sfbs20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______to_______

Commission file number 001-36452

SERVISFIRST BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

26-0734029

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2500 Woodcrest Place, Birmingham, Alabama 35209

(Address of Principal Executive Offices) (Zip Code)

(205) 949-0302

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(g) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $.001 per share	SFBS	The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Class	Outstanding as of July 27, 2020
Common stock, $.001 par value	53,882,358

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION		41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	42

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO

EX-31.02 SECTION 302 CERTIFICATION OF THE CFO

EX-32.01 SECTION 906 CERTIFICATION OF THE CEO

EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

	June 30, 2020			December 31, 2019
	(Unaudited)				(1)
ASSETS
Cash and due from banks	$	102,282		$	78,618
Interest-bearing balances due from depository institutions		1,444,293			451,509
Federal funds sold		2,352			100,473
Cash and cash equivalents		1,548,927			630,600
Available for sale debt securities, at fair value		856,128			759,399
Held to maturity debt securities (fair value of $250 at June 30, 2020 and December 31, 2019)		250			250
Mortgage loans held for sale		14,491			6,312
Loans		8,315,375			7,261,451
Less allowance for loan losses		(91,507	)		(76,584	)
Loans, net		8,223,868			7,184,867
Premises and equipment, net		55,588			56,496
Accrued interest and dividends receivable		30,928			26,262
Deferred tax assets		23,307			25,566
Other real estate owned and repossessed assets		6,537			8,178
Bank owned life insurance contracts		212,312			209,395
Goodwill and other identifiable intangible assets		14,043			14,179
Other assets		25,816			26,149
Total assets	$	11,012,195		$	8,947,653
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	2,678,893		$	1,749,879
Interest-bearing		6,664,025			5,780,554
Total deposits		9,342,918			7,530,433
Federal funds purchased		635,606			470,749
Other borrowings		64,715			64,703
Accrued interest payable		11,710			11,934
Other liabilities		42,658			27,152
Total liabilities		10,097,607			8,104,971
Stockholders' equity:
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2020 and December 31, 2019		-			-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,874,276 shares issued and outstanding at June 30, 2020, and 53,623,740 shares issued and outstanding at December 31, 2019		54			54
Additional paid-in capital		222,437			219,766
Retained earnings		672,984			616,611
Accumulated other comprehensive income		18,611			5,749
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.		914,086			842,180
Noncontrolling interest		502			502
Total stockholders' equity		914,588			842,682
Total liabilities and stockholders' equity	$	11,012,195		$	8,947,653

(1) Derived from audited financial statements.

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2020		2019			2020		2019
Interest income:
Interest and fees on loans	$	89,383	$	88,610		$	178,768	$	174,134
Taxable securities		5,092		4,193			10,246		7,939
Nontaxable securities		211		393			444		839
Federal funds sold		34		1,998			311		3,217
Other interest and dividends		360		2,593			2,078		5,357
Total interest income		95,080		97,787			191,847		191,486
Interest expense:
Deposits		10,756		24,240			27,501		46,385
Borrowed funds		1,090		3,462			3,472		6,238
Total interest expense		11,846		27,702			30,973		52,623
Net interest income		83,234		70,085			160,874		138,863
Provision for loan losses		10,283		4,884			23,867		9,769
Net interest income after provision for loan losses		72,951		65,201			137,007		129,094
Noninterest income:
Service charges on deposit accounts		1,823		1,786			3,739		3,488
Mortgage banking		2,107		1,087			3,178		1,662
Credit card income		1,398		1,741			3,163		3,317
Securities losses		-		(6	)		-		(6	)
Increase in cash surrender value life insurance		1,464		778			2,917		1,540
Other operating income		241		392			710		721
Total noninterest income		7,033		5,778			13,707		10,722
Noninterest expenses:
Salaries and employee benefits		15,792		14,339			31,450		28,604
Equipment and occupancy expense		2,434		2,287			4,834		4,546
Third party processing and other services		3,513		2,724			6,858		5,135
Professional services		1,091		1,191			2,039		2,185
FDIC and other regulatory assessments		595		1,081			1,927		2,100
OREO expense		1,303		212			1,904		234
Other operating expenses		4,088		4,188			7,724		8,546
Total noninterest expenses		28,816		26,022			56,736		51,350
Income before income taxes		51,168		44,957			93,978		88,466
Provision for income taxes		10,720		9,324			18,752		17,823
Net income		40,448		35,633			75,226		70,643
Preferred stock dividends		31		31			31		31
Net income available to common stockholders	$	40,417	$	35,602		$	75,195	$	70,612

Basic earnings per common share	$	0.75	$	0.67		$	1.40	$	1.32
Diluted earnings per common share	$	0.75	$	0.66		$	1.39	$	1.31

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Net income	$	40,448	$	35,633	$	75,226	$	70,643
Other comprehensive income, net of tax:
Unrealized net holding gains arising during period from securities available for sale, net of tax of $309 and $3,419 for the three and six months ended June 30, 2020, respectively, and net of tax of $1,448 and $2,408 for the three and six months ended June 30, 2019, respectively		1,163		5,282		12,862		9,054
Reclassification adjustment for net loss on sale of securities, net of tax of $(1) for 2019		-		5		-		5
Other comprehensive income, net of tax		1,163		5,287		12,862		9,059
Comprehensive income	$	41,611	$	40,920	$	88,088	$	79,702

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)(Unaudited)

	Three Months Ended June 30,
	Common Shares		Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling interest		Total Stockholders' Equity
Balance, April 1, 2019		53,495,208	$	-	$	53	$	218,147	$	527,853		$	(969	)	$	502	$	745,586
Common dividends declared, $0.15 per share		-		-		-		-		(8,030	)		-			-		(8,030	)
Preferred dividends paid		-		-		-		-		(31	)		-			-		(31	)
Issue restricted shares pursuant to stock incentives, net of forfeitures		5,674		-		-		-		-			-			-		-
Issue shares of common stock upon exercise of stock options		26,000		-		1		305		-			-			-		306
Stock-based compensation expense		-		-		-		206		-			-			-		206
Other comprehensive income, net of tax		-		-		-		-		-			5,287			-		5,287
Net income		-		-		-		-		35,633			-			-		35,633
Balance, June 30, 2019		53,526,882	$	-	$	54	$	218,658	$	555,425		$	4,318		$	502	$	778,957

Balance, April 1, 2020		53,844,009	$	-	$	54	$	221,901	$	641,980		$	17,448		$	502	$	881,885
Common dividends declared, $0.175 per share		-		-		-		-		(9,413	)		-			-		(9,413	)
Preferred dividends paid		-		-		-		-		(31	)		-			-		(31	)
Issue restricted shares pursuant to stock incentives, net of forfeitures		10,267		-		-		-		-			-			-		-
Issue shares of common stock upon exercise of stock options		20,000		-		-		183		-			-			-		183
Stock-based compensation expense		-		-		-		353		-			-			-		353
Other comprehensive loss, net of tax		-		-		-		-		-			1,163			-		1,163
Net income		-		-		-		-		40,448			-			-		40,448
Balance, June 30, 2020		53,874,276	$	-	$	54	$	222,437	$	672,984		$	18,611		$	502	$	914,588

	Six Months Ended June 30,
	Common Shares		Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling interest		Total Stockholders' Equity
Balance, January 1, 2019		53,375,195	$	-	$	53	$	218,521		$	500,868		$	(4,741	)	$	502	$	715,203
Common dividends paid, $0.15 per share		-		-		-		-			(8,025	)		-			-		(8,025	)
Common dividends declared, $0.15 per share		-		-		-		-			(8,030	)		-			-		(8,030	)
Preferred dividends paid		-		-		-		-			(31	)		-			-		(31	)
Issue restricted shares pursuant to stock incentives, net of forfeitures		8,374		-		-		-			-			-			-		-
Issue shares of common stock upon exercise of stock options		143,313		-		1		1,102			-			-			-		1,103
45,187 shares of common stock withheld in net settlement upon exercise of stock options		-		-		-		(1,453	)		-			-			-		(1,453	)
Stock-based compensation expense		-		-		-		488			-			-			-		488
Other comprehensive income, net of tax		-		-		-		-			-			9,059			-		9,059
Net income		-		-		-		-			70,643			-			-		70,643
Balance, June 30, 2019		53,526,882	$	-	$	54	$	218,658		$	555,425		$	4,318		$	502	$	778,957

Balance, January 1, 2020		53,623,740	$	-	$	54	$	219,766		$	616,611		$	5,749		$	502	$	842,682
Common dividends paid, $0.175 per share		-		-		-		-			(9,409	)		-			-		(9,409	)
Common dividends declared, $0.175 per share		-		-		-		-			(9,413	)		-			-		(9,413	)
Preferred dividends paid		-		-		-		-			(31	)		-			-		(31	)
Issue restricted shares pursuant to stock incentives, net of forfeitures		25,567		-		-		-			-			-			-		-
Issue shares of common stock upon exercise of stock options		224,969		-		-		2,444			-			-			-		2,444
11,031 shares of common stock withheld in net settlement upon exercise of stock options		-		-		-		(403	)		-			-			-		(403	)
Stock-based compensation expense		-		-		-		630			-			-			-		630
Other comprehensive loss, net of tax		-		-		-		-			-			12,862			-		12,862
Net income		-		-		-		-			75,226			-			-		75,226
Balance, June 30, 2020		53,874,276	$	-	$	54	$	222,437		$	672,984		$	18,611		$	502	$	914,588

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Six Months Ended June 30,
	2020			2019
OPERATING ACTIVITIES
Net income	$	75,226		$	70,643
Adjustments to reconcile net income to net cash provided by
Deferred tax (benefit) expense		(1,160	)		2,427
Provision for loan losses		23,867			9,769
Depreciation		1,842			1,845
Accretion on acquired loans		-			(91	)
Amortization of core deposit intangible		136			135
Net amortization of debt securities available for sale		2,282			1,304
Increase in accrued interest and dividends receivable		(4,666	)		(2,565	)
Stock-based compensation expense		630			488
(Decrease) increase in accrued interest payable		(224	)		549
Proceeds from sale of mortgage loans held for sale		105,181			45,543
Originations of mortgage loans held for sale		(110,182	)		(53,207	)
Gain on sale of mortgage loans held for sale		(3,178	)		(1,662	)
Net loss on sale of debt securities available for sale		-			6
Net (gain) loss on sale of other real estate owned and repossessed assets		(24	)		2
Write down of other real estate owned and repossessed assets		1,836			222
Operating losses of tax credit partnerships		4			73
Increase in cash surrender value of life insurance contracts		(2,917	)		(1,540	)
Net change in other assets, liabilities, and other operating activities		15,981			(12,609	)
Net cash provided by operating activities		104,634			61,332
INVESTMENT ACTIVITIES
Purchase of debt securities available for sale		(165,627	)		(121,590	)
Proceeds from maturities, calls and paydowns of debt securities available for sale		83,277			64,611
Purchase of debt securities held to maturity		-			(250	)
Investment in tax credit partnership and SBIC		(543	)		-
Increase in loans		(1,063,891	)		(442,031	)
Purchase of premises and equipment		(934	)		(1,218	)
Proceeds from sale of other real estate owned and repossessed assets		852			48
Net cash used in investing activities		(1,146,866	)		(500,430	)
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits		929,014			19,618
Net increase in interest-bearing deposits		883,471			469,468
Net increase in federal funds purchased		164,857			170,724
Proceeds from exercise of stock options		2,444			1,103
Taxes paid in net settlement of tax obligation upon exercise of stock options		(403	)		(1,453	)
Dividends paid on common stock		(18,793	)		(16,044	)
Dividends paid on preferred stock		(31	)		(31	)
Net cash provided by financing activities		1,960,559			643,385
Net increase in cash and cash equivalents		918,327			204,287
Cash and cash equivalents at beginning of period		630,600			681,895
Cash and cash equivalents at end of period	$	1,548,927		$	886,182
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest	$	31,197		$	52,074
Income taxes		207			24,956
Income tax refund		(47	)		-
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans	$	1,023		$	752
Dividends declared		9,413			8,030

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

NOTE 1 - GENERAL

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) and its consolidated subsidiaries, including ServisFirst Bank (the “Bank”), may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2019.

