Edgar Filing: ServisFirst Bancshares, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

(Mark one)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

☐

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	(I.R.S. Employer
Incorporation or Organization)	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)

Title of each class	Name of exchange on which registered
Common stock, par value $.001 per share	The NASDAQ Stock Market LLC

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

None

(Title of Class)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if 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 July 27, 2018
Common stock, $.001 par value	53,164,733

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			3
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	41

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

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO

EX-31.02 SECTION 302 CERTIFICATION OF THE CFO

EX-32.01 SECTION 906 CERTIFICATION OF THE CEO

EX-32.02 SECTION 906 CERTIFICATION OF THE CFO

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	June 30, 2018			December 31, 2017
	(Unaudited)			(1)
ASSETS
Cash and due from banks	$	68,344		$	86,213
Interest-bearing balances due from depository institutions		81,742			151,849
Federal funds sold		15,585			239,524
Cash and cash equivalents		165,671			477,586
Available for sale debt securities, at fair value		583,549			538,080
Held to maturity debt securities (fair value of $250 at June 30, 2018 and December 31, 2017)		250			250
Equity securities		993			1,034
Mortgage loans held for sale		4,605			4,459
Loans		6,129,649			5,851,261
Less allowance for loan losses		(64,239	)		(59,406	)
Loans, net		6,065,410			5,791,855
Premises and equipment, net		58,299			58,900
Accrued interest and dividends receivable		21,375			20,661
Deferred tax assets		11,661			13,022
Other real estate owned and repossessed assets		5,937			6,701
Bank owned life insurance contracts		129,082			127,519
Goodwill and other identifiable intangible assets		14,584			14,719
Other assets		23,146			27,598
Total assets	$	7,084,562		$	7,082,384
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	1,481,447		$	1,440,326
Interest-bearing		4,604,235			4,651,348
Total deposits		6,085,682			6,091,674
Federal funds purchased		262,659			301,797
Other borrowings		64,648			64,832
Accrued interest payable		7,222			4,971
Other liabilities		9,237			11,506
Total liabilities		6,429,448			6,474,780
Stockholders' equity:
Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at June 30, 2018 and December 31, 2017		-			-
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 53,150,733 shares issued and outstanding at June 30, 2018, and 52,992,586 shares issued and outstanding at December 31, 2017		53			53
Additional paid-in capital		217,765			217,693
Retained earnings		443,972			389,554
Accumulated other comprehensive income		(7,178	)		(198	)
Total stockholders' equity attributable to ServisFirst Bancshares, Inc.		654,612			607,102
Noncontrolling interest		502			502
Total stockholders' equity		655,114			607,604
Total liabilities and stockholders' equity	$	7,084,562		$	7,082,384

(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				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Interest income:
Interest and fees on loans	$	73,620	$	59,912	$	143,294	$	115,468
Taxable securities		3,127		2,274		5,872		4,361
Nontaxable securities		623		752		1,279		1,517
Federal funds sold		694		287		1,245		806
Other interest and dividends		332		313		715		903
Total interest income		78,396		63,538		152,405		123,055
Interest expense:
Deposits		11,714		6,321		21,335		12,303
Borrowed funds		2,160		1,650		4,112		3,133
Total interest expense		13,874		7,971		25,447		15,436
Net interest income		64,522		55,567		126,958		107,619
Provision for loan losses		4,121		4,381		8,260		9,367
Net interest income after provision for loan losses		60,401		51,186		118,698		98,252
Noninterest income:
Service charges on deposit accounts		1,653		1,382		3,238		2,736
Mortgage banking		789		1,064		1,307		1,963
Credit card income		1,756		1,189		3,334		2,368
Securities gains		-		-		4		-
Increase in cash surrender value life insurance		786		785		1,563		1,509
Other operating income		475		385		882		775
Total noninterest income		5,459		4,805		10,328		9,351
Noninterest expenses:
Salaries and employee benefits		13,098		12,031		26,394		23,744
Equipment and occupancy expense		2,113		2,265		4,067		4,505
Professional services		924		808		1,729		1,579
FDIC and other regulatory assessments		1,159		1,081		2,292		2,078
OREO expense		160		56		476		132
Other operating expenses		6,556		5,634		12,564		11,104
Total noninterest expenses		24,010		21,875		47,522		43,142
Income before income taxes		41,850		34,116		81,504		64,461
Provision for income taxes		8,310		9,952		15,361		17,778
Net income		33,540		24,164		66,143		46,683
Preferred stock dividends		31		31		31		31
Net income available to common stockholders	$	33,509	$	24,133	$	66,112	$	46,652

Basic earnings per common share	$	0.63	$	0.46	$	1.24	$	0.88
Diluted earnings per common share	$	0.62	$	0.45	$	1.22	$	0.86

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2018			2017		2018			2017
Net income	$	33,540		$	24,164	$	66,143		$	46,683
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains arising during period from securities available for sale, net of (benefit) of $(553) and $(1,858) for the three and six months ended June 30, 2018, respectively, and tax of $201 and $736 for the three and six months ended June 30, 2017, respectively		(2,073	)		374		(6,983	)		1,367
Reclassification adjustment for gains on sale of securities, net of tax of $1 for the six months ended June 30, 2018		-			-		3			-
Other comprehensive (loss) income, net of tax		(2,073	)		374		(6,980	)		1,367
Comprehensive income	$	31,467		$	24,538	$	59,163		$	48,050

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

(Unaudited)

	Preferred Stock			Common Stock			Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Noncontrolling interest			Total Stockholders' Equity
Balance, December 31, 2016		$	-		$	53		$	215,932			$	307,151			$	(624	)		$	377		$	522,889
Common dividends paid, $0.05 per share			-			-			-				(2,641	)			-				-			(2,641	)
Common dividends declared, $0.05 per share			-			-			-				(2,645	)			-				-			(2,645	)
Preferred dividends paid			-			-			-				(31	)			-				-			(31	)
Issue 272,466 shares of common stock upon exercise of stock options			-			-			717				-				-				-			717
Issue 125 shares of REIT preferred stock			-			-			-				-				-				125			125
Stock-based compensation expense			-			-			622				-				-				-			622
Other comprehensive income, net of tax			-			-			-				-				1,367				-			1,367
Net income			-			-			-				46,683				-				-			46,683
Balance, June 30, 2017		$	-		$	53		$	217,271			$	348,517			$	743			$	502		$	567,086

Balance, December 31, 2017		$	-		$	53		$	217,693			$	389,554			$	(198	)		$	502		$	607,604
Common dividends paid, $0.11 per share			-			-			-				(5,846	)			-				-			(5,846	)
Common dividends declared, $0.11 per share			-			-			-				(5,848	)			-				-			(5,848	)
Preferred dividends paid			-			-			-				(31	)			-				-			(31	)
Issue 145,297 shares of common stock upon exercise of stock options			-			-			860				-				-				-			860
30,539 shares of common stock withheld in net settlement upon exercise of stock options			-			-			(1,270	)			-				-				-			(1,270	)
Stock-based compensation expense			-			-			482				-				-				-			482
Other comprehensive income, net of tax			-			-			-				-				(6,980	)			-			(6,980	)
Net income			-			-			-				66,143				-				-			66,143
Balance, June 30, 2018		$	-		$	53		$	217,765			$	443,972			$	(7,178	)		$	502		$	655,114

