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Section 1: 10-Q (FORM 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

 

FORM 10-Q

 

 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

 

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 (I.R.S. Employer
Incorporation or Organization) 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)

 

Title of each class Name of exchange on which registered
Common stock, par value $.001 per share The NASDAQ Stock Market LLC

 

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

None

(Title of Class)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   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 (§232.405 of this chapter) 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 Act

 

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

 

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

 

Class Outstanding as of October 25, 2018
Common stock, $.001 par value 53,292,233

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
Item 1.Financial Statements3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations27
Item 3.Quantitative and Qualitative Disclosures about Market Risk42
Item 4.Controls and Procedures43
     
PART II. OTHER INFORMATION 43
Item 1.Legal Proceedings43
Item 1A.Risk Factors43
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds44
Item 3.Defaults Upon Senior Securities44
Item 4.Mine Safety Disclosures44
Item 5.Other Information44
Item 6.Exhibits44

 

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO

EX-31.02 SECTION 302 CERTIFICATION OF THE CFO

EX-32.01 SECTION 906 CERTIFICATION OF THE CEO

EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

 

 

 

 

 

 

 

 

 

2

 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   September 30, 2018  December 31, 2017
   (Unaudited)  (1)
ASSETS          
Cash and due from banks  $77,692   $86,213 
Interest-bearing balances due from depository institutions   59,096    151,849 
Federal funds sold   229,033    239,524 
Cash and cash equivalents   365,821    477,586 
Available for sale debt securities, at fair value   578,021    538,080 
Held to maturity debt securities (fair value of $250 at September 30, 2018 and December 31, 2017)   250    250 
Equity securities   889    1,034 
Mortgage loans held for sale   5,277    4,459 
Loans   6,363,531    5,851,261 
Less allowance for loan losses   (66,879)   (59,406)
Loans, net   6,296,652    5,791,855 
Premises and equipment, net   57,882    58,900 
Accrued interest and dividends receivable   24,755    20,661 
Deferred tax assets   12,268    13,022 
Other real estate owned and repossessed assets   5,714    6,701 
Bank owned life insurance contracts   129,869    127,519 
Goodwill and other identifiable intangible assets   14,517    14,719 
Other assets   25,918    27,598 
Total assets  $7,517,833   $7,082,384 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Noninterest-bearing  $1,504,447   $1,440,326 
Interest-bearing   5,000,904    4,651,348 
Total deposits   6,505,351    6,091,674 
Federal funds purchased   246,094    301,797 
Other borrowings   64,657    64,832 
Accrued interest payable   8,562    4,971 
Other liabilities   11,659    11,506 
Total liabilities   6,836,323    6,474,780 
Stockholders' equity:          
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at September 30, 2018 and December 31, 2017   -    - 
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,197,807 shares issued and outstanding at September 30, 2018, and 52,992,586 shares issued and outstanding at December 31, 2017   53    53 
Additional paid-in capital   218,062    217,693 
Retained earnings   472,681    389,554 
Accumulated other comprehensive loss   (9,788)   (198)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.   681,008    607,102 
Noncontrolling interest   502    502 
Total stockholders' equity   681,510    607,604 
Total liabilities and stockholders' equity  $7,517,833   $7,082,384 

 

(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  Nine Months Ended
   September 30,  September 30,
   2018  2017  2018  2017
Interest income:                    
Interest and fees on loans  $78,991   $63,857   $222,285   $179,325 
Taxable securities   3,276    2,288    9,148    6,649 
Nontaxable securities   583    729    1,862    2,246 
Federal funds sold   892    379    2,137    1,185 
Other interest and dividends   316    388    1,031    1,291 
Total interest income   84,058    67,641    236,463    190,696 
Interest expense:                    
Deposits   15,210    7,574    36,545    19,877 
Borrowed funds   1,985    1,671    6,097    4,804 
Total interest expense   17,195    9,245    42,642    24,681 
Net interest income   66,863    58,396    193,821    166,015 
Provision for loan losses   6,624    4,803    14,884    14,170 
Net interest income after provision for loan losses   60,239    53,593    178,937    151,845 
Noninterest income:                    
Service charges on deposit accounts   1,595    1,467    4,833    4,203 
Mortgage banking   789    978    2,096    2,941 
Credit card income   1,838    1,149    5,172    3,517 
Securities gains   186    -    190    - 
Increase in cash surrender value life insurance   787    825    2,350    2,334 
Other operating income   396    371    1,278    1,146 
Total noninterest income   5,591    4,790    15,919    14,141 
Noninterest expenses:                    
Salaries and employee benefits   13,070    12,428    39,464    36,172 
Equipment and occupancy expense   2,193    1,947    6,260    6,452 
Professional services   853    805    2,582    2,384 
FDIC and other regulatory assessments   675    810    2,967    2,888 
OREO expense   289    31    765    163 
Other operating expenses   6,070    5,476    18,634    16,580 
Total noninterest expenses   23,150    21,497    70,672    64,639 
Income before income taxes   42,680    36,886    124,184    101,347 
Provision for income taxes   8,120    11,627    23,481    29,405 
Net income   34,560    25,259    100,703    71,942 
Preferred stock dividends   -    -    31    31 
Net income available to common stockholders  $34,560   $25,259   $100,672   $71,911 
                     
Basic earnings per common share  $0.65   $0.48   $1.89   $1.36 
Diluted earnings per common share  $0.64   $0.47   $1.86   $1.33 

 

See Notes to Consolidated Financial Statements.

 

4

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2018  2017  2018  2017
Net income  $34,560   $25,259   $100,703   $71,942 
Other comprehensive (loss) income, net of tax:                    
Unrealized holding (losses) gains arising during period from securities available for sale, net of tax of $(653) and $(2,589) for the three and nine months ended September 30, 2018, respectively, and $165 and $896 for the three and nine months ended September 30, 2017, respectively   (2,463)   305    (9,740)   1,672 
Reclassification adjustment for gains on sale of securities, net of tax of $39 and $40 for the three and nine months ended September 30, 2018, respectively   147    -    150    - 
Other comprehensive (loss) income, net of tax   (2,316)   305    (9,590)   1,672 
Comprehensive income  $32,244   $25,564   $91,113   $73,614 

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

5

 

 

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)

 

   Preferred
Stock
   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Income
   Noncontrolling
interest
   Total
Stockholders'
Equity
 
Balance, December 31, 2016  $-   $53   $215,932   $307,151   $(624)  $377   $522,889 
Common dividends paid, $0.10 per share   -    -    -    (5,286)   -    -    (5,286)
Common dividends declared, $0.05 per share   -    -    -    (2,649)   -    -    (2,649)
Preferred dividends paid   -    -    -    (31)   -    -    (31)
Issue 328,214 shares of common stock upon exercise of stock options   -    -    1,784    -    -    -    1,784 
30,786 shares of common stock withheld in net settlement upon exercise of stock options   -    -    (1,149)   -    -    -    (1,149)
Issue 125 shares of REIT preferred stock   -    -    -    -    -    125    125 
Stock-based compensation expense   -    -    916    -    -    -    916 
Other comprehensive income, net of tax   -    -    -    -    1,672    -    1,672 
Net income   -    -    -    71,942    -    -    71,942 
Balance, September 30, 2017  $-   $53   $217,483   $371,127   $1,048   $502   $590,213 
                                    
