ServisFirst Bancshares, Inc. 10-Q

sfbs20240630_10q.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ FORM 10-Q (Mark one) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2024 ☐ 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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading symbol(s) Name of each exchange on which registered Common stock, par value $.001 per share SFBS New York Stock Exchange Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if 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 practicable date. Class Outstanding as of July 29, 2024 Common stock, $.001 par value 54,529,826 1 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION 3 Item 1. Consolidated Financial Statements 3 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 42 Item 4. Controls and Procedures 43 PART II. OTHER INFORMATION 43 Item 1. Legal Proceedings 43 Item 1A. Risk Factors 43 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43 Item 3. Defaults Upon Senior Securities 43 Item 4. Mine Safety Disclosures 44 Item 5. Other Information 44 Item 6. Exhibits 44 EX-31.01 SECTION 302 CERTIFICATION OF THE CEO EX-31.02 SECTION 302 CERTIFICATION OF THE CFO EX-32.01 SECTION 906 CERTIFICATION OF THE CEO EX-32.02 SECTION 906 CERTIFICATION OF THE CFO 2 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) June 30, 2024 December 31, 2023 (Unaudited) (1) ASSETS Cash and due from banks $ 135,711 $ 123,430 Interest-bearing balances due from depository institutions 1,129,922 1,907,083 Federal funds sold 11,132 100,575 Cash and cash equivalents 1,276,765 2,131,088 Available-for-sale debt securities, at fair value 1,174,386 900,183 Held-to-maturity debt securities (fair value of $ 684,234 and $ 907,191 , respectively) 767,255 982,664 Restricted equity securities 11,300 10,226 Mortgage loans held for sale 11,174 5,074 Loans 12,332,780 11,658,829 Less allowance for credit losses ( 158,092 ) ( 153,317 ) Loans, net 12,174,688 11,505,512 Premises and equipment, net 59,200 59,324 Accrued interest and dividends receivable 62,936 59,181 Deferred tax asset, net 62,321 62,918 Other real estate owned and repossessed assets 1,458 995 Bank owned life insurance contracts 296,042 292,759 Goodwill 13,615 13,615 Other assets 138,672 106,129 Total assets $ 16,049,812 $ 16,129,668 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest-bearing demand $ 2,475,415 $ 2,643,101 Interest-bearing 10,783,977 10,630,410 Total deposits 13,259,392 13,273,511 Federal funds purchased 1,097,154 1,256,724 Other borrowings 64,739 64,735 Accrued interest and dividends payable 25,293 27,545 Other liabilities 92,658 66,748 Total liabilities 14,539,236 14,689,263 Stockholders' equity: Preferred stock, par value $ 0.001 per share; 1,000,000 authorized and undesignated at June 30, 2024 and December 31, 2023 Common stock, par value $ 0.001 per share; 200,000,000 shares authorized: 54,521,479 shares issued and outstanding at June 30, 2024; and 54,461,580 shares issued and outstanding at December 31, 2023 54 54 Additional paid-in capital 234,495 232,605 Retained earnings 1,322,048 1,254,841 Accumulated other comprehensive loss ( 46,521 ) ( 47,595 ) Total stockholders' equity attributable to ServisFirst Bancshares, Inc. 1,510,076 1,439,905 Noncontrolling interest 500 500 Total stockholders' equity 1,510,576 1,440,405 Total liabilities and stockholders' equity $ 16,049,812 $ 16,129,668 (1) Derived from audited financial statements. See Notes to Consolidated Financial Statements. 