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Six Months Ended June 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	66,143		$	46,683
Adjustments to reconcile net income to net cash provided by
Deferred tax expense		1,361			4
Provision for loan losses		8,260			9,367
Depreciation		1,679			1,501
Accretion on acquired loans		(125	)		(267	)
Amortization of core deposit intangible		135			141
Net amortization of debt securities available for sale		1,219			1,999
Increase in accrued interest and dividends receivable		(714	)		(969	)
Stock-based compensation expense		482			622
Increase (decrease) in accrued interest payable		2,251			(888	)
Proceeds from sale of mortgage loans held for sale		55,342			71,518
Originations of mortgage loans held for sale		(54,181	)		(70,553	)
Gain on sale of debt securities available for sale		(4	)		-
Gain on sale of mortgage loans held for sale		(1,307	)		(1,963	)
Net loss (gain) on sale of other real estate owned and repossessed assets		10			(53	)
Write down of other real estate owned and repossessed assets		253			4
Operating losses of tax credit partnerships		70			7
Increase in cash surrender value of life insurance contracts		(1,563	)		(1,509	)
Net change in other assets, liabilities, and other operating activities		(2,238	)		(9,379	)
Net cash provided by operating activities		77,073			46,265
INVESTMENT ACTIVITIES
Purchase of debt securities available for sale		(100,718	)		(60,627	)
Proceeds from maturities, calls and paydowns of debt securities available for sale		40,484			45,325
Proceeds from sale of debt securities available for sale		5,100			-
Purchase of debt securities held to maturity		-			(20,786	)
Proceeds from maturities, calls and paydowns of debt securities held to maturity		-			4,093
Purchase of equity securities		-			(10	)
Proceeds from sale of equity securities		30			-
Increase in loans		(282,441	)		(438,253	)
Purchase of premises and equipment		(1,078	)		(12,984	)
Purchase of bank-owned life insurance contracts		-			(10,000	)
Proceeds from sale of other real estate owned and repossessed assets		1,252			1,547
Net cash used in investing activities		(337,371	)		(491,695	)
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits		41,121			91,748
Net decrease in interest-bearing deposits		(47,113	)		(117,249	)
Net decrease in federal funds purchased		(39,138	)		(55,718	)
Repayment of Federal Home Loan Bank advances		(200	)		(200	)
Proceeds from sale of preferred stock, net		-			125
Proceeds from exercise of stock options		860			717
Taxes paid in net settlement of tax obligation upon exercise of stock options		(1,270	)		-
Dividends paid on common stock		(5,846	)		(2,641	)
Dividends paid on preferred stock		(31	)		(31	)
Net cash used in financing activities		(51,617	)		(83,249	)
Net decrease in cash and cash equivalents		(311,915	)		(528,679	)
Cash and cash equivalents at beginning of period		477,586			783,997
Cash and cash equivalents at end of period	$	165,671		$	255,318
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest	$	23,196		$	16,324
Income taxes		9,465			22,363
Income tax refund		-			(182	)
NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans	$	751		$	586
Internally financed sales of other real estate owned		-			185
Dividends declared		5,848			2,645

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(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, 2017.

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

Revenue Recognition

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), provides guidance for reporting revenue from the entity’s contracts to provide goods or services to customers. The guidance requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are excluded from the scope of ASC 606, including revenue generated from financial instruments, such as securities and loans. Revenue-generating transactions that are within the scope of ASC 606, classified within non-interest income, are described as follows:

•

Deposit account service charges – represent service fees for monthly activity and maintenance on customer accounts. Attributes can be transaction-based, item-based or time-based. Revenue is recognized when our performance obligation is completed which is generally monthly for maintenance services or when a transaction is processed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

•

Credit card rewards program membership fees – represent memberships in our credit card rewards program and are paid annually by our cardholders at the time they open an account and on each anniversary. Revenue is recognized ratably over the membership period.

Other non-interest income primarily includes income on bank owned life insurance contracts, letter of credit fees and gains on sale of loans held for sale, none of which are within the scope of ASC 606.

NOTE 2 - CASH AND CASH EQUIVALENTS

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

NOTE 3 - EARNINGS PER COMMON SHARE

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In Thousands, Except Shares and Per Share Data)
Earnings per common share
Weighted average common shares outstanding		53,150,142		52,864,761		53,116,420		52,805,378
Net income available to common stockholders	$	33,509	$	24,133	$	66,112	$	46,652
Basic earnings per common share	$	0.63	$	0.46	$	1.24	$	0.88

Weighted average common shares outstanding		53,150,142		52,864,761		53,116,420		52,805,378
Dilutive effects of assumed conversions and exercise of stock options and warrants		1,045,881		1,235,843		1,073,326		1,311,694
Weighted average common and dilutive potential common shares outstanding		54,196,023		54,100,604		54,189,746		54,117,072
Net income available to common stockholders	$	33,509	$	24,133	$	66,112	$	46,652
Diluted earnings per common share	$	0.62	$	0.45	$	1.22	$	0.86

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2018 and December 31, 2017 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
	Cost		Gain		Loss			Value
June 30, 2018:	(In Thousands)
Securities Available for Sale
U.S. Treasury and government sponsored agencies	$	58,072	$	4	$	(965	)	$	57,111
Mortgage-backed securities		322,306		515		(8,390	)		314,431
State and municipal securities		120,885		411		(765	)		120,531
Corporate debt		91,412		730		(666	)		91,476
Total		592,675		1,660		(10,786	)		583,549
Securities Held to Maturity
State and municipal securities		250		-		-			250
Total	$	250	$	-	$	-		$	250

December 31, 2017:
Securities Available for Sale
U.S. Treasury and government sponsored agencies	$	55,567	$	38	$	(249	)	$	55,356
Mortgage-backed securities		278,177		1,006		(2,685	)		276,498
State and municipal securities		134,641		761		(553	)		134,849
Corporate debt		69,996		1,416		(35	)		71,377
Total		538,381		3,221		(3,522	)		538,080
Securities Held to Maturity
State and municipal securities		250		-		-			250
Total	$	250	$	-	$	-		$	250

The amortized cost and fair value of debt securities as of June 30, 2018 and December 31, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories along with the other categories of debt securities.

	June 30, 2018				December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Debt securities available for sale
Due within one year	$	47,313	$	47,336	$	22,122	$	22,172
Due from one to five years		202,998		201,448		160,773		160,563
Due from five to ten years		17,584		17,767		73,362		74,684
Due after ten years		2,474		2,567		3,947		4,163
Mortgage-backed securities		322,306		314,431		278,177		276,498
	$	592,675	$	583,549	$	538,381	$	538,080

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

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

The following table identifies, as of June 30, 2018 and December 31, 2017, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At June 30, 2018, 80 of the Company’s 781 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2018. Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized					Unrealized					Unrealized
	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value
	(In Thousands)
June 30, 2018
U.S. Treasury and government sponsored agencies	$	(809	)	$	54,065	$	(156	)	$	2,866	$	(965	)	$	56,931
Mortgage-backed securities		(5,255	)		228,217		(3,135	)		67,375		(8,390	)		295,592
State and municipal securities		(602	)		66,356		(163	)		7,872		(765	)		74,228
Corporate debt		(666	)		39,738		-			-		(666	)		39,738
Total	$	(7,332	)	$	388,376	$	(3,454	)	$	78,113	$	(10,786	)	$	466,489

December 31, 2017
U.S. Treasury and government sponsored agencies	$	(151	)	$	33,401	$	(98	)	$	2,926	$	(249	)	$	36,327
Mortgage-backed securities		(986	)		140,432		(1,699	)		75,903		(2,685	)		216,335
State and municipal securities		(450	)		66,637		(103	)		6,648		(553	)		73,285
Corporate debt		(35	)		6,955		-			-		(35	)		6,955
Total	$	(1,622	)	$	247,425	$	(1,900	)	$	85,477	$	(3,522	)	$	332,902

NOTE 5 – LOANS

The following table details the Company’s loans at June 30, 2018 and December 31, 2017:

	June 30,			December 31,
	2018			2017
	(Dollars In Thousands)
Commercial, financial and agricultural	$	2,345,879		$	2,279,366
Real estate - construction		522,788			580,874
Real estate - mortgage:
Owner-occupied commercial		1,383,882			1,328,666
1-4 family mortgage		584,133			603,063
Other mortgage		1,225,906			997,079
Subtotal: Real estate - mortgage		3,193,921			2,928,808
Consumer		67,061			62,213
Total Loans		6,129,649			5,851,261
Less: Allowance for loan losses		(64,239	)		(59,406	)
Net Loans	$	6,065,410		$	5,791,855

Commercial, financial and agricultural		38.27	%		38.96	%
Real estate - construction		8.53	%		9.93	%
Real estate - mortgage:
Owner-occupied commercial		22.58	%		22.71	%
1-4 family mortgage		9.53	%		10.30	%
Other mortgage		20.00	%		17.04	%
Subtotal: Real estate - mortgage		52.11	%		50.05	%
Consumer		1.09	%		1.06	%
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 June 30, 2018 and December 31, 2017 were as follows:

			Special
June 30, 2018	Pass		Mention		Substandard		Doubtful		Total
	(In Thousands)
Commercial, financial and agricultural	$	2,289,789	$	36,027	$	20,063	$	-	$	2,345,879
Real estate - construction		515,543		5,664		1,581		-		522,788
Real estate - mortgage:
Owner-occupied commercial		1,369,814		10,042		4,026		-		1,383,882
1-4 family mortgage		579,288		1,350		3,495		-		584,133
Other mortgage		1,203,952		15,497		6,457		-		1,225,906
Total real estate mortgage		3,153,054		26,889		13,978		-		3,193,921
Consumer		67,009		3		49		-		67,061
Total	$	6,025,395	$	68,583	$	35,671	$	-	$	6,129,649

			Special
December 31, 2017	Pass		Mention		Substandard		Doubtful		Total
	(In Thousands)
Commercial, financial and agricultural	$	2,225,084	$	27,835	$	26,447	$	-	$	2,279,366
Real estate - construction		572,657		6,691		1,526		-		580,874
Real estate - mortgage:
Owner-occupied commercial		1,317,113		7,333		4,220		-		1,328,666
1-4 family mortgage		598,222		1,599		3,242		-		603,063
Other mortgage		976,348		18,122		2,609		-		997,079
Total real estate mortgage		2,891,683		27,054		10,071		-		2,928,808
Consumer		62,083		42		88		-		62,213
Total	$	5,751,507	$	61,622	$	38,132	$	-	$	5,851,261

