Annual report pursuant to Section 13 and 15(d)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

v2.4.0.8
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Nature of Operations
Nature of Operations
 
ServisFirst Bancshares, Inc. (the “Company”) was formed on August 16, 2007 and is a bank holding company whose business is conducted by its wholly-owned subsidiary ServisFirst Bank (the “Bank”).  The Bank is headquartered in Birmingham, Alabama, and provides a full range of banking services to individual and corporate customers throughout the Birmingham market since opening for business in May 2005.  The Bank has since expanded into the Huntsville, Montgomery and Dothan, Alabama markets, and most recently into the Mobile, Alabama and Pensacola, Florida markets.  The Bank has a subsidiary, SF Holding 1, Inc., which has a subsidiary, SF Realty 1, Inc., which operates as a real estate investment trust.  More details about SF Holding 1, Inc. and SF Realty 1, Inc. are included in Note 10.
Basis of Presentation and Accounting Estimates
Basis of Presentation and Accounting Estimates
 
To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.  The allowance for loan losses, valuation of foreclosed real estate, deferred taxes, and fair values of financial instruments are particularly subject to change. All numbers are in thousands except share and per share data.
Cash, Due from Banks, Interest-Bearing Balances due from Financial Institutions
Cash, Due from Banks, Interest-Bearing Balances due from Financial Institutions
 
Cash and due from banks includes cash on hand, cash items in process of collection, amounts due from banks and interest bearing balances due from financial institutions.  For purposes of cash flows, cash and cash equivalents include cash and due from banks and federal funds sold.  Generally, federal funds are purchased and sold for one-day periods.  Cash flows from loans, mortgage loans held for sale, federal funds sold, and deposits are reported net.
 
The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits.  The total of those reserve balances was approximately $24.4 million at December 31, 2013 and $16.0 million at December 31, 2012.
Debt Securities
Debt Securities
 
Securities are classified as available-for-sale when they might be sold before maturity. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of stockholders’ equity until realized.  Gains and losses on the sale of securities available for sale are determined using the specific-identification method.  The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.
 
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are reported at amortized cost.  In determining the existence of other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Investments in Restricted Equity Securities Carried at Cost
Investments in Restricted Equity Securities Carried at Cost
 
Investments in restricted equity securities without a readily determinable market value are carried at cost.
Mortgage Loans Held for Sale
Mortgage Loans Held for Sale
 
The Company classifies certain residential mortgage loans as held for sale.  Typically mortgage loans held for sale are sold to a third party investor within a very short time period.  The loans are sold without recourse and servicing is not retained.  Net fees earned from this banking service are recorded in noninterest income.
 
In the course of originating mortgage loans and selling those loans in the secondary market, the Company makes various representations and warranties to the purchaser of the mortgage loans.  Each loan is underwritten using government agency guidelines. Any exceptions noted during this process are remedied prior to sale.  These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans.  Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Company within the specified period following discovery.  The Company continues to experience a insignificant level of investor repurchase demands.  There were no expenses incurred as part of these buyback obligations for the years ended December 31, 2013 and 2012.
Loans
 
Loans
 
Loans are reported at unpaid principal balances, less unearned fees and the allowance for loan losses.  Interest on all loans is recognized as income based upon the applicable rate applied to the daily outstanding principal balance of the loans. Interest income on nonaccrual loans is recognized on a cash basis or cost recovery basis until the loan is returned to accrual status. A loan may be returned to accrual status if the Company is reasonably assured of repayment of principal and interest and the borrower has demonstrated sustained performance for a period of at least six months. Loan fees, net of direct costs, are reflected as an adjustment to the yield of the related loan over the term of the loan.  The Company does not have a concentration of loans to any one industry or geographic market.
 
The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-collateralized and in the process of collection.  Generally, all interest accrued but not collected for loans that are placed on nonaccrual status are reversed against current interest income.  Interest collections on nonaccrual loans are generally applied as principal reductions.  The Company determines past due or delinquency status of a loan based on contractual payment terms.
 
A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement.  Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for loan losses.  Changes to the valuation allowance are recorded as a component of the provision for loan losses.
 
Impaired loans also include troubled debt restructurings (“TDRs”).  In the normal course of business management grants concessions to borrowers, which would not otherwise be considered, where the borrowers are experiencing financial difficulty.  The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan.  In some cases, the conditions of the credit also warrant nonaccrual status, even after the restructure occurs.  As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.  TDR loans may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower
Allowance for Loan Losses
Allowance for Loan Losses
 
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.
Foreclosed Real Estate
Foreclosed Real Estate
 
Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property.  At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property’s new basis.  Any write downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses.  After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell.  Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in other operating expenses.
Premises and Equipment
Premises and Equipment
 
Premises and equipment are stated at cost less accumulated depreciation.  Expenditures for additions and major improvements that significantly extend the useful lives of the assets are capitalized.  Expenditures for repairs and maintenance are charged to expense as incurred.  Assets which are disposed of are removed from the accounts and the resulting gains or losses are recorded in operations.  Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets (3 to 10 years). 
 
Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements.
Derivatives and Hedging Activities
Derivatives and Hedging Activities
 
As part of its overall interest rate risk management, the Company uses derivative instruments, which can include interest rate swaps, caps, and floors.  Financial Accounting Standards Board (“FASB”) ASC 815-10, Derivatives and Hedging, requires all derivative instruments to be carried at fair value on the balance sheet.   This accounting standard provides special accounting provisions for derivative instruments that qualify for hedge accounting.  To be eligible, the Company must specifically identify a derivative as a hedging instrument and identify the risk being hedged.   The derivative instrument must be shown to meet specific requirements under this accounting standard.
 
The Company designates the derivative on the date the derivative contract is entered into as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair-value” hedge) or (2) a hedge of a forecasted transaction of the variability of cash flows to be received or paid related to a recognized asset or liability (a “cash-flow” hedge).  Changes in the fair value of a derivative that is highly effective as a fair-value hedge, and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings.  The effective portion of the changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge is recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings).  The remaining gain or loss on the derivative, if any, in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in earnings.
              
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assessed, both at the hedge’s inception and on an ongoing basis (if the hedges do not qualify for short-cut accounting), whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is re-designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.
                                                           
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, hedge accounting is discontinued prospectively and the derivative will continue to be carried on the balance sheet at its fair value with all changes in fair value being recorded in earnings but with no offsetting being recorded on the hedged item or in other comprehensive income for cash flow hedges.
 
The Company uses derivatives to hedge interest rate exposures associated with mortgage loans held for sale and mortgage loans in process.  The Company regularly enters into derivative financial instruments in the form of forward contracts, as part of its normal asset/liability management strategies.  The Company’s obligations under forward contracts consist of “best effort” commitments to deliver mortgage loans originated in the secondary market at a future date.  Interest rate lock commitments related to loans that are originated for later sale are classified as derivatives.  In the normal course of business, the Company regularly extends these rate lock commitments to customers during the loan origination process.  The fair values of the Company’s forward contract and rate lock commitments to customers as of December 31, 2013 and 2012 were not material and have not been recorded.
Income Taxes
Income Taxes
 
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
 
The Company follows the provisions of ASC 740-10, Income Taxes.  ASC 740-10 establishes a single model to address accounting for uncertain tax positions.  ASC 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  ASC 740-10 also provides guidance on derecognition measurement classification interest and penalties, accounting in interim periods, disclosure, and transition.  ASC 740-10 provides a two-step process in the evaluation of a tax position.  The first step is recognition.  A Company determines whether it is more likely than not that a tax position will be sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the position.  The second step is measurement.  A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Stock-Based Compensation
Stock-Based Compensation
 
At December 31, 2013, the Company had two stock-based employee compensation plans for grants of equity compensation to key employees.  These plans have been accounted for under the provisions of FASB ASC 718-10, Compensation – Stock Compensation.  The stock-based employee compensation plans are more fully described in Note 13.
Earnings per Common Share
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.
Loan Commitments and Related Financial Instruments
Loan Commitments and Related Financial Instruments
 
Financial instruments, which include credit card arrangements, commitments to make loans and standby letters of credit, are issued to meet customer financing needs.  The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.  Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10.  The fair value of these financial guarantees is not material.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
 
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 22.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.
Comprehensive Income
Comprehensive Income
 
Comprehensive income consists of net income and other comprehensive income.  Accumulated comprehensive income, which is recognized as a separate component of equity, includes unrealized gains and losses on securities available for sale.
Advertising
Advertising
 
Advertising costs are expensed as incurred.  Advertising expense for the years ended December 31, 2013, 2012 and 2011 was $532,000, $454,000 and $406,000, respectively.  Advertising typically consists of local print media aimed at businesses that the Company targets as well as sponsorships of local events that the Company’s clients and prospects are involved with.
Recently Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements
 
In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which amended disclosures by requiring improved information about financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet.  Reporting entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of international financial reporting standards (“IFRS”).  Companies were required to apply this amendment for fiscal years beginning on or after January 1, 2013, and interim periods within those years.  The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.
 
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires a reporting entity to provide information about the amounts reclassified out of accumulated comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts.   Companies were required to apply this amendment prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.
 
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the U.S. Treasury and London Interbank Offered Rate.  The ASU also amends previous rules by removing the restriction on using different benchmark rates for similar hedges.  This amendment applies to all entities that elect to apply hedge accounting of the benchmark interest rate.  The amendments in this ASU were effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
 
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, which provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date.  The amendments in this ASU are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013.  The Company will evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.
 
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  These amendments in this ASU are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013.  Early adoption and retrospective application is permitted.  The Company will evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.
 
In January 2014, the FASB issued ASU No. 2014-1, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  It permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, an entity amortizes the initial investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  The amendments are effective for public entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and are effective for all entities other than public entities for annual periods beginning after December 15, 2014, and interim reporting periods within annual periods beginning after December 15, 2015.  Early adoption is permitted retrospective application is required for all periods presented.  The Company does not currently invest in such affordable housing projects, but will elect an accounting policy to apply the amendments if, and when, it does invest in such affordable housing projects.
 
In January 2014, the FASB issued ASU No. 2014-4, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).  The guidance clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a portion of the loan should be derecognized and the real estate property recognized.  ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure.  The amendments of ASU 2014-04 are effective for interim and annual periods beginning after December 15, 2014, and may be applied using either a modified retrospective transition method or a prospective transition method as described in ASU 2014-04.  The Company will evaluate this amendment but does not believe they will have an impact on its financial position or results of operations.