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ServisFirst Bancshares, Inc. - Quarter Report: 2020 June (Form 10-Q)

sfbs20200630_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

 

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

 

 

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

For the transition period from _______to_______

 

Commission file number 001-36452

 

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware26-0734029

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

2500 Woodcrest Place, Birmingham, Alabama 35209

(Address of Principal Executive Offices) (Zip Code)

 

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $.001 per share

SFBS

The NASDAQ Global Select Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐


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

 

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

 

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

 

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

 

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

 

ClassOutstanding as of July 27, 2020
Common stock, $.001 par value53,882,358

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

3

Item 1.

 

Financial Statements

 

3

Item 2.

 

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

 

24

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

40

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

PART II. OTHER INFORMATION

 

41

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

 

Defaults Upon Senior Securities

 

42

Item 4.

 

Mine Safety Disclosures

 

42

Item 5.

 

Other Information

 

42

Item 6.

 

Exhibits

 

42

 

 

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO

EX-31.02 SECTION 302 CERTIFICATION OF THE CFO

EX-32.01 SECTION 906 CERTIFICATION OF THE CEO

EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share amounts)

 
         
  

June 30, 2020

  

December 31, 2019

 
  

(Unaudited)

    (1) 

ASSETS

 

Cash and due from banks

 $102,282  $78,618 

Interest-bearing balances due from depository institutions

  1,444,293   451,509 

Federal funds sold

  2,352   100,473 

Cash and cash equivalents

  1,548,927   630,600 

Available for sale debt securities, at fair value

  856,128   759,399 

Held to maturity debt securities (fair value of $250 at June 30, 2020 and December 31, 2019)

  250   250 

Mortgage loans held for sale

  14,491   6,312 

Loans

  8,315,375   7,261,451 

Less allowance for loan losses

  (91,507)  (76,584)

Loans, net

  8,223,868   7,184,867 

Premises and equipment, net

  55,588   56,496 

Accrued interest and dividends receivable

  30,928   26,262 

Deferred tax assets

  23,307   25,566 

Other real estate owned and repossessed assets

  6,537   8,178 

Bank owned life insurance contracts

  212,312   209,395 

Goodwill and other identifiable intangible assets

  14,043   14,179 

Other assets

  25,816   26,149 

Total assets

 $11,012,195  $8,947,653 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Liabilities:

 

Deposits:

 

Noninterest-bearing

 $2,678,893  $1,749,879 

Interest-bearing

  6,664,025   5,780,554 

Total deposits

  9,342,918   7,530,433 

Federal funds purchased

  635,606   470,749 

Other borrowings

  64,715   64,703 

Accrued interest payable

  11,710   11,934 

Other liabilities

  42,658   27,152 

Total liabilities

  10,097,607   8,104,971 

Stockholders' equity:

 

Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2020 and December 31, 2019

  -   - 

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,874,276 shares issued and outstanding at June 30, 2020, and 53,623,740 shares issued and outstanding at December 31, 2019

  54   54 

Additional paid-in capital

  222,437   219,766 

Retained earnings

  672,984   616,611 

Accumulated other comprehensive income

  18,611   5,749 

Total stockholders' equity attributable to ServisFirst Bancshares, Inc.

  914,086   842,180 

Noncontrolling interest

  502   502 

Total stockholders' equity

  914,588   842,682 

Total liabilities and stockholders' equity

 $11,012,195  $8,947,653 

 

(1) Derived from audited financial statements.

 

See Notes to Consolidated Financial Statements.

 

3

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In thousands, except per share amounts)

 

(Unaudited)

 
                                 
   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest income:

 

Interest and fees on loans

  $ 89,383     $ 88,610     $ 178,768     $ 174,134  

Taxable securities

    5,092       4,193       10,246       7,939  

Nontaxable securities

    211       393       444       839  

Federal funds sold

    34       1,998       311       3,217  

Other interest and dividends

    360       2,593       2,078       5,357  

Total interest income

    95,080       97,787       191,847       191,486  

Interest expense:

 

Deposits

    10,756       24,240       27,501       46,385  

Borrowed funds

    1,090       3,462       3,472       6,238  

Total interest expense

    11,846       27,702       30,973       52,623  

Net interest income

    83,234       70,085       160,874       138,863  

Provision for loan losses

    10,283       4,884       23,867       9,769  

Net interest income after provision for loan losses

    72,951       65,201       137,007       129,094  

Noninterest income:

 

Service charges on deposit accounts

    1,823       1,786       3,739       3,488  

Mortgage banking

    2,107       1,087       3,178       1,662  

Credit card income

    1,398       1,741       3,163       3,317  

Securities losses

    -       (6 )     -       (6 )

Increase in cash surrender value life insurance

    1,464       778       2,917       1,540  

Other operating income

    241       392       710       721  

Total noninterest income

    7,033       5,778       13,707       10,722  

Noninterest expenses:

 

Salaries and employee benefits

    15,792       14,339       31,450       28,604  

Equipment and occupancy expense

    2,434       2,287       4,834       4,546  

Third party processing and other services

    3,513       2,724       6,858       5,135  

Professional services

    1,091       1,191       2,039       2,185  

FDIC and other regulatory assessments

    595       1,081       1,927       2,100  

OREO expense

    1,303       212       1,904       234  

Other operating expenses

    4,088       4,188       7,724       8,546  

Total noninterest expenses

    28,816       26,022       56,736       51,350  

Income before income taxes

    51,168       44,957       93,978       88,466  

Provision for income taxes

    10,720       9,324       18,752       17,823  

Net income

    40,448       35,633       75,226       70,643  

Preferred stock dividends

    31       31       31       31  

Net income available to common stockholders

  $ 40,417     $ 35,602     $ 75,195     $ 70,612  
                                 

Basic earnings per common share

  $ 0.75     $ 0.67     $ 1.40     $ 1.32  

Diluted earnings per common share

  $ 0.75     $ 0.66     $ 1.39     $ 1.31  

 

See Notes to Consolidated Financial Statements.

 

4

 

 

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(Unaudited)

 
                 
  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income

 $40,448  $35,633  $75,226  $70,643 

Other comprehensive income, net of tax:

 

Unrealized net holding gains arising during period from securities available for sale, net of tax of $309 and $3,419 for the three and six months ended June 30, 2020, respectively, and net of tax of $1,448 and $2,408 for the three and six months ended June 30, 2019, respectively

  1,163   5,282   12,862   9,054 

Reclassification adjustment for net loss on sale of securities, net of tax of $(1) for 2019

  -   5   -   5 

Other comprehensive income, net of tax

  1,163   5,287   12,862   9,059 

Comprehensive income

 $41,611  $40,920  $88,088  $79,702 

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

(In thousands, except share amounts)(Unaudited)

 
                                 
  

Three Months Ended June 30,

 
  

Common Shares

  

Preferred Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Noncontrolling interest

  

Total Stockholders' Equity

 

Balance, April 1, 2019

  53,495,208  $-  $53  $218,147  $527,853  $(969) $502  $745,586 

Common dividends declared, $0.15 per share

  -   -   -   -   (8,030)  -   -   (8,030)

Preferred dividends paid

  -   -   -   -   (31)  -   -   (31)

Issue restricted shares pursuant to stock incentives, net of forfeitures

  5,674   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  26,000   -   1   305   -   -   -   306 

Stock-based compensation expense

  -   -   -   206   -   -   -   206 

Other comprehensive income, net of tax

  -   -   -   -   -   5,287   -   5,287 

Net income

  -   -   -   -   35,633   -   -   35,633 

Balance, June 30, 2019

  53,526,882  $-  $54  $218,658  $555,425  $4,318  $502  $778,957 
                                 

Balance, April 1, 2020

  53,844,009  $-  $54  $221,901  $641,980  $17,448  $502  $881,885 

Common dividends declared, $0.175 per share

  -   -   -   -   (9,413)  -   -   (9,413)

Preferred dividends paid

  -   -   -   -   (31)  -   -   (31)

Issue restricted shares pursuant to stock incentives, net of forfeitures

  10,267   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  20,000   -   -   183   -   -   -   183 

Stock-based compensation expense

  -   -   -   353   -   -   -   353 

Other comprehensive loss, net of tax

  -   -   -   -   -   1,163   -   1,163 

Net income

  -   -   -   -   40,448   -   -   40,448 

Balance, June 30, 2020

  53,874,276  $-  $54  $222,437  $672,984  $18,611  $502  $914,588 

 

  

Six Months Ended June 30,

 
  

Common Shares

  

Preferred Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Noncontrolling interest

  

Total Stockholders' Equity

 

Balance, January 1, 2019

  53,375,195  $-  $53  $218,521  $500,868  $(4,741) $502  $715,203 

Common dividends paid, $0.15 per share

  -   -   -   -   (8,025)  -   -   (8,025)

Common dividends declared, $0.15 per share

  -   -   -   -   (8,030)  -   -   (8,030)

Preferred dividends paid

  -   -   -   -   (31)  -   -   (31)

Issue restricted shares pursuant to stock incentives, net of forfeitures

  8,374   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  143,313   -   1   1,102   -   -   -   1,103 

45,187 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (1,453)  -   -   -   (1,453)

Stock-based compensation expense

  -   -   -   488   -   -   -   488 

Other comprehensive income, net of tax

  -   -   -   -   -   9,059   -   9,059 

Net income

  -   -   -   -   70,643   -   -   70,643 

Balance, June 30, 2019

  53,526,882  $-  $54  $218,658  $555,425  $4,318  $502  $778,957 
                                 

Balance, January 1, 2020

  53,623,740  $-  $54  $219,766  $616,611  $5,749  $502  $842,682 

Common dividends paid, $0.175 per share

  -   -   -   -   (9,409)  -   -   (9,409)

Common dividends declared, $0.175 per share

  -   -   -   -   (9,413)  -   -   (9,413)

Preferred dividends paid

  -   -   -   -   (31)  -   -   (31)

Issue restricted shares pursuant to stock incentives, net of forfeitures

  25,567   -   -   -   -   -   -   - 

Issue shares of common stock upon exercise of stock options

  224,969   -   -   2,444   -   -   -   2,444 

11,031 shares of common stock withheld in net settlement upon exercise of stock options

  -   -   -   (403)  -   -   -   (403)

Stock-based compensation expense

  -   -   -   630   -   -   -   630 

Other comprehensive loss, net of tax

  -   -   -   -   -   12,862   -   12,862 

Net income

  -   -   -   -   75,226   -   -   75,226 

Balance, June 30, 2020

  53,874,276  $-  $54  $222,437  $672,984  $18,611  $502  $914,588 

 

See Notes to Consolidated Financial Statements.