Balance, December 31, 2017  $-   $53   $217,693   $389,554   $(198)  $502   $607,604 
Common dividends paid, $0.22 per share   -    -    -    (11,694)   -    -    (11,694)
Common dividends declared, $0.11 per share   -    -    -    (5,851)   -    -    (5,851)
Preferred dividends paid   -    -    -    (31)   -    -    (31)
Issue 191,371 shares of common stock upon exercise of stock options   -    -    1,325    -    -    -    1,325 
39,965 shares of common stock withheld in net settlement upon exercise of stock options   -    -    (1,640)   -    -    -    (1,640)
Stock-based compensation expense   -    -    684    -    -    -    684 
Other comprehensive loss, net of tax   -    -    -    -    (9,590)   -    (9,590)
Net income   -    -    -    100,703    -    -    100,703 
Balance, September 30, 2018  $-   $53   $218,062   $472,681   $(9,788)  $502   $681,510 

 

See Notes to Consolidated Financial Statements.

 

6

 

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

   Nine Months Ended September 30,
   2018  2017
OPERATING ACTIVITIES          
Net income  $100,703   $71,942 
Adjustments to reconcile net income to net cash provided by          
Deferred tax expense (benefit)   754    (3,099)
Provision for loan losses   14,884    14,170 
Depreciation   2,548    2,281 
Accretion on acquired loans   (147)   (374)
Amortization of core deposit intangible   202    209 
Net amortization of debt securities available for sale   2,268    2,874 
Increase in accrued interest and dividends receivable   (4,094)   (4,533)
Stock-based compensation expense   684    916 
Increase (decrease) in accrued interest payable   3,591    (48)
Proceeds from sale of mortgage loans held for sale   81,319    105,940 
Originations of mortgage loans held for sale   (80,041)   (103,295)
Gain on sale of debt securities available for sale   (15)   - 
Gain on sale of equity securities   (175)   - 
Gain on sale of mortgage loans held for sale   (2,096)   (2,941)
Net loss (gain) on sale of other real estate owned and repossessed assets   3    (33)
Write down of other real estate owned and repossessed assets   488    5 
Operating losses of tax credit partnerships   128    42 
Increase in cash surrender value of life insurance contracts   (2,350)   (2,334)
Net change in other assets, liabilities, and other operating activities   (2,608)   (551)
Net cash provided by operating activities   116,046    81,171 
INVESTMENT ACTIVITIES          
Purchase of debt securities available for sale   (122,821)   (77,567)
Proceeds from maturities, calls and paydowns of debt securities available for sale   63,803    65,734 
Proceeds from sale of debt securities available for sale   5,736    - 
Purchase of debt securities held to maturity   -    (29,782)
Proceeds from maturities, calls and paydowns of debt securities held to maturity   -    4,947 
Purchase of equity securities   -    (10)
Proceeds from sale of equity securities   305    - 
Increase in loans   (520,610)   (724,626)
Purchase of premises and equipment   (1,530)   (17,071)
Purchase of bank-owned life insurance contracts   -    (10,000)
Proceeds from sale of other real estate owned and repossessed assets   1,572    1,529 
Net cash used in investing activities   (573,545)   (786,846)
FINANCING ACTIVITIES          
Net increase in non-interest-bearing deposits   64,121    124,360 
Net increase in interest-bearing deposits   349,556    252,230 
Net decrease in federal funds purchased   (55,703)   (101,064)
Repayment of Federal Home Loan Bank advances   (200)   (300)
Proceeds from sale of preferred stock, net   -    125 
Proceeds from exercise of stock options   1,325    635 
Taxes paid in net settlement of tax obligation upon exercise of stock options   (1,640)   - 
Dividends paid on common stock   (11,694)   (5,286)
Dividends paid on preferred stock   (31)   (31)
Net cash provided by financing activities   345,734    270,669 
Net decrease in cash and cash equivalents   (111,765)   (435,006)
Cash and cash equivalents at beginning of period   477,586    783,997 
Cash and cash equivalents at end of period  $365,821   $348,991 
SUPPLEMENTAL DISCLOSURE          
Cash paid for:          
Interest  $39,051   $24,729 
Income taxes   20,235    30,651 
Income tax refund   (2)   (492)
NONCASH TRANSACTIONS          
Other real estate acquired in settlement of loans  $1,206   $586 
Internally financed sales of other real estate owned   130    185 
Dividends declared   5,851    2,649 

 

See Notes to Consolidated Financial Statements.

 

7

 

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(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 recurring 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, 2017.

 

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

 

Revenue Recognition

 

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), provides guidance for reporting revenue from the entity’s contracts to provide goods or services to customers. The guidance requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of our revenue-generating transactions are excluded from the scope of ASC 606, including revenue generated from financial instruments, such as securities and loans. Revenue-generating transactions that are within the scope of ASC 606, classified within non-interest income, are described as follows:

 

  Deposit account service charges – represent service fees for monthly activity and maintenance on customer accounts. Attributes can be transaction-based, item-based or time-based. Revenue is recognized when our performance obligation is completed which is generally monthly for maintenance services or when a transaction is processed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

 

  Credit card rewards program membership fees – represent memberships in our credit card rewards program and are paid annually by our cardholders at the time they open an account and on each anniversary. Revenue is recognized ratably over the membership period.

 

Other non-interest income primarily includes income on bank owned life insurance contracts, letter of credit fees and gains on sale of loans held for sale, none of which are within the scope of ASC 606.

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

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

 

NOTE 3 - EARNINGS PER COMMON SHARE

 

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


8

 

 

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2018  2017  2018  2017
   (In Thousands, Except Shares and Per Share Data)
Earnings per common share                    
Weighted average common shares outstanding   53,171,144    52,950,644    53,134,861    52,854,332 
Net income available to common stockholders  $34,560   $25,259   $100,672   $71,911 
Basic earnings per common share  $0.65   $0.48   $1.89   $1.36 
                     
Weighted average common shares outstanding   53,171,144    52,950,644    53,134,861    52,854,332 
Dilutive effects of assumed conversions and exercise of stock options and warrants   1,020,078    1,149,028    1,055,383    1,256,580 
Weighted average common and dilutive potential common shares outstanding   54,191,222    54,099,672    54,190,244    54,110,912 
Net income available to common stockholders  $34,560   $25,259   $100,672   $71,911 
Diluted earnings per common share  $0.64   $0.47   $1.86   $1.33 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2018 and December 31, 2017 are summarized as follows:

 

      Gross  Gross   
   Amortized  Unrealized  Unrealized  Market
   Cost  Gain  Loss  Value
September 30, 2018  (In Thousands)
Securities Available for Sale            
U.S. Treasury and government sponsored agencies  $75,477   $2   $(1,201)  $74,278 
Mortgage-backed securities   308,439    407    (10,022)   298,824 
State and municipal securities   113,613    234    (1,149)   112,698 
Corporate debt   92,916    257    (952)   92,221 
Total   590,445    900    (13,324)   578,021 
Securities Held to Maturity                    
State and municipal securities   250    -    -    250 
Total  $250   $-   $-   $250 
                     
December 31, 2017                    
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $55,567   $38   $(249)  $55,356 
Mortgage-backed securities   278,177    1,006    (2,685)   276,498 
State and municipal securities   134,641    761    (553)   134,849 
Corporate debt   69,996    1,416    (35)   71,377 
Total   538,381    3,221    (3,522)   538,080 
Securities Held to Maturity                    
State and municipal securities   250    -    -    250 
Total  $250   $-   $-   $250 

 

The amortized cost and fair value of debt securities as of September 30, 2018 and December 31, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories along with the other categories of debt securities.

