ServisFirst Bancshares, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 3 - Loans

Note 3 - Loans

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE

LOANS

The composition of loans at

December 31, 2018

and

2017

is summarized as follows:

	December 31,
	2018			2017

	(In Thousands)
Commercial, financial and agricultural	$	2,513,225		$	2,279,366
Real estate - construction		533,192			580,874
Real estate - mortgage:
Owner-occupied commercial		1,463,887			1,328,666
1-4 family mortgage		621,634			603,063
Other mortgage		1,337,068			997,079
Total real estate - mortgage		3,422,589			2,928,808
Consumer		64,493			62,213
Total Loans		6,533,499			5,851,261
Less: Allowance for loan losses		(68,600	)		(59,406	)
Net Loans	$	6,464,899		$	5,791,855

Changes in the allowance for loan losses during the years ended

December 31, 2018,

2017

and

2016,

respectively are as follows:

	Years Ended December 31,
	2018			2017			2016

	(In Thousands)
Balance, beginning of year	$	59,406		$	51,893		$	43,419
Loans charged off		(12,753	)		(16,332	)		(5,198	)
Recoveries		545			620			274
Provision for loan losses		21,402			23,225			13,398
Balance, end of year	$	68,600		$	59,406		$	51,893

The Company assesses the adequacy of its allowance for loan losses at the end of each calendar quarter. The level of the allowance is based on management’s evaluation of the loan portfolios, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that

may

affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that

may

be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan

may

be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance is made for specific loans, but the entire allowance is available for any loan that in management’s judgment deteriorates and is uncollectible. The portion of the reserve classified as qualitative factors, is management’s evaluation of potential future losses that would arise in the loan portfolio should management’s assumption about qualitative and environmental conditions materialize. This qualitative factor portion of the allowance for loan losses is based on management’s judgment regarding various external and internal factors including macroeconomic trends, management’s assessment of the Company’s loan growth prospects, and evaluations of internal risk controls. Inherent risks in the loan portfolio will differ based on type of loan. Specific risk characteristics by loan portfolio segment are listed below:

Commercial and industrial loans

include risks associated with borrower’s cash flow, debt service coverage and management’s expertise. These loans are subject to the risk that the Company

may

have difficulty converting collateral to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility and general collectability in a default situation. These commercial loans

may

be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates.

Real estate construction loans

include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the proposed project. Construction lending is also subject to risks associated with sub-market dynamics, including population, employment trends and household income. During times of economic stress, this type of loan has typically had a greater degree of risk than other loan types.

Real estate mortgage loans

consist of loans secured by commercial and residential real estate. Commercial real estate lending is dependent upon successful management, marketing and expense supervision necessary to maintain the property. Repayment of these loans

may

be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to a single borrower. Residential real estate lending risks are generally less significant than those of other loans. Real estate lending risks include fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems.

Consumer loans

carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans but less risky than commercial loans. Risk of default is usually determined by the well-being of the local economies. During times of economic stress, there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt.

The following table presents an analysis of the allowance for loan losses by portfolio segment as of

December 31, 2018

and

2017.

The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

Changes in the allowance for loan losses, segregated by loan type, during the years ended

December 31, 2018

and

2017,

respectively, are as follows:

		Commercial, financial and agricultural			Real estate - construction			Real estate - mortgage			Consumer			Total

	(In Thousands)
	Year Ended December 31, 2018
Allowance for loan losses:
Balance at December 31, 2017	$	32,880		$	4,989		$	21,022		$	515		$	59,406
Charge-offs		(11,428	)		-			(1,042	)		(283	)		(12,753	)
Recoveries		349			112			46			38			545
Provision		17,215			(1,579	)		5,482			284			21,402
Balance at December 31, 2018	$	39,016		$	3,522		$	25,508		$	554		$	68,600

	December 31, 2018
Individually Evaluated for Impairment	$	6,066		$	126		$	1,887		$	49		$	8,128
Collectively Evaluated for Impairment		32,950			3,396			23,621			505			60,472