 

6

 

 

SERVISFIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands) (Unaudited)

 
   

Six Months Ended June 30,

 
   

2020

   

2019

 

OPERATING ACTIVITIES

               

Net income

  $ 75,226     $ 70,643  

Adjustments to reconcile net income to net cash provided by

               

Deferred tax (benefit) expense

    (1,160 )     2,427  

Provision for loan losses

    23,867       9,769  

Depreciation

    1,842       1,845  

Accretion on acquired loans

    -       (91 )

Amortization of core deposit intangible

    136       135  

Net amortization of debt securities available for sale

    2,282       1,304  

Increase in accrued interest and dividends receivable

    (4,666 )     (2,565 )

Stock-based compensation expense

    630       488  

(Decrease) increase in accrued interest payable

    (224 )     549  

Proceeds from sale of mortgage loans held for sale

    105,181       45,543  

Originations of mortgage loans held for sale

    (110,182 )     (53,207 )

Gain on sale of mortgage loans held for sale

    (3,178 )     (1,662 )

Net loss on sale of debt securities available for sale

    -       6  

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

    (24 )     2  

Write down of other real estate owned and repossessed assets

    1,836       222  

Operating losses of tax credit partnerships

    4       73  

Increase in cash surrender value of life insurance contracts

    (2,917 )     (1,540 )

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

    15,981       (12,609 )

Net cash provided by operating activities

    104,634       61,332  

INVESTMENT ACTIVITIES

               

Purchase of debt securities available for sale

    (165,627 )     (121,590 )

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

    83,277       64,611  

Purchase of debt securities held to maturity

    -       (250 )

Investment in tax credit partnership and SBIC

    (543 )     -  

Increase in loans

    (1,063,891 )     (442,031 )

Purchase of premises and equipment

    (934 )     (1,218 )

Proceeds from sale of other real estate owned and repossessed assets

    852       48  

Net cash used in investing activities

    (1,146,866 )     (500,430 )

FINANCING ACTIVITIES

               

Net increase in non-interest-bearing deposits

    929,014       19,618  

Net increase in interest-bearing deposits

    883,471       469,468  

Net increase in federal funds purchased

    164,857       170,724  

Proceeds from exercise of stock options

    2,444       1,103  

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

    (403 )     (1,453 )

Dividends paid on common stock

    (18,793 )     (16,044 )

Dividends paid on preferred stock

    (31 )     (31 )

Net cash provided by financing activities

    1,960,559       643,385  

Net increase in cash and cash equivalents

    918,327       204,287  

Cash and cash equivalents at beginning of period

    630,600       681,895  

Cash and cash equivalents at end of period

  $ 1,548,927     $ 886,182  

SUPPLEMENTAL DISCLOSURE

               

Cash paid for:

               

Interest

  $ 31,197     $ 52,074  

Income taxes

    207       24,956  

Income tax refund

    (47 )     -  

NONCASH TRANSACTIONS

               

Other real estate acquired in settlement of loans

  $ 1,023     $ 752  

Dividends declared

    9,413       8,030  

 

See Notes to Consolidated Financial Statements.

 

7

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

 

NOTE 1 - GENERAL

 

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2019.

 

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

 

Allowance for Loan Losses

 

The Company was prepared to fully adopt Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) as of January 1, 2020 prior to the COVID-19 outbreak and subsequent passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which provided financial institutions with the option to delay adoption of ASU 2016-13. The Company has decided to delay its adoption until the earlier of the date on which the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.

 

The allowance for loan losses as of June 30, 2020 is determined under the Company’s incurred loss model. Qualitative adjustments were made to the amount of the allowance to take into effect management’s estimates of the COVID-19 pandemic’s impact on the local and regional markets in which the Company operates. Further discussion of the allowance for loan losses is included in Note 5 – Loans.

 

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

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

 

 

NOTE 3 - EARNINGS PER COMMON SHARE

 

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

 

8

 
  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(In Thousands, Except Shares and Per Share Data)

 

Earnings per common share

                

Weighted average common shares outstanding

  53,854,973   53,515,418   53,779,599   53,490,393 

Net income available to common stockholders

 $40,417  $35,602  $75,195  $70,612 

Basic earnings per common share

 $0.75  $0.67  $1.40  $1.32 
                 

Weighted average common shares outstanding

  53,854,973   53,515,418   53,779,599   53,490,393 

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

  339,533   573,689   401,361   592,464 

Weighted average common and dilutive potential common shares outstanding

  54,194,506   54,089,107   54,180,960   54,082,857 

Net income available to common stockholders

 $40,417  $35,602  $75,195  $70,612 

Diluted earnings per common share

 $0.75  $0.66  $1.39  $1.31 

 

 

NOTE 4 - SECURITIES

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2020 and December 31, 2019 are summarized as follows:

 

      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Market

 
  

Cost

  

Gain

  

Loss

  

Value

 

June 30, 2020

 

(In Thousands)

 

Securities Available for Sale

                

U.S. Treasury securities

 $39,978  $604  $-  $40,582 

Government agencies

  15,225   350   -   15,575 

Mortgage-backed securities

  497,442   19,594   -   517,036 

State and municipal securities

  45,060   517   -   45,577 

Corporate debt

  234,924   3,469   (1,035)  237,358 

Total

 $832,629  $24,534  $(1,035) $856,128 

Securities Held to Maturity

                

State and municipal securities

  250   -   -   250 

Total

 $250  $-  $-  $250 
                 

December 31, 2019

                

Securities Available for Sale

                

U.S. Treasury securities

 $48,923  $291  $(4) $49,210 

Government agencies

  18,245   143   (2)  18,386 

Mortgage-backed securities

  470,513   4,859   (1,318)  474,054 

State and municipal securities

  56,951   335   (14)  57,272 

Corporate debt

  157,549   3,098   (170)  160,477 

Total

 $752,181  $8,726  $(1,508) $759,399 

Securities Held to Maturity

                

State and municipal securities

  250   -   -   250 

Total

 $250  $-  $-  $250 

 

The amortized cost and fair value of debt securities as of June 30, 2020 and December 31, 2019 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.

 

  

June 30, 2020

  

December 31, 2019

 
  

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 
  

(In thousands)

 

Debt securities available for sale

                

Due within one year

 $50,291  $50,553  $58,722  $58,975 

Due from one to five years

  79,483   81,473   90,034   91,005 

Due from five to ten years

  187,295   188,814   129,501   131,914 

Due after ten years

  18,118   18,252   3,411   3,451 

Mortgage-backed securities

  497,442   517,036   470,513   474,054 
  $832,629  $856,128  $752,181  $759,399 
                 

Debt securities held to maturity

                

Due from one to five years

 $250  $250  $250  $250 
  $250  $250  $250  $250 

 

9

 

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

 

The carrying value of debt securities pledged to secure public funds on deposit and for other purposes as required by law as of June 30, 2020 and December 31, 2019 was $431.0 million and $389.9 million, respectively.

 

The following table identifies, as of June 30, 2020 and December 31, 2019, 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, 2020, 1 of the Company’s 657 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, 2020. 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, 2020

                        

U.S. Treasury and government sponsored agencies

 $-  $-  $-  $-  $-  $- 

Mortgage-backed securities

  -   -   -   -   -   - 

State and municipal securities (1)

  -   -   -   307   -   307 

Corporate debt

  (1,035)  68,711   -   -   (1,035)  68,711 

Total

 $(1,035) $68,711  $-  $307  $(1,035) $69,018 

(1) The municipal security with an unrealized loss for twelve months or more has an unrealized loss of $129.60.

     
                         

December 31, 2019

                        

U.S. Treasury and government sponsored agencies

 $(6) $3,278  $-  $-  $(6) $3,278 

Mortgage-backed securities

  (1,206)  153,330   (112)  24,911   (1,318)  178,241 

State and municipal securities

  (4)  1,900   (10)  2,647   (14)  4,547 

Corporate debt

  (170)  19,981   -   -   (170)  19,981 

Total

 $(1,386) $178,489  $(122) $27,558  $(1,508) $206,047 

 

 

NOTE 5 – LOANS

 

The following table details the Company’s loans at June 30, 2020 and December 31, 2019:

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 
         
  

(Dollars In Thousands)

 

Commercial, financial and agricultural

 $3,498,627  $2,696,210 

Real estate - construction

  544,586   521,392 

Real estate - mortgage:

        

Owner-occupied commercial

  1,634,495   1,587,478 

1-4 family mortgage

  665,883   644,188 

Other mortgage

  1,911,384   1,747,394 

Subtotal: Real estate - mortgage

  4,211,762   3,979,060 

Consumer

  60,400   64,789 

Total Loans

  8,315,375   7,261,451 

Less: Allowance for loan losses

  (91,507)  (76,584)

Net Loans

 $8,223,868  $7,184,867 
         
         

Commercial, financial and agricultural

  42.07

%

  37.13

%

Real estate - construction

  6.55

%

  7.18

%

Real estate - mortgage:

        

Owner-occupied commercial

  19.66

%

  21.86

%

1-4 family mortgage

  8.00

%

  8.87

%

Other mortgage

  22.99

%

  24.07

%

Subtotal: Real estate - mortgage

  50.65

%

  54.80

%

Consumer

  0.73

%

  0.89

%

Total Loans

  100.00

%

  100.00

%

 

10

 

In light of the U.S. and global economic crisis brought about by the COVID-19 pandemic, the Company has prioritized assisting its clients through this troubled time.  The CARES Act provides for Payroll Protection Plan (“PPP”) loans to be made by banks to employers with less than 500 employees if they continue to employ their existing workers.  As of  June 30, 2020, the Company has funded approximately 4,800 loans for a total amount of $1.05 billion for clients under the PPP, and management expects to continue to participate in any extensions of the PPP by the Treasury Department. At June 30, 2020, unaccreted deferred loan origination fees, net of costs, related to PPP loans totaled $28.9 million. During the second quarter of 2020, $2.6 million net PPP loan origination fees were recorded as an adjustment to loan yield. These PPP loans are included within the Commercial, financial and agricultural loan category in the table above.

 

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 borrower (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

 

Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

 

Substandard – loans that exhibit well-defined weakness or weaknesses that 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, 2020 and December 31, 2019 were as follows:

 

      

Special

             

June 30, 2020

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Total

 
                     
  

(In Thousands)

 

Commercial, financial and agricultural

 $3,388,928  $46,582  $63,117  $-  $3,498,627 

Real estate - construction

  540,898   3,100   588   -   544,586 

Real estate - mortgage:

                    

Owner-occupied commercial

  1,619,718   10,887   3,890   -   1,634,495 

1-4 family mortgage

  661,070   3,508   1,305   -   665,883 

Other mortgage

  1,903,121   6,509   1,754   -   1,911,384 

Total real estate mortgage

  4,183,909   20,904   6,949   -   4,211,762 

Consumer

  60,299   92   9   -   60,400 

Total

 $8,174,034  $70,678  $70,663  $-  $8,315,375 

 

11

 
      

Special

             

December 31, 2019

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Total

 
                     
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,629,487  $46,176  $20,547  $-  $2,696,210 

Real estate - construction

  512,373   4,731   4,288   -   521,392 

Real estate - mortgage:

                    

Owner-occupied commercial

  1,555,283   18,240   13,955   -   1,587,478 

1-4 family mortgage

  639,959   2,787   1,442   -   644,188 

Other mortgage

  1,735,869   10,018   1,507   -   1,747,394 

Total real estate mortgage

  3,931,111   31,045   16,904   -   3,979,060 

Consumer

  64,789   -   -   -   64,789 

Total

 $7,137,760  $81,952  $41,739  $-  $7,261,451 

 

Loans by performance status as of June 30, 2020 and December 31, 2019 were as follows:

 

June 30, 2020

 

Performing

  

Nonperforming

  

Total

 
             
  

(In Thousands)

 

Commercial, financial and agricultural

 $3,484,491  $14,136  $3,498,627 

Real estate - construction

  543,999   587   544,586 

Real estate - mortgage:

            

Owner-occupied commercial

  1,632,781   1,714   1,634,495 

1-4 family mortgage

  665,200   683   665,883 

Other mortgage

  1,906,523   4,861   1,911,384 

Total real estate mortgage

  4,204,504   7,258   4,211,762 

Consumer

  60,367   33   60,400 

Total

 $8,293,361  $22,014  $8,315,375 

 

December 31, 2019

 

Performing

  

Nonperforming

  

Total

 
             
  

