The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition ofServisFirst Bancshares, Inc. (the "Company") and its wholly-owned subsidiary,ServisFirst Bank . This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and nine months endedSeptember 30, 2021 andSeptember 30, 2020 . Forward-Looking Statements Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act of 1933. The words "believe," "expect," "anticipate," "project," "plan," "intend," "will," "could," "would," "might" and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company's senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including, but not limited to: the global health and economic crisis precipitated by the COVID-19 outbreak; general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes as a result of our reclassification as a large financial institution by theFDIC ; changes in our loan portfolio and the deposit base; economic crisis and associated credit issues in industries most impacted by the COVID-19 outbreak, including but not limited to, the restaurant, hospitality and retail sectors; possible changes in laws and regulations and governmental monetary and fiscal policies, including, but not limited to, economic stimulus initiatives and the ability of theU.S. Congress to increase theU.S. statutory debt limit as needed; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-bank financial institutions. The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to "Cautionary Note Regarding Forward Looking Statements" and "Risk Factors" in our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for fiscal year 2021 and our otherSEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time. Business We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered inBirmingham, Alabama . Our wholly-owned subsidiary,ServisFirst Bank , anAlabama banking corporation, provides business and personal financial services through 21 full-service banking offices located inBirmingham ,Huntsville ,Mobile ,Montgomery andDothan, Alabama ,Northwest Florida , WestCentral Florida ,Nashville, Tennessee ,Atlanta, Georgia , andCharleston, South Carolina . Through the Bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions. 28
-------------------------------------------------------------------------------- Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings, and other deposits. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.
Overview of Quarter and Year-to-Date Results
As ofSeptember 30, 2021 , we had consolidated total assets of$14.60 billion , up$2.67 billion , or 22.4%, from total assets of$11.93 billion atDecember 31, 2020 . Total loans were$8.81 billion atSeptember 30, 2021 , up$347.1 million , or 4.1%, from$8.47 billion atDecember 31, 2020 . Total deposits were$12.08 billion atSeptember 30, 2021 , up$2.10 billion , or 21.1%, from$9.98 billion atDecember 31, 2020 . Net income available to common stockholders for the three months endedSeptember 30, 2021 was$52.5 million , up$9.1 million , or 21.0%, from$43.4 million for the three months endedSeptember 30, 2020 . Basic and diluted earnings per common share were$0.97 and$0.96 for the three months endedSeptember 30, 2021 , compared to$0.80 and$0.80 , respectively, for the corresponding period in 2020. Net income available to common stockholders for the nine months endedSeptember 30, 2021 was$154.0 million , up$35.4 million , or 29.9%, from$118.6 million for the corresponding period in 2020. Basic and diluted earnings per common share were$2.84 and$2.83 , respectively, for the nine months endedSeptember 30, 2021 , compared to$2.20 and$2.19 , respectively, for the corresponding period in 2020. Critical Accounting Policies The accounting and financial policies of the Company conform toU.S. generally accepted accounting principles and to general practices within the banking industry. To prepare consolidated financial statements in conformity withU.S. GAAP, 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 credit losses and income taxes are particularly subject to change. Information concerning our accounting policies with respect to these items is available in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Financial Condition Cash and Cash Equivalents AtSeptember 30, 2021 , we had$44.7 million in federal funds sold, compared to$1.8 million atDecember 31, 2020 . We also maintain balances at theFederal Reserve Bank of Atlanta , which earn interest. AtSeptember 30, 2021 , we had$4.21 billion in balances at theFederal Reserve , compared to$1.92 billion atDecember 31, 2020 . The increase in balances kept at theFederal Reserve in 2021 result from federal stimulus funds on deposit with us by our customers stemming from the COVID-19 pandemic.Debt Securities Debt securities available for sale totaled$723.3 million atSeptember 30, 2021 and$886.7 million atDecember 31, 2020 . Investment securities held to maturity totaled$261.2 million atSeptember 30, 2021 and$250,000 atDecember 31, 2020 . During the third quarter of 2021, we transferred, at fair value,$261.3 million of mortgage-backed securities from the available for sale portfolio to the held to maturity portfolio. The unrealized after-tax gain of$5.6 million associated with these securities remained in accumulated other comprehensive income and will be amortized over their remaining life, offsetting the related amortization of discount on the transferred securities. We had paydowns of$143.9 million on mortgage-backed securities and government agencies, maturities of$44.0 million on municipal bonds, corporate securities and treasury securities, and calls of$35.1 million onU.S. government agencies and municipal securities during the nine months endedSeptember 30, 2021 . We recognized a$620,000 gain on the call of a corporate bond during the second quarter of 2021. We purchased$218.7 million in mortgage-backed securities and$80.0 million in corporate securities during the first nine months of 2021. For a tabular presentation of debt securities available for sale and held to maturity atSeptember 30, 2021 andDecember 31, 2020 , see "Note 4 - Securities" in our Notes to Consolidated Financial Statements. The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer-term securities purchased to generate level income for us over periods of interest rate fluctuations. 29
-------------------------------------------------------------------------------- The Company does not invest in collateralized debt obligations ("CDOs"). AtSeptember 30, 2021 , we had$379.4 million of bank holding company subordinated notes. If rated, all of these notes were rated BBB or better byKroll Bond Rating Agency at the time of our investment. All other corporate bonds had a Standard and Poor's or Moody's rating of A-1 or better when purchased. The total investment portfolio atSeptember 30, 2021 has a combined average credit rating of AA.
