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Section 1: 10-K/A (FORM 10-K/A)

sfbs20191231_10k.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K/A

(Mark One)

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

  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

OR

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

  For the transition period from _______to_______

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

26-0734029

(State or Other Jurisdiction of
Incorporation or Organization)

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

 

2500 Woodcrest Place, Birmingham, Alabama

35209

(Address of Principal Executive Offices)

(Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

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

 

Title of each class

Trading symbol(s)

Name of exchange on which registered

Common stock, par value $.001 per share

SFBS

NASDAQ Global Select Market

 

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

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No

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 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,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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 Act). Yes No ☒

 

As of June 30, 2019, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on a stock price of $34.26 per share of Common Stock, was $1,581,146,000.

 

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

 

Class

Outstanding as of February 21, 2020

Common stock, $.001 par value 53,703,632

                                             

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

EXPLANATORY NOTE

 

ServisFirst Bancshares, Inc., a Delaware corporation, together with its subsidiaries, including ServisFirst Bank, the “Company”, which may also be referred to as “we”, “our”, “us”, “ServisFirst Bancshares”, and “ServisFirst”, is filing this Amendment No. 1 to Annual Report on Form 10-K/A (the “Amendment”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the Securities and Exchange Commission on February 25, 2020 (the “Original Filing”). The Company is filing this Amendment solely for the purpose of including in Part II, Item 8 of its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 the Consolidated Statement of Cash Flows for the fiscal year ended December 31, 2017, which was inadvertently omitted from the Original Filing.  This addition to the Consolidated Statements of Cash Flows does not affect Dixon Hughes Goodman LLP’s unqualified opinion on our consolidated financial statements included in the Original Form 10-K and this Amendment.

 

The Amendment includes the Consent of Independent Registered Public Accounting Firm in Exhibit 23 and updates Part IV, Item 15 of the Original Filing to include new certifications of our Chief Executive Officer and Chief Financial Officer as Exhibits 31.3, 31.4, 32.3 and 32.4. 

 

Except as described above, no other changes have been made to the Original Filing. This Amendment does not reflect subsequent events that may have occurred after the original filing date of the Original Filing or modify or update in any way disclosures made in the Original Filing. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events that occurred or facts that became known to us after the filing of the Original Filing, and such forward-looking statements should be read in their historical context. Furthermore, this Amendment should be read in conjunction with the Original Filing and any other Company filings with the Securities and Exchange Commission made subsequent to the Original Filing.

 

 

 

 

 

 

 

 

 

 

 

PART II

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplementary data required by Regulations S-X and by Item 302 of Regulation S-K are set forth in the pages listed below.          

 

 

   

Page

 

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

 

64

 

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

 

66

 

Consolidated Balance Sheets at December 31, 2019 and 2018

 

68

 

Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017

 

69

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017

 

70

 

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017

 

71

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

 

72

 

Notes to Consolidated Financial Statements

 

73

 

 

 

 

 

 

 

 

 

 

 

63

 

 

Reportof Independent Registered Public Accounting Firm

 

To the shareholders and the board of directors of ServisFirst Bancshares, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of ServisFirst Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2020 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Loan Losses

 

As described in Notes 1 and 3 to the financial statements, the Company’s allowance for loan losses (“allowance”) balance was $76.6 million on gross loans of $7.3 billion as of December 31, 2019, and consisted primarily of general reserves on loans collectively evaluated for impairment and specific reserves on loans individually evaluated for impairment. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio and considers the nature of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, current economic conditions, current asset quality trends and other risks inherent in the portfolio. As disclosed by management, this evaluation is inherently subjective as it requires material estimates. Allocation of the allowance is made for specific loans, but the entire allowance is available for any loan that in management’s judgment deteriorates and is uncollectible. The general reserve component of the allowance for loan losses is based on management’s judgment regarding various external and internal factors including macroeconomic trends, management’s assessment of the Company’s loan growth prospects, and evaluations of internal risk controls (collectively, “qualitative factors”). The determination of these qualitative factors is management’s evaluation of potential future losses that would arise should their assumptions materialize.

 

64

 

We have determined that the allowance is a critical audit matter. The principal considerations for our determination of the allowance as a critical audit matter is the subjectivity of the assumptions that management utilized in determining and applying the qualitative factors in the allowance model. Furthermore, certain inputs and assumptions lack observable data and therefore, applying audit procedures required a higher degree of auditor judgment and subjectivity due to the nature and extent of audit evidence and effort required to address this matter.

