SFBS 10-Q Quarter ended June 30, 2017

2

		June 30, 2017				December 31, 2016
		(Unaudited)				(1)
ASSETS
Cash and due from banks		$	71,181			$	56,855
Interest-bearing balances due from depository institutions			134,694				566,707
Federal funds sold			49,443				160,435
Cash and cash equivalents			255,318				783,997
Available for sale debt securities, at fair value			438,808				422,375
Held to maturity debt securities (fair value of $80,532 and $63,302 at June 30, 2017 and December 31, 2016, respectively)			79,257				62,564
Restricted equity securities			1,037				1,024
Mortgage loans held for sale			5,673				4,675
Loans			5,343,688				4,911,770
Less allowance for loan losses			(55,059	)			(51,893	)
Loans, net			5,288,629				4,859,877
Premises and equipment, net			51,797				40,314
Accrued interest and dividends receivable			16,770				15,801
Deferred tax assets			26,392				27,132
Other real estate owned and repossessed assets			3,891				4,988
Bank owned life insurance contracts			125,896				114,388
Goodwill and other identifiable intangible assets			14,855				14,996
Other assets			21,276				18,317
Total assets		$	6,329,599			$	6,370,448
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,373,353			$	1,281,605
Interest-bearing			4,021,457				4,138,706
Total deposits			5,394,810				5,420,311
Federal funds purchased			300,226				355,944
Other borrowings			55,075				55,262
Accrued interest payable			3,513				4,401
Other liabilities			8,889				11,641
Total liabilities			5,762,513				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 June 30, 2017 and December 31, 2016			-				-
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2017 and December 31, 2016			-				-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,909,362 shares issued and outstanding at June 30, 2017, and 52,636,896 shares issued and outstanding at December 31, 2016			53				53
Additional paid-in capital			217,271				215,932
Retained earnings			348,517				307,151
Accumulated other comprehensive income			743				(624	)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.			566,584				522,512
Noncontrolling interest			502				377
Total stockholders' equity			567,086				522,889
Total liabilities and stockholders' equity		$	6,329,599			$	6,370,448

3

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Interest income:
Interest and fees on loans		$	59,912			$	49,210			$	115,468			$	96,457
Taxable securities			2,274				1,238				4,361				2,507
Nontaxable securities			752				834				1,517				1,692
Federal funds sold			287				210				806				283
Other interest and dividends			313				558				903				1,072
Total interest income			63,538				52,050				123,055				102,011
Interest expense:
Deposits			6,321				4,633				12,303				8,994
Borrowed funds			1,650				1,526				3,133				2,947
Total interest expense			7,971				6,159				15,436				11,941
Net interest income			55,567				45,891				107,619				90,070
Provision for loan losses			4,381				3,800				9,367				5,859
Net interest income after provision for loan losses			51,186				42,091				98,252				84,211
Noninterest income:
Service charges on deposit accounts			1,382				1,306				2,736				2,613
Mortgage banking			1,064				901				1,963				1,569
Credit card income			1,189				572				2,368				1,041
Securities (losses) gains			-				(3	)			-				(3	)
Increase in cash surrender value life insurance			785				655				1,509				1,279
Other operating income			385				416				775				783
Total noninterest income			4,805				3,847				9,351				7,282
Noninterest expenses:
Salaries and employee benefits			12,031				10,733				23,744				21,800
Equipment and occupancy expense			2,265				2,023				4,505				4,008
Professional services			808				999				1,579				1,737
FDIC and other regulatory assessments			1,081				803				2,078				1,553
OREO expense			56				41				132				490
Other operating expenses			5,634				4,905				11,104				9,206
Total noninterest expenses			21,875				19,504				43,142				38,794
Income before income taxes			34,116				26,434				64,461				52,699
Provision for income taxes			9,952				7,558				17,778				13,867
Net income			24,164				18,876				46,683				38,832
Preferred stock dividends			31				23				31				23
Net income available to common stockholders		$	24,133			$	18,853			$	46,652			$	38,809
Basic earnings per common share		$	0.46			$	0.36			$	0.88			$	0.74
Diluted earnings per common share		$	0.45			$	0.36			$	0.86			$	0.73