(In Thousands)

 

Commercial, financial and agricultural

 $2,681,280  $14,930  $2,696,210 

Real estate - construction

  519,803   1,589   521,392 

Real estate - mortgage:

            

Owner-occupied commercial

  1,576,652   10,826   1,587,478 

1-4 family mortgage

  641,875   2,313   644,188 

Other mortgage

  1,740,963   6,431   1,747,394 

Total real estate mortgage

  3,959,490   19,570   3,979,060 

Consumer

  64,766   23   64,789 

Total

 $7,225,339  $36,112  $7,261,451 

 

12

 

Loans by past due status as of June 30, 2020 and December 31, 2019 were as follows:

 

June 30, 2020

 

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

 $273  $4,437  $248  $4,958  $13,888  $3,479,781  $3,498,627 

Real estate - construction

  116   -   -   116   587   543,883   544,586 

Real estate - mortgage:

                            

Owner-occupied commercial

  -   442   -   442   1,714   1,632,339   1,634,495 

1-4 family mortgage

  80   -   -   80   683   665,120   665,883 

Other mortgage

  -   -   4,861   4,861   -   1,906,523   1,911,384 

Total real estate - mortgage

  80   442   4,861   5,383   2,397   4,203,982   4,211,762 

Consumer

  46   80   24   150   9   60,241   60,400 

Total

 $515  $4,959  $5,133  $10,607  $16,881  $8,287,887  $8,315,375 

 

December 31, 2019

 

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

 $3,135  $344  $201  $3,680  $14,729  $2,677,801  $2,696,210 

Real estate - construction

  830   -   -   830   1,589   518,973   521,392 

Real estate - mortgage:

                            

Owner-occupied commercial

  917   7,242   -   8,159   10,826   1,568,493   1,587,478 

1-4 family mortgage

  1,638   567   873   3,078   1,440   639,670   644,188 

Other mortgage

  -   -   4,924   4,924   1,507   1,740,963   1,747,394 

Total real estate - mortgage

  2,555   7,809   5,797   16,161   13,773   3,949,126   3,979,060 

Consumer

  35   25   23   83   -   64,706   64,789 

Total

 $6,555  $8,178  $6,021  $20,754  $30,091  $7,210,606  $7,261,451 

 

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: 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.

 

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 contractual 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 rate implicit in the original loan agreement, 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.

 

13

 

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. Overall macroeconomic conditions and uncertainty due to COVID-19 resulted in an increased provision for loans losses related to external factors of $9.0 million for the three months ended June 30, 2020 and $15.7 million for the six months ended June 30, 2020.

 

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

 

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 2020 and June 30, 2019. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

 

  

Commercial,

                 
  

financial and

  

Real estate -

  

Real estate -

         
  

agricultural

  

construction

  

mortgage

  

Consumer

  

Total

 
                     
  

(In Thousands)

 
  

Three Months Ended June 30, 2020

 

Allowance for loan losses:

                    

Balance at March 31, 2020

 $48,780  $3,757  $32,360  $517  $85,414 

Charge-offs

  (1,358)  (376)  (2,520)  (62)  (4,316)

Recoveries

  84   1   13   28   126 

Provision

  480   1,149   8,546   108   10,283 

Balance at June 30, 2020

 $47,986  $4,531  $38,399  $591  $91,507 

 

  

Three Months Ended June 30, 2019

 

Allowance for loan losses:

                    

Balance at March 31, 2019

 $39,459  $3,595  $26,711  $442  $70,207 

Charge-offs

  (3,610)  -   (169)  (63)  (3,842)

Recoveries

  117   -   4   16   137 

Provision

  2,743   (176)  2,237   80   4,884 

Balance at June 30, 2019

 $38,709  $3,419  $28,783  $475  $71,386 

 

  

Six Months Ended June 30, 2020

 

Allowance for loan losses:

                    

Balance at December 31, 2019

 $43,666  $2,768  $29,653  $497  $76,584 

Charge-offs

  (3,998)  (830)  (4,198)  (120)  (9,146)

Recoveries

  146   2   14   40   202 

Provision

  8,172   2,591   12,930   174   23,867 

Balance at June 30, 2020

 $47,986  $4,531  $38,399  $591  $91,507 

 

14

 
  

Six Months Ended June 30, 2019

 

Allowance for loan losses:

                    

Balance at December 31, 2018

 $39,016  $3,522  $25,508  $554  $68,600 

Charge-offs

  (6,647)  -   (219)  (281)  (7,147)

Recoveries

  129   1   11   23   164 

Provision

  6,211   (104)  3,483   179   9,769 

Balance at June 30, 2019

 $38,709  $3,419  $28,783  $475  $71,386 

 

  

As of June 30, 2020

 

Allowance for loan losses:

                    

Individually Evaluated for Impairment

 $9,344  $201  $209  $-  $9,754 

Collectively Evaluated for Impairment

  38,642   4,330   38,190   591   81,753 
                     

Loans:

                    

Ending Balance

 $3,498,627  $544,586  $4,211,762  $60,400  $8,315,375 

Individually Evaluated for Impairment

  63,531   616   8,004   9   72,160 

Collectively Evaluated for Impairment

  3,435,096   543,970   4,203,758   60,391   8,243,215 

 

  

As of December 31, 2019

 

Allowance for loan losses:

                    

Individually Evaluated for Impairment

 $6,085  $86  $3,633  $-  $9,804 

Collectively Evaluated for Impairment

  37,581   2,682   26,020   497   66,780 
                     

Loans:

                    

Ending Balance

 $2,696,210  $521,392  $3,979,060  $64,789  $7,261,451 

Individually Evaluated for Impairment

  20,843   4,320   17,985   -   43,148 

Collectively Evaluated for Impairment

  2,675,367   517,072   3,961,075   64,789   7,218,303 

 

The following table presents details of the Company’s impaired loans as of June 30, 2020 and December 31, 2019, respectively. Loans which have been fully charged off do not appear in the tables.

 

              

For the three months

  

For the six months

 
              

ended June 30,

  

ended June 30,

 
  

June 30, 2020

  

2020

  

2020

 
                  

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

 $30,371  $30,371  $-  $30,939  $122  $31,433  $531 

Real estate - construction

  29   32   -   33   -   34   1 

Real estate - mortgage:

                            

Owner-occupied commercial

  2,942   3,038   -   3,048   49   3,058   91 

1-4 family mortgage

  654   654   -   655   4   506   5 

Other mortgage

  1,701   1,701   -   1,701   18   -   - 

Total real estate - mortgage

  5,297   5,393   -   5,404   71   3,564   96 

Consumer

  9   9   -   9   -   9   - 

Total with no allowance recorded

  35,706   35,805   -   36,385   193   35,040   628 
                             

With an allowance recorded:

                            

Commercial, financial and agricultural

  33,160   34,494   9,344   33,701   203   33,793   467 

Real estate - construction

  587   637   201   965   -   1,201   - 

Real estate - mortgage:

                            

Owner-occupied commercial

  2,008   2,148   169   2,209   5   2,303   8 

1-4 family mortgage

  647   647   40   646   4   649   7 

Other mortgage

  52   52   -   52   1   104   3 

Total real estate - mortgage

  2,707   2,847   209   2,907   10   3,056   18 

Consumer

  -   -   -   -   -   -   - 

Total with allowance recorded

  36,454   37,978   9,754   37,573   213   38,050   485 
                             

Total Impaired Loans:

                            

Commercial, financial and agricultural

  63,531   64,865   9,344   64,640   325   65,226   998 

Real estate - construction

  616   669   201   998   -   1,235   1 

Real estate - mortgage:

                            

Owner-occupied commercial

  4,950   5,186   169   5,257   54   5,361   99 

1-4 family mortgage

  1,301   1,301   40   1,301   8   1,155   12 

Other mortgage

  1,753   1,753   -   1,753   19   104   3 

Total real estate - mortgage

  8,004   8,240   209   8,311   81   6,620   114 

Consumer

  9   9   -   9   -   9   - 

Total impaired loans

 $72,160  $73,783  $9,754  $73,958  $406  $73,090  $1,113 

 

15

 

December 31, 2019

 
              

For the twelve months

 
              

ended December 31, 2019

 
      

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

 $9,015  $10,563  $-  $11,284  $562 

Real estate - construction

  2,731   2,735   -   2,063   126 

Real estate - mortgage:

                    

Owner-occupied commercial

  7,150   7,246   -   7,548   618 

1-4 family mortgage

  287   287   -   289   2 

Other mortgage

  -   -   -   -   - 

Total real estate - mortgage

  7,437   7,533   -   7,837   620 

Consumer

  -   -   -   -   - 

Total with no allowance recorded

  19,183   20,831   -   21,184   1,308 
                     

With an allowance recorded:

                    

Commercial, financial and agricultural

  11,828   19,307   6,085   19,714   395 

Real estate - construction

  1,589   1,589   86   1,614   27 

Real estate - mortgage:

                    

Owner-occupied commercial

  7,888   11,028   2,456   13,627   301 

1-4 family mortgage

  1,153   1,153   176   1,157   1 

Other mortgage

  1,507   1,507   1,001   1,468   21 

Total real estate - mortgage

  10,548   13,688   3,633   16,252   323 

Consumer

  -   -   -   -   - 

Total with allowance recorded

  23,965   34,584   9,804   37,580   745 
                     

Total Impaired Loans:

                    

Commercial, financial and agricultural

  20,843   29,870   6,085   30,998   957 

Real estate - construction

  4,320   4,324   86   3,677   153 

Real estate - mortgage:

                    

Owner-occupied commercial

  15,038   18,274   2,456   21,175   919 

1-4 family mortgage

  1,440   1,440   176   1,446   3 

Other mortgage

  1,507   1,507   1,001   1,468   21 

Total real estate - mortgage

  17,985   21,221   3,633   24,089   943 

Consumer

  -   -   -   -   - 

Total impaired loans

 $43,148  $55,415  $9,804  $58,764  $2,053 

 

16

 

As of June 30, 2020, there are 244 loans outstanding totaling $342.0 million that have payment deferrals in connection with the COVID-19 relief provided by the CARES Act. Of these 244 payment deferrals, 164 were principal only deferrals totaling $102.4 million, 45 were interest only deferrals totaling $151.1 million and 35 were principal and interest deferrals totaling $88.5 million. These deferrals were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

 

Troubled Debt Restructurings (“TDR”) at June 30, 2020, December 31, 2019 and June 30, 2019 totaled $1.6 million, $3.3 million and $11.3 million, respectively. The portion of those TDRs accruing interest at June 30, 2020, December 31, 2019 and June 30, 2019 totaled $975,000, $625,000 and $2.7 million, respectively. At June 30, 2020, the Company had a related allowance for loan losses of $411,000 allocated to these TDRs, compared to $929,000 at December 31, 2019 and $2.0 million at June 30, 2019. TDR activity by portfolio segment for the three and six months ended June 30, 2020 and June 30, 2019 is presented in the table below.