All reported amounts are in thousands except share and per share data.

Allowance for Loan Losses

The Company was prepared to fully adopt Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) as of January 1, 2020 prior to the COVID-19 outbreak and subsequent passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which provided financial institutions with the option to delay adoption of ASU 2016-13. The Company has decided to delay its adoption until the earlier of the date on which the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.

The allowance for loan losses as of June 30, 2020 is determined under the Company’s incurred loss model. Qualitative adjustments were made to the amount of the allowance to take into effect management’s estimates of the COVID-19 pandemic’s impact on the local and regional markets in which the Company operates. Further discussion of the allowance for loan losses is included in Note 5 – Loans.

NOTE 2 - CASH AND CASH EQUIVALENTS

Cash on hand, cash items in process of collection, amounts due from banks, and federal funds sold are included in cash and cash equivalents.

NOTE 3 - EARNINGS PER COMMON SHARE

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In Thousands, Except Shares and Per Share Data)
Earnings per common share
Weighted average common shares outstanding		53,854,973		53,515,418		53,779,599		53,490,393
Net income available to common stockholders	$	40,417	$	35,602	$	75,195	$	70,612
Basic earnings per common share	$	0.75	$	0.67	$	1.40	$	1.32

Weighted average common shares outstanding		53,854,973		53,515,418		53,779,599		53,490,393
Dilutive effects of assumed conversions and exercise of stock options and warrants		339,533		573,689		401,361		592,464
Weighted average common and dilutive potential common shares outstanding		54,194,506		54,089,107		54,180,960		54,082,857
Net income available to common stockholders	$	40,417	$	35,602	$	75,195	$	70,612
Diluted earnings per common share	$	0.75	$	0.66	$	1.39	$	1.31

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2020 and December 31, 2019 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
	Cost		Gain		Loss			Value
June 30, 2020	(In Thousands)
Securities Available for Sale
U.S. Treasury securities	$	39,978	$	604	$	-		$	40,582
Government agencies		15,225		350		-			15,575
Mortgage-backed securities		497,442		19,594		-			517,036
State and municipal securities		45,060		517		-			45,577
Corporate debt		234,924		3,469		(1,035	)		237,358
Total	$	832,629	$	24,534	$	(1,035	)	$	856,128
Securities Held to Maturity
State and municipal securities		250		-		-			250
Total	$	250	$	-	$	-		$	250

December 31, 2019
Securities Available for Sale
U.S. Treasury securities	$	48,923	$	291	$	(4	)	$	49,210
Government agencies		18,245		143		(2	)		18,386
Mortgage-backed securities		470,513		4,859		(1,318	)		474,054
State and municipal securities		56,951		335		(14	)		57,272
Corporate debt		157,549		3,098		(170	)		160,477
Total	$	752,181	$	8,726	$	(1,508	)	$	759,399
Securities Held to Maturity
State and municipal securities		250		-		-			250
Total	$	250	$	-	$	-		$	250

The amortized cost and fair value of debt securities as of June 30, 2020 and December 31, 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories along with the other categories of debt securities.

	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Debt securities available for sale
Due within one year	$	50,291	$	50,553	$	58,722	$	58,975
Due from one to five years		79,483		81,473		90,034		91,005
Due from five to ten years		187,295		188,814		129,501		131,914
Due after ten years		18,118		18,252		3,411		3,451
Mortgage-backed securities		497,442		517,036		470,513		474,054
	$	832,629	$	856,128	$	752,181	$	759,399

Debt securities held to maturity
Due from one to five years	$	250	$	250	$	250	$	250
	$	250	$	250	$	250	$	250

All mortgage-backed securities are with government-sponsored enterprises (GSEs) such as Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation.

The carrying value of debt securities pledged to secure public funds on deposit and for other purposes as required by law as of June 30, 2020 and December 31, 2019 was $431.0 million and $389.9 million, respectively.

The following table identifies, as of June 30, 2020 and December 31, 2019, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At June 30, 2020, 1 of the Company’s 657 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2020. Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized					Unrealized					Unrealized
	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value
	(In Thousands)
June 30, 2020
U.S. Treasury and government sponsored agencies	$	-		$	-	$	-		$	-	$	-		$	-
Mortgage-backed securities		-			-		-			-		-			-
State and municipal securities (1)		-			-		-			307		-			307
Corporate debt		(1,035	)		68,711		-			-		(1,035	)		68,711
Total	$	(1,035	)	$	68,711	$	-		$	307	$	(1,035	)	$	69,018
(1) The municipal security with an unrealized loss for twelve months or more has an unrealized loss of $129.60.

December 31, 2019
U.S. Treasury and government sponsored agencies	$	(6	)	$	3,278	$	-		$	-	$	(6	)	$	3,278
Mortgage-backed securities		(1,206	)		153,330		(112	)		24,911		(1,318	)		178,241
State and municipal securities		(4	)		1,900		(10	)		2,647		(14	)		4,547
Corporate debt		(170	)		19,981		-			-		(170	)		19,981
Total	$	(1,386	)	$	178,489	$	(122	)	$	27,558	$	(1,508	)	$	206,047

NOTE 5 – LOANS

The following table details the Company’s loans at June 30, 2020 and December 31, 2019:

	June 30,			December 31,
	2020			2019

	(Dollars In Thousands)
Commercial, financial and agricultural	$	3,498,627		$	2,696,210
Real estate - construction		544,586			521,392
Real estate - mortgage:
Owner-occupied commercial		1,634,495			1,587,478
1-4 family mortgage		665,883			644,188
Other mortgage		1,911,384			1,747,394
Subtotal: Real estate - mortgage		4,211,762			3,979,060
Consumer		60,400			64,789
Total Loans		8,315,375			7,261,451
Less: Allowance for loan losses		(91,507	)		(76,584	)
Net Loans	$	8,223,868		$	7,184,867


Commercial, financial and agricultural		42.07	%		37.13	%
Real estate - construction		6.55	%		7.18	%
Real estate - mortgage:
Owner-occupied commercial		19.66	%		21.86	%
1-4 family mortgage		8.00	%		8.87	%
Other mortgage		22.99	%		24.07	%
Subtotal: Real estate - mortgage		50.65	%		54.80	%
Consumer		0.73	%		0.89	%
Total Loans		100.00	%		100.00	%

In light of the U.S. and global economic crisis brought about by the COVID-19 pandemic, the Company has prioritized assisting its clients through this troubled time. The CARES Act provides for Payroll Protection Plan (“PPP”) loans to be made by banks to employers with less than 500 employees if they continue to employ their existing workers. As of June 30, 2020, the Company has funded approximately 4,800 loans for a total amount of $1.05 billion for clients under the PPP, and management expects to continue to participate in any extensions of the PPP by the Treasury Department. At June 30, 2020, unaccreted deferred loan origination fees, net of costs, related to PPP loans totaled $28.9 million. During the second quarter of 2020, $2.6 million net PPP loan origination fees were recorded as an adjustment to loan yield. These PPP loans are included within the Commercial, financial and agricultural loan category in the table above.

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity of the borrower (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

●

Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

●

Substandard – loans that exhibit well-defined weakness or weaknesses that currently jeopardize debt repayment. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.

●

Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Loans by credit quality indicator as of June 30, 2020 and December 31, 2019 were as follows:

			Special
June 30, 2020	Pass		Mention		Substandard		Doubtful		Total

	(In Thousands)
Commercial, financial and agricultural	$	3,388,928	$	46,582	$	63,117	$	-	$	3,498,627
Real estate - construction		540,898		3,100		588		-		544,586
Real estate - mortgage:
Owner-occupied commercial		1,619,718		10,887		3,890		-		1,634,495
1-4 family mortgage		661,070		3,508		1,305		-		665,883
Other mortgage		1,903,121		6,509		1,754		-		1,911,384
Total real estate mortgage		4,183,909		20,904		6,949		-		4,211,762
Consumer		60,299		92		9		-		60,400
Total	$	8,174,034	$	70,678	$	70,663	$	-	$	8,315,375

			Special
December 31, 2019	Pass		Mention		Substandard		Doubtful		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,629,487	$	46,176	$	20,547	$	-	$	2,696,210
Real estate - construction		512,373		4,731		4,288		-		521,392
Real estate - mortgage:
Owner-occupied commercial		1,555,283		18,240		13,955		-		1,587,478
1-4 family mortgage		639,959		2,787		1,442		-		644,188
Other mortgage		1,735,869		10,018		1,507		-		1,747,394
Total real estate mortgage		3,931,111		31,045		16,904		-		3,979,060
Consumer		64,789		-		-		-		64,789
Total	$	7,137,760	$	81,952	$	41,739	$	-	$	7,261,451

Loans by performance status as of June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020	Performing		Nonperforming		Total

	(In Thousands)
Commercial, financial and agricultural	$	3,484,491	$	14,136	$	3,498,627
Real estate - construction		543,999		587		544,586
Real estate - mortgage:
Owner-occupied commercial		1,632,781		1,714		1,634,495
1-4 family mortgage		665,200		683		665,883
Other mortgage		1,906,523		4,861		1,911,384
Total real estate mortgage		4,204,504		7,258		4,211,762
Consumer		60,367		33		60,400
Total	$	8,293,361	$	22,014	$	8,315,375

December 31, 2019	Performing		Nonperforming		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,681,280	$	14,930	$	2,696,210
Real estate - construction		519,803		1,589		521,392
Real estate - mortgage:
Owner-occupied commercial		1,576,652		10,826		1,587,478
1-4 family mortgage		641,875		2,313		644,188
Other mortgage		1,740,963		6,431		1,747,394
Total real estate mortgage		3,959,490		19,570		3,979,060
Consumer		64,766		23		64,789
Total	$	7,225,339	$	36,112	$	7,261,451

Loans by past due status as of June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020	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	$	273	$	4,437	$	248	$	4,958	$	13,888	$	3,479,781	$	3,498,627
Real estate - construction		116		-		-		116		587		543,883		544,586
Real estate - mortgage:
Owner-occupied commercial		-		442		-		442		1,714		1,632,339		1,634,495
1-4 family mortgage		80		-		-		80		683		665,120		665,883
Other mortgage		-		-		4,861		4,861		-		1,906,523		1,911,384
Total real estate - mortgage		80		442		4,861		5,383		2,397		4,203,982		4,211,762
Consumer		46		80		24		150		9		60,241		60,400
Total	$	515	$	4,959	$	5,133	$	10,607	$	16,881	$	8,287,887	$	8,315,375

December 31, 2019	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	$	3,135	$	344	$	201	$	3,680	$	14,729	$	2,677,801	$	2,696,210
Real estate - construction		830		-		-		830		1,589		518,973		521,392
Real estate - mortgage:
Owner-occupied commercial		917		7,242		-		8,159		10,826		1,568,493		1,587,478
1-4 family mortgage		1,638		567		873		3,078		1,440		639,670		644,188
Other mortgage		-		-		4,924		4,924		1,507		1,740,963		1,747,394
Total real estate - mortgage		2,555		7,809		5,797		16,161		13,773		3,949,126		3,979,060
Consumer		35		25		23		83		-		64,706		64,789
Total	$	6,555	$	8,178	$	6,021	$	20,754	$	30,091	$	7,210,606	$	7,261,451

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions and other risks inherent in the portfolio. Allowances for impaired loans are generally determined based on collateral values or the present value of the estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for losses on loans. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

The methodology utilized for the calculation of the allowance for loan losses is divided into four distinct categories. Those categories include allowances for non-impaired loans (ASC 450), impaired loans (ASC 310), external qualitative factors, and internal qualitative factors. A description of each category of the allowance for loan loss methodology is listed below.