 

   September 30, 2018  December 31, 2017
   Amortized
Cost
  Fair Value  Amortized
Cost
  Fair Value
   (In thousands)
Debt securities available for sale                    
Due within one year  $49,809   $49,722   $22,122   $22,172 
Due from one to five years   213,202    210,472    160,773    160,563 
Due from five to ten years   17,141    17,106    73,362    74,684 
Due after ten years   1,854    1,897    3,947    4,163 
Mortgage-backed securities   308,439    298,824    278,177    276,498 
   $590,445   $578,021   $538,381   $538,080 
Debt securities held to maturity                    
Due from one to five years  $250   $250   $250   $250 
   $250   $250   $250   $250 

 

 

9

 

 

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

 

The following table identifies, as of September 30, 2018 and December 31, 2017, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At September 30, 2018, 197 of the Company’s 758 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2018. Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

 

   Less Than Twelve Months  Twelve Months or More  Total
   Gross     Gross     Gross   
   Unrealized     Unrealized     Unrealized   
   Losses  Fair Value  Losses  Fair Value  Losses  Fair Value
   (In Thousands)
September 30, 2018                  
U.S. Treasury and government sponsored agencies  $(736)  $62,833   $(465)  $11,311   $(1,201)  $74,144 
Mortgage-backed securities   (3,566)   141,107    (6,456)   144,336    (10,022)   285,443 
State and municipal securities   (613)   69,646    (536)   20,506    (1,149)   90,152 
Corporate debt   (952)   65,456    -    -    (952)   65,456 
Total  $(5,867)  $339,042   $(7,457)  $176,153   $(13,324)  $515,195 
                               
December 31, 2017                              
U.S. Treasury and government sponsored agencies  $(151)  $33,401   $(98)  $2,926   $(249)  $36,327 
Mortgage-backed securities   (986)   140,432    (1,699)   75,903    (2,685)   216,335 
State and municipal securities   (450)   66,637    (103)   6,648    (553)   73,285 
Corporate debt   (35)   6,955    -    -    (35)   6,955 
Total  $(1,622)  $247,425   $(1,900)  $85,477   $(3,522)  $332,902 

 

 

 

10

 

 

NOTE 5 – LOANS

 

The following table details the Company’s loans at September 30, 2018 and December 31, 2017:

 

   September 30,  December 31,
   2018  2017
   (Dollars In Thousands)
Commercial, financial and agricultural  $2,478,788   $2,279,366 
Real estate - construction   543,611    580,874 
Real estate - mortgage:          
Owner-occupied commercial   1,430,111    1,328,666 
1-4 family mortgage   610,460    603,063 
Other mortgage   1,236,954    997,079 
Subtotal: Real estate - mortgage   3,277,525    2,928,808 
Consumer   63,607    62,213 
Total Loans   6,363,531    5,851,261 
Less: Allowance for loan losses   (66,879)   (59,406)
Net Loans  $6,296,652   $5,791,855 
           
Commercial, financial and agricultural   38.95%   38.96%
Real estate - construction   8.54%   9.93%
Real estate - mortgage:          
Owner-occupied commercial   22.47%   22.71%
1-4 family mortgage   9.60%   10.30%
Other mortgage   19.44%   17.04%
Subtotal: Real estate - mortgage   51.51%   50.05%
Consumer   1.00%   1.06%
Total Loans   100.00%   100.00%

 

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

 

Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or obligors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
 Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.
 Substandard – loans that exhibit well-defined weakness or weaknesses that currently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.
 Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

 

 

11

 

 

Loans by credit quality indicator as of September 30, 2018 and December 31, 2017 were as follows:

 

      Special         
September 30, 2018  Pass  Mention  Substandard  Doubtful  Total
   (In Thousands)
Commercial, financial and agricultural  $2,413,994   $41,656   $23,138   $-   $2,478,788 
Real estate - construction   536,789    5,400    1,422    -    543,611 
Real estate - mortgage:                         
Owner-occupied commercial   1,396,503    30,101    3,507    -    1,430,111 
1-4 family mortgage   606,509    2,600    1,351    -    610,460 
Other mortgage   1,210,063    20,466    6,425    -    1,236,954 
Total real estate mortgage   3,213,075    53,167    11,283    -    3,277,525 
Consumer   63,555    3    49    -    63,607 
Total  $6,227,413   $100,226   $35,892   $-   $6,363,531 

 

      Special         
December 31, 2017  Pass  Mention  Substandard  Doubtful  Total
   (In Thousands)
Commercial, financial and agricultural  $2,225,084   $27,835   $26,447   $-   $2,279,366 
Real estate - construction   572,657    6,691    1,526    -    580,874 
Real estate - mortgage:                         
Owner-occupied commercial   1,317,113    7,333    4,220    -    1,328,666 
1-4 family mortgage   598,222    1,599    3,242    -    603,063 
Other mortgage   976,348    18,122    2,609    -    997,079 
Total real estate mortgage   2,891,683    27,054    10,071    -    2,928,808 
Consumer   62,083    42    88    -    62,213 
Total  $5,751,507   $61,622   $38,132   $-   $5,851,261 

 

 

12

 

 

Loans by performance status as of September 30, 2018 and December 31, 2017 were as follows:

 

September 30, 2018  Performing  Nonperforming  Total
   (In Thousands)
Commercial, financial and agricultural  $2,469,980   $8,808   $2,478,788 
Real estate - construction   543,611    -    543,611 
Real estate - mortgage:               
Owner-occupied commercial   1,429,958    153    1,430,111 
1-4 family mortgage   609,658    802    610,460 
Other mortgage   1,231,915    5,039    1,236,954 
Total real estate mortgage   3,271,531    5,994    3,277,525 
Consumer   63,542    65    63,607 
Total  $6,348,664   $14,867   $6,363,531 

 

December 31, 2017  Performing  Nonperforming  Total
   (In Thousands)
Commercial, financial and agricultural  $2,269,642   $9,724   $2,279,366 
Real estate - construction   580,874    -    580,874 
Real estate - mortgage:               
Owner-occupied commercial   1,328,110    556    1,328,666 
1-4 family mortgage   602,604    459    603,063 
Other mortgage   997,079    -    997,079 
Total real estate mortgage   2,927,793    1,015    2,928,808 
Consumer   62,127    86    62,213 
Total  $5,840,436   $10,825   $5,851,261 

