increased during the past three quarters due to increases in the FRB’s targeted federal funds rate.March 31, 2023. Other borrowings consist of the following:

 

·

$20.030.0 million of 5.50%on the Company’s 4.5% Subordinated Notes due November 9, 2022,8, 2027, which were issued in a private placement in November 2012,2017 and pay interest semi-annually. The Notes may be prepaid by the Company; and

·

$34.75 million of 5%the Company’s 4% Subordinated Notes due July 15, 2025,October 21, 2030, which were issued in a private placement in July 2015,October 2020 and

·$300,000 of principal reducing advances from pay interest semi-annually. The Notes may not be prepaid by 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.Company prior to October 21, 2025.

 

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 werewas 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 September 30, 2017,March 31, 2023, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $628.1 million.$2.0 billion. The Bank had loans pledged the FHLB which provided approximately $1.4 billion in available funding. The Bank has additional unpledged CRE loans that would provide an approximate additional $1.7 billion in available funding through the FHLB for a total of $3.1 billion in available funding from the FHLB. The Bank’s policy limits on brokered deposits would allow for  up to $3.6 billion in available funding for brokered deposits. Additionally, the Bank had borrowing availability of approximately $485.0$698.0 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”.“Borrowings” and has various other sources of liquidity as discussed herein.  We believe these sources of funding are adequate to meet both our immediate (within the next 12 months) and our longer term anticipated funding needs. However, we may need additional funding if we are able to maintain our current growth rate into the future.

 

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
30

 

The following table reflectsillustrates, during the contractual maturitiesperiods presented, the mix of our term liabilitiesfunding sources and the assets in which those funds are invested as a percentage of September 30, 2017. The amounts shown do not reflect any early withdrawal or prepayment assumptions.our average total assets for the period indicated. Average assets totaled $14.4 billion and $15.3 billion for the quarters ended March 31, 2023 and 2022, respectively.

 

  Payments due by Period
  Total 1 year or less Over 1 - 3
years
 Over 3 - 5
years
 Over 5 years
  (In Thousands)
Contractual Obligations (1)                    
                     
Deposits without a stated maturity $5,235,403  $-  $-  $-  $- 
Certificates of deposit (2)  561,498   324,179   152,527   83,161   1,631 
Federal funds purchased  254,880   254,880   -   -   - 
Subordinated debentures  54,975   300   -   -   54,675 
Operating lease commitments  16,180   3,101   5,365   3,870   3,844 
Total $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.

  

For the Three Months Ended March 31,

 
  

2023

  

2022

 

Sources of Funds:

        

Deposits:

        

Non-interest-bearing

  21.4

%

  31.9

%

Interest-bearing

  58.3   49.1 

Federal funds purchased

  9.6   10.6 

Long term debt and other borrowings

  0.8   0.4 

Other liabilities

  0.5   0.4 

Equity capital

  9.4   7.6 

Total sources

  100.0

%

  100.0

%

         

Uses of Funds:

        

Loans

  81.0

%

  63.1

%

Securities

  12.0   10.0 

Interest-bearing balances with banks

  3.5   23.8 

Federal funds sold

  0.4   0.1 

Other assets

  3.1   3.0 

Total uses

  100.0

%

  100.0

%

 

Capital Adequacy

 

Total stockholders’ equity attributable to us at March 31, 2023 was $1.34 billion, or 9.19% of total assets. At December 31, 2022, total stockholders’ equity attributable to us was $1.30 billion, or 8.89% of total assets.

As of September 30, 2017,March 31, 2023, 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 totalcommon equity Tier 1, Tier 1 risk-based, Tier 1total 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 September 30, 2017.March 31, 2023.

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

31

 

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of September 30, 2017,March 31, 2023, December 31, 20162022 and September 30, 2016:March 31, 2022:

 

 Actual For Capital Adequacy
Purposes
 To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 

Actual

  

For Capital Adequacy Purposes

  

To Be Well Capitalized Under Prompt Corrective Action Provisions

 
 Amount Ratio Amount Ratio Amount Ratio 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
As of September 30, 2017: (Dollars in thousands)
CET 1 Capital to Risk-Weighted Assets:                        

As of March 31, 2023:

 

CET 1 Capital to Risk Weighted Assets:

 
Consolidated $574,296   9.60% $269,204   4.50%  N/A   N/A  $1,368,751  10.01

%

 $615,176  4.50

%

 N/A  N/A 
ServisFirst Bank  629,146   10.52%  269,172   4.50% $388,803   6.50% 1,428,371  10.45

%

 615,120  4.50

%

 $888,506  6.50

%

Tier 1 Capital to Risk-Weighted Assets:                        

Tier 1 Capital to Risk Weighted Assets:

 
Consolidated  574,798   9.61%  358,938   6.00%  N/A   N/A  1,369,251  10.02

%

 820,235  6.00

%

 N/A  N/A 
ServisFirst Bank  629,648   10.53%  358,896   6.00%  478,527   8.00% 1,428,871  10.45

%

 820,160  6.00

%

 1,093,546  8.00

%

Total Capital to Risk-Weighted Assets:                        

Total Capital to Risk Weighted Assets:

 
Consolidated  688,432   11.51%  478,584   8.00%  N/A   N/A  1,578,208  11.54

%

 1,093,647  8.00

%

 N/A  N/A 
ServisFirst Bank  688,607   11.51%  478,527   8.00%  598,159   10.00  1,578,411  11.55

%

 1,093,546  8.00

%

 1,366,933  10.00

%

Tier 1 Capital to Average Assets:                         
Consolidated  574,798   8.91%  257,939   4.00%  N/A   N/A  1,369,251  9.49

%

 576,964  4.00

%

 N/A  N/A 
ServisFirst Bank  629,648   9.76%  258,498   4.00%  323,123   5.00% 1,428,871  9.91

%

 576,969  4.00

%

 721,211  5.00

%

                         
As of December 31, 2016:                        
CET 1 Capital to Risk-Weighted Assets:                        

As of December 31, 2022:

 

CET 1 Capital to Risk Weighted Assets:

 
Consolidated $508,982   9.78% $234,262   4.50%  N/A   N/A  $1,326,035  9.55

%

 $624,986  4.50

%

 N/A  N/A 
ServisFirst Bank  560,731   10.77%  234,232   4.50% $338,335   6.50% 1,385,697  9.98

%

 624,942  4.50

%

 $902,694  6.50

%

Tier 1 Capital to Risk-Weighted Assets:                        

Tier 1 Capital to Risk Weighted Assets:

 
Consolidated  509,359   9.78%  312,350   6.00%  N/A   N/A  1,326,535  9.55

%

 833,315  6.00

%

 N/A  N/A 
ServisFirst Bank  561,108   10.78%  312,309   6.00%  416,413   8.00% 1,386,197  9.98

%

 833,256  6.00

%

 1,111,008  8.00

%

Total Capital to Risk-Weighted Assets:                        

Total Capital to Risk Weighted Assets:

 
Consolidated  616,415   11.84%  416,467   8.00%  N/A   N/A  1,532,134  11.03

%

 1,111,086  8.00

%

 N/A  N/A 
ServisFirst Bank  613,501   11.79%  416,413   8.00%  520,516   10.00% 1,533,069  11.04

%

 1,111,008  8.00

%

 1,388,760  10.00

%

Tier 1 Capital to Average Assets:                         
Consolidated  509,359   8.22%  247,777   4.00%  N/A   N/A  1,326,535  9.29

%

 570,960  4.00

%

 N/A  N/A 
ServisFirst Bank  561,108   9.06%  247,760   4.00%  309,700   5.00% 1,386,197  9.71

%

 570,924  4.00

%

 713,656  5.00

%

                         
As of September 30, 2016:                        
CET 1 Capital to Risk-Weighted Assets:                        

As of March 31, 2022:

 

CET 1 Capital to Risk Weighted Assets:

 
Consolidated $488,673   9.91% $221,937   4.50%  N/A   N/A  $1,169,735  9.86

%

 $533,769  4.50

%

 N/A  N/A 
ServisFirst Bank  540,233   10.96%  221,902   4.50% $320,525   6.50% 1,232,198  10.39

%

 533,698  4.50

%

 $770,897  6.50

%

Tier 1 Capital to Risk-Weighted Assets:                        

Tier 1 Capital to Risk Weighted Assets:

 
Consolidated  489,050   9.92%  295,916   6.00%  N/A   N/A  1,170,235  9.87

%

 711,691  6.00

%

 N/A  N/A 
ServisFirst Bank  540,610   10.96%  295,869   6.00%  394,493   8.00% 1,232,698  10.39

%

 711,598  6.00

%

 948,797  8.00

%

Total Capital to Risk-Weighted Assets:                        

Total Capital to Risk Weighted Assets:

 
Consolidated  593,140   12.03%  394,554   8.00%  N/A   N/A  1,356,009  11.43

%

 948,922  8.00

%

 N/A  N/A 
ServisFirst Bank  590,043   11.97%  394,493   8.00%  493,116   10.00% 1,353,761  11.41

%

 948,797  8.00

%

 1,185,996  10.00

%

Tier 1 Capital to Average Assets:                         
Consolidated  489,050   8.20%  238,594   4.00%  N/A   N/A  1,170,235  7.67

%

 610,638  4.00

%

 N/A  N/A 
ServisFirst Bank  540,610   9.06%  238,583   4.00%  298,228   5.00% 1,232,698  8.08

%

 610,538  4.00

%

 763,172  5.00

%

 

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

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

The Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. If, in the opinion of the federal banking regulators, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulators could require, after notice and a hearing, that the Bank stop or refrain from engaging in the questioned practice.

33
32

 

Off-Balance Sheet Arrangements

 

In the normal course of business, we are a party to financial instrumentscredit arrangements with off-balance sheet risk to meet the financing needs of our customers.  These financial instrumentscredit arrangements include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit and financial guarantees.  Those instrumentscredit arrangements involve, to varying degrees, elements of credit risk in excess of the amount recognized in ourthe balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.credit arrangements. All such credit arrangements bear interest at variable rates and we have no such credit arrangements which bear interest at fixed rates.

 

Our exposure to credit loss in the event of non-performance by the other party to suchthe financial instrumentsinstrument for commitments to extend credit, credit card arrangements and standby letters of credit 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 September 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.

