UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

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(Mark one)

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

         FOR THE QUARTERLY PERIOD ENDED MARCH 31,

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

 

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

For the transition period from _______to_______

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

26-0734029

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2500 Woodcrest Place, Birmingham, Alabama

35209

(Address of Principal Executive Offices)

(Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

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

Title of each class

Trading Symbol(s)symbol(s)

Name of each 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No

 

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

 

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

 

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


 

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 practicalpracticable date.

 

ClassOutstanding as of April 28,October 27, 2023
Common stock, $.001 par value54,282,13254,435,170

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

34

Item 1.

Consolidated Financial Statements

34

Item 2.

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

2427

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

3744

Item 4.

Controls and Procedures

3845
  

PART II. OTHER INFORMATION

3845

Item 11.

Legal Proceedings

3845

Item 1A.

Risk Factors

3945

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3946

Item 3.

Defaults Upon Senior Securities

3946

Item 4.

Mine Safety Disclosures

3946

Item 5.

Other Information

3946

Item 6.

Exhibits

Exhibits3946

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

 

 

23

 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

SERVISFIRST BANCSHARES, INC.

SERVISFIRST BANCSHARES, INC.

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share amounts)

(In thousands, except share and per share amounts)

 

(In thousands, except share and per share amounts)

 
  
 

March 31, 2023

 

December 31, 2022

  

September 30, 2023

 

December 31, 2022

 
 

(Unaudited)

   (1)  

(Unaudited)

  

(1)

 

ASSETS

  

Cash and due from banks

 $139,175  $106,317  $112,150  $106,317 

Interest-bearing balances due from depository institutions

 725,318  708,221  1,861,924  708,221 

Federal funds sold

  6,478   1,515   91,035   1,515 

Cash and cash equivalents

 870,971  816,053  2,065,109  816,053 

Available for sale debt securities, at fair value

 624,948  644,815 

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 

Available-for-sale debt securities, at fair value

 834,802  644,815 

Held-to-maturity debt securities (fair value of $933,006 and $935,953, respectively)

 1,043,899  1,034,121 

Restricted equity securities

 7,307  7,734  10,226  7,734 

Mortgage loans held for sale

 1,651  1,607  6,333  1,607 

Loans

 11,629,802  11,687,968  11,641,130  11,687,968 

Less allowance for credit losses

  (148,965)  (146,297)  (152,247)  (146,297)

Loans, net

 11,480,837  11,541,671  11,488,883  11,541,671 

Premises and equipment, net

 60,093  59,850  59,516  59,850 

Accrued interest and dividends receivable

 50,500  48,422  56,500  48,422 

Deferred tax asset, net

 60,666  60,448  66,029  60,448 

Other real estate owned and repossessed assets

 248  248  690  248 

Bank owned life insurance contracts

 289,374  287,752  291,521  287,752 

Goodwill and other identifiable intangible assets

 13,615  13,615 

Goodwill

 13,615  13,615 

Other assets

  84,360   79,417   107,209   79,417 

Total assets

 $14,566,559  $14,595,753  $16,044,332  $14,595,753 

LIABILITIES AND STOCKHOLDERS' EQUITY

  

Liabilities:

  

Deposits:

  

Noninterest-bearing

 $2,898,736  $3,321,347 

Non-interest-bearing demand

 $2,621,072  $3,321,347 

Interest-bearing

  8,716,581   8,225,458   10,521,304   8,225,458 

Total deposits

 11,615,317  11,546,805  13,142,376  11,546,805 

Federal funds purchased

 1,480,160  1,618,798  1,370,289  1,618,798 

Other borrowings

 65,417  64,726  64,751  64,726 

Accrued interest payable

 20,541  18,615 

Accrued interest and dividends payable

 24,683  18,615 

Other liabilities

  45,307   48,913   40,849   48,913 

Total liabilities

 13,226,742  13,297,857  14,642,948  13,297,857 

Stockholders' equity:

  

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 

Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at September 30, 2023 and December 31, 2022

 -  - 

Common stock, par value $0.001 per share; 200,000,000 shares authorized: 54,425,447 shares issued and outstanding at September 30, 2023; and 54,326,527 shares issued and outstanding at December 31, 2022

 54  54 

Additional paid-in capital

 229,631  229,693  231,588  229,693 

Retained earnings

 1,152,681  1,109,902  1,229,080  1,109,902 

Accumulated other comprehensive loss

  (43,049)  (42,253)  (59,838)  (42,253)

Total stockholders' equity attributable to ServisFirst Bancshares, Inc.

 1,339,317  1,297,396   1,400,884   1,297,396 

Noncontrolling interest

  500   500   500   500 

Total stockholders' equity

  1,339,817   1,297,896   1,401,384   1,297,896 

Total liabilities and stockholders' equity

 $14,566,559  $14,595,753  $16,044,332  $14,595,753 

 

(1) derived

(1) Derived from audited financial statements.

See Notes to Consolidated Financial Statements.

3

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In thousands, except share and per share amounts)

 

(Unaudited)

 
  

Three Months Ended March 31,

 
  

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 

See Notes to Consolidated Financial Statements.

 

4

 

 

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 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In thousands, except per share amounts)

 

(Unaudited)

 
                 
  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Interest income:

                

Interest and fees on loans

 $178,754  $131,375  $514,204  $345,767 

Taxable securities

  15,522   11,089   37,987   29,827 

Nontaxable securities

  15   30   53   110 

Federal funds sold

  985   632   1,826   738 

Other interest and dividends

  17,930   6,173   30,114   12,600 

Total interest income

  213,206   149,299   584,184   389,042 

Interest expense:

                

Deposits

  95,901   13,655   223,585   25,925 

Borrowed funds

  17,607   9,226   51,349   14,609 

Total interest expense

  113,508   22,881   274,934   40,534 

Net interest income

  99,698   126,418   309,250   348,508 

Provision for credit losses

  4,282   15,603   15,133   30,472 

Net interest income after provision for credit losses

  95,416   110,815   294,117   318,036 

Noninterest income:

                

Service charges on deposit accounts

  2,163   1,892   6,239   6,167 

Mortgage banking

  825   784   1,963   1,924 

Credit card income

  2,532   2,612   6,627   7,656 

Securities losses

  -   -   -   (6,168)

Bank-owned life insurance income

  1,818   1,637   5,935   6,978 

Other operating income

  797   2,014   2,274   9,836 

Total noninterest income

  8,135   8,939   23,038   26,393 

Noninterest expenses:

                

Salaries and employee benefits

  20,080   19,687   57,941   58,722 

Equipment and occupancy expense

  3,579   3,140   10,435   9,056 

Third party processing and other services

  6,549   7,213   20,031   19,163 

Professional services

  1,265   1,036   4,499   3,355 

FDIC and other regulatory assessments

  2,346   975   6,105   3,254 

OREO expense

  18   21   30   56 

Other operating expenses

  7,826   10,613   20,752   26,118 

Total noninterest expenses

  41,663   42,685   119,793   119,724 

Income before income taxes

  61,888   77,069   197,362   224,705 

Provision for income taxes

  8,548   13,038   32,583   40,925 

Net income

  53,340   64,031   164,779   183,780 

Preferred stock dividends

  -   -   31   31 

Net income available to common stockholders

 $53,340  $64,031  $164,748  $183,749 
                 

Basic earnings per common share

 $0.98  $1.18  $3.03  $3.38 

Diluted earnings per common share

 $0.98  $1.17  $3.02  $3.37 

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. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(Unaudited)

 
                 
  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Net income

 $53,340  $64,031  $164,779  $183,780 

Other comprehensive loss, net of tax:

                

Unrealized net holding losses arising during period from securities available for sale, net of tax of $(340) and $(5,742) for the three and nine months ended September 30, 2023, respectively, and $(5,707) and $(18,409) for the three and nine months ended September 30, 2022, respectively

  (1,016)  (21,471)  (17,138)  (62,301)

Amortization of net unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax of $(53) and $(150) for the three and nine months ended September 30, 2023, respectively, and $(70) and $(320) for the three and nine months ended September 30, 2022, respectively

  (160)  (262)  (447)  (1,208)

Reclassification adjustment for net losses on sales of securities, net of tax of $1,295 for the nine months ended September 30, 2022

  -   -   -   5,363 

Other comprehensive loss, net of tax

  (1,176)  (21,733)  (17,585)  (58,146)

Comprehensive income

 $52,164  $42,298  $147,194  $125,634 

 

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 STATEMENT OF STOCKHOLDERS' EQUITY

 

(In thousands, except share amounts) (Unaudited)

 
                                 
  

Three Months Ended September 30,

 
  

Common Shares

  

Preferred Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Loss

  

Noncontrolling interest

  

Total Stockholders' Equity

 

Balance, July 1, 2022

  54,306,875  $-  $54  $227,906  $1,005,815  $(22,357) $500  $1,211,918 

Common dividends declared, $0.23 per share

  -   -   -   -   (12,494)  -   -   (12,494)

Dividends on nonvested restricted stock recognized as compensation expense

  -   -   -   -   35   -   -   35 

Issue restricted shares pursuant to stock incentives, net of forfeitures

  1,845   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  15,287   -   -   218   -   -   -   218 

2,551 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (189)  -   -   -   (189)

Stock-based compensation expense

  -   -   -   803   -   -   -   803 

Other comprehensive loss, net of tax

  -   -   -   -   -   (21,733)  -   (21,733)

Net income

  -   -   -   -   64,031   -   -   64,031 

Balance, September 30, 2022

  54,324,007  $-  $54  $228,738  $1,057,387  $(44,090) $500  $1,242,589 
                                 

Balance, July 1, 2023

  54,425,033  $-  $54  $230,659  $1,190,920  $(58,662) $500  $1,363,471 

Common dividends declared, $0.28 per share

  -   -   -   -   (15,239)  -   -   (15,239)

Dividends on nonvested restricted stock recognized as compensation expense

  -   -   -   -   59   -   -   59 

Issue restricted shares pursuant to stock incentives, net of forfeitures

  414   -   -   -   -   -   -   - 

Stock-based compensation expense

  -   -   -   929   -   -   -   929 

Other comprehensive loss, net of tax

  -   -   -   -   -   (1,176)  -   (1,176)

Net income

  -   -   -   -   53,340   -   -   53,340 

Balance, September 30, 2023

  54,425,447  $-  $54  $231,588  $1,229,080  $(59,838) $500  $1,401,384 

See Notes to Consolidated Financial Statements.

 

7

  

Nine Months Ended September 30,

 
  

Common Shares

  

Preferred Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Noncontrolling interest

  

Total Stockholders' Equity

 

Balance, January 1, 2022

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

Common dividends paid, $0.46 per share

  -   -   -   -   (24,976)  -   -   (24,976)

Common dividends declared, $0.23 per share

  -   -   -   -   (12,494)  -   -   (12,494)

Preferred dividends paid

  -   -   -   -   (31)  -   -   (31)

Dividends on nonvested restricted stock recognized as compensation expense

  -   -   -   -   100   -   -   100 

Issue restricted shares pursuant to stock incentives, net of forfeitures

  44,613   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  52,334   -   -   1,079   -   -   -   1,079 

10,953 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (1,129)  -   -   -   (1,129)

Stock-based compensation expense

  -   -   -   2,391   -   -   -   2,391 

Other comprehensive loss, net of tax

  -   -   -   -   -   (58,146)  -   (58,146)

Net income

  -   -   -   -   183,780   -   -   183,780 

Balance, September 30, 2022

  54,324,007  $-  $54  $228,738  $1,057,387  $(44,090) $500  $1,242,589 
                                 

Balance, January 1, 2023

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

Common dividends paid, $0.56 per share

  -   -   -   -   (30,472)  -   -   (30,472)

Common dividends declared, $0.28 per share

  -   -   -   -   (15,239)  -   -   (15,239)

Preferred dividends paid

  -   -   -   -   (31)  -   -   (31)

Dividends on nonvested restricted stock recognized as compensation expense

  -   -   -   -   141   -   -   141 

Issue restricted shares pursuant to stock incentives, net of forfeitures

  37,682   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  61,238   -   -   1,014   -   -   -   1,014 

26,462 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (1,838)  -   -   -   (1,838)

Stock-based compensation expense

  -   -   -   2,719   -   -   -   2,719 

Other comprehensive loss, net of tax

  -   -   -   -   -   (17,585)  -   (17,585)

Net income

  -   -   -   -   164,779   -   -   164,779 

Balance, September 30, 2023

  54,425,447  $-  $54  $231,588  $1,229,080  $(59,838) $500  $1,401,384 

See Notes to Consolidated Financial Statements.

8

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands) (Unaudited)

 
  

Nine Months Ended September 30,

 
  2023  2022 

OPERATING ACTIVITIES

        

Net income

 $164,779  $183,780 

Adjustments to reconcile net income to net cash provided by operations

        

Deferred expense (benefit) tax

  (5,581)  476 

Provision for credit losses

  15,133   30,472 

Depreciation

  3,241   3,155 

Accretion on acquired loans

  148   108 

Amortization of core deposit intangible

  -   23 

Amortization of investments in tax credit partnerships

  9,114   8,786 

Net amortization of debt securities available-for-sale

  222   2,352 

Increase in accrued interest and dividends receivable

  (8,078)  (5,115)

Stock-based compensation expense

  2,719   2,391 

Increase in accrued interest and dividends payable

  6,068   1,262 

Proceeds from sale of mortgage loans held for sale

  91,747   38,564 

Originations of mortgage loans held for sale

  (94,511)  (37,529)

Loss on sale of securities available for sale

  -   6,168 

Gain on sale of mortgage loans held for sale

  (1,962)  (1,924)

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

  28   (239)

Write down of other real estate owned and repossessed assets

  -   7 

Increase in cash surrender value of life insurance contracts

  (5,935)  (6,978)

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

  (70,920)  (29,074)

Net cash provided by operating activities

  106,212   196,685 

INVESTMENT ACTIVITIES

        

Purchases of debt securities available-for-sale

  (626,728)  (76,360)

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

  436,523   95,691 

Proceeds from sale of debt securities available-for-sale

  -   75,036 

Purchases of debt securities held-to-maturity

  (48,723)  (648,266)

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

  38,945   60,854 

Purchases of restricted equity securities

  (46,482)  (423)

Proceeds from sale of restricted equity securities

  43,990   - 

Investment in tax credit partnerships and SBIC

  (7,303)  (16,295)

Return of capital from tax credit partnerships and SBIC

  191   434 

Decrease (increase) in loans

  36,879   (1,752,905)

Purchases of premises and equipment

  (2,907)  (1,935)

Proceeds from death benefit of bank owned life insurance contracts

  2,566   3,900 

Proceeds from sale of other real estate owned and repossessed assets

  158   1,240 

Expenditures for other real estate owned

  -   (93)

Net cash used in investing activities

  (172,891)  (2,259,122)

FINANCING ACTIVITIES

        

Net decrease in non-interest-bearing deposits

  (700,275)  (1,137,831)

Net increase (decrease) in interest-bearing deposits

  2,295,846   (263,090)

Net decrease in federal funds purchased

  (248,509)  (245,455)

FHLB advances

  300,000   - 

Repayment of FHLB advances

  (300,000)  - 

Proceeds from exercise of stock options

  1,014   1,079 

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

  (1,838)  (1,129)

Dividends paid on common stock

  (30,472)  (24,876)

Dividends paid on preferred stock

  (31)  (31)

Net cash provided by (used in) financing activities

  1,315,735   (1,671,333)

Net increase (decrease) in cash and cash equivalents

  1,249,056   (3,733,770)

Cash and cash equivalents at beginning of period

  816,053   4,222,096 

Cash and cash equivalents at end of period

 $2,065,109  $488,326 

SUPPLEMENTAL DISCLOSURE

        

Cash paid/(received) for:

        

Interest

 $268,866  $39,272 

Income taxes

  53,991   55,375 

Income tax refund

  -   (142)

NONCASH TRANSACTIONS

        

Other real estate acquired in settlement of loans

 $628  $1,045 

Dividends on nonvested restricted stock reclassified as compensation expense

  141   100 

Dividends declared

  15,239   12,494 

See Notes to Consolidated Financial Statements.