 

  

Three Months Ended June 30, 2020

  

Six Months Ended June 30, 2020

 
      

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

  -  $-  $-   1  $350  $350 

Real estate - construction

  -   -   -   -   -   - 

Real estate - mortgage:

                        

Owner-occupied commercial

  -   -   -   -   -   - 

1-4 family mortgage

  -   -   -   -   -   - 

Other mortgage

  -   -   -   -   -   - 

Total real estate mortgage

  -   -   -   -   -   - 

Consumer

  -   -   -   -   -   - 
   -  $-  $-   1  $350  $350 

 

  

Three Months Ended June 30, 2019

  

Six Months Ended June 30, 2019

 
      

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

  1  $2,742  $2,742   1  $2,742  $2,742 

Real estate - construction

  -   -   -   -   -   - 

Real estate - mortgage:

                        

Owner-occupied commercial

  -   -   -   -   -   - 

1-4 family mortgage

  -   -   -   -   -   - 

Other mortgage

  -   -   -   -   -   - 

Total real estate mortgage

  -   -   -   -   -   - 

Consumer

  -   -   -   -   -   - 
   1  $2,742  $2,742   1  $2,742  $2,742 

 

There were no loans which were modified in the previous twelve months (i.e., the twelve months prior to default) that defaulted during the three and six months ended  June 30, 2020.  There were no loans which were modified in the previous twelve months that defaulted during the three months ended June 30, 2019. There were two commercial loans totaling $325,000 which were modified in the previous twelve months which defaulted during the six months ended  June 30, 2019.  For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.

 

17

 

 

NOTE 6 - LEASES

 

The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The leases have remaining terms up to 8.7 years. At June 30, 2020, the Company had lease right-of-use assets and lease liabilities totaling $11.7 million and $11.8 million, respectively, compared to $13.3 million and $13.4 million, respectively, at December 31, 2019 which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheet.

 

Maturities of operating lease liabilities as of June 30, 2020 are as follows:

 

  

June 30, 2020

  

(In Thousands)

2020 (remaining)

 $1,709 

2021

  2,721 

2022

  2,655 

2023

  2,181 

2024

  1,180 

thereafter

  2,570 

Total lease payments

  13,016 

Less: imputed interest

  (1,182)

Present value of operating lease liabilities

 $11,834 

 

As of June 30, 2020, the weighted average remaining term of operating leases is 5.2 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.19%.

 

Operating cash flows related to leases were $856,000 and $1.7 million, for the three and six months ended June 30, 2020, respectively, compared to $807,000 and $1.6 million for the three and six months ended June 30, 2019, respectively.

 

Lease costs during the three and six months ended June 30, 2020 and June 30, 2019 were as follows (in thousands):

 

    

Three Months Ended June 30, 2020

  

Three Months Ended June 30, 2019

 

Operating lease cost

 $873  $842 

Short-term lease cost

  16   7 

Variable lease cost

  44   52 

Sublease income

  (29)  (6)

Net lease cost

 $904  $895 

 

    

Six Months Ended June 30, 2020

  

Six Months Ended June 30, 2019

 

Operating lease cost

 $1,747  $1,691 

Short-term lease cost

  32   13 

Variable lease cost

  88   102 

Sublease income

  (45)  (12)

Net lease cost

 $1,822  $1,794 

 

 

NOTE 7 - EMPLOYEE AND DIRECTOR BENEFITS

 

Stock Options

 

The Company has a stock-based compensation plan as described below. The compensation cost that has been charged to earnings for the plan was $353,000 and $629,000 for the three and six months ended June 30, 2020 and $206,000 and $488,000 for the three and six months ended June 30, 2019.

 

18

 

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

 

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

 

  

2019

 

Expected volatility

  40.00

%

Expected dividends

  1.74

%

Expected term (in years)

  6.7 

Risk-free rate

  2.55

%

 

There were no grants of stock options during the six months ended June 30, 2020. The weighted average grant-date fair value of options granted during the six months ended June 30, 2019 was $12.60.

 

The following table summarizes stock option activity during the six months ended June 30, 2020 and June 30, 2019:

 

          

Weighted

     
      

Weighted

  

Average

     
      

Average

  

Remaining

  

Aggregate

 
      

Exercise

  

Contractual

  

Intrinsic

 
  

Shares

  

Price

  

Term (years)

  

Value

 
              

(In Thousands)

 

Six Months Ended June 30, 2020:

                

Outstanding at January 1, 2020

  965,248  $15.19   4.9  $21,911 

Granted

  -   -   -   - 

Exercised

  (236,000)  10.36   3.1   5,995 

Forfeited

  (18,000)  30.79   6.6   90 

Outstanding at June 30, 2020

  711,248   18.21   5.3  $13,808 
                 

Exercisable at June 30, 2020

  236,500  $12.76   3.6  $5,446 
                 

Six Months Ended June 30, 2019:

                

Outstanding at January 1, 2019

  1,238,748  $13.02   5.2  $23,355 

Granted

  10,500   34.44   9.7   (2)

Exercised

  (188,500)  5.58   1.8   5,014 

Forfeited

  (13,000)  29.93   7.4   56 

Outstanding at June 30, 2019

 
 
1,047,748   14.37   5.3  $21,233 
                 

Exercisable at June 30, 2019

  328,800  $8.13   3.7  $8,964 

 

As of June 30, 2020, there was approximately $949,000 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 1.1 years.

 

Restricted Stock

 

The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2020, there was $1.9 million of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 3.0 years of the restricted stock’s vesting period.

 

19

 

The following table summarizes restricted stock activity during the six months ended June 30, 2020 and 2019, respectively:

 

  

Shares

  

Weighted Average Grant Date Fair Value

 

Six Months Ended June 30, 2020:

        

Non-vested at January 1, 2020

  71,290  $31.53 

Granted

  25,567   36.29 

Vested

  (18,828)  23.06 

Forfeited

  -   - 

Non-vested at June 30, 2020

  78,029   35.14 
         

Six Months Ended June 30, 2019:

        

Non-vested at January 1, 2019

  44,076  $38.44 

Granted

  23,474   34.03 

Vested

  (5,200)  20.31 

Forfeited

  (2,500)  38.17 

Non-vested at June 30, 2019

  59,850   38.95 

 

 

NOTE 8 - DERIVATIVES

 

The Company periodically enters into derivative contracts to manage exposures to movements in interest rates. The Company purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates. The interest rate cap is not designated as a hedging instrument but rather as a stand-alone derivative. The interest rate cap has an original term of 3 years, a notional amount of $300 million and is tied to the one-month LIBOR rate with a strike rate of 0.50%. The fair value of the interest rate cap is carried on the balance sheet in other assets and the change in fair value is recognized in noninterest income each quarter. At June 30, 2020 the interest rate cap had a fair value of $543,000 and remaining term of 2.8 years.

 

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, 2020 and December 31, 2019 were not material.

 

 

NOTE 9 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In July 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminated, added and modified certain disclosure requirements for fair value measurements. Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 was effective for the Company beginning January 1, 2020. As ASU 2018-13 only revised disclosure requirements, it has no material impact on the Company’s Consolidated Financial Statements.

 

 

NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In  June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

The CARES Act gave financial institutions the option to delay adoption of ASU 2016-13. The Company decided to delay its adoption of the update until the earlier of the date the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective adoption date of January 1, 2020.

 

The Company’s CECL implementation team includes leadership from Accounting, Credit Administration and Risk Management. This group works closely with a third-party software solution vendor providing expertise in CECL modeling techniques to develop expected credit loss estimation models. Loans with similar risk characteristics have been evaluated in pools and, depending on the nature of each identified pool, the Company utilized a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product.

 

20

 

CECL parallel comparisons were performed at June 30, 2020 and the Company estimates the allowance for loan losses under CECL will be within five percent of the allowance for loan losses under the incurred loss methodology. The Company forecasted an immediate reversion to longer term average historical loss experience for the reasonable and supportable forecast due to the current level of uncertainty and unprecedented effect of COVID-19 as well as the corresponding response from the federal government through the CARES Act. Qualitative factors were adjusted for a higher level of risk associated with economic conditions with a mitigating adjustment for the regulatory environment.

 

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

 

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

 

Based upon the nature and characteristics of our securities portfolios at June 30, 2020, the macroeconomic conditions and forecasts at that date, and other management judgments, the Company does not currently expect to record any allowance for credit losses on available for sale securities.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be effective for a limited time, starting March 12, 2020 through December 31, 2022. The Company has identified a replacement reference rate established by the American Financial Exchange. This rate is based on an active market of daily fund trading among participant banks. The Company will apply the guidance provided by this ASU in transitioning to the new reference rate.

 

 

NOTE 11 - FAIR VALUE MEASUREMENT

 

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

 

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

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

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

 

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. The Company bought two corporate debt securities in a private placement transaction, for which Level 2 inputs are not available. The Company uses average observable prices of similar corporate securities owned by the Company to value the two securities and are classified in Level 3 of the hierarchy. The range of values and weighted average value as of June 30, 2020 was 82.232 to 110.1654 and 100.8549, respectively, observed for the Company’s other similar corporate securities. The range of values and weighted average value as of December 31, 2019 was 98.7836 to 112.2305 and 102.2648, respectively, observed for the Company’s other similar corporate securities.

 

21

 

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

 

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. The range of fair value adjustments and weighted average adjustments as of June 30, 2020 was 0% to 50% and 16.4%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 0% to 30% and 5.6%, respectively. 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 $3.8 million and $8.8 million during the three and six months ended June 30, 2020, respectively, and $6.6 million and $8.4 million during the three and six months ended June 30, 2019, respectively.

 

Other Real Estate Owned and repossessed assets. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure and repossessed assets are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO or repossession are charged to the allowance for loan losses subsequent to foreclosure or repossession. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. The range of fair value adjustments and weighted average adjustment as of June 30, 2020 was 5% to 15% and 11.6%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 5% to 10% and 8.0%, respectively. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO and repossessed assets of $1.9 million and $2.4 million was recognized for the three and six months ended June 30, 2020, respectively, and $202,000 and $224,000 for the three and six months ended June 30, 2019, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO and repossessed assets are classified within Level 3 of the hierarchy.

 

There was one residential real estate loan with a balance of $287,000 foreclosed and classified as OREO as of June 30, 2020, compared to one residential real estate loan foreclosure for $103,000 as of December 31, 2019.

 

22

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

 

  

Fair Value Measurements at June 30, 2020 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable Inputs

  

Unobservable

     
  

Assets (Level 1)

  

(Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Recurring Basis:

 

(In Thousands)

 

Available-for-sale debt securities:

                

U.S. Treasury securities

 $-  $40,582  $-  $40,582 

Government agency securities

  -   15,575   -   15,575 

Mortgage-backed securities

  -   517,036   -   517,036 

State and municipal securities

  -   45,577   -   45,577 

Corporate debt

  -   230,763   6,595   237,358 
Total available-for-sale debt securities  -   849,533   6,595   856,128 

Interest rate cap derivative

  -   543   -   543 

Total assets at fair value

 $-  $850,076  $6,595  $856,671 

 

  

Fair Value Measurements at December 31, 2019 Using

     
  

Quoted Prices in

             
  

Active Markets

  

Significant Other

  

Significant

     
  

for Identical

  

Observable Inputs

  

Unobservable

     
  

Assets (Level 1)

  

(Level 2)

  

Inputs (Level 3)

  

Total

 

Assets Measured on a Recurring Basis:

 

(In Thousands)

 

Available-for-sale debt securities:

                

U.S. Treasury securities

 $-  $49,210  $-  $49,210 

Government agency securities

  -   18,386   -   18,386 

Mortgage-backed securities

  -   474,054   -   474,054 

State and municipal securities

  -   57,272   -   57,272 

Corporate debt

  -   153,881   6,596   160,477 

Total assets at fair value

 $-  $752,803  $6,596  $759,399 

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019:

 

  

Fair Value Measurements at June 30, 2020

     
  

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

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Impaired loans

 $-  $-  $62,406  $62,406 

Other real estate owned and repossessed assets

  -   -   6,537   6,537 

Total assets at fair value

 $-  $-  $68,943  $68,943 

 

  

Fair Value Measurements at December 31, 2019

     
  

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

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Impaired loans

 $-  $-  $33,344  $33,344 

Other real estate owned and repossessed assets

  -   -   8,178   8,178 

Total assets at fair value

 $-  $-  $41,522  $41,522 

 

The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

23

 

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis as of June 30, 2020 and December 31, 2019 were as follows:

 

  

June 30, 2020

  

December 31, 2019

 
  

Carrying

      

Carrying

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
  

(In Thousands)

 

Financial Assets:

                

Level 1 inputs:

                

Cash and due from banks

 $1,546,575  $1,546,575  $530,127  $530,127 
                 

Level 2 inputs:

                

Federal funds sold

  2,352   2,352   100,473   100,473 

Mortgage loans held for sale

  14,491   14,676   6,302   6,312 
                 

Level 3 inputs:

                

Held to maturity debt securities

  250   250   250   250 

Loans, net

  8,161,462   8,079,541   7,151,523   7,099,198 
                 

Financial liabilities:

                

Level 2 inputs:

                

Deposits

 $9,342,918  $9,359,175  $7,530,433  $7,534,984 

Federal funds purchased

  635,606   635,606   470,749   470,749 

Other borrowings

  64,715   64,624   64,703   65,048 

 

 

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. This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and six months ended June 30, 2020 and June 30, 2019.

