ServisFirst Bancshares, Inc. - Quarter Report: 2019 September (Form 10-Q)

sfbs20190930_10q.htm

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 SEPTEMBER 30, 2019

☐	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(b) 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 Stock Market LLC

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 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,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the 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 Exchange 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 October 25, 2019
Common stock, $.001 par value	53,592,013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION		43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	44
Item 6.	Exhibits	44

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)

	September 30, 2019			December 31, 2018
	(Unaudited)				(1)
ASSETS
Cash and due from banks	$	108,804		$	97,516
Interest-bearing balances due from depository institutions		463,625			360,534
Federal funds sold		474,298			223,845
Cash and cash equivalents		1,046,727			681,895
Available for sale debt securities, at fair value		688,021			590,184
Held to maturity debt securities (fair value of $250 at September 30, 2019)		250			-
Mortgage loans held for sale		8,691			120
Loans		7,022,069			6,533,499
Less allowance for loan losses		(77,192	)		(68,600	)
Loans, net		6,944,877			6,464,899
Premises and equipment, net		56,570			57,822
Accrued interest and dividends receivable		25,423			24,070
Deferred tax assets		24,426			27,277
Other real estate owned and repossessed assets		5,337			5,169
Bank owned life insurance contracts		152,976			130,649
Goodwill and other identifiable intangible assets		14,246			14,449
Other assets		37,568			10,848
Total assets	$	9,005,112		$	8,007,382
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	1,678,672		$	1,557,341
Interest-bearing		6,045,486			5,358,367
Total deposits		7,724,158			6,915,708
Federal funds purchased		370,231			288,725
Other borrowings		64,693			64,666
Accrued interest payable		11,476			10,381
Other liabilities		24,017			12,699
Total liabilities		8,194,575			7,292,179
Stockholders' equity:
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at September 30, 2019 and December 31, 2018		-			-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,579,113 shares issued and outstanding at September 30, 2019, and 53,375,195 shares issued and outstanding at December 31, 2018		54			53
Additional paid-in capital		219,234			218,521
Retained earnings		584,968			500,868
Accumulated other comprehensive income (loss)		5,779			(4,741	)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.		810,035			714,701
Noncontrolling interest		502			502
Total stockholders' equity		810,537			715,203
Total liabilities and stockholders' equity	$	9,005,112		$	8,007,382

(1) Derived from audited financial statements.

See Notes to Consolidated Financial Statements.

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019			2018		2019		2018
Interest income:
Interest and fees on loans	$	90,767		$	78,991	$	264,901	$	222,285
Taxable securities		4,367			3,276		12,306		9,148
Nontaxable securities		316			583		1,155		1,862
Federal funds sold		1,768			892		4,985		2,137
Other interest and dividends		3,912			316		9,269		1,031
Total interest income		101,130			84,058		292,616		236,463
Interest expense:
Deposits		24,787			15,210		71,172		36,545
Borrowed funds		3,338			1,985		9,576		6,097
Total interest expense		28,125			17,195		80,748		42,642
Net interest income		73,005			66,863		211,868		193,821
Provision for loan losses		6,985			6,624		16,754		14,884
Net interest income after provision for loan losses		66,020			60,239		195,114		178,937
Noninterest income:
Service charges on deposit accounts		1,735			1,595		5,223		4,833
Mortgage banking		1,333			789		2,995		2,096
Credit card income		1,868			1,414		5,185		4,030
Securities gains		34			186		28		190
Increase in cash surrender value life insurance		787			787		2,327		2,350
Other operating income		453			294		1,172		922
Total noninterest income		6,210			5,065		16,930		14,421
Noninterest expenses:
Salaries and employee benefits		15,499			13,070		44,103		39,464
Equipment and occupancy expense		2,387			2,193		6,933		6,260
Professional services		887			853		3,072		2,582
FDIC and other regulatory (credits) assessments		(296	)		675		1,804		2,967
OREO expense		78			289		312		765
Other operating expenses		6,606			5,544		20,285		17,136
Total noninterest expenses		25,161			22,624		76,509		69,174
Income before income taxes		47,069			42,680		135,535		124,184
Provision for income taxes		9,506			8,120		27,329		23,481
Net income		37,563			34,560		108,206		100,703
Preferred stock dividends		-			-		31		31
Net income available to common stockholders	$	37,563		$	34,560	$	108,175	$	100,672

Basic earnings per common share	$	0.70		$	0.65	$	2.02	$	1.89
Diluted earnings per common share	$	0.69		$	0.64	$	2.00	$	1.86

See Notes to Consolidated Financial Statements.

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019		2018
Net income	$	37,563	$	34,560		$	108,206	$	100,703
Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) arising during period from securities available for sale, net of tax of $427 and $2,791 for the three and nine months ended September 30, 2019, respectively, and net of benefit of $(733) and $(2,589) for the three and nine months ended September 30, 2018, respectively		1,443		(2,757	)		10,497		(9,740	)
Reclassification adjustment for net gains on sale of securities available for sale, net of tax of $6 and $5 for the three and nine months ended September 30, 2019, respectively, and $39 and $40 for the three and nine months ended September 30, 2018, respectively		18		147			23		150
Other comprehensive income (loss), net of tax		1,461		(2,610	)		10,520		(9,590	)
Comprehensive income	$	39,024	$	31,950		$	118,726	$	91,113

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)(Unaudited)

	Three Months Ended September 30,
	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling interest		Total Stockholders' Equity
Balance, July 1, 2018	$	-	$	53	$	217,765		$	443,972		$	(7,178	)	$	502	$	655,114
Common dividends declared, $0.11 per share		-		-		-			(5,851	)		-			-		(5,851	)
Issue 46,074 shares of common stock upon exercise of stock options		-		-		465			-			-			-		465
9,426 shares of common stock withheld in net settlement upon exercise of stock options		-		-		(370	)		-			-			-		(370	)
Stock-based compensation expense		-		-		202			-			-			-		202
Other comprehensive income, net of tax		-		-		-			-			(2,610	)		-		(2,610	)
Net income		-		-		-			34,560			-			-		34,560
Balance, September 30, 2018	$	-	$	53	$	218,062		$	472,681		$	(9,788	)	$	502	$	681,510

Balance, July 1, 2019	$	-	$	54	$	218,658		$	555,425		$	4,318		$	502	$	778,957
Common dividends declared, $0.15 per share		-		-		-			(8,020	)		-			-		(8,020	)
Issue 41,731 shares of common stock upon exercise of stock options		-		-		571			-			-			-		571
9,069 shares of common stock withheld in net settlement upon exercise of stock options		-		-		(289	)		-			-			-		(289	)
Stock-based compensation expense		-		-		294			-			-			-		294
Other comprehensive loss, net of tax		-		-		-			-			1,461			-		1,461
Net income		-		-		-			37,563			-			-		37,563
Balance, September 30, 2019	$	-	$	54	$	219,234		$	584,968		$	5,779		$	502	$	810,537

	Nine Months Ended September 30,
	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling interest		Total Stockholders' Equity
Balance, January 1, 2018	$	-	$	53	$	217,693		$	389,554		$	(198	)	$	502	$	607,604
Common dividends paid, $0.22 per share		-		-		-			(11,694	)		-			-		(11,694	)
Common dividends declared, $0.11 per share		-		-		-			(5,851	)		-			-		(5,851	)
Preferred dividends paid		-		-		-			(31	)		-			-		(31	)
Issue 191,371 shares of common stock upon exercise of stock options		-		-		1,325			-			-			-		1,325
39,965 shares of common stock withheld in net settlement upon exercise of stock options		-		-		(1,640	)		-			-			-		(1,640	)
Stock-based compensation expense		-		-		684			-			-			-		684
Other comprehensive income, net of tax		-		-		-			-			(9,590	)		-		(9,590	)
Net income		-		-		-			100,703			-			-		100,703
Balance, September 30, 2018	$	-	$	53	$	218,062		$	472,681		$	(9,788	)	$	502	$	681,510

Balance, January 1, 2019	$	-	$	53	$	218,521		$	500,868		$	(4,741	)	$	502	$	715,203
Common dividends paid, $0.30 per share		-		-		-			(16,038	)		-			-		(16,038	)
Common dividends declared, $0.15 per share		-		-		-			(8,037	)		-			-		(8,037	)
Preferred dividends paid		-		-		-			(31	)		-			-		(31	)
Issue 185,044 shares of common stock upon exercise of stock options		-		1		1,674			-			-			-		1,675
54,256 shares of common stock withheld in net settlement upon exercise of stock options		-		-		(1,742	)		-			-			-		(1,742	)
Stock-based compensation expense		-		-		781			-			-			-		781
Other comprehensive loss, net of tax		-		-		-			-			10,520			-		10,520
Net income		-		-		-			108,206			-			-		108,206
Balance, September 30, 2019	$	-	$	54	$	219,234		$	584,968		$	5,779		$	502	$	810,537