Loans by performance status as of June 30, 2018 and December 31, 2017 were as follows:

June 30, 2018	Performing		Nonperforming		Total
	(In Thousands)
Commercial, financial and agricultural	$	2,338,563	$	7,316	$	2,345,879
Real estate - construction		522,788		-		522,788
Real estate - mortgage:
Owner-occupied commercial		1,383,210		672		1,383,882
1-4 family mortgage		583,130		1,003		584,133
Other mortgage		1,220,835		5,071		1,225,906
Total real estate mortgage		3,187,175		6,746		3,193,921
Consumer		67,020		41		67,061
Total	$	6,115,546	$	14,103	$	6,129,649

December 31, 2017	Performing		Nonperforming		Total
	(In Thousands)
Commercial, financial and agricultural	$	2,269,642	$	9,724	$	2,279,366
Real estate - construction		580,874		-		580,874
Real estate - mortgage:
Owner-occupied commercial		1,328,110		556		1,328,666
1-4 family mortgage		602,604		459		603,063
Other mortgage		997,079		-		997,079
Total real estate mortgage		2,927,793		1,015		2,928,808
Consumer		62,127		86		62,213
Total	$	5,840,436	$	10,825	$	5,851,261

Loans by past due status as of June 30, 2018 and December 31, 2017 were as follows:

June 30, 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	$	7,259	$	1,554	$	431	$	9,244	$	6,885	$	2,329,750	$	2,345,879
Real estate - construction		2,097		3,182		-		5,279		-		517,509		522,788
Real estate - mortgage:
Owner-occupied commercial		3,365		591		250		4,206		422		1,379,254		1,383,882
1-4 family mortgage		919		263		288		1,470		715		581,948		584,133
Other mortgage		1,203		12,941		5,071		19,215		-		1,206,691		1,225,906
Total real estate - mortgage		5,487		13,795		5,609		24,891		1,137		3,167,893		3,193,921
Consumer		316		49		41		406		-		66,655		67,061
Total	$	15,159	$	18,580	$	6,081	$	39,820	$	8,022	$	6,081,807	$	6,129,649

December 31, 2017			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	$	1,410	$	5,702	$	12	$	7,124	$	9,712	$	2,262,530	$	2,279,366
Real estate - construction		56		997		-		1,053		-		579,821		580,874
Real estate - mortgage:
Owner-occupied commercial		-		3,664		-		3,664		556		1,324,446		1,328,666
1-4 family mortgage		430		850		-		1,280		459		601,324		603,063
Other mortgage		5,116		-		-		5,116		-		991,963		997,079
Total real estate - mortgage		5,546		4,514		-		10,060		1,015		2,917,733		2,928,808
Consumer		131		23		48		202		38		61,973		62,213
Total	$	7,143	$	11,236	$	60	$	18,439	$	10,765	$	5,822,057	$	5,851,261

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 and are the following: 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 loan’s effective interest rate, 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.

The following table presents an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended June 30, 2018 and June 30, 2017. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

	Commercial,
	financial and			Real estate -			Real estate -
	agricultural			construction			mortgage			Consumer			Total
	(In Thousands)
	Three Months Ended June 30, 2018
Allowance for loan losses:
Balance at March 31, 2018	$	35,787		$	4,138		$	21,606		$	519		$	62,050
Charge-offs		(1,732	)		-			(440	)		(47	)		(2,219	)
Recoveries		173			97			2			15			287
Provision		1,950			(173	)		2,270			74			4,121
Balance at June 30, 2018	$	36,178		$	4,062		$	23,438		$	561		$	64,239

	Three Months Ended June 30, 2017
Allowance for loan losses:
Balance at March 31, 2017	$	28,707		$	4,825		$	19,962		$	398		$	53,892
Charge-offs		(3,067	)		(40	)		(106	)		(33	)		(3,246	)
Recoveries		16			14			2			-			32
Provision		3,471			339			534			37			4,381
Balance at June 30, 2017	$	29,127		$	5,138		$	20,392		$	402		$	55,059

	Six Months Ended June 30, 2018
Allowance for loan losses:
Balance at December 31, 2017	$	32,880		$	4,989		$	21,022		$	515		$	59,406
Charge-offs		(2,820	)		-			(821	)		(135	)		(3,776	)
Recoveries		177			104			44			24			349
Provision		5,941			(1,031	)		3,193			157			8,260
Balance at June 30, 2018	$	36,178		$	4,062		$	23,438		$	561		$	64,239

	Six Months Ended June 30, 2017
Allowance for loan losses:
Balance at December 31, 2016	$	28,872		$	5,125		$	17,504		$	392		$	51,893
Charge-offs		(5,922	)		(40	)		(372	)		(108	)		(6,442	)
Recoveries		206			30			4			1			241
Provision		5,971			23			3,256			117			9,367
Balance at June 30, 2017	$	29,127		$	5,138		$	20,392		$	402		$	55,059

	As of June 30, 2018
Allowance for loan losses:
Individually Evaluated for Impairment	$	5,423		$	120		$	285		$	49		$	5,877
Collectively Evaluated for Impairment		30,755			3,942			23,153			512			58,362

Loans:
Ending Balance	$	2,345,879		$	522,788		$	3,193,921		$	67,061		$	6,129,649
Individually Evaluated for Impairment		20,063			1,623			16,240			49			37,975
Collectively Evaluated for Impairment		2,325,816			521,165			3,177,681			67,012			6,091,674

	As of December 31, 2017
Allowance for loan losses:
Individually Evaluated for Impairment	$	4,276		$	120		$	1,163		$	50		$	5,609
Collectively Evaluated for Impairment		28,604			4,869			19,859			465			53,797

Loans:
Ending Balance	$	2,279,366		$	580,874		$	2,928,808		$	62,213		$	5,851,261
Individually Evaluated for Impairment		26,447			1,571			12,404			88			40,510
Collectively Evaluated for Impairment		2,252,919			579,303			2,916,404			62,125			5,810,751

The following table presents details of the Company’s impaired loans as of June 30, 2018 and December 31, 2017, respectively. Loans which have been fully charged off do not appear in the tables.

							For the three months				For the six months
							ended June 30,				ended June 30,
	June 30, 2018						2018				2018
									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	$	4,842	$	5,733	$	-	$	5,257	$	53	$	5,611	$	113
Real estate - construction		626		629		-		629		8		630		16
Real estate - mortgage:
Owner-occupied commercial		2,512		2,679		-		2,836		42		2,910		86
1-4 family mortgage		2,258		2,258		-		2,255		23		2,255		48
Other mortgage		5,071		5,071		-		5,082		62		5,098		125
Total real estate - mortgage		9,841		10,008		-		10,173		127		10,263		259
Consumer		-		-		-		-		-		-		-
Total with no allowance recorded		15,309		16,370		-		16,059		188		16,504		388

With an allowance recorded:
Commercial, financial and agricultural		15,221		22,044		5,423		15,200		121		15,542		245
Real estate - construction		997		997		120		997		14		997		28
Real estate - mortgage:
Owner-occupied commercial		3,776		3,776		27		3,775		46		3,775		94
1-4 family mortgage		1,237		1,237		178		1,240		12		1,240		26
Other mortgage		1,386		1,386		80		1,540		16		1,700		36
Total real estate - mortgage		6,399		6,399		285		6,555		74		6,715		156
Consumer		49		49		49		49		1		49		1
Total with allowance recorded		22,666		29,489		5,877		22,801		210		23,303		430

Total Impaired Loans:
Commercial, financial and agricultural		20,063		27,777		5,423		20,457		174		21,153		358
Real estate - construction		1,623		1,626		120		1,626		22		1,627		44
Real estate - mortgage:
Owner-occupied commercial		6,288		6,455		27		6,611		88		6,685		180
1-4 family mortgage		3,495		3,495		178		3,495		35		3,495		74
Other mortgage		6,457		6,457		80		6,622		78		6,798		161
Total real estate - mortgage		16,240		16,407		285		16,728		201		16,978		415
Consumer		49		49		49		49		1		49		1
Total impaired loans	$	37,975	$	45,859	$	5,877	$	38,860	$	398	$	39,807	$	818

December 31, 2017
							For the twelve months
							ended December 31, 2017
			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	$	10,036	$	16,639	$	-	$	16,417	$	571
Real estate - construction		574		577		-		663		31
Real estate - mortgage:
Owner-occupied commercial		2,640		2,806		-		2,875		159
1-4 family mortgage		2,262		2,262		-		2,289		93
Other mortgage		746		746		-		727		44
Total real estate - mortgage		5,648		5,814		-		5,891		296
Consumer		38		39		-		42		3
Total with no allowance recorded		16,296		23,069		-		23,013		901