3 SERVISFIRST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Interest income: Interest and fees on loans $ 194,300 $ 171,718 $ 381,278 $ 335,450 Taxable securities 16,158 11,570 32,137 22,465 Nontaxable securities 9 17 18 38 Federal funds sold 538 227 1,079 841 Other interest and dividends 16,535 6,124 39,738 12,184 Total interest income 227,540 189,656 454,250 370,978 Interest expense: Deposits 104,671 71,971 208,737 127,684 Borrowed funds 16,994 16,434 37,143 33,742 Total interest expense 121,665 88,405 245,880 161,426 Net interest income 105,875 101,251 208,370 209,552 Provision for credit losses 5,353 6,654 9,721 10,851 Net interest income after provision for credit losses 100,522 94,597 198,649 198,701 Noninterest income: Service charges on deposit accounts 2,293 2,142 4,443 4,076 Mortgage banking 1,379 696 2,057 1,138 Credit card income 2,333 2,406 4,488 4,095 Bank-owned life insurance income 2,058 2,496 5,289 4,117 Other operating income 828 842 1,427 1,477 Total noninterest income 8,891 8,582 17,704 14,903 Noninterest expenses: Salaries and employee benefits 24,213 18,795 47,199 37,861 Equipment and occupancy expense 3,567 3,421 7,124 6,856 Third party processing and other services 7,465 6,198 14,631 13,482 Professional services 1,741 1,580 3,205 3,234 FDIC and other regulatory assessments 2,202 2,242 6,107 3,759 Other real estate owned expense 7 6 37 12 Other operating expenses 3,623 6,224 10,818 12,926 Total noninterest expenses 42,818 38,466 89,121 78,130 Income before income taxes 66,595 64,713 127,232 135,474 Provision for income taxes 14,459 11,245 25,070 24,035 Net income 52,136 53,468 102,162 111,439 Dividends on preferred stock 31 31 31 31 Net income available to common stockholders $ 52,105 53,437 102,131 111,408 Basic earnings per common share $ 0.96 $ 0.98 $ 1.87 $ 2.05 Diluted earnings per common share $ 0.95 $ 0.98 $ 1.87 $ 2.04 See Notes to Consolidated Financial Statements. 4 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Net income $ 52,136 $ 53,468 $ 102,162 $ 111,439 Other comprehensive income (loss), net of tax Unrealized net holding gains (losses) arising during period from securities available for sale, net of tax of $ 65 and $ (5,182) for the three ended June 30, 2024 and 2023, respectively, and $ 2,437 and $( 5,403 ) for the six months ended June 30, 2024 and 2023, respectively 205 ( 15,455 ) 1,344 ( 16,122 ) Amortization of net unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax of $ (45) and $ (51) for the three ended June 30, 2024 and 2023, respectively, and $ (82) and $ (96) for the six months ended June 30, 2024 and 2023, respectively ( 134 ) ( 158 ) ( 270 ) ( 287 ) Other comprehensive income (loss), net of tax 71 ( 15,613 ) 1,074 ( 16,409 ) Comprehensive income $ 52,207 $ 37,855 $ 103,236 $ 95,030 See Notes to Consolidated Financial Statements. 5 SERVISFIRST BANCSHARES, INC.​​​​​ CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share amounts) (Unaudited) Three Months Ended June 30, Common Shares Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling interest Total Stockholders' Equity Balance, April 1, 2023 54,398,025 $ - $ 54 $ 229,631 $ 1,152,681 $ ( 43,049 ) $ 500 $ 1,339,817 Common dividends declared, $ 0.28 per share - - - - ( 15,239 ) - - ( 15,239 ) Preferred dividends paid - - - - ( 31 ) - - ( 31 ) Dividends on nonvested restricted stock recognized as compensation expense - - - - 41 - - 41 Issue restricted shares pursuant to stock incentives, net of forfeitures 16,555 - - - - - - - Issue shares of common stock upon exercise of stock options 10,453 - - 168 - - - 168 2,247 shares of common stock withheld in net settlement upon exercise of stock options - - - ( 122 ) - - - ( 122 ) Stock-based compensation expense - - - 982 - - - 982 Other comprehensive loss, net of tax - - - - - ( 15,613 ) - ( 15,613 ) Net income - - - - 53,468 - - 53,468 Balance, June 30, 2023 54,425,033 $ - $ 54 $ 230,659 $ 1,190,920 $ ( 58,662 ) $ 500 $ 1,363,471 Balance, April 1, 2024 54,507,778 $ - $ 54 $ 233,560 $ 1,286,245 $ ( 46,592 ) $ 500 $ 1,473,767 Common dividends declared, $ 0.30 per share - - - - ( 16,356 ) - - ( 16,356 ) Preferred dividends paid - - - - ( 31 ) - - ( 31 ) Dividends on nonvested restricted stock recognized as compensation expense - - - - 54 - - 54 Issue restricted shares pursuant to stock incentives, net of forfeitures 2,113 - - - - - - - Issue shares of common stock upon exercise of stock options 11,588 - - 238 - - - 238 3,162 shares of common stock withheld in net settlement upon exercise of stock options - - - ( 182 ) - - - ( 182 ) Stock-based compensation expense - - - 879 - - - 879 Other comprehensive income, net of tax - - - - - 71 - 71 Net income - - - - 52,136 - - 52,136 Balance, June 30, 2024 54,521,479 $ - $ 54 $ 234,495 $ 1,322,048 $ ( 46,521 ) $ 500 $ 1,510,576 6 Six Months Ended June 30, Common Shares Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling interest Total Stockholders' Equity Balance, January 1, 2023 54,326,527 $ - $ 54 $ 229,693 $ 1,109,902 $ ( 42,253 ) $ 500 $ 1,297,896 Common dividends paid, $ 0.28 per share - - - - ( 15,233 ) - - ( 15,233 ) Common dividends declared, $ 0.28 per share - - - - ( 15,239 ) - - ( 15,239 ) Preferred dividends paid - - - - ( 31 ) - - ( 31 ) Dividends on nonvested restricted stock recognized as compensation expense - - - - 82 - - 82 Issue restricted shares pursuant to stock incentives, net of forfeitures 37,268 - - - - - - - Issue shares of common stock upon exercise of stock options 61,238 - - 1,014 - - - 1,014 26,462 shares of common stock withheld in net settlement upon exercise of stock options - - - ( 1,838 ) - - - ( 1,838 ) Stock-based compensation expense - - - 1,790 - - - 1,790 Other comprehensive loss, net of tax - - - - - ( 16,409 ) - ( 16,409 ) Net income - - - - 111,439 - - 111,439 Balance, June 30, 2023 54,425,033 $ - $ 54 $ 230,659 $ 1,190,920 $ ( 58,662 ) $ 500 $ 1,363,471 Balance, January 1, 2024 54,461,580 $ - $ 54 $ 232,605 $ 1,254,841 $ ( 47,595 ) $ 500 $ 1,440,405 Impact of adoption ASU 2023-02, net of tax - - - - ( 2,269 ) - - ( 2,269 ) Adjusted balance, January 1, 2024 54,461,580 - 54 232,605 1,252,572 ( 47,595 ) 500 1,438,136 Common dividends paid, $ 0.30 per share - - - - ( 16,353 ) - - ( 16,353 ) Common dividends declared, $ 0.30 per share - - - - ( 16,356 ) - - ( 16,356 ) Preferred dividends paid - - - - ( 31 ) - - ( 31 ) Dividends on nonvested restricted stock recognized as compensation expense - - - - 54 - - 54 Issue restricted shares pursuant to stock incentives, net of forfeitures 42,025 - - - - - - - Issue shares of common stock upon exercise of stock options 17,874 - - 369 - - - 369 5,176 shares of common stock withheld in net settlement upon exercise of stock options - - - ( 315 ) - - - ( 315 ) Stock-based compensation expense - - - 1,836 - - - 1,836 Other comprehensive income, net of tax - - - - - 1,074 - 1,074 Net income - - - - 102,162 - - 102,162 Balance, June 30, 2024 54,521,479 $ - $ 54 $ 234,495 $ 1,322,048 $ ( 46,521 ) $ 500 $ 1,510,576 See Notes to Consolidated Financial Statements. 7 SERVISFIRST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 2024 2023 OPERATING ACTIVITIES Net income $ 102,162 $ 111,439 Adjustments to reconcile net income to net cash provided by operations Deferred tax benefit 596 312 Provision for credit losses 9,721 10,851 Depreciation 2,239 2,142 Accretion on acquired loans 96 98 Amortization of investments in tax credit partnerships 4,807 6,540 Net (accretion) amortization of debt securities available-for-sale ( 311 ) 226 Increase in accrued interest and dividends receivable ( 3,755 ) ( 1,761 ) Stock-based compensation expense 1,836 1,790 (Decrease) increase in accrued interest and dividends payable ( 2,252 ) 4,446 Proceeds from sale of mortgage loans held for sale 89,460 51,674 Originations of mortgage loans held for sale ( 93,502 ) ( 52,910 ) Gain on sale of mortgage loans held for sale ( 2,058 ) ( 1,138 ) Net gain (loss) on sale of other real estate owned and repossessed assets ( 95 ) ( 5 ) Increase in