 

 

13

 

 

Loans by past due status as of September 30, 2018 and December 31, 2017 were as follows:

 

September 30, 2018  Past Due Status (Accruing Loans)         
            Total Past         
   30-59 Days  60-89 Days  90+ Days  Due  Non-Accrual  Current  Total Loans
   (In Thousands)
Commercial, financial and agricultural  $513   $9,147   $309   $9,969   $8,499   $2,460,320   $2,478,788 
Real estate - construction   538    997    -    1,535    -    542,076    543,611 
Real estate - mortgage:                                   
Owner-occupied commercial   375    3,941    -    4,316    153    1,425,642    1,430,111 
1-4 family mortgage   150    970    301    1,421    501    608,538    610,460 
Other mortgage   -    63    5,039    5,102    -    1,231,852    1,236,954 
Total real estate - mortgage   525    4,974    5,340    10,839    654    3,266,032    3,277,525 
Consumer   173    24    65    262    -    63,345    63,607 
Total  $1,749   $15,142   $5,714   $22,605   $9,153   $6,331,773   $6,363,531 

 

December 31, 2017  Past Due Status (Accruing Loans)         
            Total Past         
   30-59 Days  60-89 Days  90+ Days  Due  Non-Accrual  Current  Total Loans
   (In Thousands)
Commercial, financial and agricultural  $1,410   $5,702   $12   $7,124   $9,712   $2,262,530   $2,279,366 
Real estate - construction   56    997    -    1,053    -    579,821    580,874 
Real estate - mortgage:                                   
Owner-occupied commercial   -    3,664    -    3,664    556    1,324,446    1,328,666 
1-4 family mortgage   430    850    -    1,280    459    601,324    603,063 
Other mortgage   5,116    -    -    5,116    -    991,963    997,079 
Total real estate - mortgage   5,546    4,514    -    10,060    1,015    2,917,733    2,928,808 
Consumer   131    23    48    202    38    61,973    62,213 
Total  $7,143   $11,236   $60   $18,439   $10,765   $5,822,057   $5,851,261 

 

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

 

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

 

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

 

14

 

 

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

 

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

 

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

 

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and nine months ended September 30, 2018 and September 30, 2017. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

 

15

 

 

 

   Commercial,            
   financial and  Real estate -  Real estate -      
   agricultural  construction  mortgage  Consumer  Total
   (In Thousands)
   Three Months Ended September 30, 2018
Allowance for loan losses:                         
Balance at June 30, 2018  $36,178   $4,062   $23,438   $561   $64,239 
Charge-offs   (3,923)   -    (48)   (76)   (4,047)
Recoveries   52    4    1    6    63 
Provision   6,794    (132)   (62)   24    6,624 
Balance at September 30, 2018  $39,101   $3,934   $23,329   $515   $66,879 
    
   Three Months Ended September 30, 2017
Allowance for loan losses:                         
Balance at June 30, 2017  $29,127   $5,138   $20,392   $402   $55,059 
Charge-offs   (924)   (16)   (550)   (65)   (1,555)
Recoveries   67    12    59    14    152 
Provision   3,431    197    1,065    110    4,803 
Balance at September 30, 2017  $31,701   $5,331   $20,966   $461   $58,459 
    
   Nine Months Ended September 30, 2018
Allowance for loan losses:                         
Balance at December 31, 2017  $32,880   $4,989   $21,022   $515   $59,406 
Charge-offs   (6,743)   -    (869)   (211)   (7,823)
Recoveries   229    108    44    31    412 
Provision   12,735    (1,163)   3,132    180    14,884 
Balance at September 30, 2018  $39,101   $3,934   $23,329   $515   $66,879 
    
   Nine Months Ended September 30, 2017
Allowance for loan losses:                         
Balance at December 31, 2016  $28,872   $5,125   $17,504   $392   $51,893 
Charge-offs   (6,846)   (56)   (922)   (173)   (7,997)
Recoveries   273    42    62    16    393 
Provision   9,402    220    4,322    226    14,170 
Balance at September 30, 2017  $31,701   $5,331   $20,966   $461   $58,459 
    
   As of September 30, 2018
Allowance for loan losses:                         
Individually Evaluated for Impairment  $6,297   $181   $274   $49   $6,801 
Collectively Evaluated for Impairment   32,804    3,753    23,055    466    60,078 
                          
Loans:                         
Ending Balance  $2,478,788   $543,611   $3,277,525   $63,607   $6,363,531 
Individually Evaluated for Impairment   23,138    1,463    13,083    49    37,733 
Collectively Evaluated for Impairment   2,455,650    542,148    3,264,442    63,558    6,325,798 
    
   As of December 31, 2017
Allowance for loan losses:                         
Individually Evaluated for Impairment  $4,276   $120   $1,163   $50   $5,609 
Collectively Evaluated for Impairment   28,604    4,869    19,859    465    53,797 
                          
Loans:                         
Ending Balance  $2,279,366   $580,874   $2,928,808   $62,213   $5,851,261 
Individually Evaluated for Impairment   26,447    1,571    12,404    88    40,510 
Collectively Evaluated for Impairment   2,252,919    579,303    2,916,404    62,125    5,810,751 

 

16

 

 

The following table presents details of the Company’s impaired loans as of September 30, 2018 and December 31, 2017, respectively. Loans which have been fully charged off do not appear in the tables.

 

            For the three months  For the nine months
            ended September 30,  ended September 30,
   September 30, 2018  2018  2018
               Interest     Interest
      Unpaid     Average  Income  Average  Income
   Recorded  Principal  Related  Recorded  Recognized  Recorded  Recognized
   Investment  Balance  Allowance  Investment  in Period  Investment  in Period
   (In Thousands)
With no allowance recorded:                                   
Commercial, financial and agricultural  $4,611   $5,502   $-   $4,694   $50   $5,259   $162 
Real estate - construction   466    469    -    481    7    543    21 
Real estate - mortgage:                                   
Owner-occupied commercial   1,800    1,982    -    2,008    16    2,311    91 
1-4 family mortgage   501    501    -    501    (4)   501    1 
Other mortgage   5,039    5,039    -    5,052    62    5,083    187 
Total real estate - mortgage   7,340    7,522    -    7,561    74    7,895    279 
Consumer   -    -    -    -    -    -    - 
Total with no allowance recorded   12,417    13,493    -    12,736    131    13,697    462 
                                    
With an allowance recorded:                                   
Commercial, financial and agricultural   18,527    25,946    6,297    19,041    136    19,035    478 
Real estate - construction   997    997    181    997    14    997    42 
Real estate - mortgage:                                   
Owner-occupied commercial   3,507    3,507    34    3,507    46    3,507    142 
1-4 family mortgage   850    850    160    850    12    850    35 
Other mortgage   1,386    1,386    80    1,386    15    1,595    51 
Total real estate - mortgage   5,743    5,743    274    5,743    73    5,952    228 
Consumer   49    49    49    49    1    49    2 
Total with allowance recorded   25,316    32,735    6,801    25,830    224    26,033    750 
                                    