 

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 September 30, 2017 and December 31, 2016 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at September 30, 2017March 31, 2023 are as follows:

 

 September 30, 2017 

March 31, 2023

 
 (In Thousands) 

(In Thousands)

 
Commitments to extend credit $1,873,412  $3,958,312 
Credit card arrangements  82,684  362,347 
Standby letters of credit  49,894   60,666 
 $2,005,990  $4,381,325 

 

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.

 

34

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 September 30, 2017March 31, 2023 was $25.3$58.0 million compared to net income and net income available to common stockholders of $20.9$57.6 million for the three months ended September 30, 2016. Net income and net income available to common stockholders for the nine months ended September 30, 2017 was $71.9 million compared to net income and net income available to common stockholders of $59.7 million for the nine months ended September 30, 2016.March 31, 2022. The increase in net income for the three months ended September 30, 2017 over the same period in 2016 was primarily attributable to a $10.5$2.6 million increase in net interest income resulting from growth in earning assets, partially offset by a $3.4 million increase in tax provision. The increase in net income forduring the ninethree months ended September 30, 2017March 31, 2023 to $108.3 million, compared to 2016 was primarily$105.7 million during the result of a $28.0 millionsame period in 2022. The increase in net interest income resulting fromis primarily attributable to growth in average earning assets and a $2.0 million increase inloans, which increased by $2.00 billion. Total non-interest income leddecreased by increased credit card income. Non-interest$1.6 million to $6.3 million during the three months ended March 31, 2023 compared to $7.9 million during the same period in 2022. Total non-interest expenses increased by $1.3$2.4 million and $5.6to $39.7 million respectively, forduring the three and nine months ended September 30, 2017March 31, 2023 compared to 2016.$37.2 million during the same period in 2022.

 

Basic and diluted net income per common share were $0.48$1.07 and $0.47,$1.06, respectively, for the three months ended September 30, 2017,March 31, 2023, compared to $0.40 and $0.39, respectively,$1.06 for both for the corresponding period in 2016. Basic and diluted net income per common share were $1.36 and $1.33, respectively, for the nine months ended September 30, 2017, compared to $1.14 and $1.12, respectively, for the corresponding period in 2016.2022.  Return on average assets for the three and nine months ended September 30, 2017March 31, 2023 was 1.55% and 1.52%, respectively,1.63% compared to 1.39% and 1.43%, respectively,1.53% for the corresponding periodsperiod in 2016. Return2022, and return on average common stockholders’ equity for the three and nine months ended September 30, 2017March 31, 2023 was 17.28% and 17.24%17.83% compared to 16.66% and 16.60%, respectively,20.09% for the corresponding periodsperiod in 2016.2022.

 

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.

33

 

Net Interest Income

 

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

 

Taxable-equivalent net interest income increased $8.5$2.5 million, or 17.6%2.4%, to  $56.9$108.4 million for the three months ended September 30, 2017March 31, 2023 compared to $48.4$105.8 million for the corresponding period in 2016, and increased $28.0 million, or 20.1%, to $167.5 million for the nine months ended September 30, 2017 compared to $139.5 million for the corresponding period in 2016.2022. This increase was primarily attributable to growtha $2.00 billion increase in average earning assets, which increased $435.8 million,loans, or 7.6%20.8%, from the third quarter of 2016 to the third quarter of 2017, and $699.2 million, or 13.0%, from the nine months ended September 30, 2016 to the same period in 2017.year-over-year. Average interest-bearing balances with banks decreased by $3.13 billion. The taxable-equivalent yield on interest-earning assets increased from 3.10% to 4.37% for5.27% year-over-year, primarily a result of the three months ended September 30, 2017 from 3.81% for the corresponding period in 2016, and increased to 4.23% for the nine months ended September 30, 2017 from 3.93% for the corresponding period in 2016.Federal Reserve increasing market interest rates during 2022. The yield on loans for the three months ended September 30, 2017March 31, 2023 was 4.66%5.70% compared to 4.47%4.34% for the corresponding period in 2016, and 4.58% compared to 4.47% for the nine months ended September 30, 2017 and September 30, 2016, respectively.2022. The cost of total interest-bearing liabilities increased to 0.81%2.98% for the three months ended September 30, 2017 compared to 0.64%March 31, 2023 from 0.33% for the corresponding period in 2016, and increased to 0.74% for the nine months ended September 30, 2017 from 0.63% for the corresponding period in 2016.2022. Net interest margin for the three months ended September 30, 2017 was 3.77% comparedMarch 31, 2023 increased 26 basis points to 3.35%3.15% from 2.89% for the corresponding period in 2016, and 3.69% for the nine months ended September 30, 2017 compared to 3.47% for the corresponding period in 2016.2022.

 

Beginning in March of 2022, the Federal Reserve Bank increased their targeted federal funds rate from 0 – 0.25% to its current range of 4.75 – 5.00%. Our cost of funding has increased as a result of deposit pricing pressures resulting from these rate increases. We believe our net interest income will benefit over a short period of time following the Federal Reserve Bank’s ceasing these rate increases.