 

The primary audit procedures we performed to address this critical audit matter included:

 

We evaluated the design and tested the operating effectiveness of key controls relating to the Company’s allowance, including controls over the credit monitoring function related to loan performance, the determination of qualitative factors, and the precision of management’s review and approval of the allowance model and resulting estimate.

 

We evaluated the reasonableness of management’s estimates and judgments related to the qualitative factors and the resulting allocation to the allowance. This included evaluating the appropriateness of the methodologies used by management to estimate the qualitative factor components of the allowance, including evaluating the appropriateness and completeness of risk factors used in determining the qualitative factors.

 

To test the reasonableness of the qualitative factors, we compared information utilized by management to internal and external evidence and assessed the appropriateness of data utilized by management in developing the assumptions, including the consideration of potentially new or contradictory information.

 

We also analyzed the qualitative factors over a historical period in comparison to changes in the Company’s loan portfolio and the economy and evaluated the appropriateness and level of the qualitative factor allowances.

 

We performed analytical procedures on the overall level and various components of the allowance, including historical reserves, qualitative reserves and specific reserves, as well as credit quality to ensure movement in a directionally consistent manner relative to credit quality indicators and changes in the Company’s loan portfolio and the economy.

 

/s/ Dixon Hughes Goodman LLP

 

We have served as the Company's auditor since 2014.

 

Atlanta, Georgia

February 25, 2020

 

65

 

 

Reportof Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

ServisFirst Bancshares, Inc.

 

 Opinion on Internal Control Over Financial Reporting

 

We have audited ServisFirst Bancshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, ServisFirst Bancshares, Inc. and subsidiaries (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of ServisFirst Bancshares, Inc. as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019, and our report dated February 25, 2020, expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

 

The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

66

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Dixon Hughes Goodman LLP

 

Atlanta, Georgia

February 25, 2020

 

 

 

67

 

SERVISFIRSTBANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   

December 31, 2019

   

December 31, 2018

 

ASSETS

               

Cash and due from banks

  $ 78,618     $ 97,516  

Interest-bearing balances due from depository institutions

    451,509       360,534  

Federal funds sold

    100,473       223,845  

Cash and cash equivalents

    630,600       681,895  

Available for sale debt securities, at fair value

    759,399       590,184  

Held to maturity debt securities (fair value of $250 at December 31, 2019)

    250       -  

Mortgage loans held for sale

    6,312       120  

Loans

    7,261,451       6,533,499  

Less allowance for loan losses

    (76,584 )     (68,600 )

Loans, net

    7,184,867       6,464,899  

Premises and equipment, net

    56,496       57,822  

Accrued interest and dividends receivable

    26,262       24,070  

Deferred tax asset, net

    25,566       27,277  

Other real estate owned and repossessed assets

    8,178       5,169  

Bank owned life insurance contracts

    209,395       130,649  

Goodwill and other identifiable intangible assets

    14,179       14,449  

Other assets

    26,149       10,848  

Total assets

  $ 8,947,653     $ 8,007,382  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Liabilities:

               

Deposits:

               

Non-interest-bearing demand

  $ 1,749,879     $ 1,557,341  

Interest-bearing

    5,780,554       5,358,367  

Total deposits

    7,530,433       6,915,708  

Federal funds purchased

    470,749       288,725  

Other borrowings

    64,703       64,666  

Accrued interest and dividends payable

    11,934       10,381  

Other liabilities

    27,152       12,699  

Total liabilities

    8,104,971       7,292,179  

Stockholders' equity:

               

Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at December 31, 2019 and December 31, 2018

    -       -  

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,623,740 shares issued and outstanding at December 31, 2019, and 53,375,195 shares issued and outstanding at December 31, 2018

    54       53  

Additional paid-in capital

    219,766       218,521  

Retained earnings

    616,611       500,868  

Accumulated other comprehensive income (loss)

    5,749       (4,741 )

Total stockholders' equity attributable to ServisFirst Bancshares, Inc.

    842,180       714,701  

Noncontrolling interest

    502       502  

Total stockholders' equity

    842,682       715,203  

Total liabilities and stockholders' equity

  $ 8,947,653     $ 8,007,382  

 

See Notes to Consolidated Financial Statements.