With an allowance recorded:
Commercial, financial and agricultural		16,411		16,992		4,276		17,912		651
Real estate - construction		997		997		120		997		56
Real estate - mortgage:
Owner-occupied commercial		3,914		3,914		601		3,801		215
1-4 family mortgage		980		980		281		1,113		54
Other mortgage		1,862		1,862		281		1,862		80
Total real estate - mortgage		6,756		6,756		1,163		6,776		349
Consumer		50		50		50		42		3
Total with allowance recorded		24,214		24,795		5,609		25,727		1,059

Total Impaired Loans:
Commercial, financial and agricultural		26,447		33,631		4,276		34,329		1,222
Real estate - construction		1,571		1,574		120		1,660		87
Real estate - mortgage:
Owner-occupied commercial		6,554		6,720		601		6,676		374
1-4 family mortgage		3,242		3,242		281		3,402		147
Other mortgage		2,608		2,608		281		2,589		124
Total real estate - mortgage		12,404		12,570		1,163		12,667		645
Consumer		88		89		50		84		6
Total impaired loans	$	40,510	$	47,864	$	5,609	$	48,740	$	1,960

Troubled Debt Restructurings (“TDR”) at June 30, 2018, December 31, 2017 and June 30, 2017 totaled $17.3 million, $20.6 million and $16.4 million, respectively. At June 30, 2018, the Company had a related allowance for loan losses of $3.6 million allocated to these TDRs, compared to $4.3 million at December 31, 2017 and $3.1 million at June 30, 2017. There were no modifications made to new TDRs or renewals of existing TDRs for the three and six months ended June 30, 2018. TDR activity by portfolio segment for the three and six months ended June 30, 2017 is presented in the table below.

	Three Months Ended June 30, 2017						Six Months Ended June 30, 2017
			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		5	$	7,205	$	7,205		5	$	7,205	$	7,205
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		-		-		-		-		-		-
		9	$	12,716	$	12,716		9	$	12,716	$	12,716

One commercial TDR loan totaling $0.3 million which was modified in the previous twelve months (i.e., twelve months prior to default) defaulted during the three and six months ended June 30, 2018. No TDRs which were modified in the previous twelve months defaulted during the three and six months ended June 30, 2017. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. As of June 30, 2018, the Company’s TDRs have all resulted from term extensions, rather than from interest rate reductions or debt forgiveness.

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

Stock Options

At June 30, 2018, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $244,000 and $482,000 for the three and six months ended June 30, 2018 and $285,000 and $622,000 for the three and six months ended June 30, 2017.

The Company’s 2005 Amended and Restated Stock Option Plan allows for the grant of stock options to purchase up to 6,150,000 shares of the Company’s common stock. 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. Both plans allow 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 plans 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.

	2018			2017
Expected volatility		24.13	%		29.00	%
Expected dividends		1.06	%		0.44	%
Expected term (in years)		6.25			6.25
Risk-free rate		2.67	%		2.09	%

The weighted average grant-date fair value of options granted during the six months ended June 30, 2018 and June 30, 2017 was $10.95 and $11.84, respectively.

The following table summarizes stock option activity during the six months ended June 30, 2018 and June 30, 2017:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (years)		Value
								(In Thousands)
Six Months Ended June 30, 2018:
Outstanding at January 1, 2018		1,666,834		$	10.68		5.5	$	51,377
Granted		12,750			41.50		9.7		(9	)
Exercised		(175,836	)		4.90		3.1		6,317
Forfeited		(6,000	)		19.50		7.7		128
Outstanding at June 30, 2018		1,497,748			11.58		5.3	$	43,787

Exercisable at June 30, 2018		748,600		$	7.34		3.9	$	25,811

Six Months Ended June 30, 2017:
Outstanding at January 1, 2017		2,026,334		$	9.00		6.2	$	57,636
Granted		51,500			37.95		9.6		(80	)
Exercised		(292,000	)		4.98		4.4		9,169
Forfeited		(32,000	)		21.96		8.6		(462	)
Outstanding at June 30, 2017		1,753,834			10.28		5.9	$	45,777

Exercisable at June 30, 2017		811,736		$	5.20		4.4	$	25,303

As of June 30, 2018, there was approximately $1,695,000 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 2.4 years.

Restricted Stock

The Company periodically grants restricted stock awards that vest upon service conditions. Dividend payments are made during the vesting period. The value of restricted stock is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period. As of June 30, 2018, there was $811,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.8 years of the restricted stock’s vesting period.

The following table summarizes restricted stock activity during the six months ended June 30, 2018 and 2017, respectively:

	Shares			Weighted Average Grant Date Fair Value
Six Months Ended June 30, 2018:
Non-vested at January 1, 2018		120,676		$	10.29
Granted		11,850			41.29
Vested		(61,700	)		5.81
Forfeited		-			-
Non-vested at June 30, 2018		70,826			19.38

Six Months Ended June 30, 2017:
Non-vested at January 1, 2017		118,676		$	8.88
Granted		6,000			38.16
Vested		(4,200	)		14.49
Forfeited		(800	)		15.74
Non-vested at June 30, 2017		119,676			9.94

NOTE 7 - 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 agreements with investors and rate lock commitments to customers as of June 30, 2018 and December 31, 2017 were not material.

NOTE 8 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU require a reclassification from / to accumulated other comprehensive income and to / from retained earnings for stranded tax effects resulting from the change in the newly enacted federal corporate income tax rate. Consequently, the amendments in this ASU eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018 with early adoption allowed. The Bank elected to early adopt this ASU as of December 31, 2017. The effect of the adoption of this ASU was to decrease accumulated other comprehensive income by $43,000 with the offset to retained earnings as recorded in the statement of changes in stockholders' equity. This represents the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and credit card fees, did not change significantly from current practice.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU became effective for the Company on January 1, 2018. Accordingly, the calculation of fair value of the loan portfolio was refined to incorporate exit pricing, but had no material impact on our fair value disclosures. See Note 10 – Fair Value Measurement.

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued 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 are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early application of this ASU is permitted for all entities. In January 2018, the FASB issued a proposal to allow an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has reviewed its current lessee portfolio and is assessing the impact of the new standard on its financial statements, related disclosures, systems, and internal controls. The accounting changes are expected to relate primarily to its leased branches and office space which are currently accounted for as operating leases. Based upon leases that were outstanding as of June 30, 2018, the Company anticipates recognizing a right of use asset and a lease liability, but it does not expect the new standard to have a material impact on its consolidated financial statements.

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. For SEC filers, the amendments in this ASU are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company has contracted with a third-party provider to implement enhanced modeling techniques that incorporate the loss measurement requirements in these amendments as part of adopting the ASU.

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 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this ASU will not impact the Company’s financial statements, as it has always amortized premiums to the first call date.

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 currently only includes 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 will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company will adopt this ASU effective January 1, 2019. The amendments are not expected to have an impact on the Company’s consolidated financial statements because it does not have any stock-based payment awards currently outstanding to nonemployees.

NOTE 10 - 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 $1,543,000 and $3,888,000 during the three and six months ended June 30, 2018, respectively, and $2,329,000 and $5,307,000 during the three and six months ended June 30, 2017, 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 $99,000 and $353,000 was recognized for the three and six months ended June 30, 2018, respectively, and $83,000 and $53,000 for the three and six months ended June 30, 2017, 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 $176,000 foreclosed and classified as OREO as of June 30, 2018 compared to none as of December 31, 2017.

Management is negotiating a deed in lieu of a foreclosure related to a $360,000 loan as of June 30, 2018.

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:

	Fair Value Measurements at June 30, 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 and government agencies	$	-	$	57,111	$	-	$	57,111
Mortgage-backed securities		-		314,431		-		314,431
State and municipal securities		-		120,531		-		120,531
Corporate debt		-		84,951		6,525		91,476
Total assets at fair value	$	-	$	577,024	$	6,525	$	583,549

	Fair Value Measurements at December 31, 2017 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 and government agencies	$	-	$	55,356	$	-	$	55,356
Mortgage-backed securities		-		276,498		-		276,498
State and municipal securities		-		134,849		-		134,849
Corporate debt		-		64,877		6,500		71,377
Total assets at fair value	$	-	$	531,580	$	6,500	$	538,080

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017:

	Fair Value Measurements at June 30, 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	$	-	$	-	$	32,098	$	32,098
Other real estate owned and repossessed assets		-		-		5,937		5,937
Total assets at fair value	$	-	$	-	$	38,035	$	38,035

	Fair Value Measurements at December 31, 2017
	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	$	-	$	-	$	34,901	$	34,901
Other real estate owned and repossessed assets		-		-		6,701		6,701
Total assets at fair value	$	-	$	-	$	41,602	$	41,602

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

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 prices obtained from independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing service regarding their methods of price discovery. Securities measured with these techniques are classified within Level 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 fair value hierarchy.