Non-Impaired Loans. Non-impaired loans are grouped into homogeneous loan pools by loan type: commercial and industrial, construction and development, commercial real estate, second lien home equity lines of credit, and all other loans. Each loan pool is stratified by internal risk rating and multiplied by a loss allocation percentage derived from the loan pool historical loss rate. The historical loss rate is based on an age weighted 5 year history of net charge-offs experienced by pool, with the most recent net charge-off experience given a greater weighting. This results in the expected loss rate per year, adjusted by a qualitative adjustment factor and a years-to-impairment factor, for each pool of loans to derive the total amount of allowance for non-impaired loans.

Impaired Loans. Loans are considered impaired, when based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the rate implicit in the original loan agreement, at the loan’s observable market price or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral-dependent. Fair value estimates for specifically impaired collateral-dependent loans are derived from appraised values based on the current market value or “as is” value of the property, normally from recently received and reviewed appraisals. Appraisals are obtained from certified and licensed appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by our credit administration department, and values are adjusted downward to reflect anticipated disposition costs. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated for each impaired loan. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.

External Qualitative Factors. The determination of the portion of the allowance for loan losses relating to external qualitative factors is based on consideration of the following factors: gross domestic product growth rate, changes in prime rate, delinquency trends, peer delinquency trends, year over year loan growth and state unemployment rate trends. Data for the three most recent periods is utilized in the calculation for each external qualitative component. The factors have a consistent weighted methodology to calculate the amount of allowance due to external qualitative factors. Overall macroeconomic conditions and uncertainty due to COVID-19 resulted in an increased provision for loans losses related to external factors of $9.0 million for the three months ended June 30, 2020 and $15.7 million for the six months ended June 30, 2020.

Internal Qualitative Factors. The determination of the portion of the allowance for loan losses relating to internal qualitative factors is based on the consideration of criteria which includes the following: number of extensions and deferrals, single pay and interest only loans, current financial information, credit concentrations and risk grade accuracy. A self-assessment for each of the criteria is made with a consistent weighted methodology used to calculate the amount of allowance required for internal qualitative factors.

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 2020 and June 30, 2019. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

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

	(In Thousands)
	Three Months Ended June 30, 2020
Allowance for loan losses:
Balance at March 31, 2020	$	48,780		$	3,757		$	32,360		$	517		$	85,414
Charge-offs		(1,358	)		(376	)		(2,520	)		(62	)		(4,316	)
Recoveries		84			1			13			28			126
Provision		480			1,149			8,546			108			10,283
Balance at June 30, 2020	$	47,986		$	4,531		$	38,399		$	591		$	91,507

	Three Months Ended June 30, 2019
Allowance for loan losses:
Balance at March 31, 2019	$	39,459		$	3,595		$	26,711		$	442		$	70,207
Charge-offs		(3,610	)		-			(169	)		(63	)		(3,842	)
Recoveries		117			-			4			16			137
Provision		2,743			(176	)		2,237			80			4,884
Balance at June 30, 2019	$	38,709		$	3,419		$	28,783		$	475		$	71,386

	Six Months Ended June 30, 2020
Allowance for loan losses:
Balance at December 31, 2019	$	43,666		$	2,768		$	29,653		$	497		$	76,584
Charge-offs		(3,998	)		(830	)		(4,198	)		(120	)		(9,146	)
Recoveries		146			2			14			40			202
Provision		8,172			2,591			12,930			174			23,867
Balance at June 30, 2020	$	47,986		$	4,531		$	38,399		$	591		$	91,507

	Six Months Ended June 30, 2019
Allowance for loan losses:
Balance at December 31, 2018	$	39,016		$	3,522		$	25,508		$	554		$	68,600
Charge-offs		(6,647	)		-			(219	)		(281	)		(7,147	)
Recoveries		129			1			11			23			164
Provision		6,211			(104	)		3,483			179			9,769
Balance at June 30, 2019	$	38,709		$	3,419		$	28,783		$	475		$	71,386

	As of June 30, 2020
Allowance for loan losses:
Individually Evaluated for Impairment	$	9,344	$	201	$	209	$	-	$	9,754
Collectively Evaluated for Impairment		38,642		4,330		38,190		591		81,753

Loans:
Ending Balance	$	3,498,627	$	544,586	$	4,211,762	$	60,400	$	8,315,375
Individually Evaluated for Impairment		63,531		616		8,004		9		72,160
Collectively Evaluated for Impairment		3,435,096		543,970		4,203,758		60,391		8,243,215

	As of December 31, 2019
Allowance for loan losses:
Individually Evaluated for Impairment	$	6,085	$	86	$	3,633	$	-	$	9,804
Collectively Evaluated for Impairment		37,581		2,682		26,020		497		66,780

Loans:
Ending Balance	$	2,696,210	$	521,392	$	3,979,060	$	64,789	$	7,261,451
Individually Evaluated for Impairment		20,843		4,320		17,985		-		43,148
Collectively Evaluated for Impairment		2,675,367		517,072		3,961,075		64,789		7,218,303

The following table presents details of the Company’s impaired loans as of June 30, 2020 and December 31, 2019, respectively. Loans which have been fully charged off do not appear in the tables.

							For the three months				For the six months
							ended June 30,				ended June 30,
	June 30, 2020						2020				2020
									Interest				Interest
			Unpaid				Average		Income		Average		Income
	Recorded		Principal		Related		Recorded		Recognized		Recorded		Recognized
	Investment		Balance		Allowance		Investment		in Period		Investment		in Period

	(In Thousands)
With no allowance recorded:
Commercial, financial and agricultural	$	30,371	$	30,371	$	-	$	30,939	$	122	$	31,433	$	531
Real estate - construction		29		32		-		33		-		34		1
Real estate - mortgage:
Owner-occupied commercial		2,942		3,038		-		3,048		49		3,058		91
1-4 family mortgage		654		654		-		655		4		506		5
Other mortgage		1,701		1,701		-		1,701		18		-		-
Total real estate - mortgage		5,297		5,393		-		5,404		71		3,564		96
Consumer		9		9		-		9		-		9		-
Total with no allowance recorded		35,706		35,805		-		36,385		193		35,040		628

With an allowance recorded:
Commercial, financial and agricultural		33,160		34,494		9,344		33,701		203		33,793		467
Real estate - construction		587		637		201		965		-		1,201		-
Real estate - mortgage:
Owner-occupied commercial		2,008		2,148		169		2,209		5		2,303		8
1-4 family mortgage		647		647		40		646		4		649		7
Other mortgage		52		52		-		52		1		104		3
Total real estate - mortgage		2,707		2,847		209		2,907		10		3,056		18
Consumer		-		-		-		-		-		-		-
Total with allowance recorded		36,454		37,978		9,754		37,573		213		38,050		485

Total Impaired Loans:
Commercial, financial and agricultural		63,531		64,865		9,344		64,640		325		65,226		998
Real estate - construction		616		669		201		998		-		1,235		1
Real estate - mortgage:
Owner-occupied commercial		4,950		5,186		169		5,257		54		5,361		99
1-4 family mortgage		1,301		1,301		40		1,301		8		1,155		12
Other mortgage		1,753		1,753		-		1,753		19		104		3
Total real estate - mortgage		8,004		8,240		209		8,311		81		6,620		114
Consumer		9		9		-		9		-		9		-
Total impaired loans	$	72,160	$	73,783	$	9,754	$	73,958	$	406	$	73,090	$	1,113

December 31, 2019
							For the twelve months
							ended December 31, 2019
			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	$	9,015	$	10,563	$	-	$	11,284	$	562
Real estate - construction		2,731		2,735		-		2,063		126
Real estate - mortgage:
Owner-occupied commercial		7,150		7,246		-		7,548		618
1-4 family mortgage		287		287		-		289		2
Other mortgage		-		-		-		-		-
Total real estate - mortgage		7,437		7,533		-		7,837		620
Consumer		-		-		-		-		-
Total with no allowance recorded		19,183		20,831		-		21,184		1,308

With an allowance recorded:
Commercial, financial and agricultural		11,828		19,307		6,085		19,714		395
Real estate - construction		1,589		1,589		86		1,614		27
Real estate - mortgage:
Owner-occupied commercial		7,888		11,028		2,456		13,627		301
1-4 family mortgage		1,153		1,153		176		1,157		1
Other mortgage		1,507		1,507		1,001		1,468		21
Total real estate - mortgage		10,548		13,688		3,633		16,252		323
Consumer		-		-		-		-		-
Total with allowance recorded		23,965		34,584		9,804		37,580		745

Total Impaired Loans:
Commercial, financial and agricultural		20,843		29,870		6,085		30,998		957
Real estate - construction		4,320		4,324		86		3,677		153
Real estate - mortgage:
Owner-occupied commercial		15,038		18,274		2,456		21,175		919
1-4 family mortgage		1,440		1,440		176		1,446		3
Other mortgage		1,507		1,507		1,001		1,468		21
Total real estate - mortgage		17,985		21,221		3,633		24,089		943
Consumer		-		-		-		-		-
Total impaired loans	$	43,148	$	55,415	$	9,804	$	58,764	$	2,053

As of June 30, 2020, there are 244 loans outstanding totaling $342.0 million that have payment deferrals in connection with the COVID-19 relief provided by the CARES Act. Of these 244 payment deferrals, 164 were principal only deferrals totaling $102.4 million, 45 were interest only deferrals totaling $151.1 million and 35 were principal and interest deferrals totaling $88.5 million. These deferrals were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

Troubled Debt Restructurings (“TDR”) at June 30, 2020, December 31, 2019 and June 30, 2019 totaled $1.6 million, $3.3 million and $11.3 million, respectively. The portion of those TDRs accruing interest at June 30, 2020, December 31, 2019 and June 30, 2019 totaled $975,000, $625,000 and $2.7 million, respectively. At June 30, 2020, the Company had a related allowance for loan losses of $411,000 allocated to these TDRs, compared to $929,000 at December 31, 2019 and $2.0 million at June 30, 2019. TDR activity by portfolio segment for the three and six months ended June 30, 2020 and June 30, 2019 is presented in the table below.

