SFBS 10-Q Quarter ended Sept. 30, 2018

2

		September 30, 2018				December 31, 2017
		(Unaudited)				(1)
ASSETS
Cash and due from banks		$	77,692			$	86,213
Interest-bearing balances due from depository institutions			59,096				151,849
Federal funds sold			229,033				239,524
Cash and cash equivalents			365,821				477,586
Available for sale debt securities, at fair value			578,021				538,080
Held to maturity debt securities (fair value of $250 at September 30, 2018 and December 31, 2017)			250				250
Equity securities			889				1,034
Mortgage loans held for sale			5,277				4,459
Loans			6,363,531				5,851,261
Less allowance for loan losses			(66,879	)			(59,406	)
Loans, net			6,296,652				5,791,855
Premises and equipment, net			57,882				58,900
Accrued interest and dividends receivable			24,755				20,661
Deferred tax assets			12,268				13,022
Other real estate owned and repossessed assets			5,714				6,701
Bank owned life insurance contracts			129,869				127,519
Goodwill and other identifiable intangible assets			14,517				14,719
Other assets			25,918				27,598
Total assets		$	7,517,833			$	7,082,384
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,504,447			$	1,440,326
Interest-bearing			5,000,904				4,651,348
Total deposits			6,505,351				6,091,674
Federal funds purchased			246,094				301,797
Other borrowings			64,657				64,832
Accrued interest payable			8,562				4,971
Other liabilities			11,659				11,506
Total liabilities			6,836,323				6,474,780
Stockholders' equity:
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at September 30, 2018 and December 31, 2017			-				-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,197,807 shares issued and outstanding at September 30, 2018, and 52,992,586 shares issued and outstanding at December 31, 2017			53				53
Additional paid-in capital			218,062				217,693
Retained earnings			472,681				389,554
Accumulated other comprehensive loss			(9,788	)			(198	)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.			681,008				607,102
Noncontrolling interest			502				502
Total stockholders' equity			681,510				607,604
Total liabilities and stockholders' equity		$	7,517,833			$	7,082,384

3

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Interest income:
Interest and fees on loans		$	78,991			$	63,857			$	222,285			$	179,325
Taxable securities			3,276				2,288				9,148				6,649
Nontaxable securities			583				729				1,862				2,246
Federal funds sold			892				379				2,137				1,185
Other interest and dividends			316				388				1,031				1,291
Total interest income			84,058				67,641				236,463				190,696
Interest expense:
Deposits			15,210				7,574				36,545				19,877
Borrowed funds			1,985				1,671				6,097				4,804
Total interest expense			17,195				9,245				42,642				24,681
Net interest income			66,863				58,396				193,821				166,015
Provision for loan losses			6,624				4,803				14,884				14,170
Net interest income after provision for loan losses			60,239				53,593				178,937				151,845
Noninterest income:
Service charges on deposit accounts			1,595				1,467				4,833				4,203
Mortgage banking			789				978				2,096				2,941
Credit card income			1,838				1,149				5,172				3,517
Securities gains			186				-				190				-
Increase in cash surrender value life insurance			787				825				2,350				2,334
Other operating income			396				371				1,278				1,146
Total noninterest income			5,591				4,790				15,919				14,141
Noninterest expenses:
Salaries and employee benefits			13,070				12,428				39,464				36,172
Equipment and occupancy expense			2,193				1,947				6,260				6,452
Professional services			853				805				2,582				2,384
FDIC and other regulatory assessments			675				810				2,967				2,888
OREO expense			289				31				765				163
Other operating expenses			6,070				5,476				18,634				16,580
Total noninterest expenses			23,150				21,497				70,672				64,639
Income before income taxes			42,680				36,886				124,184				101,347
Provision for income taxes			8,120				11,627				23,481				29,405
Net income			34,560				25,259				100,703				71,942
Preferred stock dividends			-				-				31				31
Net income available to common stockholders		$	34,560			$	25,259			$	100,672			$	71,911
Basic earnings per common share		$	0.65			$	0.48			$	1.89			$	1.36
Diluted earnings per common share		$	0.64			$	0.47			$	1.86			$	1.33