9

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31,September 30, 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-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 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 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. The difference in earnings per share under the two-class method was not significant for both the three and ninemonth periodperiods ended March 31,September 30, 2023 and 2022,2022. respectively.

 

 

Three Months Ended March 31,

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 
 

(In Thousands, Except Shares and Per Share Data)

  

(In Thousands, Except Shares and Per Share Data)

 

Earnings per common share

  

Weighted average common shares outstanding

  54,360,253   54,263,143   54,424,561   54,315,671   54,398,845   54,291,739 

Net income available to common stockholders

 $57,971  $57,613  $53,340  $64,031  $164,748  $183,749 

Basic earnings per common share

 $1.07  $1.06  $0.98  $1.18  $3.03  $3.38 
  

Weighted average common shares outstanding

 54,360,253  54,263,143  54,424,561  54,315,671  54,398,845  54,291,739 

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

  174,229   258,899 

Dilutive effects of assumed exercise of stock options and vesting of performance shares

  106,074   231,011   131,952   242,054 

Weighted average common and dilutive potential common shares outstanding

  54,534,482   54,522,042   54,530,635   54,546,682   54,530,797   54,533,793 

Net income available to common stockholders

 $57,971  $57,613  $53,340  $64,031  $164,748  $183,749 

Diluted earnings per common share

 $1.06  $1.06  $0.98  $1.17  $3.02  $3.37 

 

8

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31,September 30, 2023 and December 31, 2022 are summarized as follows:

 

      

Gross

  

Gross

     
  

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

  272,070   7   (29,046)  243,031 

State and municipal securities

  14,646   2   (1,337)  13,311 

Corporate debt

  398,676   3   (33,067)  365,612 

Total

 $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, 2022

                

Debt Securities Available for Sale

                

U.S. Treasury Securities

 $3,002  $-  $(33) $2,969 

Government Agency Securities

  9   -   -   9 

Mortgage-backed securities

  282,480   5   (32,782)  249,703 

State and municipal securities

  15,205   1   (1,597)  13,609 

Corporate debt

  406,680   -   (28,155)  378,525 

Total

 $707,376  $6  $(62,567) $644,815 

Debt Securities Held to Maturity

                

U.S. Treasury Securities

 $507,151  $-  $(36,197) $470,954 

Mortgage-backed securities

  518,929   7   (60,960)  457,976 

State and municipal securities

  8,041   -   (1,018)  7,023 

Total

 $1,034,121  $7  $(98,175) $935,953 
10

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gain

  

Loss

  

Value

 

September 30, 2023

 

(In Thousands)

 

Debt Securities Available-for-Sale

                

U.S. Treasury Securities

 $280,807  $7  $(96) $280,718 

Mortgage-backed securities

  251,001   -   (35,760)  215,241 

State and municipal securities

  12,762   1   (1,570)  11,193 

Corporate debt

  375,673   -   (48,023)  327,650 

Total

 $920,243  $8  $(85,449) $834,802 

Debt Securities Held-to-Maturity

                

U.S. Treasury Securities

 $558,196  $-  $(35,014) $523,182 

Mortgage-backed securities

  477,646   -   (74,928)  402,718 

State and municipal securities

  8,057   -   (951)  7,106 

Total

 $1,043,899  $-  $(110,893) $933,006 
                 

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

  282,480   5   (32,782)  249,703 

State and municipal securities

  15,205   1   (1,597)  13,609 

Corporate debt

  406,680   -   (28,155)  378,525 

Total

 $707,376  $6  $(62,567) $644,815 

Debt Securities Held-to-Maturity

                

U.S. Treasury Securities

 $507,151  $-  $(36,197) $470,954 

Mortgage-backed securities

  518,929   7   (60,960)  457,976 

State and municipal securities

  8,041   -   (1,018)  7,023 

Total

 $1,034,121  $7  $(98,175) $935,953 

 

The amortized cost and fair value of debt securities as of March 31,September 30, 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.

 

 

March 31, 2023

  

December 31, 2022

  

September 30, 2023

  

December 31, 2022

 
 

Amortized Cost

  

Market Value

  

Amortized Cost

  

Market Value

  

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 
 

(In Thousands)

  

(In Thousands)

 

Debt securities available for sale

 

Debt securities available-for-sale

 

Due within one year

 $24,422  $24,042  $24,712  $24,432  $292,131  $291,740  $24,712  $24,432 

Due from one to five years

 59,243  57,178  58,554  57,092  66,668  63,623  58,554  57,092 

Due from five to ten years

 329,662  298,353  338,630  311,100  307,443  261,919  338,630  311,100 

Due after ten years

 3,000  2,344  3,000  2,488  3,000  2,279  3,000  2,488 

Mortgage-backed securities

  272,070   243,031   282,480   249,703   251,001   215,241   282,480   249,703 
 $688,397  $624,948  $707,376  $644,815  $920,243  $834,802  $707,376  $644,815 
  

Debt securities held to maturity

 

Debt securities held-to-maturity

 

Due within one year

 $250  $250  $250  $250  $309,311  $304,931  $250  $250 

Due from one to five years

 386,897  370,166  386,465  366,095  128,708  115,557  386,465  366,095 

Due from five to ten years

 128,500  114,383  128,477  111,632  128,234  109,800  128,477  111,632 

Due after ten years

 -  -  -  - 

Mortgage-backed securities

  506,342   453,162   518,929   457,976   477,646   402,718   518,929   457,976 
 $1,021,989  $937,961  $1,034,121  $935,953  $1,043,899  $933,006  $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,September 30, 2023 and December 31, 2022 was $1.45 billion and $789.3 million, respectively.

 

911

 

The following table identifies, as of March 31,September 30, 2023 and December 31, 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

  

Less Than Twelve Months

  

Twelve Months or More

  

Total

 
 

Gross

   

Gross

   

Gross

    

Gross

   

Gross

   

Gross

   
 

Unrealized

   

Unrealized

   

Unrealized

    

Unrealized

   

Unrealized

   

Unrealized

   
 

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

 
 

(In Thousands)

  

(In Thousands)

 

March 31, 2023

 

Debt Securities available for sale

 

September 30, 2023

 

Debt Securities available-for-sale

 

U.S. Treasury Securities

 $(96) $231,360  $-  $-  $(96) $231,360 

Mortgage-backed securities

 (33) 1,137  (35,727) 214,104  (35,760) 215,241 

State and municipal securities

 -  -  (1,570) 10,462  (1,570) 10,462 

Corporate debt

  (772)  13,660   (47,251)  305,631   (48,023)  319,291 

Total

 $(901) $246,157  $(84,548) $530,197  $(85,449) $776,354 

Debt Securities held-to-maturity

 

U.S. Treasury Securities

 $(6) $49,669  $(35,008) $473,513  $(35,014) $523,182 

Mortgage-backed securities

 (38) 846  (74,890) 398,551  (74,928) 399,396 

State and municipal securities

  -   -   (951)  6,856   (951)  6,856 

Total

 $(44) $50,515  $(110,849) $878,920  $(110,893) $929,434 

December 31, 2022

 

Debt Securities available-for-sale

 

U.S. Treasury Securities

 $-  $-  $(11) $2,990  $(11) $2,990  $(33) $2,969  $-  $-  $(33) $2,969 

Government Agency Securities

 -  4  -  -  -  4  -  9  -  -  -  9 

Mortgage-backed securities

 (364) 8,468  (28,682) 233,956  (29,046) 242,424   (3,473)  60,234   (29,309)  189,109   (32,782)  249,343 

State and municipal securities

 (27) 3,328  (1,310) 9,202  (1,337) 12,530  (186) 5,283  (1,411) 7,880  (1,597) 13,163 

Corporate debt

  (8,809)  163,363   (24,258)  189,931   (33,067)  353,294   (18,566)  304,254   (9,589)  63,411   (28,155)  367,666 

Total

 $(9,200) $175,163  $(54,261) $436,079  $(63,461) $611,242  $(22,258) $372,749  $(40,309) $260,400  $(62,567) $633,149 

Debt Securities held to maturity

 

Debt Securities held-to-maturity

 

U.S. Treasury Securities

 $(2,678) $130,640  $(27,343) $346,939  $(30,021) $477,579  $(12,662) $295,383  $(23,537) $175,570  $(36,197) $470,953 

Mortgage-backed securities

 (1,645) 31,827  (51,545) 416,994  (53,190) 448,821  (31,367) 278,746  (29,592) 174,842  (60,960) 453,588 

State and municipal securities

 -  -  (827) 6,969  (827) 6,969   (544)  4,443   (474)  2,330   (1,018)  6,773 

Total

 $(4,323) $162,467  $(79,715) $770,902  $(84,038) $933,369  $(44,573) $578,572  $(53,603) $352,742  $(98,175) $931,314 

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 March 31,September 30, 2023 and 2022, no allowance for credit losses has been recognized on available for saleavailable-for-sale debt securities 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 saleavailable-for-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 at maturity. The unrealized losses are due to increases 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 considers historical credit loss 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 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,September 30, 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,September 30, 2023 and 2022. All debt securities in an unrealized loss position as of March 31,September 30, 2023 continue to perform as scheduled and the Company does not believe there is a possiblean expected credit loss or that an allowance for credit loss on these debt securities is necessary.

 

The following table summarizes information about sales of debt securities.securities available-for-sale.

 

 

Three Months Ended March 31,

  

Nine Months Ended September 30,

 
 

2023

  

2022

  

2023

  

2022

 
 

(In Thousands)

  

(In Thousands)

 

Sale proceeds

 $-  $45,394  $-  $75,036 

Gross realized gains

 $-  $-  $-  $- 

Gross realized losses

  -   (3,335)  -   (6,168)

Net realized losses

 $-  $(3,335)

Net realized gain (loss)

 $-  $(6,168)

 

10
12

 

NOTE 5 LOANS

 

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 ServisFirstthe 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 – Includes 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 March 31,September 30, 2023 and December 31, 2022:

 

 

September 30,

 

December 31,

 
 

March 31,

 

December 31,

  

2023

  

2022

 
 

2023

  

2022

  
 

(Dollars In Thousands)

  

(Dollars In Thousands)

 

Commercial, financial and agricultural

 $3,081,926  $3,145,317  $2,890,535  $3,145,317 

Real estate - construction

 1,469,670  1,532,388  1,509,937  1,532,388 

Real estate - mortgage:

  

Owner-occupied commercial

 2,243,436  2,199,280  2,237,684  2,199,280 

1-4 family mortgage

 1,138,645  1,146,831  1,170,099  1,146,831 

Other mortgage

  3,624,071   3,597,750   3,766,124   3,597,750 

Subtotal: Real estate - mortgage

 7,006,152  6,943,861  7,173,907  6,943,861 

Consumer

  72,054   66,402   66,751   66,402 

Total Loans

  11,629,802   11,687,968   11,641,130   11,687,968 

Less: Allowance for credit losses

  (148,965)  (146,297)  (152,247)  (146,297)

Net Loans

 $11,480,837  $11,541,671  $11,488,883  $11,541,671 
  
  

Commercial, financial and agricultural

 26.50

%

 26.91

%

 24.83

%

 26.91

%

Real estate - construction

 12.64

%

 13.11

%

 12.97

%

 13.11

%

Real estate - mortgage:

  

Owner-occupied commercial

 19.29

%

 18.82

%

 19.22

%

 18.82

%

1-4 family mortgage

 9.79

%

 9.81

%

 10.05

%

 9.81

%

Other mortgage

  31.16

%

  30.78

%

  32.36

%

  30.78

%

Subtotal: Real estate - mortgage

 60.24

%

 59.41

%

 61.63

%

 59.41

%

Consumer

  0.62

%

  0.57

%

  0.57

%

  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 loan credit loss portfolio segments and classes. These categories are utilized to develop the associated allowance for credit 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 obligorborrower (or obligors,guarantors, 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 presentlycurrently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institutioncompany 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.

