SFBS 10-Q Quarter ended March 31, 2018

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 MARCH 31, 2018

☐

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

For the transition period from _______to_______

Commission file number 001-36452

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	26-0734029
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

2500 Woodcrest Place, Birmingham, Alabama	35209
(Address of Principal Executive Offices)	(Zip Code)

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

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

2

		March 31, 2018				December 31, 2017
		(Unaudited)				(1)
ASSETS
Cash and due from banks		$	64,912			$	86,213
Interest-bearing balances due from depository institutions			53,311				151,849
Federal funds sold			197,882				239,524
Cash and cash equivalents			316,105				477,586
Available for sale debt securities, at fair value			560,635				538,080
Held to maturity debt securities (fair value of $250 at March 31, 2018 and December 31, 2017)			250				250
Equity securities			1,026				1,034
Mortgage loans held for sale			4,522				4,459
Loans			5,928,327				5,851,261
Less allowance for loan losses			(62,050	)			(59,406	)
Loans, net			5,866,277				5,791,855
Premises and equipment, net			58,624				58,900
Accrued interest and dividends receivable			20,261				20,661
Deferred tax assets, net			11,468				13,022
Other real estate owned and repossessed assets			5,748				6,701
Bank owned life insurance contracts			128,296				127,519
Goodwill and other identifiable intangible assets			14,652				14,719
Other assets			23,871				27,598
Total assets		$	7,011,735			$	7,082,384
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,407,592			$	1,440,326
Interest-bearing			4,569,795				4,651,348
Total deposits			5,977,387				6,091,674
Federal funds purchased			326,399				301,797
Other borrowings			64,739				64,832
Accrued interest payable			7,823				4,971
Other liabilities			6,090				11,506
Total liabilities			6,382,438				6,474,780
Stockholders' equity:
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at March 31, 2018 and December 31, 2017			-				-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,147,169 shares issued and outstanding at March 31, 2018, and 52,992,586 shares issued and outstanding at December 31, 2017			53				53
Additional paid-in capital			217,536				217,693
Retained earnings			416,311				389,554
Accumulated other comprehensive loss			(5,105	)			(198	)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.			628,795				607,102
Noncontrolling interest			502				502
Total stockholders' equity			629,297				607,604
Total liabilities and stockholders' equity		$	7,011,735				7,082,384

3

		Three Months Ended March 31,
		2018				2017
Interest income:
Interest and fees on loans		$	69,674			$	55,556
Taxable securities			2,745				2,087
Nontaxable securities			656				765
Federal funds sold			551				519
Other interest and dividends			383				590
Total interest income			74,009				59,517
Interest expense:
Deposits			9,621				5,982
Borrowed funds			1,952				1,483
Total interest expense			11,573				7,465
Net interest income			62,436				52,052
Provision for loan losses			4,139				4,986
Net interest income after provision for loan losses			58,297				47,066
Noninterest income:
Service charges on deposit accounts			1,585				1,354
Mortgage banking			518				899
Credit card income			1,578				1,179
Securities gains			4				-
Increase in cash surrender value life insurance			777				724
Other operating income			407				390
Total noninterest income			4,869				4,546
Non-interest expenses:
Salaries and employee benefits			13,296				11,713
Equipment and occupancy expense			1,954				2,250
Professional services			805				771
FDIC and other regulatory assessments			1,133				997
Other real estate owned expense			316				76
Other operating expenses			6,008				5,460
Total non-interest expenses			23,512				21,267
Income before income taxes			39,654				30,345
Provision for income taxes			7,051				7,826
Net income			32,603				22,519
Dividends on preferred stock			-				-
Net income available to common stockholders		$	32,603			$	22,519
Basic earnings per common share		$	0.61			$	0.43
Diluted earnings per common share		$	0.60			$	0.42

4

		Three Months Ended March 31,
		2018				2017
Net income		$	32,603			$	22,519
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains arising during period from securities available for sale, net of (benefit) tax of $(1,340) and $534 for 2018 and 2017, respectively			(4,910	)			993
Reclassification adjustment for gains on sale of securities, net of tax of $1 for 2018			3				-
Other comprehensive (loss) income, net of tax			(4,907	)			993
Comprehensive income		$	27,696			$	23,512

5

																		Accumulated
										Additional								Other								Total
		Preferred				Common				Paid-in				Retained				Comprehensive				Noncontrolling				Stockholders'
		Stock				Stock				Capital				Earnings				Income				Interest				Equity
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
Balance, December 31, 2017		$	-			$	53			$	217,693			$	389,554			$	(198	)		$	502			$	607,604
Common dividends declared, $0.11 per share			-				-				-				(5,846	)			-				-				(5,846	)
Issue 173,836 shares of common stock upon exercise of stock options			-				-				852				-				-				-				852
30,003 shares of common stock withheld in net settlement upon exercise of stock options			-				-				(1,247	)			-				-				-				(1,247	)
Stock-based compensation expense			-				-				238				-				-				-				238
Other comprehensive income, net of tax			-				-				-				-				(4,907	)			-				(4,907	)
Net income			-				-				-				32,603				-				-				32,603
Balance, March 31, 2018		$	-			$	53			$	217,536			$	416,311			$	(5,105	)		$	502			$	629,297