 

Forward-Looking Statements

 

Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “could,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including, but not limited to: the global health and economic crisis precipitated by the COVID-19 outbreak; general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes in our loan portfolio and deposit base; economic crisis and associated credit issues in industries most impacted by the COVID-19 outbreak, including but not limited to, the restaurant, hospitality and retail sectors; possible changes in laws and regulations and governmental monetary and fiscal policies; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-banks. The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for fiscal year 2020 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. The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time.

 

24

 

Business

 

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

 

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

 

Overview of Second Quarter 2020 Results

 

As of June 30, 2020, we had consolidated total assets of $11.01 billion, up $2.27 billion, or 26%, when compared to consolidated assets of $8.74 billion at December 31, 2019. Total loans were $8.31 billion at June 30, 2020, up $1.35 billion, or 19%, from $6.97 billion at December 31, 2019. Total deposits were $9.34 billion at June 30, 2020, up $1.94 billion, or 26%, from $7.40 billion at December 31, 2019.

 

Net income available to common stockholders for the three months ended June 30, 2020 was $40.4 million, an increase of $4.8 million, or 13.5%, from $35.6 million for the corresponding period in 2019. Basic and diluted earnings per common share were $0.75 and $0.75, respectively, for the three months ended June 30, 2020, compared to basic and diluted earnings per common share of $0.67 and $0.66 for the corresponding period in 2019.

 

Net income available to common stockholders for the six months ended June 30, 2020 was $75.2 million, an increase of $4.6 million, or 6.5%, from $70.6 million for the corresponding period in 2019. Basic and diluted earnings per common share were $1.40 and $1.39, respectively, for the six months ended June 30, 2020, compared to $1.32 and $1.31, respectively, for the corresponding period in 2019.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate, deferred taxes, and fair value of financial instruments are particularly subject to change. Information concerning our accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

Financial Condition

 

Cash and Cash Equivalents

 

At June 30, 2020, we had $2.3 million in federal funds sold, compared to $100.5 million at December 31, 2019. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2020, we had $1.30 billion in balances at the Federal Reserve, compared to $61.9 million at December 31, 2019. The increase in balances kept at the Federal Reserve in 2020 result from federal stimulus funds on deposit with us by our customers stemming from the COVID-19 pandemic. We expect these funds to be temporary in nature.

 

Debt Securities

 

Debt securities available for sale totaled $856.1 million at June 30, 2020 and $759.4 million at December 31, 2019. Investment securities held to maturity totaled $250,000 at June 30, 2020. We had paydowns of $51.4 million on mortgage-backed securities and government agencies, maturities of $21.2 million on municipal bonds, corporate securities and treasury securities, and calls of $5.9 million on U.S. government agencies and municipal securities during the six months ended June 30, 2020. We purchased $82.6 million in mortgage-backed securities and $86.0 million in corporate securities during the first six months of 2020. For a tabular presentation of debt securities available for sale and held to maturity at June 30, 2020 and December 31, 2019, see “Note 4 – Securities” in our Notes to Consolidated Financial Statements.

 

25

 

The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we 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, 2020 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.

 

The Company does not invest in collateralized debt obligations (“CDOs”). At June 30, 2020, we had $237.4 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Bond Rating Agency at the time of our investment in them. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at June 30, 2020 has a combined average credit rating of AA.

 

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes was $431.0 million and $389.9 million as of June 30, 2020 and December 31, 2019, respectively.

 

Loans

 

As of June 30, 2020, there are 244 loans outstanding totaling $342.0 million that have payment deferrals in connection with the COVID-19 relief provided by the CARES Act. Of these 244 payment deferrals, 164 were principal only deferrals totaling $102.4 million, 45 were interest only deferrals totaling $151.1 million and 35 were principal and interest deferrals totaling $88.5 million. The amount of accrued interest related to payment deferrals totaled $6.1 million at June 30, 2020. These deferrals were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

 

We had total loans of $8.32 billion at June 30, 2020, an increase of $1.05 billion, or 14.5%, compared to $7.26 billion at December 31, 2019. During the second quarter of 2020 we originated approximately 4,800 PPP loans totaling $1.05 billion. Over 4,000 of these loans have a balance of less than $350,000. The percentage of our loans in each of our regions were as follows:

 

   

Percentage of Total Loans in MSA

 

Birmingham, AL

    39.3

%

Huntsville, AL

    8.6

%

Dothan, AL

    8.7

%

Montgomery, AL

    5.7

%

Mobile, AL

    6.2

%

Total Alabama MSAs

    68.5

%

Pensacola, FL

    6.3

%

West Florida (1)

    4.8

%

Total Florida MSAs

    11.1

%

Nashville, TN

    9.5

%

Atlanta, GA

    6.5

%

Charleston, SC

    4.4

%

 

26

 

Asset Quality

 

The Company determined to delay its adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” until the earlier of the date on which the national emergency concerning COVID-19 terminates or December 31, 2020, as outlined in the CARES Act, with an effective retrospective implementation date of January 1, 2020.  Accordingly, the Company will continue to use the incurred loss methodology to calculate the allowance for loan losses until the earlier of either event.

 

The allowance for loan losses, sometimes referred to as the “ALLL,” 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 ALLL, 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 ALLL at an adequate level. If the ALLL is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased. Our management believes that the allowance was adequate at June 30, 2020.

 

Our management reviews the adequacy of the ALLL on a quarterly basis. The ALLL 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, 2020, total loans rated Special Mention, Substandard, and Doubtful were $141.3 million, or 1.7% of total loans, compared to $123.7 million, or 1.7% of total loans, at December 31, 2019. 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 ALLL 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, including the economic distress caused by the COVID-19 pandemic 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.

 

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 reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Impaired loans are measured based on the present value of expected future cash flows discounted at the interest rate implicit in the original loan agreement, or, as a practical expedient, 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.

 

The following table presents a summary of changes in the allowance for loan losses for the three and six months ended June 30, 2020 and 2019:

 

   

As of and for the Three Months Ended

   

As of and for the Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(Dollars in thousands)

 

Total loans outstanding, net of unearned income

  $ 8,315,375     $ 6,968,886     $ 8,315,375     $ 6,968,886  

Average loans outstanding, net of unearned income

  $ 8,333,704     $ 6,789,051     $ 7,847,426     $ 6,695,792  

Allowance for loan losses at beginning of period

    85,414       70,207       76,584       68,600  

Charge-offs:

                               

Commercial, financial and agricultural loans

    1,358       3,610       3,998       6,647  

Real estate - construction

    376       -       830       -  

Real estate - mortgage

    2,520       169       4,198       219  

Consumer loans

    62       63       120       281  

Total charge-offs

    4,316       3,842       9,146       7,147  

Recoveries:

                               

Commercial, financial and agricultural loans

    84       117       146       129  

Real estate - construction

    1       -       2       1  

Real estate - mortgage

    13       4       14       11  

Consumer loans

    28       16       40       23  

Total recoveries

    126       137       202       164  

Net charge-offs

    4,190       3,705       8,944       6,983  

Provision for loan losses

    10,283       4,884       23,867       9,769  

Allowance for loan losses at period end

  $ 91,507     $ 71,386     $ 91,507     $ 71,386  

Allowance for loan losses to period end loans

    1.10

%

    1.02

%

    1.10

%

    1.02

%

Net charge-offs to average loans

    0.20

%

    0.22

%

    0.23

%

    0.21

%

 

27

 

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 at June 30, 2020 and December 31, 2019:

 

           

Percentage of loans

 
           

in each category

 

June 30, 2020

 

Amount

   

to total loans

 
   

(In Thousands)

 

Commercial, financial and agricultural

  $ 47,986       42.07

%

Real estate - construction

    4,531       6.55

%

Real estate - mortgage

    38,399       50.65

%

Consumer

    591       0.73

%

Total

  $ 91,507       100.00

%

 

           

Percentage of loans

 
           

in each category

 

December 31, 2019

 

Amount

   

to total loans

 
   

(In Thousands)

 

Commercial, financial and agricultural

  $ 43,666       37.13

%

Real estate - construction

    2,768       7.18

%

Real estate - mortgage

    29,653       54.80

%

Consumer

    497       0.89

%

Total

  $ 76,584       100.00

%

 

Nonperforming Assets

 

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased to $22.0 million at June 30, 2020, compared to $36.1 million at December 31, 2019. Of this total, nonaccrual loans of $16.9 million at June 30, 2020 represented a net decrease of $13.2 million from nonaccrual loans at December 31, 2019. Excluding credit card accounts, there were two loans 90 or more days past due and still accruing totaling $5.1 million at June 30, 2020, compared to seven loans totaling $6.0 million at December 31, 2019. Troubled Debt Restructurings (“TDR”) at June 30, 2020 and December 31, 2019 were $1.6 million and $3.3 million, respectively.