 

13

The table below presents loan balances classified by credit quality indicator, loan type and based on year of origination as of March 31, 2023:September 30, 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 
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving Loans

  

Revolving lines of credit converted to term loans

  

Total

 
  

(In Thousands)

 

Commercial, financial and agricultural

                                 

Pass

 $259,905  $482,415  $411,742  $174,227  $107,571  $167,772  $1,180,671  $565  $2,784,868 

Special Mention

  504   2,368   8,285   6,070   1,629   6,317   25,731   13   50,917 

Substandard - accruing

  1,457   -   409   372   9,501   28,642   5,718   -   46,099 

Substandard -Non-accrual

  -   475   914   485   -   3,147   3,630   -   8,651 

Total Commercial, financial and agricultural

 $261,866  $485,258  $421,350  $181,154  $118,701  $205,878  $1,215,750  $578  $2,890,535 

Current-period gross charge-offs

  1,213   4,677   2,531   -   4   476   1,497   -   10,398 
                                     

Real estate - construction

                                    

Pass

 $137,298  $867,332  $353,340  $55,083  $6,071  $21,297  $67,763  $-  $1,508,184 

Special Mention

  3   556   -   -   -   -   -   -   559 

Substandard - accruing

  -   -   -   -   -   994   -   -   994 

Substandard -Non-accrual

  -   -   -   -   -   -   -   200   200 

Total Real estate - construction

 $137,301  $867,888  $353,340  $55,083  $6,071  $22,291  $67,763  $200  $1,509,937 

Current-period gross charge-offs

  -   -   19   -   -   -   -   -   19 
                                     

Owner-occupied commercial

                                    

Pass

 $93,823  $455,222  $533,643  $305,149  $186,042  $546,139  $64,968  $854  $2,185,840 

Special Mention

  5,380   1,426   7,757   8,344   8,605   7,591   -   -   39,103 

Substandard - accruing

  1,383   -   -   -   -   4,353   -   -   5,736 

Substandard -Non-accrual

  -   -   -   -   2,329   4,676   -   -   7,005 

Total Owner-occupied commercial

 $100,586  $456,648  $541,400  $313,493  $196,976  $562,759  $64,968  $854  $2,237,684 

Current-period gross charge-offs

  -   -   -   -   117   -   -   -   117 
                                     

1-4 family mortgage

                                    

Pass

 $111,341  $373,591  $234,258  $77,861  $47,905  $65,376  $248,681  $-  $1,159,013 

Special Mention

  622   379   2,075   1,022   100   230   1,427   -   5,855 

Substandard - accruing

  -   -   -   -   -   429   253   -   682 

Substandard -Non-accrual

  -   903   976   729   763   1,178   -   -   4,549 

Total 1-4 family mortgage

 $111,963  $374,873  $237,309  $79,612  $48,768  $67,213  $250,361  $-  $1,170,099 

Current-period gross charge-offs

  -   40   -   -   -   -   -   -   40 
                                     

Other mortgage

                                    

Pass

 $86,069  $1,105,884  $1,116,900  $498,233  $282,615  $562,626  $100,756  $247  $3,753,330 

Special Mention

  -   -   -   -   -   -   1,050   -   1,050 

Substandard - accruing

  -   231   -   -   -   11,007   -   -   11,238 

Substandard -Non-accrual

  -   -   -   -   130   376   -   -   506 

Total Other mortgage

 $86,069  $1,106,115  $1,116,900  $498,233  $282,745  $574,009  $101,806  $247  $3,766,124 
                                     

Consumer

                                    

Pass

 $20,592  $4,014  $4,781  $2,077  $1,412  $2,752  $31,123  $-  $66,751 

Special Mention

  -   -   -   -   -   -   -   -   - 

Substandard - accruing

  -   -   -   -   -   -   -   -   - 

Total Consumer

 $20,592  $4,014  $4,781  $2,077  $1,412  $2,752  $31,123  $-  $66,751 

Current-period gross charge-offs

  -   -   -   -   -   -   842   -   842 
                                     

Total Loans

                                    

Pass

 $709,028  $3,288,458  $2,654,664  $1,112,630  $631,616  $1,365,962  $1,693,962  $1,666  $11,457,986 

Special Mention

  6,509   4,729   18,117   15,436   10,334   14,138   28,208   13   97,484 

Substandard - accruing

  2,840   231   409   372   9,501   45,425   5,971   -   64,749 

Substandard -Non-accrual

  -   1,378   1,890   1,214   3,222   9,377   3,630   200   20,911 

Total Loans

 $718,377  $3,294,796  $2,675,080  $1,129,652  $654,673  $1,434,902  $1,731,771  $1,879  $11,641,130 

Current-period gross charge-offs

 $1,213  $4,717  $2,550  $-  $121  $476  $2,339  $-  $11,416 

 

1214

 

LoansThe table below presents loan balances classified by credit quality indicator, loan type and based on year of origination as of December 31, 2022 2022:were as follows:

 

                          

Revolving

     
  

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  

Loans

  

Total

 
  

(In Thousands)

 

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

                                

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

                                

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

                                

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

                                

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

                                

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 

 

1315

 

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

 

March 31, 2023

 

Performing

  

Nonperforming

  

Total

 

September 30, 2023

 

Performing

  

Nonperforming

  

Total

 
 
 

(In Thousands)

  

(In Thousands)

 

Commercial, financial and agricultural

 $3,074,568  $7,358  $3,081,926  $2,881,861  $8,674  $2,890,535 

Real estate - construction

 1,469,670  -  1,469,670  1,509,737  200  1,509,937 

Real estate - mortgage:

  

Owner-occupied commercial

 2,240,048  3,388  2,243,436  2,230,678  7,006  2,237,684 

1-4 family mortgage

 1,136,601  2,044  1,138,645  1,164,055  6,044  1,170,099 

Other mortgage

  3,619,109   4,962   3,624,071   3,765,618   506   3,766,124 

Total real estate - mortgage

 6,995,758  10,394  7,006,152 

Total real estate mortgage

 7,160,351  13,556  7,173,907 

Consumer

  71,973   81   72,054   66,578   173   66,751 

Total

 $11,611,969  $17,833  $11,629,802  $11,618,527  $22,603  $11,641,130 
  

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 

 

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 

16

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

 

March 31, 2023

 

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

 $1,023  $1,153  $139  $2,315  $7,219  $3,072,392  $3,081,926  $1,014 

Real estate - construction

  -   -   -   -   -   1,469,670   1,469,670   - 

Real estate - mortgage:

                                

Owner-occupied commercial

  3,030   370   -   3,400   3,388   2,236,648   2,243,436   3,222 

1-4 family mortgage

  5,998   558   -   6,556   2,044   1,130,045   1,138,645   177 

Other mortgage

  -   -   4,456   4,456   506   3,619,109   3,624,071   506 

Total real estate - mortgage

  9,028   928   4,456   14,412   5,938   6,985,802   7,006,152   3,905 

Consumer

  94   64   81   239   -   71,815   72,054   - 

Total

 $10,145  $2,145  $4,676  $16,966  $13,157  $11,599,679  $11,629,802  $4,919 
                                 

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 

September 30, 2023

 

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

 $2,810  $105  $24  $2,939  $8,650  $2,878,946  $2,890,535  $4,564 

Real estate - construction

  511   -   -   511   200   1,509,226   1,509,937   8,320 

Real estate - mortgage:

                                

Owner-occupied commercial

  95   -   -   95   7,006   2,230,583   2,237,684   6,841 

1-4 family mortgage

  2,786   26   1,495   4,307   4,549   1,161,243   1,170,099   874 

Other mortgage

  -   1,050   -   1,050   506   3,764,568   3,766,124   506 

Total real estate - mortgage

  2,881   1,076   1,495   5,452   12,061   7,156,394   7,173,907   8,221 

Consumer

  256   25   173   454   -   66,297   66,751   - 

Total

 $6,458  $1,206  $1,692  $9,356  $20,911  $11,610,863  $11,641,130  $21,105 
                                 

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 ACLallowance for credit losses ("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 estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses.

 

The Company uses the discounted cash flow (“DCF”) method to estimate ACL for all loan pools except for commercial and industrial ("C&I") revolving lines of credit and credit cards. C&I revolving lines of credit and credit cards are members of the Commercial, financial and agricultural and Consumer portfolios, respectively. For all 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,September 30, 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 the national unemployment rate to be generally unchangeddecline and the 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 commercialC&I revolving lines of credit and credit card pools.  The commercialC&I 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 adjusted for 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.

 

Inherent risks in the loan portfolio will differ based on type of loan. Specific risk characteristics by loan portfolio segment are listed below:

 

Commercial, financial and industrialagricultural loans include risks associated with the 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 the degree of specialization, mobility, and general collectability in a default situation. These commercial loans may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates.

 

17

Real estate construction loans include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the proposed 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 mortgage loans 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 local economies.  During times of economic stress, there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt.

 

The following table presents changes in the ACL, segregated by loan type, for the three and ninemonths ended March 31,September 30, 2023 and March 31,September 30, 2022.

 

 

Commercial,

          

Commercial,

         
 

financial and

 

Real estate -

 

Real estate -

      

financial and

 

Real estate -

 

Real estate -

     
 

agricultural

  

construction

  

mortgage

  

Consumer

  

Total

  

agricultural

  

construction

  

mortgage

  

Consumer

  

Total

 
 
 

(In Thousands)

 
 

Three Months Ended September 30, 2023

 

Allowance for credit losses:

 

Balance at July 1, 2023

 $43,465  $40,443  $66,237  $2,127  $152,272 

Charge-offs

 (4,783) (19) -  (341) (5,143)

Recoveries

 825  -  -  11  836 

Provision

  6,454   (2,401)  37   192   4,282 

Balance at September 30, 2023

 $45,961  $38,023  $66,274  $1,989  $152,247 
 
 

Three Months Ended September 30, 2022

 

Allowance for credit losses:

 

Balance at July 1, 2022

 $41,610  $35,992  $48,793  $1,992  $128,387 

Charge-offs

 (2,902) -  (170) (260) (3,332)

Recoveries

 297  -  -  12  309 

Provision

  3,829   4,024   7,420   330   15,603 

Balance at September 30, 2022

 $42,834  $40,016  $56,043  $2,074  $140,967 
 

(In Thousands)

  
 

Three Months Ended March 31, 2023

  

Nine Months Ended September 30, 2023

 

Allowance for credit losses:

            

Balance at January 1, 2023

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

Charge-offs

 (1,257) -  (26) (390) (1,673) (10,398) (19) (157) (842) (11,416)

Recoveries

 128  3  1  11  143  2,187  3  -  43  2,233 

Provision

  1,193   (2,409)  4,530   883   4,197   11,342   (4,850)  7,779   862   15,133 

Balance at March 31, 2023

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

Balance at September 30, 2023

 $45,961  $38,023  $66,274  $1,989  $152,247 
 
 

Nine Months Ended September 30, 2022

 

Allowance for credit losses:

 

Balance at January 1, 2022

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

Charge-offs

 (7,141) -  (221) (459) (7,821)

Recoveries

 1,619  -  -  37  1,656 

Provision

  6,487   13,022   10,435   528   30,472 

Balance at September 30, 2022

 $42,834  $40,016  $56,043  $2,074  $140,967 

 

  

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 

18

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 ACLallowance 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 SheetsSheet 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 both March 31,September 30, 2023 and $575,000 at December 31, 2022. TheThere was no provision expense for unfunded commitments for the three and ninemonths ended March 31,September 30, 2023, respectively, and provision expense was $329,000 and $629,000 for the threeand 2022nine was zero and $300,000, months ended September 30, 2022, 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

    

Accounts

       

ACL

 

March 31, 2023

 

Real Estate

  

Receivable

  

Equipment

  

Other

  

Total

  

Allocation

 

September 30, 2023

 

Real Estate

  

Receivable

  

Equipment

  

Other

  

Total

  

Allocation

 
 

(In Thousands)

  

(In Thousands)

 

Commercial, financial and agricultural

 $21,757  $7,468  $831  $24,524  $54,580  $10,558  $20,457  $10,686  $830  $23,917  $55,890  $15,025 

Real estate - construction

 872  -  -  1,184  2,056  5  200  -  -  994  1,194  90 

Real estate - mortgage:

  

Owner-occupied commercial

 10,935  -  -  48  10,983  207  12,029  -  -  709  12,738  1.530 

1-4 family mortgage

 3,746  -  -  -  3,746  291  10,933  -  -  -  10,933  73 

Other mortgage

  11,258   -   -   -   11,258   76   5,944   -   -   -   5,944   411 

Total real estate - mortgage

 25,939  -  -  48  25,987  574  28,906  -  -  709  29,615  2,014 

Consumer

  -   -   -   -   -   -   -   -   -   -   -   - 

Total

 $48,568  $7,468  $831  $25,756  $82,623  $11,137  $49,563  $10,686  $830  $25,620  $86,699  $17,129 

      

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 

 

1619

 
      

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 U.S. GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that iswas 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.terminated. 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 iswas 60 days after the date on which the national COVID-19 emergency terminates.terminated. 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 the Financial Accounting Standards Board's ("FASB") 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 modifications 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 ninemonths ended March 31,September 30, 2023:

 

 

Three Months Ended September 30, 2023

 
   

Payment Deferral

     
 

Term

 

and Term

   

Percentage of

 
 

Extensions

  

Extensions

  

Total

  

Total Loans

 
 

(In Thousands)

 
 

Commercial, financial and agricultural

 $25,339  $-  $25,339  0.22

%

Other mortgage

  303   -   303   -

%

Total

 $25,642  $-  $25,642   0.22

%

 
 

Nine Months Ended September 30, 2023

 
   

Payment Deferral

        

Payment Deferral

     
 

Term

 

and Term

   

Percentage of

  

Term

 

and Term

   

Percentage of

 
 

Extensions

  

Extensions

  

Total

  

Total Loans

  

Extensions

  

Extensions

  

Total

  

Total Loans

 
 

(In Thousands)

  

(In Thousands)

 
  

Commercial, financial and agricultural

 $39,978  $-  $39,978  0.34

%

 $39,631  $-  $39,631  0.34

%

Real estate - construction

 200  -  200  -

%

 200  -  200  -

%

Owner-occupied commercial

 9,215  701  9,916  0.09

%

 15,208  -  15,208  0.13

%

1-4 family mortgage

 214  -  214  -

%

Other mortgage

  11,254   359   11,613   0.10

%

  11,236   -   11,236   0.10

%

Total

 $60,861  $1,060  $61,921   0.53

%

 $66,275  $-  $66,275   0.57

%

 

20

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and ninemonths ended March 31,September 30, 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

Three Months Ended September 30, 2023

Total Payment

Term Extensions

Deferral

(In months)

(In Thousands)

Commercial, financial and agricultural

3 to 12$-

Real estate - construction

--

Owner-occupied commercial

3-

1-4 family mortgage

--

Other mortgage

--

Nine Months Ended September 30, 2023

Total Payment

Term Extensions

Deferral

(In months)

(In Thousands)

Commercial, financial and agricultural

3 to 65$-

Real estate - construction

6-

Owner-occupied commercial

3 to 6049

1-4 family mortgage

3-

Other mortgage

3 to 3659

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 March 31, 2023. 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 first quarter of September 30, 2023.

 

As of March 31,September 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the firstthree quarterand nine months of September 30, 2023that subsequently defaulted. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.

 

TDRs at December 31, 2022 and March 31,September 30, 2022 totaled $2.5 million and $2.5$2.0 million, respectively. The portion of those TDRs accruing interest at December 31, 2022 and March 31,September 30, 2022 totaled $431,000 and $426,000,$236,000, respectively. There were no modifications made to new TDRs or renewals of existing TDRs for the three and ninemonths ended March 31, 2022September 30,

2022.There were no loans which were modified in the previous twelve months (i.e., the twelve months prior to default) that defaulted during the three and nine months of September 30, 2022. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.

 

NOTE 6 - LEASES

 

The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The leases have remaining terms up to 910 years. At March 31,September 30, 2023, the Company had lease right-of-use assets and lease liabilities totaling $19.8$20.5 million and $20.7$21.4 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 as of September 30, 2023 are as follows:

 

 

March 31, 2023

  

September 30, 2023

 
 

(In Thousands)

  

(In Thousands)

 

2023 (remaining)

 $3,864  $1,329 

2024

 3,768  4,637 

2025

 3,672  4,344 

2026

 3,066  3,504 

2027

 2,588  2,920 

thereafter

  6,079   6,710 

Total lease payments

 23,037  23,444 

Less: imputed interest

  (2,339)  (2,003)

Present value of operating lease liabilities

 $20,698  $21,441 

 

As of March 31,September 30, 2023, the weighted average remaining term of operating leases was 6.3is 6.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.95%3.16%.

 

21

Operating cash flowsoutflows related to leases were $1.2$1.8 million and $1.0$4.3 million for the three and ninemonths ended March 31,September 30, 2023, respectively, compared to $1.1 million and $3.1 million for the threeand 2022,nine months ended September 30, 2022, respectively.