35

 

The following tables show,table shows, for the three and nine months ended September 30, 2017March 31, 2023 and September 30, 2016,March 31, 2022, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflecttable reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. TheBoth tables are presented on a taxable-equivalent basis where applicable:

 

Average Consolidated Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended September 30,

(In thousands, except Average Yields and Rates)

On a Fully Taxable-Equivalent Basis

For the Three Months Ended March 31,

(Dollar Amounts In Thousands)

 

 

2023

  

2022

 
   

Interest

 

Average

   

Interest

 

Average

 
 2017 2016 

Average

 

Earned /

 

Yield /

 

Average

 

Earned /

 

Yield /

 
 Average
Balance
 Interest
Earned /
Paid
 Average
Yield /
 Rate
 Average
Balance
 Interest
Earned /
Paid
 Average
Yield /
 Rate
 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 
Assets:                         
Interest-earning assets:                         
Loans, net of unearned income (1)(2)                        

Loans, net of unearned income (1)(2):

 
Taxable $5,407,109  $63,519   4.66% $4,554,900  $51,233   4.47% $11,632,439  $163,576  5.70

%

 $9,621,484  $102,891  4.34

%

Tax-exempt (3)  33,357   435   5.17   21,939   241   4.37   18,978   157   3.36   25,195   254   4.09 
Total loans, net of unearned income  5,440,466   63,954   4.66   4,576,839   51,474   4.47  11,651,417  163,733  5.70  9,646,679  103,145  4.34 
Mortgage loans held for sale  4,862   43   3.51   6,724   64   3.79  1,522  24  6.40  927  4  1.75 
Investment securities:                         
Taxable  385,431   2,287   2.37   224,825   1,232   2.19  1,724,523  10,939  2.54  1,518,572  8,222  2.17 
Tax-exempt (3)  131,478   1,097   3.34   135,272   1,262   3.73   3,781   23   2.43   8,812   51   2.32 
Total investment securities (4)  516,909   3,384   2.62   360,097   2,494   2.77 

Total debt securities (4)

 1,728,304  10,962  2.54  1,527,384  8,273  2.17 
Federal funds sold  111,175   378   1.35   217,158   347   0.64  50,526  614  4.93  16,639  13  0.32 
Restricted equity securities  1,030   9   3.47   5,658   57   4.01  9,919  188  7.69  7,371  68  4 
Interest-bearing balances with banks  118,510   379   1.27   590,675   759   0.51   510,021   5,873   4.67   3,637,882   1,804   0.20 
Total interest-earning assets $6,192,952  $68,147   4.37% $5,757,151  $55,195   3.81% $13,951,709  $181,394  5.27

%

 $14,836,882  $113,307  3.10

%

Non-interest-earning assets:                         
Cash and due from banks  65,457           58,809          106,448       74,534      
Net fixed assets and equipment  54,727           25,000         
Allowance for loan losses, accrued interest and other assets  151,786           145,804         

Net premises and equipment

 60,617       61,209      

Allowance for credit losses, accrued interest and other assets

  279,775        313,560      
Total assets $6,464,922           5,986,764          $14,398,549       $15,286,185      
                         
Liabilities and stockholders' equity:                         
Interest-bearing liabilities:                         
Interest-bearing demand deposits $800,437  $849   0.42% $696,100  $644   0.37% $1,675,355  $5,151  1.25

%

 $1,594,645  $778  0.20

%

Savings deposits  48,313   37   0.30   43,569   33   0.30  134,671  312  0.94  135,545  59  0.18 
Money market accounts  2,774,061   5,170   0.74   2,471,829   3,387   0.55  5,756,642  44,978  3.17  4,985,224  3,204  0.26 
Time deposits (5)  546,020   1,518   1.10   519,653   1,294   0.99 

Time deposits

  850,639   5,272   2.51   792,930   1,803   0.92 
Total interest-bearing deposits  4,168,831   7,574   0.72   3,731,151   5,358   0.57  8,417,307  55,713  2.68  7,508,344  5,844  0.32 
Federal funds purchased  282,806   954   1.34   436,415   698   0.64  1,389,217  16,003  4.67  1,620,012  932  0.23 
Other borrowings  55,034   717   5.17   55,410   717   5.15   114,726   1,305   4.61   64,708   690   4.32 
Total interest-bearing liabilities $4,506,671  $9,245   0.81% $4,222,976  $6,773   0.64% $9,921,250  $73,021  2.98

%

 $9,193,064  $7,466  0.33

%

Non-interest-bearing liabilities:                         
Non-interest-bearing demand deposits  1,363,207           1,250,139          3,086,774       4,870,701      
Other liabilities  15,070           14,376          72,121       59,619      
Stockholders' equity  578,626           494,248          1,358,587       1,156,186      
Unrealized gains on securities and derivatives  1,348           5,025         

Accumulated other comprehensive (loss) income

  (40,183)       6,615      
Total liabilities and stockholders' equity $6,464,922          $5,986,764          $14,398,549       $15,286,185      
Net interest income     $58,902          $48,422         $108,373       $105,841    
Net interest spread          3.56%          3.17%      2.29

%

      2.77

%

Net interest margin          3.77%          3.35%      3.15

%

      2.89

%

 

(1)

Non-accrual loans are included in average loan balances in all periods. Loan fees of $749,000$3,630 and $653,000$7,686 are included in interest income in 2017the first quarter of 2023 and 2016,2022, respectively. Loan fees include accretion of PPP loan fees.

