ServisFirst Bancshares, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Note 10 - Fair Value Measurement

Note 10 - Fair Value Measurement

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE

- FAIR VALUE MEASUREMENT

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into

three

broad levels, which are described below:

Level

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level

inputs.

Level

Observable prices that are based on inputs

not

quoted on active markets, but corroborated by market data.

Level

Unobservable inputs are used when little or

market data is available. The fair value hierarchy gives the lowest priority to Level

inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.

Debt Securities

. Where quoted prices are available in an active market, securities are classified within Level

of the hierarchy. Level

securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are

not

available, the Company generally relies on pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants

may

be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing source regarding their methods of price discovery. Securities measured with these techniques are classified within Level

of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In cases where Level

or Level

inputs are

not

available, securities are classified in Level

of the hierarchy.

Impaired Loans

. Impaired loans are measured and reported at fair value when full payment under the loan terms is

not

probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does

not

incorporate the exit-price concept of fair value described in ASC

820

and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level

within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was

$2,660,000

and

$7,967,000

during the

three

and

nine

months ended

September 30, 2017,

respectively, and

$3,544,000

and

$6,090,000

during the

three

and

nine

months ended

September 30, 2016,

respectively.

Other Real Estate Owned

. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value,

not

to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level

within the valuation hierarchy. A gain on the sale of OREO of

$20,000

and

$56,000

was recognized for the

three

and

nine

months ended

September 30, 2017,

respectively, and a loss on the sale and write-downs of

$148,000

and

$584,000

for the

three

and

nine

months ended

September 30, 2016,

respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and gains or losses on the disposal of OREO. OREO is classified within Level

of the hierarchy.

There were

residential real estate loan foreclosures classified as OREO as of

September 30, 2017,

compared to

$189,000

as of

December 31, 2016.

One residential real estate loan with a balance of

$921,000

was in the process of being foreclosed as of

September 30, 2017.

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of

September 30, 2017

and

December 31, 2016:

	Fair Value Measurements at September 30, 2017, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets Measured on a Recurring Basis:	(In Thousands)
Available-for-sale securities:
U.S. Treasury and government sponsored agencies	$	-	$	56,778	$	-	$	56,778
Mortgage-backed securities		-		243,743		-		243,743
State and municipal securities		-		134,804		-		134,804
Total assets at fair value	$	-	$	435,325	$	-	$	435,325

	Fair Value Measurements at December 31, 2016, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets Measured on a Recurring Basis:	(In Thousands)
Available-for-sale securities
U.S. Treasury and government sponsored agencies	$	-	$	46,254	$	-	$	46,254
Mortgage-backed securities		-		227,190		-		227,190
State and municipal securities		-		139,930		-		139,930
Corporate debt		-		9,001		-		9,001
Total assets at fair value	$	-	$	422,375	$	-	$	422,375

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of

September 30, 2017

and

December 31, 2016:

	Fair Value Measurements at September 30, 2017, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets Measured on a Nonrecurring Basis:	(In Thousands)
Impaired loans	$	-	$	-	$	41,114	$	41,114
Other real estate owned and repossessed assets		-		-		3,888		3,888
Total assets at fair value	$	-	$	-	$	45,002	$	45,002

	Fair Value Measurements at December 31, 2016, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets Measured on a Nonrecurring Basis:	(In Thousands)
Impaired loans	$	-	$	-	$	37,437	$	37,437
Other real estate owned and repossessed assets		-		-		4,988		4,988
Total assets at fair value	$	-	$	-	$	42,425	$	42,425

The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are

quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are

not

available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates

may

not

be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented

may

not

necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and due from banks:

The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.

Debt securities:

Where quoted prices are available in an active market, securities are classified within Level

of the hierarchy. Level

securities include highly liquid government securities such as U.S. treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are

not

available, the Company generally relies on prices obtained from independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants

may

be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing service regarding their methods of price discovery. Securities measured with these techniques are classified within Level

of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities. In cases where Level

or Level

inputs are

not

available, securities are classified in Level

of the fair value hierarchy.

Equity securities:

Fair values for other investments are considered to be their cost as they are redeemed at par value.

Federal funds sold:

The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.

Mortgage loans held for sale:

Loans are committed to be delivered to investors on a “best efforts delivery” basis within

days of origination. Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values.

Bank owned life insurance contracts:

The carrying amounts in the statements of condition approximate these assets’ fair value.

Loans, net:

For variable-rate loans that re-price frequently and with

significant change in credit risk, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The method of estimating fair value does

not

incorporate the exit-price concept of fair value as prescribed by ASC

820

and generally produces a higher value than an exit-price approach. The measurement of the fair value of loans is classified within Level

of the fair value hierarchy.

Deposits:

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation using interest rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposits do

not

take into consideration the value of the Company’s long-term relationships with depositors, which

may

have significant value. Measurements of the fair value of certificates of deposit are classified within Level

of the fair value hierarchy.

Federal funds purchased:

The carrying amounts in the statements of condition approximate these assets’ fair value.

Other borrowings:

The fair values of other borrowings are estimated using a discounted cash flow analysis, based on interest rates currently being offered on the best alternative debt available at the measurement date. These measurements are classified as Level

in the fair value hierarchy.

Loan commitments:

The fair values of the Company’s off-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company’s other off-balance-sheet financial instruments consists of non-fee-producing, variable-rate commitments, the Company has determined they do

not

have a distinguishable fair value.

The carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of

September 30, 2017

and

December 31, 2016

are presented in the following table. This table includes those financial assets and liabilities that are

not

measured and reported at fair value on a recurring basis or nonrecurring basis.

	September 30, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Financial Assets:
Level 1 inputs:
Cash and due from banks	$	166,150	$	166,150	$	623,562	$	623,562

Level 2 inputs:
Available for sale debt securities		435,325		435,325		422,375		422,375
Held to maturity debt securities		36,891		37,406		25,052		25,431
Restricted equity securities		1,038		1,038		1,024		1,024
Federal funds sold		182,841		182,841		160,435		160,435
Mortgage loans held for sale		4,971		5,033		4,675		4,736
Bank owned life insurance contracts		126,722		126,722		114,388		114,388

Level 3 inputs:
Debt securities held to maturity		50,508		51,923		37,512		37,871
Loans, net		5,570,306		5,564,250		4,859,877		4,872,689

Financial liabilities:
Level 2 inputs:
Deposits	$	5,796,901	$	5,793,324	$	5,420,311	$	5,417,320
Federal funds purchased		254,880		254,880		355,944		355,944
Other borrowings		54,975		56,996		55,262		54,203

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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