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES
Net income	$	108,206		$	100,703
Adjustments to reconcile net income to net cash provided by
Deferred tax expense		2,851			754
Provision for loan losses		16,754			14,884
Depreciation		2,774			2,548
Accretion on acquired loans		(91	)		(147	)
Amortization of core deposit intangible		203			202
Net amortization of debt securities available for sale		2,040			2,268
Increase in accrued interest and dividends receivable		(1,353	)		(4,094	)
Stock-based compensation expense		781			684
Increase in accrued interest payable		1,095			3,591
Proceeds from sale of mortgage loans held for sale		90,188			81,319
Originations of mortgage loans held for sale		(95,764	)		(80,041	)
Net gain on sale of debt securities available for sale		(28	)		(15	)
Gain on sale of equity securities		-			(175	)
Gain on sale of mortgage loans held for sale		(2,995	)		(2,096	)
Net (gain) loss on sale of other real estate owned and repossessed assets		(6	)		3
Write down of other real estate owned and repossessed assets		288			488
Operating (income) loss of tax credit partnerships		(16	)		128
Increase in cash surrender value of life insurance contracts		(2,327	)		(2,350	)
Net change in other assets, liabilities, and other operating activities		(19,766	)		(2,608	)
Net cash provided by operating activities		102,834			116,046
INVESTMENT ACTIVITIES
Purchase of debt securities available for sale		(186,240	)		(122,821	)
Proceeds from maturities, calls and paydowns of debt securities available for sale		100,687			63,803
Proceeds from sale of debt securities available for sale		-			5,736
Purchase of debt securities held to maturity		(250	)		-
Proceeds from sale of equity securities		-			305
Purchase of BOLI contracts		(20,000	)		-
Increase in loans		(505,224	)		(520,610	)
Purchase of premises and equipment		(1,522	)		(1,530	)
Proceeds from sale of other real estate owned and repossessed assets		727			1,572
Net cash used in investing activities		(611,822	)		(573,545	)
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits		121,331			64,121
Net increase in interest-bearing deposits		687,119			349,556
Net increase (decrease) in federal funds purchased		81,506			(55,703	)
Repayment of Federal Home Loan Bank advances		-			(200	)
Proceeds from exercise of stock options		1,675			1,325
Taxes paid in net settlement of tax obligation upon exercise of stock options		(1,742	)		(1,640	)
Dividends paid on common stock		(16,038	)		(11,694	)
Dividends paid on preferred stock		(31	)		(31	)
Net cash provided by financing activities		873,820			345,734
Net increase (decrease) in cash and cash equivalents		364,832			(111,765	)
Cash and cash equivalents at beginning of period		681,895			477,586
Cash and cash equivalents at end of period	$	1,046,727		$	365,821
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest	$	79,653		$	39,051
Income taxes		34,464			20,235
Income tax refund		(86	)		(2	)
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans	$	1,177		$	1,206
Internally financed sale of other real estate owned		-			130
Dividends declared		8,037			5,851

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(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, 2018.

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

Leases

The Company leases certain office space and equipment under operating leases. Accounting Standards Update 2016-02, “Leases (Topic 842)” requires that operating leases in effect as of date of adoption, January 1, 2019 for the Company, be recognized as a liability to make lease payments and as an asset representing the right to use the asset during the lease term, or “lease liability” and “right-of-use asset”, respectively. The lease liability is measured by the present value of remaining lease payments, discounted at the Company’s incremental borrowing rate.

Certain of the leases include one or more renewal options that extend the initial lease term one to five years. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, a majority of renewals to extend lease terms are not included in the right-of-use assets and lease liabilities as they are not reasonably certain to be exercised. Renewal options are regularly evaluated and when they are reasonably certain to be exercised, are included in lease terms.

None of the Company’s leases provide an implicit rate. The Company uses its incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The Company has made an accounting policy election to not apply the recognition requirements in ASU 2016-02 to short-term leases. The Company has also elected to use the practical expedients allowed by the new standard as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases.

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In Thousands, Except Shares and Per Share Data)
Earnings per common share
Weighted average common shares outstanding		53,544,747		53,171,144		53,508,710		53,134,861
Net income available to common stockholders	$	37,563	$	34,560	$	108,175	$	100,672
Basic earnings per common share	$	0.70	$	0.65	$	2.02	$	1.89

Weighted average common shares outstanding		53,544,747		53,171,144		53,508,710		53,134,861
Dilutive effects of assumed conversions and exercise of stock options and warrants		551,621		1,020,078		578,700		1,055,383
Weighted average common and dilutive potential common shares outstanding		54,096,368		54,191,222		54,087,410		54,190,244
Net income available to common stockholders	$	37,563	$	34,560	$	108,175	$	100,672
Diluted earnings per common share	$	0.69	$	0.64	$	2.00	$	1.86

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2019 and December 31, 2018 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
	Cost		Gain		Loss			Value
September 30, 2019	(In Thousands)
Securities Available for Sale
U.S. Treasury securities	$	51,888	$	311	$	(1	)	$	52,198
Government Agency securities		18,234		129		(2	)		18,361
Mortgage-backed securities		398,818		4,425		(604	)		402,639
State and municipal securities		65,270		330		(32	)		65,568
Corporate debt		146,551		2,834		(130	)		149,255
Total	$	680,761	$	8,029	$	(769	)	$	688,021
Securities Held to Maturity
State and municipal securities		250		-		-			250
Total	$	250	$	-	$	-		$	250

December 31, 2018
Securities Available for Sale
U.S. Treasury securities	$	58,750	$	75	$	(397	)	$	58,428
Government Agency securities		18,784		3		(222	)		18,565
Mortgage-backed securities		309,244		591		(5,531	)		304,304
State and municipal securities		106,465		208		(679	)		105,994
Corporate debt		102,982		668		(757	)		102,893
Total	$	596,225	$	1,545	$	(7,586	)	$	590,184

The amortized cost and fair value of debt securities as of September 30, 2019 and December 31, 2018 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.

	September 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Debt securities available for sale
Due within one year	$	55,777	$	55,973	$	38,343	$	38,225
Due from one to five years		106,374		107,205		167,873		166,380
Due from five to ten years		117,885		120,258		77,811		78,276
Due after ten years		1,907		1,946		2,954		2,999
Mortgage-backed securities		398,818		402,639		309,244		304,304
	$	680,761	$	688,021	$	596,225	$	590,184

Debt securities held to maturity
Due from one to five years	$	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 September 30, 2019 and December 31, 2018 was $408.9 million and $281.9 million, respectively.

The following table identifies, as of September 30, 2019 and December 31, 2018, 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 September 30, 2019, 43 of the Company’s 691 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 September 30, 2019. 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)
September 30, 2019
U.S. Treasury securities	$	-		$	-	$	(1	)	$	2,998	$	(1	)	$	2,998
Government Agency securities		(2	)		267		-			-		(2	)		267
Mortgage-backed securities		(457	)		77,726		(147	)		28,217		(604	)		105,943
State and municipal securities		(11	)		6,170		(21	)		4,035		(32	)		10,205
Corporate debt		(130	)		17,036		-			-		(130	)		17,036
Total	$	(600	)	$	101,199	$	(169	)	$	35,250	$	(769	)	$	136,449

December 31, 2018
U.S. Treasury securities	$	(8	)		1,001	$	(388	)	$	32,449	$	(396	)	$	34,206
Government Agency securities		-			-		(223	)		18,429		(223	)		17,673
Mortgage-backed securities		(539	)		67,721		(4,992	)		204,260		(5,531	)		271,981
State and municipal securities		(101	)		20,821		(578	)		52,190		(679	)		73,011
Corporate debt		(315	)		36,245		(442	)		13,474		(757	)		49,718
Total	$	(963	)	$	125,788	$	(6,623	)	$	320,802	$	(7,586	)	$	446,590

NOTE 5 – LOANS

The following table details the Company’s loans at September 30, 2019 and December 31, 2018:

	September 30,			December 31,
	2019			2018

	(Dollars In Thousands)
Commercial, financial and agricultural	$	2,653,934		$	2,513,225
Real estate - construction		550,871			533,192
Real estate - mortgage:
Owner-occupied commercial		1,526,911			1,463,887
1-4 family mortgage		632,346			621,634
Other mortgage		1,592,072			1,337,068
Subtotal: Real estate - mortgage		3,751,329			3,422,589
Consumer		65,935			64,493
Total Loans		7,022,069			6,533,499
Less: Allowance for loan losses		(77,192	)		(68,600	)
Net Loans	$	6,944,877		$	6,464,899


Commercial, financial and agricultural		37.79	%		38.47	%
Real estate - construction		7.85	%		8.16	%
Real estate - mortgage:
Owner-occupied commercial		21.74	%		22.41	%
1-4 family mortgage		9.01	%		9.51	%
Other mortgage		22.67	%		20.46	%
Subtotal: Real estate - mortgage		53.42	%		52.39	%
Consumer		0.94	%		0.99	%
Total Loans		100.00	%		100.00	%

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 obligor (or obligors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

●

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

●

Substandard – loans that exhibit well-defined weakness or weaknesses that 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 September 30, 2019 and December 31, 2018 were as follows:

			Special
September 30, 2019	Pass		Mention		Substandard		Doubtful		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,573,465	$	58,639	$	21,830	$	-	$	2,653,934
Real estate - construction		540,560		6,011		4,300		-		550,871
Real estate - mortgage:
Owner-occupied commercial		1,492,829		12,972		21,110		-		1,526,911
1-4 family mortgage		629,806		947		1,593		-		632,346
Other mortgage		1,571,238		19,332		1,502		-		1,592,072
Total real estate mortgage		3,693,873		33,251		24,205		-		3,751,329
Consumer		65,935		-		-		-		65,935
Total	$	6,873,833	$	97,901	$	50,335	$	-	$	7,022,069

			Special
December 31, 2018	Pass		Mention		Substandard		Doubtful		Total

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

Loans by performance status as of September 30, 2019 and December 31, 2018 were as follows:

September 30, 2019	Performing		Nonperforming		Total

	(In Thousands)
Commercial, financial and agricultural	$	2,637,785	$	16,149	$	2,653,934
Real estate - construction		549,283		1,588		550,871
Real estate - mortgage:
Owner-occupied commercial		1,511,666		15,245		1,526,911
1-4 family mortgage		630,755		1,591		632,346
Other mortgage		1,585,609		6,463		1,592,072
Total real estate mortgage		3,728,030		23,299		3,751,329
Consumer		65,923		12		65,935
Total	$	6,981,020	$	41,049	$	7,022,069

December 31, 2018	Performing		Nonperforming		Total

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

Loans by past due status as of September 30, 2019 and December 31, 2018 were as follows:

September 30, 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	$	4,519	$	1,127	$	119	$	5,765	$	16,030	$	2,632,139	$	2,653,934
Real estate - construction		650		-		-		650		1,588		548,633		550,871
Real estate - mortgage:
Owner-occupied commercial		9,005		-		118		9,123		15,127		1,502,661		1,526,911
1-4 family mortgage		2,229		600		112		2,941		1,480		627,925		632,346
Other mortgage		31		375		4,956		5,362		1,507		1,585,203		1,592,072
Total real estate - mortgage		11,265		975		5,186		17,426		18,114		3,715,789		3,751,329
Consumer		31		44		12		87		-		65,848		65,935
Total	$	16,465	$	2,146	$	5,317	$	23,928	$	35,732	$	6,962,409	$	7,022,069

December 31, 2018	Past Due Status (Accruing Loans)
							Total Past
	30-59 Days		60-89 Days		90+ Days		Due		Non-Accrual		Current		Total Loans

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

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 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 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.

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.

During the third quarter of 2019, the Company recorded a $7.4 million payment resulting from the termination of a Loan Guarantee Program (“LGP”) operated by the State of Alabama. The payment was recorded as an increase to the allowance for loan losses specifically related to loans formerly enrolled in this program, in accordance with the Company’s established ALLL review and evaluation criteria. In general, loans enrolled in the program had a collateral shortfall or other enhanced credit risk. In return for the Company’s acceptance of these higher risk loans, the Company received a guarantee of up to 50% of losses in the event of a borrower’s default. These were loans that would have otherwise not met the Company’s loan underwriting criteria. The program required a 1% fee on the commitment balance at origination. As of September 30, 2019, the Company had 72 loans outstanding totaling $44.3 million that were formerly enrolled in the loan guarantee program. Of this total, $37.8 million were categorized as pass within the Company's credit quality asset classification, $5.2 million were categorized as Special Mention and $1.3 million were categorized as Substandard.

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 nine months ended September 30, 2019 and September 30, 2018. 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 September 30, 2019
Allowance for loan losses:
Balance at June 30, 2019	$	38,709		$	3,419		$	28,783		$	475		$	71,386
Charge-offs		(3,626	)		-			(4,974	)		(172	)		(8,772	)
Recoveries		126			1			-			60			187
Allocation from LGP		4,905			115			2,386			-			7,406
Provision		5,108			(343	)		2,069			151			6,985
Balance at September 30, 2019	$	45,222		$	3,192		$	28,264		$	514		$	77,192

	Three Months Ended September 30, 2018
Allowance for loan losses:
Balance at June 30, 2018	$	36,178		$	4,062		$	23,438		$	561		$	64,239
Charge-offs		(3,923	)		-			(48	)		(76	)		(4,047	)
Recoveries		52			4			1			6			63
Provision		6,794			(132	)		(62	)		24			6,624
Balance at September 30, 2018	$	39,101		$	3,934		$	23,329		$	515		$	66,879

	Nine Months Ended September 30, 2019
Allowance for loan losses:
Balance at December 31, 2018	$	39,016		$	3,522		$	25,508		$	554		$	68,600
Charge-offs		(10,273	)		-			(5,193	)		(453	)		(15,919	)
Recoveries		255			2			11			83			351
Allocation from LGP		4,905			115			2,386			-			7,406
Provision		11,319			(447	)		5,552			330			16,754
Balance at September 30, 2019	$	45,222		$	3,192		$	28,264		$	514		$	77,192

	Nine Months Ended September 30, 2018
Allowance for loan losses:
Balance at December 31, 2017	$	32,880		$	4,989		$	21,022		$	515		$	59,406
Charge-offs		(6,743	)		-			(869	)		(211	)		(7,823	)
Recoveries		229			108			44			31			412
Provision		12,735			(1,163	)		3,132			180			14,884
Balance at September 30, 2018	$	39,101		$	3,934		$	23,329		$	515		$	66,879

	As of September 30, 2019
Allowance for loan losses:
Individually Evaluated for Impairment	$	7,165	$	110	$	2,013	$	-	$	9,288
Collectively Evaluated for Impairment		38,057		3,082		26,251		514		67,904

Loans:
Ending Balance	$	2,653,934	$	550,871	$	3,751,329	$	65,935	$	7,022,069
Individually Evaluated for Impairment		21,855		4,332		25,306		-		51,493
Collectively Evaluated for Impairment		2,632,079		546,539		3,726,023		65,935		6,970,576

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

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

The following table presents details of the Company’s impaired loans as of September 30, 2019 and December 31, 2018, respectively. Loans which have been fully charged off do not appear in the tables.

							For the three months					For the nine months
							ended September 30,					ended September 30,
	September 30, 2019						2019					2019
									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	$	2,705	$	4,308	$	-	$	3,186	$	50		$	3,799	$	129
Real estate - construction		2,744		2,747		-		2,423		39			1,834		80
Real estate - mortgage:
Owner-occupied commercial		7,341		7,436		-		7,414		120			7,625		506
1-4 family mortgage		298		298		-		315		-			321		2
Other mortgage		-		-		-		-		-			-		-
Total real estate - mortgage		7,639		7,734		-		7,729		120			7,946		508
Consumer		-		-		-		-		-			-		-
Total with no allowance recorded		13,088		14,789		-		13,338		209			13,579		717

With an allowance recorded:
Commercial, financial and agricultural		19,150		26,551		7,165		21,260		15			22,568		467
Real estate - construction		1,588		1,588		110		1,588		(14	)		1,623		27
Real estate - mortgage:
Owner-occupied commercial		14,867		18,173		1,159		19,664		61			19,850		548
1-4 family mortgage		1,293		1,293		204		1,293		1			1,296		3
Other mortgage		1,507		1,507		650		1,507		(23	)		1,456		21
Total real estate - mortgage		17,667		20,973		2,013		22,464		39			22,602		572
Consumer		-		-		-		-		-			-		-
Total with allowance recorded		38,405		49,112		9,288		45,312		40			46,793		1,066

Total Impaired Loans:
Commercial, financial and agricultural		21,855		30,859		7,165		24,446		65			26,367		596
Real estate - construction		4,332		4,335		110		4,011		25			3,457		107
Real estate - mortgage:
Owner-occupied commercial		22,208		25,609		1,159		27,078		181			27,475		1,054
1-4 family mortgage		1,591		1,591		204		1,608		1			1,617		5
Other mortgage		1,507		1,507		650		1,507		(23	)		1,456		21
Total real estate - mortgage		25,306		28,707		2,013		30,193		159			30,548		1,080
Consumer		-		-		-		-		-			-		-
Total impaired loans	$	51,493	$	63,901	$	9,288	$	58,650	$	249		$	60,372	$	1,783

December 31, 2018
							For the twelve months
							ended December 31, 2018
			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	$	6,064	$	6,064	$	-	$	6,142	$	237
Real estate - construction		464		467		-		524		28
Real estate - mortgage:
Owner-occupied commercial		1,763		1,947		-		2,223		120
1-4 family mortgage		1,071		1,071		-		1,088		21
Other mortgage		5,061		5,061		-		5,133		252
Total real estate - mortgage		7,895		8,079		-		8,444		393
Consumer		-		-		-		-		-
Total with no allowance recorded		14,423		14,610		-		15,110		658

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

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

Troubled Debt Restructurings (“TDR”) at September 30, 2019, December 31, 2018 and September 30, 2018 totaled $11.2 million, $14.6 million and $16.6 million, respectively. TDRs that were in accrual status totaled $3.5 million, $3.1 million and $15.5 million for the same comparative periods. At September 30, 2019, the Company had a related allowance for loan losses of $1.8 million allocated to these TDRs, compared to $4.3 million at December 31, 2018 and $3.7 million at September 30, 2018. TDR activity by portfolio segment for the three and nine months ended September 30, 2019 and 2018 is presented in the table below.