(2)

Accretion on

Amortization of acquired loan discountspremiums of $107,000$49 and $194,000 are$21 is included in interest income in 20172023 and 2016,2022, respectively.

(3)

Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%21%.

(4)Unrealized gains of $2,072,000 and $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.

34

 

  

For the Three Months Ended March 31,

 
  

2023 Compared to 2022 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

 $24,207  $36,478  $60,685 

Tax-exempt

  (56)  (41)  (97)

Total loans, net of unearned income

  24,151   36,437   60,588 

Mortgages held for sale

  4   16   20 

Debt securities:

            

Taxable

  1,199   1,518   2,717 

Tax-exempt

  (31)  3   (28)

Total debt securities

  1,168   1,521   2,689 

Federal funds sold

  73   528   601 

Restricted equity securities

  48   140   120 

Interest-bearing balances with banks

  (2,835)  6,904   4,069 

Total interest-earning assets

  22,609   45,546   68,087 
             

Interest-bearing liabilities:

            

Interest-bearing demand deposits

  41   4,332   4,373 

Savings

  -   252   252 

Money market accounts

  572   41,202   41,774 

Time deposits

  140   3,329   3,469 

Total interest-bearing deposits

  753   49,115   49,868 

Federal funds purchased

  (152)  15,223   15,071 

Other borrowed funds

  566   49   615 

Total interest-bearing liabilities

  1,167   64,387   65,554 

Increase in net interest income

 $21,442  $(18,841) $2,533 

36
35

  For the Three 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 $10,054  $2,232  $12,286 
Tax-exempt  144   50   194 
Total loans, net of unearned income  10,198   2,282   12,480 
Mortgages held for sale  (16)  (5)  (21)
Debt securities:            
Taxable  949   106   1,055 
Tax-exempt  (34)  (131)  (165)
Total debt securities  915   (25)  890 
Federal funds sold  (227)  258   31 
Restricted equity securities  (41)  (7)  (48)
Interest-bearing balances with banks  (923)  543   (380)
Total interest-earning assets  9,906   3,046   12,952 
             
Interest-bearing liabilities:            
Interest-bearing demand deposits  105   100   205 
Savings  4   -   4 
Money market accounts  455   1,328   1,783 
Time deposits  69   155   224 
Total interest-bearing deposits  633   1,583   2,216 
Federal funds purchased  (311)  567   256 
Other borrowed funds  (4)  4   - 
Total interest-bearing liabilities  318   2,154   2,472 
Increase in net interest income $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 increasesThe rate component was unfavorable as average rates paid on interest-bearing liabilities increased 265 basis points while loan yields increased only 136 basis points. An increase in the Federal Reserve Bank’s target federal funds rate hasaverage equity 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 Nine Months Ended September 30,

(In thousands, except Average Yields and Rates)

  2017 2016
  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 $5,193,860  $178,311   4.59% $4,398,894  $147,328   4.47%
Tax-exempt (3)  33,963   1,257   4.93   16,200   573   4.72 
Total loans, net of unearned income  5,227,823   179,568   4.58   4,415,094   147,901   4.47 
Mortgage loans held for sale  5,483   158   3.85   6,710   200   3.98 
Investment securities:                        
Taxable  381,157   6,646   2.32   216,947   3,739   2.30 
Tax-exempt (3)  132,545   3,373   3.39   136,326   3,845   3.76 
Total investment securities (4)  513,702   10,019   2.60   353,273   7,584   2.86 
Federal funds sold  147,626   1,185   1.07   136,879   630   0.61 
Restricted equity securities  1,030   39   5.06   5,427   154   3.79 
Interest-bearing balances with banks  174,040   1,252   0.96   453,087   1,734   0.51 
Total interest-earning assets $6,069,704  $192,221   4.23% $5,370,470  $158,203   3.93%
Non-interest-earning assets:                        
Cash and due from banks  64,704           61,906         
Net fixed assets and equipment  49,796           23,095         
Allowance for loan losses, accrued interest and other assets  144,499           133,357         
Total assets $6,328,703          $5,588,828         
                         
Liabilities and stockholders' equity:                        
Interest-bearing liabilities:                        
Interest-bearing demand deposits $789,916  $2,348   0.40% $684,348  $1,838   0.36%
Savings deposits  48,967   113   0.31   42,062   95   0.30 
Money market accounts  2,678,993   13,143   0.66   2,186,703   8,612   0.53 
Time deposits (5)  537,806   4,273   1.06   508,510   3,807   1.00 
Total interest-bearing deposits  4,055,682   19,877   0.66   3,421,623   14,352   0.56 
Federal funds purchased  326,017   2,653   1.09   460,844   2,210   0.64 
Other borrowings  55,134   2,150   5.21   55,520   2,152   5.18 
Total interest-bearing liabilities $4,436,833  $24,680   0.74% $3,937,987  $18,714   0.63%
Non-interest-bearing liabilities:                        
Non-interest-bearing demand deposits  1,319,695           1,157,106         
Other liabilities  14,637           13,250         
Stockholders' equity  556,952           475,905         
Unrealized gains on securities and derivatives  586           4,580         
Total liabilities and stockholders' equity $6,328,703          $5,588,828         
Net interest income     $167,541          $139,489     
Net interest spread          3.49%          3.30%
Net interest margin          3.69%          3.47%

(1)Non-accrual loans are included in average loan balances in all periods.  Loan fees of $2,376,000 and $1,574,000 are included in interest income in 2017 and 2016, respectively.
(2)Accretion on acquired loan discounts of $374,000 and $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 $189,000 are included in interest in 2017 and 2016, respectively.

