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ServisFirst Bancshares, Inc. - Quarter Report: 2014 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

 

 

FORM 10-Q

 

 

(Mark one)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014

 

¨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 000-53149

 

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.)

 

850 Shades Creek Parkway, Birmingham, Alabama   35209

(Address of Principal Executive Offices)   (Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

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

 

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

Yes x No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

 

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

 

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 Monday, July 28, 2014
Common stock, $.001 par value   24,749,436

 

 

 

 
 

  

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
Item 1. Consolidated Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
Item 4. Controls and Procedures 43
     
PART II. OTHER INFORMATION 44
Item 1 Legal Proceedings 44
Item 1A. Risk Factors 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 3. Defaults Upon Senior Securities 44
Item 4. Mine Safety Disclosures 44
Item 5. Other Information 44
Item 6. Exhibits 44

 

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. CONSOLIDATED FINANCIAL STATEMENTS

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS JUNE 30, 2014 AND DECEMBER 31, 2013

(In thousands, except share and per share amounts)

 

   June 30, 2014   December 31, 2013 
   (Unaudited)   (Audited) 
ASSETS          
Cash and due from banks  $76,893   $61,370 
Interest-bearing balances due from depository institutions   199,990    188,411 
Federal funds sold   3,044    8,634 
Cash and cash equivalents   279,927    258,415 
Available for sale debt securities, at fair value   294,254    266,220 
Held to maturity debt securities (fair value of $31,446 and $31,315 at June 30, 2014 and December 31, 2013, respectively)   31,178    32,274 
Restricted equity securities   3,418    3,738 
Mortgage loans held for sale   11,675    8,134 
Loans   3,053,989    2,858,868 
Less allowance for loan losses   (32,984)   (30,663)
Loans, net   3,021,005    2,828,205 
Premises and equipment, net   7,745    8,351 
Accrued interest and dividends receivable   9,686    10,262 
Deferred tax assets   12,817    11,018 
Other real estate owned and repossessed assets   6,739    12,861 
Bank owned life insurance contracts   70,090    69,008 
Other assets   14,150    12,213 
Total assets  $3,762,684   $3,520,699 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Noninterest-bearing  $729,163   $650,456 
Interest-bearing   2,428,479    2,369,186 
Total deposits   3,157,642    3,019,642 
Federal funds purchased   181,070    174,380 
Other borrowings   19,957    19,940 
Accrued interest payable   1,946    769 
Other liabilities   21,995    8,776 
Total liabilities   3,382,610    3,223,507 
Stockholders' equity:          
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001 (liquidation preference $1,000), net of discount; 40,000 shares authorized, 40,000 shares issued and outstanding at June 30, 2014 and at December 31, 2013   39,958    39,958 
Preferred stock, par value $.001 per share; 1,000,000 authorized and 960,000 currently undesignated   -    - 
Common stock, par value $.001 per share; 50,000,000 shares authorized; 24,749,436 shares issued and outstanding at June 30, 2014 and 22,050,036 shares issued and outstanding at December 31, 2013   25    7 
Additional paid-in capital   183,765    123,325 
Retained earnings   150,769    130,011 
Accumulated other comprehensive income   5,305    3,891 
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.   379,822    297,192 
Noncontrolling interest   252    - 
Total Stockholders' equity   380,074    297,192 
Total liabilities and stockholders' equity  $3,762,684    3,520,699 

 

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   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
Interest income:                    
Interest and fees on loans  $33,250   $28,874   $65,502   $56,192 
Taxable securities   1,126    908    2,223    1,856 
Nontaxable securities   870    847    1,741    1,679 
Federal funds sold   38    17    80    33 
Other interest and dividends   140    46    159    97 
Total interest income   35,424    30,692    69,705    59,857 
Interest expense:                    
Deposits   3,027    2,784    6,041    5,497 
Borrowed funds   419    427    837    978 
Total interest expense   3,446    3,211    6,878    6,475 
Net interest income   31,978    27,481    62,827    53,382 
Provision for loan losses   2,438    3,334    4,752    7,618 
Net interest income after provision for loan losses   29,540    24,147    58,075    45,764 
Noninterest income:                    
Service charges on deposit accounts   1,057    806    1,925    1,568 
Mortgage banking   674    787    958    1,752 
Securities gains   -    8    -    131 
Increase in cash surrender value life insurance   546    485    1,082    955 
Other operating income   661    487    1,148    964 
Total noninterest income   2,938    2,573    5,113    5,370 
Noninterest expenses:                    
Salaries and employee benefits   9,098    7,056    16,795    12,735 
Equipment and occupancy expense   1,409    1,469    2,775    2,580 
Professional services   532    425    1,048    886 
FDIC and other regulatory assessments   528    426    1,045    858 
OREO expense   298    204    785    594 
Other operating expenses   3,552    2,792    6,692    5,471 
Total noninterest expenses   15,417    12,372    29,140    23,124 
Income before income taxes   17,061    14,348    34,048    28,010 
Provision for income taxes   5,476    4,662    10,705    9,073 
Net income   11,585    9,686    23,343    18,937 
Preferred stock dividends   116    100    216    200 
Net income available to common stockholders  $11,469   $9,586   $23,127   $18,737 
                     
Basic earnings per common share  $0.49   $0.46   $1.01   $0.94 
                     
Diluted earnings per common share  $0.46   $0.44   $0.97   $0.88 

 

See Notes to Consolidated Financial Statements

 

4
 

  

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
Net income  $11,585   $9,686   $23,343   $18,937 
Other comprehensive income (loss), net of tax:                    
Unrealized holding gains (losses) arising during period from securities available for sale, net of tax of $528 and $753 for the three and six months ended June 30, 2014, respectively, and $(1,503) and $(1,657) for the three and six months ended June 30, 2013, respectively   996    (2,790)   1,414    (3,077)
Reclassification adjustment for net gains on sale of securities in net income, net of tax of $3 and $46 for the three and six months ended June 30, 2013, respectively   -    (6)   -    (86)
Other comprehensive income (loss), net of tax   996    (2,796)   1,414    (3,163)
Comprehensive income  $12,581   $6,890   $24,757   $15,774 

 

See Notes to Consolidated Financial Statements

 

5
 

  

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(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, 2013  $39,958   $7   $123,325   $130,011   $3,891   $-   $297,192 
Common dividends paid, $0.05 per share   -    -    -    (1,132)   -    -    (1,132)
Common dividends declared, $0.05 per share   -    -    -    (1,237)   -    -    (1,237)
Preferred dividends paid   -    -    -    (216)   -    -    (216)
3-for-1 common stock split, in the form of a stock dividend   -    17    (17)   -    -    -    - 
Issue 625,000 (pre-split) shares of common stock, net of issuance cost of $4,777   -    1    52,097    -    -    -    52,098 
Issue 250 shares of REIT preferred stock   -    -    -    -    -    250    250 
Exercise 824,400 stock options and warrants, including tax benefit   -    -    5,258    -    -    -    5,258 
Stock-based compensation expense   -    -    3,102    -    -    -    3,102 
Other comprehensive income, net of tax   -    -    -    -    1,414    -    1,414 
Net income   -    -    -    23,343    -    2    23,345 
Balance, June 30, 2014  $39,958   $25   $183,765   $150,769   $5,305   $252   $380,074 
                                    
Balance, December 31, 2012  $39,958   $6   $93,505   $92,492   $7,296   $-   $233,257 
Common dividends paid   -    -    -    (12)   -    -    (12)
Preferred dividends paid   -    -    -    (200)   -    -    (200)
Exercise 148,500 stock options and warrants, including tax benefit   -    -    789    -    -    -    789 
Issuance of 1,800,000 shares upon mandatory conversion of subordinated mandatorily convertible debentures   -    1    14,999    -    -    -    15,000 
Other comprehensive loss, net of tax   -    -    -    -    (3,163)   -    (3,163)
Stock-based compensation expense   -    -    581    -    -    -    581 
Net income   -    -    -    18,937    -    -    18,937 
Balance, June 30, 2013  $39,958   $7   $109,874   $111,217   $4,133   $-   $265,189 

 

See Notes to Consolidated Financial Statements

 

6
 

  

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(In thousands) (Unaudited)

 

   2014   2013 
OPERATING ACTIVITIES          
Net income  $23,343   $18,937 
Adjustments to reconcile net income to net cash provided by:          
Deferred tax benefit   (2,561)   (1,294)
Provision for loan losses   4,752    7,618 
Depreciation and amortization   997    908 
Net amortization of investments   1,115    504 
Decrease in accrued interest and dividends receivable   576    57 
Stock-based compensation expense   3,102    581 
Increase (decrease) in accrued interest payable   1,177    (37)
Proceeds from sale of mortgage loans held for sale   64,463    110,306 
Originations of mortgage loans held for sale   (67,046)   (99,072)
Gain on sale of debt securities available for sale   -    (131)
Gain on sale of mortgage loans held for sale   (958)   (1,782)
Net loss on sale of other real estate owned   272    87 
Write down of other real estate owned   289    402 
Decrease in special prepaid FDIC insurance assessments   -    2,498 
Increase in cash surrender value of life insurance contracts   (1,082)   (955)
Excess tax benefits from exercise of stock options and warrants   (355)   (5)
Net change in other assets, liabilities, and other operating activities   10,840    1,393 
Net cash provided by operating activities   38,924    40,015 
INVESTMENT ACTIVITIES          
Purchase of debt securities available for sale   (39,428)   (33,885)
Proceeds from sale of debt securities available for sale   -    4,139 
Proceeds from maturities, calls and paydowns of debt securities available for sale   13,209    30,614 
Purchase of debt securities held to maturity   -    (10,668)
Proceeds from maturities, calls and paydowns of  debt securities held to maturity   1,096    2,827 
Increase in loans   (197,422)   (240,406)
Purchase of premises and equipment   (391)   (817)
Proceeds from sale of restricted equity securities   320    203 
Proceeds from sale of other real estate owned and repossessed assets   5,431    2,501 
Investment in tax credit partnerships   (1,530)   (5,057)
Net cash used in investing activities   (218,715)   (250,549)
FINANCING ACTIVITIES          
Net increase in noninterest-bearing deposits   78,707    17,022 
Net increase in interest-bearing deposits   59,293    146,383 
Net increase in federal funds purchased   6,690    58,410 
Proceeds from sale of common stock, net   52,098    - 
Proceeds from sale of preferred stock, net   250    - 
Proceeds from exercise of stock options and warrants   5,258    789 
Excess tax benefits from exercise of stock options and warrants   355    5 
Dividends paid on common stock   (1,132)   (12)
Dividends paid on preferred stock   (216)   (200)
Net cash provided by financing activities   201,303    222,397 
Net increase in cash and cash equivalents   21,512    11,863 
Cash and cash equivalents at beginning of year   258,415    180,745 
Cash and cash equivalents at end of year  $279,927   $192,608 
SUPPLEMENTAL DISCLOSURE          
Cash paid for:          
Interest  $5,701    6,512 
Income taxes   6,993    9,890 
NONCASH TRANSACTIONS          
Conversion of mandatorily convertible subordinated debentures  $-    15,000 
Other real estate acquired in settlement of loans   -    2,369 
Internally financed sales of other real estate owned   130    - 
Common dividends declared   1,237    - 

 

See Notes to Consolidated Financial Statements

 

7
 

  

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

 

NOTE 1 - GENERAL

 

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U. S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) 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/A for the year ended December 31, 2013.