	Three Months Ended September 30, 2019						Nine Months Ended September 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
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

	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
			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		6	$	7,242	$	7,242		6	$	7,242	$	7,242
Real estate - construction		1		997		997		1		997		997
Real estate - mortgage:
Owner-occupied commercial		2		3,664		3,664		2		3,664		3,664
1-4 family mortgage		1		850		850		1		850		850
Other mortgage		-		-		-		-		-		-
Total real estate mortgage		3		4,514		4,514		3		4,514		4,514
Consumer		-		-		-		-		-		-
		10	$	12,753	$	12,753		10	$	12,753	$	12,753

The following table presents TDRs by portfolio segment which defaulted during the three and nine months ended September 30, 2019 and 2018, and which were modified in the previous twelve months (i.e., twelve months prior to default). For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of September 30, 2019, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018

	(In thousands)
Defaulted during the period, where modified in a TDR twelve months prior to default
Commercial, financial and agricultural	$	-	$	-	$	325	$	268
Real estate - construction		-		-		-		-
Real estate - mortgage:
Owner-occupied commercial		-		-		-		-
1-4 family mortgage		-		-		-		-
Other mortgage		-		-		-		-
Total real estate mortgage		-		-		-		-
Consumer		-		-		-		-
	$	-	$	-	$	325	$	268

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 9.7 years. At September 30, 2019, the Company had lease right-of-use assets and lease liabilities totaling $12.3 million and $12.4 million, respectively, which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheet.

Maturities of operating lease liabilities as of September 30, 2019 are as follows:

	September 30, 2019
	(In Thousands)
2019 (remaining)	$	819
2020		3,297
2021		2,680
2022		2,655
2023		2,181
thereafter		3,749
Total lease payments		15,381
Less: imputed interest		(2,977	)
Present value of operating lease liabilities	$	12,404

As of September 30, 2019, the weighted average remaining term of operating leases is 5.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.88%.

Operating cash flows related to leases were $888,000 and $2,451,000 for the three and nine months ended September 30, 2019, respectively.

Lease costs during the three and nine months ended September 30, 2019 were as follows (in thousands):

	Three Months Ended September 30, 2019
Operating lease cost	$	809
Short-term lease cost		8
Variable lease cost		49
Sublease income		(23	)
Net lease cost	$	843

	Nine Months Ended September 30, 2019
Operating lease cost	$	2,500
Short-term lease cost		21
Variable lease cost		151
Sublease income		(35	)
Net lease cost	$	2,637

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 approximately $294,000 and $781,000 for the three and nine months ended September 30, 2019 and $202,000 and $684,000 for the three and nine months ended September 30, 2018.

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			2018
Expected volatility		40.00	%		24.72	%
Expected dividends		1.74	%		1.06	%
Expected term (in years)		6.7			6.3
Risk-free rate		2.56	%		2.67	%

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2019 and September 30, 2018 was $12.60 and $10.98, respectively.

The following table summarizes stock option activity during the nine months ended September 30, 2019 and September 30, 2018:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (years)		Value
								(In Thousands)
Nine Months Ended September 30, 2019:
Outstanding at January 1, 2019		1,238,748		$	13.02		5.2	$	23,355
Granted		10,500			34.44		9.4		(14	)
Exercised		(239,300	)		7.02		2.3		6,162
Forfeited		(20,200	)		24.88		6.5		167
Outstanding at September 30, 2019		989,748			14.46		5.0	$	18,603

Exercisable at September 30, 2019		278,000		$	7.36		3.1	$	7,261

Nine Months Ended September 30, 2018:
Outstanding at January 1, 2018		1,666,834		$	10.68		5.5	$	51,377
Granted		12,750			41.58		9.5		(31	)
Exercised		(231,336	)		4.94		3.1		7,665
Forfeited		(33,000	)		15.00		6.4		758
Outstanding at September 30, 2018		1,415,248			11.79		5.1	$	38,998

Exercisable at September 30, 2018		693,100		$	6.78		3.5	$	22,513

As of September 30, 2019, there was approximately $1,198,000 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 1.3 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 September 30, 2019, there was $1,491,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 2.7 years of the restricted stock’s vesting period.

The following table summarizes restricted stock activity during the nine months ended September 30, 2019 and 2018, respectively:

	Shares			Weighted Average Grant Date Fair Value
Nine Months Ended September 30, 2019:
Non-vested at January 1, 2019		44,076		$	38.44
Granted		33,774			33.60
Vested		(5,200	)		20.31
Forfeited		(2,500	)		38.17
Non-vested at September 30, 2019		70,150			37.46

Nine Months Ended September 30, 2018:
Non-vested at January 1, 2018		120,676		$	10.29
Granted		12,850			41.48
Vested		(73,700	)		5.88
Forfeited		(750	)		41.21
Non-vested at September 30, 2018		59,076			22.18

NOTE 8 - DERIVATIVES

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 rate lock commitments to customers as of September 30, 2019 and December 31, 2018 were not material.

NOTE 9 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU were effective for the Company on January 1, 2019. The Company elected the three practical expedients allowed by the amendments as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases. Upon adoption on January 1, 2019, the Company recorded right-of-use assets and related lease liabilities of $15.6 million and did not restate comparative periods. There was no impact on the Company’s consolidated statements of income or cash flows. See Note 6 – Leases for additional information.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, which only included share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees are now substantially aligned. The ASU superseded Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The Company adopted this ASU effective January 1, 2019. However, the amendments did not have an impact on the Company’s Consolidated Financial Statements because the Company does not currently have any stock-based payment awards outstanding to nonemployees.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU were effective for the Company as of January 1, 2019. The amendments in this ASU did not impact the Company’s Consolidated Financial Statements, as the Company has always amortized premiums to the first call date.

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. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for the company for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company has established a cross-functional implementation team with assigned roles and responsibilities, key tasks to complete, and a general timeline to be followed. The team meets regularly to discuss the latest developments and ensure progress is being made on the adoption plan. The Company has contracted with a third-party provider for enhanced modeling techniques that incorporate the loss measurement requirements in these amendments and is in the process of finalizing and documenting the methodologies that will be utilized, including challenging estimated credit loss model assumptions and outputs and refining the qualitative framework. The team is also currently developing controls, processes, policies and disclosures in preparation for performing a complete parallel run in the fourth quarter of 2019. The Company has scheduled an independent third-party validation of the new model(s) and anticipate completion during the fourth quarter of 2019. The Company continues to evaluate the impact adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures, and while currently unable to reasonably estimate the impact of adopting the ASU, the Company expects that the impact of adoption could be significantly influenced by the composition, characteristics and quality of its loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.

In July 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

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. In cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.

Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 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. 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 $7.7 million and $16.1 million during the three and nine months ended September 30, 2019, respectively, and $4.9 million and $8.8 million during the three and nine months ended September 30, 2018, 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. 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 $58,000 and $303,000 was recognized for the three and nine months ended September 30, 2019, respectively, and $228,000 and $581,000 for the three and nine months ended September 30, 2018, 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 $425,000 that was foreclosed during the third quarter 2019 and classified as OREO as of September 30, 2019.

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

	Fair Value Measurements at September 30, 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	$	-	$	52,198	$	-	$	52,198
Government Agency securities		-		18,361		-		18,361
Mortgage-backed securities		-		402,639		-		402,639
State and municipal securities		-		65,568		-		65,568
Corporate debt		-		142,645		6,610		149,255
Total assets at fair value	$	-	$	681,411	$	6,610	$	688,021

	Fair Value Measurements at December 31, 2018 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	$	-	$	58,428	$	-	$	58,428
Government Agency securities		-		18,565		-		18,565
Mortgage-backed securities		-		304,304		-		304,304
State and municipal securities		-		105,994		-		105,994
Corporate debt		-		96,375		6,518		102,893
Total assets at fair value	$	-	$	583,666	$	6,518	$	590,184

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018:

	Fair Value Measurements at September 30, 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	$	-	$	-	$	42,205	$	42,205
Other real estate owned and repossessed assets		-		-		5,337		5,337
Total assets at fair value	$	-	$	-	$	47,542	$	47,542

	Fair Value Measurements at December 31, 2018
	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	$	-	$	-	$	30,463	$	30,463
Other real estate owned and repossessed assets		-		-		5,169		5,169
Total assets at fair value	$	-	$	-	$	35,632	$	35,632

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 September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019				December 31, 2018
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(In Thousands)
Financial Assets:
Level 1 inputs:
Cash and due from banks	$	572,429	$	572,429	$	458,050	$	458,050

Level 2 inputs:
Federal funds sold		474,298		474,298		223,845		223,845
Mortgage loans held for sale		8,691		8,656		120		121

Level 3 inputs:
Held to maturity debt securities		250		250		-		-
Loans, net		6,902,672		6,816,956		6,464,899		6,398,604

Financial liabilities:
Level 2 inputs:
Deposits	$	7,724,158	$	7,728,323	$	6,915,708	$	6,910,176
Federal funds purchased		370,231		370,231		288,725		288,725
Other borrowings		64,693		64,629		64,666		64,613

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 (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2019 and September 30, 2018.