 

68

 

SERVISFIRSTBANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

 

   

YEAR ENDED DECEMBER 31,

 
   

2019

   

2018

   

2017

 

Interest income:

                       

Interest and fees on loans

  $ 354,308     $ 305,370     $ 246,682  

Taxable securities

    17,008       12,654       9,117  

Nontaxable securities

    1,429       2,406       2,948  

Federal funds sold

    6,038       3,103       1,693  

Other interest and dividends

    12,020       3,094       2,316  

Total interest income

    390,803       326,627       262,756  

Interest expense:

                       

Deposits

    90,958       55,502       28,831  

Borrowed funds

    12,200       8,446       6,502  

Total interest expense

    103,158       63,948       35,333  

Net interest income

    287,645       262,679       227,423  

Provision for loan losses

    22,638       21,402       23,225  

Net interest income after provision for loan losses

    265,007       241,277       204,198  

Noninterest income:

                       

Service charges on deposit accounts

    7,029       6,547       5,702  

Mortgage banking

    4,361       2,784       3,835  

Credit card income

    7,076       5,550       3,594  

Securities gains

    27       190       -  

Increase in cash surrender value life insurance

    3,746       3,130       3,131  

Other operating income

    1,743       1,239       1,099  

Total noninterest income

    23,982       19,440       17,361  

Noninterest expenses:

                       

Salaries and employee benefits

    57,783       51,849       47,604  

Equipment and occupancy expense

    9,272       8,423       8,018  

Professional services

    4,235       3,646       3,217  

FDIC and other regulatory assessments

    2,975       3,869       3,918  

Other real estate owned expense

    415       790       323  

Other operating expenses

    27,448       23,298       21,129  

Total noninterest expenses

    102,128       91,875       84,209  

Income before income taxes

    186,861       168,842       137,350  

Provision for income taxes

    37,618       31,902       44,258  

Net income

    149,243       136,940       93,092  

Dividends on preferred stock

    63       63       62  

Net income available to common stockholders

  $ 149,180     $ 136,877     $ 93,030  

Basic earnings per common share

  $ 2.79     $ 2.57     $ 1.76  

Diluted earnings per common share

  $ 2.76     $ 2.53     $ 1.72  

 

See Notes to Consolidated Financial Statements.

 

69

 

SERVISFIRSTBANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

   

YEAR ENDED DECEMBER 31,

 
   

2019

   

2018

   

2017

 

Net income

  $ 149,243     $ 136,940     $ 93,092  

Other comprehensive income (loss), net of tax:

                       

Unrealized net holding gains (losses) arising during period from securities available for sale, net of tax of $2,788, $(1,205) and $(362) for 2019, 2018 and 2017, respectively

    10,511       (4,531 )     (674 )

Reduction in unrealized loss related to held to maturity debt securities transferred to available for sale, net of tax of $592

    -       -       1,100  

Reclassification adjustment for net gains on sale of securities available for sale, net of tax of $6 and $3 for 2019 and 2018, respectively

    (21 )     (12 )     -  

Other comprehensive income (loss), net of tax

    10,490       (4,543 )     426  

Comprehensive income

  $ 159,733     $ 132,397     $ 93,518  

 

 

See Notes to Consolidated Financial Statements.

 

70

 

SERVISFIRSTBANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

YEAR ENDED DECEMBER 31,

 

   

Preferred

Stock

   

Common

Stock

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income

   

Noncontrolling

Interest

   

Total

Stockholders'

Equity

 

Balance, January 1, 2017

  $ -     $ 53     $ 215,932     $ 307,151     $ (624 )   $ 377     $ 522,889  

Common dividends paid, $0.15 per share

    -       -       -       (7,935 )     -       -       (7,935 )

Common dividends declared, $0.05 per share

    -       -       -       (2,649 )     -       -       (2,649 )

Preferred dividends paid

    -       -       -       (62 )     -       -       (62 )

Issue 385,500 shares of common stock upon exercise of stock options

    -       -       1,911       -       -       -       1,911  

35,010 shares of common stock withheld in net settlement upon exercise of stock options

    -       -       (1,320 )     -       -       -       (1,320 )

Issue 125 shares of REIT preferred stock

    -       -       -       -       -       125       125  

Stock-based compensation expense

    -       -       1,170       -       -       -       1,170  

Other comprehensive income, net of tax

    -       -       -       -       383       -       383  

Reclassification of the disproportionate tax effect of enactment of the Tax Cuts and Jobs Act of 2017

    -       -       -       (43 )     43       -       -  

Net income

    -       -       -       93,092       -       -       93,092  

Balance, December 31, 2017

  $ -     $ 53     $ 217,693     $ 389,554     $ (198 )   $ 502     $ 607,604  

Common dividends paid, $0.33 per share

    -       -       -       (17,545 )     -       -       (17,545 )