Loans:
Ending Balance	$	2,513,225		$	533,192		$	3,422,589		$	64,493		$	6,533,499
Individually Evaluated for Impairment		18,444			1,461			18,637			49			38,591
Collectively Evaluated for Impairment		2,494,781			531,731			3,403,952			64,444			6,494,908

	Year Ended December 31, 2017
Allowance for loan losses:
Balance at December 31, 2016	$	28,872		$	5,125		$	17,504		$	392		$	51,893
Charge-offs		(13,910	)		(56	)		(2,056	)		(310	)		(16,332	)
Recoveries		337			168			89			26			620
Provision		17,581			(248	)		5,485			407			23,225
Balance at December 31, 2017	$	32,880		$	4,989		$	21,022		$	515		$	59,406

	December 31, 2017
Individually Evaluated for Impairment	$	4,276		$	120		$	1,163		$	50		$	5,609
Collectively Evaluated for Impairment		28,604			4,869			19,859			465			53,797

Loans:
Ending Balance	$	2,279,366		$	580,874		$	2,928,808		$	62,213		$	5,851,261
Individually Evaluated for Impairment		26,447			1,571			12,404			88			40,510
Collectively Evaluated for Impairment		2,252,919			579,303			2,916,404			62,125			5,810,751

The credit quality of the loan portfolio is summarized

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 presently 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

December 31, 2018

and

2017

were as follows:

			Special
December 31, 2018	Pass		Mention		Substandard		Doubtful		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,447,052	$	47,754	$	18,419	$	-	$	2,513,225
Real estate - construction		525,021		6,749		1,422		-		533,192
Real estate - mortgage:
Owner-occupied commercial		1,431,982		28,547		3,358		-		1,463,887
1-4 family mortgage		616,884		2,703		2,047		-		621,634
Other mortgage		1,309,101		16,506		11,461		-		1,337,068
Total real estate - mortgage		3,357,967		47,756		16,866		-		3,422,589
Consumer		64,444		-		49		-		64,493
Total	$	6,394,484	$	102,259	$	36,756	$	-	$	6,533,499

			Special
December 31, 2017	Pass		Mention		Substandard		Doubtful		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,225,084	$	27,835	$	26,447	$	-	$	2,279,366
Real estate - construction		572,657		6,691		1,526		-		580,874
Real estate - mortgage:
Owner-occupied commercial		1,317,113		7,333		4,220		-		1,328,666
1-4 family mortgage		598,222		1,599		3,242		-		603,063
Other mortgage		976,348		18,122		2,609		-		997,079
Total real estate - mortgage		2,891,683		27,054		10,071		-		2,928,808
Consumer		62,083		42		88		-		62,213
Total	$	5,751,507	$	61,622	$	38,132	$	-	$	5,851,261

Nonperforming loans include nonaccrual loans and loans

or more days past due and still accruing. Loans by performance status as of

December 31, 2018

and

2017

are as follows:

December 31, 2018	Performing		Nonperforming		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,502,117	$	11,108	$	2,513,225
Real estate - construction		532,195		997		533,192
Real estate - mortgage:
Owner-occupied commercial		1,460,529		3,358		1,463,887
1-4 family mortgage		619,465		2,169		621,634
Other mortgage		1,327,038		10,030		1,337,068
Total real estate - mortgage		3,407,032		15,557		3,422,589
Consumer		64,385		108		64,493
Total	$	6,505,729	$	27,770	$	6,533,499

December 31, 2017	Performing		Nonperforming		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,269,642	$	9,724	$	2,279,366
Real estate - construction		580,874		-		580,874
Real estate - mortgage:
Owner-occupied commercial		1,328,110		556		1,328,666
1-4 family mortgage		602,604		459		603,063
Other mortgage		997,079		-		997,079
Total real estate - mortgage		2,927,793		1,015		2,928,808
Consumer		62,127		86		62,213
Total	$	5,840,436	$	10,825	$	5,851,261