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,” “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: 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; 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 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 and two loan production offices located in Alabama, Tampa Bay, Sarasota and Pensacola, 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 Third Quarter 2019 Results

As of September 30, 2019, we had consolidated total assets of $9.01 billion, up $997.7 million, or 12.5%, when compared to consolidated assets of $8.01 billion at December 31, 2018. Total loans were $7.02 billion at September 30, 2019, up $488.6 million, or 7.5%, from $6.53 billion at December 31, 2018. Total deposits were $7.72 billion at September 30, 2019, up $808.5 million, or 11.7%, from $6.92 billion at December 31, 2018.

Net income available to common stockholders for the three months ended September 30, 2019 was $37.6 million, an increase of $3.0 million, or 8.7%, from $34.6 million for the corresponding period in 2018. Basic and diluted earnings per common share were $0.70 and $0.69, respectively, for the three months ended September 30, 2019, compared to basic and diluted earnings per common share of $0.65 and $0.64 for the corresponding period in 2018.

Net income available to common stockholders for the nine months ended September 30, 2019 was $108.2 million, an increase of $7.5 million, or 7.4%, from $100.7 million for the corresponding period in 2018. Basic and diluted earnings per common share were $2.02 and $2.00, respectively, for the nine months ended September 30, 2019, compared to $1.89 and $1.86, respectively, for the corresponding period in 2018.

Critical Accounting Policies

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles (“U.S. GAAP”) 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, 2018.

Financial Condition

Cash and Cash Equivalents

At September 30, 2019, we had $474.3 million in federal funds sold, compared to $223.8 million at December 31, 2018. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At September 30, 2019, we had $72.0 million in balances at the Federal Reserve, compared to $41.9 million at December 31, 2018. The balances we keep on deposit at the Federal Reserve will fluctuate depending on our net funding position and on our ability to earn higher rates on balances at other correspondent banks.

Debt Securities

Debt securities available for sale totaled $688.0 million at September 30, 2019 and $590.2 million at December 31, 2018. Investment securities held to maturity totaled $250,000 at September 30, 2019. We had paydowns of $48.5 million on mortgage-backed securities and government agencies, maturities of $40.1 million on municipal bonds, corporate securities and treasury securities, and calls of $8.1 million on municipal securities during the nine months ended September 30, 2019. We purchased $122.7 million in mortgage-backed securities and $52.9 million in corporate securities during the first nine months of 2019. For a tabular presentation of debt securities available for sale and held to maturity at September 30, 2019 and December 31, 2018, 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 September 30, 2019 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”). We have $149.3 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 September 30, 2019 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 $408.9 million and $291.6 million as of September 30, 2019 and December 31, 2018, respectively.

Loans

We had total loans of $7.02 billion at September 30, 2019, an increase of $488.6 million, or 7.5%, compared to $6.53 billion at December 31, 2018. At September 30, 2019, the percentage of our loans in each of our regions were as follows:

	Percentage of Total Loans in MSA
Birmingham-Hoover, AL MSA		39.8	%
Dothan, AL MSA		9.4	%
Huntsville, AL MSA		8.6	%
Mobile, AL MSA		6.7	%
Montgomery, AL MSA		5.8	%
Total Alabama MSAs		70.3	%
Pensacola-Ferry Pass-Brent, FL MSA		6.2	%
Tampa-St. Petersburg-Clearwater, FL MSA		3.7	%
Total Florida MSAs		9.9	%
Atlanta-Sandy Springs-Roswell, GA MSA		6.2	%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA		10.1	%
Charleston-North Charleston, SC MSA		3.5	%

Loans in our new Sarasota, Florida office are included in the Tampa-St. Petersburg-Clearwater, FL MSA line in the table above. The amount of loans in our Sarasota office were negligible as of September 30, 2019.

Asset Quality

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. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. 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. The Company is following its established policies and procedures in applying the entirety of the $7.4 million payment resulting from the state sponsored loan guarantee program termination to the allowance for loan losses. Our management believes that the allowance was adequate at September 30, 2019.

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 September 30, 2019, total loans rated Special Mention, Substandard, and Doubtful were $148.2 million, or 2.1% of total loans, compared to $139.0 million, or 2.1% of total loans, at December 31, 2018. 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 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.

During the third quarter of 2019, the Company recorded a $7.4 million payment resulting from the termination of a Loan Guarantee Program (“LGP”) operated by the State of Alabama. The payment was recorded as an increase to the allowance for loan losses specifically related to loans formerly enrolled in this program, in accordance with the Company’s established ALLL review and evaluation criteria. In general, loans enrolled in the program had a collateral shortfall or other enhanced credit risk. In return for the Company’s acceptance of these higher risk loans, the Company received a guarantee of up to 50% of losses in the event of a borrower’s default. These were loans that would have otherwise not met the Company’s loan underwriting criteria. The program required a 1% fee on the commitment balance at origination. As of September 30, 2019, the Company had 72 loans outstanding totaling $44.3 million that were formerly enrolled in the loan guarantee program.

The following table presents a summary of changes in the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018:

	As of and for the Three Months Ended						As of and for the Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Total loans outstanding, net of unearned income	$	7,022,069		$	6,363,531		$	7,022,069		$	6,363,531
Average loans outstanding, net of unearned income	$	6,961,270		$	6,233,377		$	6,785,257		$	6,036,547
Allowance for loan losses at beginning of period		71,386			64,239			68,600			59,406
Charge-offs:
Commercial, financial and agricultural loans		3,626			3,923			10,273			6,743
Real estate - mortgage		4,974			48			5,193			869
Consumer loans		172			76			453			211
Total charge-offs		8,772			4,047			15,919			7,823
Recoveries:
Commercial, financial and agricultural loans		126			52			255			229
Real estate - construction		-			4			2			108
Real estate - mortgage		1			1			11			44
Consumer loans		60			6			83			31
Total recoveries		187			63			351			412
Net charge-offs		8,585			3,984			15,568			7,411
Allocation from LGP		7,406			-			7,406			-
Provision for loan losses		6,985			6,624			16,754			14,884
Allowance for loan losses at period end	$	77,192		$	66,879		$	77,192		$	66,879
Allowance for loan losses to period end loans		1.10	%		1.05	%		1.10	%		1.05	%
Net charge-offs to average loans		0.49	%		0.25	%		0.31	%		0.16	%

Management believes that the comprehensive allowance analysis developed by our credit administration group is in compliance with all current regulatory guidelines; however, actual losses could differ from management’s estimates.

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 September 30, 2019 and December 31, 2018:

			Percentage of loans
			in each category
September 30, 2019	Amount		to total loans
	(In Thousands)
Commercial, financial and agricultural	$	45,222		37.79	%
Real estate - construction		3,192		7.85	%
Real estate - mortgage		28,264		53.42	%
Consumer		514		0.94	%
Total	$	77,192		100.00	%

			Percentage of loans
			in each category
December 31, 2018	Amount		to total loans
	(In Thousands)
Commercial, financial and agricultural	$	39,016		38.47	%
Real estate - construction		3,522		8.16	%
Real estate - mortgage		25,508		52.39	%
Consumer		554		0.99	%
Total	$	68,600		100.00	%

Nonperforming Assets

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased $13.2 million to $41.0 million at September 30, 2019, compared to $27.8 million at December 31, 2018. Of this total, nonaccrual loans of $35.7 million at September 30, 2019, represented a net increase of $13.8 million from nonaccrual loans at December 31, 2018. One rural healthcare loan with a current balance of $11.6 million, originated by our Nashville, Tennessee region, was placed on nonaccrual status during the third quarter of 2019. Excluding credit card accounts, there were three loans 90 or more days past due and still accruing totaling $5.2 million at September 30, 2019, compared to three loans totaling $5.7 million at December 31, 2018. Troubled Debt Restructurings (“TDR”) at September 30, 2019 and December 31, 2018 were $11.2 million and $14.6 million, respectively. There were no loans newly classified as a TDR or renewals of existing TDRs for the three months ended September 30, 2019 and one renewal of an existing TDR totaling $2.7 million for the nine months ended September 30, 2019. There was one loan newly classified as TDR totaling $0.1 million and nine renewals of existing TDRs totaling $12.7 million for the three and nine months ended September 30, 2018. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.