Common dividends declared, $0.15 per share

    -       -       -       (8,018 )     -       -       (8,018 )

Preferred dividends paid

    -       -       -       (63 )     -       -       (63 )

Issue 353,259 shares of common stock upon exercise of stock options

    -       -       2,337       -       -       -       2,337  

61,077 shares of common stock withheld in net settlement upon exercise of stock options

    -       -       (2,360 )     -       -       -       (2,360 )

Stock-based compensation expense

    -       -       851       -       -       -       851  

Other comprehensive loss, net of tax

    -       -       -       -       (4,543 )     -       (4,543 )

Net income

    -       -       -       136,940       -       -       136,940  

Balance, December 31, 2018

  $ -     $ 53     $ 218,521     $ 500,868     $ (4,741 )   $ 502     $ 715,203  

Common dividends paid, $0.45 per share

    -       -       -       (24,053 )     -       -       (24,053 )

Common dividends declared, $0.175 per share

    -       -       -       (9,384 )     -       -       (9,384 )

Preferred dividends paid

    -       -       -       (63 )     -       -       (63 )

Issue 228,381 shares of common stock upon exercise of stock options

    -       1       2,122       -       -       -       2,123  

60,419 shares of common stock withheld in net settlement upon exercise of stock options

    -       -       (1,977 )     -       -       -       (1,977 )

Stock-based compensation expense

    -       -       1,100       -       -       -       1,100  

Other comprehensive income, net of tax

    -       -       -       -       10,490       -       10,490  

Net income

    -       -       -       149,243       -       -       149,243  

Balance, December 31, 2019

  $ -     $ 54     $ 219,766     $ 616,611     $ 5,749     $ 502     $ 842,682  

 

 

See Notes to Consolidated Financial Statements.

 

71

 

SERVISFIRSTBANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

   

Year Ended December 31,

 
   

2019

   

2018

   

2017

 

OPERATING ACTIVITIES

                       

Net income

  $ 149,243     $ 136,940     $ 93,092  

Adjustments to reconcile net income to net cash provided by

                       

Deferred tax expense (benefit)

    (1,077 )     (14,255 )     14,048  

Provision for loan losses

    22,638       21,402       23,225  

Depreciation

    3,682       3,378       2,568  

Accretion on acquired loans

    (90 )     (163 )     (464 )

Amortization of core deposit intangible

    270       270       277  

Net amortization of debt securities available for sale

    3,095       2,843       4,019  

Increase in accrued interest and dividends receivable

    (2,192 )     (3,409 )     (4,860 )

Stock-based compensation expense

    1,100       851       1,170  

Increase in accrued interest payable

    1,553       5,410       570  

Proceeds from sale of mortgage loans held for sale

    135,359       106,806       136,259  

Originations of mortgage loans held for sale

    (137,190 )     (99,683 )     (132,208 )

Net gain on sale of debt securities available for sale

    (27 )     (15 )     -  

Gain on sale of equity securities

    -       (175 )     -  

Gain on sale of mortgage loans held for sale

    (4,361 )     (2,784 )     (3,835 )

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

    (122 )     21       (33 )

Write down of other real estate owned and repossessed assets

    287       664       23  

Operating losses of tax credit partnerships

    8       163       79  

Increase in cash surrender value of life insurance contracts

    (3,746 )     (3,130 )     (3,131 )

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

    (4,155 )     13,167       (12,335 )

Net cash provided by operating activities

    164,275       168,301       118,464  

INVESTMENT ACTIVITIES

                       

Purchase of debt securities available for sale

    (293,832 )     (156,815 )     (83,004 )

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

    97,732       91,787       84,637  

Proceeds from sale of debt securities available for sale

    38,453       5,736       3,500  

Purchase of debt securities held to maturity

    (250 )     -       (66,002 )

Purchase of equity securities

    -       -       (10 )

Proceeds from sale of equity securities

    -       304       -  

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

    -       250       6,227  

Purchase of BOLI contracts

    (75,000 )     -       (10,000 )

Increase in loans

    (754,533 )     (696,701 )     (957,975 )

Purchase of premises and equipment

    (2,356 )     (2,300 )     (21,154 )

Expenditures to complete construction of other real estate owned

    -       (7 )     -  

Proceeds from sale of other real estate owned and repossessed assets

    1,437       3,272       1,533  

Net cash used in investing activities

    (988,349 )     (754,474 )     (1,042,248 )

FINANCING ACTIVITIES

                       