Equity securities: The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the redemption provision of the investments. Within equity securities, we hold an investment in a fund that qualifies us for Community Reinvestment Act credits. This investment is classified in Level 1 of the fair value hierarchy.

Mortgage loans held for sale: Loans are committed to be delivered to investors on a “best efforts delivery” basis within 30 days of origination. Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values.

Bank owned life insurance contracts: The carrying amounts in the statements of financial condition approximate these assets’ fair value.

	June 30, 2018				December 31, 2017
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(In Thousands)
Financial Assets:
Level 1 Inputs:
Cash and due from banks	$	150,086	$	150,086	$	238,062	$	238,062

Level 2 inputs:
Available for sale debt securities		577,024		577,024		531,580		531,580
Equity securities		993		993		1,034		1,034
Federal funds sold		15,585		15,585		239,524		239,524
Mortgage loans held for sale		4,605		4,605		4,459		4,459
Bank-owned life insurance contracts		129,082		129,082		127,519		127,519

Level 3 Inputs:
Available for sale debt securities		6,525		6,525		6,500		6,500
Held to maturity debt securities		250		250		250		250
Loans, net		6,033,312		5,961,354		5,756,954		5,712,441

Financial liabilities:
Level 2 inputs:
Deposits	$	6,085,682	$	6,078,286	$	6,091,674	$	6,086,085
Federal funds purchased		262,659		262,659		301,797		301,797
Other borrowings		64,648		65,677		64,832		65,921

NOTE 11 – SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2018, and events which occurred subsequent to June 30, 2018 but were not recognized in the financial statements.

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 six months ended June 30, 2018 and June 30, 2017.

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 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. ServisFirst Bancshares, Inc. 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 nineteen full-service banking offices located in Alabama, Tampa Bay, Florida, the panhandle of Florida, the greater Atlanta, Georgia metropolitan area, Charleston, South Carolina, and Nashville, Tennessee. Through the bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions.

Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings, and other deposits. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.

Overview

As of June 30, 2018, we had consolidated total assets of $7.085 billion, roughly flat when compared to consolidated assets of $7.082 billion at December 31, 2017. Total loans were $6.13 billion at June 30, 2018, up $278.4 million, or 4.8%, from $5.85 billion at December 31, 2017. Total deposits were $6.09 billion at June 30, 2018, which was flat from December 31, 2017.

Net income available to common stockholders for the three months ended June 30, 2018 was $33.5 million, an increase of $9.4 million, or 39.0%, from $24.1 million for the corresponding period in 2017. Basic and diluted earnings per common share were $0.63 and $0.62, respectively, for the three months ended June 30, 2018, compared to basic and diluted earnings per common share of $0.46 and $0.45 for the corresponding period in 2017.

Net income available to common stockholders for the six months ended June 30, 2018 was $66.1 million, an increase of $19.4 million, or 41.5%, from $46.7 million for the corresponding period in 2017. Basic and diluted earnings per common share were $1.24 and $1.22, respectively, for the six months ended June 30, 2018, compared to $0.88 and $0.86, respectively, for the corresponding period in 2017.

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, 2017.

Financial Condition

Cash and Cash Equivalents

At June 30, 2018, we had $15.6 million in federal funds sold, compared to $239.5 million at December 31, 2017. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2018, we had $80.2 million in balances at the Federal Reserve, compared to $150.3 million at December 31, 2017. This decrease was a result of our lower levels of excess liquidity due to loan growth and flat deposits during the first half of 2018.

Debt Securities

Debt securities available for sale totaled $583.5 million at June 30, 2018 and $538.1 million at December 31, 2017. We had pay downs of $25.9 million on mortgage-backed securities, maturities of $10.6 million on municipal and corporate securities, and calls of $3.4 million on municipal securities and subordinated notes during the six months ended June 30, 2018. We purchased $70.9 million in mortgage-backed securities, $27.0 million in municipal and corporate securities and $2.9 million of U.S. Treasury and government sponsored agency during the first six months of 2018.

The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer term securities purchased to generate level income for us over periods of interest rate fluctuations.

Each quarter, management assesses whether there have been events or economic circumstances indicating that a security on which there is an unrealized loss is other-than-temporarily impaired. Management considers several factors, including the amount and duration of the impairment; the intent and ability of the Company to hold the security for a period sufficient for a recovery in value; and known recent events specific to the issuer or its industry. In analyzing an issuer’s financial condition, management considers whether the securities are issued by agencies of the federal government, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports, among other things. As we currently do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity, and impairment positions at June 30, 2018 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. As of June 30, 2018, we owned restricted securities of First National Bankers Bank with an aggregate book value and market value of $0.4 million. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity.

The Bank does not invest in collateralized debt obligations (“CDOs”). We have $91.5 million of bank holding company subordinated notes. All of these notes were rated BBB or better by Kroll Bond Rating Agency at the time of our investment in them. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio at June 30, 2018 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 $285.5 million and $284.2 million as of June 30, 2018 and December 31, 2017, respectively.

Loans

We had total loans of $6.13 billion at June 30, 2018, an increase of $279.0 million, or 4.8%, compared to $5.85 billion at December 31, 2017. At June 30, 2018, the percentage of our loans in each of our regions were as follows:

	Percentage of Total Loans in MSA
Birmingham-Hoover, AL MSA		42.4	%
Huntsville, AL MSA		9.3	%
Dothan, AL MSA		9.3	%
Mobile, AL MSA		6.3	%
Montgomery, AL MSA		6.1	%
Total Alabama MSAs		73.4	%
Pensacola-Ferry Pass-Brent, FL MSA		6.3	%
Tampa-St. Petersburg-Clearwater, FL MSA		2.6	%
Total Florida MSAs		8.9	%
Atlanta-Sandy Springs-Roswell, GA MSA		5.0	%
Nashville-Davidson-Murfreesboro-Franklin, TN MSA		9.2	%
Charleston-North Charleston, SC MSA		3.5	%

Asset Quality

The allowance for loan losses 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 allowance for loan losses, 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 allowance at an adequate level. Our management believes that the allowance was adequate at June 30, 2018.

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. Management believes that the comprehensive allowance analysis developed by our credit administration group is in compliance with all current regulatory guidelines.

			Percentage of loans
			in each category
June 30, 2018	Amount		to total loans
	(In Thousands)
Commercial, financial and agricultural	$	36,178		38.27	%
Real estate - construction		4,062		8.53	%
Real estate - mortgage		23,438		52.11	%
Consumer		561		1.09	%
Total	$	64,239		100.00	%

			Percentage of loans
			in each category
December 31, 2017	Amount		to total loans
	(In Thousands)
Commercial, financial and agricultural	$	32,880		38.96	%
Real estate - construction		4,989		9.93	%
Real estate - mortgage		21,022		50.05	%
Consumer		515		1.06	%
Total	$	59,406		100.00	%

Nonperforming Assets

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased $3.3 million to $14.1 million at June 30, 2018, compared to $10.8 million at December 31, 2017. Of this total, nonaccrual loans of $8.0 million at June 30, 2018, represented a net decrease of $2.8 million from nonaccrual loans at December 31, 2017. Excluding credit card accounts, there were six loans 90 or more days past due and still accruing totaling $6.0 million, compared to no loans 90 or more days past due and still accruing at December 31, 2017. This increase primarily relates to one commercial real estate mortgage loan totaling $5.1 million which is well-collateralized and is actively in the process of collection. Troubled Debt Restructurings (“TDR”) at June 30, 2018 and December 31, 2017 were $17.3 million and $20.6 million, respectively. There were no loans newly classified as TDR or renewals of existing TDRs for the three and six months ended June 30, 2018. One relationship totaling $12.7 million, which includes nine loans of various types, was newly classified as TDR for the three and six months ended June 30, 2017. These TDRs are the result of term extensions rather than interest rate reductions or forgiveness of debt.