 

On May 19, 2014, the Company completed the sale of an aggregate of 625,000 shares (pre-split) of its common stock in its initial public offering. The shares were sold to the public at a price of $91.00 per share (pre-split), generating gross offering proceeds of approximately $56.9 million. The net proceeds to the Company from the sale of such shares, after underwriting commissions and offering expenses, were approximately $52.1 million.

 

The Company announced on June 16, 2014 that it declared a three-for-one split of its common stock in the form of a stock dividend. On July 16, 2014, stockholders of record as of the close of business on July 9, 2014, would receive a distribution of two additional shares of ServisFirst common stock for each share they hold. Except where specifically indicated otherwise, all reported amounts in this Form 10-Q are adjusted to give effect to this stock split.

 

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

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

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

 

NOTE 3 - EARNINGS PER COMMON SHARE

 

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and warrants. All reported amounts in the Form 10-Q are adjusted to give effect to the 3-for-1 stock split disclosed above.

 

8
 

  

   Three Months Ended June 30,   Six Months Ended June 30, 
   2014   2013   2014   2013 
   (In Thousands, Except Shares and Per Share Data) 
Earnings per common share                
Weighted average common shares outstanding   23,627,898    20,834,700    22,917,881    19,854,387 
Net income available to common stockholders  $11,469   $9,586   $23,127   $18,737 
Basic earnings per common share  $0.49   $0.46   $1.01   $0.94 
                     
Weighted average common shares outstanding   23,627,898    20,834,700    22,917,881    19,854,387 
Dilutive effects of assumed conversions and exercise of stock options and warrants   1,195,693    820,626    991,827    1,589,208 
Weighted average common and dilutive potential common shares outstanding   24,823,591    21,655,326    23,909,708    21,443,595 
Net income available to common stockholders  $11,469   $9,586   $23,127   $18,737 
Effect of interest expense on convertible debt, net of tax and discretionary expenditures related to conversion   -    -    -    115 
Net income available to common stockholders, adjusted for effect of debt conversion  $11,469   $9,586   $23,127   $18,852 
Diluted earnings per common share  $0.46   $0.44   $0.97   $0.88 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2014 and December 31, 2013 are summarized as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gain   Loss   Value 
  (In Thousands) 
June 30, 2014    
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $48,590   $847   $(1)  $49,436 
Mortgage-backed securities   92,522    3,360    (19)   95,863 
State and municipal securities   129,202    4,028    (260)   132,970 
Corporate debt   15,779    206    -    15,985 
Total   286,093    8,441    (280)   294,254 
Securities Held to Maturity                    
Mortgage-backed securities   25,630    459    (606)   25,483 
State and municipal securities   5,548    415    -    5,963 
Total  $31,178   $874   $(606)  $31,446 
                     
December 31, 2013                    
Securities Available for Sale                    
U.S. Treasury and government sponsored agencies  $31,641   $674   $(41)  $32,274 
Mortgage-backed securities   85,764    2,574    (98)   88,240 
State and municipal securities   127,083    3,430    (682)   129,831 
Corporate debt   15,738    163    (26)   15,875 
Total   260,226    6,841    (847)   266,220 
Securities Held to Maturity                    
Mortgage-backed securities   26,730    266    (1,422)   25,574 
State and municipal securities   5,544    197    -    5,741 
Total  $32,274   $463   $(1,422)  $31,315 

 

The amortized cost and fair value of debt securities as of June 30, 2014 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories along with the other categories of debt securities.

 

9
 

 

   June 30, 2014 
   Available-for-sale   Held-to-maturity 
   Amortized
Cost
   Fair Value   Amortized
Cost
   Fair Value 
   (In thousands) 
Less than one year  $6,562   $6,622   $-   $- 
One year to five years   113,605    116,426    -    - 
Five years to ten years   72,615    74,488    -    - 
More than ten years   788    855    5,548    5,963 
Mortgage-backed securities   92,522    95,863    25,630    25,483 
   $286,092   $294,254   $31,178   $31,446 

 

The Company had no sales of available-for-sale debt securities during the first six months of 2014. The Company sold one corporate debt security for total proceeds of $3.0 million and a gain of $8,000 during the three months ended June 30, 2013 and sold two corporate debt securities for total proceeds of $4.1 million and a gain of $131,000 during the first six months of 2013.

 

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 June 30, 2014 and December 31, 2013, 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 June 30, 2014, 60 of the Company’s 684 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 June 30, 2014. 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) 
June 30, 2014                        
U.S. Treasury and government sponsored agencies  $(1)  $999   $-   $-   $(1)  $999 
Mortgage-backed securities   (2)   2,042    (623)   18,564    (625)   20,606 
State and municipal securities   (88)   9,695    (172)   14,472    (260)   24,167 
Corporate debt   -    -    -    -    -    - 
Total  $(91)  $12,736   $(795)  $33,036   $(886)  $45,772 
                               
December 31, 2013                              
U.S. Treasury and government sponsored agencies  $(41)  $5,854   $-   $-   $(41)  $5,854 
Mortgage-backed securities   (852)   21,365    (668)   6,691    (1,520)   28,056 
State and municipal securities   (607)   30,666    (75)   3,443    (682)   34,109 
Corporate debt   (26)   5,958    -    -    (26)   5,958 
Total  $(1,526)  $63,843   $(743)  $10,134   $(2,269)  $73,977 

 

10
 

  

NOTE 5 – LOANS

 

The following table details the Company’s loans at June 30, 2014 and December 31, 2013 :

 

   June 30,   December 31, 
   2014   2013 
   (Dollars In Thousands) 
Commercial, financial and agricultural  $1,362,757   $1,278,649 
Real estate - construction   178,033    151,868 
Real estate - mortgage:          
Owner-occupied commercial   708,294    710,372 
1-4 family mortgage   296,220    278,621 
Other mortgage   457,845    391,396 
Subtotal: Real estate - mortgage   1,462,359    1,380,389 
Consumer   50,840    47,962 
Total Loans   3,053,989    2,858,868 
Less: Allowance for loan losses   (32,984)   (30,663)
Net Loans  $3,021,005   $2,828,205 
           
Commercial, financial and agricultural   44.62%   44.73%
Real estate - construction   5.83%   5.31%
Real estate - mortgage:          
Owner-occupied commercial   23.19%   24.85%
1-4 family mortgage   9.70%   9.74%
Other mortgage   14.99%   13.69%
Subtotal: Real estate - mortgage   47.88%   48.28%
Consumer   1.67%   1.68%
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.

 

Loans by credit quality indicator as of June 30, 2014 and December 31, 2013 were as follows:

 

11
 

  

       Special             
June 30, 2014  Pass   Mention   Substandard   Doubtful   Total 
   (In Thousands) 
Commercial, financial and agricultural  $1,320,071   $38,801   $3,885   $-   $1,362,757 
Real estate - construction   164,167    5,260    8,606    -    178,033 
Real estate - mortgage:                         
Owner-occupied commercial   690,258    15,830    2,206    -    708,294 
1-4 family mortgage   287,379    589    8,252    -    296,220 
Other mortgage   441,072    11,824    4,949    -    457,845 
Total real estate mortgage   1,418,709    28,243    15,407    -    1,462,359 
Consumer   50,045    -    795    -    50,840 
Total  $2,952,992   $72,304   $28,693   $-   $3,053,989 

 

       Special             
December 31, 2013  Pass   Mention   Substandard   Doubtful   Total 
   (In Thousands) 
Commercial, financial and agricultural  $1,238,109   $34,883   $5,657   $-   $1,278,649 
Real estate - construction   139,239    3,392    9,237    -    151,868 
Real estate - mortgage:                         
Owner-occupied commercial   696,687    11,545    2,140    -    710,372 
1-4 family mortgage   265,019    1,253    12,349    -    278,621 
Other mortgage   379,419    8,179    3,798    -    391,396 
Total real estate mortgage   1,341,125    20,977    18,287    -    1,380,389 
Consumer   47,243    3    716    -    47,962 
Total  $2,765,716   $59,255   $33,897   $-   $2,858,868 

 

12
 

  

Loans by performance status as of June 30, 2014 and December 31, 2013 were as follows:

 

June 30, 2014  Performing   Nonperforming   Total 
   (In Thousands) 
Commercial, financial and agricultural  $1,361,701   $1,056   $1,362,757 
Real estate - construction   170,432    7,601    178,033 
Real estate - mortgage:               
Owner-occupied commercial   706,711    1,583    708,294 
1-4 family mortgage   295,021    1,199    296,220 
Other mortgage   456,886    959    457,845 
Total real estate mortgage   1,458,618    3,741    1,462,359 
Consumer   50,045    795    50,840 
Total  $3,040,796   $13,193   $3,053,989 

 

December 31, 2013  Performing   Nonperforming   Total 
   (In Thousands) 
Commercial, financial and agricultural  $1,276,935   $1,714   $1,278,649 
Real estate - construction   148,118    3,750    151,868 
Real estate - mortgage:               
Owner-occupied commercial   708,937    1,435    710,372 
1-4 family mortgage   276,725    1,896    278,621 
Other mortgage   391,153    243    391,396 
Total real estate mortgage   1,376,815    3,574    1,380,389 
Consumer   47,264    698    47,962 
Total  $2,849,132   $9,736   $2,858,868 