Net increase in non-interest-bearing deposits

    192,538       117,015       158,721  

Net increase in interest-bearing deposits

    422,187       707,019       512,642  

Net increase (decrease) in federal funds purchased

    182,024       (13,072 )     (54,147 )

Proceeds from issuance of 4.5% Subordinated Notes due November 8, 2027, net of issuance cost

    -       -       29,943  

Repayment of 5.5% Subordinated Notes due November 9, 2022

    -       -       (20,000 )

Repayment of Federal Home Loan Bank advances

    -       (200 )     (400 )

Proceeds from sale of preferred stock, net

    -       -       125  

Proceeds from exercise of stock options

    2,123       2,337       1,911  

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

    (1,977 )     (2,360 )     (1,320 )

Dividends paid on common stock

    (24,053 )     (20,194 )     (10,040 )

Dividends paid on preferred stock

    (63 )     (63 )     (62 )

Net cash provided by financing activities

    772,779       790,482       617,373  

Net (decrease) increase in cash and cash equivalents

    (51,295 )     204,309       (306,411 )

Cash and cash equivalents at beginning of period

    681,895       477,586       783,997  

Cash and cash equivalents at end of period

  $ 630,600     $ 681,895     $ 477,586  

SUPPLEMENTAL DISCLOSURE

                       

Cash paid for:

                       

Interest

  $ 101,605     $ 58,538     $ 34,763  

Income taxes

    42,232       30,547       42,586  

Income tax refund

    (86 )     (2 )     (492 )

NONCASH TRANSACTIONS

                       

Other real estate acquired in settlement of loans

  $ 4,611     $ 3,080     $ 4,685  

Internally financed sale of other real estate owned

    -       662       1,449  

Dividends declared

    9,384       8,018       2,649  

 

 

See Notes to Consolidated Financial Statements.

 

72

 

SERVISFIRSTBANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

ServisFirst Bancshares, Inc. (the “Company”) was formed on August 16, 2007 and is a bank holding company whose business is conducted by its wholly owned subsidiary ServisFirst Bank (the “Bank”). The Bank is headquartered in Birmingham, Alabama, and has provided a full range of banking services to individual and corporate customers throughout the Birmingham market since opening for business in May 2005. The Bank has since expanded into the Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola, Sarasota and Tampa Bay, Florida, Atlanta, Georgia, Charleston, South Carolina and Nashville, Tennessee markets. The Bank owns all of the stock of SF Intermediate Holding Company, Inc., which, in turn, owns all of the stock of SF Holding 1, Inc., which, in turn, owns all of the common stock of the Company’s real estate investment trusts, SF Realty 1, Inc., SF FLA Realty, Inc., SF GA Realty, Inc. and SF TN Realty, Inc. More details about SF Intermediate Holding Company, Inc. and its subsidiaries are included in Note 11.

 

Reclassification

 

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.

 

Basis of Presentation and Accounting Estimates

 

To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate, goodwill and other intangible assets and fair values of financial instruments are particularly subject to change. All numbers are in thousands except share and per share data.

 

Cash, Due from Banks, Interest-Bearing Balances due from Financial Institutions

 

Cash and due from banks includes cash on hand, cash items in process of collection, amounts due from banks and interest bearing balances due from financial institutions. For purposes of cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Cash flows from loans, mortgage loans held for sale, federal funds sold, and deposits are reported net.

 

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits. The total of those reserve balances was approximately $33.9 million at December 31, 2019 and $51.0 million at December 31, 2018.

 

Debt Securities

 

Securities are classified as available-for-sale when they might be sold before maturity. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of stockholders’ equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific-identification method. The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.

 

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are reported at amortized cost. In determining the existence of other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

73

 

Mortgage Loans Held for Sale

 

The Company classifies certain residential mortgage loans as held for sale. Typically, mortgage loans held for sale are sold to a third-party investor within a very short time period. The loans are sold without recourse and servicing is not retained. Net fees earned from this banking service are recorded in noninterest income.

 

In the course of originating mortgage loans and selling those loans in the secondary market, the Company makes various representations and warranties to the purchaser of the mortgage loans. Each loan is underwritten using government agency guidelines. Any exceptions noted during this process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Company within the specified period following discovery. The Company continues to experience an insignificant level of investor repurchase demands. There were no expenses incurred as part of these buyback obligations for the years ended December 31, 2019 and 2018.