 

Lease costs during the three and ninemonths ended March 31,September 30, 2023 and September 30, 2022were as follows (in thousands):

 

 

Three Months Ended March 31,

  

Three Months Ended September 30,

 
 

2023

  

2022

  

2023

  

2022

 

Operating lease cost

 $1,230  $1,043  $1,784  $1,051 

Short-term lease cost

 -  22 

Variable lease cost

 191  148  212  153 

Sublease income

  (8)  (24)  (5)  (5)

Net lease cost

 $1,413  $1,167  $1,991  $1,221 
 
 

Nine Months Ended September 30,

 
 

2023

  

2022

 

Operating lease cost

 $4,291  $3,098 

Short-term lease cost

 -  47 

Variable lease cost

 597  452 

Sublease income

  (21)  (34)

Net lease cost

 $4,867  $3,563 

 

18

 

NOTE 7 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Incentive Plan

 

At March 31, 2023, theThe Company hadhas a stock incentive plan as described below. The compensation cost that has been charged to earnings for the plan was approximately $808,000$929,000 and $790,000$2.7 million for the three and ninemonths ended March 31,September 30, 2023, respectively, and $804,000 and $2.4 million for the threeand 2022,nine months ended September 30, 2022, respectively.

 

The Company’s 2009 Amended and Restated Stock Incentive Plan authorizes the grant of up to 5,550,000 shares and allows for the issuance of Stock Appreciation Rights, Restricted Stock, Stock Options, Non-stock Share Equivalents, Performance Shares or Performance Units. The 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 plan is ten years.

 

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

There were nohave not been any grants of stock options duringsince firstOctober quarters of 2023 and 2022.2019.

 

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

 

          

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 
          

Weighted

     
      

Weighted

  

Average

     
      

Average

  

Remaining

  

Aggregate

 
      

Exercise

  

Contractual

  

Intrinsic

 
  

Shares

  

Price

  

Term (years)

  

Value

 
              

(In Thousands)

 

Nine Months Ended September 30, 2023:

                

Outstanding at January 1, 2023

  280,000  $19.43   3.0  $14,088 

Exercised

  (87,700)  12.04   0.8   3,520 

Forfeited

  (1,000)  34.09   5.3   18 

Outstanding at September 30, 2023

  191,300  $22.65   3.4  $6,235 
                 

Exercisable at September 30, 2023

  139,300  $17.12   1.7  $5,051 
                 

Nine Months Ended September 30, 2022:

                

Outstanding at January 1, 2022

  353,250  $19.28   3.8  $23,525 

Exercised

  (65,500)  16.42   2.3   4,164 
Forfeited  (1,500)  35.21   5.8   67 

Outstanding at September 30, 2022

  286,250  $19.51   3.4  $18,431 
                 

Exercisable at September 30, 2022

  225,500  $14.89   2.3  $14,990 

 

22

As of March 31,September 30, 2023, there was $159,000$77,000 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 1.0 year.six months.

 

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 March 31,September 30, 2023, there was $5.3$4.6 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 2.22.0 years of the restricted stock’s vesting period.

 

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.market conditions. 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 beginningstarting on January 1st of the year of the grant.grant date. The fair value of the performance shares is determined using a Monte Carlo simulation model on the grant date. As of March 31,September 30, 2023, there was $1.2 million$895,000 of total unrecognized compensation cost related to non-vested performance shares. As of March 31,September 30, 2023, non-vested performance shares had a weighted average remaining time to vest of 1.81.3 years.

 

 

Restricted Stock

  

Performance Shares

  

Restricted Stock

  

Performance Shares

 
 

Shares

  

Weighted Average Grant Date Fair Value

  

Shares

  

Weighted Average Grant Date Fair Value

  

Shares

  

Weighted Average Grant Date Fair Value

  

Shares

  

Weighted Average Grant Date Fair Value

 

Three Months Ended March 31, 2023:

 

Nine Months Ended September 30, 2023:

 

Non-vested at January 1, 2023

 141,580  $56.39  23,852  $54.16  141,580  $56.39  23,852  $54.16 

Granted

 27,258  69.83  8,091  70.29  49,415  60.29  8,091  70.29 

Vested

 (17,521) 48.32  -  -  (31,492) 52.22  -  - 

Forfeited

  (6,545) 69.90   -  -   (11,733) 64.78   -  - 

Non-vested at March 31, 2023

  144,772  $59.29   31,943  $58.25 

Non-vested at September 30, 2023

  147,770  $57.92   31,943  $58.25 
  

Three Months Ended March 31, 2022:

 

Nine Months Ended September 30, 2022:

 

Non-vested at January 1, 2022

 127,602  $42.27  12,437  $37.05  127,602  $42.27  12,437  $37.05 

Granted

 27,851  84.67  6,557  74.52  52,819  83.33  11,415  72.81 

Vested

 (9,612) 42.23  -  -  (26,563) 43.51  -  - 

Forfeited

  (877) 40.72   -  -   (8,206) 61.70   -  - 

Non-vested at March 31, 2022

  144,964  $50.43   18,994  $49.99 

Non-vested at September 30, 2022

  145,652  $55.84   23,852  $54.16 

 

 

NOTE 8 - DERIVATIVES

 

The Company periodically enters into derivative contracts to manage exposuresexposure 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 was not designated as a hedging instrument but rather as a stand-alone derivative.instrument. The interest rate cap hashad an original term of 3 years, a notional amount of $300 million and iswas tied to the one-month LIBOR rate with a strike rate of 0.50%. The fair value of the interest rate cap iswas carried on the consolidated balance sheetConsolidated Balance Sheet in other assets and the change in fair value iswas recognized in noninterest income each quarter. At March 31, 2023 theThe interest rate cap had a fair value of $1.2 million and remaining term of one month.contract expired May 4, 2023.

 

The Company has entered into forward loan sale commitments with secondary market investors to deliver loans on a “best efforts delivery” 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-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 with customers related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of March 31,September 30, 2023 and December 31, 2022 were not material.

 

NOTE 9 RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In March 2022, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU 2022-02Financial 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.statements other than providing the new required disclosures.

23

 

NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2023, the FASB issued ASU 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional 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 related income tax credits. The ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits. ASU 2023-02 is effective for public entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company is assessing its tax credit investments for whether they qualify for proportional amortization treatment and plans to adopt the amendments soon after. The Company does not currently believe the amendments will have a material impact on its consolidated financial statements.

20

 

NOTE 11 - FAIR VALUE MEASUREMENT

 

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

 

Level 1:Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2:Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3:Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

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

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

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

 

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

 

Debt Securities.Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing 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, as in the case of certain corporate securities, these securities are classified in Level 3 of the hierarchy.

 

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. Loans individually evaluated are measured and reported at fair value when full payment under the loan terms is not probable. Loans 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 820-10 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. Loans individually evaluated are subject to nonrecurring fair value adjustment upon initial recognition or subsequent individuallyindividual evaluation. A portion of the ACLallowance for credit losses is allocated toderived from loans individually evaluated  ifwhere the value of such loans is deemed to be less than the unpaid balance. The range of fair value adjustments and weighted average adjustment as of March 31,September 30, 2023 was 0% to 90%65% and 14.9%25%, 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 to write-down individually evaluated loans that are measured at fair value on a nonrecurring basis was $-.-$7.2 million and $13.5 million during the three and ninemonths ended March 31,September 30, 2023, respectively, and $3.0$1.4 million and $3.2 million during the three and ninemonths ended March 31, 2022.September 30, 2022, respectively.

 

24

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 ACLallowance for credit losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. The range of fair value adjustments and weighted average adjustment as of March 31,September 30, 2023 was 0%26% to 100% and 53.3%42%, 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. There were no lossesA loss on the sale and write-downs of OREO duringand repossessed assets of $33,000 and $28,000 was recognized for the three months endedand March 31, 2023, compared to $6,000 during the threenine months ended March 31,September 30, 2023, respectively, and $232,000 for the nine months ended September 30, 2022. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy.

 

21

There werewas twoone residential real estate loansloan with an aggregatea balance of $248,000$95,000 foreclosed and classified as OREO as of March 31,September 30, 2023, andcompared to two residential real estate loan foreclosures for $248,000 as of December 31, 2022.

 

TwoTen residential real estate loans for $190,000totaling $1.8 million were in the process of foreclosurebeing foreclosed as of March 31,September 30, 2023.  There were no residential real estate loanloans that waswere in the process of being foreclosed as of December 31, 2022.

 

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

 

  

Fair Value Measurements at March 31, 2023 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

 $2,990  $-  $-  $2,990 

Government agency securities

  -   4   -   4 

Mortgage-backed securities

  -   243,031   -   243,031 

State and municipal securities

  -   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

 $2,990  $616,279  $6,860  $626,129 

 

Fair Value Measurements at September 30, 2023 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

 $280,718  $-  $-  $280,718 

Mortgage-backed securities

 -  215,241  -  215,241 

State and municipal securities

 -  11,193  -  11,193 

Corporate debt

  -   320,790   6,860   327,650 

Total available-for-sale debt securities

  280,718   547,224   6,860   834,802 

Total assets at fair value

 $280,718  $547,224  $6,860  $834,802 
 
 

Fair Value Measurements at December 31, 2022 Using

     

Fair Value Measurements at December 31, 2022 Using

    
 

Quoted Prices in

        

Quoted Prices in

       
 

Active Markets

 

Significant Other

 

Significant

    

Active Markets

 

Significant Other

 

Significant

   
 

for Identical

 

Observable Inputs

 

Unobservable

    

for Identical

 

Observable Inputs

 

Unobservable

   
 

Assets (Level 1)

  

(Level 2)

  

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 debt securities:

  

U.S. Treasury securities

 $2,969  $-  $-  $2,969  $2,969  $-  $-  $2,969 

Government agency securities

 -  9  -  9  -  9  -  9 

Mortgage-backed securities

 -  249,703  -  249,703  -  249,703  -  249,703 

State and municipal securities

 -  13,609  -  13,609  -  13,609  -  13,609 

Corporate debt

  -   367,665   10,860   378,525   -   367,665   10,860   378,525 

Total available-for-sale debt securities

 2,969  630,986  10,860  644,815  2,969  630,986  10,860  644,815 

Interest rate cap derivative

  -   4,201   -   4,201   -   4,201   -   4,201 

Total assets at fair value

 $2,969  $635,187  $10,860  $649,016  $2,969  $635,187  $10,860  $649,016 

 

2225

 

The following table presents the Company’s financial assets carried at fair value on a nonrecurring basis as of March 31,September 30, 2023 and December 31, 2022. There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022.2022:

 

  

Fair Value Measurements at March 31, 2023 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable

  

Unobservable

     
  

Assets (Level 1)

  

Inputs (Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Loans individually evaluated

 $-  $-  $71,486  $71,486 

Other real estate owned and repossessed assets

  -   -   248   248 

Total assets at fair value

 $-  $-  $71,734  $71,734 

  

Fair Value Measurements at December 31, 2022 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable

  

Unobservable

     
  

Assets (Level 1)

  

Inputs (Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Loans individually evaluated

 $-  $-  $73,017  $73,017 

Other real estate owned

  -   -   248   248 

Total assets at fair value

 $-  $-  $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.

  

Fair Value Measurements at September 30, 2023

     
  

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Loans individually evaluated

 $-  $-  $69,570  $69,570 

Other real estate owned and repossessed assets

  -   -   690   690 

Total assets at fair value

 $-  $-  $70,260  $70,260 
                 
  

Fair Value Measurements at December 31, 2022

     
  

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Loans individually evaluated

 $-  $-  $73,017  $73,017 

Other real estate owned and repossessed assets

  -   -   248   248 

Total assets at fair value

 $-  $-  $73,265  $73,265 

 

In the case of the debtinvestment securities portfolio, the Company monitors the portfolio to ascertain when transfers between levels have been affected.  The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare.  For the threenine months ended March 31,September 30, 2023, there was one transfer out of levelfrom Level 3 into levelto Level 2.

 

The table below includes a rollforward of the balance sheet amounts for the periodthree and nine months ended March 31,September 30, 2023 and March 31,September 30, 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,

  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 
 

Available-for-sale Securities

  

Available-for-sale Securities

  

Available-for-sale Securities

  

Available-for-sale Securities

  

Available-for-sale Securities

  

Available-for-sale Securities

 
 

(In Thousands)

  

(In Thousands)

 

Fair value, beginning of period

 $10,860  $16,992  $6,860  $6,000  $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) -  -  160  (805)

Purchases

 -  -  -  -  -  - 

Transfers out of Level 3

  (4,160)  (5,149)  -   -   (4,160)  (10,187)

Fair value, end of period

 $6,860  $11,500  $6,860  $6,000  $6,860  $6,000 

 

26

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 estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis as of March 31,September 30, 2023 and December 31, 2022 were as follows:

 

 

March 31, 2023

  

December 31, 2022

  

September 30, 2023

  

December 31, 2022

 
 

Carrying

   

Carrying

    

Carrying

   

Carrying

   
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
 

(In Thousands)

  

(In Thousands)

 

Financial Assets:

  

Level 1 Inputs:

  

Cash and cash equivalents

 $864,493  $864,493  $814,538  $814,538  $1,974,074  $1,974,074  $814,538  $814,538 

Held to maturity U.S. Treasury securities

 507,601  477,580  507,601  470,954  558,196  523,182  507,151  470,954 
  

Level 2 Inputs:

  

Federal funds sold

 6,478  6,478  1,515  1,515  91,035  91,035  1,515  1,515 

Held to maturity debt securites

 506,342  453,162  526,720  464,749 

Held to maturity debt securities

 485,453  409,574  526,720  464,749 

Mortgage loans held for sale

 1,651  1,642  1,607  1,604  6,333  6,281  1,607  1,604 

Restricted equity securities

 7,307  7,307  7,734  7,734  10,226  10,226  7,734  7,734 
  

Level 3 Inputs:

  

Held to maturity debt securites

 250  250  250  250 

Held to maturity debt securities

 250  250  250  250 

Loans, net

 11,480,837  11,145,529  11,541,671  11,265,517  11,488,883  11,069,141  11,541,671  11,265,517 
  

Financial Liabilities:

  

Level 2 Inputs:

  

Deposits

 $11,615,317  $11,602,610  $11,546,805  $11,529,647  $13,142,376  $13,128,874  $11,546,805  $11,529,647 

Federal funds purchased

 1,480,160  1,480,160  1,618,798  1,618,798  1,370,289  1,370,289  1,618,798  1,618,798 
Other borrowings 65,417  57,340  64,726  57,101  64,751  57,829  64,726  57,101 

 

ITEM 2. MANAGEMENTS 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”).Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated balance sheetsfinancial statements as of March 31, 2023 and December 31, 2022 and consolidated statements of income for the three and nine months ended March 31,September 30, 2023 and March 31,September 30, 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 (the “Exchange Act”) and Section 27A of the Securities Act of 1933. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “could,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including, but not limited to: the global health and economic crisis precipitated by the COVID-19 outbreak; general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships, including in light of the continuing high rate of domestic inflation;relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes as a result of our reclassification as a large financial institution by the FDIC; changes in our loan portfolio and the deposit base; economic crisis and associated credit issues in industries most impacted byassociated with the COVID-19 outbreak;efficacy of return to office policies; possible changes in laws and regulations and governmental monetary and fiscal policies;policies, including, but not limited to, Federal Reserve policies in connection with continued inflationary pressures and the ability of the U.S. Congress to increase the U.S. statutory debt limit as needed; computer hacking or cyber-attacks resulting in unauthorized access to confidential or proprietary information; substantial, unexpected or prolonged changes in the level or cost of liquidity; 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.non-bank financial institutions. 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, our Quarterly Reports on Form 10-Q for fiscal year 2023 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.statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time.