4

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Net income		$	24,164			$	18,876			$	46,683			$	38,832
Other comprehensive income, net of tax:
Unrealized holding gains arising during period from securities available for sale, net of tax of $201 and $736 for the three and six months ended June 30, 2017, respectively, and $272 and $1,256 for the three and six months ended June 30, 2016, respectively			374				520				1,367				2,354
Reclassification adjustment for net losses on sale of securities, net of tax of $1 for the three and six months ended June 30, 2016			-				2				-				2
Other comprehensive income, net of tax			374				522				1,367				2,356
Comprehensive income		$	24,538			$	19,398			$	48,050			$	41,188

5

		Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Noncontrolling Interest				Total Stockholders' Equity
Balance, December 31, 2015		$	52			$	211,546			$	234,124			$	3,048			$	377			$	449,147
Common dividends paid, $0.04 per share			-				-				(2,095	)			-				-				(2,095	)
Common dividends declared, $.04 per share			-				-				(2,099	)			-				-				(2,099	)
Preferred dividends paid			-				-				(23	)			-				-				(23	)
Issue 549,500 shares of common stock upon exercise of stock options			-				2,339				-				-				-				2,339
Stock based compensation expense			-				640				-				-				-				640
Other comprehensive income, net of tax			-				-				-				2,356				-				2,356
Net income			-				-				38,832				-				-				38,832
Balance, June 30, 2016		$	52			$	214,525			$	268,739			$	5,404			$	377			$	489,097
Balance, December 31, 2016		$	53			$	215,932			$	307,151			$	(624	)		$	377			$	522,889
Common dividends paid, $0.05 per share			-				-				(2,641	)			-				-				(2,641	)
Common dividends declared, $0.05 per share			-				-				(2,645	)			-				-				(2,645	)
Preferred dividends paid			-				-				(31	)			-				-				(31	)
Issue 272,466 shares of common stock upon exercise of stock options			-				717				-				-				-				717
Issue 125 shares of REIT preferred stock			-				-				-				-				125				125
Stock based compensation expense			-				622				-				-				-				622
Other comprehensive income, net of tax			-				-				-				1,367				-				1,367
Net income			-				-				46,683				-				-				46,683
Balance, June 30, 2017		$	53			$	217,271			$	348,517			$	743			$	502			$	567,086