Total Impaired Loans:                                   
Commercial, financial and agricultural   23,138    31,448    6,297    23,735    186    24,294    640 
Real estate - construction   1,463    1,466    181    1,478    21    1,540    63 
Real estate - mortgage:                                   
Owner-occupied commercial   5,307    5,489    34    5,515    62    5,818    233 
1-4 family mortgage   1,351    1,351    160    1,351    8    1,351    36 
Other mortgage   6,425    6,425    80    6,438    77    6,678    238 
Total real estate - mortgage   13,083    13,265    274    13,304    147    13,847    507 
Consumer   49    49    49    49    1    49    2 
Total impaired loans  $37,733   $46,228   $6,801   $38,566   $355   $39,730   $1,212 

 

17

 

 

December 31, 2017
            For the twelve months
            ended December 31, 2017
      Unpaid     Average  Interest Income
   Recorded  Principal  Related  Recorded  Recognized in
   Investment  Balance  Allowance  Investment  Period
   (In Thousands)
With no allowance recorded:                         
Commercial, financial and agricultural  $10,036   $16,639   $-   $16,417   $571 
Real estate - construction   574    577    -    663    31 
Real estate - mortgage:                         
Owner-occupied commercial   2,640    2,806    -    2,875    159 
1-4 family mortgage   2,262    2,262    -    2,289    93 
Other mortgage   746    746    -    727    44 
Total real estate - mortgage   5,648    5,814    -    5,891    296 
Consumer   38    39    -    42    3 
Total with no allowance recorded   16,296    23,069    -    23,013    901 
                          
With an allowance recorded:                         
Commercial, financial and agricultural   16,411    16,992    4,276    17,912    651 
Real estate - construction   997    997    120    997    56 
Real estate - mortgage:                         
Owner-occupied commercial   3,914    3,914    601    3,801    215 
1-4 family mortgage   980    980    281    1,113    54 
Other mortgage   1,862    1,862    281    1,862    80 
Total real estate - mortgage   6,756    6,756    1,163    6,776    349 
Consumer   50    50    50    42    3 
Total with allowance recorded   24,214    24,795    5,609    25,727    1,059 
                          
Total Impaired Loans:                         
Commercial, financial and agricultural   26,447    33,631    4,276    34,329    1,222 
Real estate - construction   1,571    1,574    120    1,660    87 
Real estate - mortgage:                         
Owner-occupied commercial   6,554    6,720    601    6,676    374 
1-4 family mortgage   3,242    3,242    281    3,402    147 
Other mortgage   2,608    2,608    281    2,589    124 
Total real estate - mortgage   12,404    12,570    1,163    12,667    645 
Consumer   88    89    50    84    6 
Total impaired loans  $40,510   $47,864   $5,609   $48,740   $1,960 

 

Troubled Debt Restructurings (“TDR”) at September 30, 2018, December 31, 2017 and September 30, 2017 totaled $16.6 million, $20.6 million and $16.4 million, respectively. At September 30, 2018, the Company had a related allowance for loan losses of $3.7 million allocated to these TDRs, compared to $4.3 million at December 31, 2017 and $4.0 million at September 30, 2017. TDR activity by portfolio segment for the three and nine months ended September 30, 2018 and 2017 is presented in the table below.

 

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   Three Months Ended September 30, 2018  Nine Months Ended September 30, 2018
      Pre-  Post-     Pre-  Post-
      Modification  Modification     Modification  Modification
      Outstanding  Outstanding     Outstanding  Outstanding
   Number of  Recorded  Recorded  Number of  Recorded  Recorded
   Contracts  Investment  Investment  Contracts  Investment  Investment
   (In Thousands)
Troubled Debt Restructurings                              
Commercial, financial and agricultural   6   $7,242   $7,242    6   $7,242   $7,242 
Real estate - construction   1    997    997    1    997    997 
Real estate - mortgage:                              
Owner-occupied commercial   2    3,664    3,664    2    3,664    3,664 
1-4 family mortgage   1    850    850    1    850    850 
Other mortgage   -    -    -    -    -    - 
Total real estate mortgage   3    4,514    4,514    3    4,514    4,514 
Consumer   -    -    -    -    -    - 
    10   $12,753   $12,753    10   $12,753   $12,753 

 

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

 

There were no loans which were modified in the previous twelve months (i.e., twelve months prior to default) that defaulted during the three months ended September 30, 2018 and one commercial TDR loan totaling $0.3 million defaulted during the nine months ended September 30, 2018. No TDRs which were modified in the previous twelve months defaulted during the three and nine months ended September 30, 2017. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of September 30, 2018, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

 

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At September 30, 2018, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $202,000 and $684,000 for the three and nine months ended September 30, 2018 and $294,000 and $916,000 for the three and nine months ended September 30, 2017.

 

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

 

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The Company estimates the fair value of each stock option award using a Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatilities of the Company’s common stock. 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.

 

   2018  2017
Expected volatility   24.72%   29.00%
Expected dividends   1.06%   0.44%
Expected term (in years)   6.25    6.25 
Risk-free rate   2.67%   2.08%

 

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2018 and September 30, 2017 was $10.98 and $11.83, respectively.

 

The following table summarizes stock option activity during the nine months ended September 30, 2018 and September 30, 2017:

 

         Weighted   
      Weighted  Average   
      Average  Remaining  Aggregate
      Exercise  Contractual  Intrinsic
   Shares  Price  Term (years)  Value
                   (In Thousands) 
Nine Months Ended September 30, 2018:                    
Outstanding at January 1, 2018   1,666,834   $10.68    5.5   $51,377 
Granted   12,750    41.58    9.5    (31)
Exercised   (231,336)   4.94    3.1    7,665 
Forfeited   (33,000)   15.00    6.4    758 
Outstanding at September 30, 2018   1,415,248    11.79    5.1   $38,998 
                     
Exercisable at September 30, 2018   693,100   $6.78    3.5   $22,513 
                     
Nine Months Ended September 30, 2017:                    
Outstanding at January 1, 2017   2,026,334   $9.00    6.2   $57,636 
Granted   52,500    37.93    9.4    (35)
Exercised   (359,000)   4.97    4.2    11,590 
Forfeited   (32,000)   21.96    8.4    489 
Outstanding at September 30, 2017   1,687,834    10.51    5.7   $45,136 
                     
Exercisable at September 30, 2017   810,736   $5.22    4.2   $25,971 

 

As of September 30, 2018, there was approximately $1,514,000 of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 2.2 years.

 

Restricted Stock

 

The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of September 30, 2018, there was $752,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.9 years of the restricted stock’s vesting period.

 

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The following table summarizes restricted stock activity during the nine months ended September 30, 2018 and 2017, respectively:

 

   Shares  Weighted
Average Grant
Date Fair
Value
Nine Months Ended September 30, 2018:          
Non-vested at January 1, 2018   120,676   $10.29 
Granted   12,850    41.48 
Vested   (73,700)   5.88 
Forfeited   (750)   41.21 
Non-vested at September 30, 2018   59,076    19.38 
           
Nine Months Ended September 30, 2017:          
Non-vested at January 1, 2017   118,676   $8.88 
Granted   7,000    38.02 
Vested   (4,200)   15.74 
Forfeited   (800)   15.74 
Non-vested at September 30, 2017   120,676    10.29 

 

NOTE 7 - DERIVATIVES

 

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of September 30, 2018 and December 31, 2017 were not material.