38

  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 increasesbut was partially offset by a decrease 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 onaverage non-interest-bearing deposits.

 

Provision for LoanCredit 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 September 30, 2017, total loans rated Special Mention, Substandard, and Doubtful were $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 loancredit losses was $4.8$4.2 million for the three months ended September 30, 2017, an increaseMarch 31, 2023, a decrease of $1.3$1.2 million from $3.5$5.4 million for the three months ended September 30, 2016,March 31, 2022.  The decrease in provision expense is primarily the result of improvement in the economic projections used to inform loss driver forecasts within the ACL model. The ACL for March 31, 2023, December 31, 2022 and was $14.2March 31, 2022 totaled $149.0 million, for the nine months ended September 30, 2017, a $4.9$146.0 million, increase compared to $9.3 million for the nine months ended September 30, 2016. Nonperforming loans decreased to $14.9and $119.0 million, or 0.26% of total loans, at September 30, 2017 from $16.9 million, or 0.34% of total loans, at December 31, 2016, but were higher than $6.7 million, or 0.14% of total loans, at September 30, 2016. Impaired loans increased to $49.6 million, or 0.88% of total loans, at September 30, 2017, compared to $45.6 million, or 0.93% of total loans, at December 31, 2016. The allowance for loan losses totaled $58.5 million, or 1.04% of total loans, net of unearned income, at September 30, 2017, compared to $51.9 million, or 1.06%1.28%, 1.25%, and 1.21% of loans, net of unearned income, respectively.  Annualized net credit charge-offs to quarter-to-date average loans were 0.05% for the first quarter of 2023, a six basis point decrease compared to 0.11% for the first quarter of 2022.  Nonperforming loans were flat at  $17.8 million, or 0.15% of total loans, at March 31, 2023 from the same amounts at December 31, 2016.2022, and decreased compared to $19.4 million, or 0.20% of total loans, at March 31, 2022.

39

 

Noninterest Income

 

Noninterest income was flat at $4.8totaled $6.3 million for the three months ended September 30, 2017March 31, 2023, a decrease of $1.6 million compared to the corresponding period in 2016, and totaled $14.1 million for the nine months ended September 30, 2017, an increase of $2.0 million,2022. Service charges on deposit accounts decreased $208,000, or 16.5%, compared to the corresponding period in 2016. Mortgage banking income decreased $0.1 million, or 9.1%9.71%, to $1.0$1.9 million for the three months ended September 30, 2017March 31, 2023, compared to $1.1$2.1 million forin the samecorresponding period in 2016, and increased $0.2 million,2022. Mortgage banking revenue decreased $84,000, or 7.4%15.97%, to $2.9 million for the nine months ended September 30, 2017 compared to $2.7 million for the same period in 2016. Credit card income was flat at $1.1 million$442,000 for the three months ended September 30, 2017March 31, 2023, compared to $526,000 in the samecorresponding period in 2016, and increased $1.3 million,2022. Interest rate increases have negatively impacted the housing market, which contributed to the decrease in mortgage banking revenue. Net credit card revenue decreased $683,000, or 59.1%28.79%, to $3.5$1.7 million forduring the ninethree months ended September 30, 2017March 31, 2023, compared to $2.2$2.4 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.three months ended March 31, 2022. The number of credit card accounts increased 35.7% from September 30, 2016 to September 30, 2017approximately 8.2% and the volumeaggregate amount of purchasesspend on cardsall credit card accounts increased 58.5% from14.7% during the quarterthree months ended September 30, 2016March 31, 2023 compared to the three months ended March 31, 2022. Other income for the three months ended March 31, 2023, decreased $4.0 million, or 86.3%, to $635,000 when compared to the corresponding period in 2022. We did not recognize any income on the interest rate cap during the first quarter ended September 30, 2017.of 2023, compared to $3.4 million during the first quarter of 2022. Merchant service revenue increased by $118,000, or 35.2%, to $455,000, during the first quarter of 2023 compared to $336,000 during the corresponding period in 2022.

 

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

  

Three Months Ended March 31,

         
  

2023

  

2022

  

$ change

  

% change

 
  

(Dollars In Thousands)

     

Noninterest income:

                

Service charges on deposit accounts

 $1,934  $2,142  $(208)  (9.7

)%

Mortgage banking

  442   526   (84)  (16.0

)%

Credit cards

  1,689   2,372   (683)  (28.8

)%

Securities gains

  -   (3,335)  NM   NM 

Increase in cash surrender value life insurance

  1,621   1,608   13   0.8

%

Other operating income

  635   4,635   (4,000)  (86.3

)%

Total noninterest income

 $6,321  $7,948  $(1,627)  (20.5

)%

Noninterest Expense

 

Noninterest expense totaled $21.5$39.7 million for the three months ended September 30, 2017,March 31, 2023, an increase of $1.3$2.4 million, or 6.4%6.6%, compared to $20.2$37.2 million for the same period in 2016,2022. Salary and totaled $64.6benefit expense increased $765,000, or 4.2%, to $19.1 million for the ninethree months ended September 30, 2017, an increase of $5.6 million, or 9.5%, compared to $59.0March 31, 2023, from $18.3 million for the same period in 2016.