 

Loans

 

Loans are reported at unpaid principal balances, less unearned fees and the allowance for loan losses. Interest on all loans is recognized as income based upon the applicable rate applied to the daily outstanding principal balance of the loans. Interest income on nonaccrual loans is recognized on a cash basis or cost recovery basis until the loan is returned to accrual status. A loan may be returned to accrual status if the Company is reasonably assured of repayment of principal and interest and the borrower has demonstrated sustained performance for a period of at least six months. Loan fees, net of direct costs, are reflected as an adjustment to the yield of the related loan over the term of the loan. The Company does not have a concentration of loans to any one industry.

 

The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-collateralized and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status are reversed against current interest income. Interest collections on nonaccrual loans are generally applied as principal reductions. The Company determines past due or delinquency status of a loan based on contractual payment terms.

 

A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

 

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business management grants concessions to borrowers, which would not otherwise be considered, where the borrowers are experiencing financial difficulty. The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan. In some cases, the conditions of the credit also warrant nonaccrual status, even after the restructure occurs. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure. TDR loans may be returned to accrual status if there has been at least a six-month sustained period of repayment performance by the borrower.

 

Acquired loans are recorded at fair value at the date of acquisition and accordingly, no allowance for loan losses is transferred to the acquiring entity in connection with acquisition accounting. The fair values of loans with evidence of credit deterioration (purchased, credit impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit impaired loans. For purchased credit impaired loans, cash flows are estimated at Day 1 and discounted at a market interest rate which creates accretable yield to be recognized over the life of the loan. Contractual principal and interest payments not expected to be collected are considered non-accretable difference. Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each purchased credit impaired loan in comparison to management’s initial performance expectations.

 

Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.

 

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Acquired performing loans are accounted for using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Acquired performing loans are recorded as of the acquisition date at fair value, considering credit and other risks, with no separate allowance for loan losses account. Credit losses on the acquired performing loans are estimated in future periods based on analysis of the performing portfolio. A provision for loan losses is recognized for any further credit deterioration that occurs in these loans subsequent to the acquisition date. Fair value discounts on Day 1 are accreted as interest income over the life of the loans.

 

Allowance for Loan Losses

 

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.

 

Foreclosed Real Estate

 

Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property’s new basis. Any write downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in other operating expenses.

 

Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Assets which are disposed of are removed from the accounts and the resulting gains or losses are recorded in operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets (3 to 39.5 years).

 

Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements.

 

Leases

 

The Company leases certain office space and equipment under operating leases. Accounting Standards Update 2016-02, “Leases (Topic 842)” requires that operating leases in effect as of date of adoption,  January 1, 2019 for the Company, be recognized as a liability to make lease payments and as an asset representing the right to use the asset during the lease term, or “lease liability” and “right-of-use asset”, respectively. The lease liability is measured by the present value of remaining lease payments, discounted at the Company’s incremental borrowing rate. The Company reports its right-of-use assets in other assets and its lease liabilities in other liabilities.

 

Certain of the leases include one or more renewal options that extend the initial lease term 1 to 5 years. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, a majority of renewals to extend lease terms are not included in the right-of-use assets and lease liabilities as they are not reasonably certain to be exercised. Renewal options are regularly evaluated and when they are reasonably certain to be exercised, are included in lease terms.

 

None of the Company’s leases provide an implicit rate. The Company uses its incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

 

The Company has made an accounting policy election to not apply the recognition requirements in ASU 2016-02 to short-term leases. The Company has also elected to use the practical expedients allowed by the new standard as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases.

 

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Goodwill and Other Identifiable Intangible Assets 

 

Other identifiable intangible assets include a core deposit intangible recorded in connection with the acquisition of Metro Bancshares, Inc. The core deposit intangible is being amortized over 7 years and the estimated useful life is periodically reviewed for reasonableness.

 

The Company has recorded $13.6 million of goodwill at December 31, 2019 in connection with the acquisition of Metro Bancshares, Inc. in 2015. The Company tests its goodwill for impairment annually unless interim events or circumstances make it more likely than not that an impairment loss has occurred. Impairment is defined as the amount by which the implied fair value of the goodwill is less than the goodwill’s carrying value. Impairment losses, if incurred, would be charged to operating expense. For the purposes of evaluating goodwill, the Company has determined that it operates only one reporting unit.

 

Derivatives and Hedging Activities

 

As part of its overall interest rate risk management, the Company uses derivative instruments, which can include interest rate swaps, caps, and floors. Financial Accounting Standards Board (“FASB”) ASC 815-10, Derivatives and Hedging, requires all derivative instruments to be carried at fair value on the balance sheet. This accounting standard provides special accounting provisions for derivative instruments that qualify for hedge accounting. To be eligible, the Company must specifically identify a derivative as a hedging instrument and identify the risk being hedged. The derivative instrument must be shown to meet specific requirements under this accounting standard.