 

NOTE 8 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  The amendments in this ASU require a reclassification from / to accumulated other comprehensive income and to / from retained earnings for stranded tax effects resulting from the change in the newly enacted federal corporate income tax rate.  Consequently, the amendments in this ASU eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017.  The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018 with early adoption allowed.  The Bank elected to early adopt this ASU as of December 31, 2017.  The effect of the adoption of this ASU was to decrease accumulated other comprehensive income by $43,000 with the offset to retained earnings as recorded in the statement of changes in stockholders' equity.  This represents the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and credit card fees, did not change significantly from current practice.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU became effective for the Company on January 1, 2018. Accordingly, the calculation of fair value of the loan portfolio was refined to incorporate exit pricing, but had no material impact on our fair value disclosures. See Note 10 – Fair Value Measurement.

 

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NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early application of this ASU is permitted for all entities. In January 2018, the FASB issued a proposal to allow an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has reviewed its current lessee portfolio and is assessing the impact of the new standard on its financial statements, related disclosures, systems, and internal controls. The accounting changes are expected to relate primarily to its leased branches and office space which are currently accounted for as operating leases. Based upon leases that were outstanding as of September 30, 2018, the Company anticipates recognizing a right of use asset and a lease liability related to substantially all the $17.4 million of operating lease commitments summarized in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q. However, the lease commitments requiring balance sheet recognition continue to be evaluated. Management anticipates that the addition of the right of use asset will decrease the Company’s risk-based capital ratios but does not believe the impact will be material. Other aspects of the amendments are not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

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

 

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

 

In June 2018, the FASB issued ASU 2018-06, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company will adopt this ASU effective January 1, 2019. The amendments are not expected to have an impact on the Company’s Consolidated Financial Statements because it does not have any stock-based payment awards currently outstanding to nonemployees.

 

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In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments represent changes to clarify, correct errors in, or make improvements to the Accounting Standards Codification, eliminating inconsistencies and providing clarifications in current guidance. The amendments include those made to: Subtopic 220-10, Income Statement- Reporting Comprehensive Income-Overall; Subtopic 470-50, Debt-Modifications and Extinguishments; Subtopic 480-10, Distinguishing Liabilities from Equity-Overall; Subtopic 718-740, Compensation-Stock Compensation-Income Taxes; Subtopic 805-740, Business Combinations-Income Taxes; Subtopic 815-10, Derivatives and Hedging-Overall; Subtopic 820-10, Fair Value Measurement-Overall; Subtopic 940-405, Financial Services-Brokers and Dealers-Liabilities; and Subtopic 962-325, Plan Accounting-Defined Contribution Pension Plans-Investments-Other. The transition and effective date guidance of these amendments are based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. Management is reviewing each subtopic impacted by the amendments to determine their applicability and potential impact to the Company’s Consolidated Financial Statements but does not currently believe they will have a material impact.

 

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases (Topic 842). These amendments affect narrow aspects of the guidance issued in the amendments in ASU 2016-02, including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. Management is reviewing the amendments to determine what impact, if any, they will have beyond the impact that existing, but not-yet-adopted, amendments under Topic 842 will have on the Company’s Consolidated Financial Statements.

 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. These amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The amendments also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842. For entities that have not adopted Topic 842 before the issuance of ASU No. 2018-11, the effective date and transition requirements for the amendments related to separating components of a contract are the same as the effective date and transition requirements in ASU No. 2016-02. All entities, including early adopters, that elect the practical expedient related to separating components of a contract in ASU No. 2018-11 must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected. Management expects to elect both transition options. The amendments are not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

In July 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. For public business entities, the amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. For all other entities, the amendments are effective for annual periods beginning after December 15, 2020, and interim periods in annual periods beginning after December 15, 2021. Early adoption is permitted. Management is reviewing these amendments with respect to its use of software solutions for its operations, which are fairly extensive, to determine the possible impact but does not currently believe they will have a material impact to its Consolidated Financial Statements.

 

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NOTE 10 - FAIR VALUE MEASUREMENT

 

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

 

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

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

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

 

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

 

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

 

Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $4,893,000 and $8,782,000 during the three and nine months ended September 30, 2018, respectively, and $2,660,000 and $7,967,000 during the three and nine months ended September 30, 2017, respectively.

 

Other Real Estate Owned and repossessed assets. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure and repossessed assets 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 or repossession are charged to the allowance for loan losses subsequent to foreclosure or repossession. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO and repossessed assets of $228,000 and $581,000 was recognized for the three and nine months ended September 30, 2018, respectively, and $20,000 and $56,000 for the three and nine months ended September 30, 2017, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO and repossessed assets are classified within Level 3 of the hierarchy.

 

24

 

 

There was one residential real estate loan with a balance of $360,000 foreclosed and classified as OREO as of September 30, 2018 compared to none as of December 31, 2017.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:

 

   Fair Value Measurements at September 30, 2018 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 and government agencies  $-   $74,278   $-   $74,278 
Mortgage-backed securities   -    298,824    -    298,824 
State and municipal securities   -    112,698    -    112,698 
Corporate debt   -    85,696    6,525    92,221 
Total assets at fair value  $-   $571,496   $6,525   $578,021 

 

   Fair Value Measurements at December 31, 2017 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 and government agencies  $-   $55,356   $-   $55,356 
Mortgage-backed securities   -    276,498    -    276,498 
State and municipal securities   -    134,849    -    134,849 
Corporate debt   -    64,877    6,500    71,377 
Total assets at fair value  $-   $531,580   $6,500   $538,080 

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017:

 

   Fair Value Measurements at September 30, 2018   
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Nonrecurring Basis:  (In Thousands)
Impaired loans  $-   $-   $30,932   $30,932 
Other real estate owned and repossessed assets   -    -    5,714    5,714 
Total assets at fair value  $-   $-   $36,646   $36,646 

 

   Fair Value Measurements at December 31, 2017   
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total
Assets Measured on a Nonrecurring Basis:  (In Thousands)
Impaired loans  $-   $-   $34,901   $34,901 
Other real estate owned and repossessed assets   -    -    6,701    6,701 
Total assets at fair value  $-   $-   $41,602   $41,602 

 

 

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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.

 

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

 

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

 

Equity securities: The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the redemption provision of the investments. Within equity securities, we hold and investment in a fund that qualifies us for Community Reinvestment Act credits. This investment is classified in Level 1 of the fair value hierarchy.

