SFBS 10-Q Quarter ended March 31, 2017

3

		March 31, 2017				December 31, 2016
		(Unaudited)				(1)
ASSETS
Cash and due from banks		$	54,993			$	56,855
Interest-bearing balances due from depository institutions			283,181				566,707
Federal funds sold			127,390				160,435
Cash and cash equivalents			465,564				783,997
Available for sale debt securities, at fair value			453,956				422,375
Held to maturity debt securities (fair value of $73,180 and $63,302 at March 31, 2017 and December 31, 2016, respectively)			72,057				62,564
Equity securities			1,034				1,024
Mortgage loans held for sale			6,599				4,675
Loans			5,151,984				4,911,770
Less allowance for loan losses			(53,892	)			(51,893	)
Loans, net			5,098,092				4,859,877
Premises and equipment, net			46,407				40,314
Accrued interest and dividends receivable			16,051				15,801
Deferred tax assets			26,966				27,132
Other real estate owned and repossessed assets			5,102				4,988
Bank owned life insurance contracts			115,112				114,388
Goodwill and other identifiable intangible assets			14,924				14,996
Other assets			14,301				18,317
Total assets		$	6,336,165			$	6,370,448
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,292,440			$	1,281,605
Interest-bearing			4,069,092				4,138,706
Total deposits			5,361,532				5,420,311
Federal funds purchased			358,241				355,944
Other borrowings			55,169				55,262
Accrued interest payable			4,214				4,401
Other liabilities			11,861				11,641
Total liabilities			5,791,017				5,847,559
Stockholders' equity:
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $0.001 (liquidation preference $1,000), net of discount; no shares authorized or outstanding at March 31, 2017 and December 31, 2016			-				-
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at March 31, 2017 and December 31, 2016			-				-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,812,396 shares issued and outstanding at March 31, 2017, and 52,636,896 shares issued and outstanding at December 31, 2016			53				53
Additional paid-in capital			217,195				215,932
Retained earnings			327,029				307,151
Accumulated other comprehensive income			369				(624	)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.			544,646				522,512
Noncontrolling interest			502				377
Total stockholders' equity			545,148				522,889
Total liabilities and stockholders' equity		$	6,336,165			$	6,370,448

4

		Three Months Ended March 31,
		2017				2016
Interest income:
Interest and fees on loans		$	55,556			$	47,247
Taxable securities			2,087				1,269
Nontaxable securities			765				858
Federal funds sold			519				73
Other interest and dividends			590				514
Total interest income			59,517				49,961
Interest expense:
Deposits			5,982				4,361
Borrowed funds			1,483				1,421
Total interest expense			7,465				5,782
Net interest income			52,052				44,179
Provision for loan losses			4,986				2,059
Net interest income after provision for loan losses			47,066				42,120
Noninterest income:
Service charges on deposit accounts			1,354				1,307
Mortgage banking			899				668
Increase in cash surrender value life insurance			724				624
Other operating income			1,569				836
Total noninterest income			4,546				3,435
Noninterest expenses:
Salaries and employee benefits			11,713				11,067
Equipment and occupancy expense			2,250				1,985
Professional services			771				738
FDIC and other regulatory assessments			997				750
Other real estate owned expense			76				449
Other operating expenses			5,460				4,301
Total non-interest expenses			21,267				19,290
Income before income taxes			30,345				26,265
Provision for income taxes			7,826				6,309
Net income			22,519				19,956
Dividends on preferred stock			-				-
Net income available to common stockholders		$	22,519			$	19,956
Basic earnings per common share		$	0.43			$	0.38
Diluted earnings per common share		$	0.42			$	0.38

5

		Three Months Ended March 31,
		2017				2016
Net income		$	22,519			$	19,956
Other comprehensive income, net of tax:
Unrealized holding gains arising during period from securities available for sale, net of tax of $534 and $984 for 2017 and 2016, respectively			993				1,837
Comprehensive income		$	23,512			$	21,793

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																		Accumulated
										Additional								Other								Total
		Preferred				Common				Paid-in				Retained				Comprehensive				Noncontrolling				Stockholders'
		Stock				Stock				Capital				Earnings				Income				Interest				Equity
Balance, December 31, 2015		$	-			$	52			$	211,546			$	234,124			$	3,048			$	377			$	449,147
Common dividends declared, $0.04 per share			-				-				-				(2,095	)			-				-				(2,095	)
Issue 411,000 shares of common stock upon exercise and vesting of stock options and restricted stock			-				-				1,752				-				-				-				1,752
Stock based compensation expense			-				-				343				-				-				-				343
Other comprehensive income, net of tax			-				-				-				-				1,837				-				1,837
Net income			-				-				-				19,956				-				-				19,956
Balance, March 31, 2016		$	-			$	52			$	213,641			$	251,985			$	4,885			$	377			$	470,940
Balance, December 31, 2016		$	-			$	53			$	215,932			$	307,151			$	(624	)		$	377			$	522,889
Common dividends declared, $0.05 per share			-				-				-				(2,641	)			-				-				(2,641	)
Issue 175,500 shares of common stock upon exercise of stock options			-				-				926				-				-				-				926
Issue 125 shares of REIT preferred stock			-				-				-				-				-				125				125
Stock based compensation expense			-				-				337				-				-				-				337
Other comprehensive income, net of tax			-				-				-				-				993				-				993
Net income			-				-				-				22,519				-				-				22,519
Balance, March 31, 2017		$	-			$	53			$	217,195			$	327,029			$	369			$	502			$	545,148