 

13
 

  

Loans by past due status as of June 30, 2014 and December 31, 2013 were as follows:

 

June 30, 2014  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  $1,018   $-   $-   $1,018   $1,056   $1,360,683   $1,362,757 
Real estate - construction   673    -    -    673    7,601    169,759    178,033 
Real estate - mortgage:                                   
Owner-occupied commercial   293    -    -    293    1,583    706,418    708,294 
1-4 family mortgage   530    -    -    530    1,199    294,491    296,220 
Other mortgage   -    -    -    -    959    456,886    457,845 
Total real estate - mortgage   823    -    -    823    3,741    1,457,795    1,462,359 
Consumer   7    -    -    7    795    50,038    50,840 
Total  $2,521   $-   $-   $2,521   $13,193   $3,038,275   $3,053,989 

 

December 31, 2013  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  $73   $-   $-   $73   $1,714   $1,276,862   $1,278,649 
Real estate - construction   -    -    -    -    3,750    148,118    151,868 
Real estate - mortgage:                                   
Owner-occupied commercial   -    -    -    -    1,435    708,937    710,372 
1-4 family mortgage   177    -    19    196    1,877    276,548    278,621 
Other mortgage   -    -    -    -    243    391,153    391,396 
Total real estate - mortgage   177    -    19    196    3,555    1,376,638    1,380,389 
Consumer   89    97    96    282    602    47,078    47,962 
Total  $339   $97   $115   $551   $9,621   $2,848,696   $2,858,868 

 

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 as of June 30, 2014 and December 31, 2013. 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 -       Qualitative     
   agricultural   construction   mortgage   Consumer   Factors   Total 
   (In Thousands) 
   Three Months Ended June 30, 2014 
Allowance for loan losses:                              
Balance at March 31, 2014  $10,980   $6,058   $8,137   $951   $5,602   $31,728 
Chargeoffs   (142)   (325)   (890)   (18)   -    (1,375)
Recoveries   1    180    10    2    -    193 
Provision   (59)   465    1,224    50    758    2,438 
Balance at June 30, 2014  $10,780   $6,378   $8,481   $985   $6,360   $32,984 

 

   Three Months Ended June 30, 2013 
Allowance for loan losses:                              
Balance at March 31, 2013  $8,951   $6,642   $5,737   $164   $6,185   $27,679 
Chargeoffs   (101)   (1,888)   (270)   (129)   -    (2,388)
Recoveries   31    95    3    3    -    132 
Provision   2,259    604    569    186    (284)   3,334 
Balance at June 30, 2013  $11,140   $5,453   $6,039   $224   $5,901   $28,757 

 

   Six Months Ended June 30, 2014 
Allowance for loan losses:                              
Balance at December 31, 2013  $11,170   $5,809   $7,495   $855   $5,334   $30,663 
Chargeoffs   (1,364)   (348)   (894)   (76)   -    (2,682)
Recoveries   46    188    14    3    -    251 
Provision   928    729    1,866    203    1,026    4,752 
Balance at June 30, 2014  $10,780   $6,378   $8,481   $985   $6,360   $32,984 

 

   Six Months Ended June 30, 2013 
Allowance for loan losses:                              
Balance at December 31, 2012  $8,233   $6,511   $4,912   $199   $6,403   $26,258 
Chargeoffs   (988)   (3,877)   (270)   (131)   -    (5,266)
Recoveries   37    102    3    5    -    147 
Provision   3,858    2,717    1,394    151    (502)   7,618 
Balance at June 30, 2013  $11,140   $5,453   $6,039   $224   $5,901   $28,757 

 

   As of June 30, 2014 
Allowance for loan losses:                              
Individually Evaluated for Impairment   1,215    2,324    2,883    795    -    7,217 
Collectively Evaluated for Impairment   9,565    4,054    5,598    190    6,360    25,767 
                               
Loans:                              
Ending Balance  $1,362,757   $178,033   $1,462,359   $50,840   $-   $3,053,989 
Individually Evaluated for Impairment   3,885    8,607    15,406    795    -    28,693 
Collectively Evaluated for Impairment   1,358,872    169,426    1,446,953    50,045    -    3,025,296 

 

   As of December 31, 2013 
Allowance for loan losses:                              
Individually Evaluated for Impairment   1,992    1,597    1,982    699    -    6,270 
Collectively Evaluated for Impairment   9,178    4,212    5,513    156    5,334    24,393 
                               
Loans:                              
Ending Balance  $1,278,649   $151,868   $1,380,389   $47,962   $-   $2,858,868 
Individually Evaluated for Impairment   3,827    9,238    18,202    699    -    31,966 
Collectively Evaluated for Impairment   1,274,822    142,630    1,362,187    47,263    -    2,826,902 

 

The following table presents details of the Company’s impaired loans as of June 30, 2014 and December 31, 2013, respectively. Loans which have been fully charged off do not appear in the tables.

 

16
 

  

               For the three months   For the six months 
               ended June 30,   ended June 30, 
   June 30, 2014   2014   2014 
                   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  $2,171   $2,663   $-   $2,357   $31   $1,744   $64 
Real estate - construction   2,278    2,655    -    2,311    3    2,253    25 
Real estate - mortgage:                                   
Owner-occupied commercial   749    749    -    755    10    761    17 
1-4 family mortgage   1,521    1,521    -    1,522    18    1,361    36 
Other mortgage   2,305    2,305    -    2,306    36    2,307    71 
Total real estate - mortgage   4,575    4,575    -    4,583    64    4,429    124 
Consumer   -    -    -    -    -    -    - 
Total with no allowance recorded   9,024    9,893    -    9,251    98    8,426    213 
                                    
With an allowance recorded:                                   
Commercial, financial and agricultural   1,714    1,855    1,215    1,968    (13)   1,990    15 
Real estate - construction   6,329    6,871    2,324    6,308    (16)   6,216    20 
Real estate - mortgage:                                   
Owner-occupied commercial   1,456    1,456    434    1,476    3    1,498    17 
1-4 family mortgage   6,731    7,321    1,577    11,225    84    11,261    171 
Other mortgage   2,644    2,944    872    2,918    9    2,934    44 
Total real estate - mortgage   10,831    11,721    2,883    15,619    96    15,693    232 
Consumer   795    795    795    800    (2)   804    (1)
Total with allowance recorded   19,669    21,242    7,217    24,695    65    24,703    266 
                                    
Total Impaired Loans:                                   
Commercial, financial and agricultural   3,885    4,518    1,215    4,325    18    3,734    79 
Real estate - construction   8,607    9,526    2,324    8,619    (13)   8,469    45 
Real estate - mortgage:                                   
Owner-occupied commercial   2,205    2,205    434    2,231    13    2,259    34 
1-4 family mortgage   8,252    8,842    1,577    12,747    102    12,622    207 
Other mortgage   4,949    5,249    872    5,224    45    5,241    115 
Total real estate - mortgage   15,406    16,296    2,883    20,202    160    20,122    356 
Consumer   795    795    795    800    (2)   804    (1)
Total impaired loans  $28,693   $31,135   $7,217   $33,946   $163   $33,129   $479 

 

17
 

  

   December 31, 2013         
       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  $1,210   $1,210   $-   $1,196   $63 
Real estate - construction   1,967    2,405    -    1,363    32 
Real estate - mortgage:                         
Owner-occupied commercial   577    577    -    603    32 
1-4 family mortgage   1,198    1,198    -    1,200    55 
Other mortgage   2,311    2,311    -    1,901    123 
Total real estate - mortgage   4,086    4,086    -    3,704    210 
Consumer   -    -    -    -    - 
Total with no allowance recorded   7,263    7,701    -    6,263    305 
                          
With an allowance recorded:                         
Commercial, financial and agricultural   2,618    2,958    1,992    2,844    98 
Real estate - construction   7,270    7,750    1,597    6,564    200 
Real estate - mortgage:                         
Owner-occupied commercial   1,509    1,509    620    1,573    38 
1-4 family mortgage   11,120    11,120    1,210    10,743    342 
Other mortgage   1,487    1,586    152    1,873    96 
Total real estate - mortgage   14,116    14,215    1,982    14,189    476 
Consumer   699    699    699    790    28 
Total with allowance recorded   24,703    25,622    6,270    24,387    802 
                          
Total Impaired Loans:                         
Commercial, financial and agricultural   3,828    4,168    1,992    4,040    161 
Real estate - construction   9,237    10,155    1,597    7,927    232 
Real estate - mortgage:                         
Owner-occupied commercial   2,086    2,086    620    2,176    70 
1-4 family mortgage   12,318    12,318    1,210    11,943    397 
Other mortgage   3,798    3,897    152    3,774    219 
Total real estate - mortgage   18,202    18,301    1,982    17,893    686 
Consumer   699    699    699    790    28 
Total impaired loans  $31,966   $33,323   $6,270   $30,650   $1,107 

 

Troubled Debt Restructurings (“TDR”) at June 30, 2014, December 31, 2013 and June 30, 2013 totaled $9.2 million, $ 14.2 million and $9.4 million, respectively. At June 30, 2014, the Company had a related allowance for loan losses of $2.2 million allocated to these TDRs, compared to $2.4 million at December 31, 2013 and $1.4 million at June 30, 2013. The Company’s TDRs have resulted primarily from allowing the borrower to pay interest-only for an extended period of time, or through interest rate reductions rather than from debt forgiveness. There are seven TDR loans to one borrower in the amount of $2.2 million in payment default status at June 30, 2014. All other loans classified as TDRs as of June 30, 2014 are performing as agreed under the terms of their restructured plans. The following table presents an analysis of TDRs as of June 30, 2014 and June 30, 2013.