 

OREO and repossessed assets decreased to $6.5 million at June 30, 2020, from $8.2 million at December 31, 2019. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2020 and 2019:

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
   

(In thousands)

 

Balance at beginning of period

  $ 8,178     $ 5,169  

Transfers from loans and capitalized expenses

    1,023       752  

Proceeds from sales

    (852 )     (48 )

Internally financed sales

    -       -  

Write-downs / net gain (loss) on sales

    (1,812 )     (224 )

Balance at end of period

  $ 6,537     $ 5,649  

 

28

 

The following table summarizes our nonperforming assets and TDRs at June 30, 2020 and December 31, 2019:

 

   

June 30, 2020

   

December 31, 2019

 
           

Number of

           

Number of

 
   

Balance

   

Loans

   

Balance

   

Loans

 
   

(Dollar Amounts In Thousands)

 

Nonaccrual loans:

                               

Commercial, financial and agricultural

  $ 13,888       24     $ 14,729       29  

Real estate - construction

    587       3       1,588       2  

Real estate - mortgage:

                               

Owner-occupied commercial

    1,714       5       10,826       3  

1-4 family mortgage

    683       7       1,440       5  

Other mortgage

    -       -       1,507       1  

Total real estate - mortgage

    2,397       12       13,773       9  

Consumer

    9       1       -       -  

Total Nonaccrual loans:

  $ 16,881       40     $ 30,090       40  
                                 

90+ days past due and accruing:

                               

Commercial, financial and agricultural

  $ 248       2     $ 201       3  

Real estate - construction

    -       -       -       -  

Real estate - mortgage:

                               

Owner-occupied commercial

    -       -       -       -  

1-4 family mortgage

    -       -       873       5  

Other mortgage

    4,861       1       4,924       1  

Total real estate - mortgage

    4,861       1       5,797       6  

Consumer

    24       6       23       8  

Total 90+ days past due and accruing:

  $ 5,133       9     $ 6,021       17  
                                 

Total Nonperforming Loans:

  $ 22,014       49     $ 36,111       57  
                                 

Plus: Other real estate owned and repossessions

    6,537       11       8,178       12  

Total Nonperforming Assets

  $ 28,551       60     $ 44,289       69  
                                 

Restructured accruing loans:

                               

Commercial, financial and agricultural

  $ 975       3     $ 625       2  

Real estate - construction

    -       -       -       -  

Real estate - mortgage:

                               

Owner-occupied commercial

    -       -       -       -  

1-4 family mortgage

    -       -       -       -  

Other mortgage

    -       -       -       -  

Total real estate - mortgage

    -       -       -       -  

Consumer

    -       -       -       -  

Total restructured accruing loans:

  $ 975       3     $ 625       2  
                                 

Total Nonperforming assets and restructured accruing loans

  $ 29,526       63     $ 44,914       71  
                                 

Ratios:

                               

Nonperforming loans to total loans

    0.26

%

            0.50

%

       

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

    0.34

%

            0.61

%

       

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

    0.35

%

            0.62

%

       

 

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.

 

29

 

Impaired Loans and Allowance for Loan Losses

 

As of June 30, 2020, we had impaired loans of $72.2 million inclusive of nonaccrual loans, an increase of $29.1 million from $43.1 million as of December 31, 2019. This increase is primarily attributable to two commercial relationships newly classified as impaired during the first six months of 2020. Substandard loans are detailed in Note 5, “Loans”, within the credit quality indicator table. While total impaired loans have increased, our overall collateral exposure on these impairments has remained consistent. We allocated $9.8 million of our allowance for loan losses at June 30, 2020 to these impaired loans, unchanged compared to December 31, 2019. 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 interest rate implicit in the original loan agreement, 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 loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration team performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

 

Of the $72.2 million of impaired loans reported as of June 30, 2020, $63.5 million were commercial, financial and agricultural loans, $616,000 were real estate construction loans and $8.0 million were real estate mortgage loans.

 

Deposits

 

Total deposits were $9.34 billion at June 30, 2020, an increase of $1.8 billion, or 24.1%, over $7.53 billion at December 31, 2019. Increased growth rates during 2020 have been the result of Paycheck Protection Program (“PPP”) lending in which our borrowers have retained portions of their proceeds in the Bank. We anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in our mature markets.

 

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

 

The following table summarizes balances of our deposits and the percentage of each type to the total at June 30, 2020 and December 31, 2019:

 

   

June 30, 2020

   

December 31, 2019

 

Noninterest-bearing demand

  $ 2,678,893       28.67

%

  $ 1,749,879       23.24

%

Interest-bearing demand

    5,786,886       61.94

%

    4,986,155       66.21

%

Savings

    77,387       0.83

%

    65,808       0.87

%

Time deposits , $250,000 and under

    277,278       2.97

%

    267,259       3.55

%

Time deposits, over $250,000

    422,474       4.52

%

    461,332       6.13

%

Brokered CDs

    100,000       1.07

%

    -       -

%

    $ 9,342,918       100.00

%

  $ 7,530,433       100.00

%

 

Other Borrowings

 

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $635.6 million and $470.7 million at June 30, 2020 and December 31, 2019, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 0.20% for the quarter ended June 30, 2020. Other borrowings consist of the following:

 

 

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

 

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

 

Liquidity

 

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

 

30

 

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, 2020, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $1.99 billion. At June 30, 2020, the Bank had borrowing availability of approximately $772.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. Additionally, the Bank had $2.73 billion in available lines from the Federal Reserve Bank-Atlanta. $1.68 billion of these lines from the Federal Reserve Bank-Atlanta are collateralized by loans of the Bank. The remaining $1.05 billion are collateralized by PPP loans originated by the Bank. We believe these sources of funding are adequate to meet our anticipated funding needs. Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Other Borrowings”.

 

We are subject to general FDIC guidelines that require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity materially increasing or decreasing. However, uncertainties brought about by the COVID-19 pandemic may adversely affect our ability to obtain funding or may increase the cost of funding.

 

The following table reflects the contractual maturities of our term liabilities as of June 30, 2020. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

 

 

     

Payments due by Period

 
                     

Over 1 - 3

   

Over 3 - 5

         
     

Total

   

1 year or less

   

years

   

years

   

Over 5 years

 
     

(In Thousands)

 

Contractual Obligations (1)

                                 
                                           

Deposits without a stated maturity

    $ 8,464,353     $ -     $ -     $ -     $ -  

Certificates of deposit (2)

      778,565       443,718       273,236       61,611       -  

Brokered certificates of deposit

      100,000       50,000       50,000              

Federal funds purchased

      635,606       635,606       -       -       -  

Subordinated debentures

      64,750       -       -       -       64,750  

Operating lease commitments

      11,833       1,515       4,813       3,080       2,425  

Total

    $ 10,055,107     $ 1,130,839     $ 328,049     $ 64,691     $ 67,175  

 

(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

 

Total stockholders’ equity attributable to us at June 30, 2020 was $914.6 million, or 8.30% of total assets. At December 31, 2019, total stockholders’ equity attributable to us was $842.2 million, or 9.41% of total assets.

 

As of June 30, 2020, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios.

 

The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, beginning January 1, 2016 and became fully effective on January 1, 2019. As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer.

 

31

 

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios, not including the capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of June 30, 2020, December 31, 2019 and June 30, 2019:

 

                                     

To Be Well Capitalized

 
                     

For Capital Adequacy

   

Under Prompt Corrective

 
     

Actual

   

Purposes

   

Action Provisions

 
     

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of June 30, 2020:

 

(Dollars in Thousands)

 

CET 1 Capital to Risk-Weighted Assets:

                                               

Consolidated

  $ 881,539       11.26

%

  $ 352,327       4.50

%

    N/A       N/A  

ServisFirst Bank

    943,578       12.06

%

    352,219       4.50

%

  $ 508,761       6.50

%

Tier 1 Capital to Risk-Weighted Assets:

                                               

Consolidated

    882,041       11.27

%

    469,769       6.00

%

    N/A       N/A  

ServisFirst Bank

    944,080       12.06

%

    469,625       6.00

%

    626,167       8.00

%

Total Capital to Risk-Weighted Assets:

                                               

Consolidated

    1,038,763       13.27

%

    626,359       8.00

%

    N/A       N/A  

ServisFirst Bank

    1,036,087       13.24

%

    626,167       8.00

%

    782,709       10.00  

Tier 1 Capital to Average Assets:

                                               

Consolidated

    882,041       9.24

%

    381,766       4.00

%

    N/A       N/A  

ServisFirst Bank

    944,080       9.90

%

    381,558       4.00

%

    476,948       5.00

%

                                                   

As of December 31, 2019:

                                               

CET 1 Capital to Risk-Weighted Assets:

                                               

Consolidated

  $ 822,396       10.50

%

  $ 342,283       4.50

%

    N/A       N/A  

ServisFirst Bank

    885,172       11.30

%

    342,269       4.50

%

  $ 494,389       6.50

%

Tier 1 Capital to Risk-Weighted Assets:

                                               

Consolidated

    822,896       10.50

%

    456,377       6.00

%

    N/A       N/A  

ServisFirst Bank

    885,674       11.31

%

    456,359       6.00

%

    608,479       8.00

%

Total Capital to Risk-Weighted Assets:

                                               

Consolidated

    964,683       12.31

%

    608,502       8.00

%

    N/A       N/A  

ServisFirst Bank

    962,758       12.29

%

    608,479       8.00

%

    760,598       10.00

%

Tier 1 Capital to Average Assets:

                                               

Consolidated

    822,896       9.13

%

    356,012       4.00

%

    N/A       N/A  

ServisFirst Bank

    885,674       9.83

%

    355,998       4.00

%

    444,997       5.00

%

                                                   

As of June 30, 2019:

                                               

CET 1 Capital to Risk-Weighted Assets:

                                               

Consolidated

  $ 759,998       10.18

%

  $ 335,955       4.50

%

    N/A       N/A  

ServisFirst Bank

    823,912       11.04

%

    335,942       4.50

%

  $ 485,249       6.50

%

Tier 1 Capital to Risk-Weighted Assets:

                                               

Consolidated

    760,500       10.19

%

    447,940       6.00

%

    N/A       N/A  

ServisFirst Bank

    824,414       11.04

%

    447,922       6.00

%

    597,230       8.00

%

Total Capital to Risk-Weighted Assets:

                                               

Consolidated

    897,070       12.02

%

    597,254       8.00

%

    N/A       N/A  

ServisFirst Bank

    896,300       12.01

%

    597,230       8.00

%

    746,537       10.00

%

Tier 1 Capital to Average Assets:

                                               

Consolidated

    760,500       9.00

%

    338,030       4.00

%

    N/A       N/A  

ServisFirst Bank

    824,414       9.76

%

    338,016       4.00

%

    422,520       5.00

%

 

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

 

32

 

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

 

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

 

Off-Balance Sheet Arrangements

 

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in our balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.

 

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of June 30, 2020, we have reserved $500,000 for losses on such off-balance sheet arrangements consistent with guidance in the FRB’s Interagency Policy Statement SR 06-17.

 

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers. We had a reserve of $370,000 as of June 30, 2020 and December 31, 2019 for the settlement of any repurchase demands by investors.

 

Financial instruments whose contract amounts represent credit risk at June 30, 2020 and December 31, 2019 are as follows:

 

   

June 30, 2020

   

December 31, 2019

 
   

(In Thousands)

   

(In Thousands)

 

Commitments to extend credit

  $ 2,505,241     $ 2,303,788  

Credit card arrangements

    270,218       248,617  

Standby letters of credit

    65,585       48,394  
    $ 2,841,044     $ 2,600,799  

 

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 and net income available to common stockholders for the three months ended June 30, 2020 was $40.4 million compared to net income and net income available to common stockholders of $35.6 million, respectively, for the three months ended June 30, 2019. Net income and net income available to common stockholders for the six months ended June 30, 2020 was $75.2 million compared to net income and net income available to common stockholders of $70.6 million for the six months ended June 30, 2019. The increase in net income for the three months ended June 30, 2020 over the same period in 2019 was primarily attributable to a $13.1 million increase in net interest income resulting from a $1.9 billion increase in average earning assets, and a $1.3 million increase in non-interest income, led by increased mortgage banking revenue. The same key drivers contributed to the increase in net income for the six months ended June 30, 2020 compared to 2019 resulting in a $22.0 million increase in net interest income on a $1.4 billion increase in average earning assets, and a $3.0 million increase in non-interest income. Increases in non-interest expense of $2.8 million and $5.4 million and increases in income tax expense of $1.4 million and $929,000, respectively, for the three and six months ended June 30, 2020 compared to 2019 partially offset increases in income.