27

 

Business

 

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

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.

 

FirstThird quarter highlights

 

 

Diluted earnings per common share of $1.06$0.98 for the firstthird quarter of 2023.2023, a decrease of 16%, from the third quarter 2022.

 

Return on assets increasedAverage loans of $11.6 billion for the third quarter of 2023, an increase of $643.1 million, or 6%, from 1.53% to 1.63% year-over-year.a year ago.

 

Book value per share grewAverage deposits of $12.7 billion for the third quarter of 2023, an increase of $1.1 billion, or 10%, from $21.61 to $24.63, or 14%, year-over-year.a year ago.

 

Deposit balances grew $69Net interest income of $99.7 million duringfor the firstthird quarter of 2023, while the deposit pipeline increased by $244a decrease of $26.7 million, or 51%.21%, from the third quarter of 2022.

 

Bank level Tier 1 capital to average assets increasedNet interest margin of 2.64% for the third quarter of 2023 decreased 100 bps from 8.08% to 9.91% year-over-year.3.64% in the third quarter of 2022. The decrease primarily resulted from increases in rates paid on interest-bearing deposits.

 

Overview

 

As of March 31,September 30, 2023, we had consolidated total assets of $14.57$16.0 billion, down $29.2 million,an increase of $1.4 billion, or 0.2%9.9%, from total assets of $14.60$14.6 billion at December 31, 2022. Total loans were $11.63$11.6 billion at March 31,September 30, 2023, down $58.2a decrease of $46.8 million, or 0.5%0.4%, from $11.69$11.7 billion at December 31, 2022. Total deposits were $11.62$13.1 billion at March 31,September 30, 2023, up $68.5 million,an increase of $1.6 billion, or 0.6%13.8%, from $11.55$11.5 billion at December 31, 2022.

 

Net income available to common stockholders for the three months ended March 31,September 30, 2023 was $58.0$53.3 million, up $358,000,a decrease of $10.7 million, or 0.6%16.7%, from $57.6$64.0 million for the three months ended March 31,September 30, 2022.  Basic and diluted earnings per common share were $1.07 and $1.06, respectively,both $0.98 for the three months ended March 31,September 30, 2023, compared to $1.06 for both$1.18 and $1.17, respectively, in the corresponding period in 2022. Changes

Net income available to common stockholders for the nine months ended September 30, 2023 was $164.7 million, a decrease of $19.0 million, or 10.3%, from $183.7 million for the corresponding period in income2022. Basic and expenses are more fully explaineddiluted earnings per common share were $3.03 and $3.02, respectively, for the nine months ended September 30, 2023, compared to $3.38 and $3.37, respectively, for the corresponding period in “Results of Operations” below.2022.

28

 

Performance Ratios

 

The following table presents selected ratios of our results of operations for the three and nine months ended March 31,September 30, 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.

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Return on average assets

  1.37

%

  1.77

%

  1.50

%

  1.64

%

Return on average common stockholders' equity

  15.12

%

  20.49

%

  16.23

%

  20.44

%

Dividend payout ratio

  28.63

%

  19.07

%

  28.63

%

  20.28

%

Net interest margin (1)

  2.64

%

  3.64

%

  2.90

%

  3.26

%

Efficiency ratio (2)

  38.64

%

  31.54

%

  36.05

%

  31.93

%

Average stockholders' equity to average total assets

  9.07

%

  8.61

%

  9.22

%

  8.02

%

                 

(1) Net interest margin is 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 March 31,September 30, 2023, we had $6.5$91.0 million in federal funds sold, compared to $1.5 million at December 31, 2022. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At March 31,September 30, 2023, we had $713.6 million$1.85 billion in balances at the Federal Reserve, compared to $693.8 million at December 31, 2022.

 

Investment Securities

 

Debt securities available for sale totaled $624.9$834.8 million at March 31,September 30, 2023 and $644.8 million at December 31, 2022. Investment securities held to maturity totaled $1.02$1.04 billion at March 31,September 30, 2023 and $1.03 billion at December 31, 2022. We had paydowns of $22.3$62.6 million on mortgage-backed securities and government agencies, maturities of $3.6$374.0 million on municipal bonds, corporate securities and treasury securities, and calls of $13.0 million on U.S. government agencies mortgage-backed securities,and municipal bonds, corporate securities, and Treasury securities, and calls of $5.0 million on corporate securities during the threenine months ended March 31,September 30, 2023. We recognized a $3.3$6.2 million loss on the sale of $45.4 million in available for sale debt securities for the nine months ended September 30, 2022. We sold sixteen debt securities available for sale for $75.0 million that were yielding less than 1.00%. We purchased $675.5 million in U.S. Treasuries during the first quarter of 2022.  We purchased $190.6nine months ended September 30, 2023, compared to $361.6 million in U.S. Treasuries, $286.7 million in mortgage-backed securities, $52.5and $76.4 million in corporate securities and $197.1 million in US Treasury securities during the first threenine months ofended September 30, 2022.  For a tabular presentation of debt securities available for sale and held to maturity at March 31,September 30, 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-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 isAll investment securities in an unrealized loss position as of September 30, 2023 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is other-than-temporarily impaired. Management considers several factors, includingnot due to credit-related factors. In addition, we have 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 within the portfolio until maturity or until the value recovers, and we believe that it is not more likely than not that we will be required to sell these securities before recoveryprior to recovery. We continue to monitor all of their amortized cost basis, whichour securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be at maturity, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash chargessold or would require a charge to earnings as a provision for credit losses in one or more futuresuch periods. All securities held are traded in liquid markets.

29

 

The Company does not invest in collateralized debt obligations (“CDOs”). As of March 31,September 30, 2023, we had $398.7$385.7 million of bank holding company subordinated notes. If rated, all such bonds were rated BBB or better by Kroll Bond Rating Agency at the time of our 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 has a combined average credit rating of AA as of March 31,September 30, 2023.

 

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$1.45 billion and $789.3 million as of March 31,September 30, 2023 and December 31, 2022, respectively. The increase in pledged investments is due to increased public fund balances during the third quarter of 2023.

 

Loans

 

We had total loans of $11.63$11.6 billion at March 31,September 30, 2023, down $58.2a decrease of $46.8 million, or 0.5%0.4%, compared to $11.69$11.7 billion at December 31, 2022.

 

Asset Quality

 

The Company assesses the adequacy of its ACLallowance for credit losses ("ACL") at the end of each calendar quarter. The level of ACL is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and 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 theThe ACL is believed 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 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 termlong-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 environment among other factors. See “Note 1 – General” and “Note 5 – Loans” in the Notes to Consolidated Financial Statements included in Item 1. Consolidated Financial Statements elsewhere in this report.

26

 

The expected credit losses for each loan pool 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 collectively 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 classified as TDRs. SpecificIndividual allocations of the ACL for credit losses are estimated onby using 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.

 

  

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

%

      

Percentage

 
      

of loans in

 
      

each

 
      

category to

 

March 31, 2023

 

Amount

  

total loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $42,895   26.50

%

Real estate - construction

  40,483   12.64

%

Real estate - mortgage

  63,157   60.24

%

Consumer

  2,430   0.62

%

Total

 $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

%

  

As of and for the Three Months Ended

  

As of and for the Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(Dollars in thousands)

 

Total loans outstanding, net of unearned income

 $11,641,130  $11,278,614  $11,641,130  $11,278,614 

Average loans outstanding, net of unearned income

 $11,563,026  $10,919,957  $11,604,264  $10,256,572 

Allowance for credit losses at beginning of period

  152,272   128,387   146,297   116,660 

Charge-offs:

                

Commercial, financial and agricultural loans

  4,783   2,902   10,398   7,143 

Real estate - construction

  19   -   19   - 

Real estate - mortgage

  -   170   157   220 

Consumer loans

  341   261   842   459 

Total charge-offs

  5,143   3,333   11,416   7,822 

Recoveries:

                

Commercial, financial and agricultural loans

  825   297   2,187   1,619 

Real estate - construction

  -   -   3   - 

Real estate - mortgage

  -   -   -   - 

Consumer loans

  11   12   43   37 

Total recoveries

  836   309   2,233   1,656 

Net charge-offs

  4,307   3,024   9,184   6,166 

Provision for credit losses

  4,282   15,604   15,133   30,473 

Allowance for credit losses at period end

 $152,247  $140,967  $152,247  $140,967 

Allowance for credit losses to period end loans

  1.31

%

  1.25

%

  1.31

%

  1.25

%

Net charge-offs to average loans

  0.15

%

  0.11

%

  0.11

%

  0.08

%

 

2730

      

Percentage of loans

 
   ACL  

in each category

 

September 30, 2023

 

Amount

  

to total loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $45,961   33.22

%

Real estate - construction

  38,023   10.08

%

Real estate - mortgage

  66,274   55.97

%

Consumer

  1,989   0.73

%

Total

 $152,247   100.00

%

         
      

Percentage of loans

 
   ACL  

in each category

 

December 31, 2022

 

Amount

  

to total loans

 
  

(In Thousands)

 

Commercial, financial and agricultural

 $42,830   31.30

%

Real estate - construction

  42,889   11.57

%

Real estate - mortgage

  58,652   56.43

%

Consumer

  1,926   0.70

%

Total

 $146,297   100.00

%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, remained flatincreased to $22.5 million at September 30, 2023, compared to $17.8 million at March 31, 2023 and December 31, 2022, respectively.2022. Of this total, nonaccrual loans of $13.2$20.9 million at March 31,September 30, 2023 represented a net increase of $707,000$8.5 million from nonaccrual loans at December 31, 2022.  Excluding credit card accounts, there were six loans 90 or more days past due and still accruing totaling $5.1$1.5 million at March 31,September 30, 2023, compared to one loansloan totaling $4.6 million at December 31, 2022. Loans made to borrowers experiencing financial difficulty that were modified during the three months ended March 31,September 30, 2023 were $61.9$25.6 million. TDRs at December 31, 2022, and March 31,September 30, 2022 were $2.5 million and $2.1$2.4 million, respectively.

31

The following table details our nonperforming assets at September 30, 2023 and December 31, 2022:

  

September 30, 2023

  

December 31, 2022

 
      

Number of

      

Number of

 
  

Balance

  

Loans

  

Balance

  

Loans

 
  

(Dollar Amounts In Thousands)

 

Nonaccrual loans:

                

Commercial, financial and agricultural

 $8,650   37  $7,108   18 

Real estate - construction

  200   1   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  7,006   13   3,312   3 

1-4 family mortgage

  4,549   38   1,524   16 

Other mortgage

  506   2   506   2 

Total real estate - mortgage

  12,061   53   5,342   21 

Consumer

  -   -   -   - 

Total Nonaccrual loans:

 $20,911   91  $12,450   39 
                 

90+ days past due and accruing:

                

Commercial, financial and agricultural

 $24   3  $195   26 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  1,495   6   594   5 

Other mortgage

  -   -   4,512   1 

Total real estate - mortgage

  1,495   6   5,106   6 

Consumer

  173   -   90   44 

Total 90+ days past due and accruing:

 $1,692   9  $5,391   76 
                 

Total Nonperforming Loans:

 $22,603   100  $17,841   115 
                 

Plus: Other real estate owned and repossessions

  690   4   248   2 

Total Nonperforming Assets

 $23,293   104  $18,089   117 
                 

Restructured accruing loans:

                

Commercial, financial and agricultural

 $-   -  $2,480   5 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  -   -   -   - 

Other mortgage

  -   -   -   - 

Total real estate - mortgage

  -   -   -   - 

Consumer

  -   -   -   - 

Total restructured accruing loans:

 $-   -  $2,480   5 
                 

Total Nonperforming assets and restructured accruing loans

 $23,293   104  $20,569   122 
                 

Ratios:

                

Nonperforming loans to total loans

  0.19

%

      0.15

%

    

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

  0.20

%

      0.15

%

    

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

  0.20

%

      0.18

%

    

 

OREO and repossessed assets decreasedincreased to $248,000$690,000 at March 31,September 30, 2023, from $2.0 millioncompared to $248,000 at December 31, 2022. The following table summarizes OREO and repossessed asset activity for the threenine months ended March 31,September 30, 2023 and 2022:

 

  

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 at March 31, 2023 and December 31, 2022:

  

March 31, 2023

  

December 31, 2022

 
      

Number of

      

Number of

 
  

Balance

  

Loans

  

Balance

  

Loans

 
  

(Dollar Amounts In Thousands)

 

Nonaccrual loans:

                

Commercial, financial and agricultural

 $7,219   22  $7,108   18 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  3,388   3   3,312   3 

1-4 family mortgage

  2,044   20   1,524   16 

Other mortgage

  506   2   506   2 

Total real estate - mortgage

  5,938   25   5,342   21 

Consumer

  -   -   -   - 

Total Nonaccrual loans:

 $13,157   47  $12,450   39 
                 

90+ days past due and accruing:

                

Commercial, financial and agricultural

 $146   22  $195   26 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  -   5   594   5 

Other mortgage

  4,456   1   4,512   1 

Total real estate - mortgage

  4,456   6   5,106   6 

Consumer

  81   31   90   44 

Total 90+ days past due and accruing:

 $4,683   59  $5,391   76 
                 

Total Nonperforming Loans:

 $17,840   106  $17,841   115 
                 

Plus: Other real estate owned and repossessions

  248   2   248   2 

Total Nonperforming Assets

 $18,089   108  $18,089   117 
                 

Restructured accruing loans:

                

Commercial, financial and agricultural

 $-   -  $2,480   5 

Real estate - construction

  -   -   -   - 

Real estate - mortgage:

                

Owner-occupied commercial

  -   -   -   - 

1-4 family mortgage

  -   -   -   - 

Other mortgage

  -   -   -   - 

Total real estate - mortgage

  -   -   -   - 

Consumer

  -   -   -   - 

Total restructured accruing loans:

 $-   -  $2,480   5 

Total Nonperforming assets and restructured accruing loans

 $18,089   108  $20,569   122 
                 

Ratios:

                

Nonperforming loans to total loans

  0.15

%

      0.15

%

    

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

  0.16

%

      0.15

%

    

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

  0.16

%

      0.18

%

    

28

  

Nine Months Ended September 30,

 
  

2023

  

2022

 
  

(In thousands)

 

Balance at beginning of period

 $248  $1,208 

Transfers from loans and capitalized expenses

  628   1,045 

Proceeds from sales

  (158

)

  (1,240

)

Internally financed sales

  -   - 

Write-downs / net gain (loss) on sales

  (28

)

  232 

Balance at end of period

 $690  $1,245 

 

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 unlessif management believes that the collection of interest is not 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 ACLallowance for credit losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.