The carrying value of investment securities pledged to secure public funds on
deposit and for other purposes was
Loans We had total loans of$8.81 billion atSeptember 30, 2021 , an increase of$347.1 million , or 4.1%, compared to$8.47 billion atDecember 31, 2020 . Excluding the impact of PPP loan origination and forgiveness, we grew our loans by$859.9 million , or 11.4% fromDecember 31, 2020 toSeptember 30, 2021 . We originated approximately 7,400 PPP loans totaling$1.5 billion during the Covid-19 pandemic. Over 6,300 of these loans had a balance of less than$350,000 . As ofSeptember 30, 2021 , there are 18 loans outstanding totaling$2.7 million that have payment deferrals in connection with the COVID-19 relief provided by the CARES Act. All of these payment deferrals were principal and interest deferrals. The amount of accrued interest related to payment deferrals provided by the CARES Act on all loans originated to date totaled$4.1 million atSeptember 30, 2021 . These deferrals were not considered troubled debt restructurings based on interagency guidance issued inMarch 2020 . Asset Quality The Company assesses the adequacy of its allowance for credit losses at the end of each calendar quarter. The level of allowance is based on the Company's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors. The allowance is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. The allowance for credit losses is believed adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio. Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow ("DCF"), probability of default / loss given default ("PD/LGD") or remaining life method. For all loan pools utilizing the DCF method, the Company utilizes and forecasts the national unemployment rate as a loss driver. The Company also utilizes and forecasts GDP growth as a second loss driver for its agricultural and consumer loan pools. Consistent forecasts of the loss drivers are used across the loan segments. AtSeptember 30, 2021 andDecember 31, 2020 , the Company utilized a reasonable and supportable forecast period of twelve months followed by a six-month straight-line reversion to long term averages. The Company leveraged economic projections from reputable and independent sources to inform its loss driver forecasts. The Company expects national unemployment to remain above pre-pandemic levels over the forecast period with an improved national GDP growth rate as the economy comes back on-line over the next year. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company's historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. See "Note 5 - Loans" in our Notes to Consolidated Financial Statements. The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. 30
-------------------------------------------------------------------------------- Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings. Specific allocations of the allowance for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows. Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the allowance for loan losses represented management's best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for losses on loans included allowance allocations calculated in accordance with FASB Accounting Standards Codification ("ASC") Topic 310, "Receivables" and allowance allocations calculated in accordance with ASC Topic 450, "Contingencies." As of and for the Three Months As of and for the Nine Months Ended Ended September 30, September 30, 2021 2020 2021 2020 (Dollars in thousands) Total loans outstanding, net of unearned income$ 8,812,811 $ 8,508,554 $ 8,812,811 $ 8,508,554 Average loans outstanding, net of unearned income$ 8,680,174 $ 8,365,155 $ 8,613,172 $ 8,021,262 Allowance for credit losses at beginning of period 104,670 -
87,942
Allowance for loan losses at beginning of period - 91,507 - 76,584
Charge-offs:
Commercial, financial and agricultural loans 1,541 11,146 2,168 15,144 Real estate - construction - - - 830 Real estate - mortgage 208 200 279 4,397 Consumer loans 86 44 227 165 Total charge-offs 1,835 11,390 2,674 20,536 Recoveries: Commercial, financial and agricultural loans 140 12 464 158 Real estate - construction - - 52 2 Real estate - mortgage 4 12 68 26 Consumer loans 8 15 32 55 Total recoveries 152 39 616 241 Net charge-offs 1,683 11,351 2,058 20,295 Provision for credit losses 5,963 12,284 23,066 36,151 Allowance for credit losses at period end$ 108,950 $ -$ 108,950 $ - Allowance for loan losses at period end $ -$ 92,440 $ -$ 92,440 Allowance for credit losses to period end loans 1.24 % - % 1.24 % - % Allowance for loan losses to period end loans - % 1.09 % - % 1.09 % Net charge-offs to average loans 0.08 % 0.54 % 0.03 % 0.34 % Percentage of loans in each category September 30, 2021 Amount to total loans (In Thousands) Commercial, financial and agricultural$ 40,888 33.22 % Real estate - construction 24,537 10.08 % Real estate - mortgage 42,007 55.97 % Consumer 1,518 0.73 % Total$ 108,950 100.00 % Percentage of loans in each category December 31, 2020 Amount to total loans (In Thousands) Commercial, financial and agricultural$ 36,370 38.93 % Real estate - construction 16,057 7.01 % Real estate - mortgage 33,722 53.29 % Consumer 1,793 0.77 % Total$ 87,942 100.00 % 31