 

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   June 30, 2014   June 30, 2013 
       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   3   $1,000   $1,000    2   $1,066   $1,066 
Real estate - construction   4    1,298    1,298    -    -    - 
Real estate - mortgage:                              
Owner-occupied commercial   -    -    -    3    3,121    3,121 
1-4 family mortgage   4    5,824    5,234    1    4,925    4,925 
Other mortgage   2    1,985    1,685    1    294    294 
Total real estate mortgage   6    7,809    6,919    5    8,340    8,340 
Consumer   -    -    -    -    -    - 
    13   $10,107   $9,217    7   $9,406   $9,406 

 

   Number of   Recorded   Number of   Recorded 
   Contracts   Investment   Contracts   Investment 
                     
Troubled Debt Restructurings                    
That Subsequently Defaulted                    
Commercial, financial and agricultural   1   $142    -   $- 
Real estate - construction   4    1,298    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   -    -    -    - 
1-4 family mortgage   2    747    -    - 
Other mortgage   -    -    -    - 
Total real estate - mortgage   2    747    -    - 
Consumer   -    -    -    - 
    7   $2,187    -   $- 

 

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

At June 30, 2014, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $2,082,000 and $3,102,000 for the three and six months ended June 30, 2014 and $322,000 and $581,000 for the three and six months ended June 30, 2013. The Company recorded a non-routine expense of $703,000 for the first quarter of 2014 resulting from the correction of its accounting for vested stock options previously granted to members of its advisory boards, and recorded a non-routine expense of $1,774,000 for the second quarter of 2014 resulting from an acceleration of vesting of all stock options granted to members of its advisory boards. Such stock options were historically accounted for under the provisions of Accounting Standards Codification (“ASC”) 718-10, Compensation – Stock Compensation, and now have been determined to be recorded as an expense at the fair value of such options in accordance with the provisions of ASC 505-50, Equity-based Payments to Non-employees.

 

The Company’s 2005 Amended and Restated Stock Option Plan allows for the grant of stock options to purchase up to 3,075,000 shares (post-split) of the Company’s common stock. The Company’s 2009 Amended and Restated Stock Incentive Plan authorizes the grant of up to 2,775,000 shares (post-split) and allows for the issuance of Stock Appreciation Rights, Restricted Stock, Stock Options, Non-stock Share Equivalents, Performance Shares or Performance Units. On April 24, 2014, the Company’s stockholders approved the amendment of the 2009 Plan, which amendment authorized the issuance of an additional 500,000 shares (1,500,000 post-split). Both plans allow for the grant of incentive stock options and non-qualified stock options, and awards are generally granted with an exercise price equal to the estimated fair 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 has granted non-plan options to certain persons representing key business relationships to purchase up to an aggregate amount of 165,000 shares of the Company’s common stock at prices between $5.00 and $6.67 per share with a term of ten years. These options are non-qualified and not part of either plan.

 

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 volatilities are based on an index of southeastern United States publicly traded banks. 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.

 

   2014   2013 
Expected volatility   19.25%   18.50%
Expected dividends   1.45%   -%
Expected term (in years)   7.75    7.50 
Risk-free rate   2.33%   1.39%

 

The weighted average grant-date fair value of options granted during the six months ended June 30, 2014 and June 30, 2013 was $2.95 and $2.68, respectively.

 

The following table summarizes stock option activity during the six months ended June 30, 2014 and June 30, 2013:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Shares   Price   Term (years)   Value 
               (In Thousands) 
Six Months Ended June 30, 2014:                    
Outstanding at January 1, 2014   2,328,900   $7.69    5.5   $14,300 
Granted   114,000    13.83    9.6    - 
Exercised   (779,400)   5.63    2.8    18,069 
Forfeited   -    -    -    - 
Outstanding at June 30, 2014   1,663,500    9.08    6.3   $32,818 
                     
Exercisable at June 30, 2014   506,232   $5.24    3.4   $11,931 
                     
Six Months Ended June 30, 2013:                    
Outstanding at January 1, 2013   2,449,500   $6.96    5.8   $9,905 
Granted   75,000    11.00    9.7    - 
Exercised   (129,000)   4.81    3.1    1,054 
Forfeited   -    -    -    - 
Outstanding at June 30, 2013   2,395,500    7.20    5.6   $15,893 
                     
Exercisable at June 30, 2013   1,343,985   $4.70    3.2   $12,277 

 

As of June 30, 2014, there was $1,658,000 of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 1.9 years.

 

Restricted Stock

 

The Company has issued 235,500 shares of restricted stock to certain employees. The value of restricted stock awards is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2014, there was $1,144,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.6 years of the restricted stock’s vesting period.

 

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Stock Warrants

 

The Company granted warrants for 45,000 shares of common stock of the Company with an exercise price of $8.33 per share in the second quarter of 2009. These warrants were granted in connection with the issuance of the Company’s 8.25% Subordinated Note due June 1, 2016. All of these warrants were exercised during the second quarter of 2014.

 

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 June 30, 2014 and December 31, 2013 were not material.

 

NOTE 8 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the U.S. Treasury and London Interbank Offered Rate. The ASU also amends previous rules by removing the restriction on using different benchmark rates for similar hedges. This amendment applies to all entities that elect to apply hedge accounting of the benchmark interest rate. The amendments in this ASU were effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.

 

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments in this ASU are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.

 

In January 2014, the FASB issued ASU No. 2014-1, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. It permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for public entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and are effective for all entities other than public entities for annual periods beginning after December 15, 2014, and interim reporting periods within annual periods beginning after December 15, 2015. Early adoption is permitted retrospective application is required for all periods presented. The Company made an investment in a limited partnership during the first quarter of 2014 which has invested in a qualified affordable housing project. The Company has made an election to account for this investment as provided for in this update, and will recognize the net investment performance of its share of the partnership as tax credits become available.

 

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NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the FASB issued ASU No. 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. These amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of residential foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures about such activities are required by these amendments. The amendments in this ASU become effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2014, and early adoption is permitted. The Company is assessing the impact that these amendments will have on its financial position and results of operations, but does not currently anticipate that it will have a material impact.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. The Company is assessing the effects of this ASU, which exclude financial instruments from its scope, but does not anticipate that it will have a material impact on its financial position or results of operations.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. None of the Company’s share-based payment awards have service components, so the Company does not believe this ASU will have an impact of its financial position or results of operations.

 

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.

 

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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 $1,321,000 and $3,556,000 during the three and six months ended June 30, 2014, respectively, and $1,757,000 and $5,682,000 during the three and six months ended June 30, 2013, respectively.

 

Other Real Estate Owned. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO of $226,000 and $532,000 was recognized for the three and six months ended June 30, 2014, respectively, and $203,000 and $511,000 for the three and six months ended June 30, 2013, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:

 

   Fair Value Measurements at June 30, 2014 Using     
   Quoted Prices in             
   Active Markets   Significant Other   Significant     
   for Identical   Observable Inputs   Unobservable     
   Assets (Level 1)   (Level 2)   Inputs (Level 3)   Total 
  (In Thousands) 
Assets Measured on a Recurring Basis:    
Available-for-sale securities:                    
U.S. Treasury and government sponsored agencies  $-   $49,436   $-   $49,436 
Mortgage-backed securities   -    95,863    -    95,863 
State and municipal securities   -    132,970    -    132,970 
Corporate debt   -    15,985    -    15,985 
Total assets at fair value  $-   $294,254   $-   $294,254 

 

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   Fair Value Measurements at December 31, 2013 Using     
   Quoted Prices in             
   Active Markets   Significant Other   Significant     
   for Identical   Observable Inputs   Unobservable     
   Assets (Level 1)   (Level 2)   Inputs (Level 3)   Total 
  (In Thousands) 
Assets Measured on a Recurring Basis:                    
Available-for-sale securities                    
U.S. Treasury and government sponsored agencies  $-   $32,274   $-   $32,274 
Mortgage-backed securities   -    88,240    -    88,240 
State and municipal securities   -    129,831    -    129,831 
Corporate debt   -    15,875    -    15,875 
Total assets at fair value  $-   $266,220   $-   $266,220 

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013:

 

   Fair Value Measurements at June 30, 2014 Using     
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs (Level 3)
   Total 
  (In Thousands) 
Assets Measured on a Nonrecurring Basis:    
Impaired loans  $-   $-   $21,476   $21,476 
Other real estate owned and repossessed assets   -    -    6,739    6,739 
Total assets at fair value  $-   $-   $28,215   $28,215 

 

   Fair Value Measurements at December 31, 2013 Using     
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs (Level 3)
   Total 
  (In Thousands) 
Assets Measured on a Nonrecurring Basis:    
Impaired loans  $-   $-   $25,696   $25,696 
Other real estate owned and repossessed assets   -    -    12,861    12,861 
Total assets at fair value  $-   $-   $38,557   $38,557 

 

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:

 

Cash and cash equivalents: The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.

 

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

 

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Restricted equity securities: Fair values for other investments are considered to be their cost as they are redeemed at par value.

 

Loans, net: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The method of estimating fair value does not incorporate the exit-price concept of fair value as prescribed by ASC 820 and generally produces a higher value than an exit-price approach. The measurement of the fair value of loans is classified within Level 3 of the fair value hierarchy.

 

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.

 

Accrued interest and dividends receivable: The carrying amounts in the statements of condition approximate these assets’ fair value.

 

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

 

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation using interest rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposits do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. Measurements of the fair value of certificates of deposit are classified within Level 2 of the fair value hierarchy.

 

Other borrowings: The fair values of borrowings are estimated using discounted cash flow analysis, based on interest rates currently being offered by the Federal Home Loan Bank for borrowings of similar terms as those being valued. These measurements are classified as Level 2 in the fair value hierarchy.

 

Other borrowings: The fair values of other borrowings are estimated using a discounted cash flow analysis, based on interest rates currently being offered on the best alternative debt available at the measurement date. These measurements are classified as Level 2 in the fair value hierarchy.

 

Accrued interest payable: The carrying amounts in the statements of condition approximate these assets’ fair value.

 

Loan commitments: The fair values of the Company’s off-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company’s other off-balance-sheet financial instruments consists of non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

 

The carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2014 and December 31, 2013 are presented in the following table. This table includes those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.

 

25
 

  

   June 30, 2014   December 31, 2013 
   Carrying       Carrying     
   Amount   Fair Value   Amount   Fair Value 
   (In Thousands) 
Financial Assets:                    
Level 2 inputs:                    
Available for sale debt securities  $294,254   $294,254   $266,220   $266,220 
Held to maturity debt securities   31,178    31,446    32,274    31,315 
Restricted equity securities   3,418    3,418    3,738    3,738 
Federal funds sold   3,044    3,044    8,634    8,634 
Mortgage loans held for sale   11,675    11,675    8,134    8,134 
Bank owned life insurance contracts   70,090    70,090    69,008    69,008 
                     
Level 3 inputs:                    
Loans, net   3,021,005    3,030,177    2,828,205    2,825,924 
                     
Financial Liabilities:                    
Level 2 inputs:                    
Deposits  $3,157,642   $3,159,217   $3,019,642   $3,021,847 
Federal funds purchased   181,070    181,070    174,380    174,380 
Other borrowings   19,957    19,957    19,940    19,940 

 

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 June 30, 2014, and events which occurred subsequent to June 30, 2014 but were not recognized in the financial statements. As of the date of this filing, there were no subsequent events that required recognition or disclosure, except for the effects of the 3-for-1 stock split disclosed in Note 1.