	Three Months Ended June 30, 2020						Six Months Ended June 30, 2020
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
	(In Thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural		-	$	-	$	-		1	$	350	$	350
Real estate - construction		-		-		-		-		-		-
Real estate - mortgage:
Owner-occupied commercial		-		-		-		-		-		-
1-4 family mortgage		-		-		-		-		-		-
Other mortgage		-		-		-		-		-		-
Total real estate mortgage		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		-	$	-	$	-		1	$	350	$	350

	Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
	(In Thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural		1	$	2,742	$	2,742		1	$	2,742	$	2,742
Real estate - construction		-		-		-		-		-		-
Real estate - mortgage:
Owner-occupied commercial		-		-		-		-		-		-
1-4 family mortgage		-		-		-		-		-		-
Other mortgage		-		-		-		-		-		-
Total real estate mortgage		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		1	$	2,742	$	2,742		1	$	2,742	$	2,742

There were no loans which were modified in the previous twelve months (i.e., the twelve months prior to default) that defaulted during the three and six months ended June 30, 2020. There were no loans which were modified in the previous twelve months that defaulted during the three months ended June 30, 2019. There were two commercial loans totaling $325,000 which were modified in the previous twelve months which defaulted during the six months ended June 30, 2019. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status.

NOTE 6 - LEASES

The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The leases have remaining terms up to 8.7 years. At June 30, 2020, the Company had lease right-of-use assets and lease liabilities totaling $11.7 million and $11.8 million, respectively, compared to $13.3 million and $13.4 million, respectively, at December 31, 2019 which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheet.

Maturities of operating lease liabilities as of June 30, 2020 are as follows:

	June 30, 2020
	(In Thousands)
2020 (remaining)	$	1,709
2021		2,721
2022		2,655
2023		2,181
2024		1,180
thereafter		2,570
Total lease payments		13,016
Less: imputed interest		(1,182	)
Present value of operating lease liabilities	$	11,834

As of June 30, 2020, the weighted average remaining term of operating leases is 5.2 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.19%.

Operating cash flows related to leases were $856,000 and $1.7 million, for the three and six months ended June 30, 2020, respectively, compared to $807,000 and $1.6 million for the three and six months ended June 30, 2019, respectively.

Lease costs during the three and six months ended June 30, 2020 and June 30, 2019 were as follows (in thousands):

	Three Months Ended June 30, 2020			Three Months Ended June 30, 2019
Operating lease cost	$	873		$	842
Short-term lease cost		16			7
Variable lease cost		44			52
Sublease income		(29	)		(6	)
Net lease cost	$	904		$	895

	Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Operating lease cost	$	1,747		$	1,691
Short-term lease cost		32			13
Variable lease cost		88			102
Sublease income		(45	)		(12	)
Net lease cost	$	1,822		$	1,794

NOTE 7 - EMPLOYEE AND DIRECTOR BENEFITS

Stock Options

The Company has a stock-based compensation plan as described below. The compensation cost that has been charged to earnings for the plan was $353,000 and $629,000 for the three and six months ended June 30, 2020 and $206,000 and $488,000 for the three and six months ended June 30, 2019.

The Company’s 2009 Amended and Restated Stock Incentive Plan authorizes the grant of up to 5,550,000 shares and allows for the issuance of Stock Appreciation Rights, Restricted Stock, Stock Options, Performance Shares or Performance Units. The plan allows for the grant of incentive stock options and non-qualified stock options, and option awards are granted with an exercise price equal to the market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plan is ten years.

The Company estimates the fair value of each stock option award using a Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatilities of the Company’s common stock. The expected term for options granted is based on the short-cut method and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	2019
Expected volatility		40.00	%
Expected dividends		1.74	%
Expected term (in years)		6.7
Risk-free rate		2.55	%

There were no grants of stock options during the six months ended June 30, 2020. The weighted average grant-date fair value of options granted during the six months ended June 30, 2019 was $12.60.

The following table summarizes stock option activity during the six months ended June 30, 2020 and June 30, 2019:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (years)		Value
								(In Thousands)
Six Months Ended June 30, 2020:
Outstanding at January 1, 2020		965,248		$	15.19		4.9	$	21,911
Granted		-			-		-		-
Exercised		(236,000	)		10.36		3.1		5,995
Forfeited		(18,000	)		30.79		6.6		90
Outstanding at June 30, 2020		711,248			18.21		5.3	$	13,808

Exercisable at June 30, 2020		236,500		$	12.76		3.6	$	5,446

Six Months Ended June 30, 2019:
Outstanding at January 1, 2019		1,238,748		$	13.02		5.2	$	23,355
Granted		10,500			34.44		9.7		(2	)
Exercised		(188,500	)		5.58		1.8		5,014
Forfeited		(13,000	)		29.93		7.4		56
Outstanding at June 30, 2019		1,047,748			14.37		5.3	$	21,233

Exercisable at June 30, 2019		328,800		$	8.13		3.7	$	8,964

As of June 30, 2020, there was approximately $949,000 of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized on the straight-line method over the next 1.1 years.

Restricted Stock

The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2020, there was $1.9 million of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 3.0 years of the restricted stock’s vesting period.

The following table summarizes restricted stock activity during the six months ended June 30, 2020 and 2019, respectively:

	Shares			Weighted Average Grant Date Fair Value
Six Months Ended June 30, 2020:
Non-vested at January 1, 2020		71,290		$	31.53
Granted		25,567			36.29
Vested		(18,828	)		23.06
Forfeited		-			-
Non-vested at June 30, 2020		78,029			35.14

Six Months Ended June 30, 2019:
Non-vested at January 1, 2019		44,076		$	38.44
Granted		23,474			34.03
Vested		(5,200	)		20.31
Forfeited		(2,500	)		38.17
Non-vested at June 30, 2019		59,850			38.95

NOTE 8 - DERIVATIVES

The Company periodically enters into derivative contracts to manage exposures to movements in interest rates. The Company purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates. The interest rate cap is not designated as a hedging instrument but rather as a stand-alone derivative. The interest rate cap has an original term of 3 years, a notional amount of $300 million and is tied to the one-month LIBOR rate with a strike rate of 0.50%. The fair value of the interest rate cap is carried on the balance sheet in other assets and the change in fair value is recognized in noninterest income each quarter. At June 30, 2020 the interest rate cap had a fair value of $543,000 and remaining term of 2.8 years.

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of June 30, 2020 and December 31, 2019 were not material.

NOTE 9 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In July 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminated, added and modified certain disclosure requirements for fair value measurements. Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 was effective for the Company beginning January 1, 2020. As ASU 2018-13 only revised disclosure requirements, it has no material impact on the Company’s Consolidated Financial Statements.

NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The CARES Act gave financial institutions the option to delay adoption of ASU 2016-13. The Company decided to delay its adoption of the update until the earlier of the date the national emergency concerning COVID-19 terminates or December 31, 2020, with an effective retrospective adoption date of January 1, 2020.

The Company’s CECL implementation team includes leadership from Accounting, Credit Administration and Risk Management. This group works closely with a third-party software solution vendor providing expertise in CECL modeling techniques to develop expected credit loss estimation models. Loans with similar risk characteristics have been evaluated in pools and, depending on the nature of each identified pool, the Company utilized a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. 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.

CECL parallel comparisons were performed at June 30, 2020 and the Company estimates the allowance for loan losses under CECL will be within five percent of the allowance for loan losses under the incurred loss methodology. The Company forecasted an immediate reversion to longer term average historical loss experience for the reasonable and supportable forecast due to the current level of uncertainty and unprecedented effect of COVID-19 as well as the corresponding response from the federal government through the CARES Act. Qualitative factors were adjusted for a higher level of risk associated with economic conditions with a mitigating adjustment for the regulatory environment.

Credit losses for loans that no longer share similar risk characteristics were estimated on an individual basis. Individual evaluations were performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings. Specific allowances were estimated based 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.

The estimation methodology for credit losses on lending-related commitments were similar to the process for estimating credit losses for loans, with the addition of a probability of draw estimate that will be applied to each commitment amount.

Based upon the nature and characteristics of our securities portfolios at June 30, 2020, the macroeconomic conditions and forecasts at that date, and other management judgments, the Company does not currently expect to record any allowance for credit losses on available for sale securities.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be effective for a limited time, starting March 12, 2020 through December 31, 2022. The Company has identified a replacement reference rate established by the American Financial Exchange. This rate is based on an active market of daily fund trading among participant banks. The Company will apply the guidance provided by this ASU in transitioning to the new reference rate.

NOTE 11 - 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 1: 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 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 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 1 of the hierarchy. Level 1 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 2 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. The Company bought two corporate debt securities in a private placement transaction, for which Level 2 inputs are not available. The Company uses average observable prices of similar corporate securities owned by the Company to value the two securities and are classified in Level 3 of the hierarchy. The range of values and weighted average value as of June 30, 2020 was 82.232 to 110.1654 and 100.8549, respectively, observed for the Company’s other similar corporate securities. The range of values and weighted average value as of December 31, 2019 was 98.7836 to 112.2305 and 102.2648, respectively, observed for the Company’s other similar corporate securities.

Derivative instruments. The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate curves, adjusted for counterparty credit risk. These measurements are classified as level 2 within the valuation 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 820-10 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 3 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. The range of fair value adjustments and weighted average adjustments as of June 30, 2020 was 0% to 50% and 16.4%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 0% to 30% and 5.6%, respectively. 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 $3.8 million and $8.8 million during the three and six months ended June 30, 2020, respectively, and $6.6 million and $8.4 million during the three and six months ended June 30, 2019, respectively.

Other Real Estate Owned and repossessed assets. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure and repossessed assets 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 or repossession are charged to the allowance for loan losses subsequent to foreclosure or repossession. 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. The range of fair value adjustments and weighted average adjustment as of June 30, 2020 was 5% to 15% and 11.6%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2019 was 5% to 10% and 8.0%, respectively. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO and repossessed assets of $1.9 million and $2.4 million was recognized for the three and six months ended June 30, 2020, respectively, and $202,000 and $224,000 for the three and six months ended June 30, 2019, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO and repossessed assets are classified within Level 3 of the hierarchy.

There was one residential real estate loan with a balance of $287,000 foreclosed and classified as OREO as of June 30, 2020, compared to one residential real estate loan foreclosure for $103,000 as of December 31, 2019.