4

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Net income		$	34,560			$	25,259			$	100,703			$	71,942
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains arising during period from securities available for sale, net of tax of $(653) and $(2,589) for the three and nine months ended September 30, 2018, respectively, and $165 and $896 for the three and nine months ended September 30, 2017, respectively			(2,463	)			305				(9,740	)			1,672
Reclassification adjustment for gains on sale of securities, net of tax of $39 and $40 for the three and nine months ended September 30, 2018, respectively			147				-				150				-
Other comprehensive (loss) income, net of tax			(2,316	)			305				(9,590	)			1,672
Comprehensive income		$	32,244			$	25,564			$	91,113			$	73,614

5

		Preferred Stock				Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Noncontrolling interest				Total Stockholders' Equity
Balance, December 31, 2016		$	-			$	53			$	215,932			$	307,151			$	(624	)		$	377			$	522,889
Common dividends paid, $0.10 per share			-				-				-				(5,286	)			-				-				(5,286	)
Common dividends declared, $0.05 per share			-				-				-				(2,649	)			-				-				(2,649	)
Preferred dividends paid			-				-				-				(31	)			-				-				(31	)
Issue 328,214 shares of common stock upon exercise of stock options			-				-				1,784				-				-				-				1,784
30,786 shares of common stock withheld in net settlement upon exercise of stock options			-				-				(1,149	)			-				-				-				(1,149	)
Issue 125 shares of REIT preferred stock			-				-				-				-				-				125				125
Stock-based compensation expense			-				-				916				-				-				-				916
Other comprehensive income, net of tax			-				-				-				-				1,672				-				1,672
Net income			-				-				-				71,942				-				-				71,942
Balance, September 30, 2017		$	-			$	53			$	217,483			$	371,127			$	1,048			$	502			$	590,213
Balance, December 31, 2017		$	-			$	53			$	217,693			$	389,554			$	(198	)		$	502			$	607,604
Common dividends paid, $0.22 per share			-				-				-				(11,694	)			-				-				(11,694	)
Common dividends declared, $0.11 per share			-				-				-				(5,851	)			-				-				(5,851	)
Preferred dividends paid			-				-				-				(31	)			-				-				(31	)
Issue 191,371 shares of common stock upon exercise of stock options			-				-				1,325				-				-				-				1,325
39,965 shares of common stock withheld in net settlement upon exercise of stock options			-				-				(1,640	)			-				-				-				(1,640	)
Stock-based compensation expense			-				-				684				-				-				-				684
Other comprehensive loss, net of tax			-				-				-				-				(9,590	)			-				(9,590	)
Net income			-				-				-				100,703				-				-				100,703
Balance, September 30, 2018		$	-			$	53			$	218,062			$	472,681			$	(9,788	)		$	502			$	681,510