6

		Three Months Ended March 31,
		2018				2017
OPERATING ACTIVITIES
Net income		$	32,603			$	22,519
Adjustments to reconcile net income to net cash provided by
Deferred tax expense (benefit)			1,554				(369	)
Provision for loan losses			4,139				4,986
Depreciation			832				752
Accretion on acquired loans			(72	)			(143	)
Amortization of core deposit intangible			67				72
Net amortization of debt securities available for sale			623				1,001
Decrease (increase) in accrued interest and dividends receivable			400				(250	)
Stock-based compensation expense			238				337
Increase (decrease) in accrued interest payable			2,852				(187	)
Proceeds from sale of mortgage loans held for sale			24,720				32,501
Originations of mortgage loans held for sale			(24,265	)			(33,526	)
Gain on sale of debt securities available for sale			(4	)			-
Gain on sale of mortgage loans held for sale			(518	)			(899	)
Net gain on sale of other real estate owned and repossessed assets			-				(36	)
Write down of other real estate owned and repossessed assets			254				-
Operating losses (income) of tax credit partnerships			29				(22	)
Increase in cash surrender value of life insurance contracts			(777	)			(724	)
Net change in other assets, liabilities, and other operating activities			(3,790	)			3,202
Net cash provided by operating activities			38,885				29,214
INVESTMENT ACTIVITIES
Purchase of securities available for sale			(54,666	)			(53,885	)
Proceeds from maturities, calls and paydowns of securities available for sale			20,376				23,357
Proceeds from sale of debt securities available for sale			5,100				-
Purchase of securities held to maturity			-				(9,786	)
Proceeds from maturities, calls and paydowns of securities held to maturity			-				293
Purchase of equity securities			-				(10	)
Increase in loans			(78,664	)			(243,562	)
Purchase of premises and equipment			(556	)			(6,844	)
Proceeds from sale of other real estate owned and repossessed assets			874				426
Net cash used in investing activities			(107,536	)			(290,011	)
FINANCING ACTIVITIES
Net (decrease) increase in non-interest-bearing deposits			(32,734	)			10,835
Net decrease in interest-bearing deposits			(81,553	)			(69,614	)
Net increase in federal funds purchased			24,602				2,297
Repayment of Federal Home Loan Bank advances			(100	)			(100	)
Proceeds from sale of preferred stock, net			-				125
Proceeds from exercise of stock options			852				926
Taxes paid in net settlement of tax obligation upon exercise of stock options			(1,247	)			-
Dividends paid on common stock			(2,650	)			(2,105	)
Net cash used in financing activities			(92,830	)			(57,636	)
Net decrease in cash and cash equivalents			(161,481	)			(318,433	)
Cash and cash equivalents at beginning of period			477,586				783,997
Cash and cash equivalents at end of period		$	316,105			$	465,564
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest		$	8,721			$	7,652
Income taxes			2,902				652
Income tax refund			-				(181	)
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans		$	175			$	553
Internally financed sales of other real estate owned			-				49
Dividends declared			5,846				2,641

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 recurring 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, 2017.

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

Revenue Recognition

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) , provides guidance for reporting revenue from the entity’s contracts to provide goods or services to customers. The guidance requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are excluded from the scope of ASC 606, including revenue generated from financial instruments, such as securities and loans. Revenue-generating transactions that are within the scope of ASC 606, classified within non-interest income, are described as follows:

•

Deposit account service charges – represent service fees for monthly activity and maintenance on customer accounts. Attributes can be transaction-based, item-based or time-based. Revenue is recognized when our performance obligation is completed which is generally monthly for maintenance services or when a transaction is processed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

•

Credit card rewards program membership fees – represent memberships in our credit card rewards program and are paid annually by our cardholders at the time they open an account and on each anniversary. Revenue is recognized ratably over the membership period.

Other non-interest income primarily includes income on bank owned life insurance contracts, letter of credit fees and gains on sale of loans held for sale, none of which are within the scope of ASC 606.

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.

8

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2018 and December 31, 2017 are summarized as follows:

The amortized cost and fair value of debt securities as of March 31, 2018 and December 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, 2018 and December 31, 2017, 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, 2018, 73 of the Company’s 797 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, 2018. 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, 2018 and December 31, 2017:

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, 2018 and December 31, 2017 were as follows:

Loans by performance status as of March 31, 2018 and December 31, 2017 were as follows:

Loans by past due status as of March 31, 2018 and December 31, 2017 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, 2018 and March 31, 2017. 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, 2018 and December 31, 2017, respectively. Loans which have been fully charged off do not appear in the table.

Troubled Debt Restructurings (“TDR”) at March 31, 2018, December 31, 2017 and March 31, 2017 totaled $18.8 million, $20.6 million and $7.3 million, respectively. At March 31, 2018, the Company had a related allowance for loan losses of $5.1 million allocated to these TDRs, compared to $4.3 million at December 31, 2017 and $2.3 million at March 31, 2017. There were no modifications made to new TDRs or renewals of existing TDRs for the three months ended March 31, 2018 and 2017.

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, 2018 or 2017. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.