 

32

In keeping with this guidance from regulators, the bank offered short-term modifications made in responseCompany continues to work with COVID-19 affected borrowers to borrowers who were currentdefer their payments and otherwise not past due. Shouldinterest. While interest continues to accrue to income, through normal U.S. GAAP accounting, 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 March 31,September 30, 2023, we carried $2.4the Company carries $2.3 million of accrued interest income on deferrals made to COVID-19 affected borrowers compared to $2.4 million at December 31, 2022. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

 

Deposits

 

We 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 bearingTotal deposits our total deposits increased by $68.5 million to $11.62were $13.14 billion at March 31,September 30, 2023, compared toan increase of $1.60 billion, or 13.8%, from $11.55 billion at December 31, 2022. The bulk of the increase in our total deposits were in interest-bearing deposits, money market accounts and time deposits. We anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in our mature markets.

 

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

 

The following table summarizes balances of our deposits and the percentage of each type to the total at March 31,September 30, 2023 and December 31, 2022.2022:

 

 

March 31, 2023

  

December 31, 2022

  

September 30, 2023

  

December 31, 2022

 

Non-interest-bearing demand

 $2,898,736  24.96

%

 $3,321,347  28.76

%

Noninterest-bearing demand

 $2,621,072  19.94

%

 $3,321,347  28.76

%

Interest-bearing demand

 1,762,583  15.17

%

 1,861,496  16.12

%

 2,147,355  16.34

%

 1,861,496  16.12

%

Money market

 5,998,057  51.64

%

 5,362,705  46.44

%

 7,146,835  54.38

%

 5,362,705  46.44

%

Savings

 131,016  1.13

%

 138,450  1.20

%

 108,677  0.83

%

 138,450  1.20

%

Time deposits, $250,000 and under

 261,118  2.25

%

 239,772  2.08

%

Time deposits , $250,000 and under

 372,963  2.84

%

 239,772  2.08

%

Time deposits, over $250,000

 563,807  4.85

%

 573,035  4.96

%

 745,474  5.67

%

 573,035  4.96

%

Brokered time deposits

  -  -

%

  50,000  0.43

%

  -  -

%

  50,000  0.43

%

 $11,615,317  100.00

%

 $11,546,805  100.00

%

 $13,142,376  100.00

%

 $11,546,805  100.00

%

 

At March 31,As of September 30, 2023, and December 31, 2022, we estimate that we had approximately $6.9$8.5 billion and $7.0$7.7 billion respectively, in uninsured deposits, which arerespectively. These uninsured deposits represent the portion of deposit accounts that exceed the FDIC insurance limit.limits. Included in our uninsured deposits on September 30, 2023, and December 31, 2022, we estimate that we had approximately $2.1 billion and $758 million, respectively, in public funds. While public fund balances that exceed FDIC limits are uninsured deposits, these deposits are collateralized by securities.  

29

 

The following table presents the maturities of our time deposits in excess ofthat exceed FDIC insurance limitlimits as of March 31,September 30, 2023.

 

 

Portion of time deposits in excess of insurance limit

  

Portion of time deposits in excess of insurance limit

 
 

March 31, 2023

  

September 30, 2023

 

Time deposits otherwise uninsured with a maturity of:

 

(In Thousands)

 
 
Uninsured time deposits with a maturity of: 

(In Thousands)

 

3 months or less

 $75,443  $59,178 

Over 3 months through 6 months

 57,907 

Over 3 through 6 months

 $108,947 

Over 6 months through 12 months

 83,621  145,788 

Over 12 months

  110,666   80,744 

Total

 $327,637  $394,657 

 

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.

 

33

Other Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $1.48$1.37 billion and $1.64$1.62 billion at March 31,September 30, 2023 and December 31, 2022, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 4.67%5.13% for the quarter ended March 31,September 30, 2023. Other borrowings consist of the following:

$30.0 million on the Company’s 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually. The Notes may be prepaid by the Company; and

 

 

$34.75 million of the Company’s 4% Subordinated Notes due October 21, 2030, which were issued in a private placement in October 2020 and pay interest semi-annually. The Notes may not be prepaid by the Company prior to October 21, 2025.

$30.0 million of 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually.

 

Liquidity

 

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

 

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity waswere to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At March 31,September 30, 2023, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $2.0$2.48 billion. The Bank had loans pledged to the FHLB which provided approximately $1.4$1.71 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,At September 30, 2023, the Bank had borrowing availability of approximately $698.0$931.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements.  We believe these sources of funding are adequate to meet our anticipated funding needs.

 

Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Borrowings” and has various other sources of liquidity as discussed herein.“Other Borrowings”. 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.

30

 

The following table illustrates, during the periods presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $14.4$15.43 billion and $15.3$14.71 billion for the quartersthree and nine months ended March 31, 2023 and 2022, respectively.September 30, 2023.

 

 

For the Three Months Ended March 31,

  

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Sources of Funds:

            

Deposits:

  

Non-interest-bearing

 21.4

%

 31.9

%

 

 

20.1% 

 

30.6% 19.7

%

 31.6

%

Interest-bearing

 58.3  49.1  60.7  49.4  61.2  49.0 

Federal funds purchased

 9.6  10.6  8.3  10.4  8.6  10.5 

Long term debt and other borrowings

 0.8  0.4  0.7  0.4  0.6  0.4 

Other liabilities

 0.5  0.4  0.5  0.4  0.4  0.4 

Equity capital

  9.4   7.6   9.8   8.8   9.5   8.1 

Total sources

  100.0

%

  100.0

%

  100.0

%

  100.0

%

  100.0

%

  100.0

%

  

Uses of Funds:

            

Loans

 81.0

%

 63.1

%

 75.0

%

 75.9

%

 79.0

%

 69.1

%

Securities

 12.0  10.0  13.2  12.5  12.5  11.5 

Interest-bearing balances with banks

 3.5  23.8  8.4  6.6  5.2  15.5 

Federal funds sold

 0.4  0.1  0.5  0.7  0.3  0.3 

Other assets

  3.1   3.0   2.9   4.2   3.0   3.6 

Total uses

  100.0

%

  100.0

%

  100.0

%

  99.9

%

  100.0

%

  100.0

%

34

 

Capital Adequacy

 

Total stockholders’ equity attributable to us at March 31,September 30, 2023 was $1.34$1.40 billion, or 9.19%9.04% 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 March 31,September 30, 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 common equity Tier 1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of March 31,September 30, 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, not including the applicable 2.5% capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of March 31,September 30, 2023, December 31, 2022 and March 31,September 30, 2022:

 

 

Actual

  

For Capital Adequacy Purposes

  

To Be Well Capitalized Under Prompt Corrective Action Provisions

          

To Be Well Capitalized

 
 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

      

For Capital Adequacy

 

Under Prompt Corrective

 

As of March 31, 2023:

 

CET 1 Capital to Risk Weighted Assets:

 
 

Actual

  

Purposes

  

Action Provisions

 
 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of September 30, 2023

 

(Dollars in Thousands)

 

CET 1 Capital to Risk-Weighted Assets:

 

Consolidated

 $1,368,751  10.01

%

 $615,176  4.50

%

 N/A  N/A  $1,447,107  10.69

%

 $609,385  4.50

%

 N/A  N/A 

ServisFirst Bank

 1,428,371  10.45

%

 615,120  4.50

%

 $888,506  6.50

%

 1,508,380  11.14

%

 609,345  4.50

%

 $880,164  6.50

%

Tier 1 Capital to Risk Weighted Assets:

 

Tier 1 Capital to Risk-Weighted Assets:

 

Consolidated

 1,369,251  10.02

%

 820,235  6.00

%

 N/A  N/A  1,447,607  10.69

%

 812,514  6.00

%

 N/A  N/A 

ServisFirst Bank

 1,428,871  10.45

%

 820,160  6.00

%

 1,093,546  8.00

%

 1,508,880  11.14

%

 812,459  6.00

%

 1,083,279  8.00

%

Total Capital to Risk Weighted Assets:

 

Total Capital to Risk-Weighted Assets:

 

Consolidated

 1,578,208  11.54

%

 1,093,647  8.00

%

 N/A  N/A  1,659,180  12.25

%

 1,083,352  8.00

%

 N/A  N/A 

ServisFirst Bank

 1,578,411  11.55

%

 1,093,546  8.00

%

 1,366,933  10.00

%

 1,661,702  12.27

%

 1,083,279  8.00

%

 1,354,099  10.00%

Tier 1 Capital to Average Assets:

  

Consolidated

 1,369,251  9.49

%

 576,964  4.00

%

 N/A  N/A  1,447,607  9.35

%

 619,043  4.00

%

 N/A  N/A 

ServisFirst Bank

 1,428,871  9.91

%

 576,969  4.00

%

 721,211  5.00

%

 1,508,880  9.75

%

 619,041  4.00

%

 773,801  5.00

%

  

As of December 31, 2022:

 

CET 1 Capital to Risk Weighted Assets:

 

As of December 31, 2022

 

CET 1 Capital to Risk-Weighted Assets:

 

Consolidated

 $1,326,035  9.55

%

 $624,986  4.50

%

 N/A  N/A  $1,326,035  9.55

%

 $624,986  4.50

%

 N/A  N/A 

ServisFirst Bank

 1,385,697  9.98

%

 624,942  4.50

%

 $902,694  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

 1,326,535  9.55

%

 833,315  6.00

%

 N/A  N/A  1,326,535  9.55

%

 833,315  6.00

%

 N/A  N/A 

ServisFirst Bank

 1,386,197  9.98

%

 833,256  6.00

%

 1,111,008  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

 1,532,134  11.03

%

 1,111,086  8.00

%

 N/A  N/A  1,532,134  11.03

%

 1,111,086  8.00

%

 N/A  N/A 

ServisFirst Bank

 1,533,069  11.04

%

 1,111,008  8.00

%

 1,388,760  10.00

%

 1,533,069  11.04

%

 1,111,008  8.00

%

 1,388,760  10.00

%

Tier 1 Capital to Average Assets:

  

Consolidated

 1,326,535  9.29

%

 570,960  4.00

%

 N/A  N/A  1,326,535  9.29

%

 570,960  4.00

%

 N/A  N/A 

ServisFirst Bank

 1,386,197  9.71

%

 570,924  4.00

%

 713,656  5.00

%

 1,386,197  9.71

%

 570,924  4.00

%

 713,656  5.00

%

  

As of March 31, 2022:

 

CET 1 Capital to Risk Weighted Assets:

 

As of September 30, 2022

 

CET 1 Capital to Risk-Weighted Assets:

 

Consolidated

 $1,169,735  9.86

%

 $533,769  4.50

%

 N/A  N/A  $1,272,564  9.42

%

 $607,684  4.50

%

 N/A  N/A 

ServisFirst Bank

 1,232,198  10.39

%

 533,698  4.50

%

 $770,897  6.50

%

 1,332,933  9.87

%

 607,645  4.50

%

 $877,710  6.50

%

Tier 1 Capital to Risk Weighted Assets:

 

Tier 1 Capital to Risk-Weighted Assets:

 

Consolidated

 1,170,235  9.87

%

 711,691  6.00

%

 N/A  N/A  1,273,064  9.43

%

 810,245  6.00

%

 N/A  N/A 

ServisFirst Bank

 1,232,698  10.39

%

 711,598  6.00

%

 948,797  8.00

%

 1,333,433  9.87

%

 810,194  6.00

%

 1,080,259  8.00

%

Total Capital to Risk Weighted Assets:

 

Total Capital to Risk-Weighted Assets:

 

Consolidated

 1,356,009  11.43

%

 948,922  8.00

%

 N/A  N/A  1,480,681  10.96

%

 1,080,326  8.00

%

 N/A  N/A 

ServisFirst Bank

 1,353,761  11.41

%

 948,797  8.00

%

 1,185,996  10.00

%

 1,476,329  10.93

%

 1,080,259  8.00

%

 1,350,323  10.00

%

Tier 1 Capital to Average Assets:

  

Consolidated

 1,170,235  7.67

%

 610,638  4.00

%

 N/A  N/A  1,273,064  8.84

%

 576,098  4.00

%

 N/A  N/A 

ServisFirst Bank

 1,232,698  8.08

%

 610,538  4.00

%

 763,172  5.00

%

 1,333,433  9.26

%

 576,009  4.00

%

 720,011  5.00

%

35

 

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, isare dividends the Bank pays to us as the Bank’s sole shareholder.stockholder. 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 Bankbank 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.

 

32

Off-Balance Sheet ArrangementsCommitments and Contingencies

 

In the normal course of business, we are a party to financial credit arrangementsinstruments with off-balance sheet risk to meet the financing needs of our customers. These financial credit arrangementsinstruments include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and financial guarantees. Those credit arrangementsinstruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in theour balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial 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 thesuch financial instrument for commitments to extend credit, credit card arrangements and standby letters of credit is represented by the contractual or notional amount of thosethese instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

 

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.

 

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

 

 

March 31, 2023

  

September 30, 2023

 
 

(In Thousands)

  

(In Thousands)

 

Commitments to extend credit

 $3,958,312  $3,511,615 

Credit card arrangements

 362,347  407,442 

Standby letters of credit

  60,666   80,838 
 $4,381,325  $3,999,895 

36

 

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

 

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

 

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

 

Results of Operations

 

Summary of Net Income

 

Net income and net income available to common stockholders for the three months ended March 31,September 30, 2023 was $58.0$53.3 million compared to $57.6net income and net income available to common stockholders of $64.0 million for the three months ended March 31,September 30, 2022.  Net income and net income available to common stockholders for the nine months ended September 30, 2023 was $164.7 million compared to net income and net income available to common stockholders of $183.7 million for the nine months ended September 30, 2022.  For the three and nine months ended September 30, 2023 compared to 2022 net interest income decreased $26.7 million and $39.3 million, respectively. Net interest income was negatively impacted by the continued narrowing in net interest spread due to Federal Reserve increases in interest rates over the last year. The net interest spread in the third quarter of 2023 was 1.63% compared to 1.94% in the second quarter of 2023 and 3.25% in the third quarter of 2022. The increase in net income was primarily attributable to a $2.6 million increasedecrease in net interest income duringfor the three months ended March 31, 2023 to $108.3 million, compared to $105.7 million during the same period in 2022. The increase in net interest incomeand nine-month periods is primarily attributable to growth in average loans, which increased by $2.00 billion. Total non-interest income decreased by $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 $2.4 million to $39.7 million during the three months ended March 31, 2023 compared to $37.2 million during the same period in 2022.rising costs associated with deposits.