 

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

 

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

 

   September 30, 2018  December 31, 2017
   Carrying     Carrying   
   Amount  Fair Value  Amount  Fair Value
   (In Thousands)
Financial Assets:                    
Level 1 inputs:                    
Cash and due from banks  $136,788   $136,788   $238,062   $238,062 
                     
Level 2 inputs:                    
Available for sale debt securities   571,496    571,496    531,580    531,580 
Equity securities   889    889    1,034    1,034 
Federal funds sold   229,033    229,033    239,524    239,524 
Mortgage loans held for sale   5,277    5,277    4,459    4,459 
Bank-owned life insurance contracts   129,869    129,869    127,519    127,519 
                     
Level 3 inputs:                    
Available for sale debt securities   6,525    6,525    6,500    6,500 
Held to maturity debt securities   250    250    250    250 
Loans, net   6,265,720    6,174,697    5,756,954    5,712,441 
                     
Financial liabilities:                    
Level 2 inputs:                    
Deposits  $6,505,351   $6,497,244   $6,091,674   $6,086,085 
Federal funds purchased   246,094    246,094    301,797    301,797 
Other borrowings   64,657    64,601    64,832    65,921 

 

 

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NOTE 11 – SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2018, and events which occurred subsequent to September 30, 2018 but were not recognized in the financial statements.

 

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

 

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2018 and September 30, 2017.

 

Forward-Looking Statements

 

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

 

Business

 

We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through 20 full-service banking offices located in Alabama, Tampa Bay, Florida, the panhandle of Florida, the greater Atlanta, Georgia metropolitan area, Charleston, South Carolina, and Nashville, Tennessee. Through the bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions.

 

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

 

27

 

 

Overview

 

As of September 30, 2018, we had consolidated total assets of $7.52 billion, up $435.4 million, or 6.1%, when compared to consolidated assets of $7.08 billion at December 31, 2017. Total loans were $6.36 billion at September 30, 2018, up $512.3 million, or 8.8%, from $5.85 billion at December 31, 2017. Total deposits were $6.51 billion at September 30, 2018, up $413.7 million, or 6.8%, from $6.09 billion at December 31, 2017.

 

Net income available to common stockholders for the three months ended September 30, 2018 was $34.6 million, an increase of $9.3 million, or 36.8%, from $25.3 million for the corresponding period in 2017. Basic and diluted earnings per common share were $0.65 and $0.64, respectively, for the three months ended September 30, 2018, compared to basic and diluted earnings per common share of $0.48 and $0.47 for the corresponding period in 2017.

 

Net income available to common stockholders for the nine months ended September 30, 2018 was $100.7 million, an increase of $28.8 million, or 40.0%, from $71.9 million for the corresponding period in 2017. Basic and diluted earnings per common share were $1.89 and $1.86, respectively, for the nine months ended September 30, 2018, compared to $1.36 and $1.33, respectively, for the corresponding period in 2017.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate, deferred taxes, and fair value of financial instruments are particularly subject to change. Information concerning our accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

Financial Condition

 

Cash and Cash Equivalents

 

At September 30, 2018, we had $229.0 million in federal funds sold, compared to $239.5 million at December 31, 2017. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At September 30, 2018, we had $57.6 million in balances at the Federal Reserve, compared to $150.3 million at December 31, 2017. We disbursed funds that we would have otherwise had on deposit at the Federal Reserve to correspondent banks due to higher interest rates paid by those banks.

 

Debt Securities

 

Debt securities available for sale totaled $578.0 million at September 30, 2018 and $538.1 million at December 31, 2017. We had pay downs of $39.4 million on mortgage-backed securities, maturities of $14.8 million on municipal and corporate securities, and calls of $6.4 million on municipal securities and subordinated notes during the nine months ended September 30, 2018. We purchased $70.9 million in mortgage-backed securities, $27.6 million in municipal and corporate securities and $22.8 million of U.S. Treasury and government sponsored agency during the first nine months of 2018.

 

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

 

28

 

 

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at September 30, 2018 are interest-rate driven, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash charges to earnings in one or more future periods.

 

All securities held are traded in liquid markets. As of September 30, 2018, we owned restricted securities of First National Bankers Bank with an aggregate book value and market value of $0.4 million. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity.

 

The Bank does not invest in collateralized debt obligations (“CDOs”). We have $92.2 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Bond Rating Agency at the time of our investment in them. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at September 30, 2018 has a combined average credit rating of AA.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes was $307.1 million and $284.2 million as of September 30, 2018 and December 31, 2017, respectively.

 

Loans

 

We had total loans of $6.36 billion at September 30, 2018, an increase of $512.3 million, or 8.8%, compared to $5.85 billion at December 31, 2017. At September 30, 2018, the percentage of our loans in each of our regions were as follows:

 

   Percentage of Total
Loans in MSA
Birmingham-Hoover, AL MSA   41.8%
Dothan, AL MSA   9.6%
Huntsville, AL MSA   9.2%
Mobile, AL MSA   6.5%
Montgomery, AL MSA   5.9%
Total Alabama MSAs   73.0%
Pensacola-Ferry Pass-Brent, FL MSA   6.1%
Tampa-St. Petersburg-Clearwater, FL MSA   2.9%
Total Florida MSAs   9.0%
Atlanta-Sandy Springs-Roswell, GA MSA   4.8%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA   9.4%
Charleston-North Charleston, SC MSA   3.7%

 

Asset Quality

 

The allowance for loan losses is established and maintained at levels management deems adequate to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. In assessing the adequacy of the allowance for loan losses, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level. Our management believes that the allowance was adequate at September 30, 2018.

 

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

 

29

 

 

      Percentage of loans
      in each category
September 30, 2018  Amount  to total loans
   (In Thousands)
Commercial, financial and agricultural  $39,101    38.95%
Real estate - construction   3,934    8.54%
Real estate - mortgage   23,329    51.51%
Consumer   515    1.00%
Total  $66,879    100.00%

 

       
      Percentage of loans
      in each category
December 31, 2017  Amount  to total loans
   (In Thousands)
Commercial, financial and agricultural  $32,880    38.96%
Real estate - construction   4,989    9.93%
Real estate - mortgage   21,022    50.05%
Consumer   515    1.06%
Total  $59,406    100.00%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased $4.1 million to $14.9 million at September 30, 2018, compared to $10.8 million at December 31, 2017. Of this total, nonaccrual loans of $9.2 million at September 30, 2018, represented a net decrease of $1.6 million from nonaccrual loans at December 31, 2017. Excluding credit card accounts, there were five loans 90 or more days past due and still accruing totaling $5.6 million, compared to no loans 90 or more days past due and still accruing at December 31, 2017. This increase primarily relates to one commercial real estate mortgage loan totaling $5.0 million which is well-collateralized and is actively in the process of collection. Troubled Debt Restructurings (“TDR”) at September 30, 2018 and December 31, 2017 were $16.6 million and $20.6 million, respectively. There was one loan newly classified as TDR totaling $0.1 million and nine renewals of existing TDRs totaling $12.7 million for the three and nine months ended September 30, 2018. One relationship totaling $12.7 million consisting of nine loans, was newly classified as TDR during the second quarter of 2017. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.