Loans by past due status as of

December 31, 2018

and

2017

are as follows:

December 31, 2018	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	$	1,222	$	48	$	605	$	1,875	$	10,503	$	2,500,847	$	2,513,225
Real estate - construction		-		1,352		-		1,352		997		530,843		533,192
Real estate - mortgage:
Owner-occupied commercial		412		-		-		412		3,358		1,460,117		1,463,887
1-4 family mortgage		534		235		123		892		2,046		618,696		621,634
Other mortgage		1,174		-		5,008		6,182		5,022		1,325,864		1,337,068
Total real estate - mortgage		2,120		235		5,131		7,486		10,426		3,404,677		3,422,589
Consumer		58		123		108		289		-		64,204		64,493
Total	$	3,400	$	1,758	$	5,844	$	11,002	$	21,926	$	6,500,571	$	6,533,499

December 31, 2017	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	$	1,410	$	5,702	$	12	$	7,124	$	9,712	$	2,262,530	$	2,279,366
Real estate - construction		56		997		-		1,053		-		579,821		580,874
Real estate - mortgage:
Owner-occupied commercial		-		3,664		-		3,664		556		1,324,446		1,328,666
1-4 family mortgage		430		850		-		1,280		459		601,324		603,063
Other mortgage		5,116		-		-		5,116		-		991,963		997,079
Total real estate - mortgage		5,546		4,514		-		10,060		1,015		2,917,733		2,928,808
Consumer		131		23		48		202		38		61,973		62,213
Total	$	7,143	$	11,236	$	60	$	18,439	$	10,765	$	5,822,057	$	5,851,261

Fair value estimates for specifically impaired 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 state-certified 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 to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. As subsequent events dictate and estimated net realizable values decline, required reserves

may

be established or further adjustments recorded.

The following table presents details of the Company’s impaired loans as of

December 31, 2018

and

2017,

respectively. Loans which have been fully charged off do

not

appear in the tables.

December 31, 2018

			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
	Investment		Balance		Allowance		Investment		in Period

	(In Thousands)
With no allowance recorded:
Commercial, financial and agricultural	$	6,064	$	6,064	$	-	$	6,142	$	237
Real estate - construction		464		467		-		524		28
Real estate - mortgage:
Owner-occupied commercial		1,763		1,947		-		2,223		120
1-4 family mortgage		1,071		1,071		-		1,088		21
Other mortgage		5,061		5,061		-		5,133		252
Total real estate - mortgage		7,895		8,079		-		8,444		393
Consumer		-		-		-		-		-
Total with no allowance recorded		14,423		14,610		-		15,110		658

With an allowance recorded:
Commercial, financial and agricultural		12,380		20,141		6,066		15,918		462
Real estate - construction		997		997		126		997		31
Real estate - mortgage:
Owner-occupied commercial		3,358		3,358		99		3,364		105
1-4 family mortgage		975		975		208		975		30
Other mortgage		6,409		6,409		1,580		6,598		217
Total real estate - mortgage		10,742		10,742		1,887		10,937		352
Consumer		49		49		49		49		3
Total with allowance recorded		24,168		31,929		8,128		27,901		848

Total Impaired Loans:
Commercial, financial and agricultural		18,444		26,205		6,066		22,060		699
Real estate - construction		1,461		1,464		126		1,521		59
Real estate - mortgage:
Owner-occupied commercial		5,121		5,305		99		5,587		225
1-4 family mortgage		2,046		2,046		208		2,063		51
Other mortgage		11,470		11,470		1,580		11,731		469
Total real estate - mortgage		18,637		18,821		1,887		19,381		745
Consumer		49		49		49		49		3
Total impaired loans	$	38,591	$	46,539	$	8,128	$	43,011	$	1,506