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

	Fair Value Measurements at June 30, 2020 Using
	Quoted Prices in
	Active Markets		Significant Other		Significant
	for Identical		Observable Inputs		Unobservable
	Assets (Level 1)		(Level 2)		Inputs (Level 3)		Total
Assets Measured on a Recurring Basis:	(In Thousands)
Available-for-sale debt securities:
U.S. Treasury securities	$	-	$	40,582	$	-	$	40,582
Government agency securities		-		15,575		-		15,575
Mortgage-backed securities		-		517,036		-		517,036
State and municipal securities		-		45,577		-		45,577
Corporate debt		-		230,763		6,595		237,358
Total available-for-sale debt securities		-		849,533		6,595		856,128
Interest rate cap derivative		-		543		-		543
Total assets at fair value	$	-	$	850,076	$	6,595	$	856,671

	Fair Value Measurements at December 31, 2019 Using
	Quoted Prices in
	Active Markets		Significant Other		Significant
	for Identical		Observable Inputs		Unobservable
	Assets (Level 1)		(Level 2)		Inputs (Level 3)		Total
Assets Measured on a Recurring Basis:	(In Thousands)
Available-for-sale debt securities:
U.S. Treasury securities	$	-	$	49,210	$	-	$	49,210
Government agency securities		-		18,386		-		18,386
Mortgage-backed securities		-		474,054		-		474,054
State and municipal securities		-		57,272		-		57,272
Corporate debt		-		153,881		6,596		160,477
Total assets at fair value	$	-	$	752,803	$	6,596	$	759,399

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019:

	Fair Value Measurements at June 30, 2020
	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	$	-	$	-	$	62,406	$	62,406
Other real estate owned and repossessed assets		-		-		6,537		6,537
Total assets at fair value	$	-	$	-	$	68,943	$	68,943

	Fair Value Measurements at December 31, 2019
	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	$	-	$	-	$	33,344	$	33,344
Other real estate owned and repossessed assets		-		-		8,178		8,178
Total assets at fair value	$	-	$	-	$	41,522	$	41,522

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 no 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 estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis as of June 30, 2020 and December 31, 2019 were as follows:

	June 30, 2020				December 31, 2019
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(In Thousands)
Financial Assets:
Level 1 inputs:
Cash and due from banks	$	1,546,575	$	1,546,575	$	530,127	$	530,127

Level 2 inputs:
Federal funds sold		2,352		2,352		100,473		100,473
Mortgage loans held for sale		14,491		14,676		6,302		6,312

Level 3 inputs:
Held to maturity debt securities		250		250		250		250
Loans, net		8,161,462		8,079,541		7,151,523		7,099,198

Financial liabilities:
Level 2 inputs:
Deposits	$	9,342,918	$	9,359,175	$	7,530,433	$	7,534,984
Federal funds purchased		635,606		635,606		470,749		470,749
Other borrowings		64,715		64,624		64,703		65,048

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst 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 six months ended June 30, 2020 and June 30, 2019.

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 in our loan portfolio and 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; 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-banks. 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 2020 and our other SEC 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 in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through 20 full-service banking offices located in Alabama, Tampa Bay, Florida, the panhandle of Florida, the greater Atlanta, Georgia metropolitan area, Charleston, South Carolina, and Nashville, Tennessee. 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.

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 Second Quarter 2020 Results

As of June 30, 2020, we had consolidated total assets of $11.01 billion, up $2.27 billion, or 26%, when compared to consolidated assets of $8.74 billion at December 31, 2019. Total loans were $8.31 billion at June 30, 2020, up $1.35 billion, or 19%, from $6.97 billion at December 31, 2019. Total deposits were $9.34 billion at June 30, 2020, up $1.94 billion, or 26%, from $7.40 billion at December 31, 2019.

Net income available to common stockholders for the three months ended June 30, 2020 was $40.4 million, an increase of $4.8 million, or 13.5%, from $35.6 million for the corresponding period in 2019. Basic and diluted earnings per common share were $0.75 and $0.75, respectively, for the three months ended June 30, 2020, compared to basic and diluted earnings per common share of $0.67 and $0.66 for the corresponding period in 2019.

Net income available to common stockholders for the six months ended June 30, 2020 was $75.2 million, an increase of $4.6 million, or 6.5%, from $70.6 million for the corresponding period in 2019. Basic and diluted earnings per common share were $1.40 and $1.39, respectively, for the six months ended June 30, 2020, compared to $1.32 and $1.31, respectively, for the corresponding period in 2019.

Critical Accounting Policies

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.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 loan losses, valuation of foreclosed real estate, deferred taxes, and fair value of financial instruments 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 ended December 31, 2019.

Financial Condition

Cash and Cash Equivalents

At June 30, 2020, we had $2.3 million in federal funds sold, compared to $100.5 million at December 31, 2019. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2020, we had $1.30 billion in balances at the Federal Reserve, compared to $61.9 million at December 31, 2019. The increase in balances kept at the Federal Reserve in 2020 result from federal stimulus funds on deposit with us by our customers stemming from the COVID-19 pandemic. We expect these funds to be temporary in nature.

Debt Securities

Debt securities available for sale totaled $856.1 million at June 30, 2020 and $759.4 million at December 31, 2019. Investment securities held to maturity totaled $250,000 at June 30, 2020. We had paydowns of $51.4 million on mortgage-backed securities and government agencies, maturities of $21.2 million on municipal bonds, corporate securities and treasury securities, and calls of $5.9 million on U.S. government agencies and municipal securities during the six months ended June 30, 2020. We purchased $82.6 million in mortgage-backed securities and $86.0 million in corporate securities during the first six months of 2020. For a tabular presentation of debt securities available for sale and held to maturity at June 30, 2020 and December 31, 2019, 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.

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at June 30, 2020 are interest-rate driven, no declines are deemed to be other than temporary. We will continue to evaluate our investment securities for possible other-than-temporary impairment, which could result in non-cash charges to earnings in one or more future periods. All securities held are traded in liquid markets.

The Company does not invest in collateralized debt obligations (“CDOs”). At June 30, 2020, we had $237.4 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Bond Rating Agency at the time of our investment in them. 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 at June 30, 2020 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 $431.0 million and $389.9 million as of June 30, 2020 and December 31, 2019, respectively.

Loans

As of June 30, 2020, there are 244 loans outstanding totaling $342.0 million that have payment deferrals in connection with the COVID-19 relief provided by the CARES Act. Of these 244 payment deferrals, 164 were principal only deferrals totaling $102.4 million, 45 were interest only deferrals totaling $151.1 million and 35 were principal and interest deferrals totaling $88.5 million. The amount of accrued interest related to payment deferrals totaled $6.1 million at June 30, 2020. These deferrals were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.

We had total loans of $8.32 billion at June 30, 2020, an increase of $1.05 billion, or 14.5%, compared to $7.26 billion at December 31, 2019. During the second quarter of 2020 we originated approximately 4,800 PPP loans totaling $1.05 billion. Over 4,000 of these loans have a balance of less than $350,000. The percentage of our loans in each of our regions were as follows:

	Percentage of Total Loans in MSA
Birmingham, AL		39.3	%
Huntsville, AL		8.6	%
Dothan, AL		8.7	%
Montgomery, AL		5.7	%
Mobile, AL		6.2	%
Total Alabama MSAs		68.5	%
Pensacola, FL		6.3	%
West Florida (1)		4.8	%
Total Florida MSAs		11.1	%
Nashville, TN		9.5	%
Atlanta, GA		6.5	%
Charleston, SC		4.4	%

Asset Quality

The Company determined to delay its adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” until the earlier of the date on which the national emergency concerning COVID-19 terminates or December 31, 2020, as outlined in the CARES Act, with an effective retrospective implementation date of January 1, 2020. Accordingly, the Company will continue to use the incurred loss methodology to calculate the allowance for loan losses until the earlier of either event.

The allowance for loan losses, sometimes referred to as the “ALLL,” is established and maintained at levels management deems adequate to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. In assessing the adequacy of the ALLL, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the ALLL at an adequate level. If the ALLL is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased. Our management believes that the allowance was adequate at June 30, 2020.

Our management reviews the adequacy of the ALLL on a quarterly basis. The ALLL calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At June 30, 2020, total loans rated Special Mention, Substandard, and Doubtful were $141.3 million, or 1.7% of total loans, compared to $123.7 million, or 1.7% of total loans, at December 31, 2019. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the ALLL to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions, including the economic distress caused by the COVID-19 pandemic and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the original terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Impaired loans are measured based on the present value of expected future cash flows discounted at the interest rate implicit in the original loan agreement, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral-dependent.

The following table presents a summary of changes in the allowance for loan losses for the three and six months ended June 30, 2020 and 2019:

	As of and for the Three Months Ended						As of and for the Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Total loans outstanding, net of unearned income	$	8,315,375		$	6,968,886		$	8,315,375		$	6,968,886
Average loans outstanding, net of unearned income	$	8,333,704		$	6,789,051		$	7,847,426		$	6,695,792
Allowance for loan losses at beginning of period		85,414			70,207			76,584			68,600
Charge-offs:
Commercial, financial and agricultural loans		1,358			3,610			3,998			6,647
Real estate - construction		376			-			830			-
Real estate - mortgage		2,520			169			4,198			219
Consumer loans		62			63			120			281
Total charge-offs		4,316			3,842			9,146			7,147
Recoveries:
Commercial, financial and agricultural loans		84			117			146			129
Real estate - construction		1			-			2			1
Real estate - mortgage		13			4			14			11
Consumer loans		28			16			40			23
Total recoveries		126			137			202			164
Net charge-offs		4,190			3,705			8,944			6,983
Provision for loan losses		10,283			4,884			23,867			9,769
Allowance for loan losses at period end	$	91,507		$	71,386		$	91,507		$	71,386
Allowance for loan losses to period end loans		1.10	%		1.02	%		1.10	%		1.02	%
Net charge-offs to average loans		0.20	%		0.22	%		0.23	%		0.21	%

The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percentage of loans in each category to total loans at June 30, 2020 and December 31, 2019:

			Percentage of loans
			in each category
June 30, 2020	Amount		to total loans
	(In Thousands)
Commercial, financial and agricultural	$	47,986		42.07	%
Real estate - construction		4,531		6.55	%
Real estate - mortgage		38,399		50.65	%
Consumer		591		0.73	%
Total	$	91,507		100.00	%

			Percentage of loans
			in each category
December 31, 2019	Amount		to total loans
	(In Thousands)
Commercial, financial and agricultural	$	43,666		37.13	%
Real estate - construction		2,768		7.18	%
Real estate - mortgage		29,653		54.80	%
Consumer		497		0.89	%
Total	$	76,584		100.00	%

Nonperforming Assets

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, decreased to $22.0 million at June 30, 2020, compared to $36.1 million at December 31, 2019. Of this total, nonaccrual loans of $16.9 million at June 30, 2020 represented a net decrease of $13.2 million from nonaccrual loans at December 31, 2019. Excluding credit card accounts, there were two loans 90 or more days past due and still accruing totaling $5.1 million at June 30, 2020, compared to seven loans totaling $6.0 million at December 31, 2019. Troubled Debt Restructurings (“TDR”) at June 30, 2020 and December 31, 2019 were $1.6 million and $3.3 million, respectively.