 

Basic and diluted net income per common share were $0.75 for the three months ended June 30, 2020, compared to $0.67 and $0.66, respectively, for the corresponding period in 2019. Basic and diluted net income per common share were $1.40 and $1.39, respectively, for the six months ended June 30, 2020, compared to $1.32 and $1.31, respectively, for the corresponding period in 2019. Return on average assets for the three and six months ended June 30, 2020 was 1.55% and 1.54%, respectively, compared to 1.69% and 1.72%, respectively, for the corresponding periods in 2019. Return on average common stockholders’ equity for the three and six months ended June 30, 2020 was 18.40% and 17.31%, respectively, compared to 18.72% and 19.06%, respectively, for the corresponding periods in 2019.

 

Net Interest Income and Net Interest Margin Analysis

 

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

 

Taxable-equivalent net interest income increased $13.2 million, or 18.8%, to $83.3 million for the three months ended June 30, 2020 compared to $70.1 million for the corresponding period in 2019, and increased $22.1 million, or 15.9%, to $161.0 million for the six months ended June 30, 2020 compared to $138.9 million for the corresponding period in 2019. This increase was primarily attributable to growth in average earning assets, which increased $1.91 billion, or 23.3%, from the second quarter of 2019 to the second quarter of 2020, and $1.40 billion, or 17.5%, from the six months ended June 30, 2019 to the same period in 2020. The taxable-equivalent yield on interest-earning assets decreased to 3.80% for the three months ended June 30, 2020 from 4.80% for the corresponding period in 2019, and decreased to 4.10% for the six months ended June 30, 2020 from 4.82% for the corresponding period in 2019. The yield on loans for the three months ended June 30, 2020 was 4.31% compared to 5.23% for the corresponding period in 2019, and 4.58% compared to 5.24% for the six months ended June 30, 2020 and June 30, 2019, respectively. The cost of total interest-bearing liabilities decreased to 0.69% for the three months ended June 30, 2020 compared to 1.83% for the corresponding period in 2019, and decreased to 0.94% for the six months ended June 30, 2020 from 1.78% for the corresponding period in 2019. Net interest margin for the three months ended June 30, 2020 was 3.32% compared to 3.44% for the corresponding period in 2019, and 3.44% for the six months ended June 30, 2020 compared to 3.50% for the corresponding period in 2019.

 

34

 

The following tables show, for the three and six months ended June 30, 2020 and June 30, 2019, 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:

 

Average Balance Sheets and Net Interest Analysis

 

On a Fully Taxable-Equivalent Basis

 

For the Three Months Ended June 30,

 

(In thousands, except Average Yields and Rates)

 
                                                 
   

2020

   

2019

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Earned /

   

Yield /

   

Average

   

Earned /

   

Yield /

 
   

Balance

   

Paid

   

Rate

   

Balance

   

Paid

   

Rate

 

Assets:

                                               

Interest-earning assets:

                                               

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

                                               

Taxable

  $ 8,301,775     $ 89,042       4.31

%

  $ 6,756,927     $ 88,280       5.24

%

Tax-exempt (3)

    31,929       327       4.12       32,124       307       3.83  

Total loans, net of unearned income

    8,333,704       89,369       4.31       6,789,051       88,587       5.23  

Mortgage loans held for sale

    13,278       69       2.09       5,208       50       3.85  

Investment securities:

                                               

Taxable

    761,575       5,092       2.67       565,491       4,192       2.97  

Tax-exempt (3)

    38,201       250       2.62       77,364       406       2.10  

Total investment securities (4)

    799,776       5,342       2.67       642,855       4,598       2.86  

Federal funds sold

    83,274       33       0.16       323,714       1,998       2.48  

Interest-bearing balances with banks

    849,549       360       0.17       411,481       2,593       2.53  

Total interest-earning assets

  $ 10,079,581     $ 95,173       3.80     $ 8,172,309     $ 97,826       4.80  

Non-interest-earning assets:

                                               

Cash and due from banks

    76,212                       76,988                  

Net fixed assets and equipment

    57,446                       58,607                  

Allowance for loan losses, accrued interest and other assets

    248,702                       156,264                  

Total assets

  $ 10,461,941                     $ 8,464,168                  
                                                 

Liabilities and stockholders' equity:

                                         

Interest-bearing liabilities:

                                               

Interest-bearing demand deposits

  $ 992,848     $ 875       0.35

%

  $ 909,847     $ 2,004       0.88

%

Savings deposits

    72,139       75       0.42       54,391       77       0.57  

Money market accounts

    4,285,907       5,555       0.52       3,932,459       18,418       1.88  

Time deposits

    877,448       4,251       1.95       694,414       3,741       2.16  

Total interest-bearing deposits

    6,228,342       10,756       0.69       5,591,111       24,240       1.74  

Federal funds purchased

    572,990       310       0.22       418,486       2,681       2.57  

Other borrowings

    64,711       781       4.85       64,680       781       4.84  

Total interest-bearing liabilities

  $ 6,866,043     $ 11,847       0.69

%

  $ 6,074,277     $ 27,702       1.83

%

Non-interest-bearing liabilities:

                                               

Non-interest-bearing demand deposits

    2,646,030                       1,591,722                  

Other liabilities

    69,061                       35,161                  

Stockholders' equity

    862,500                       763,742                  

Accumulated other comprehensive loss

    18,307                       (734 )                

Total liabilities and stockholders' equity

  $ 10,461,941                     $ 8,464,168                  

Net interest income

          $ 83,326                     $ 70,124          

Net interest spread

                    3.11

%

                    2.97

%

Net interest margin

                    3.32

%

                    3.44

%

 

                                         

(1)

Non-accrual loans are included in average loan balances in all periods. Loan fees of $3,650 and $914 are included in interest income in the second quarter of 2020 and 2019, respectively. Loan fees in 2020 include amortization of PPP loan fees.

(2)

Net accretion on acquired loan discounts of $53 is included in interest income in the second quarter of 2019.

(3)

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

(4)

Unrealized gains (losses) of $133 and $(985) are excluded from the yield calculation in the second quarter of 2020 and 2019, respectively.

 

35

 

   

For the Three Months Ended June 30,

 
   

2020 Compared to 2019 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

  $ 17,985     $ (17,223 )   $ 762  

Tax-exempt

    (2 )     22       20  

Total loans, net of unearned income

    17,983       (17,201 )     782  

Mortgages held for sale

    50       (31 )     19  

Debt securities:

                       

Taxable

    1,332       (432 )     900  

Tax-exempt

    (240 )     84       (156 )

Total debt securities

    1,092       (348 )     744  

Federal funds sold

    (870 )     (1,095 )     (1,965 )

Interest-bearing balances with banks

    1,381       (3,614 )     (2,233 )

Total interest-earning assets

    19,636       (22,289 )     (2,653 )
                         

Interest-bearing liabilities:

                       

Interest-bearing demand deposits

    167       (1,296 )     (1,129 )

Savings

    21       (23 )     (2 )

Money market accounts

    1,513       (14,376 )     (12,863 )

Time deposits

    906       (396 )     510  

Total interest-bearing deposits

    2,607       (16,091 )     (13,484 )

Federal funds purchased

    725       (3,096 )     (2,371 )

Other borrowed funds

    -       -       -  

Total interest-bearing liabilities

    3,332       (19,187 )     (15,855 )

Increase in net interest income

  $ 16,304     $ (3,102 )   $ 13,202  

 

Decreases in average yields on loans drive unfavorable rate component. PPP loans originated during the second quarter of 2020 carry an interest rate of 1.00%, well below the average yield on other loans. However, this lower yield is offset by the accretion of net origination fees paid by the Small Business Administration on PPP loans. Decreases in average rates paid on interest-bearing deposits drive favorable rate component change. Growth in average loans, noninterest bearing deposits and equity drive favorable volume component change and overall change.

 

36

 

Average Balance Sheets and Net Interest Analysis

 

On a Fully Taxable-Equivalent Basis

 

For the Six Months Ended June 30,

 

(In thousands, except Average Yields and Rates)

 
                                                 
   

2020

   

2019

 
           

Interest

                   

Interest

         
   

Average

   

Earned /

   

Average

   

Average

   

Earned /

   

Average

 
   

Balance

   

Paid

   

Yield / Rate

   

Balance

   

Paid

   

Yield / Rate

 

Assets:

                                               

Interest-earning assets:

                                               

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

                                               

Taxable

  $ 7,815,184     $ 178,119       4.58

%

  $ 6,664,437     $ 173,515       5.25

%

Tax-exempt (3)

    32,242       654       4.08       31,355       592       3.81  

Total loans, net of unearned income

    7,847,426       178,773       4.58       6,695,792       174,107       5.24  

Mortgage loans held for sale

    8,780       93       2.13       3,421       76       4.48  

Investment securities:

                                               

Taxable

    755,994       10,246       2.73       542,351       7,939       2.95  

Tax-exempt (3)

    41,115       507       2.48       82,423       870       2.13  

Total investment securities (4)

    797,109       10,753       2.71       624,774       8,809       2.84  

Federal funds sold

    94,348       311       0.66       258,564       3,217       2.51  

Interest-bearing balances with banks

    659,374       2,078       0.63       424,841       5,357       2.54  

Total interest-earning assets

  $ 9,407,037     $ 192,008       4.10

%

  $ 8,007,392     $ 191,566       4.82

%

Non-interest-earning assets:

                                               

Cash and due from banks

    71,176                       75,592                  

Net fixed assets and equipment

    57,756                       58,729                  

Allowance for loan losses, accrued interest and other assets

    246,673                       153,120                  

Total assets

  $ 9,782,642                     $ 8,294,833                  
                                                 

Liabilities and stockholders' equity:

                                               

Interest-bearing liabilities:

                                               

Interest-bearing demand deposits

  $ 974,826     $ 2,220       0.46

%

  $ 926,176     $ 4,007       0.87

%

Savings deposits

    69,759       159       0.46       54,239       149       0.55  

Money market accounts

    4,173,597       16,682       0.80       3,845,792       34,932       1.83  

Time deposits

    841,686       8,439       2.02       696,682       7,297       2.11  

Total interest-bearing deposits

    6,059,868       27,500       0.91       5,522,889       46,385       1.69  

Federal funds purchased

    532,814       1,910       0.72       366,029       4,676       2.58  

Other borrowings

    64,709       1,562       4.85       64,675       1,562       4.87  

Total interest-bearing liabilities

  $ 6,657,391     $ 30,972       0.94

%

  $ 5,953,593     $ 52,623       1.78

%

Non-interest-bearing liabilities:

                                               

Non-interest-bearing demand deposits

    2,197,850                       1,558,783                  

Other liabilities

    56,013                       35,275                  

Stockholders' equity

    858,150                       749,754                  

Accumulated other comprehensive (loss)

    13,238                       (2,572 )                

Total liabilities and stockholders' equity

  $ 9,782,642                     $ 8,294,833                  

Net interest income

          $ 161,036                     $ 138,943          

Net interest spread

                    3.16

%

                    3.04

%

Net interest margin

                    3.44

%

                    3.50

%

 

                                           

(1)

 

Non-accrual loans are included in average loan balances in all periods. Loan fees of $4,930 and $1,887 are included in interest income in 2020 and 2019, respectively. Loan fees in 2020 include amortization of PPP loan fees.

(2)

 

Accretion on acquired loan discounts of $91 are included in interest income in 2019.

(3)

 

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

(4)

 

Unrealized gains (losses) of $231 and $(3,311) are excluded from the yield calculation in 2020 and 2019, respectively.