6

		Nine Months Ended September 30,
		2018				2017
OPERATING ACTIVITIES
Net income		$	100,703			$	71,942
Adjustments to reconcile net income to net cash provided by
Deferred tax expense (benefit)			754				(3,099	)
Provision for loan losses			14,884				14,170
Depreciation			2,548				2,281
Accretion on acquired loans			(147	)			(374	)
Amortization of core deposit intangible			202				209
Net amortization of debt securities available for sale			2,268				2,874
Increase in accrued interest and dividends receivable			(4,094	)			(4,533	)
Stock-based compensation expense			684				916
Increase (decrease) in accrued interest payable			3,591				(48	)
Proceeds from sale of mortgage loans held for sale			81,319				105,940
Originations of mortgage loans held for sale			(80,041	)			(103,295	)
Gain on sale of debt securities available for sale			(15	)			-
Gain on sale of equity securities			(175	)			-
Gain on sale of mortgage loans held for sale			(2,096	)			(2,941	)
Net loss (gain) on sale of other real estate owned and repossessed assets			3				(33	)
Write down of other real estate owned and repossessed assets			488				5
Operating losses of tax credit partnerships			128				42
Increase in cash surrender value of life insurance contracts			(2,350	)			(2,334	)
Net change in other assets, liabilities, and other operating activities			(2,608	)			(551	)
Net cash provided by operating activities			116,046				81,171
INVESTMENT ACTIVITIES
Purchase of debt securities available for sale			(122,821	)			(77,567	)
Proceeds from maturities, calls and paydowns of debt securities available for sale			63,803				65,734
Proceeds from sale of debt securities available for sale			5,736				-
Purchase of debt securities held to maturity			-				(29,782	)
Proceeds from maturities, calls and paydowns of debt securities held to maturity			-				4,947
Purchase of equity securities			-				(10	)
Proceeds from sale of equity securities			305				-
Increase in loans			(520,610	)			(724,626	)
Purchase of premises and equipment			(1,530	)			(17,071	)
Purchase of bank-owned life insurance contracts			-				(10,000	)
Proceeds from sale of other real estate owned and repossessed assets			1,572				1,529
Net cash used in investing activities			(573,545	)			(786,846	)
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits			64,121				124,360
Net increase in interest-bearing deposits			349,556				252,230
Net decrease in federal funds purchased			(55,703	)			(101,064	)
Repayment of Federal Home Loan Bank advances			(200	)			(300	)
Proceeds from sale of preferred stock, net			-				125
Proceeds from exercise of stock options			1,325				635
Taxes paid in net settlement of tax obligation upon exercise of stock options			(1,640	)			-
Dividends paid on common stock			(11,694	)			(5,286	)
Dividends paid on preferred stock			(31	)			(31	)
Net cash provided by financing activities			345,734				270,669
Net decrease in cash and cash equivalents			(111,765	)			(435,006	)
Cash and cash equivalents at beginning of period			477,586				783,997
Cash and cash equivalents at end of period		$	365,821			$	348,991
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest		$	39,051			$	24,729
Income taxes			20,235				30,651
Income tax refund			(2	)			(492	)
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans		$	1,206			$	586
Internally financed sales of other real estate owned			130				185
Dividends declared			5,851				2,649

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”) 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, 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 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.

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2018 and December 31, 2017 are summarized as follows:

The amortized cost and fair value of debt securities as of September 30, 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 September 30, 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 September 30, 2018, 197 of the Company’s 758 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 September 30, 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.

10

NOTE 5 – LOANS

The following table details the Company’s loans at September 30, 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 (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 September 30, 2018 and December 31, 2017 were as follows:

Loans by performance status as of September 30, 2018 and December 31, 2017 were as follows:

Loans by past due status as of September 30, 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 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 nine months ended September 30, 2018 and September 30, 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 September 30, 2018 and December 31, 2017, respectively. Loans which have been fully charged off do not appear in the tables.

Troubled Debt Restructurings (“TDR”) at September 30, 2018, December 31, 2017 and September 30, 2017 totaled $16.6 million, $20.6 million and $16.4 million, respectively. At September 30, 2018, the Company had a related allowance for loan losses of $3.7 million allocated to these TDRs, compared to $4.3 million at December 31, 2017 and $4.0 million at September 30, 2017. TDR activity by portfolio segment for the three and nine months ended September 30, 2018 and 2017 is presented in the table below.

There were no loans which were modified in the previous twelve months (i.e., twelve months prior to default) that defaulted during the three months ended September 30, 2018 and one commercial TDR loan totaling $0.3 million defaulted during the nine months ended September 30, 2018. No TDRs which were modified in the previous twelve months defaulted during the three and nine months ended September 30, 2017. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of September 30, 2018, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.