 

Basic and diluted net incomeearnings per common share were $1.07 and $1.06, respectively,both $0.98, for the three months ended March 31,September 30, 2023, compared to $1.06$1.18 and $1.17, respectively for boththe corresponding period in 2022.  Basic and diluted earnings per common share were $3.03 and $3.02, respectively, for the nine months ended September 30, 2023, compared to $3.38 and $3.37, respectively, for the corresponding period in 2022.  Return on average assets for the three and nine months ended March 31,September 30, 2023 was 1.63%1.37% and 1.50% compared to 1.53%1.77% and 1.64%, respectively, for the corresponding periodperiods in 2022, and return2022.  Return on average common stockholders’ equity for the three and nine months ended March 31,September 30, 2023 was 17.83%15.12% and 16.23%, respectively, compared to 20.09%20.49% and 20.43%, respectively, for the corresponding periodperiods in 2022.

33

 

Net Interest Income and Net Interest Margin Analysis

 

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

 

Taxable-equivalent net interest income increased $2.5decreased $26.7 million, or 2.4%21.1%, to $108.4$99.7 million for the three months ended March 31,September 30, 2023 compared to $105.8$126.5 million for the corresponding period in 2022, and decreased $39.3 million, or 11.3%, to $309.4 million for the nine months ended September 30, 2023 compared to $348.7 million for the corresponding period in 2022. This increase was primarily attributable to a $2.00 billion increase in average loans, or 20.8%, year-over-year. Average interest-bearingNoninterest-bearing demand deposit balances with banks decreased by $3.13 billion.$1.63 billion and $1.79 billion for the three and nine-month periods, respectively. A majority of these balances were moved into interest-bearing accounts as market interest rates increased during 2022 and 2023. Rates paid on interest-bearing deposits also increased as discussed in more detail below. The taxable-equivalent yield on interest-earning assets increased to 5.65% for the three months ended September 30, 2023 from 3.10%4.30% for the corresponding period in 2022, and increased to 5.27% year-over-year, primarily a result of5.48% for the Federal Reserve increasing market interest rates duringnine months ended September 30, 2023 from 3.63% for the corresponding period in 2022.  The yield on loans for the three months ended March 31,September 30, 2023 was 5.70%6.13% compared to 4.34%4.77% for the corresponding period in 2022.2022, and 5.92% compared to 4.51% for the nine months ended September 30, 2023 and September 30, 2022, respectively.  The cost of total interest-bearing liabilities increased to 2.98%4.02% for the three months ended March 31,September 30, 2023 compared to 1.05% for the corresponding period in 2022, and increased to 3.54% for the nine months ended September 30, 2023 from 0.33%0.61% for the corresponding period in 2022.  Net interest margin for the three months ended March 31,September 30, 2023 increased 26 basis pointswas 2.64% compared to 3.15% from 2.89%3.64% for the corresponding period in 2022, and 2.90% for the nine months ended September 30, 2023 compared to 3.26% for the corresponding period in 2022.

37

 

Beginning in March of 2022, the Federal Reserve Bank increased their targeted federal funds rate from 0 – 0.25% to its current range as of 4.75September 30, 2023 of 5.255.00%5.50%. 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.

 

The following table shows,tables show, for the three and nine months ended March 31,September 30, 2023 and March 31,September 30, 2022, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying table reflectstables reflect changes in our net interest margin as a result ofresulting from changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result ofresulting from 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. BothThe 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 March 31,

(Dollar Amounts In Thousands)

 

  

2023

  

2022

 
      

Interest

  

Average

      

Interest

  

Average

 
  

Average

  

Earned /

  

Yield /

  

Average

  

Earned /

  

Yield /

 
  

Balance

  

Paid

  

Rate

  

Balance

  

Paid

  

Rate

 

Assets:

                        

Interest-earning assets:

                        

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

                        

Taxable

 $11,632,439  $163,576   5.70

%

 $9,621,484  $102,891   4.34

%

Tax-exempt (3)

  18,978   157   3.36   25,195   254   4.09 

Total loans, net of unearned income

  11,651,417   163,733   5.70   9,646,679   103,145   4.34 

Mortgage loans held for sale

  1,522   24   6.40   927   4   1.75 

Investment securities:

                        

Taxable

  1,724,523   10,939   2.54   1,518,572   8,222   2.17 

Tax-exempt (3)

  3,781   23   2.43   8,812   51   2.32 

Total debt securities (4)

  1,728,304   10,962   2.54   1,527,384   8,273   2.17 

Federal funds sold

  50,526   614   4.93   16,639   13   0.32 

Restricted equity securities

  9,919   188   7.69   7,371   68   4 

Interest-bearing balances with banks

  510,021   5,873   4.67   3,637,882   1,804   0.20 

Total interest-earning assets

 $13,951,709  $181,394   5.27

%

 $14,836,882  $113,307   3.10

%

Non-interest-earning assets:

                        

Cash and due from banks

  106,448           74,534         

Net premises and equipment

  60,617           61,209         

Allowance for credit losses, accrued interest and other assets

  279,775           313,560         

Total assets

 $14,398,549          $15,286,185         
                         

Liabilities and stockholders' equity:

                        

Interest-bearing liabilities:

                        

Interest-bearing demand deposits

 $1,675,355  $5,151   1.25

%

 $1,594,645  $778   0.20

%

Savings deposits

  134,671   312   0.94   135,545   59   0.18 

Money market accounts

  5,756,642   44,978   3.17   4,985,224   3,204   0.26 

Time deposits

  850,639   5,272   2.51   792,930   1,803   0.92 

Total interest-bearing deposits

  8,417,307   55,713   2.68   7,508,344   5,844   0.32 

Federal funds purchased

  1,389,217   16,003   4.67   1,620,012   932   0.23 

Other borrowings

  114,726   1,305   4.61   64,708   690   4.32 

Total interest-bearing liabilities

 $9,921,250  $73,021   2.98

%

 $9,193,064  $7,466   0.33

%

Non-interest-bearing liabilities:

                        

Non-interest-bearing demand deposits

  3,086,774           4,870,701         

Other liabilities

  72,121           59,619         

Stockholders' equity

  1,358,587           1,156,186         

Accumulated other comprehensive (loss) income

  (40,183)          6,615         

Total liabilities and stockholders' equity

 $14,398,549          $15,286,185         

Net interest income

     $108,373          $105,841     

Net interest spread

          2.29

%

          2.77

%

Net interest margin

          3.15

%

          2.89

%

38

Average 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)

 
                         
  

2023

  

2022

 
      

Interest

  

Average

      

Interest

  

Average

 
  

Average

  

Earned /

  

Yield /

  

Average

  

Earned /

  

Yield /

 
  

Balance

  

Paid

  

Rate

  

Balance

  

Paid

  

Rate

 

Assets:

                        

Interest-earning assets:

                        

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

                        

Taxable

 $11,545,003  $178,485   6.13

%

 $10,900,105  $131,187   4.77

%

Tax-exempt (3)

  18,023   214   4.71   19,852   207   4.14 

Total loans, net of unearned income

  11,563,026   178,699   6.13   10,919,957   131,394   4.77 

Mortgage loans held for sale

  5,476   92   6.67   2,906   20   2.73 

Investment securities:

                        

Taxable

  2,029,995   15,568   3.07   1,797,560   11,089   2.47 

Tax-exempt (3)

  2,408   15   2.49   5,863   35   2.39 

Total investment securities (4)

  2,032,403   15,583   3.07   1,803,423   11,124   2.47 

Federal funds sold

  74,424   985   5.25   102,028   632   2.46 

Restricted equity securities

  8,471   126   5.90   7,724   71   3.65 

Interest-bearing balances with banks

  1,293,243   17,759   5.45   945,142   6,102   2.56 

Total interest-earning assets

 $14,977,043  $213,244   5.65  $13,781,180  $149,343   4.30 

Non-interest-earning assets:

                        

Cash and due from banks

  111,566           256,607         

Net fixed assets and equipment

  60,121           60,155         

Allowance for credit losses, accrued

interest and other assets

  283,357           294,006         

Total assets

 $15,432,087          $14,391,948         
                         

Liabilities and stockholders' equity:

                     

Interest-bearing liabilities:

                        

Interest-bearing demand deposits

 $2,153,973  $14,767   2.72

%

 $1,722,926  $1,235   0.28

%

Savings deposits

  112,814   459   1.61   144,368   75   0.21 

Money market accounts

  6,538,426   69,947   4.24   4,444,583   9,982   0.89 

Time deposits

  1,093,388   10,728   3.89   809,057   2,363   1.16 

Total interest-bearing deposits

  9,898,601   95,901   3.84   7,120,934   13,655   0.76 

Federal funds purchased

  1,237,721   16,926   5.43   1,493,444   8,536   2.27 

Other borrowings

  64,734   690   4.23   65,406   690   4.19 

Total interest-bearing liabilities

 $11,201,056  $113,517   4.02

%

 $8,679,784  $22,881   1.05

%

Non-interest-bearing liabilities:

                        

Non-interest-bearing demand

deposits

  2,778,858           4,410,318         

Other liabilities

  52,797           62,093         

Stockholders' equity

  1,457,893           1,263,870         

Accumulated other comprehensive loss

  (58,517)          (24,117)        

Total liabilities and

stockholders' equity

 $15,432,087          $14,391,948         

Net interest income

     $99,727          $126,462     

Net interest spread

          1.63

%

          3.25

%

Net interest margin

          2.64

%

          3.64

%

 

(1)

Non-accrual loans are included in average loan balances in all periods. Loan fees of $3,630$2,996 and $7,686$3,849 are included in interest income in the firstthird quarter of 2023 and 2022, respectively. Loan fees include accretion of PPP loan fees.

(2)

Amortization of acquired loan premiums of $49 and $21$38 is included in interest income in 2023 and 2022, respectively.

(3)

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

(4)

Unrealized losses of $(83,815) and $(36,688) are excluded from the yield calculation in the third quarter of 2023 and 2022, respectively.

 

3439

 

  

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 

35

  

For the Three Months Ended September 30,

 
  

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

 $8,142  $39,156  $47,298 

Tax-exempt

  (20)  27   7 

Total loans, net of unearned income

  8,122   39,183   47,305 

Mortgages held for sale

  28   44   72 

Debt securities:

            

Taxable

  1,555   2,924   4,479 

Tax-exempt

  (22)  2   (20)

Total debt securities

  1,533   2,926   4,459 

Federal funds sold

  (208)  561   353 

Restricted equity securities

  11   44   55 

Interest-bearing balances with banks

  2,871   8,786   11,657 

Total interest-earning assets

 $12,357  $51,544  $63,901 
             

Interest-bearing liabilities:

            

Interest-bearing demand deposits

 $384  $13,148  $13,532 

Savings

  (19)  403   384 

Money market accounts

  6,672   53,293   59,965 

Time deposits

  1,084   7,281   8,365 

Total interest-bearing deposits

  8,121   74,125   82,246 

Federal funds purchased

  (1,685)  10,075   8,390 

Other borrowed funds

  (7)  7   - 

Total interest-bearing liabilities

  6,429   84,207   90,636 

Increase in net interest income

 $5,928  $(32,663) $(26,735)

 

Our growth in loans continues to drive favorable volume component change and overall change. The rate component was unfavorable as loan yields increased 136 basis points and average rates paid on interest-bearing liabilities increased 265308 basis points.

40

Average 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)

 
                         
  

2023

  

2022

 
      

Interest

          

Interest

     
  

Average

  

Earned /

  

Average

  

Average

  

Earned /

  

Average

 
  

Balance

  

Paid

  

Yield / Rate

  

Balance

  

Paid

  

Yield / Rate

 

Assets:

                        

Interest-earning assets:

                        

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

                        

Taxable

 $11,585,830  $513,534   5.93

%

 $10,233,704  $345,165   4.51

%

Tax-exempt (3)

  18,434   611   4.43   22,868   717   4.19 

Total loans, net of unearned income

  11,604,264   514,145   5.92   10,256,572   345,882   4.51 

Mortgage loans held for sale

  4,019   180   5.99   1,442   29   2.69 

Investment securities:

                        

Taxable

  1,838,423   38,035   2.77   1,698,208   29,828   2.35 

Tax-exempt (3)

  3,045   64   2.81   7,263   136   2.50 

Total debt securities (4)

  1,841,468   38,099   2.77   1,705,471   29,964   2.35 

Federal funds sold

  47,040   1,826   5.19   50,102   738   1.97 

Restricted equity securities

  9,070   447   7   7,608   211   4 

Interest-bearing balances with banks

  757,722   29,621   5   2,295,282   12,389   3.63 

Total interest-earning assets

 $14,263,583  $584,318   5.48

%

 $14,316,477  $389,213   3.63

%

Non-interest-earning assets:

                        

Cash and due from banks

  106,285           179,378         

Net fixed assets and equipment

  60,411           60,675         

Allowance for credit losses, accrued

interest and other assets

  280,829           301,675         

Total assets

 $14,711,108          $14,858,205         
                         

Liabilities and stockholders' equity:

                        

Interest-bearing liabilities:

                        

Interest-bearing demand deposits

 $1,821,205  $26,771   1.97

%

 $1,672,861  $2,903   0.23

%

Savings deposits

  123,098   1,192   1.29   138,160   194   0.19 

Money market accounts

  6,091,766   171,176   3.76   4,680,296   17,017   0.49 

Time deposits

  976,759   24,446   3.35   789,463   5,811   0.98 

Total interest-bearing deposits

  9,012,828   223,585   3.32   7,280,780   25,925   0.48 

Federal funds purchased

  1,272,285   48,199   5.07   1,554,283   12,539   1.08 

Other borrowings

  93,304   3,150   4.51   65,406   2,070   4.23 

Total interest-bearing liabilities

 $10,378,417  $274,934   3.54

%

 $8,900,469  $40,534   0.61

%

Non-interest-bearing liabilities:

                        

Non-interest-bearing demand

deposits

  2,913,244           4,700,160         

Other liabilities

  62,590           59,362         

Stockholders' equity

  1,405,702           1,209,209         

Accumulated other comprehensive loss

  (48,845)          (10,995)        

Total liabilities and

stockholders' equity

 $14,711,108          $14,858,205         

Net interest income

     $309,384          $348,679     

Net interest spread

          1.94

%

          3.02

%

Net interest margin

          2.90

%

          3.26

%

(1)

Non-accrual loans are included in average loan balances in all periods. Loan fees of $9,577 and $15,975, are included in interest income in 2023 and 2022, respectively. Loan fees include accretion of PPP loan fees.

(2)

Amortization of acquired loan premiums of $148 and $108 is included in interest income in 2023 and 2022, respectively.

(3)

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

(4)

Unrealized losses of $(71,105) and $(14,920) are excluded from the yield calculation in 2023 and 2022, respectively.