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Nonperforming Assets Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased to$14.5 million atSeptember 30, 2021 , compared to$19.0 million atDecember 31, 2020 . Of this total, nonaccrual loans of$9.1 million atSeptember 30, 2021 represented a net decrease of$4.9 million from nonaccrual loans atDecember 31, 2020 . Excluding credit card accounts, there were five loans 90 or more days past due and still accruing totaling$5.3 million atSeptember 30, 2021 , compared to one loan totaling$4.9 million atDecember 31, 2020 . Troubled Debt Restructurings ("TDR") atSeptember 30, 2021 andDecember 31, 2020 were$2.9 million and$1.4 million , respectively. OREO and repossessed assets decreased to$2.1 million atSeptember 30, 2021 , from$6.5 million atDecember 31, 2020 . The following table summarizes OREO and repossessed asset activity for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 (In thousands) Balance at beginning of period $ 6,497 $
8,178
Transfers from loans and capitalized expenses 1,419 2,406 Proceeds from sales (911 ) (1,780 ) Internally financed sales (3,779 ) - Write-downs / net gain (loss) on sales (1,158 ) (1,828 ) Balance at end of period $ 2,068 $ 6,976
The following table summarizes our nonperforming assets and TDRs at
September 30, 2021 December 31, 2020 Number of Number of Balance Loans Balance Loans (Dollar Amounts In Thousands) Nonaccrual loans: Commercial, financial and agricultural$ 6,966 23$ 11,709 22 Real estate - construction 234 1 234 1 Real estate - mortgage: Owner-occupied commercial 1,061 2 1,259 4 1-4 family mortgage 884 9 771 7 Other mortgage - - - - Total real estate - mortgage 1,945 11 2,030 11 Consumer - - - - Total Nonaccrual loans:$ 9,145 35$ 13,973 34 90+ days past due and accruing: Commercial, financial and agricultural $ 36 5 $ 11 2 Real estate - construction - - - - Real estate - mortgage: Owner-occupied commercial - - - - 1-4 family mortgage 579 4 104 1 Other mortgage 4,691 1 4,805 1 Total real estate - mortgage 5,270 5 4,909 2 Consumer 20 17 61 25 Total 90+ days past due and accruing:$ 5,326 27$ 4,981 29 Total Nonperforming Loans:$ 14,471 62$ 18,954 63 Plus: Other real estate owned and repossessions 2,068 7 6,497 11 Total Nonperforming Assets$ 16,539 69$ 25,451 74 Restructured accruing loans: Commercial, financial and agricultural$ 437 2$ 818 3 Real estate - construction - - - - Real estate - mortgage: Owner-occupied commercial - - - - 1-4 family mortgage - - - - Other mortgage - - - - Total real estate - mortgage - - - - Consumer - - - - Total restructured accruing loans:$ 437 2$ 818 3 Total Nonperforming assets and restructured accruing loans$ 16,976 71$ 26,269 77
Ratios:
Nonperforming loans to total loans 0.16 % 0.22 % Nonperforming assets to total loans plus other real estate owned and repossessions 0.19 % 0.30 % Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions 0.19 % 0.31 % 32
-------------------------------------------------------------------------------- The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent if management believes that the collection of interest is not expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for credit losses to reflect management's estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments and interest. While interest continues to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As ofSeptember 30, 2021 , the Company carries$4.1 million of accrued interest income on deferrals made to COVID-19 affected borrowers compared to$5.8 million atDecember 31, 2020 . At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers but recognizes the breadth of the economic impact may affect its borrowers' ability to repay in future periods. Deposits Total deposits were$12.08 billion atSeptember 30, 2021 , an increase of$2.10 billion , or 21.1%, over$9.98 billion atDecember 31, 2020 . Increased growth rates during 2020 and 2021 have been the result of PPP lending in which our borrowers have retained portions of their proceeds in the Bank. We believe that these increased deposit balances will be temporary in nature. We anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in our mature markets.
For amounts and rates of our deposits by category, see the table "Average Balance Sheets and Net Interest Analysis on a Fully Taxable-Equivalent Basis" under the subheading "Net Interest Income."
The following table summarizes balances of our deposits and the percentage of
each type to the total at
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