 

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 June 30, 2014 and for the three and six months ended June 30, 2014 and June 30, 2013.

 

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 the deposit base; possible changes in laws and regulations and governmental monetary and fiscal policies, including, but not limited to, economic stimulus initiatives; 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/A 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.

 

26
 

 

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 twelve full-service banking offices located in Alabama and the panhandle of Florida, as well as a loan production office in 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 (including negotiable orders of withdrawal, or NOW accounts). 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 (including NOW accounts), interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.

 

Overview

 

As of June 30, 2014, we had consolidated total assets of $3.8 billion, an increase of $0.3 billion, or 8.6%, from $3.5 billion at December 31, 2013. Total loans were $3.1 billion at June 30, 2014, up $0.2 billion, or 6.9%, from $2.9 billion at December 31, 2013. Total deposits were $3.2 billion at June 30, 2014, an increase of $0.2 billion, or 6.7%, from $3.0 billion at December 31, 2013.

 

Net income available to common stockholders for the quarter ended June 30, 2014 was $11.5 million, an increase of $1.9 million, or 19.8%, from $9.6 million for the quarter ended June 30, 2013. Basic and diluted earnings per common share were $0.49 and $0.46, respectively, for the three months ended June 30, 2014, compared to $0.46 and $0.44, respectively, for the corresponding period in 2013.

 

Net income available to common stockholders for the six months ended June 30, 2014 was $23.1 million, an increase of $4.4 million, or 23.5%, from $18.7 million for the six months ended June 30, 2013. Basic and diluted earnings per common share were $1.01 and $0.97, respectively, for the six months ended June 30, 2014, compared to $0.94 and $0.88, respectively, for the corresponding period in 2013.

 

The Company completed an initial public offering of 625,000 shares (pre-split) of its common stock during the quarter ended June 30, 2014, generating gross proceeds of $56.9 million to support future growth. Stockholders’ equity increased to $380.1 million at June 30, 2014, or 27.9%, from $297.1 million at December 31, 2013. The increase was primarily attributable to the results of the Company’s initial public offering and retained earnings over the period.

 

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/A for the fiscal year ended December 31, 2013.

 

27
 

 

Financial Condition

 

Cash and Cash Equivalents

 

At June 30, 2014, we had $3.0 million in federal funds sold, compared to $8.6 million at December 31, 2013. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2014, we had $197.7 million in balances at the Federal Reserve, compared to $186.0 million at December 31, 2013.

 

Debt Securities

 

Debt securities available for sale totaled $294.3 million at June 30, 2014 and $266.2 million at December 31, 2013. Debt securities held to maturity totaled $31.2 million at June 30, 2014 and $32.3 million at December 31, 2013. Pay-downs of $9.7 million in mortgage-backed securities, and maturities and calls of $5.0 million in government agency securities were replaced with purchases of $9.5 million of U.S. Treasury securities, $15.3 million of mortgage-backed securities, $7.8 million of U.S. government agencies and $7.2 million of municipal securities during the first six months of 2014. All securities bought during the first six months of 2014 were are classified as available for sale.

 

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

 

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at June 30, 2014 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 June 30, 2014, we owned certain restricted securities of the Federal Home Loan Bank with an aggregate book value and market value of $3.1 million and certain securities of First National Bankers Bank in which we invested $0.3 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”). All tax-exempt securities currently held are issued by government issuers within the State of Alabama. All corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at June 30, 2014 has a combined average credit rating of AA.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $187.6 million and $200.7 million as of June 30, 2014 and December 31, 2013, respectively.

 

28
 

 

Loans

 

We had total loans of $3.1 billion at June 30, 2014, an increase of $0.2 billion, or 6.9%, compared to $2.9 billion at December 31, 2013. At June 30, 2014, the percentage of our loans in each of our markets were as follows:

 

   Percentage of Total
 Loans in MSA
 
Birmingham-Hoover, AL MSA   50.34%
Huntsville, AL MSA   14.24%
Dothan, AL MSA   12.37%
Montgomery, AL MSA   9.84%
Mobile, AL MSA   4.04%
Total Alabama MSAs   90.83%
Pensacola, FL MSA   7.09%
Nashville, TN MSA   2.08%

 

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 June 30, 2014.

 

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

 

June 30, 2014  Amount   Percentage of loans
 in each category
 to total loans
 
   (In Thousands) 
Commercial, financial and agricultural  $10,780    44.62%
Real estate - construction   6,378    5.83%
Real estate - mortgage   8,481    47.88%
Consumer   985    1.67%
Qualitative factors   6,360    -%
Total  $32,984    100.00%

 

December 31, 2013  Amount   Percentage of loans
 in each category
 to total loans
 
   (In Thousands) 
Commercial, financial and agricultural  $11,170    44.73%
Real estate - construction   5,809    5.31%
Real estate - mortgage   7,495    48.28%
Consumer   855    1.68%
Qualitative factors   5,334    -%
Total  $30,663    100.00%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased to $13.2 million at June 30, 2014, compared to $9.7 million at December 31, 2013. Of this total, nonaccrual loans of $13.2 million at June 30, 2014 represented a net increase of $3.5 million from nonaccrual loans at December 31, 2013. There were no loans 90 or more days past due and still accruing at June 30, 2014, compared to two loans 90 or more days past due and still accruing totaling $115,000, at December 31, 2013. Troubled Debt Restructurings (“TDR”) at June 30, 2014 and December 31, 2013 were $9.2 million and $14.2 million, respectively. This decrease is attributable to net pay-downs of $4.7 million and net charge-offs of $1.7 million. One loan for $1.4 million was newly classified as a TDR during the second quarter of 2014. There were seven TDR loans totaling $2.2 million in payment default status at June 30, 2014.

 

Other real estate owned (OREO) and repossessions decreased to $6.7 million at June 30, 2014, from $12.9 million at December 31, 2013. The total number of OREO and repossessed asset accounts decreased to 26 at June 30, 2014, from 51 at December 31, 2013.

 

29
 

  

The following table summarizes our nonperforming assets and TDRs at June 30, 2014 and December 31, 2013:

 

   June 30, 2014 December 31, 2013 
   Balance   Number of
Loans
   Balance   Number of  
Loans
 
   (Dollar Amounts In Thousands) 
Nonaccrual loans:                    
Commercial, financial and agricultural  $1,056    9   $1,714    9 
Real estate - construction   7,601    21    3,750    14 
Real estate - mortgage:                    
Owner-occupied commercial   1,583    4    1,435    3 
1-4 family mortgage   1,199    4    1,877    3 
Other mortgage   959    1    243    1 
Total real estate - mortgage   3,741    9    3,555    7 
Consumer   795    6    602    4 
Total Nonaccrual loans:  $13,193    45   $9,621    34 
                     
90+ days past due and accruing:                    
Commercial, financial and agricultural  $-    -   $-    - 
Real estate - construction   -    -    -    - 
Real estate - mortgage:                    
Owner-occupied commercial   -    -    -    - 
1-4 family mortgage   -    -    19    1 
Other mortgage   -    -    -    - 
Total real estate - mortgage   -    -    19    1 
Consumer   -    -    96    1 
Total 90+ days past due and accruing:  $-    -   $115    2 
                     
Total Nonperforming Loans:  $13,193    45   $9,736    36 
                     
Plus: Other real estate owned and repossessions   6,739    26    12,861    51 
Total Nonperforming Assets  $19,932    71   $22,597    87 
                     
Restructured accruing loans:                    
Commercial, financial and agricultural  $858    2   $962    2 
Real estate - construction   -    -    217    1 
Real estate - mortgage:                    
Owner-occupied commercial   -    -    -    - 
1-4 family mortgage   4,487    2    8,225    2 
Other mortgage   1,685    2    285    1 
Total real estate - mortgage   6,172    4    8,510    3 
Consumer   -    -    -    - 
Total restructured accruing loans:  $7,030    6   $9,689    6 
                     
Total Nonperforming assets and restructured accruing loans  $26,962    77   $32,286    93 
                     
Ratios:                    
Nonperforming loans to total loans   0.43%        0.34%     
Nonperforming assets to total loans plus other real estate owned   0.65%        0.79%     
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned   0.88%        1.12%     

 

 

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 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

 

We have allocated approximately $6.4 million of our allowance for loan losses to real estate construction, including acquisition and development and lot loans, $10.8 million to commercial, financial and agricultural loans and $9.5 million to other loan types. We have a total loan loss reserve as of June 30, 2014 allocable to specific loan types of $26.7 million. Another $ 6.3 million of our allowance for loan losses is based on our judgment regarding various external and internal factors, including macroeconomic trends, our assessment of the Company’s loan growth prospects and evaluations of internal risk controls. The total resulting loan loss reserve is $33.0 million. Based upon historical performance, known factors, overall judgment and regulatory methodologies, including consideration of the possible effect of current residential housing market defaults and business failures plaguing financial institutions in general, management believes that the current methodology used to determine the adequacy of the allowance for loan losses is reasonable.

 

As of June 30, 2014, we had impaired loans of $28.7 million inclusive of nonaccrual loans, a decrease of $3.3 million from $32.0 million as of December 31, 2013. We allocated $7.2 million of our allowance for loan losses at June 30, 2014 to these impaired loans. 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 risk management team performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

Of the $28.7 million of impaired loans reported as of June 30, 2014, $8.6 million were real estate construction loans, $6.2 million (a total of 16 loans with six builders) were residential construction loans, and $135,000 consisted of various residential lot loans to two builders.

 

Deposits

 

Total deposits increased $0.2 billion, or 6.7%, to $3.2 billion at June 30, 2014 compared to $3.0 billion at December 31, 2013. We anticipate long-term sustainable growth in deposits through continued development of market share in our markets.