6

		Six Months Ended June 30,
		2017				2016
OPERATING ACTIVITIES
Net income		$	46,683			$	38,832
Adjustments to reconcile net income to net cash provided by
Deferred tax			4				440
Provision for loan losses			9,367				5,859
Depreciation			1,501				1,480
Accretion on acquired loans			(267	)			(624	)
Amortization of core deposit intangible			141				176
Net amortization of debt securities available for sale			1,999				1,288
(Increase) decrease in accrued interest and dividends receivable			(969	)			211
Stock-based compensation expense			622				640
(Decrease) increase in accrued interest payable			(888	)			507
Proceeds from sale of mortgage loans held for sale			71,518				61,054
Originations of mortgage loans held for sale			(70,553	)			(59,169	)
Loss on sale of debt securities available for sale			-				3
Gain on sale of mortgage loans held for sale			(1,963	)			(1,569	)
Net (gain) loss on sale of other real estate owned and repossessed assets			(53	)			39
Write down of other real estate owned and repossessed assets			4				397
Losses of tax credit partnerships			7				176
Increase in cash surrender value of life insurance contracts			(1,509	)			(1,279	)
Net change in other assets, liabilities, and other operating activities			(9,379	)			(7,563	)
Net cash provided by operating activities			46,265				40,898
INVESTMENT ACTIVITIES
Purchase of debt securities available for sale			(60,627	)			(15,119	)
Proceeds from sale of debt securities available for sale			-				6,085
Proceeds from maturities, calls and paydowns of debt securities available for sale			45,325				34,255
Purchase of debt securities held to maturity			(20,786	)			(439	)
Proceeds from maturities, calls and paydowns of debt securities held to maturity			4,093				1,203
Purchase of equity securities			(10	)			(708	)
Increase in loans			(438,253	)			(325,496	)
Purchase of premises and equipment			(12,984	)			(5,267	)
Purchase of bank-owned life insurance contracts			(10,000	)			(10,000	)
Expenditures to complete construction of other real estate owned			-				(3	)
Proceeds from sale of other real estate owned and repossessed assets			1,547				1,575
Investment in tax credit partnerships			-				(2,491	)
Net cash used in investing activities			(491,695	)			(316,405	)
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits			91,748				132,201
Net (decrease) increase in interest-bearing deposits			(117,249	)			311,706
Net (decrease) increase in federal funds purchased			(55,718	)			68,070
Repayment of Federal Home Loan Bank advances			(200	)			(200	)
Proceeds from sale of preferred stock, net			125				-
Proceeds from exercise of stock options and warrants			717				2,339
Dividends paid on common stock			(2,641	)			(2,095	)
Dividends paid on preferred stock			(31	)			(23	)
Net cash (used in) provided by financing activities			(83,249	)			511,998
Net (decrease) increase in cash and cash equivalents			(528,679	)			236,491
Cash and cash equivalents at beginning of period			783,997				352,235
Cash and cash equivalents at end of period		$	255,318			$	588,726
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest		$	16,324			$	11,434
Income taxes			22,363				17,546
Income tax refund			(182	)			-
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans		$	586			$	2,036
Internally financed sales of other real estate owned			185				1,157
Dividends declared			2,645				2,099

7

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”) 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, 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 available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and warrants. All reported amounts in this Form 10-Q have been adjusted to give effect to the two-for-one stock split discussed above.

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2017 and December 31, 2016 are summarized as follows:

The amortized cost and fair value of debt securities as of June 30, 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 June 30, 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 June 30, 2017, nine of the Company’s 813 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, 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.

10

NOTE 5 – LOANS

The following table details the Company’s loans at June 30, 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 (or obligors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

·

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

·

Substandard – loans that exhibit well-defined weakness or weaknesses that currently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.

·

Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Loans by credit quality indicator as of June 30, 2017 and December 31, 2016 were as follows:

Loans by performance status as of June 30, 2017 and December 31, 2016 were as follows:

Loans by past due status as of June 30, 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 homogeneous loan pools by loan type and are the following: commercial and industrial, construction and development, commercial real estate, second lien home equity lines of credit, and all other loans. Each loan pool is stratified by internal risk rating and multiplied by a loss allocation percentage derived from the loan pool historical loss rate. The historical loss rate is based on an age weighted 5 year history of net charge-offs experienced by pool, with the most recent net charge-off experience given a greater weighting. This results in the expected loss rate per year, adjusted by a qualitative adjustment factor and a years-to-impairment factor, for each pool of loans to derive the total amount of allowance for non-impaired loans.

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

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

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

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 2017 and June 30, 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 June 30, 2017 and December 31, 2016, respectively. Loans which have been fully charged off do not appear in the tables.

Troubled Debt Restructurings (“TDR”) at June 30, 2017, December 31, 2016 and June 30, 2016 totaled $16.4 million, $7.3 million and $6.8 million, respectively. At June 30, 2017, the Company had a related allowance for loan losses of $3.1 million allocated to these TDRs, compared to $2.3 million at December 31, 2016 and $1.0 million at June 30, 2016. TDR activity by portfolio segment for the three and six months ended June 30, 2017 is presented in the table below.

There were no TDRs which defaulted during the three and six months ended June 30, 2017 and 2016, and which were modified in the previous twelve months (i.e., the twelve months prior to default). For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of June 30, 2017, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.