cash surrender value of life insurance contracts ( 2,058 ) ( 4,117 ) Net change in other assets, liabilities, and other operating activities ( 5,162 ) ( 36,094 ) Net cash provided by operating activities 101,724 93,493 INVESTMENT ACTIVITIES Purchases of debt securities available-for-sale ( 641,347 ) ( 414,056 ) Proceeds from maturities, calls and paydowns of debt securities available-for-sale 367,459 46,203 Purchases of debt securities held-to-maturity ( 45,472 ) ( 48,723 ) Proceeds from maturities, calls and paydowns of debt securities held-to-maturity 260,881 25,155 Purchases of restricted equity securities ( 1,074 ) ( 12,750 ) Proceeds from sale of restricted equity securities - 13,177 Investment in tax credit partnerships and SBIC ( 8,800 ) ( 5,817 ) Return of capital from tax credit partnerships and SBIC 139 - (Increase) decrease in loans ( 680,141 ) 77,363 Purchases of premises and equipment ( 2,115 ) ( 1,947 ) Proceeds from sale of other real estate owned and repossessed assets 780 158 Net cash used in investing activities ( 749,690 ) ( 321,237 ) FINANCING ACTIVITIES Net decrease in non-interest-bearing deposits ( 167,686 ) ( 466,245 ) Net increase in interest-bearing deposits 153,567 1,207,659 Net decrease in federal funds purchased ( 159,570 ) ( 320,732 ) FHLB advances - 300,000 Repayment of FHLB advances - ( 300,000 ) Proceeds from exercise of stock options 369 1,014 Taxes paid in net settlement of tax obligation upon exercise of stock options ( 315 ) ( 1,838 ) Dividends paid on common stock ( 32,691 ) ( 30,444 ) Dividends paid on preferred stock ( 31 ) ( 31 ) Net cash (used in) provided by financing activities ( 206,357 ) 389,383 Net (decrease) increase in cash and cash equivalents ( 854,323 ) 161,639 Cash and cash equivalents at beginning of period 2,131,088 816,053 Cash and cash equivalents at end of period $ 1,276,765 $ 977,692 SUPPLEMENTAL DISCLOSURE Cash paid for: Interest $ 248,132 $ 156,980 Income taxes 27,134 46,968 NONCASH TRANSACTIONS Other real estate acquired in settlement of loans $ 1,148 $ 737 Dividends on nonvested restricted stock reclassified as compensation expense 55 41 Dividends declared 16,356 15,239 See Notes to Consolidated Financial Statements. 8 SERVISFIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (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 nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations that 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, 2023. All reported amounts are in thousands except share and per share data. 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 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. The difference in earnings per share under the two-class method was not significant for both the three and six month periods ended June 30, 2024 and 2023. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In Thousands, Except Shares and Per Share Data) Earnings per common share Weighted average common shares outstanding 54,516,638 54,411,016 54,503,829 54,385,775 Net income available to common stockholders $ 52,105 $ 53,437 $ 102,131 $ 111,408 Basic earnings per common share $ 0.96 $ 0.98 $ 1.87 $ 2.05 Weighted average common shares outstanding 54,516,638 54,411,016 54,503,829 54,385,775 Dilutive effects of assumed exercise of stock options and vesting of performance shares 92,041 109,214 98,203 141,542 Weighted average common and dilutive potential common shares outstanding 54,608,679 54,520,230 54,602,032 54,527,317 Net income available to common stockholders $ 52,105 $ 53,437 $ 102,131 $ 111,408 Diluted earnings per common share $ 0.95 $ 0.98 $ 1.87 $ 2.04 NOTE 4 - SECURITIES The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2024 and December 31, 2023 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Loss Value June 30, 2024 (In Thousands) Debt Securities Available-for-Sale