 

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

 

Other Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $181.1 million and $174.4 million at June 30, 2014 and December 31, 2013, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 0.28% for the quarter ended June 30, 2014. The $20.0 million in other borrowings consist of 5.50% Subordinated Notes due November 9, 2022, which were issued in a private placement in November 2012. The notes 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.

 

31
 

 

 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 June 30, 2014, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $129.8 million. Additionally, the Bank had additional borrowing availability of approximately $160.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We added a new line for $40.0 million during the second quarter of 2014. We believe these sources of funding are adequate to meet immediate anticipated funding needs. Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Other Borrowings”.

 

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

 

The following table reflects the contractual maturities of our term liabilities as of June 30, 2014. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

   Payments due by Period 
   Total   1 year or less   Over 1 – 3  
years
   Over 3 - 5  
years
   Over 5 years 
   (In Thousands) 
                     
Contractual Obligations (1)                         
                          
Deposits without a stated maturity  $2,756,828   $-   $-   $-   $- 
Certificates of deposit (2)   400,814    233,376    126,770    40,668    - 

Federal funds purchased

   181,070    181,070    -    -    - 
Subordinated debentures   19,957    -    -    -    19,957 
Operating lease commitments   15,580    2,568    4,849    4,036    4,127 
Total  $3,374,249   $417,014   $131,619   $44,704   $24,084 

 

(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 June 30, 2014, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of June 30, 2014.

 

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of June 30, 2014, December 31, 2013 and June 30, 2013:

 

32
 

  

   Actual   For Capital Adequacy 
Purposes
   To Be Well Capitalized 
Under Prompt Corrective  
Action Provisions
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
As of June 30, 2014:                        
Total Capital to Risk-Weighted Assets:                              
Consolidated  $427,458    13.74%  $248,911    8.00%   $N/A    N/A 
ServisFirst Bank   373,795    12.01%   248,886    8.00%   311,108    10.00%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   374,517    12.04%   124,456    4.00%   N/A    N/A 
ServisFirst Bank   340,811    10.95%   124,443    4.00%   186,665    6.00%
Tier 1 Capital to Average Assets:                              
Consolidated   374,517    10.32%   124,456    4.00%   N/A    N/A 
ServisFirst Bank   340,811    9.39%   145,201    4.00%   181,501    5.00%
                               
As of December 31, 2013:                              
Total Capital to Risk-Weighted Assets:                              
Consolidated  $343,904    11.73%  $234,617    8.00%  N/A    N/A 
ServisFirst Bank   341,256    11.64%   234,601    8.00%   293,252    10.00%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   293,301    10.00%   117,308    4.00%   N/A    N/A 
ServisFirst Bank   310,593    10.59%   117,301    4.00%   175,951    6.00%
Tier 1 Capital to Average Assets:                              
Consolidated   293,301    8.48%   138,373    4.00%   N/A    N/A 
ServisFirst Bank   310,593    8.98%   138,331    4.00%   172,913    5.00%
                               
As of June 30, 2013:                              
Total Capital to Risk-Weighted Assets:                              
Consolidated  $309,699    11.65%  $212,673    8.00%   $N/A    N/A%
ServisFirst Bank   307,399    11.56%   212,670    8.00%   265,837    10.00%
Tier 1 Capital to Risk-Weighted Assets:                              
Consolidated   261,018    9.82%   106,337    4.00%   N/A    N/A%
ServisFirst Bank   278,642    10.48%   106,335    4.00%   159,502    6.00%
Tier 1 Capital to Average Assets:                              
Consolidated   261,018    8.80%   118,920    4.00%   N/A    N/A%
ServisFirst Bank   278,642    9.37%   118,993    4.00%   148,741    5.00%

 

Off-Balance Sheet Arrangements

 

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers. We had a reserve of $293,000 as of June 30, 2014 and $264,000 as of December 31, 2013 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at June 30, 2014 are as follows:

 

   June 30, 2014 
   (In Thousands) 
Commitments to extend credit  $1,112,439 
Credit card arrangements   38,915 
Standby letters of credit   26,029 
   $1,177,383 

 

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

 

33
 

 

 

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

 

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

 

Results of Operations

 

Summary of Net Income

 

Net income for the three months ended June 30, 2014 was $11.6 million compared to net income of $9.7 million for the three months ended June 30, 2013. Net income for the six months ended June 30, 2014 was $23.3 million compared to net income of $18.9 million for the six months ended June 30, 2013. Core net income for the three and six months ended June 30, 2014 was $12.7 million and $25.0 million, respectively. Core net income excludes the impact of non-routine expenses in the first and second quarter of 2014 resulting from the correction of our accounting for vested stock options previously granted to members of our advisory boards in our markets, including the acceleration of vesting, as more fully described in “Non-interest Expense” below. For a reconciliation of these non-GAAP measures to the most comparable GAAP measure, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” below. Increases in net income were primarily attributable to increased net interest income, partially offset by increased operating expenses. Net interest income for the three months ended June 30, 2014 increased to $32.0 million, or 16.4%, compared to $27.5 million for the corresponding period in 2013. Net interest income for the six months ended June 30, 2014 increased to $62.8 million, or 17.6%, compared to $53.4 million for the corresponding period in 2013. The provision for loan losses decreased $0.9 million to $2.4 million for the three months ended June 30, 2014 compared to the corresponding period in 2013, and decreased $2.8 million to $4.8 million for the six months ended June 30, 2014 compared to the corresponding period in 2013. The decrease in provision for loan losses is more fully explained in “Provision for Loan Losses” below. Non-interest income increased $0.3 million to $2.9 million for the three months ended June 30, 2014 compared to the corresponding period in 2013, and decreased $0.3 million to $5.1 million for the six months ended June 30, 2014 compared to the corresponding period in 2013. Non-interest expenses for the three months ended June 30, 2014 increased to $15.4 million, or 24.2%, compared to $12.4 million for the corresponding period in 2013, and for the six months ended June 30, 2014 increased to $29.1 million, or 26.0%, compared to $23.1 million for the corresponding period in 2013. Changes in non-interest income and non-interest expense are more fully explained below.

 

Basic and diluted net income per common share were $0.49 and $0.46, respectively, for the three months ended June 30, 2014, compared to $0.46 and $0.44, respectively, for the corresponding period in 2013. Basic and diluted net income per common share were $1.01 and $0.97, respectively, for the six months ended June 30, 2014, compared to $0.94 and $0.88, respectively, for the corresponding period in 2013. Core basic and diluted earnings per share were $0.53 and $0.51, respectively, for the three months ended June 30, 2014, and were $1.08 and $1.03, respectively, for the six months ended June 30, 2014. Return on average assets for the three and six months ended June 30, 2014 was 1.28% and 1.32%, respectively, compared to 1.31% for both of the corresponding periods in 2013. Core return on average assets for the three and six months ended June 30, 2014 was 1.41%. Return on average common stockholders’ equity for the three and six months ended June 30, 2014 was 15.03% and 15.61%, respectively, compared to 17.28% and 17.96% for the corresponding period in 2013. Core return on average common stockholders’ equity for the three and six months ended June 30, 2014 was 16.54% and 16.70%.

 

Net Interest Income

 

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

 

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Taxable-equivalent net interest income increased $4.5 million, or 16.1%, to $32.4 million for the three months ended June 30, 2014 compared to $27.9 million for the corresponding period in 2013, and increased $9.5 million, or 17.5%, to $63.7 million for the six months ended June 30, 2014 compared to $54.2 million for the corresponding period in 2013. This increase was primarily attributable to growth in average earning assets, which increased $0.6 billion, or 22.3% from the second quarter of 2013 to the second quarter of 2014, and $0.6 billion, or 21.6%, from the first six months of 2013 to the first six months of 2014. The taxable-equivalent yield on interest-earning assets decreased to 4.13% for the three months ended June 30, 2014 from 4.38% for the corresponding period in 2013, and decreased to 4.17% for the six months ended June 30, 2014 from 4.39% for the corresponding period in 2013. The yield on loans for the three months ended June 30, 2014 was 4.45% compared to 4.58% for the corresponding period in 2013, and 4.47% compared to 4.61% for the six months ended June 30, 2014 and June 30, 2013, respectively. Loan fees included in the yield calculation increased to $220,000 for the three months ended June 30, 2014 from $60,000 for the corresponding period in 2013, and increased to $460,000 for the six months ended June 30, 2014 from $65,000 for the corresponding period in 2013. Document preparation fees charged on each loan were increased from $300 to $400 early in 2014, and there was an increase in the amount of letter of credit fees collected during the three and six months ended June 30, 2014 when compared to the same periods in 2013. The cost of total interest-bearing liabilities decreased to 0.53% for the three months ended June 30, 2014 from 0.59% for the corresponding period in 2013, and to 0.54% for the six months ended June 30, 2014 from 0.62% for the corresponding period in 2013. Net interest margin for the three months ended June 30, 2014 was 3.74% compared to 3.93% for the corresponding period in 2013, and 3.76% for the six months ended June 30, 2014 compared to 3.92% for the corresponding period in 2013.