OREO and repossessed assets increased slightly to $5.3 million at September 30, 2019, from $5.2 million at December 31, 2018. The total number of OREO and repossessed asset accounts was 12 at September 30, 2019 and December 31, 2018, respectively. The following table summarizes OREO and repossessed asset activity for the nine months ended September 30, 2019 and 2018:

	Nine Months Ended September 30,
	2019			2018
	(In thousands)
Balance at beginning of period	$	5,169		$	6,701
Transfers from loans and capitalized expenses		1,177			1,206
Proceeds from sales		(727	)		(1,572	)
Internally financed sales		-			(130	)
Write-downs / net gain (loss) on sales		(282	)		(491	)
Balance at end of period	$	5,337		$	5,714

The following table summarizes our nonperforming assets and TDRs at September 30, 2019 and December 31, 2018:

	September 30, 2019					December 31, 2018
				Number of					Number of
	Balance			Loans		Balance			Loans
	(Dollar Amounts In Thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	16,030			29	$	10,503			16
Real estate - construction		1,588			2		997			1
Real estate - mortgage:
Owner-occupied commercial		15,127			4		3,358			2
1-4 family mortgage		1,480			6		2,046			9
Other mortgage		1,507			1		5,022			1
Total real estate - mortgage		18,114			11		10,426			12
Consumer		-			-		-			-
Total Nonaccrual loans:	$	35,732			42	$	21,926			29

90+ days past due and accruing:
Commercial, financial and agricultural	$	119			3	$	605			10
Real estate - construction		-			-		-			-
Real estate - mortgage:
Owner-occupied commercial		118			1		-			-
1-4 family mortgage		112			1		123			1
Other mortgage		4,956			1		5,008			1
Total real estate - mortgage		5,186			3		5,131			2
Consumer		12			8		108			28
Total 90+ days past due and accruing:	$	5,317			14	$	5,844			40

Total Nonperforming Loans:	$	41,049			56	$	27,770			69

Plus: Other real estate owned and repossessions		5,649			12		5,169			12
Total Nonperforming Assets	$	46,698			68	$	32,939			81

Restructured accruing loans:
Commercial, financial and agricultural	$	2,742			1	$	3,073			3
Real estate - construction		-			-		-			-
Real estate - mortgage:
Owner-occupied commercial		726			1		-			-
1-4 family mortgage		-			-		-			-
Other mortgage		-			-		-			-
Total real estate - mortgage		726			1		-			-
Consumer		-			-		-			-
Total restructured accruing loans:	$	3,468			2	$	3,073			3

Total Nonperforming assets and restructured accruing loans	$	50,166			70	$	36,012			84

Ratios:
Nonperforming loans to total loans		0.58	%				0.43	%
Nonperforming assets to total loans plus other real estate owned and repossessions		0.66	%				0.50	%
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions		0.71	%				0.55	%

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 September 30, 2019, we had impaired loans of $51.5 million inclusive of nonaccrual loans, an increase of $12.9 million from $38.6 million as of December 31, 2018. We allocated $9.3 million of our allowance for loan losses at September 30, 2019 to these impaired loans, an increase of $2.5 million compared to $6.8 million as of September 30, 2018. 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 $51.5 million of impaired loans reported as of September 30, 2019, $21.9 million were commercial, financial and agricultural loans, $4.3 million were real estate construction loans and $25.3 million were real estate mortgage loans.

Deposits

Total deposits were $7.72 billion at September 30, 2019, an increase of $808.5 million, or 11.7%, over $6.92 billion at December 31, 2018. 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 September 30, 2019 and December 31, 2018:

	September 30, 2019				December 31, 2018
Noninterest-bearing demand	$	1,678,672	21.73	%	$	1,557,341	22.52	%
Interest-bearing demand		5,286,288	68.44	%		4,624,909	66.88	%
Savings		59,980	0.78	%		53,880	0.78	%
Time deposits , $250,000 and under		263,421	3.41	%		257,925	3.73	%
Time deposits, over $250,000		435,797	5.64	%		421,653	6.10	%
	$	7,724,158	100.00	%	$	6,915,708	100.00	%

Other Borrowings

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $370.2 million and $288.7 million at September 30, 2019 and December 31, 2018, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 2.30% for the quarter ended September 30, 2019. 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 September 30, 2019, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $1.37 billion. Additionally, the Bank had additional borrowing availability of approximately $732.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. 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.

The following table reflects the contractual maturities of our term liabilities as of September 30, 2019. 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	$	7,024,940	$	-	$	-	$	-	$	-
Certificates of deposit (2)		699,218		414,249		199,408		85,561		-
Federal funds purchased		370,231		370,231		-		-		-
Subordinated debentures		64,750		-		-		-		64,750
Operating lease commitments		16,825		3,583		5,911		4,063		3,268
Total	$	8,175,964	$	788,063	$	205,319	$	89,624	$	68,018


(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 September 30, 2019 was $810.0 million, or 9.0% of total assets. At December 31, 2018, total stockholders’ equity attributable to us was $714.7 million, or 8.9% of total assets.

As of September 30, 2019, 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 September 30, 2019, December 31, 2018 and September 30, 2018:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2019:	(Dollars in Thousands)
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	790,168		10.39	%	$	342,283		4.50	%		N/A		N/A
ServisFirst Bank		852,807		11.21	%		342,269		4.50	%	$	494,389		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		790,670		10.39	%		456,377		6.00	%		N/A		N/A
ServisFirst Bank		853,309		11.22	%		456,359		6.00	%		608,479		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		933,055		12.27	%		608,502		8.00	%		N/A		N/A
ServisFirst Bank		931,001		12.24	%		608,479		8.00	%		760,598		10.00
Tier 1 Capital to Average Assets:
Consolidated		790,670		8.88	%		356,012		4.00	%		N/A		N/A
ServisFirst Bank		853,309		9.59	%		355,998		4.00	%		444,997		5.00	%

As of December 31, 2018:
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	705,203		10.12	%	$	313,564		4.50	%		N/A		N/A
ServisFirst Bank		768,614		11.03	%		313,554		4.50	%	$	452,911		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		705,705		10.13	%		418,086		6.00	%		N/A		N/A
ServisFirst Bank		769,116		11.04	%		418,071		6.00	%		557,428		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		839,471		12.05	%		557,448		8.00	%		N/A		N/A
ServisFirst Bank		867,715		12.03	%		557,428		8.00	%		696,786		10.00	%
Tier 1 Capital to Average Assets:
Consolidated		705,705		9.07	%		311,214		4.00	%		N/A		N/A
ServisFirst Bank		769,116		9.89	%		311,206		4.00	%		389,007		5.00	%

As of September 30, 2018:
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	676,506		10.08	%	$	302,011		4.50	%		N/A		N/A
ServisFirst Bank		740,140		11.03	%		301,997		4.50	%	$	436,219		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		677,008		10.09	%		402,682		6.00	%		N/A		N/A
ServisFirst Bank		740,642		11.04	%		402,663		6.00	%		536,884		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		809,044		120.05	%		536,909		8.00	%		N/A		N/A
ServisFirst Bank		808,021		12.04	%		536,884		8.00	%		671,105		10.00	%
Tier 1 Capital to Average Assets:
Consolidated		677,008		9.28	%		291,724		4.00	%		N/A		N/A
ServisFirst Bank		740,642		10.16	%		291,709		4.00	%		364,637		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 September 30, 2019, we have reserved $0.5 million 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 $0.4 million as of September 30, 2019 and December 31, 2018 for the settlement of any repurchase demands by investors.

Financial instruments whose contract amounts represent credit risk at September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019		December 31, 2018
	(In Thousands)		(In Thousands)
Commitments to extend credit	$	2,222,363	$	1,985,801
Credit card arrangements		235,340		173,613
Standby letters of credit		54,799		40,590
	$	2,512,502	$	2,200,004

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 September 30, 2019 was $37.6 million compared to net income and net income available to common stockholders of $34.6 million, respectively, for the three months ended September 30, 2018. Net income and net income available to common stockholders for the nine months ended September 30, 2019 was $108.2 million compared to net income and net income available to common stockholders of $100.7 million for the nine months ended September 30, 2018. The increase in net income for the three months ended September 30, 2019 over the same period in 2018 was primarily attributable to a $6.1 million increase in net interest income resulting from a $1.58 billion increase in average earning assets, and a $1.1 million increase in non-interest income, led by increased mortgage banking income. The same key drivers contributed to the increase in net income for the nine months ended September 30, 2019 compared to 2018 resulting in a $18.0 million increase in net interest income on a $1.38 billion increase in average earning assets, and a $2.5 million increase in non-interest income. Credit card income led the increase in non-interest income for the nine months ended September 30, 2019 compared to 2018. Increases in non-interest expense of $2.5 million and $7.3 million and increases in income tax expense of $1.4 million and $3.8 million, respectively, for the three and nine months ended September 30, 2019 compared to 2018 partially offset increases in income. Non-interest expense for the three months ended September 30, 2019 benefitted from a $1.7 million credit we recognized as a result of the Federal Deposit Insurance Corporation’s Small Bank Credit, which was applied toward our assessment during the third quarter. This credit is discussed in more detail below under the caption “Noninterest Expense.”

Basic and diluted net income per common share were $0.70 and $0.69, respectively, for the three months ended September 30, 2019, compared to $0.65 and $0.64, respectively, for the corresponding period in 2018. Basic and diluted net income per common share were $2.02 and $2.00, respectively, for the nine months ended September 30, 2019, compared to $1.89 and $1.86, respectively, for the corresponding period in 2018. Return on average assets for the three and nine months ended September 30, 2019 was 1.67% and 1.70%, respectively, compared to 1.87% and 1.90%, respectively, for the corresponding periods in 2018. Return on average common stockholders’ equity for the three and nine months ended September 30, 2019 was 18.69% and 18.93% compared to 20.42% and 20.88%, respectively, for the corresponding periods in 2018.