U.S. Treasury Securities $ 609,123 $ 38 $ ( 340 ) $ 608,821 Mortgage-backed securities 268,557 1 ( 27,195 ) 241,363 State and municipal securities 11,140 1 ( 1,162 ) 9,979 Corporate debt 350,692 - ( 36,469 ) 314,223 Total $ 1,239,512 $ 40 $ ( 65,166 ) $ 1,174,386 Debt Securities Held-to-Maturity U.S. Treasury Securities $ 274,270 $ - $ ( 23,932 ) $ 250,338 Mortgage-backed securities 484,911 18 ( 58,379 ) 426,550 State and municipal securities 8,074 - ( 728 ) 7,346 Total $ 767,255 $ 18 $ ( 83,039 ) $ 684,234 December 31, 2023 Debt Securities Available-for-Sale U.S. Treasury Securities $ 340,556 $ 251 $ - $ 340,807 Mortgage-backed securities 241,458 6 ( 25,979 ) 215,485 State and municipal securities 11,400 1 ( 1,178 ) 10,223 Corporate debt 375,676 - ( 42,009 ) 333,667 Total $ 969,090 $ 258 $ ( 69,166 ) $ 900,183 Debt Securities Held-to-Maturity U.S. Treasury Securities $ 508,985 $ - $ ( 24,718 ) $ 484,267 Mortgage-backed securities 465,615 3 ( 50,025 ) 415,593 State and municipal securities 8,063 - ( 732 ) 7,331 Total $ 982,664 $ 3 $ ( 75,475 ) $ 907,191 9 The amortized cost and fair value of debt securities as of June 30, 2024 and December 31, 2023 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, 2024 December 31, 2023 Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Debt securities available-for-sale Due within one year $ 566,771 $ 566,467 $ 350,400 $ 350,396 Due from one to five years 116,025 111,359 70,016 67,334 Due from five to ten years 285,159 252,915 304,216 264,893 Due after ten years 3,000 2,282 3,000 2,076 Mortgage-backed securities 268,557 241,363 241,458 215,485 $ 1,239,512 $ 1,174,386 $ 969,090 $ 900,183 Debt securities held-to-maturity Due within one year $ 25,225 $ 25,176 $ 260,047 $ 257,835 Due from one to five years 253,830 229,634 203,481 185,741 Due from five to ten years 3,289 2,874 53,521 48,022 Mortgage-backed securities 484,911 426,550 465,615 415,593 $ 767,255 $ 684,234 $ 982,664 $ 907,191 All mortgage-backed securities are with government-sponsored enterprises such as Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation. Restricted equity securities are comprised entirely of restricted investment in Federal Home Loan Bank stock for membership requirements. The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law as of June 30, 2024 and December 31, 2023 was $ 1.59 billion and $ 1.49 billion, respectively. The increase in pledged investment is due to increases in public funds balances deposited with the Bank during the second quarter of 2024. The following table identifies, as of June 30, 2024 and December 31, 2023, 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. 10 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, 2024 Debt Securities available-for-sale U.S. Treasury Securities $ ( 340 ) $ 164,413 $ - $ - $ ( 340 ) $ 164,413 Mortgage-backed securities ( 87 ) 46,401 ( 27,108 ) 194,850 ( 27,195 ) 241,251 State and municipal securities - - ( 1,162 ) 9,533 ( 1,162 ) 9,533 Corporate debt ( 2,634 ) 20,786 ( 33,836 ) 293,437 ( 36,469 ) 314,223 Total $ ( 3,061 ) $ 231,600 $ ( 62,106 ) $ 497,820 $ ( 65,166 ) $ 729,420 Debt Securities held-to-maturity U.S. Treasury Securities $ - $ - $ ( 23,932 ) $ 250,340 $ ( 23,932 ) $ 250,339 Mortgage-backed securities ( 564 ) 41,186 ( 57,815 ) 378,928 ( 58,379 ) 420,114 State and municipal securities - - ( 728 ) 7,096 ( 728 ) 7,096 Total $ ( 564 ) $ 41,186 $ ( 82,475 ) $ 636,364 $ ( 83,039 ) $ 677,549 December 31, 2023 Debt Securities available-for-sale U.S. Treasury Securities $ - $ - $ - $ - $ - $ - Government Agency Securities - - - - - - Mortgage-backed securities ( 6 ) 704 ( 25,973 ) 214,393 ( 25,979 ) 215,097 State and municipal securities - - ( 1,178 ) 9,777 ( 1,178 ) 9,777 Corporate debt ( 794 ) 15,141 ( 41,214 ) 311,666 ( 42,009 ) 326,807 Total $ ( 801 ) $ 15,845 $ ( 68,365 ) $ 