Details2022. Total FTE employees increased from 511 as of expenses areMarch 31, 2022, to 573 as follows:

·Salary and benefit expense increased $1.5 million, or 13.4%of March 31, 2023. Equipment and occupancy expense increased $502,000, or 17.1%, to $12.4 million for the three months ended September 30, 2017 from $11.0 million for the same period in 2016, and increased $3.4 million or 10.4%, to $36.2 million for the nine months ended September 30, 2017 from $32.8 million for the same period in 2016. Total employees increased from 416 as of September 30, 2016 to 438 as of September 30, 2017, or 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 decreased $0.2 million, or 7.3%, to $1.9 million for the three months ended September 30, 2017 from $2.1 million for the corresponding period in 2016, and increased $0.3 million, or 5.6%, to $6.4 million during the nine months ended September 30, 2017 from $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, 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 were flat at $0.8 million for the three months ended September 30, 2017 compared to the same period in 2016, and increased $0.6 million to $2.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. The 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 $0.5 million to $5.5 million for the three months ended September 30, 2017 compared to the same period in 2016, and increased $2.4 million to $16.6 million for the nine months ended September 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 $0.4 million of the increase for the nine month comparative periods. Increased transaction volume drove increased loan expenses ($0.6 million), increased bank service charges ($0.1 million) and increased travel expenses ($0.1 million). We incurred a $0.2 million increase in non-credit losses during the 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 months ended March 31, 2023 from $2.9 million for the corresponding period in 2022.We opened new offices in Charlotte and nine month periods ending September 30, 2017 comparedAsheville, North Carolina during the second and third quarters of 2022, which contributed to the increase in equipment and occupancy expense. Third party processing and other services increased $1.7 million, or 30.0%, to $7.3 million for the three months ended March 31, 2023, from $5.6 million for the corresponding period in 2022.  The increase year-over-year in third party processing also includes Federal Reserve Bank charges related to correspondent bank settlement activities. Professional services increased $662,000, or 66.7%, to $1.7 million for the three months ended March 31, 2023, from $992,000 for the same periodsperiod in 2016.2022. FDIC and other regulatory assessments increased $385,000, or 34.0%, to $1.5 million for the three months ended March 31, 2023 from $1.1 million for the corresponding period in 2022. OREO expense increased $3,000, or 100.0%, to $6,000 for the three months ended March 31, 2023 from $3,000 for the corresponding period in 2022. Other operating expenses decreased $1.6 million, or 18.8%, to $6.7 million for the three months ended March 31, 2023, from $8.3 million for the corresponding period in 2022. We recognized $874,000 of expenses during the three months ended March 31, 2022, associated with the conversion to a new core operating system scheduled to take place within the year. We wrote down investments in new market tax credit entities by $2.5 million during the three months ended March 31, 2022. We increased our ACL on unfunded loan commitments by $300,000 in the first quarter of 2022.

 

  Three Months Ended
September 30,
     Nine Months Ended
September 30,
    
  2017 2016 $ change % change 2017 2016 $ change % change
Non-interest income:                                
Service charges on deposit accounts $1,467  $1,367  $100   7.3% $4,203  $3,980  $223   5.6%
Mortgage banking  978   1,112   (134)  (12.1)%  2,941   2,681   260   9.7%
Credit card income  1,149   1,116   33   3.0%  3,517   2,159   1,358   62.9%
Securities gains  -   -   -   NM   -   (3)  3   NM 
Increase in cash surrender value life insurance  825   770   55   7.1%  2,334   2,049   285   13.9%
Other operating income  371   426   (55)  (12.9)%  1,146   1,207   (61)  (5.1)%
Total non-interest income $4,790  $4,791  $(1)  -% $14,141  $12,073  $2,068   17.1%
                                 
Non-interest expense:                                
Salaries and employee benefits  12,428   10,958   1,470   13.4%  36,172   32,758   3,414   10.4%
Equipment and occupancy expense  1,947   2,100   (153)  (7.3)%  6,452   6,108   344   5.6%
Professional services  805   1,182   (377)  (31.9)%  2,384   2,919   (535)  (18.3)%
FDIC and other regulatory assessments  810   775   35   4.5%  2,888   2,328   560   24.1%
OREO expense  31   178   (147)  (82.6)%  163   668   (505)  (75.6)%
Other operating expense  5,476   4,969   507   10.2%  16,580   14,175   2,405   17.0%
Total non-interest expense $21,497  $20,162  $1,335   6.6% $64,639  $58,956  $5,683   9.6%
36

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

  

Three Months Ended March 31,

         
  

2023

  

2022

  

$ change

  