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 $6.1 million, or 9.1%, to $73.1 million for the three months ended September 30, 2019 compared to $67.0 million for the corresponding period in 2018, and increased $17.8 million, or 9.1%, to $212.0 million for the nine months ended September 30, 2019 compared to $194.2 million for the corresponding period in 2018. This increase was primarily attributable to growth in average earning assets, which increased $1.58 billion, or 22.4%, from the third quarter of 2018 to the third quarter of 2019, and $1.38 billion, or 20.1%, from the nine months ended September 30, 2018 to the same period in 2019. The taxable-equivalent yield on interest-earning assets decreased to 4.65% for the three months ended September 30, 2019 from 4.74% for the corresponding period in 2018 and increased to 4.76% for the nine months ended September 30, 2019 from 4.63% for the corresponding period in 2018. The yield on loans for the three months ended September 30, 2019 was 5.17% compared to 5.03% for the corresponding period in 2018, and 5.22% compared to 4.92% for the nine months ended September 30, 2019 and September 30, 2018, respectively. The cost of total interest-bearing liabilities increased to 1.73% for the three months ended September 30, 2019 compared to 1.33% for the corresponding period in 2018 and increased to 1.77% for the nine months ended September 30, 2019 from 1.14% for the corresponding period in 2018. Net interest margin for the three months ended September 30, 2019 was 3.36% compared to 3.77% for the corresponding period in 2018, and 3.45% for the nine months ended September 30, 2019 compared to 3.80% for the corresponding period in 2018. The Federal Reserve’s Open Market Committee has dropped their targeted federal funds rate by a total of 50 basis points during the third quarter of 2019 in two separate moves of 25 basis points each. Our management has made efforts to drop the rates we pay on interest-bearing deposit accounts as part of management’s continuing response to reductions in the federal funds rate.

The following tables show, for the three and nine months ended September 30, 2019 and September 30, 2018, 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 September 30,
(In thousands, except Average Yields and Rates)

	2019							2018
			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	$	6,927,075	$	90,426		5.18	%	$	6,203,372		$	78,702		5.03	%
Tax-exempt (3)		34,195		343		3.98			30,005			298		3.94
Total loans, net of unearned income		6,961,270		90,769		5.17			6,233,377			79,000		5.03
Mortgage loans held for sale		6,482		40		2.45			3,538			37		4.15
Investment securities:
Taxable		595,405		4,367		2.93			482,571			3,276		2.72
Tax-exempt (3)		59,992		332		2.21			105,592			646		2.45
Total investment securities (4)		655,397		4,699		2.87			588,163			3,922		2.67
Federal funds sold		312,968		1,768		2.24			163,453			892		2.17
Interest-bearing balances with banks		690,973		3,912		2.25			61,867			316		2.03
Total interest-earning assets	$	8,627,090	$	101,188		4.65		$	7,050,398		$	84,167		4.74
Non-interest-earning assets:
Cash and due from banks		71,418							76,800
Net fixed assets and equipment		58,243							58,873
Allowance for loan losses, accrued interest and other assets		162,654							128,843
Total assets	$	8,919,405						$	7,314,914

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	900,754	$	1,904		0.84	%	$	819,807		$	1,378		0.67	%
Savings deposits		57,431		87		0.60			53,835			70		0.52
Money market accounts		4,265,435		18,900		1.76			3,305,293			11,087		1.33
Time deposits		703,278		3,897		2.20			643,260			2,675		1.65
Total interest-bearing deposits		5,926,898		24,788		1.66			4,822,195			15,210		1.25
Federal funds purchased		441,526		2,557		2.30			229,016			1,204		2.09
Other borrowings		64,689		781		4.79			64,652			781		4.79
Total interest-bearing liabilities	$	6,433,113	$	28,126		1.73	%	$	5,115,863		$	17,195		1.33	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		1,654,928							1,511,410
Other liabilities		34,070							16,333
Stockholders' equity		792,284							678,839
Accumulated other comprehensive loss		5,010							(7,531	)
Total liabilities and stockholders' equity	$	8,919,405						$	7,314,914
Net interest income			$	73,062							$	66,972
Net interest spread						2.92	%							3.41	%
Net interest margin						3.36	%							3.77	%


(1)	Non-accrual loans are included in average loan balances in all periods. Loan fees of $1,573 and $985 are included in interest income in the third quarter of 2019 and 2018, respectively.
(2)	Net accretion on acquired loan discounts of $22 is included in interest income in the third quarter of 2018.
(3)	Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%.
(4)	Unrealized gains (losses) of $6,287 and $(9,590) are excluded from the yield calculation in the third quarter of 2019 and 2018, respectively.

	For the Three Months Ended September 30,
	2019 Compared to 2018 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	$	9,394		$	2,330		$	11,724
Tax-exempt		42			3			45
Total loans, net of unearned income		9,436			2,333			11,769
Mortgages held for sale		22			(19	)		3
Debt securities:
Taxable		812			279			1,091
Tax-exempt		(257	)		(57	)		(314	)
Total debt securities		555			222			777
Federal funds sold		844			32			876
Interest-bearing balances with banks		3,558			38			3,596
Total interest-earning assets		14,415			2,606			17,021

Interest-bearing liabilities:
Interest-bearing demand deposits		146			380			526
Savings		5			12			17
Money market accounts		3,712			4,101			7,813
Time deposits		268			954			1,222
Total interest-bearing deposits		4,131			5,447			9,578
Federal funds purchased		1,220			133			1,353
Other borrowed funds		-			-			-
Total interest-bearing liabilities		5,351			5,580			10,931
Increase in net interest income	$	9,064		$	(2,974	)	$	6,090

Increases in average rates paid on interest-bearing deposits in excess of increases in average yields on loans and debt securities drive unfavorable rate component change while growth in loans, non-interest bearing deposits and average equity continues to drive favorable volume component change and overall change.

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

	2019								2018
				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	$	6,752,945		$	263,942		5.23	%	$	6,004,367		$	221,350		4.93	%
Tax-exempt (3)		32,312			934		3.85			32,180			960		3.98
Total loans, net of unearned income		6,785,257			264,876		5.22			6,036,547			222,310		4.92
Mortgage loans held for sale		4,452			116		3.48			3,668			118		4.30
Investment securities:
Taxable		560,230			12,306		2.93			464,870			9,146		2.62
Tax-exempt (3)		74,864			1,201		2.14			112,615			2,148		2.54
Total investment securities (4)		635,094			13,507		2.84			577,485			11,294		2.61
Federal funds sold		276,898			4,985		2.41			145,730			2,137		1.96
Interest-bearing balances with banks		514,527			9,269		2.41			77,073			1,032		1.79
Total interest-earning assets	$	8,216,228		$	292,753		4.76	%	$	6,840,503		$	236,891		4.63	%
Non-interest-earning assets:
Cash and due from banks		74,185								71,131
Net fixed assets and equipment		58,565								59,278
Allowance for loan losses, accrued interest and other assets		156,332								133,671
Total assets	$	8,505,310							$	7,104,583

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	917,609		$	5,911		0.86	%	$	848,595		$	3,668		0.58	%
Savings deposits		55,315			236		0.57			53,984			158		0.39
Money market accounts		3,987,210			53,831		1.81			3,141,707			26,297		1.12
Time deposits		698,905			11,194		2.14			605,765			6,422		1.42
Total interest-bearing deposits		5,659,039			71,172		1.68			4,650,051			36,545		1.05
Federal funds purchased		391,471			7,233		2.47			273,543			3,754		1.83
Other borrowings		64,680			2,343		4.84			64,718			2,343		4.84
Total interest-bearing liabilities	$	6,115,190		$	80,748		1.77	%	$	4,988,312		$	42,642		1.14	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		1,591,184								1,457,054
Other liabilities		34,866								14,696
Stockholders' equity		764,087								650,527
Accumulated other comprehensive (loss)		(17	)							(6,006	)
Total liabilities and stockholders' equity	$	8,505,310							$	7,104,583
Net interest income				$	212,005							$	194,249
Net interest spread							3.00	%							3.49	%
Net interest margin							3.45	%							3.80	%


(1)			Non-accrual loans are included in average loan balances in all periods. Loan fees of $3,461 and $2,725 are included in interest income in 2019 and 2018, respectively.
(2)			Accretion on acquired loan discounts of $91 and $147 are included in interest income in 2019 and 2018, respectively.
(3)			Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%.
(4)			Unrealized losses of $77 and $7,658 are excluded from the yield calculation in 2019 and 2018, respectively.