OREO and repossessed assets decreased to $5.9 million at June 30, 2018, from $6.7 million at December 31, 2017. The total number of OREO and repossessed asset accounts decreased to 11 at June 30, 2018, compared to 12 at December 31, 2017. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2018 and 2017:

	Six Months Ended June 30,
	2018			2017
	(In thousands)
Balance at beginning of period	$	6,701		$	4,988
Transfers from loans and capitalized expenses		751			586
Proceeds from sales		(1,252	)		(1,547	)
Internally financed sales		-			(185	)
Write-downs / net gain (loss) on sales		(263	)		49
Balance at end of period	$	5,937		$	3,891

The following table summarizes our nonperforming assets and TDRs at June 30, 2018 and December 31, 2017:

	June 30, 2018					December 31, 2017
				Number of					Number of
	Balance			Loans		Balance			Loans
	(Dollar Amounts In Thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	6,885			16	$	9,712			18
Real estate - construction		-			-		-			-
Real estate - mortgage:
Owner-occupied commercial		422			2		556			2
1-4 family mortgage		715			2		459			2
Other mortgage		-			-		-			-
Total real estate - mortgage		1,137			4		1,015			4
Consumer		-			-		38			1
Total Nonaccrual loans:	$	8,022			20	$	10,765			23

90+ days past due and accruing:
Commercial, financial and agricultural	$	431			6	$	12			3
Real estate - construction		-			-		-			-
Real estate - mortgage:
Owner-occupied commercial		250			1		-			-
1-4 family mortgage		288			2		-			-
Other mortgage		5,071			1		-			-
Total real estate - mortgage		5,609			4		-			-
Consumer		41			14		48			24
Total 90+ days past due and accruing:	$	6,081			24	$	60			27

Total Nonperforming Loans:	$	14,103			44	$	10,825			50
Plus: Other real estate owned and repossessions		5,937			11		6,701			12
Total Nonperforming Assets	$	20,040			55	$	17,526			62

Restructured accruing loans:
Commercial, financial and agricultural	$	10,061			6	$	11,438			6
Real estate - construction		997			1		997			1
Real estate - mortgage:
Owner-occupied commercial		3,664			2		3,664			2
1-4 family mortgage		850			1		850			1
Other mortgage		-			-		-			-
Total real estate - mortgage		4,514			3		4,514			3
Consumer		-			-		-			-
Total restructured accruing loans:	$	15,572			10	$	16,949			10
Total Nonperforming assets and restructured accruing loans	$	35,612			65	$	34,475			72

Ratios:
Nonperforming loans to total loans		0.23	%				0.19	%
Nonperforming assets to total loans plus other real estate owned and repossessions		0.33	%				0.30	%
Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions		0.58	%				0.59	%

The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for loan losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.

Impaired Loans and Allowance for Loan Losses

As of June 30, 2018, we had impaired loans of $38.0 million, inclusive of nonaccrual loans, a decrease of $2.5 million from $40.5 million as of December 31, 2017. We allocated $5.9 million of our allowance for loan losses at June 30, 2018 to these impaired loans, an increase of $0.3 million compared to $5.6 million as of December 31, 2017. 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 loan’s effective interest rate, 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 impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

Of the $38.0 million of impaired loans reported as of June 30, 2018, $20.1 million were commercial, financial and agricultural loans, $1.6 million were real estate construction loans, $16.2 million were real estate mortgage loans and $0.1 million were consumer loans.

Deposits

Total deposits were flat at $6.09 billion at June 30, 2018 compared to December 31, 2017. While we have not experienced growth in our deposits during the first half of 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.”

Other Borrowings

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $262.7 million and $301.8 million at June 30, 2018 and December 31, 2017, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 1.87% for the quarter ended June 30, 2018. Other borrowings consist of the following:

•

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

•

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

Liquidity

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

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At June 30, 2018, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $549.7 million. Additionally, the Bank had additional borrowing availability of approximately $458.0 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.

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 following table reflects the contractual maturities of our term liabilities as of June 30, 2018. 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	$	5,482,366	$	-	$	-	$	-	$	-
Certificates of deposit (2)		603,316		369,661		152,230		81,374		51
Federal funds purchased		262,659		262,659		-		-		-
Subordinated debentures		64,648		-		-		-		64,648
Operating lease commitments		19,533		3,418		6,356		5,120		4,639
Total	$	6,432,522	$	635,738	$	158,586	$	86,494	$	69,338

(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

As of June 30, 2018, 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 as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of June 30, 2018.

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 of capital to total regulatory or risk-weighted assets, as of June 30, 2018, December 31, 2017 and June 30, 2017:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2018:	(Dollars in thousands)
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	647,449		10.08	%	$	289,164		4.50	%		N/A		N/A
ServisFirst Bank		710,665		11.06	%		289,131		4.50	%	$	417,634		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		647,951		10.08	%		385,552		6.00	%		N/A		N/A
ServisFirst Bank		711,167		11.07	%		385,508		6.00	%		514,011		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		777,338		12.10	%		514,070		8.00	%		N/A		N/A
ServisFirst Bank		775,906		12.08	%		514,011		8.00	%		642,514		10.00
Tier 1 Capital to Average Assets:
Consolidated		647,951		9.21	%		281,293		4.00	%		N/A		N/A
ServisFirst Bank		711,167		10.11	%		281,271		4.00	%		351,589		5.00	%

As of December 31, 2017:
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	593,111		9.51	%	$	280,553		4.50	%		N/A		N/A
ServisFirst Bank		651,201		10.45	%		280,523		4.50	%	$	405,199		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		593,613		9.52	%		374,070		6.00	%		N/A		N/A
ServisFirst Bank		651,703		10.45	%		374,030		6.00	%		498,707		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		718,151		11.52	%		498,760		8.00	%		N/A		N/A
ServisFirst Bank		711,609		11.42	%		498,707		8.00	%		623,384		10.00	%
Tier 1 Capital to Average Assets:
Consolidated		593,613		8.51	%		278,970		4.00	%		N/A		N/A
ServisFirst Bank		651,703		9.35	%		278,954		4.00	%		348,693		5.00	%

As of June 30, 2017:
CET 1 Capital to Risk-Weighted Assets:
Consolidated	$	551,433		9.72	%	$	255,319		4.50	%		N/A		N/A
ServisFirst Bank		603,094		10.63	%		255,286		4.50	%	$	368,747		6.50	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		551,935		9.73	%		340,425		6.00	%		N/A		N/A
ServisFirst Bank		603,596		10.64	%		340,382		6.00	%		453,842		8.00	%
Total Capital to Risk-Weighted Assets:
Consolidated		662,169		11.67	%		453,900		8.00	%		N/A		N/A
ServisFirst Bank		659,155		11.62	%		453,842		8.00	%		567,303		10.00	%
Tier 1 Capital to Average Assets:
Consolidated		551,935		8.88	%		248,732		4.00	%		N/A		N/A
ServisFirst Bank		603,596		9.71	%		249,293		4.00	%		311,616		5.00	%

Off-Balance Sheet Arrangements

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

Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of June 30, 2018, 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 June 30, 2018 and December 31, 2017 for the settlement of any repurchase demands by investors.

Financial instruments whose contract amounts represent credit risk at June 30, 2018 are as follows:

	June 30, 2018
	(In Thousands)
Commitments to extend credit	$	1,957,118
Credit card arrangements		115,667
Standby letters of credit		31,834
	$	2,104,619

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

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

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

Results of Operations

Summary of Net Income

Net income and net income available to common stockholders for the three months ended June 30, 2018 was $33.5 million compared to net income and net income available to common stockholders of $24.2 and $24.1 million, respectively, for the three months ended June 30, 2017. Net income and net income available to common stockholders for the six months ended June 30, 2018 was $66.1 million compared to net income and net income available to common stockholders of $46.7 million for the six months ended June 30, 2017. The increase in net income for the three months ended June 30, 2018 over the same period in 2017 was primarily attributable to a $8.9 million increase in net interest income resulting from growth in earning assets and a $0.7 million increase in non-interest income, led by increased credit card income. The increase in net income for the six months ended June 30, 2018 compared to 2017 was primarily the result of a $19.3 million increase in net interest income resulting from growth in average earning assets and a $0.9 million increase in non-interest income, led by increased credit card income. Increases in non-interest expense of $2.1 million and $4.4 million, respectively, for the three and six months ended June 30, 2018 compared to 2017 partially offset increases in income.

Basic and diluted net income per common share were $0.63 and $0.62, respectively, for the three months ended June 30, 2018, compared to $0.46 and $0.45, respectively, for the corresponding period in 2017. Basic and diluted net income per common share were $1.24 and $1.22, respectively, for the six months ended June 30, 2018, compared to $0.88 and $0.86, respectively, for the corresponding period in 2017. Return on average assets for the three and six months ended June 30, 2018 was 1.91% compared to 1.55% and 1.50%, respectively, for the corresponding periods in 2017. Return on average common stockholders’ equity for the three and six months ended June 30, 2018 was 20.89% and 21.13% compared to 17.36% and 17.23%, respectively, for the corresponding periods in 2017.