 

The Company designates the derivative on the date the derivative contract is entered into as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair-value” hedge) or (2) a hedge of a forecasted transaction of the variability of cash flows to be received or paid related to a recognized asset or liability (a “cash-flow” hedge). Changes in the fair value of a derivative that is highly effective as a fair-value hedge, and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings. The effective portion of the changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge is recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). The remaining gain or loss on the derivative, if any, in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in earnings.

 

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assessed, both at the hedge’s inception and on an ongoing basis (if the hedges do not qualify for short-cut accounting), whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is re-designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.

 

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, hedge accounting is discontinued prospectively and the derivative will continue to be carried on the balance sheet at its fair value with all changes in fair value being recorded in earnings but with no offsetting being recorded on the hedged item or in other comprehensive income for cash flow hedges.

 

The Company uses derivatives to hedge interest rate exposures associated with mortgage loans held for sale and mortgage loans in process. The Company regularly enters into derivative financial instruments in the form of forward contracts, as part of its normal asset/liability management strategies. The Company’s obligations under forward contracts consist of “best effort” commitments to deliver mortgage loans originated in the secondary market at a future date. Interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. In the normal course of business, the Company regularly extends these rate lock commitments to customers during the loan origination process. The fair values of the Company’s forward contract and rate lock commitments to customers as of December 31, 2019 and 2018 were not material and have not been recorded.

 

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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 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.

 

Income Taxes

 

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

 

The Company follows the provisions of ASC 740-10, Income Taxes. ASC 740-10 establishes a single model to address accounting for uncertain tax positions. ASC 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740-10 also provides guidance on derecognition measurement classification interest and penalties, accounting in interim periods, disclosure, and transition. ASC 740-10 provides a two-step process in the evaluation of a tax position. The first step is recognition. A Company determines whether it is more likely than not that a tax position will be sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the position. The second step is measurement. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

 

Stock-Based Compensation

 

At December 31, 2019, the Company had a stock-based compensation plan for grants of equity compensation to key employees and directors. The plan has been accounted for under the provisions of FASB ASC 718-10, Compensation – Stock Compensation with respect to employee stock options and under the provisions of FASB ASC 505-50, Equity-Based Payments to Non-Employees, with respect to non-employee stock options. Specifically, awards to employees are accounted for using the fair value-based method of accounting. Stock compensation costs are recognized prospectively for all new awards granted under the stock-based compensation plans. Compensation expense related to share options is calculated using a method that is based on the underlying assumptions of the Black-Scholes-Merton option pricing model and is charged to expense over the requisite service period (e.g. vesting period). Compensation expense related to restricted stock awards is based upon the fair value of the awards on the date of grant and is charged to earnings over the requisite service period of the award.

 

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Earnings per Common Share

 

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

 

Loan Commitments and Related Financial Instruments

 

Financial instruments, which include credit card arrangements, commitments to make loans and standby letters of credit, are issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10. The fair value of these financial guarantees is not material.

 

Fair Value of Financial Instruments

 

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 21. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income. Accumulated comprehensive income, which is recognized as a separate component of equity, includes unrealized gains and losses on securities available for sale.

 

Advertising 

 

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2019, 2018 and 2017 was $581,000, $557,000 and $716,000, respectively. Advertising typically consists of local print media aimed at businesses that the Company targets as well as sponsorships of local events in which the Company’s clients and prospects are involved.

 

Recently Adopted 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. The Company adopted the amendments in this ASU by applying the alternative transition method allowing comparative periods to not be restated and any cumulative effect adjustment to the opening balance of retained earnings to be recognized as of January 1, 2019. The Company elected the three practical expedients allowed by the amendments as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases. Upon adoption on January 1, 2019 the Company recorded a right-of-use asset of approximately $15.3 million and lease liability of approximately $15.3 million. See Note 6 – Leases.

 

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 were effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption was permitted. The amendments were to 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 did 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 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, which previously only included 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 were effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption was permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company adopted this ASU effective January 1, 2019; however, the amendments did not have an impact on the Company’s Consolidated Financial Statements because it does not have any unvested stock-based payment awards currently outstanding to nonemployees.