% change

 
  

(Dollars In Thousands)

     

Noninterest expense:

                

Salaries and employee benefits

 $19,066  $18,301  $765   4.2

%

Equipment and occupancy

  3,435   2,933   502   17.1

%

Third party processing and other services

  7,284   5,605   1,679   30.0

%

Professional services

  1,654   992   662   66.7

%

FDIC and other regulatory assessments

  1,517   1,132   385   34.0

%

Other real estate owned

  6   3   3   100.0

%

Other operating expense

  6,702   8,252   (1,550)  (18.8

)%

Total noninterest expense

 $39,664  $37,218  $2,446   6.6

%

 

Income Tax Expense

 

Income tax expense was $11.6$12.8 million for the three months ended September 30, 2017 compared to $8.2March 31, 2023 versus $13.5 million for the same period in 2016, and was $29.4 million for the nine months ended September 30, 2017 compared to $22.0 million for the same period in 2016.2022. Our effective tax rate for the three and nine months ended September 30, 2017March 31, 2023 was 31.5% and 29.0%18.07%, respectively, compared to 28.1% and 27.0%18.96% for the corresponding periodsperiod in 2016, respectively.2022. We recognized a reductiontax credits during the three months ended March 31, 2023 of $3.9 million, compared to $3.3 million for the corresponding period in provision for income taxes resulting from2022. We recognized excess tax benefits from the exercise and vesting of stock options and restricted stock during the three and nine months ended September 30, 2017 of $0.8 million and $4.3 million, respectively, comparedas a credit to $1.2 million and $4.7 million during the three and nine months ended September 30, 2016, respectively. Lower excessour income tax benefitsexpense from the exercise of stock options and lower Alabama state sales taxes, which we can deduct from our Alabama corporate income taxes, duringvesting of restricted stock of $1.1 million in the thirdfirst quarter of 2017 contributed to the higher effective tax rate when2023, compared to $571,000 in the samefirst quarter in 2016.of 2022. Our primary permanent differences are related to tax exempttax-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.

Critical Accounting Estimates

The accounting and financial policies of the Company conform to U.S. GAAP and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The ACL, valuation of impaired loans and 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, 2022.

 

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.

 

41
37

 

To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall or remain the same. Our asset-liability committee (“ALCO”) develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status ofrisks that our balance sheet.sheet is exposed to. Our annual budget reflects the anticipated rate environment for the next 12 months.

The asset-liability committeeALCO employs modeling techniques such as net interest income simulations and economic value of equity simulations to determine what amount of the Bank’s net interest income is at risk given different movements in market interest rates. Simulations assume gradual and instantaneous (shocks) movements in market interest rates of up and down 100, 200, 300 and 400 basis points, when practicable. A set of Benchmark and optional scenarios are ran and results are compared to base model results to measure sensitivity to movements in market interest rates. The ALCO establishes limits for the amount of negative change in net interest margin in the first year, second year and two-year cumulative time horizon. Current policy limits for the 100 and 200 basis point shock and ramp scenarios in the first and second year range from -4% to -17%.  The ALCO conducts a quarterly analysis of the rate sensitivity position, reviews established limits, and reports its results to our board of directors.

The asset-liability committee thoroughly analyzes the maturities As 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. ThereMarch 31, 2023, 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 disclosed2022. We could experience an increase in the cost of funding our Annual Reportbalance sheet. In response to increased inflationary pressures the Federal Reserve increased their targeted federal funds rate from 0 – 0.25% to 4.75 – 5.00% since March of 2022. Such rate increases could lead to us further increasing rates on Form 10-K.our deposits and short-term borrowings. We could also experience increased pricing competition for our existing loans or future borrower prospects, which could decrease rates earned on our earning assets.

 

ITEM 4. CONTROLS AND PROCEDURES

 

CEO and CFO Certification.

 

Appearing as exhibits to this report are Certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). The Certifications are required to be made by Rule 13a-14 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.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'sSEC’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"“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 September 30, 2017.March 31, 2023. Based upon the Evaluation, our CEO and CFO have concluded that, as of September 30, 2017,March 31, 2023, 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.proceedings except as disclosed in Item 3, “Legal Proceedings”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and there has been no material change in any matter described therein.

 

38

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, 2016,2022, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard toin the Company’s risk factors previouslyfrom those disclosed in the Company’s Annual Report on 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.10-K for the year ended December 31, 2022.

42

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a) Exhibit:

Exhibit: Description
31.01Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02Certification of principal financial officer pursuant to Rule 13a-14(a).
32.01Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
101.CAL101.INS   Inline XBRL Instance Document
101.SCH    Inline XBRL Taxonomy Extension Schema Document
101.CAL  Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF101.LAB   XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
101.INS101.DEF   Inline XBRL InstanceTaxonomy Extension Definition Linkbase Document
101.SCH104   Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Schema Documentand contained in Exhibit 101)

 

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: May 2, 2023       
Date: October 31, 2017By/s/ Thomas A. Broughton III 
  Thomas A. Broughton III 
  President and Chief Executive Officer
    
Date: October 31, 2017May 2, 2023 By /s/ William M. Foshee 
  William M. Foshee 
  Chief Financial Officer

 

 

43

39