Net Interest Income

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 $8.6 million, or 15.3%, to $64.7 million for the three months ended June 30, 2018 compared to $56.1 million for the corresponding period in 2017, and increased $18.7 million, or 17.2%, to $127.3 million for the six months ended June 30, 2018 compared to $108.6 million for the corresponding period in 2017. This increase was primarily attributable to growth in average earning assets, which increased $824.4 million, or 13.8%, from the second quarter of 2017 to the second quarter of 2018, and $728.8 million, or 12.1%, from the six months ended June 30, 2017 to the same period in 2018. The taxable-equivalent yield on interest-earning assets increased to 4.64% for the three months ended June 30, 2018 from 4.30% for the corresponding period in 2017, and increased to 4.57% for the six months ended June 30, 2018 from 4.17% for the corresponding period in 2017. The yield on loans for the three months ended June 30, 2018 was 4.93% compared to 4.60% for the corresponding period in 2017, and 4.87% compared to 4.55% for the six months ended June 30, 2018 and June 30, 2017, respectively. The cost of total interest-bearing liabilities increased to 1.13% for the three months ended June 30, 2018 compared to 0.74% for the corresponding period in 2017, and increased to 1.04% for the six months ended June 30, 2018 from 0.71% for the corresponding period in 2017. Net interest margin for the three months ended June 30, 2018 was 3.82% compared to 3.77% for the corresponding period in 2017, and 3.81% for the six months ended June 30, 2018 compared to 3.65% for the corresponding period in 2017.

The following tables show, for the three and six months ended June 30, 2018 and June 30, 2017, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended June 30,

(In thousands, except Average Yields and Rates)

	2018								2017
				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	$	5,958,377		$	73,326		4.94	%	$	5,192,812	$	59,508		4.60	%
Tax-exempt (3)		30,246			297		3.94			41,143		505		4.92
Total loans, net of unearned income		5,988,623			73,623		4.93			5,233,955		60,013		4.60
Mortgage loans held for sale		3,770			40		4.26			5,958		58		3.90
Investment securities:
Taxable		475,777			3,127		2.63			389,505		2,274		2.34
Tax-exempt (3)		112,145			729		2.60			133,590		1,129		3.38
Total investment securities (4)		587,922			3,856		2.62			523,095		3,403		2.60
Federal funds sold		141,915			694		1.96			98,598		287		1.17
Equity securities		1,022			3		1.18			1,030		27		10.51
Interest-bearing balances with banks		73,714			329		1.79			109,909		286		1.04
Total interest-earning assets	$	6,796,966		$	78,545		4.64	%	$	5,972,545	$	64,074		4.30	%
Non-interest-earning assets:
Cash and due from banks		68,190								68,894
Net fixed assets and equipment		59,262								49,813
Allowance for loan losses, accrued interest and other assets		129,585								143,286
Total assets	$	7,054,003								6,234,538

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	827,540		$	1,147		0.56	%	$	779,916	$	767		0.39	%
Savings deposits		54,842			47		0.34			48,150		36		0.30
Money market accounts		3,089,595			8,498		1.10			2,567,817		4,097		0.64
Time deposits		596,450			2,022		1.36			537,220		1,421		1.06
Total interest-bearing deposits		4,568,427			11,714		1.03			3,933,103		6,321		0.64
Federal funds purchased		295,309			1,378		1.87			336,344		933		1.11
Other borrowings		64,699			782		4.85			55,130		717		5.22
Total interest-bearing liabilities	$	4,928,435		$	13,874		1.13	%	$	4,324,577	$	7,971		0.74	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		1,469,194								1,338,514
Other liabilities		13,079								13,739
Stockholders' equity		650,641								556,521
Accumulated other comprehensive (loss) income		(7,346	)							1,187
Total liabilities and stockholders' equity	$	7,054,003							$	6,234,538
Net interest income				$	64,671						$	56,103
Net interest spread							3.51	%						3.56	%
Net interest margin							3.82	%						3.77	%

(1)

Non-accrual loans are included in average loan balances in all periods. Loan fees of $990 and $851 are included in interest income in the second quarter of 2018 and 2017, respectively.

(2)

Accretion on acquired loan discounts of $53 and $124 are included in interest income in the second quarter of 2018 and 2017, respectively.

(3)

Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21% for the second quarter of 2018 and 35% for the second quarter of 2017.

(4)

Unrealized (losses) gains of $(9,354) and $1,824 are excluded from the yield calculation in the second quarter of 2018 and 2017, respectively.

	For the Three Months Ended June 30,
	2018 Compared to 2017 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	$	9,205		$	4,613		$	13,818
Tax-exempt		(119	)		(89	)		(208	)
Total loans, net of unearned income		9,086			4,524			13,610
Mortgages held for sale		(23	)		5			(18	)
Debt securities:
Taxable		544			309			853
Tax-exempt		(164	)		(236	)		(400	)
Total debt securities		380			73			453
Federal funds sold		160			247			407
Equity securities		-			(24	)		(24	)
Interest-bearing balances with banks		(115	)		158			43
Total interest-earning assets		9,488			4,983			14,471

Interest-bearing liabilities:
Interest-bearing demand deposits		49			331			380
Savings		5			6			11
Money market accounts		965			3,436			4,401
Time deposits		169			432			601
Total interest-bearing deposits		1,188			4,205			5,393
Federal funds purchased		(126	)		571			445
Other borrowed funds		118			(53	)		65
Total interest-bearing liabilities		1,180			4,723			5,903
Increase in net interest income	$	8,308		$	260		$	8,568

Our 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 Six Months Ended June 30,

(In thousands, except Average Yields and Rates)

	2018								2017
				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	$	5,903,216		$	142,648		4.87	%	$	5,085,468	$	114,791		4.55	%
Tax-exempt (3)		33,285			662		3.98			34,271		822		4.80
Total loans, net of unearned income		5,936,501			143,310		4.87			5,119,739		115,613		4.55
Mortgage loans held for sale		3,734			81		4.37			5,798		115		4.00
Investment securities:
Taxable		455,873			5,872		2.58			378,985		4,361		2.30
Tax-exempt (3)		116,185			1,500		2.58			133,087		2,274		3.42
Total investment securities (4)		572,058			7,372		2.58			512,072		6,635		2.59
Federal funds sold		136,722			1,245		1.84			166,154		806		0.98
Equity securities		1,026			6		1.18			1,030		31		6.07
Interest-bearing balances with banks		84,801			709		1.69			202,265		872		0.87
Total interest-earning assets	$	6,734,842		$	152,723		4.57	%	$	6,007,058	$	124,072		4.17	%
Non-interest-earning assets:
Cash and due from banks		68,249								64,321
Net fixed assets and equipment		59,484								47,290
Allowance for loan losses, accrued interest and other assets		135,099								140,796
Total assets	$	6,997,674							$	6,259,465

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	863,227		$	2,290		0.53	%	$	784,569	$	1,499		0.39	%
Savings deposits		54,059			88		0.33			49,299		76		0.31
Money market accounts		3,058,558			15,209		1.00			2,630,672		7,973		0.61
Time deposits (5)		586,708			3,748		1.29			533,630		2,755		1.04
Total interest-bearing deposits		4,562,552			21,335		0.94			3,998,170		12,303		0.62
Federal funds purchased		296,175			2,550		1.74			347,981		1,699		0.98
Other borrowings		64,752			1,562		4.86			55,184		1,434		5.24
Total interest-bearing liabilities	$	4,923,479		$	25,447		1.04	%	$	4,401,335	$	15,436		0.71	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		1,429,426								1,297,578
Other liabilities		13,863								14,417
Stockholders' equity		636,137								545,936
Accumulated other comprehensive (loss) income		(5,231	)							199
Total liabilities and stockholders' equity	$	6,997,674							$	6,259,465
Net interest income				$	127,276						$	108,636
Net interest spread							3.53	%						3.46	%
Net interest margin							3.81	%						3.65	%

(1)

Non-accrual loans are included in average loan balances in all periods. Loan fees of $1,739 and $1,626 are included in interest income in 2018 and 2017, respectively.

(2)

Accretion on acquired loan discounts of $125 and $267 are included in interest income in 2018 and 2017, respectively.

(3)

Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21% in 2018 and 35% in 2017.

(4)

Unrealized (losses) gains of $(6,677) and $304 are excluded from the yield calculation in 2018 and 2017, respectively.

(5)

Accretion on acquired CD premiums of $32 are included in interest expense in 2017.