 

The following tables show, for the three and six months ended June 30, 2014 and June 30, 2013, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

 

35
 

  

Average Consolidated Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended June 30, 2014 and 2013

(Dollar Amounts In Thousands)

 

   2014   2013 
   Average
 Balance
   Interest
 Earned /
 Paid
   Average
 Yield /
Rate
   Average
Balance
   Interest
 Earned /  
Paid
   Average
 Yield /
 Rate
 
                         
Assets:                              
Interest-earning assets:                              
Loans, net of unearned income (1)                              
Taxable  $2,978,631   $33,095    4.46%  $2,519,869   $28,787    4.58%
Tax-exempt(2)   15,803    128    3.25    2,453    35    5.72 
Mortgage loans held for sale   8,048    65    3.24    14,157    74    2.10 
Investment securities:                              
Taxable   188,148    1,127    2.40    139,189    918    2.65 
Tax-exempt(2)   123,897    1,269    4.11    115,428    1,215    4.22 
Total investment securities (3)   312,045    2,396    3.08    254,617    2,133    3.36 
Federal funds sold   41,388    38    0.37    21,303    14    0.26 
Restricted equity securities   3,446    65    7.57    3,738    21    2.25 
Interest-bearing balances with banks   121,532    75    0.25    30,083    18    0.24 
Total interest-earning assets  $3,480,893   $35,862    4.13%  $2,846,220   $31,082    4.38%
Non-interest-earning assets:                              
Cash and due from banks   57,387              42,175           
Net fixed assets and equipment   8,377              9,359           
Allowance for loan losses, accrued interest and other assets   88,849              75,239           
Total assets  $3,635,506              2,972,993           
                               
Liabilities and stockholders' equity:                              
Interest-bearing liabilities:                              
Interest-bearing demand deposits  $482,115   $320    0.27%  $415,955   $291    0.28%
Savings deposits   25,406    18    0.28    21,733    15    0.28 
Money market accounts   1,472,346    1,607    0.44    1,123,605    1,285    0.46 
Time deposits   402,613    1,083    1.08    402,733    1,193    1.19 
Federal funds purchased   195,809    136    0.28    185,533    136    0.29 
Other borrowings   19,953    283    5.69    19,920    294    5.92 
Total interest-bearing liabilities  $2,598,242   $3,447    0.53%  $2,169,479   $3,214    0.59%
Non-interest-bearing liabilities:                              
Non-interest-bearing demand deposits   675,098              539,228           
Other liabilities   15,908              1,799           
Stockholders' equity   341,371              255,837           
Unrealized gains on securities and derivatives   4,888              6,650           
Total liabilities and stockholders' equity  $3,635,506             $2,972,993           
Net interest spread             3.60%             3.79%
Net interest margin             3.74%             3.93%

 

(1)         Non-accrual loans are included in average loan balances in all periods. Loan fees of $220,000 and $60,000 are included in interest income in 2014 and 2013, respectively.

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

(3)         Unrealized gains of $7,519,000 and $10,230,000 are excluded from the yield calculation in 2014 and 2013, respectively.

 

36
 

  

   For the Three Months Ended June 30, 
   2014 Compared to 2013 
   Increase (Decrease) in Interest Income and Expense Due
to Changes in:
 
   Volume   Rate   Total 
   (In Thousands) 
Interest-earning assets:               
Loans, net of unearned income               
Taxable  $5,116   $(808)  $4,308 
Tax-exempt   114    (21)   93 
Mortgages held for sale   (40)   31    (9)
Debt securities:               
Taxable   299    (90)   209 
Tax-exempt   88    (34)   54 
Total debt securities   387    (124)   263 
Federal funds sold   16    8    24 
Restricted equity securities   (2)   46    44 
Interest-bearing balances with banks   56    1    57 
Total interest-earning assets   5,647    (867)   4,780 
                
Interest-bearing liabilities:               
Interest-bearing demand deposits   44    (15)   29 
Savings   3    -    3 
Money market accounts   383    (61)   322 
Time deposits   -    (110)   (110)
Federal funds purchased   7    (7)   - 
Other borrowed funds   -    (11)   (11)
Total interest-bearing liabilities   437    (204)   233 
Increase in net interest income  $5,210   $(663)  $4,547 

 

We have experienced an unfavorable variance relating to the interest rate component because rates on earning assets have declined at a greater pace compared to deposit cost. Accordingly, the prolonged low interest rate environment has resulted in a compression of the net interest margin. Our growth in loans continues to result in favorable volume component change and overall change.

 

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Average Consolidated Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Six Months Ended June 30, 2014 and 2013

(Dollar Amounts In Thousands)

 

   2014   2013 
   Average
Balance
   Interest
Earned /
Paid
   Average
 Yield / Rate
   Average
Balance
   Interest
Earned /
Paid
   Average
Yield / Rate
 
                         
Assets:                              
Interest-earning assets:                              
Loans, net of unearned income (1)                              
Taxable  $2,935,770   $65,231    4.48%  $2,453,697   $56,047    4.61%
Tax-exempt(2)   15,180    248    3.29    2,458    72    5.91 
Mortgage loans held for sale   6,282    95    3.05    16,725    168    2.03 
Investment securities:                              
Taxable   181,532    2,223    2.47    141,281    1,879    2.68 
Tax-exempt(2)   123,295    2,526    4.13    112,524    2,411    4.32 
Total investment securities (3)   304,827    4,749    3.14    253,805    4,290    3.41 
Federal funds sold   48,104    85    0.36    22,406    26    0.23 
Restricted equity securities   3,591    65    3.65    4,347    43    1.99 
Interest-bearing balances with banks   102,014    89    0.18    32,381    38    0.24 
Total interest-earning assets  $3,415,768   $70,562    4.17%  $2,785,819   $60,684    4.39%
Non-interest-earning assets:                              
Cash and due from banks   56,738              41,808           
Net fixed assets and equipment   8,549              9,301           
Allowance for loan losses, accrued interest and other assets   87,111              74,734           
Total assets  $3,568,166             $2,911,662           
                               
Liabilities and stockholders' equity:                              
Interest-bearing liabilities:                              
Interest-bearing demand deposits  $480,406   $638    0.27%  $414,951   $572    0.28%
Savings deposits   25,245    35    0.28    21,910    30    0.28 
Money market accounts   1,444,649    3,164    0.44    1,099,052    2,510    0.46 
Time deposits   407,590    2,205    1.09    399,336    2,385    1.20 
Federal funds purchased   195,888    270    0.28    161,491    221    - 
Other borrowings   19,949    566    5.72    23,660    760    6.48 
Total interest-bearing liabilities  $2,573,727   $6,878    0.54%  $2,120,400   $6,478    0.62%
Non-interest-bearing liabilities:                              
Non-interest-bearing demand deposits   657,641              531,491           
Other liabilites   10,982              9,394           
Stockholders' equity   321,054              243,509           
Unrealized gains on securities and derivatives   4,762              6,868           
Total liabilities and stockholders' equity  $3,568,166             $2,911,662           
Net interest spread             3.63%             3.78%
Net interest margin             3.76%             3.92%

 

(1)Non-accrual loans are included in average loan balances in all periods. Loan fees of $460,000 and $65,000 are included in interest income in 2014 and 2013, respectively.
(2)Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(3)Unrealized gains of $7,329,000 and $10,566,000 are excluded from the yield calculation in 2014 and 2013, respectively.

 

38
 

 

 

   For the Six Months Ended June 30, 
   2014 Compared to 2013 
   Increase (Decrease) in Interest Income and Expense Due to
Changes in:
 
   Volume   Rate   Total 
   (In Thousands) 
Interest-earning assets:               
Loans, net of unearned income               
Taxable  $10,748   $(1,564)  $9,184 
Tax-exempt   221    (45)   176 
Mortgages held for sale   (134)   61    (73)
Debt securities:               
Taxable   502    (158)   344 
Tax-exempt   224    (109)   115 
Total debt securities   726    (267)   459 
Federal funds sold   40    19    59 
Restricted equity securities   (8)   30    22 
Interest-bearing balances with banks   63    (12)   51 
Total interest-earning assets   11,656    (1,778)   9,878 
                
Interest-bearing liabilities:               
Interest-bearing demand deposits   88    (22)   66 
Savings   5    -    5 
Money market accounts   761    (107)   654 
Time deposits   48    (228)   (180)
Federal funds purchased   47    2    49 
Other borrowed funds   (111)   (83)   (194)
Total interest-bearing liabilities   838    (438)   400 
Increase in net interest income  $10,818   $(1,340)  $9,478 

 

Adverse variance of the change in interest rate component has led to a 16 basis point decrease in the net interest margin due to the prolonged low interest rate environment. Our growth in loans continues to result in a favorable volume component change and overall change.

 

Provision for Loan Losses

 

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At June 30, 2014, total loans rated Special Mention, Substandard, and Doubtful were $101.0 million, or 3.3% of total loans, compared to $93.2 million, or 3.3% of total loans, at December 31, 2013. Impaired loans are reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

 

39
 

  

The provision for loan losses was $2.4 million for the three months ended June 30, 2014, a decrease of $0.9 from $3.3 million for the three months ended June 30, 2013, and was $4.7 million for the six months ended June 30, 2014, a $2.9 million decrease, compared to $7.6 million for the six months ended June 30, 2013. The decrease in provision for loan losses for the three and six-month periods ended June 30, 2014 is primarily attributable to improving credit quality resulting from fewer loan charge-offs. Nonperforming loans increased to $13.2 million, or 0.43% of total loans, at June 30, 2014 from $9.7 million, or 0.34% of total loans, at December 31, 2013, but were lower than $15.0 million, or 0.58% of total loans, at June 30, 2013. Impaired loans decreased to $28.7 million, or 0.9% of total loans, at June 30, 2014, compared to $32.0 million, or 1.1% of total loans, at December 31, 2013. The allowance for loan losses totaled $33.0 million, or 1.08% of total loans, net of unearned income, at June 30, 2014, compared to $30.7 million, or 1.07% of loans, net of unearned income, at December 31, 2013 and $28.8 million, or 1.11% of loans, net of unearned income, at June 30, 2013.

 

Non-interest Income

 

Non-interest income totaled $2.9 million for the three months ended June 30, 2014, an increase of $0.3 million, or 11.5%, compared to the corresponding period in 2013, and totaled $5.1 million for the six months ended June 30, 2014, a decrease of $0.3 million, or 5.6%, compared to the corresponding period in 2013. Service charges on deposit accounts increased to $1.1 million for the three months ended June 30, 2014 compared to $0.8 million for the same period in 2013, and increased to $1.9 million for the six months ended June 30, 2014 compared to $1.6 million for the same period in 2013. This increase was primarily the result of increases in monthly service charges and various transaction fees on many of our business accounts that became effective in May 2014. Income from credit cards increased to $0.5 million for the three months ended June 30, 2014 from $0.3 million for the same period in 2013, and increased to $0.9 million for the six months ended June 30, 2014 compared to $0.6 million for the same period in 2013. We continue to aggressively expand our credit card products, and have begun to sell credit card services through our correspondent banks. Increases in the cash surrender value of bank-owned life insurance contracts increased by $0.1 million during the three month and six periods ended June 30, 2014 compared to the same periods in 2013, a result of the purchase of additional life insurance contracts in September 2013. Income from mortgage banking for the three months ended June 30, 2014 was $0.7 million, down from $0.8 million for the same period in 2013, and for the six months ended June 30, 2014 was $1.0 million compared to $1.8 million for the same period in 2013. Recent fluctuations in market rates for mortgages have resulted in a lower number of refinancings of existing mortgages. We had no securities sales during the first six months of 2014 compared to $0.1 million in gains on sales proceeds of $3.0 million during the second quarter of 2013, and $0.1 million in gains on sales proceeds of $4.1 million during the first six months of 2013.