 

37

 

   

For the Six Months Ended June 30,

 
   

2020 Compared to 2019 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

  $ 28,123     $ (23,519 )   $ 4,604  

Tax-exempt

    18       44       62  

Total loans, net of unearned income

    28,141       (23,475 )     4,666  

Mortgages held for sale

    73       (56 )     17  

Debt securities:

                       

Taxable

    2,954       (647 )     2,307  

Tax-exempt

    (490 )     127       (363 )

Total debt securities

    2,464       (520 )     1,944  

Federal funds sold

    (1,346 )     (1,560 )     (2,906 )

Interest-bearing balances with banks

    2,029       (5,308 )     (3,279 )

Total interest-earning assets

    31,361       (30,919 )     442  
                         

Interest-bearing liabilities:

                       

Interest-bearing demand deposits

    202       (1,989 )     (1,787 )

Savings

    39       (29 )     10  

Money market accounts

    2,778       (21,028 )     (18,250 )

Time deposits

    1,483       (341 )     1,142  

Total interest-bearing deposits

    4,502       (23,387 )     (18,885 )

Federal funds purchased

    1,546       (4,312 )     (2,766 )

Other borrowed funds

    2       (2 )     -  

Total interest-bearing liabilities

    6,050       (27,701 )     (21,651 )

Increase in net interest income

  $ 25,311     $ (3,218 )   $ 22,093  

 

Decreases in the average rates paid on interest-bearing deposits drive favorable rate component change. Decreases in average yields on loans drive unfavorable rate component while growth in loans, non-interest-bearing deposits and average equity continues to drive favorable volume component change and overall change.

 

Provision for Loan Losses

 

The provision for loan losses was $10.3 million for the three months ended June 30, 2020, an increase of $5.4 million from $4.9 million for the three months ended June 30, 2019, and was $23.9 million for the six months ended June 30, 2020, a $14.1 million increase compared to $9.8 million for the six months ended June 30, 2019. Annualized net credit charge-offs to quarter-to-date average loans decreased two basis points to 20% for the second quarter of 2020 compared to 0.22% for the corresponding period in 2019 and increased two basis points to 0.23% for the six months ended June 30, 2020 compared to 0.21% for the corresponding period in 2019. Nonperforming loans decreased to $22.0 million, or 0.26% of total loans, at June 30, 2020 from $36.1 million, or 0.50% of total loans, at December 31, 2019, and were $32.1 million, or 0.46% of total loans, at June 30, 2019. Impaired loans increased to $72.2 million, or 0.87% of total loans, at June 30, 2020, compared to $43.1 million, or 0.59% of total loans, at December 31, 2019. We have evaluated risk factors related to macroeconomic conditions and uncertainty due to COVID-19 which resulted in additional reserve for loan losses related to external factors of $15.7 million at June 30, 2020. The allowance for loan losses totaled $91.5 million, or 1.10% of total loans, net of unearned income, at June 30, 2020, compared to $76.6 million, or 1.02% of loans, net of unearned income, at December 31, 2019.

 

Noninterest Income

 

Noninterest income totaled $7.0 million for the three months ended June 30, 2020, an increase of $1.2 million, or 21.7%, compared to the corresponding period in 2019, and totaled $13.7 million for the six months ended June 30, 2020, an increase of $3.0 million, or 51.7%, compared to the corresponding period in 2019. Mortgage banking income increased $1.0, or 93.8%, to $2.1 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, and increased $1.5 million, or 91.2%, to $3.2 million for the six months ended June 30, 2020 compared to $1.7 million for the same period in 2019. The number of loans originated for sale during the first half of 2020 increased approximately 61.3% when compared to the same period in 2019. Credit card income decreased $343,000 to $1.4 million for the three months ended June 30, 2020 compared to $1.7 million for the same period in 2019, and decreased $154,000 to $3.2 million for the six months ended June 30, 2020 compared to $3.3 million for the same period in 2019. The amount of spend on purchase cards increased $20.5 million while the amount of spend on business credit cards decreased $14.3 million during the second quarter of 2020 when compared to the second quarter of 2019. Purchase card spend carries lower profit margins than credit cards due to their higher rebates.

 

38

 

Noninterest Expense 

 

Noninterest expense totaled $28.8 million for the three months ended June 30, 2020, an increase of $2.8 million, or 10.7%, compared to $26.0 million for the same period in 2019, and totaled $56.7 million for the six months ended June 30, 2020, an increase of $5.4 million, or 10.5%, compared to $51.3 million for the same period in 2019.

 

Details of expenses are as follows:

 

 

Salary and benefit expense increased $1.5 million, or 10.1%, to $15.8 million for the three months ended June 30, 2020 from $14.3 million for the same period in 2019, and increased $2.8 million, or 9.9%, to $31.4 million for the six months ended June 30, 2020 from $28.6 million for the same period in 2019. Total employees decreased from 495 as of June 30, 2019 to 492 as of June 30, 2020.

 

 

Equipment and occupancy expense increased $147,000, or 6.4%, to $2.4 million for the three months ended June 30, 2020 from $2.3 million for the corresponding period in 2019, and increased $288,000, or 6.3%, to $4.8 million from $4.5 million for the six months ended June 30, 2020 compared to the corresponding period in 2019.

 

 

Third party processing and other services increased $789,000, or 29.0%, to $3.5 million for the three months ended June 30, 2020 from $2.3 million for the corresponding period in 2019, and increased $1.7 million, or 33.6%, to $6.8 million from $5.1 million for the six months ended June 30, 2020 compared to the corresponding period in 2019. Limited-term licenses were added to our loan origination systems to enable more employees to assist customers with their PPP loans. These licenses added $514,000 to third party processing expenses during the second quarter of 2020.

 

 

Professional services expense decreased $100,000, or 8.4%, to $1.1 million for the three months ended June 30, 2020 compared to the same period in 2019, and decreased $146,000 or 6.7%, to $2.0 million for the six months ended June 30, 2020 compared to the same period in 2019.

 

 

FDIC and other regulatory assessments decreased $486,000 to $595,000 for the three months ended June 30, 2020 compared to the same period in 2019, and decreased $173,000 to $1.9 million for the six months ended June 30, 2020 compared to the same period in 2019. Lower growth in assets during the second quarter of 2020, excluding PPP loans, resulted in us adjusting our accrual for assessments to be paid at the end of the third quarter of 2020.

 

 

OREO expense increased $1.1 million, or 515%, to $1.3 million for the three months ended June 30, 2020 compared to the same period in 2019, and increased $1.7 million, or 714%, to $1.9 million for the six months ended June 30, 2020 compared to the same period in 2019. Updated appraisals resulted in write-downs in values on two properties in our Birmingham, Alabama market.

 

 

Other operating expenses decreased $100,000, or 2.4%, to $4.1 million for the three months ended June 30, 2020 compared to the same period in 2019, and decreased $822,000, or 9.6%, to $7.7 million for the six months ended June 30, 2020 compared to the same period in 2019.

 

The following table presents our non-interest income and non-interest expense for the three and six month periods ending June 30, 2020 compared to the same periods in 2019.

 

   

Three Months Ended June 30,

                   

Six Months Ended June 30,

                 
   

2020

   

2019

   

$ change

   

% change

   

2020

   

2019

   

$ change

   

% change

 

Non-interest income:

                                                               

Service charges on deposit accounts

  $ 1,823     $ 1,786     $ 37       2.1

%

  $ 3,739     $ 3,488     $ 251       7.2

%

Mortgage banking

    2,107       1,087       1,020       93.8

%

    3,178       1,662       1,516       91.2

%

Credit card income

    1,398       1,741       (343 )     (19.7

%)

    3,163       3,317       (154 )     (4.6

%)

Securities gains

    -       (6 )     6       (100.0

%)

    -       (6 )     6       (100.0

%)

Increase in cash surrender value life insurance

    1,464       778       686       88.2

%

    2,917       1,540       1,377       89.4

%

Other operating income

    241       392       (151 )     (38.5

%)

    710       721       (11 )     (1.5

%)

Total non-interest income

  $ 7,033     $ 5,778     $ 1,255       21.7

%

  $ 13,707     $ 10,722     $ 2,985       27.8

%

                                                                 

Non-interest expense:

                                                               

Salaries and employee benefits

  $ 15,792     $ 14,339     $ 1,453       10.1

%

  $ 31,450     $ 28,604     $ 2,846       9.9

%

Equipment and occupancy expense

    2,434       2,287       147       6.4

%

    4,834       4,546       288       6.3

%

Third party processing and other services

    3,513       2,724       789       29.0

%

    6,858       5,135       1,723       33.6

%

Professional services

    1,091       1,191       (100 )     (8.4

%)

    2,039       2,185       (146 )     (6.7

%)

FDIC and other regulatory assessments

    595       1,081       (486 )     (45.0

%)

    1,927       2,100       (173 )     (8.2

%)

OREO expense

    1,303       212       1,091       514.6

%

    1,904       234       1,670       713.7

%

Other operating expense

    4,088       4,188       (100 )     (2.4

%)

    7,724       8,546       (822 )     (9.6

%)

Total non-interest expense

  $ 28,816     $ 26,022     $ 2,794       10.7

%

  $ 56,736     $ 51,350     $ 5,386       10.5

%

 

39

 

Income Tax Expense

 

Income tax expense was $10.7 million for the three months ended June 30, 2020 compared to $9.3 million for the same period in 2019, and was $18.8 million for the six months ended June 30, 2020 compared to $17.8 million for the same period in 2019. Our effective tax rate for the three and six months ended June 30, 2020 was 21.0% and 20.0%, respectively, compared to 20.7% and 20.2% for the corresponding periods in 2019, respectively. We recognized excess tax benefits as a credit to our income tax expense from the exercise and vesting of stock options and restricted stock during the three and six months ended June 30, 2020 of $136,000 and $1.2 million, respectively, compared to $186,000 and $958,000 during the three and six months ended June 30, 2019, respectively. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance.

 

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

 

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, 2019, and there have been no material changes to our sensitivity to changes in interest rates since December 31, 2019, as disclosed in our Annual Report on Form 10-K.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

CEO and CFO Certification.

 

Appearing as exhibits to this report are Certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). The Certifications are required to be made by Rule 13a-14 or Rule 15d-14 under the Securities Exchange Act of 1934. 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, 2020. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2020, our disclosure controls and procedures are effective to ensure that material information relating to the Company. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

 

Changes in Internal Control Over Financial Reporting


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

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time we may be a party to various legal proceedings arising in the ordinary course of business. Management does not believe the Company or the Bank is currently a party to any material legal proceedings.

 

ITEM 1A. RISK FACTORS

 

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of:

 

The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

 

Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. Such measures have included travel bans and restrictions, curfews, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in the near future.

 

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The outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our customers or business partners, including but not limited to:

 

 

Credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;

 

Possible business disruptions experienced by our vendors and business partners in carrying out work that supports our operations;

 

Heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic; and,

 

Operational failures due to changes in our normal business practices necessitated by our internal measures to protect our employees and government-mandated measures intended to slow the spread of the virus.

 

These factors may exist for an extended period of time and may continue to adversely affect our business, financial condition and operations even after the COVID-19 outbreak has subsided.

 

The extent to which the pandemic impacts our business, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Additionally, future outbreaks of COVID-19, or other viruses, may occur.

 

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Therefore, the risk factors discussed in our Annual Report on Form 10-K could be heightened, changed or be added to in the future. 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

 

None.

 

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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)     

 

*denotes compensatory plan or arrangement

 

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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, 2020 By /s/ Thomas A. Broughton III
    Thomas A. Broughton III
    President and Chief Executive Officer
     
     
Date: July 30, 2020 By /s/ William M. Foshee
    William M. Foshee
    Chief Financial Officer

 

 

 

 

 

 

 

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