535,836 $ ( 69,166 ) $ 551,681 Debt Securities held-to-maturity U.S. Treasury Securities $ - $ - $ ( 24,718 ) $ 484,267 $ ( 24,718 ) $ 484,267 Mortgage-backed securities ( 1 ) 430 ( 50,024 ) 411,585 ( 50,025 ) 412,015 State and municipal securities - - ( 732 ) 7,081 ( 732 ) 7,081 Total $ ( 1 ) $ 430 $ ( 75,474 ) $ 902,933 $ ( 75,475 ) $ 903,363 At June 30, 2024 and 2023, no allowance for credit losses (“ACL”) has been recognized on available-for-sale debt securities in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired. This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to available-for-sale debt securities. The issuers of these debt securities continue to make timely principal and interest payments under the contractual terms of the securities. The Company does not intend to sell these debt securities and it is more likely than not that the Company will not be required to sell the debt securities before recovery of their amortized cost, which may be at maturity. The unrealized losses are due to increases in market interest rates over the yields available at the time the debt securities were purchased. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, and (iv) internal forecasts. Historical loss rates associated with securities having similar grades as those in our portfolio have generally not been significant. Furthermore, as of June 30, 2024 and 2023, there were no past due principal or interest payments associated with these securities. Based upon (i) the issuer’s strong bond ratings and (ii) a zero historical loss rate, no allowance for credit losses has been recorded for held-to-maturity State and Municipal Securities as such amount is not material at June 30, 2024 and 2023. All debt securities in an unrealized loss position as of June 30, 2024 continue to perform as scheduled and the Company does not believe there is a possible credit loss or that an allowance for credit loss on these debt securities is necessary. NOTE 5 – LOANS The loan portfolio is classified based on the underlying collateral utilized to secure each loan for financial reporting purposes. This classification is consistent with the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (FDIC). 11 Commercial, financial and agricultural - Includes loans to business enterprises issued for commercial, industrial, agricultural production and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Real estate – construction – Includes loans secured by real estate to finance land development or the construction of industrial, commercial or residential buildings. Repayment is dependent upon the completion and eventual sale, refinance or operation of the related real estate project. Owner-occupied commercial real estate mortgage – Includes loans secured by nonfarm nonresidential properties for which the primary source of repayment is the cash flow from the ongoing operations conducted by the party that owns the property. 1-4 family real estate mortgage – Includes loans secured by residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower. Other real estate mortgage – Includes loans secured by nonowner-occupied properties, including office buildings, industrial buildings, warehouses, retail buildings, multifamily residential properties and farmland. Repayment is primarily dependent on income generated from the underlying collateral. Consumer – Includes loans to individuals not secured by real estate. Repayment is dependent upon the personal cash flow of the borrower. The following table details the Company’s loans at June 30, 2024 and December 31, 2023: June 30, December 31, 2024 2023 (Dollars In Thousands) Commercial, financial and agricultural $ 2,935,577 $ 2,823,986 Real estate - construction 1,510,677 1,519,619 Real estate - mortgage: Owner-occupied commercial 2,399,644 2,257,163 1-4 family mortgage 