December 31, 2017

			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	$	10,036	$	16,639	$	-	$	16,417	$	571
Real estate - construction		574		577		-		663		31
Real estate - mortgage:
Owner-occupied commercial		2,640		2,806		-		2,875		159
1-4 family mortgage		2,262		2,262		-		2,289		93
Other mortgage		746		746		-		727		44
Total real estate - mortgage		5,648		5,814		-		5,891		296
Consumer		38		39		-		42		3
Total with no allowance recorded		16,296		23,069		-		23,013		901

With an allowance recorded:
Commercial, financial and agricultural		16,411		16,992		4,276		17,912		651
Real estate - construction		997		997		120		997		56
Real estate - mortgage:
Owner-occupied commercial		3,914		3,914		601		3,801		215
1-4 family mortgage		980		980		281		1,113		54
Other mortgage		1,862		1,862		281		1,862		80
Total real estate - mortgage		6,756		6,756		1,163		6,776		349
Consumer		50		50		50		42		3
Total with allowance recorded		24,214		24,795		5,609		25,727		1,059

Total Impaired Loans:
Commercial, financial and agricultural		26,447		33,631		4,276		34,329		1,222
Real estate - construction		1,571		1,574		120		1,660		87
Real estate - mortgage:
Owner-occupied commercial		6,554		6,720		601		6,676		374
1-4 family mortgage		3,242		3,242		281		3,402		147
Other mortgage		2,608		2,608		281		2,589		124
Total real estate - mortgage		12,404		12,570		1,163		12,667		645
Consumer		88		89		50		84		6
Total impaired loans	$	40,510	$	47,864	$	5,609	$	48,740	$	1,960

Troubled Debt Restructurings (“TDR”) at

December 31, 2018

and

2017

totaled

$14.6

million and

$20.6

million, respectively. The Company had a related allowance for loan losses of

$4.3

million allocated to these TDRs at

December 31, 2018

and

2017,

respectively. The Company’s TDRs for the years ended

December 31, 2018

and

2017

have all resulted from term extensions rather than from interest rate reductions or debt forgiveness. The following tables present loans modified in a TDR during the periods presented by portfolio segment and the financial impact of those modifications. The tables include modifications made to new TDRs, as well as renewals of existing TDRs.

	Year Ended December 31, 2018
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment

	(In Thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural		6	$	7,242	$	7,242
Real estate - construction		1		997		997
Real estate - mortgage:
Owner-occupied commercial		2		3,664		3,664
1-4 family mortgage		1		850		850
Other mortgage		-		-		-
Total real estate - mortgage		3		4,514		4,514
Consumer		-		-		-
		10	$	12,753	$	12,753

	Year ended December 31, 2017
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment

Commercial, financial and agricultural		6	$	11,438	$	11,438
Real estate - construction		1		997		997
Real estate - mortgage:
Owner-occupied commercial		2		3,664		3,664
1-4 family mortgage		1		850		850
Other mortgage		-		-		-
Total real estate - mortgage		3		4,514		4,514
Consumer		-		-		-
		10	$	16,949	$	16,949

The following table presents TDRs by portfolio segment which defaulted during the years ended

December 31, 2018

and

2017,

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

days past due and still accruing or placement on nonaccrual status.

	Year Ended December 31,
	2018		2017
Defaulted during the period, where modified in a TDR twelve months prior to default
Commercial, financial and agricultural	$	6,900	$	-
Real estate - construction		997		-
Real estate - mortgage:
Owner occupied commercial		3,664		-
1-4 family mortgage		850		-
Other mortgage		-		-
Total real estate - mortgage		4,514		-
Consumer		-		-
	$	12,411	$	-

In the ordinary course of business, the Company has granted loans to certain related parties, including directors, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the years ended

December 31, 2018

and

2017

are as follows:

	Years Ended December 31,
	2018			2017

	(In Thousands)
Balance, beginning of year	$	8,440		$	10,806
Additions		4,174			-
Advances		3,657			7,351
Repayments		(10,843	)		(9,717	)
Balance, end of year	$	5,428		$	8,440

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References + Details