 

OREO and repossessed assets decreased to $5.7 million at September 30, 2018, from $6.7 million at December 31, 2017. The total number of OREO and repossessed asset accounts increased to 13 at September 30, 2018, compared to 12 at December 31, 2017. The following table summarizes OREO and repossessed asset activity for the nine months ended September 30, 2018 and 2017:

 

   Nine Months Ended September 30,
   2018  2017
   (In thousands)
Balance at beginning of period  $6,701   $4,988 
Transfers from loans and capitalized expenses   1,206    586 
Proceeds from sales   (1,572)   (1,529)
Internally financed sales   (130)   (185)
Write-downs / net gain (loss) on sales   (491)   28 
Balance at end of period  $5,714   $3,888 

 


30

 

 

The following table summarizes our nonperforming assets and TDRs at September 30, 2018 and December 31, 2017:

 

   September 30, 2018  December 31, 2017
      Number of     Number of
   Balance  Loans  Balance  Loans
   (Dollar Amounts In Thousands)
Nonaccrual loans:                    
Commercial, financial and agricultural  $8,499    17   $9,712    18 
Real estate - construction   -    -    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   153    2    556    2 
1-4 family mortgage   501    2    459    2 
Other mortgage   -    -    -    - 
Total real estate - mortgage   654    4    1,015    4 
Consumer   -    -    38    1 
Total Nonaccrual loans:  $9,153    21   $10,765    23 
                     
90+ days past due and accruing:                    
Commercial, financial and agricultural  $309    9   $12    3 
Real estate - construction   -    -    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   -    -    -    - 
1-4 family mortgage   301    3    -    - 
Other mortgage   5,039    1    -    - 
Total real estate - mortgage   5,340    4    -    - 
Consumer   65    18    48    24 
Total 90+ days past due and accruing:  $5,714    31   $60    27 
                     
Total Nonperforming Loans:  $14,867    52   $10,825    50 
                     
Plus: Other real estate owned and repossessions   5,714    13    6,701    12 
Total Nonperforming Assets  $20,581    65   $17,526    62 
                     
Restructured accruing loans:                    
Commercial, financial and agricultural  $9,984    7   $11,438    6 
Real estate - construction   997    1    997    1 
Real estate - mortgage:                    
Owner-occupied commercial   3,664    2    3,664    2 
1-4 family mortgage   850    1    850    1 
Other mortgage   -    -    -    - 
Total real estate - mortgage   4,514    3    4,514    3 
Consumer   -    -    -    - 
Total restructured accruing loans:  $15,495    11   $16,949    10 
                     
Total Nonperforming assets and restructured accruing loans  $36,076    76   $34,475    72 
                     
Ratios:                    
Nonperforming loans to total loans   0.23%        0.19%     
Nonperforming assets to total loans plus other real estate owned and repossessions   0.32%        0.30%     
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions   0.57%        0.59%     

 

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

 

Impaired Loans and Allowance for Loan Losses

 

As of September 30, 2018, we had impaired loans of $37.7 million, inclusive of nonaccrual loans, a decrease of $2.8 million from $40.5 million as of December 31, 2017. We allocated $6.8 million of our allowance for loan losses at September 30, 2018 to these impaired loans, an increase of $1.2 million compared to $5.6 million as of December 31, 2017. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of impairment, if any, and subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

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Of the $37.7 million of impaired loans reported as of September 30, 2018, $23.1 million were commercial, financial and agricultural loans, $1.5 million were real estate construction loans, $13.1 million were real estate mortgage loans and $49,000 were consumer loans.

 

Deposits

 

Total deposits were $6.51 billion at September 30, 2018, an increase of $413.7 million, or 6.8%, over $6.09 billion at December 31, 2017. 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 Balance Sheets and Net Interest Analysis on a Fully Taxable-Equivalent Basis” under the subheading “Net Interest Income.”

 

Other Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $246.1 million and $301.8 million at September 30, 2018 and December 31, 2017, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 2.09% for the quarter ended September 30, 2018. Other borrowings consist of the following:

 

$34.75 million of 5% Subordinated Notes due July 15, 2025, which were issued in a private placement in July 2015 and pay interest semi-annually; and
$30.0 million of 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually.

 

Liquidity

 

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

 

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At September 30, 2018, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $692.7 million. Additionally, the Bank had additional borrowing availability of approximately $522.0 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 “Other Borrowings”.

 

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

 

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

 

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

 

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The following table reflects the contractual maturities of our term liabilities as of September 30, 2018. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

   Payments due by Period
         Over 1 - 3  Over 3 - 5   
   Total  1 year or less  years  years  Over 5 years
   (In Thousands)
Contractual Obligations (1)                         
                          
Deposits without a stated maturity  $5,849,136   $-   $-   $-   $- 
Certificates of deposit (2)   656,215    381,981    170,170    104,013    51 
Federal funds purchased   246,094    246,094    -    -    - 
Subordinated debentures   64,657    -    -    -    64,657 
Operating lease commitments   17,191    2,945    5,604    4,631    4,011 
Total  $6,833,293   $631,020   $175,774   $108,644   $68,719 

 

(1)Excludes interest.
(2)Certificates of deposit give customers the right to early withdrawal.  Early withdrawals may be subject to penalties.  The penalty amount depends on the remaining time to maturity at the time of early withdrawal.

 

Capital Adequacy

 

As of September 30, 2018, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios.

 

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 is being phased in incrementally over time, beginning January 1, 2016 and becoming fully effective on January 1, 2019, and will ultimately consist of an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets.

 

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The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios, not including the capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of September 30, 2018, December 31, 2017 and September 30, 2017:

 

               To Be Well Capitalized
         For Capital Adequacy  Under Prompt Corrective
   Actual  Purposes  Action Provisions
   Amount  Ratio  Amount  Ratio  Amount  Ratio
As of September 30, 2018:  (Dollars in thousands)
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $676,506    10.08%  $302,011    4.50%   N/A    N/A 
ServisFirst Bank   740,140    11.03%   301,997    4.50%  $436,219    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   677,008    10.09%   402,682    6.00%   N/A    N/A 
ServisFirst Bank   740,642    11.04%   402,663    6.00%   536,884    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   809,044    12.05%   536,909    8.00%   N/A    N/A 
ServisFirst Bank   808,021    12.04%   536,884    8.00%   671,105    10.00 
Tier 1 Capital to Average Assets:                              
Consolidated   677,008    9.28%   291,724    4.00%   N/A    N/A 
ServisFirst Bank   740,642    10.16%   291,709    4.00%   364,637    5.00%
                               
As of December 31, 2017:                              
CET 1 Capital to Risk-Weighted Assets:                              
Consolidated  $593,111    9.51%  $280,553    4.50%   N/A    N/A 
ServisFirst Bank   651,201    10.45%   280,523    4.50%  $405,199    6.50%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   593,613    9.52%   374,070    6.00%   N/A    N/A 
ServisFirst Bank   651,703    10.45%   374,030    6.00%   498,707    8.00%
Total Capital to Risk-Weighted Assets:                              
Consolidated   718,151    11.52%   498,760    8.00%   N/A    N/A 
ServisFirst Bank   711,609    11.42%   498,707    8.00%   623,384    10.00%
Tier 1 Capital to Average Assets:                              
Consolidated   593,613    8.51%   278,970