	For the Six Months Ended June 30,
	2018 Compared to 2017 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	$	19,363		$	8,494		$	27,857
Tax-exempt		(23	)		(137	)		(160	)
Total loans, net of unearned income		19,340			8,357			27,697
Mortgages held for sale		(44	)		10			(34	)
Debt securities:
Taxable		951			560			1,511
Tax-exempt		(265	)		(509	)		(774	)
Total debt securities		686			51			737
Federal funds sold		(164	)		603			439
Equity securities		-			(25	)		(25	)
Interest-bearing balances with banks		(688	)		525			(163	)
Total interest-earning assets		19,130			9,521			28,651

Interest-bearing liabilities:
Interest-bearing demand deposits		162			629			791
Savings		8			4			12
Money market accounts		1,465			5,771			7,236
Time deposits		293			700			993
Total interest-bearing deposits		1,928			7,104			9,032
Federal funds purchased		(285	)		1,136			851
Other borrowed funds		236			(108	)		128
Total interest-bearing liabilities		1,879			8,132			10,011
Increase in net interest income	$	17,251		$	1,389		$	18,640

Our 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 represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At June 30, 2018, total loans rated Special Mention, Substandard, and Doubtful were $104.3 million, or 1.7% of total loans, compared to $99.8 million, or 1.7% of total loans, at December 31, 2017. Impaired loans are reviewed specifically and separately to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. 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 allowance 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.

The provision for loan losses was $4.1 million for the three months ended June 30, 2018, a decrease of $0.3 million from $4.4 million for the three months ended June 30, 2017, and was $8.3 million for the six months ended June 30, 2018, a $1.1 million decrease compared to $9.4 million for the six months ended June 30, 2017. Net credit charge-offs to quarter-to-date average loans decreased 12 basis points to 0.13% for the second quarter of 2018 compared to 0.25% for the corresponding period in 2017 and decreased 12 basis points to 0.12% for the six months ended June 30, 2018 compared to 0.24% for the corresponding period in 2017. Nonperforming loans increased to $14.1 million, or 0.23% of total loans, at June 30, 2018 from $10.8 million, or 0.19% of total loans, at December 31, 2017, and were higher than $11.0 million, or 0.21% of total loans, at June 30, 2017. Impaired loans decreased to $38.0 million, or 0.62% of total loans, at June 30, 2018, compared to $40.5 million, or 0.69% of total loans, at December 31, 2017. The allowance for loan losses totaled $64.2 million, or 1.05% of total loans, net of unearned income, at June 30, 2018, compared to $59.4 million, or 1.02% of loans, net of unearned income, at December 31, 2017.

Noninterest Income

Noninterest income totaled $5.5 million for the three months ended June 30, 2018, an increase of $0.7 million, or 13.6%, compared to the corresponding period in 2017, and totaled $10.3 million for the six months ended June 30, 2018, an increase of $1.0 million, or 10.6%, compared to the corresponding period in 2017. Mortgage banking income decreased $275,000, or 25.8%, to $0.8 million for the three months ended June 30, 2018 compared to $1.1 million for the same period in 2017, and decreased $0.7 million, or 33.4%, to $1.3 million for the six months ended June 30, 2018 compared to $2.0 million for the same period in 2017. The number of loans originated during the second quarter of 2018 decreased approximately 10% when compared to the same quarter in 2017 on slower refinance activity. Credit card income increased $0.6 million for the three months ended June 30, 2018 from $1.2 million for the same period in 2017, and increased to $3.3 million for the six months ended June 30, 2018 compared to $2.4 million for the same period in 2017. The amount of purchases on cards increased by approximately 22% during the second quarter of 2018 compared to the second quarter of 2017.

Noninterest Expense

Noninterest expense totaled $24.0 million for the three months ended June 30, 2018, an increase of $2.1 million, or 9.8%, compared to $21.9 million for the same period in 2017, and totaled $47.5 million for the six months ended June 30, 2018, an increase of $4.4 million, or 10.2%, compared to $43.1 million for the same period in 2017.

Details of expenses are as follows:

•

Salary and benefit expense increased $1.1 million, or 8.9%, to $13.1 million for the three months ended June 30, 2018 from $12.0 million for the same period in 2017, and increased $2.7 million, or 11.2%, to $26.4 million for the six months ended June 30, 2018 from $23.7 million for the same period in 2017. Total employees increased from 433 as of June 30, 2017 to 459 as of June 30, 2018, or 6.0%.

•

Equipment and occupancy expense decreased $0.2 million, or 6.7%, to $2.1 million for the three months ended June 30, 2018 from $2.3 million for the corresponding period in 2017, and decreased $0.4 million, or 9.7%, to $4.1 million from $4.5 million for the six months ended June 30, 2018 compared to the corresponding period in 2017. A decrease in rental payments more than offset increased depreciation expense resulting from our fourth quarter 2017 move from our previous headquarters building, which was leased, to our new headquarters building, which is owned.

•

Professional services expense increased $0.1 million to $0.9 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $0.2 million to $1.7 million for the six months ended June 30, 2018 compared to the same period in 2017. This increase was primarily the result of increases in internal audit fees.

•

FDIC and other regulatory assessments increased $0.1 million to $1.2 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $0.2 million to $2.3 million for the six months ended June 30, 2018 compared to the same period in 2017. Asset growth drives up our assessment base.

•

OREO expense increased $0.1 million to $0.2 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $0.3 million to $0.5 million for the six months ended June 30, 2018 compared to the same period in 2017. We incurred some costs to excavate raw land in our Atlanta market in preparation to sell it.

•

Other operating expenses increased $0.9 million to $6.6 million for the three months ended June 30, 2018 compared to the same period in 2017, and increased $1.5 million to $12.6 million for the six months ended June 30, 2018 compared to the same period in 2017. Disputed debit card transaction write-offs, increases in data processing costs and increases in bank service charges related to our correspondent banking activities contributed to the increase in other operating expenses.

The following table presents our non-interest income and non-interest expense for the three and six month periods ending June 30, 2018 compared to the same periods in 2017.

	Three Months Ended June 30,										Six Months Ended June 30,
	2018		2017		$ change			% change			2018		2017		$ change			% change
Non-interest income:
Service charges on deposit accounts	$	1,653	$	1,382	$	271			19.6	%	$	3,238	$	2,736	$	502			18.3	%
Mortgage banking		789		1,064		(275	)		(25.8	)%		1,307		1,963		(656	)		(33.4	)%
Credit card income		1,756		1,189		567			47.7	%		3,334		2,368		966			40.8	%
Securities gains		-		-		-			-	%		4		-		4			400.0	%
Increase in cash surrender value life insurance		786		785		1			0.1	%		1,563		1,509		54			3.6	%
Other operating income		475		385		90			23.4	%		882		775		107			13.8	%
Total non-interest income	$	5,459	$	4,805	$	654			13.6	%	$	10,328	$	9,351	$	977			10.4	%

Non-interest expense:
Salaries and employee benefits	$	13,098	$	12,031	$	1,067			8.9	%	$	26,394	$	23,744	$	2,650			11.2	%
Equipment and occupancy expense		2,113		2,265		(152	)		(6.7	)%		4,067		4,505		(438	)		(9.7	)%
Professional services		924		808		116			14.4	%		1,729		1,579		150			9.5	%
FDIC and other regulatory assessments		1,159		1,081		78			7.2	%		2,292		2,078		214			10.3	%
OREO expense		160		56		104			185.7	%		476		132		344			260.6	%
Other operating expense		6,556		5,634		922			16.4	%		12,564		11,104		1,460			13.1	%
Total non-interest expense	$	24,010	$	21,875	$	2,135			9.8	%	$	47,522	$	43,142	$	4,380			10.2	%

Income Tax Expense

Income tax expense was $8.3 million for the three months ended June 30, 2018 versus $10.0 million for the same period in 2017, and was $15.4 million for the six months ended June 30, 2018 compared to $17.8 million for the same period in 2017. Lower corporate income tax rates resulting from the passage of the Tax Cuts and Jobs Act in December 2017 has resulted in lower effective tax rates. Our effective tax rate for the three and six months ended June 30, 2018 was 19.9% and 18.9%, respectively, compared to 29.2% and 27.6% for the corresponding periods in 2017, respectively. We recognized excess tax benefits as a credit to our income tax expense from the exercise and vesting of stock options and restricted stock during the three and six months ended June 30, 2018 of $457,000 and $1.9 million, respectively, compared to $1.4 million and $3.5 million during the three and six months ended June 30, 2017, respectively. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap”, which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2017, and there have been no material changes to our sensitivity to changes in interest rates since December 31, 2017, 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, as amended (the “Exchange Act”). This item contains the information about the evaluation that is referred to in the Certifications, and the information set forth below in this Item 4 should be read in conjunction with the Certifications for a more complete understanding of the Certifications.

Evaluation of Disclosure Controls and Procedures.

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

We conducted an evaluation (the "Evaluation") of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of June 30, 2018. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2018, our disclosure controls and procedures are effective to ensure that material information relating to ServisFirst Bancshares, Inc. 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, 2017, 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.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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

	SERVISFIRST BANCSHARES, INC.

Date: July 31, 2018	By	/s/ Thomas A. Broughton III
		Thomas A. Broughton III
		President and Chief Executive Officer


Date: July 31, 2018	By	/s/ William M. Foshee
		William M. Foshee
		Chief Financial Officer