41

  

For the Nine Months Ended September 30,

 
  

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

 $49,847  $118,522  $168,369 

Tax-exempt

  (145)  39   (106)

Total loans, net of unearned income

  49,702   118,561   168,263 

Mortgages held for sale

  89   62   151 

Debt securities:

            

Taxable

  2,602   5,605   8,207 

Tax-exempt

  (87)  15   (72)

Total debt securities

  2,515   5,620   8,135 

Federal funds sold

  (48)  1,136   1,088 

Restricted equity securities

  38   198   236 

Interest-bearing balances with banks

  (13,320)  30,552   17,232 

Total interest-earning assets

 $38,976  $156,129  $195,105 
             

Interest-bearing liabilities:

            

Interest-bearing demand deposits

 $280  $23,588  $23,868 

Savings

  (23)  1,021   998 

Money market accounts

  6,613   147,546   154,159 

Time deposits

  1,677   16,958   18,635 

Total interest-bearing deposits

  8,547   189,113   197,660 

Federal funds purchased

  (2,668)  38,328   35,660 

Other borrowed funds

  934   146   1,080 

Total interest-bearing liabilities

  6,813   227,587   234,400 

Increase in net interest income

 $32,163  $(71,458) $(39,295)

The increase in our loan portfolio is positively impacting the volume component. However, the rate component has been negatively impacted by an increase of 293 basis points while loan yields increased only 136 basis points. An increase in the average equity contributed to a favorable volume component, but wasrates paid on interest-bearing liabilities, partially offset by a decreaserise in average non-interest-bearing deposits.loan yields of 141 basis points.

 

Provision for Credit Losses

 

The provision for credit losses was $4.2$4.3 million for the three months ended March 31,September 30, 2023, a decrease of $1.2$11.3 million from $5.4$15.6 million for the three months ended March 31,September 30, 2022, and was $15.1 million for the nine months ended September 30, 2023, a $15.3 million decrease compared to $30.5 million for the nine months ended September 30, 2022. Due to the rising interest rate climate, management anticipates a slower pace in loan growth compared to the historical average. The decrease in provision expense is primarily attributable to slower forecasted growth of the result of improvement in the economic projections used to inform loss driver forecastsbudgeted loan portfolio within the ACL model. The ACL for March 31,September 30, 2023 and December 31, 2022 and March 31, 2022 totaled $149.0 million, $146.0was $152.2 million and $119.0$146.3 million, or 1.28%,1.31% and 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 quarterthree months ended September 30, 2023, compared to annualized net credit recoveries to quarter-to-date average loans of 0.02% for the same period in 2022. Annualized net credit charge-offs to year-to-date average loans were 0.06% for the nine months ended September 30, 2023, compared to 0.04% for the corresponding period in 2022. Nonperforming loans were flatincreased to $21.5 million, or 0.19% of total loans, at September 30, 2023 from $17.8 million, or 0.15% of total loans, at March 31, 2023 from the same amounts at December 31, 2022, and decreased compared to $19.4were $15.5 million, or 0.20%0.15% of total loans, at March 31,September 30, 2022. See the section captioned “Asset Quality” located elsewhere in this item for additional discussion related to provision for credit losses.

 

Noninterest Income

 

Noninterest income totaled $6.3 million for the three months ended March 31, 2023, a decrease of $1.6 million compared to the corresponding period in 2022. Service charges on deposit accounts decreased $208,000, or 9.71%, to $1.9 million for the three months ended March 31, 2023, compared to $2.1 million in the corresponding period in 2022. Mortgage banking revenue decreased $84,000, or 15.97%, to $442,000 for the three months ended March 31, 2023, compared to $526,000 in the corresponding period in 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 28.79%, to $1.7 million during the three months ended March 31, 2023, compared to $2.4 million during the three months ended March 31, 2022. The number of credit card accounts increased approximately 8.2% and the aggregate amount of spend on all credit card accounts increased 14.7% during the three months ended March 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 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 $39.7 million for the three months ended March 31, 2023, an increase of $2.4 million, or 6.6%, compared to $37.2 million for the same period in 2022. Salary and benefit expense increased $765,000, or 4.2%, to $19.1 million for the three months ended March 31, 2023, from $18.3 million for the same period in 2022. Total FTE employees increased from 511 as of March 31, 2022, to 573 as of March 31, 2023. Equipment and occupancy expense increased $502,000, or 17.1%, to $3.4 million 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 Asheville, 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 period in 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,

         
  

2023

  

2022

  

$ change

  

% change

  

2023

  

2022

  

$ change

  

% change

 

Noninterest income:

                                

Service charges on deposit accounts

 $2,163  $1,892  $271   14.3

%

 $6,239  $6,167  $72   1.2

%

Mortgage banking

  825   784   41   5.2

%

  1,963   1,924   39   2.0

%

Credit card income

  2,532   2,612   (80)  (3.1

 

)%

 

  6,627   7,656   (1,029)  (13.4

 

)%

 

Securities losses

  -   -   -   -

%

  -   (6,168)  6,168   (100.0

 

)%

 

Increase in cash surrender value life insurance

  1,818   1,637   181   11.1

%

  5,935   6,978   (1,043)  (14.9

 

)%

 

Other operating income

  797   2,014   (1,217)  (60.4

 

)%

 

  2,274   9,836   (7,562)  (76.9

 

)%

 

Total non-interest income

 $8,135  $8,939  $(804)  (9.0

 

)%

 

 $23,038  $26,393  $(3,355)  (12.7

 

)%

 

 

3642

 

ChangesNoninterest income totaled $8.1 million for the three months ended September 30, 2023, a decrease of $804,000 compared to the corresponding period in our non-interest expenses, including percentage changes, are detailed2022, and totaled $23.0 million for the nine months ended September 30, 2023, a decrease of $3.4 million, or 12.7%, compared to the corresponding period in 2022. Mortgage banking income increased $41,000, or 5.2%, to $825,000 for the following table:three months ended September 30, 2023 compared to $784,000 for the same period in 2022, and increased $39,000, or 2.0%, to $2.0 million for the nine months ended September 30, 2023 compared to $1.9 million for the same period in 2022. Net credit card income decreased $80,000 to $2.5 million for the three months ended September 30, 2023 compared to the same period in 2022, and decreased $1.0 million to $6.6 million for the nine months ended September 30, 2023 compared to the same period in 2022. Bank-owned life insurance (“BOLI”) income increased $181,000, or 11.1%, to $1.8 million during the three months ended September 30, 2023, compared to the corresponding period in 2022, and decreased $1.0 million, or 14.9%, to $5.9 million for the nine months ended September 30, 2023 compared to $7.0 million for the same period in 2022. Other income decreased $1.2 million, or 60.4%, to $797,000 for the three months ended September 30, 2023 compared to $2.0 million for the same period in 2022, and decreased $7.6 million, or 76.9%, to $2.3 million for the nine months ended September 30, 2023 compared to $9.8 million for the same period in 2022. We recognized income on an interest rate cap of $48,000 for both the third quarter and year-to-date 2023 compared to income of $1.3 million during the third quarter of 2022 and $6.5 million year-to-date 2022. The interest rate cap terminated during the second quarter of 2023. Merchant service revenue increased $125,000, or 26.7%, to $594,000 during the three months ended September 30, 2023, compared to the corresponding period in 2022, and increased $354,000, or 27.8%, to $1.6 million for the nine months ended September 30, 2023 compared to $1.3 million for the same period in 2022.

 

  

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

%

Noninterest Expense

  

Three Months Ended September 30,

          

Nine Months Ended September 30,

         
  

2023

  

2022

  

$ change

  

% change

  

2023

  

2022

  

$ change

  

% change

 

Noninterest expense:

                                

Salaries and employee benefits

 $20,080  $19,687  $393   2.0

%

 $57,941  $58,722  $(781)  (1.3

 

)%

 

Equipment and occupancy expense

  3,579   3,140   439   14.0

%

  10,435   9,056   1,379   15.2

%

Third party processing and other services

  6,549   7,213   (664)  (9.2

 

)%

 

  20,031   19,163   868   4.5

%

Professional services

  1,265   1,036   229   22.1

%

  4,499   3,355   1,144   34.1

%

FDIC and other regulatory assessments

  2,346   975   1,371   140.6

%

  6,105   3,254   2,851   87.6

%

OREO expense

  18   21   (3)  (14.3

 

)%

 

  30   56   (26)  (46.4

 

)%

 

Other operating expense

  7,826   10,613   (2,787)  (26.3

 

)%

 

  20,752   26,118   (5,366)  (20.5

 

)%

 

Total non-interest expense

 $41,663  $42,685  $(1,022)  (2.4

 

)%

 

 $119,793  $119,724  $69   0.1

%

Noninterest expense totaled $41.7 million for the three months ended September 30, 2023, a decrease of $1.0 million, or 2.4%, compared to $42.7 million for the same period in 2022, and totaled $119.8 million for the nine months ended September 30, 2023, an increase of $69,000, or 0.1%, compared to $119.7 million for the same period in 2022.

Details of expense are as follows:

Salary and benefit expense increased $393,000, or 2.0%, to $20.1 million for the three months ended September 30, 2023, from $19.7 million for the same period in 2022, and decreased $781,000, or 1.3%, to $57.9 million for the nine months ended September 30, 2023 from $58.7 million for the same period in 2022. The number of FTE employees increased from 558 as of September 30, 2022, to 568 as of September 30, 2023.

Equipment and occupancy expense increased $439,000, or 14.0%, to $3.6 million for the three months ended September 30, 2023 from $3.1 million for the corresponding period in 2022, and increased $1.4 million, or 15.2%, to $10.4 million for the nine months ended September 30, 2023 compared to $9.1 million for the corresponding period in 2022. The year-over-year increase is primarily attributed to new leases that commenced after the third quarter of 2022.

Third party processing and other services decreased $664,000, or 9.2%, to $6.5 million for the three months ended September 30, 2023, from $7.2 million for the corresponding period in 2022, and increased $868,000, or 4.5%, to $20.0 million for the nine months ended September 30, 2023 compared to $19.2 million for the corresponding period in 2022. Third party processing and other services also includes Federal Reserve Bank charges related to correspondent bank settlement activities.

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FDIC and other regulatory assessments increased $1.4 million, or 140.6%, to $2.3 million for the three months ended September 30, 2023 from $975,000 for the corresponding period in 2022, and increased $2.9 million, or 87.6%, to $6.1 million for the nine months ended September 30, 2023 compared to $3.3 million for the corresponding period in 2022. The FDIC increased the assessment rate by two basis points beginning in the first quarter of 2023.

OREO expense decreased $3,000, or 14.3%, to $18,000 for the three months ended September 30, 2023 from $21,000 for the corresponding period in 2022, and decreased $26,000, or 46.4%, to $30,000 from $56,000 for the nine months ended September 30, 2023 compared to the corresponding period in 2022.

Other operating expenses decreased $2.8 million, or 26.3%, to $7.8 million for the three months ended September 30, 2023, from $10.6 million for the corresponding period in 2022, and decreased $5.4 million, or 20.5%, to $20.8 million from $26.1 million for the nine months ended September 30, 2023 compared to the corresponding period in 2022. During the third quarter of 2022 we reached a preliminary settlement on a lawsuit and wrote down the value of a private investment resulting in charges of $3.1 million, or $2.4 million net of income tax.

 

Income Tax Expense

 

Income tax expense was $12.8$8.5 million for the three months ended March 31,September 30, 2023 versus $13.5compared to $13.0 million for the same period in 2022, and was $32.6 million for the nine months ended September 30, 2023, compared to $40.9 million for the same period in 2022. Our effective tax rate for the three and nine months ended March 31,September 30, 2023 was 18.07%13.81% and 16.51%, respectively, compared to 18.96%16.92% and 18.21% for the corresponding periodperiods in 2022.2022, respectively. We recognized $3.7 million and $11.1 million in federal new markets tax credits during the three and nine months ended March 31,September 30, 2023, of $3.9 million,respectively, compared to $3.3$3.1 million forand $9.4 million during the corresponding periodsame periods in 2022.2022, respectively. We recognized excess tax benefits as aan income tax credit to our income tax expense from the exercise and vesting of stock options and vesting of restricted stock during the three and nine months ended September 30, 2023 of $1.1$0 and $1.2 million, in the first quarter of 2023,respectively, compared to $571,000 in$370,000 and $1.3 million during the first quarter of 2022.three and nine months ended September 30, 2022, respectively. 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. GAAPgenerally accepted accounting principles and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles,GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. In management’s opinion, certain accounting policies have a more significant impact than others on the Company’s financial reporting. The ACL, valuation of impaired loansallowance for credit losses and foreclosed real estate, deferredincome taxes and fair value of financial instruments are particularly subject to change.significant for the Company’s financial reporting. Information concerning our accounting policies and critical accounting estimates 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. There were no changes to the accounting policies for the allowance for credit losses or income taxes during the three and nine months ended September 30, 2023.

 

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 inintrinsic to the balance sheet, due toinfluenced by variety factors such as differences in timing among the mismatch betweenmaturity or repricing of assets, liabilities and off-balance sheet instruments; differences in the maturitiesamounts of rate-sensitive assets, liabilities and rate-sensitive liabilities.off balance sheet instruments that are maturing or repricing at the same time; differences in the amounts by which short-term and long term market interest rates change  (e.g., yield curve shifts); and the impact of changes in the maturity of various assets, liabilities or off-balance sheet instruments as interest rates change. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short-term rates may be rising while longer-term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates.

 

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

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

The asset-liability committee thoroughly analyzes the maturities of Marchrate-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 includes guidelines for maximum sensitivities for different benchmark interest rate simulations. For example, management should maintain the gap such that net interest margins will not change more than 9% if interest rates change 100 basis points or more than 13% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2023,2022, and there have been no significantmaterial changes to our sensitivity to changes in interest rates since December 31, 2022. We could experience an increase2022, as disclosed in the cost of funding our balance 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 ratesAnnual Report on 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.Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

CEO and CFO Certification.

 

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

 

Evaluation of Disclosure Controls and Procedures.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 March 31,September 30, 2023. Based upon the Evaluation, our CEO and CFO have concluded that, as of March 31,September 30, 2023, our disclosure controls and procedures are effective to ensure that material information relating to ServisFirst Bancshares, Inc.the Company. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

Changes in Internal Control Over Financial Reporting

 

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

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time we may be a party to various legal proceedings arising in the ordinary course of business. Management does not believe the Company or the Bank is currently a party to any material legal proceedings except as disclosed in Item 3, “Legal Proceedings”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and there has been no material change in any matter described therein.proceedings.

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

 

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

 

None.

Our Board of Directors declared the following dividends during the third quarter of fiscal year 2023:

Declaration Date

Record Date

Payment Date

 

Dividend per Share

  

Amount

(in thousands)

 

September 18, 2023

October 2, 2023

October 10, 2023

 $0.28  $15,239 

Refer to the “Capital Adequacy” section within Management’s Discussion and Analysis in Part I, Item 2 for information regarding the Company’s dividend policy and restrictions on payment of dividends.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.(a)         The Company did not implement any material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors during the quarter ended September 30, 2023.

(b)         None of the Company’s directors or officers adopted or terminated any Rule 10b5-1 or non-10b5-1 trading arrangements during the quarter ended September 30, 2023.

 

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.INS  Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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SIGNATURES

 

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

 

 SERVISFIRST BANCSHARES, INC.
   
Date: May 2,November 3, 2023   By/s/ Thomas A. Broughton III
  Thomas A. Broughton III
  President and Chief Executive Officer

Date: May 2,November 3, 2023   By/s/ William M. Foshee
  William M. Foshee
  Chief Financial Officer

 

 

 

 

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