OREO and repossessed assets decreased to $6.5 million at June 30, 2020, from $8.2 million at December 31, 2019. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2020 and 2019:

	Six Months Ended June 30,
	2020			2019
	(In thousands)
Balance at beginning of period	$	8,178		$	5,169
Transfers from loans and capitalized expenses		1,023			752
Proceeds from sales		(852	)		(48	)
Internally financed sales		-			-
Write-downs / net gain (loss) on sales		(1,812	)		(224	)
Balance at end of period	$	6,537		$	5,649

The following table summarizes our nonperforming assets and TDRs at June 30, 2020 and December 31, 2019:

	June 30, 2020					December 31, 2019
				Number of					Number of
	Balance			Loans		Balance			Loans
	(Dollar Amounts In Thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	13,888			24	$	14,729			29
Real estate - construction		587			3		1,588			2
Real estate - mortgage:
Owner-occupied commercial		1,714			5		10,826			3
1-4 family mortgage		683			7		1,440			5
Other mortgage		-			-		1,507			1
Total real estate - mortgage		2,397			12		13,773			9
Consumer		9			1		-			-
Total Nonaccrual loans:	$	16,881			40	$	30,090			40

90+ days past due and accruing:
Commercial, financial and agricultural	$	248			2	$	201			3
Real estate - construction		-			-		-			-
Real estate - mortgage:
Owner-occupied commercial		-			-		-			-
1-4 family mortgage		-			-		873			5
Other mortgage		4,861			1		4,924			1
Total real estate - mortgage		4,861			1		5,797			6
Consumer		24			6		23			8
Total 90+ days past due and accruing:	$	5,133			9	$	6,021			17

Total Nonperforming Loans:	$	22,014			49	$	36,111			57

Plus: Other real estate owned and repossessions		6,537			11		8,178			12
Total Nonperforming Assets	$	28,551			60	$	44,289			69

Restructured accruing loans:
Commercial, financial and agricultural	$	975			3	$	625			2
Real estate - construction		-			-		-			-
Real estate - mortgage:
Owner-occupied commercial		-			-		-			-
1-4 family mortgage		-			-		-			-
Other mortgage		-			-		-			-
Total real estate - mortgage		-			-		-			-
Consumer		-			-		-			-
Total restructured accruing loans:	$	975			3	$	625			2

Total Nonperforming assets and restructured accruing loans	$	29,526			63	$	44,914			71

Ratios:
Nonperforming loans to total loans		0.26	%				0.50	%
Nonperforming assets to total loans plus other real estate owned and repossessions		0.34	%				0.61	%
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions		0.35	%				0.62	%

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 unless management believes that the collection of interest is 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 loan losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.

Impaired Loans and Allowance for Loan Losses

As of June 30, 2020, we had impaired loans of $72.2 million inclusive of nonaccrual loans, an increase of $29.1 million from $43.1 million as of December 31, 2019. This increase is primarily attributable to two commercial relationships newly classified as impaired during the first six months of 2020. Substandard loans are detailed in Note 5, “Loans”, within the credit quality indicator table. While total impaired loans have increased, our overall collateral exposure on these impairments has remained consistent. We allocated $9.8 million of our allowance for loan losses at June 30, 2020 to these impaired loans, unchanged compared to December 31, 2019. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the interest rate implicit in the original loan agreement, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of impairment, if any, and subsequent changes are included in the allowance for loan losses. Interest on accruing loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration team performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

Of the $72.2 million of impaired loans reported as of June 30, 2020, $63.5 million were commercial, financial and agricultural loans, $616,000 were real estate construction loans and $8.0 million were real estate mortgage loans.

Deposits

Total deposits were $9.34 billion at June 30, 2020, an increase of $1.8 billion, or 24.1%, over $7.53 billion at December 31, 2019. Increased growth rates during 2020 have been the result of Paycheck Protection Program (“PPP”) lending in which our borrowers have retained portions of their proceeds in the Bank. 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 June 30, 2020 and December 31, 2019:

	June 30, 2020				December 31, 2019
Noninterest-bearing demand	$	2,678,893	28.67	%	$	1,749,879	23.24	%
Interest-bearing demand		5,786,886	61.94	%		4,986,155	66.21	%
Savings		77,387	0.83	%		65,808	0.87	%
Time deposits , $250,000 and under		277,278	2.97	%		267,259	3.55	%
Time deposits, over $250,000		422,474	4.52	%		461,332	6.13	%
Brokered CDs		100,000	1.07	%		-	-	%
	$	9,342,918	100.00	%	$	7,530,433	100.00	%

Other Borrowings

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $635.6 million and $470.7 million at June 30, 2020 and December 31, 2019, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 0.20% for the quarter ended June 30, 2020. Other borrowings consist of the following:

●

$34.75 million of 5% Subordinated Notes due July 15, 2025, which were issued in a private placement in July 2015 and pay interest semi-annually; and

●

$30.0 million of 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually.

Liquidity

Liquidity is defined as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, and other cash demands and disbursement needs, and otherwise to operate on an ongoing basis.

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At June 30, 2020, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $1.99 billion. At June 30, 2020, the Bank had borrowing availability of approximately $772.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. Additionally, the Bank had $2.73 billion in available lines from the Federal Reserve Bank-Atlanta. $1.68 billion of these lines from the Federal Reserve Bank-Atlanta are collateralized by loans of the Bank. The remaining $1.05 billion are collateralized by PPP loans originated by the Bank. We believe these sources of funding are adequate to meet our anticipated funding needs. Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, correspondent banking relationships and related federal funds purchased, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Other Borrowings”.

We are subject to general FDIC guidelines that require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity materially increasing or decreasing. However, uncertainties brought about by the COVID-19 pandemic may adversely affect our ability to obtain funding or may increase the cost of funding.

The following table reflects the contractual maturities of our term liabilities as of June 30, 2020. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

	Payments due by Period
					Over 1 - 3		Over 3 - 5
	Total		1 year or less		years		years		Over 5 years
	(In Thousands)
Contractual Obligations (1)

Deposits without a stated maturity	$	8,464,353	$	-	$	-	$	-	$	-
Certificates of deposit (2)		778,565		443,718		273,236		61,611		-
Brokered certificates of deposit		100,000		50,000		50,000
Federal funds purchased		635,606		635,606		-		-		-
Subordinated debentures		64,750		-		-		-		64,750
Operating lease commitments		11,833		1,515		4,813		3,080		2,425
Total	$	10,055,107	$	1,130,839	$	328,049	$	64,691	$	67,175

(1)	Excludes interest.
(2)	Certificates of deposit give customers the right to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal.

Capital Adequacy

Total stockholders’ equity attributable to us at June 30, 2020 was $914.6 million, or 8.30% of total assets. At December 31, 2019, total stockholders’ equity attributable to us was $842.2 million, or 9.41% of total assets.

As of June 30, 2020, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios.

The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, beginning January 1, 2016 and became fully effective on January 1, 2019. As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer.

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios, not including the capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of June 30, 2020, December 31, 2019 and June 30, 2019:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2020:	(Dollars in Thousands)
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	881,539		11.26	%	$	352,327		4.50	%		N/A		N/A
ServisFirst Bank		943,578		12.06	%		352,219		4.50	%	$	508,761		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		882,041		11.27	%		469,769		6.00	%		N/A		N/A
ServisFirst Bank		944,080		12.06	%		469,625		6.00	%		626,167		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		1,038,763		13.27	%		626,359		8.00	%		N/A		N/A
ServisFirst Bank		1,036,087		13.24	%		626,167		8.00	%		782,709		10.00
Tier 1 Capital to Average Assets:
Consolidated		882,041		9.24	%		381,766		4.00	%		N/A		N/A
ServisFirst Bank		944,080		9.90	%		381,558		4.00	%		476,948		5.00	%

As of December 31, 2019:
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	822,396		10.50	%	$	342,283		4.50	%		N/A		N/A
ServisFirst Bank		885,172		11.30	%		342,269		4.50	%	$	494,389		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		822,896		10.50	%		456,377		6.00	%		N/A		N/A
ServisFirst Bank		885,674		11.31	%		456,359		6.00	%		608,479		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		964,683		12.31	%		608,502		8.00	%		N/A		N/A
ServisFirst Bank		962,758		12.29	%		608,479		8.00	%		760,598		10.00	%
Tier 1 Capital to Average Assets:
Consolidated		822,896		9.13	%		356,012		4.00	%		N/A		N/A
ServisFirst Bank		885,674		9.83	%		355,998		4.00	%		444,997		5.00	%

As of June 30, 2019:
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	759,998		10.18	%	$	335,955		4.50	%		N/A		N/A
ServisFirst Bank		823,912		11.04	%		335,942		4.50	%	$	485,249		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		760,500		10.19	%		447,940		6.00	%		N/A		N/A
ServisFirst Bank		824,414		11.04	%		447,922		6.00	%		597,230		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		897,070		12.02	%		597,254		8.00	%		N/A		N/A
ServisFirst Bank		896,300		12.01	%		597,230		8.00	%		746,537		10.00	%
Tier 1 Capital to Average Assets:
Consolidated		760,500		9.00	%		338,030		4.00	%		N/A		N/A
ServisFirst Bank		824,414		9.76	%		338,016		4.00	%		422,520		5.00	%

We are a legal entity separate and distinct from the Bank. Our principal source of cash flow, including cash flow to pay dividends to our stockholders, is dividends the Bank pays to us as the Bank’s sole shareholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us as well as to our payment of dividends to our stockholders. The requirement that a bank holding company must serve as a source of strength to its subsidiary banks also results in the position of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its stockholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other arrangements that may undermine the Bank holding company’s ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Delaware corporate law.

The Alabama Banking Department also regulates the Bank’s dividend payments. Under Alabama law, a state-chartered bank may not pay a dividend in excess of 90% of its net earnings until the Bank’s surplus is equal to at least 20% of its capital (our Bank’s surplus currently exceeds 20% of its capital). Moreover, our Bank is also required by Alabama law to obtain the prior approval of the Superintendent of Banks (“Superintendent”) for its payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (i) the Bank’s net earnings (as defined by statute) for that year, plus (ii) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, no dividends, withdrawals or transfers may be made from the Bank’s surplus without the prior written approval of the Superintendent.

The Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. If, in the opinion of the federal banking regulators, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulators could require, after notice and a hearing, that the Bank stop or refrain from engaging in the questioned practice.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in our balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of June 30, 2020, we have reserved $500,000 for losses on such off-balance sheet arrangements consistent with guidance in the FRB’s Interagency Policy Statement SR 06-17.

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers. We had a reserve of $370,000 as of June 30, 2020 and December 31, 2019 for the settlement of any repurchase demands by investors.

Financial instruments whose contract amounts represent credit risk at June 30, 2020 and December 31, 2019 are as follows:

	June 30, 2020		December 31, 2019
	(In Thousands)		(In Thousands)
Commitments to extend credit	$	2,505,241	$	2,303,788
Credit card arrangements		270,218		248,617
Standby letters of credit		65,585		48,394
	$	2,841,044	$	2,600,799

Commitments to extend credit beyond current funded amounts are agreements to lend to a customer as long as there is no violation of any condition established in the applicable loan agreement. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by us upon extension of credit is based on our management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. All letters of credit are due within one year or less of the original commitment date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Federal funds lines of credit are uncommitted lines issued to downstream correspondent banks for the purpose of providing liquidity to them. The lines are unsecured, and we have no obligation to sell federal funds to the correspondent, nor does the correspondent have any obligation to request or accept purchases of federal funds from us.

Results of Operations

Summary of Net Income

Net income and net income available to common stockholders for the three months ended June 30, 2020 was $40.4 million compared to net income and net income available to common stockholders of $35.6 million, respectively, for the three months ended June 30, 2019. Net income and net income available to common stockholders for the six months ended June 30, 2020 was $75.2 million compared to net income and net income available to common stockholders of $70.6 million for the six months ended June 30, 2019. The increase in net income for the three months ended June 30, 2020 over the same period in 2019 was primarily attributable to a $13.1 million increase in net interest income resulting from a $1.9 billion increase in average earning assets, and a $1.3 million increase in non-interest income, led by increased mortgage banking revenue. The same key drivers contributed to the increase in net income for the six months ended June 30, 2020 compared to 2019 resulting in a $22.0 million increase in net interest income on a $1.4 billion increase in average earning assets, and a $3.0 million increase in non-interest income. Increases in non-interest expense of $2.8 million and $5.4 million and increases in income tax expense of $1.4 million and $929,000, respectively, for the three and six months ended June 30, 2020 compared to 2019 partially offset increases in income.