 

Non-interest Expense

 

Non-interest expense totaled $15.4 million for the three months ended June 30, 2014, an increase of $3.0 million, or 24.2%, compared to $12.4 million for the same period in 2013, and totaled $29.1 million for the six months ended June 30, 2014, an increase of $6.0 million, or 26.0%, compared to $23.1 million for the same period in 2013.

 

Details of expenses are as follows:

 

·Salary and benefit expense increased $2.0 million, or 28.2%, to $9.1 million for the three months ended June 30, 2014 from $7.1 million for the same period in 2013, and increased $4.1 million, or 32.3%, to $16.8 million for the six months ended June 30, 2014 from $12.7 million for the same period in 2013. We had 280 full-time equivalent employees at June 30, 2014 compared to 265 at June 30, 2013, a 5.7% increase. Items impacting the second quarter of 2014 when compared to the same period in 2013 include: (1) new hires with annual salaries totaling $0.2 million (less than $0.1 million recognized during the quarter), (2) $0.3 million higher deferrals of lending-related compensation expense and (3) non-routine expenses of $1.8 million resulting from a correction of our accounting for vested stock options previously granted to members of our advisory boards, as discussed more fully below. Items impacting the six month period ending June 30, 2014 when compared to the same period in 2013 include: (1) new hires with annual salaries totaling $0.9 million ($0.3 million recognized during the first six months of 2014), (2) reversal of $0.6 million during the first quarter of 2014 from accrued incentives related to the 2013 plan year, (3) $0.2 million higher deferrals of lending-related compensation expense and (4) non-routine expenses of $2.5 million resulting from the correction of our accounting for vested stock options previously granted to members of our advisory boards in our markets and the related acceleration of vesting of these stock options. The non-routine expenses discussed above impacted our diluted earnings per share for the first and second quarters of 2014 by $0.02 and $0.05, respectively. We historically accounted for these options under the provisions of FASB ASC 718-10, Compensation – Stock Compensation, and now have determined to recognize as an expense the fair value of these vested options in accordance with the provisions of the FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees. The change in accounting treatment is a non-cash item and does not impact the Company’s operating activities or cash from operations.
40
 

  

·Other operating expenses increased $0.8 million to $3.6 million for the three months ended June 30, 2014 compared to the same period in 2013, and increased $1.2 million to $6.7 million for the six months ended June 30, 2014 compared to the same period in 2013. This increase was primarily the result of write-downs of investments in tax credit partnerships of $0.4 million for the three months ended June 30, 2014 and $0.8 million for the six months ended June 30, 2014 compared to $53,000 and $0.1 million during the same periods in 2013, respectively. We recognized corresponding tax credits of $0.9 million and $1.5 million for the three and six months ended June 30, 2014 compared to $53,000 and $0.1 million for the same periods in 2013. In addition, we accrued $0.4 million during the second quarter of 2014 for the potential settlement of a lawsuit.

 

The following table presents our non-interest income and non-interest expense for the three and six month periods ending June 30, 2014 compared to the same periods in 2013.

 

   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
   2014   2013   $ change   % change   2014   2013   $ change   % change 
Non-interest Income:                                        
Service charges on deposit accounts  $1,057   $806   $251    31.1%  $1,925   $1,568   $357    22.8%
Mortgage banking   674    787    (113)   (14.4)%   958    1,752    (794)   (45.3)%
Securities gains   -    8    (8)   NM    -    131    (131)   NM 
Increase in cash surrender value life insurance   546    485    61    12.6%   1,082    955    127    13.3%
Other operating income   661    487    174    35.7%   1,148    964    184    19.1%
Total non-interest income  $2,938   $2,573   $365    14.2%  $5,113   $5,370   $(257)   (4.8)%
                                         
Non-interest Expense:                                        
Salaries and employee benefits  $9,098   $7,056   $2,042    28.9%  $16,795   $12,735   $4,060    31.9%
Equipment and occupancy expense   1,409    1,469    (60)   (4.1)%   2,775    2,580    195    7.6%
Professional services   532    425    107    25.2%   1,048    886    162    18.3%
FDIC and other regulatory assessments   528    426    102    23.9%   1,045    858    187    21.8%
OREO expense   298    204    94    46.1%   785    594    191    32.2%
Other operating expense   3,552    2,792    760    27.2%   6,692    5,471    1,221    22.3%
Total non-interest expense  $15,417   $12,372   $3,045    24.6%  $29,140   $23,124   $6,016    26.0%

 

Income Tax Expense

 

Income tax expense was $5.5 million for the three months ended June 30, 2014 compared to $4.7 million for the same period in 2013, and was $10.7 million for the six months ended June 30, 2014 compared to $9.1 million for the same period in 2013. Our effective tax rate for the three and six months ended June 30, 2014 was 32.1% and 31.4%, respectively, compared to 32.5% and 32.4%, respectively, for the corresponding periods in 2013. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, change in cash surrender value of bank-owned life insurance and incentive stock option expenses.

 

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

 

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

 

As discussed in more detail in the section titled “Non-interest Expense,” we recorded a non-routine expense of $0.7 million for the first quarter of 2014 resulting from the correction of our accounting for vested stock options previously granted to members of our advisory boards, and we recorded a non-routine expense of $1.8 million for the second quarter of 2014 resulting from an acceleration of vesting of stock options previously granted to members of our advisory boards. This change in accounting treatment is a non-cash item and does not impact our operating activities or cash from operations. The non-GAAP financial measures included in this quarterly report on Form 10-Q results for the first and second quarters of 2014 and the first six months of 2014 are “core net income,” “core net income available to common stockholders,” “core diluted earnings per share,” “core return on average assets” and “core return on average common stockholders’ equity.” Each of these five core financial measures excludes the impact of the non-routine expenses attributable to the correction of our accounting for stock options and related acceleration of vesting of such stock options.

 

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“Core net income” is defined as net income, adjusted by the net effect of the non-routine expense.

 

“Core net income available to common stockholders” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense.

 

“Core diluted earnings per share” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense, divided by weighted average diluted shares outstanding.

 

“Core return on average assets” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average total assets.

 

“Core return of average common stockholders’ equity” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average common stockholders’ equity.

 

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that these non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies, including those in our industry, use. The following reconciliation table provides a more detailed analysis of the non-GAAP financial measures for the six months ended June 30, 2014 and the three month periods ended June 30, 2014 and March 31, 2014. Dollars are in thousands, except share and per share data.

 

   For the Six Months
Ended June 30, 
2014
  

For the Three 

Months Ended June
 30, 2014

   For the Three
 Months Ended 
March 31, 2014
 
Provision for income taxes - GAAP  $10,705   $5,476   $5,229 
Adjustments:               
Adjustment for non-routine expense   865    619    246 
Core provision for income taxes  $11,570   $6,095   $5,475 
                
Return on average assets - GAAP   1.32%   1.28%   1.36%
Net income - GAAP  $23,343   $11,585   $11,758 
Adjustments:               
Adjustment for non-routine expense   1,612    1,155    457 
Core net income  $24,955   $12,740   $12,215 
Average assets  $3,568,159   $3,635,506   $3,500,257 
Core return on average assets   1.41%   1.41%   1.42%
                
Return on average common stockholders' equity   15.61%   15.03%   17.83%
Net income available to common stockholders - GAAP  $23,127   $11,469   $11,658 
Adjustments:               
Adjustment for non-routine expense   1,612    1,155    457 
Core net income available to common stockholders  $24,739   $12,624   $12,115 
Average common stockholders' equity  $298,713   $306,050   $265,188 
Core return on average common stockholders' equity   16.70%   16.54%   18.53%
                
Earnings per share - GAAP  $1.01   $0.49   $0.53 
Weighted average shares outstanding, diluted   22,917,881    23,627,898    22,199,976 
Core diluted earnings per share  $1.08   $0.53   $0.55 
                
Diluted earnings per share - GAAP  $0.97   $0.46   $0.51 
Weighted average shares outstanding, diluted   23,909,707    24,823,590    22,985,670 
Core diluted earnings per share  $1.03   $0.51   $0.53 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall or remain the same. Our asset-liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next 12 months. The asset-liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors.

 

The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap”, which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2013, and there are no significant changes to our sensitivity to changes in interest rates since December 31, 2013 as disclosed in our Form 10-K/A.

 

ITEM 4. CONTROLS AND PROCEDURES

 

CEO and CFO Certification.

 

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

 

Evaluation of Disclosure Controls and Procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

We conducted an evaluation (the "Evaluation") of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of June 30, 2014. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2014, our disclosure controls and procedures are effective to ensure that material information relating to ServisFirst Bancshares, Inc. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

 

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as previously disclosed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013.

  

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time we may be a party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any material legal proceedings except as disclosed in Item 3, “Legal Proceedings”, in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, and there has been no material change in any matter described therein.

 

ITEM 1A. RISK FACTORS

 

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in the Form 10-K/A. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part 1, Item 2 above.

 

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

 

On May 13, 2014, the Company’s registration statement on Form S-1 (File No. 333-193401), which related to the Company’s initial public offering, was declared effective by the SEC. Under that registration statement, the Company registered and sold an aggregate of 625,000 shares (pre-split) of common stock at a price to the public of $91.00 per share (pre-split), generating gross offering proceeds of approximately $56.9 million. Upon completion of the sale of the shares of our common stock referenced in the preceding sentence, our initial public offering terminated. Sandler O’Neill & Partners, L.P. and Raymond James & Associates, Inc. served as underwriters for the offering. The net proceeds to the Company of the sale of such shares, after underwriting commissions and offering expenses, were approximately $52.1 million. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates. There has been no material change in the planned use of proceeds from the Company’s initial public offering as described in its final prospectus filed with the SEC on May 14, 2014 under Rule 424(b) of the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit:   Description
31.01   Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02   Certification of principal financial officer pursuant to Rule 13a-14(a).
32.01   Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02   Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

 

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

 

    SERVISFIRST BANCSHARES, INC.
       
Date: July 30, 2014   By /s/ Thomas A. Broughton  III
      Thomas A. Broughton III
      President and Chief Executive Officer
       
Date: July 30, 2014   By /s/ William M. Foshee
      William M. Foshee
      Chief Financial Officer.

:

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