	For the Nine Months Ended September 30,
	2019 Compared to 2018 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	$	28,717		$	13,875		$	42,592
Tax-exempt		4			(30	)		(26	)
Total loans, net of unearned income		28,721			13,845			42,566
Mortgages held for sale		22			(24	)		(2	)
Debt securities:
Taxable		2,016			1,144			3,160
Tax-exempt		(643	)		(304	)		(947	)
Total debt securities		1,373			840			2,213
Federal funds sold		2,272			576			2,848
Interest-bearing balances with banks		7,765			472			8,237
Total interest-earning assets		40,153			15,709			55,862

Interest-bearing liabilities:
Interest-bearing demand deposits		319			1,924			2,243
Savings		4			74			78
Money market accounts		8,401			19,133			27,534
Time deposits		1,104			3,668			4,772
Total interest-bearing deposits		9,828			24,799			34,627
Federal funds purchased		1,929			1,550			3,479
Other borrowed funds		(1	)		1			-
Total interest-bearing liabilities		11,756			26,350			38,106
Increase in net interest income	$	28,397		$	(10,641	)	$	17,756

Increases in the average rates paid on interest-bearing deposits in excess of increases in average yields on loans and debt securities drive unfavorable rate component change 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 $7.0 million for the three months ended September 30, 2019, an increase of $0.4 million from $6.6 million for the three months ended September 30, 2018, and was $16.8 million for the nine months ended September 30, 2019, a $1.9 million increase compared to $14.9 million for the nine months ended September 30, 2018. Net credit charge-offs to quarter-to-date average loans increased 24 basis points to 0.49% for the third quarter of 2019 compared to 0.25% for the corresponding period in 2018 and increased 15 basis points to 0.31% for the nine months ended September 30, 2019 compared to 0.16% for the corresponding period in 2018. Nonperforming loans increased to $41.0 million, or 0.58% of total loans, at September 30, 2019 from $27.8 million, or 0.43% of total loans, at December 31, 2018, and were $14.9 million, or 0.23% of total loans, at September 30, 2018. Impaired loans increased to $51.5 million, or 0.73% of total loans, at September 30, 2019, compared to $38.6 million, or 0.59% of total loans, at December 31, 2018. The allowance for loan losses totaled $77.2 million, or 1.10% of total loans, net of unearned income, at September 30, 2019, compared to $68.6 million, or 1.05% of loans, net of unearned income, at December 31, 2018.

Noninterest Income

Noninterest income totaled $6.2 million for the three months ended September 30, 2019, an increase of $1.1 million, or 22.6%, compared to the corresponding period in 2018, and totaled $16.9 million for the nine months ended September 30, 2019, an increase of $2.5 million, or 17.4%, compared to the corresponding period in 2018. Mortgage banking income increased $544,000, or 68.9%, to $1.3 million for the three months ended September 30, 2019 compared to $789,000 for the same period in 2018, and increased $899,000, or 42.9%, to $3.0 million for the nine months ended September 30, 2019 compared to $2.1 million for the same period in 2018. The number of loans originated for sale during the three months ended September 30, 2019 increased approximately 64% when compared to the same period in 2018. Credit card income increased $454,000 to $1.9 million for the three months ended September 30, 2019 compared to $1.4 million for the same period in 2018 and increased $1.2 million to $5.2 million for the nine months ended September 30, 2019 compared to $4.0 million for the same period in 2018. The amount of purchases on cards increased by approximately 35% during the third quarter of 2019 compared to the third quarter of 2018 and increased approximately 38% during the nine months ended September 30, 2019 when compared to the same period in 2018.

Noninterest Expense

Noninterest expense totaled $25.2 million for the three months ended September 30, 2019, an increase of $2.5 million, or 11.2%, compared to $22.6 million for the same period in 2018, and totaled $76.5 million for the nine months ended September 30, 2019, an increase of $7.3 million, or 10.6%, compared to $69.2 million for the same period in 2018.

Details of expenses are as follows:

●

Salary and benefit expense increased $2.4 million, or 18.6%, to $15.5 million for the three months ended September 30, 2019 from $13.1 million for the same period in 2018, and increased $4.6 million, or 11.8%, to $44.1 million for the nine months ended September 30, 2019 from $39.5 million for the same period in 2018. Total employees increased from 460 as of September 30, 2018 to 506 as of September 30, 2019, or 10%.

●

Equipment and occupancy expense increased $194,000, or 8.8%, to $2.4 million for the three months ended September 30, 2019 from $2.2 million for the corresponding period in 2018, and increased $673,000, or 10.8%, to $6.9 million from $6.3 million for the nine months ended September 30, 2019 compared to the corresponding period in 2018.

●

Professional services expense increased $34,000, or 4.0%, to $887,000 for the three months ended September 30, 2019 compared to the same period in 2018, and increased $490,000, or 19.0%, to $3.1 million for the nine months ended September 30, 2019 compared to the same period in 2018. Increases were primarily the result of increased audit fees and compliance consulting expense.

●

We recognized a credit of $1.7 million during the third quarter of 2019 as a result of the FDIC’s Small Bank Assessment Credit. This credit is being applied toward banks’ assessments as long as the FDIC’s Deposit Insurance Fund (DIF) reserve ratio remains above 1.38%. The DIF reserve ratio reached 1.40% as of June 30, 2019. Due to the Small Bank Assessment Credit, our FDIC and other regulatory assessments reflected a credit of $296,000 for the third quarter of 2019. This compares to assessments of $675,000 for the third quarter of 2018. FDIC and other regulatory assessments decreased $1.2 million, or 39.2%, to $1.8 million for the nine months ended September 30, 2019 compared to the same period in 2018.

●

OREO expense decreased $211,000 to $78,000 for the three months ended September 30, 2019 compared to the same period in 2018, and decreased $453,000 to $312,000 for the nine months ended September 30, 2019 compared to $765,000 for the same period in 2018. In 2018, we incurred some costs to excavate raw land in our Atlanta market in preparation for sale and also wrote down the value of a commercial building in Birmingham based on a recent appraisal.

●

Other operating expenses increased $1.1 million, or 19.2%, to $6.6 million for the three months ended September 30, 2019 compared to the same period in 2018, and increased $3.1 million, or 18.4%, to $20.3 million for the nine months ended September 30, 2019 compared to the same period in 2018. Increases in data processing expenses and Federal Reserve Bank service charges contributed to this increase in other operating expenses.

The following table presents our non-interest income and non-interest expense for the three and nine month periods ending September 30, 2019 compared to the same periods in 2018.

	Three Months Ended September 30,											Nine Months Ended September 30,
	2019			2018		$ change			% change			2019		2018		$ change			% change
Non-interest income:
Service charges on deposit accounts	$	1,735		$	1,595	$	140			8.8	%	$	5,223	$	4,833	$	390			8.1	%
Mortgage banking		1,333			789		544			68.9	%		2,995		2,096		899			42.9	%
Credit card income		1,868			1,414		454			32.1	%		5,185		4,030		1,155			28.7	%
Securities gains		34			186		(152	)		NM			28		190		(162	)		NM
Increase in cash surrender value life insurance		787			787		-			-	%		2,327		2,350		(23	)		(1.0	%)
Other operating income		453			294		159			54.1	%		1,172		922		250			27.1	%
Total non-interest income	$	6,210		$	5,065	$	1,145			22.6	%	$	16,930	$	14,421	$	2,509			17.4	%

Non-interest expense:
Salaries and employee benefits	$	15,499		$	13,070	$	2,429			18.6	%	$	44,103	$	39,464	$	4,639			11.8	%
Equipment and occupancy expense		2,387			2,193		194			8.8	%		6,933		6,260		673			10.8	%
Professional services		887			853		34			4.0	%		3,072		2,582		490			19.0	%
FDIC and other regulatory assessments		(296	)		675		(971	)		(143.9	%)		1,804		2,967		(1,163	)		(39.2	%)
OREO expense		78			289		(211	)		(73.0	%)		312		765		(453	)		(59.2	%)
Other operating expense		6,606			5,544		1,062			19.2	%		20,285		17,136		3,149			18.4	%
Total non-interest expense	$	25,161		$	22,624	$	2,537			11.2	%	$	76,509	$	69,174	$	7,335			10.6	%

Income Tax Expense

Income tax expense was $9.5 million for the three months ended September 30, 2019 compared to $8.1 million for the same period in 2018 and was $27.3 million for the nine months ended September 30, 2019 compared to $23.5 million for the same period in 2018. Our effective tax rate for the three and nine months ended September 30, 2019 was 20.20% and 20.16%, respectively, compared to 19.03% and 18.91% for the corresponding periods in 2018, 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 nine months ended September 30, 2019 of $231,000 and $1.2 million, respectively, compared to $539,000 and $2.4 million during the three and nine months ended September 30, 2018, 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 invested in an additional $20.0 million of bank-owned life insurance on the last day of the third quarter of 2019.

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 5% if interest rates change 100 basis points or more than 10% if interest rates change 200 basis points. These policy limits were dropped from 10% and 15%, respectively, in early 2019 primarily in response to the Bank’s lower net interest margin. There have been no material changes to our sensitivity to changes in interest rates since December 31, 2018, 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 September 30, 2019. Based upon the Evaluation, our CEO and CFO have concluded that, as of September 30, 2019, 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, 2018, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in the Form 10-K. 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.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
104		Cover page formatted as Inline XBRL and contained in Exhibit 101

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: October 29, 2019		By /s/ Thomas A. Broughton III
		Thomas A. Broughton III
		President and Chief Executive Officer


Date: October 29, 2019		By /s/ William M. Foshee
		William M. Foshee
		Chief Financial Officer