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		Three Months Ended March 31,
		2017				2016
OPERATING ACTIVITIES
Net income		$	22,519			$	19,956
Adjustments to reconcile net income to net cash provided by
Deferred tax (benefit)			(369	)			(255	)
Provision for loan losses			4,986				2,059
Depreciation			752				730
Accretion on acquired loans			(143	)			(290	)
Amortization of core deposit intangible			72				91
Net amortization of debt securities available for sale			1,001				634
(Increase) decrease in accrued interest and dividends receivable			(250	)			282
Stock-based compensation expense			337				343
(Decrease) increase in accrued interest payable			(187	)			1,274
Proceeds from sale of mortgage loans held for sale			32,501				27,918
Originations of mortgage loans held for sale			(33,526	)			(24,091	)
Gain on sale of mortgage loans held for sale			(899	)			(668	)
Net (gain) loss on sale of other real estate owned and repossessed assets			(36	)			19
Write down of other real estate owned and repossessed assets			-				373
Losses of tax credit partnerships			(22	)			38
Increase in cash surrender value of life insurance contracts			(724	)			(624	)
Net change in other assets, liabilities, and other operating activities			3,202				(515	)
Net cash provided by operating activities			29,214				27,274
INVESTMENT ACTIVITIES
Purchase of securities available for sale			(53,885	)			(10,069	)
Proceeds from maturities, calls and paydowns of securities available for sale			23,357				21,119
Purchase of securities held to maturity			(9,786	)			(439	)
Proceeds from maturities, calls and paydowns of securities held to maturity			293				326
Purchase of equity securities			(10	)			(708	)
Increase in loans			(243,562	)			(124,622	)
Purchase of premises and equipment			(6,844	)			(2,285	)
Expenditures to complete construction of other real estate owned			-				(3	)
Proceeds from sale of other real estate owned and repossessed assets			426				1,013
Net cash used in investing activities			(290,011	)			(115,668	)
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits			10,835				16,808
Net (decrease) increase in interest-bearing deposits			(69,614	)			99,051
Net increase in federal funds purchased			2,297				145,525
Repayment of Federal Home Loan Bank advances			(100	)			(100	)
Proceeds from sale of preferred stock, net			125				-
Proceeds from exercise of stock options			926				1,752
Dividends paid on common stock			(2,105	)			(1,240	)
Net cash provided by financing activities			(57,636	)			261,796
Net (decrease) increase in cash and cash equivalents			(318,433	)			173,402
Cash and cash equivalents at beginning of period			783,997				352,235
Cash and cash equivalents at end of period		$	465,564			$	525,637
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest		$	7,652			$	4,508
Income taxes			652				674
Income tax refund			(181	)			(867	)
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans		$	553			$	1,076
Internally financed sales of other real estate owned			49				1,022
Dividends declared			2,641				2,095

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NOTE 1 - GENERAL

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2016.

On December 20, 2016, the Company effected a two-for-one split of its common stock in the form of a stock dividend. Except where specifically indicated otherwise, all reported amounts in this Form 10-Q have been adjusted to give effect to this stock split.

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

NOTE 2 - CASH AND CASH EQUIVALENTS

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

NOTE 3 - EARNINGS PER COMMON SHARE

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and warrants. All reported amounts in this Form 10-Q have been adjusted to give effect to the 2-for-1 stock split disclosed above.

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NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2017 and December 31, 2016 are summarized as follows:

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

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

The following table identifies, as of March 31, 2017 and December 31, 2016, 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 March 31, 2017, seven of the Company’s 802 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 March 31, 2017. 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.

NOTE 5 – LOANS

The following table details the Company’s loans at March 31, 2017 and December 31, 2016:

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

·

Pass – loans which are well protected by the current net worth and paying capacity of the obligor(s) 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 presently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies 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 March 31, 2017 and December 31, 2016 were as follows:

Loans by performance status as of March 31, 2017 and December 31, 2016 were as follows:

Loans by past due status as of March 31, 2017 and December 31, 2016 were as follows:

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

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

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

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three months ended March 31, 2017 and March 31, 2016. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

The following table presents details of the Company’s impaired loans as of March 31, 2017 and December 31, 2016, respectively. Loans which have been fully charged off do not appear in the table.

Troubled Debt Restructurings (“TDR”) at March 31, 2017, December 31, 2016 and March 31, 2016 totaled $7.3 million, $7.3 million and $6.8 million, respectively. At March 31, 2017, the Company had a related allowance for loan losses of $2.3 million allocated to these TDRs, compared to $2.3 million at December 31, 2016 and $0.9 million at March 31, 2016. There were no modifications made to new TDRs or renewals of existing TDRs for the three months ended March 31, 2017 and 2016.

No TDRs which were modified in the previous twelve months (i.e., the twelve months prior to default) defaulted during the three months ended March 31, 2017 or 2016. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.