Basic and diluted net income per common share were $0.75 for the three months ended June 30, 2020, compared to $0.67 and $0.66, respectively, for the corresponding period in 2019. Basic and diluted net income per common share were $1.40 and $1.39, respectively, for the six months ended June 30, 2020, compared to $1.32 and $1.31, respectively, for the corresponding period in 2019. Return on average assets for the three and six months ended June 30, 2020 was 1.55% and 1.54%, respectively, compared to 1.69% and 1.72%, respectively, for the corresponding periods in 2019. Return on average common stockholders’ equity for the three and six months ended June 30, 2020 was 18.40% and 17.31%, respectively, compared to 18.72% and 19.06%, respectively, for the corresponding periods in 2019.

Net Interest Income and Net Interest Margin Analysis

Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. The major factors which affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.

Taxable-equivalent net interest income increased $13.2 million, or 18.8%, to $83.3 million for the three months ended June 30, 2020 compared to $70.1 million for the corresponding period in 2019, and increased $22.1 million, or 15.9%, to $161.0 million for the six months ended June 30, 2020 compared to $138.9 million for the corresponding period in 2019. This increase was primarily attributable to growth in average earning assets, which increased $1.91 billion, or 23.3%, from the second quarter of 2019 to the second quarter of 2020, and $1.40 billion, or 17.5%, from the six months ended June 30, 2019 to the same period in 2020. The taxable-equivalent yield on interest-earning assets decreased to 3.80% for the three months ended June 30, 2020 from 4.80% for the corresponding period in 2019, and decreased to 4.10% for the six months ended June 30, 2020 from 4.82% for the corresponding period in 2019. The yield on loans for the three months ended June 30, 2020 was 4.31% compared to 5.23% for the corresponding period in 2019, and 4.58% compared to 5.24% for the six months ended June 30, 2020 and June 30, 2019, respectively. The cost of total interest-bearing liabilities decreased to 0.69% for the three months ended June 30, 2020 compared to 1.83% for the corresponding period in 2019, and decreased to 0.94% for the six months ended June 30, 2020 from 1.78% for the corresponding period in 2019. Net interest margin for the three months ended June 30, 2020 was 3.32% compared to 3.44% for the corresponding period in 2019, and 3.44% for the six months ended June 30, 2020 compared to 3.50% for the corresponding period in 2019.

The following tables show, for the three and six months ended June 30, 2020 and June 30, 2019, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

Average Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Three Months Ended June 30,
(In thousands, except Average Yields and Rates)

	2020							2019
			Interest		Average						Interest		Average
	Average		Earned /		Yield /			Average			Earned /		Yield /
	Balance		Paid		Rate			Balance			Paid		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (1)(2)
Taxable	$	8,301,775	$	89,042		4.31	%	$	6,756,927		$	88,280		5.24	%
Tax-exempt (3)		31,929		327		4.12			32,124			307		3.83
Total loans, net of unearned income		8,333,704		89,369		4.31			6,789,051			88,587		5.23
Mortgage loans held for sale		13,278		69		2.09			5,208			50		3.85
Investment securities:
Taxable		761,575		5,092		2.67			565,491			4,192		2.97
Tax-exempt (3)		38,201		250		2.62			77,364			406		2.10
Total investment securities (4)		799,776		5,342		2.67			642,855			4,598		2.86
Federal funds sold		83,274		33		0.16			323,714			1,998		2.48
Interest-bearing balances with banks		849,549		360		0.17			411,481			2,593		2.53
Total interest-earning assets	$	10,079,581	$	95,173		3.80		$	8,172,309		$	97,826		4.80
Non-interest-earning assets:
Cash and due from banks		76,212							76,988
Net fixed assets and equipment		57,446							58,607
Allowance for loan losses, accrued interest and other assets		248,702							156,264
Total assets	$	10,461,941						$	8,464,168

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	992,848	$	875		0.35	%	$	909,847		$	2,004		0.88	%
Savings deposits		72,139		75		0.42			54,391			77		0.57
Money market accounts		4,285,907		5,555		0.52			3,932,459			18,418		1.88
Time deposits		877,448		4,251		1.95			694,414			3,741		2.16
Total interest-bearing deposits		6,228,342		10,756		0.69			5,591,111			24,240		1.74
Federal funds purchased		572,990		310		0.22			418,486			2,681		2.57
Other borrowings		64,711		781		4.85			64,680			781		4.84
Total interest-bearing liabilities	$	6,866,043	$	11,847		0.69	%	$	6,074,277		$	27,702		1.83	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		2,646,030							1,591,722
Other liabilities		69,061							35,161
Stockholders' equity		862,500							763,742
Accumulated other comprehensive loss		18,307							(734	)
Total liabilities and stockholders' equity	$	10,461,941						$	8,464,168
Net interest income			$	83,326							$	70,124
Net interest spread						3.11	%							2.97	%
Net interest margin						3.32	%							3.44	%


(1)	Non-accrual loans are included in average loan balances in all periods. Loan fees of $3,650 and $914 are included in interest income in the second quarter of 2020 and 2019, respectively. Loan fees in 2020 include amortization of PPP loan fees.
(2)	Net accretion on acquired loan discounts of $53 is included in interest income in the second quarter of 2019.
(3)	Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%.
(4)	Unrealized gains (losses) of $133 and $(985) are excluded from the yield calculation in the second quarter of 2020 and 2019, respectively.

	For the Three Months Ended June 30,
	2020 Compared to 2019 Increase (Decrease) in Interest Income and Expense Due to Changes in:
	Volume			Rate			Total
	(In Thousands)
Interest-earning assets:
Loans, net of unearned income
Taxable	$	17,985		$	(17,223	)	$	762
Tax-exempt		(2	)		22			20
Total loans, net of unearned income		17,983			(17,201	)		782
Mortgages held for sale		50			(31	)		19
Debt securities:
Taxable		1,332			(432	)		900
Tax-exempt		(240	)		84			(156	)
Total debt securities		1,092			(348	)		744
Federal funds sold		(870	)		(1,095	)		(1,965	)
Interest-bearing balances with banks		1,381			(3,614	)		(2,233	)
Total interest-earning assets		19,636			(22,289	)		(2,653	)

Interest-bearing liabilities:
Interest-bearing demand deposits		167			(1,296	)		(1,129	)
Savings		21			(23	)		(2	)
Money market accounts		1,513			(14,376	)		(12,863	)
Time deposits		906			(396	)		510
Total interest-bearing deposits		2,607			(16,091	)		(13,484	)
Federal funds purchased		725			(3,096	)		(2,371	)
Other borrowed funds		-			-			-
Total interest-bearing liabilities		3,332			(19,187	)		(15,855	)
Increase in net interest income	$	16,304		$	(3,102	)	$	13,202

Decreases in average yields on loans drive unfavorable rate component. PPP loans originated during the second quarter of 2020 carry an interest rate of 1.00%, well below the average yield on other loans. However, this lower yield is offset by the accretion of net origination fees paid by the Small Business Administration on PPP loans. Decreases in average rates paid on interest-bearing deposits drive favorable rate component change. Growth in average loans, noninterest bearing deposits and equity drive favorable volume component change and overall change.

Average Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Six Months Ended June 30,
(In thousands, except Average Yields and Rates)

	2020							2019
			Interest								Interest
	Average		Earned /		Average			Average			Earned /		Average
	Balance		Paid		Yield / Rate			Balance			Paid		Yield / Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (1)(2)
Taxable	$	7,815,184	$	178,119		4.58	%	$	6,664,437		$	173,515		5.25	%
Tax-exempt (3)		32,242		654		4.08			31,355			592		3.81
Total loans, net of unearned income		7,847,426		178,773		4.58			6,695,792			174,107		5.24
Mortgage loans held for sale		8,780		93		2.13			3,421			76		4.48
Investment securities:
Taxable		755,994		10,246		2.73			542,351			7,939		2.95
Tax-exempt (3)		41,115		507		2.48			82,423			870		2.13
Total investment securities (4)		797,109		10,753		2.71			624,774			8,809		2.84
Federal funds sold		94,348		311		0.66			258,564			3,217		2.51
Interest-bearing balances with banks		659,374		2,078		0.63			424,841			5,357		2.54
Total interest-earning assets	$	9,407,037	$	192,008		4.10	%	$	8,007,392		$	191,566		4.82	%
Non-interest-earning assets:
Cash and due from banks		71,176							75,592
Net fixed assets and equipment		57,756							58,729
Allowance for loan losses, accrued interest and other assets		246,673							153,120
Total assets	$	9,782,642						$	8,294,833

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	974,826	$	2,220		0.46	%	$	926,176		$	4,007		0.87	%
Savings deposits		69,759		159		0.46			54,239			149		0.55
Money market accounts		4,173,597		16,682		0.80			3,845,792			34,932		1.83
Time deposits		841,686		8,439		2.02			696,682			7,297		2.11
Total interest-bearing deposits		6,059,868		27,500		0.91			5,522,889			46,385		1.69
Federal funds purchased		532,814		1,910		0.72			366,029			4,676		2.58
Other borrowings		64,709		1,562		4.85			64,675			1,562		4.87
Total interest-bearing liabilities	$	6,657,391	$	30,972		0.94	%	$	5,953,593		$	52,623		1.78	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		2,197,850							1,558,783
Other liabilities		56,013							35,275
Stockholders' equity		858,150							749,754
Accumulated other comprehensive (loss)		13,238							(2,572	)
Total liabilities and stockholders' equity	$	9,782,642						$	8,294,833
Net interest income			$	161,036							$	138,943
Net interest spread						3.16	%							3.04	%
Net interest margin						3.44	%							3.50	%


(1)			Non-accrual loans are included in average loan balances in all periods. Loan fees of $4,930 and $1,887 are included in interest income in 2020 and 2019, respectively. Loan fees in 2020 include amortization of PPP loan fees.
(2)			Accretion on acquired loan discounts of $91 are included in interest income in 2019.
(3)			Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%.
(4)			Unrealized gains (losses) of $231 and $(3,311) are excluded from the yield calculation in 2020 and 2019, respectively.

	For the Six Months Ended June 30,
	2020 Compared to 2019 Increase (Decrease) in Interest Income and Expense Due to Changes in:
	Volume			Rate			Total
	(In Thousands)
Interest-earning assets:
Loans, net of unearned income
Taxable	$	28,123		$	(23,519	)	$	4,604
Tax-exempt		18			44			62
Total loans, net of unearned income		28,141			(23,475	)		4,666
Mortgages held for sale		73			(56	)		17
Debt securities:
Taxable		2,954			(647	)		2,307
Tax-exempt		(490	)		127			(363	)
Total debt securities		2,464			(520	)		1,944
Federal funds sold		(1,346	)		(1,560	)		(2,906	)
Interest-bearing balances with banks		2,029			(5,308	)		(3,279	)
Total interest-earning assets		31,361			(30,919	)		442

Interest-bearing liabilities:
Interest-bearing demand deposits		202			(1,989	)		(1,787	)
Savings		39			(29	)		10
Money market accounts		2,778			(21,028	)		(18,250	)
Time deposits		1,483			(341	)		1,142
Total interest-bearing deposits		4,502			(23,387	)		(18,885	)
Federal funds purchased		1,546			(4,312	)		(2,766	)
Other borrowed funds		2			(2	)		-
Total interest-bearing liabilities		6,050			(27,701	)		(21,651	)
Increase in net interest income	$	25,311		$	(3,218	)	$	22,093

Decreases in the average rates paid on interest-bearing deposits drive favorable rate component change. Decreases in average yields on loans drive unfavorable rate component while growth in loans, non-interest-bearing deposits and average equity continues to drive favorable volume component change and overall change.