 

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Recent Accounting Pronouncements

 

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. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company will adopt this guidance as of January 1, 2020. Transition to the new ASU will be through a cumulative-effect adjustment to beginning retained earnings, net of income taxes, as of January 1, 2020.

 

The Company’s CECL implementation team includes leadership from Accounting, Credit Administration and Risk Management. This group has worked closely with a third-party software solution vendor providing expertise in CECL modeling techniques to develop new expected credit loss estimation models. Loans with similar risk characteristics will be collectively evaluated in pools and, depending on the nature of each identified pool, the Company is currently planning to implement a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool will then be adjusted by forecast factors that can be quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. The Company plans to utilize a stable macroeconomic environment forecast over a one year reasonable and supportable forecast period. After the forecast period, the Company will revert to longer term average historical loss experience to estimate losses over the remaining life. The Company will also include qualitative factor adjustments, as appropriate, to account for potential limitations in the model and to fully reflect the Company’s expectations of current conditions pertinent to its loan portfolio.

 

Credit losses for loans that no longer share similar risk characteristics will be estimated on an individual basis. Individual evaluations will typically be performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings. Specific allowances will be estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

 

The estimation methodology for credit losses on lending-related commitments will be similar to the process for estimating credit losses for loans, with the addition of a probability of draw estimate that will be applied to each commitment amount.

 

Based upon the nature and characteristics of our securities portfolios at the adoption date, the macroeconomic conditions and forecasts at that date, and other management judgments, the Company does not currently expect to record any allowance for credit losses on available for sale securities.

 

CECL parallel comparisons were performed and enhanced throughout 2019, with limited comparisons completed for the second and third quarters and a more complete parallel run for the fourth quarter. Based on the fourth quarter parallel run and the prevailing economic conditions and forecasts as of the adoption date, the Company is currently estimating a decrease in the allowance for loan losses under CECL by approximately 1% to 5%. The estimated decrease in the allowance at adoption is the result of implementing a more quantitative methodology along with the loan portfolio consisting primarily of commercial loans with generally short contractual maturities which more than offsets any increases in the consumer loan portfolios with generally longer maturities.

 

The Company will continue to enhance key implementation initiatives during the first quarter of 2020, including documentation and analytics, policies and procedures, and end-to-end process controls. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.

 

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.

 

 

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NOTE 2.

DEBT SECURITIES

 

The amortized cost and fair values of available-for-sale and held-to-maturity debt securities at December 31, 2019 and 2018 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gain

   

Loss

   

Value

 

December 31, 2019

 

(In Thousands)

 

Securities Available for Sale

                               

U.S. Treasury Securities

  $ 48,923     $ 291     $ (4 )   $ 49,210  

Government Agency Securities

    18,245       143       (2 )     18,386  

Mortgage-backed securities

    470,513       4,859       (1,318 )     474,054  

State and municipal securities

    56,951       335       (14 )     57,272  

Corporate debt

    157,549       3,098       (170 )     160,477  

Total

  $ 752,181     $ 8,726     $ (1,508 )   $ 759,399  

Debt Securities Held to Maturity

                               

State and municipal securities

    250       -       -       250  

Total

  $ 250     $ -     $ -     $ 250  
                                 

December 31, 2018

                               

Securities Available for Sale

                               

U.S Treasury Securities

  $ 58,750     $ 75     $ (397 )   $ 58,428  

Government Agency Securities

    18,784       3       (222 )     18,565  

Mortgage-backed securities

    309,244       591       (5,531 )     304,304  

State and municipal securities

    106,465       208       (679 )     105,994  

Corporate debt

    102,982       668       (757 )     102,893  

Total

  $ 596,225     $ 1,545     $ (7,586 )   $ 590,184  

Securities Held to Maturity

                               

State and municipal securities

    -       -       -       -  

Total

  $ -     $ -     $ -     $ -  

 

All mortgage-backed debt 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.

 

At year-end 2019 and 2018, there were no holdings of debt securities of any issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

The amortized cost and fair value of debt securities as of December 31, 2019 and 2018 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

December 31, 2019

   

December 31, 2018

 
   

Amortized Cost

   

Market Value

   

Amortized Cost

   

Market Value

 
   

(In Thousands)

 

Debt securities available for sale

                               

Due within one year

  $ 58,722     $ 58,975     $ 38,343     $ 38,225  

Due from one to five years

    90,034       91,005       167,873       166,380  

Due from five to ten years

    129,501       131,914       77,811       78,276  

Due after ten years

    3,411       3,451       2,954       2,999  

Mortgage-backed securities

    470,513       474,054       309,244