Provision for Loan Losses

The provision for loan losses was $10.3 million for the three months ended June 30, 2020, an increase of $5.4 million from $4.9 million for the three months ended June 30, 2019, and was $23.9 million for the six months ended June 30, 2020, a $14.1 million increase compared to $9.8 million for the six months ended June 30, 2019. Annualized net credit charge-offs to quarter-to-date average loans decreased two basis points to 20% for the second quarter of 2020 compared to 0.22% for the corresponding period in 2019 and increased two basis points to 0.23% for the six months ended June 30, 2020 compared to 0.21% for the corresponding period in 2019. Nonperforming loans decreased to $22.0 million, or 0.26% of total loans, at June 30, 2020 from $36.1 million, or 0.50% of total loans, at December 31, 2019, and were $32.1 million, or 0.46% of total loans, at June 30, 2019. Impaired loans increased to $72.2 million, or 0.87% of total loans, at June 30, 2020, compared to $43.1 million, or 0.59% of total loans, at December 31, 2019. We have evaluated risk factors related to macroeconomic conditions and uncertainty due to COVID-19 which resulted in additional reserve for loan losses related to external factors of $15.7 million at June 30, 2020. The allowance for loan losses totaled $91.5 million, or 1.10% of total loans, net of unearned income, at June 30, 2020, compared to $76.6 million, or 1.02% of loans, net of unearned income, at December 31, 2019.

Noninterest Income

Noninterest income totaled $7.0 million for the three months ended June 30, 2020, an increase of $1.2 million, or 21.7%, compared to the corresponding period in 2019, and totaled $13.7 million for the six months ended June 30, 2020, an increase of $3.0 million, or 51.7%, compared to the corresponding period in 2019. Mortgage banking income increased $1.0, or 93.8%, to $2.1 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, and increased $1.5 million, or 91.2%, to $3.2 million for the six months ended June 30, 2020 compared to $1.7 million for the same period in 2019. The number of loans originated for sale during the first half of 2020 increased approximately 61.3% when compared to the same period in 2019. Credit card income decreased $343,000 to $1.4 million for the three months ended June 30, 2020 compared to $1.7 million for the same period in 2019, and decreased $154,000 to $3.2 million for the six months ended June 30, 2020 compared to $3.3 million for the same period in 2019. The amount of spend on purchase cards increased $20.5 million while the amount of spend on business credit cards decreased $14.3 million during the second quarter of 2020 when compared to the second quarter of 2019. Purchase card spend carries lower profit margins than credit cards due to their higher rebates.

Noninterest Expense

Noninterest expense totaled $28.8 million for the three months ended June 30, 2020, an increase of $2.8 million, or 10.7%, compared to $26.0 million for the same period in 2019, and totaled $56.7 million for the six months ended June 30, 2020, an increase of $5.4 million, or 10.5%, compared to $51.3 million for the same period in 2019.

Details of expenses are as follows:

●

Salary and benefit expense increased $1.5 million, or 10.1%, to $15.8 million for the three months ended June 30, 2020 from $14.3 million for the same period in 2019, and increased $2.8 million, or 9.9%, to $31.4 million for the six months ended June 30, 2020 from $28.6 million for the same period in 2019. Total employees decreased from 495 as of June 30, 2019 to 492 as of June 30, 2020.

●

Equipment and occupancy expense increased $147,000, or 6.4%, to $2.4 million for the three months ended June 30, 2020 from $2.3 million for the corresponding period in 2019, and increased $288,000, or 6.3%, to $4.8 million from $4.5 million for the six months ended June 30, 2020 compared to the corresponding period in 2019.

●

Third party processing and other services increased $789,000, or 29.0%, to $3.5 million for the three months ended June 30, 2020 from $2.3 million for the corresponding period in 2019, and increased $1.7 million, or 33.6%, to $6.8 million from $5.1 million for the six months ended June 30, 2020 compared to the corresponding period in 2019. Limited-term licenses were added to our loan origination systems to enable more employees to assist customers with their PPP loans. These licenses added $514,000 to third party processing expenses during the second quarter of 2020.

●

Professional services expense decreased $100,000, or 8.4%, to $1.1 million for the three months ended June 30, 2020 compared to the same period in 2019, and decreased $146,000 or 6.7%, to $2.0 million for the six months ended June 30, 2020 compared to the same period in 2019.

●

FDIC and other regulatory assessments decreased $486,000 to $595,000 for the three months ended June 30, 2020 compared to the same period in 2019, and decreased $173,000 to $1.9 million for the six months ended June 30, 2020 compared to the same period in 2019. Lower growth in assets during the second quarter of 2020, excluding PPP loans, resulted in us adjusting our accrual for assessments to be paid at the end of the third quarter of 2020.

●

OREO expense increased $1.1 million, or 515%, to $1.3 million for the three months ended June 30, 2020 compared to the same period in 2019, and increased $1.7 million, or 714%, to $1.9 million for the six months ended June 30, 2020 compared to the same period in 2019. Updated appraisals resulted in write-downs in values on two properties in our Birmingham, Alabama market.

●

Other operating expenses decreased $100,000, or 2.4%, to $4.1 million for the three months ended June 30, 2020 compared to the same period in 2019, and decreased $822,000, or 9.6%, to $7.7 million for the six months ended June 30, 2020 compared to the same period in 2019.

The following table presents our non-interest income and non-interest expense for the three and six month periods ending June 30, 2020 compared to the same periods in 2019.

	Three Months Ended June 30,											Six Months Ended June 30,
	2020		2019			$ change			% change			2020		2019			$ change			% change
Non-interest income:
Service charges on deposit accounts	$	1,823	$	1,786		$	37			2.1	%	$	3,739	$	3,488		$	251			7.2	%
Mortgage banking		2,107		1,087			1,020			93.8	%		3,178		1,662			1,516			91.2	%
Credit card income		1,398		1,741			(343	)		(19.7	%)		3,163		3,317			(154	)		(4.6	%)
Securities gains		-		(6	)		6			(100.0	%)		-		(6	)		6			(100.0	%)
Increase in cash surrender value life insurance		1,464		778			686			88.2	%		2,917		1,540			1,377			89.4	%
Other operating income		241		392			(151	)		(38.5	%)		710		721			(11	)		(1.5	%)
Total non-interest income	$	7,033	$	5,778		$	1,255			21.7	%	$	13,707	$	10,722		$	2,985			27.8	%

Non-interest expense:
Salaries and employee benefits	$	15,792	$	14,339		$	1,453			10.1	%	$	31,450	$	28,604		$	2,846			9.9	%
Equipment and occupancy expense		2,434		2,287			147			6.4	%		4,834		4,546			288			6.3	%
Third party processing and other services		3,513		2,724			789			29.0	%		6,858		5,135			1,723			33.6	%
Professional services		1,091		1,191			(100	)		(8.4	%)		2,039		2,185			(146	)		(6.7	%)
FDIC and other regulatory assessments		595		1,081			(486	)		(45.0	%)		1,927		2,100			(173	)		(8.2	%)
OREO expense		1,303		212			1,091			514.6	%		1,904		234			1,670			713.7	%
Other operating expense		4,088		4,188			(100	)		(2.4	%)		7,724		8,546			(822	)		(9.6	%)
Total non-interest expense	$	28,816	$	26,022		$	2,794			10.7	%	$	56,736	$	51,350		$	5,386			10.5	%

Income Tax Expense

Income tax expense was $10.7 million for the three months ended June 30, 2020 compared to $9.3 million for the same period in 2019, and was $18.8 million for the six months ended June 30, 2020 compared to $17.8 million for the same period in 2019. Our effective tax rate for the three and six months ended June 30, 2020 was 21.0% and 20.0%, respectively, compared to 20.7% and 20.2% for the corresponding periods in 2019, respectively. We recognized excess tax benefits as a credit to our income tax expense from the exercise and vesting of stock options and restricted stock during the three and six months ended June 30, 2020 of $136,000 and $1.2 million, respectively, compared to $186,000 and $958,000 during the three and six months ended June 30, 2019, respectively. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance.

We own real estate investment trusts for the purpose of holding and managing participations in residential mortgages and commercial real estate loans originated by the Bank. The trusts are wholly-owned subsidiaries of a trust holding company, which in turn is an indirect wholly-owned subsidiary of the Bank. The trusts earn interest income on the loans they hold and incur operating expenses related to their activities. They pay their net earnings, in the form of dividends, to the Bank, which receives a deduction for state income taxes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Like all financial institutions, we are subject to market risk from changes in interest rates. Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short-term rates may be rising while longer-term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates.

To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall or remain the same. Our asset-liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next 12 months. The asset-liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors.

The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap”, which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2019, and there have been no material changes to our sensitivity to changes in interest rates since December 31, 2019, as disclosed in our Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

CEO and CFO Certification.

Appearing as exhibits to this report are Certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). The Certifications are required to be made by Rule 13a-14 or Rule 15d-14 under the Securities Exchange Act of 1934. This item contains the information about the evaluation that is referred to in the Certifications, and the information set forth below in this Item 4 should be read in conjunction with the Certifications for a more complete understanding of the Certifications.

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We conducted an evaluation (the "Evaluation") of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of June 30, 2020. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2020, our disclosure controls and procedures are effective to ensure that material information relating to the Company. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we may be a party to various legal proceedings arising in the ordinary course of business. Management does not believe the Company or the Bank is currently a party to any material legal proceedings.

ITEM 1A. RISK FACTORS

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of:

The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. Such measures have included travel bans and restrictions, curfews, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in the near future.

The outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our customers or business partners, including but not limited to:

●

Credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;

●

Possible business disruptions experienced by our vendors and business partners in carrying out work that supports our operations;

●

Heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic; and,

●

Operational failures due to changes in our normal business practices necessitated by our internal measures to protect our employees and government-mandated measures intended to slow the spread of the virus.

These factors may exist for an extended period of time and may continue to adversely affect our business, financial condition and operations even after the COVID-19 outbreak has subsided.

The extent to which the pandemic impacts our business, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Additionally, future outbreaks of COVID-19, or other viruses, may occur.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Therefore, the risk factors discussed in our Annual Report on Form 10-K could be heightened, changed or be added to in the future. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part 1, Item 2 above.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit:	Description
31.01	Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02	Certification of principal financial officer pursuant to Rule 13a-14(a).
32.01	Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02	Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*denotes compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SERVISFIRST BANCSHARES, INC.



Date: July 30, 2020	By	/s/ Thomas A. Broughton III
		Thomas A. Broughton III
		President and Chief Executive Officer


Date: July 30, 2020	By	/s/ William M. Foshee
		William M. Foshee
		Chief Financial Officer