1,350,428 1,249,938 Other mortgage 4,072,007 3,744,346 Subtotal: Real estate - mortgage 7,822,079 7,251,447 Consumer 64,447 63,777 Total Loans 12,332,780 11,658,829 Less: Allowance for credit losses ( 158,092 ) ( 153,317 ) Net Loans $ 12,174,688 $ 11,505,512 Commercial, financial and agricultural 23.80 % 24.22 % Real estate - construction 12.25 % 13.03 % Real estate - mortgage: Owner-occupied commercial 19.46 % 19.36 % 1-4 family mortgage 10.95 % 10.72 % Other mortgage 33.03 % 32.12 % Subtotal: Real estate - mortgage 63.43 % 62.20 % Consumer 0.52 % 0.55 % 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 credit loss portfolio segments and classes. These categories are utilized to develop the associated allowance for credit 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. 12 ● 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 presently 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. The table below presents loan balances classified by credit quality indicator, loan type and based on year of origination as of June 30, 2024: June 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Revolving lines of credit converted to term loans Total (In Thousands) Commercial, financial and agricultural Pass $ 390,883 $ 219,953 $ 404,844 $ 323,452 $ 102,767 $ 222,767 $ 1,167,822 $ 370 $ 2,832,858 Special Mention 699 376 1,740 4,995 4,092 6,358 22,752 - 41,012 Substandard - accruing 2,604 1,295 1,312 1,513 413 26,317 7,032 - 40,486 Substandard -Non-accrual 429 2,574 226 2,441 395 12,567 2,589 - 21,221 Total Commercial, financial and agricultural $ 394,615 $ 224,198 $ 408,122 $ 332,401 $ 107,667 $ 268,009 $ 1,200,195 $ 370 $ 2,935,577 Current-period gross write-offs $ - $ 1,002 $ - $ - $ 675 $ 2,548 $ 972 $ - $ 5,197 Real estate - construction Pass $ 126,125 $ 273,888 $ 737,590 $ 227,956 $ 49,963 $ 19,286 $ 72,308 $ - $ 1,507,116 Special Mention - 590 - - - - - - 590 Substandard - accruing - - 1,998 - - 973 - - 2,971 Total Real estate - construction $ 126,125 $ 274,478 $ 739,588 $ 227,956 $ 49,963 $ 20,259 $ 72,308 $ - $ 1,510,677 Owner-occupied commercial Pass $ 164,537 $ 182,089 $ 512,548 $ 513,998 $ 280,086 $ 644,086 $ 56,278 $ 824 $ 2,354,446 Special Mention - 1,774 7,594 775 7,658 10,160 - - 27,961 Substandard - accruing - 417 1,158 6,797 - 2,460 - - 10,832 Substandard -Non-accrual - - - - - 6,405 - - 6,405 Total Owner-occupied commercial $ 164,537 $ 184,280 $ 521,300 $ 521,570 $ 287,744 $ 663,111 $ 56,278 $ 824 $ 2,399,644 Current-period gross write-offs $ - $ - $ - $ 100 $ - $ - $ - $ - $ 100 1-4 family mortgage Pass $ 154,079 $ 148,882 $ 357,692 $ 210,230 $ 73,716 $ 92,343 $ 297,858 $ - $ 1,334,800 Special Mention - 549 258 2,477 913 4,214 1,176 - 9,587 Substandard - accruing - - - - - 420 293 - 713 Substandard -Non-accrual - 401 344 858 871 1,471 1,383 - 5,328 Total 1-4 family mortgage $ 154,079 $ 149,832 $ 358,294 $ 213,565 $ 75,500 $ 98,448 $ 300,710 $ - $ 1,350,428 Current-period gross write-offs $ - $ - $ 19 $ 62 $ - $ 5 $ - $ - $ 86 Other mortgage Pass $ 245,532 $ 161,591 $ 1,276,730 $ 1,097,461 $ 421,990 $ 745,569 $ 98,279 $ 246 $ 4,047,398 Special Mention - - 5,024 875 - 3,439 - - 9,338 Substandard - accruing - - 4,976 - - 9,797 - - 14,773 Substandard -Non-accrual - - - - - 498 - - 498 Total Other mortgage $ 245,532 $ 161,591 $ 1,286,730 $ 1,098,336 $ 421,990 $ 759,303 $ 98,279 $ 246 $ 4,072,007 Consumer Pass $ 24,311 $ 4,034 $ 3,056 $ 1,863 $ 1,391 $ 3,692 $ 26,026 $ - $ 64,373 Special Mention - - - - - 22 - - 22 Substandard - accruing - - - - - - 50 - 50 Substandard -Non-accrual - - - - - 2 - - 2 Total Consumer $ 24,311 $ 4,034 $ 3,056 $ 1,863 $ 1,391 $ 3,716 $ 26,076 $ - $ 64,447 Current-period gross write-offs $ - $ 8 $ - $ - $ - $ 24 $ 174 $ - $ 206 Total Loans Pass $ 1,105,467 $ 990,437 $ 3,292,460 $ 2,374,960 $ 929,913 $ 1,727,743 $ 1,718,571 $ 1,440 $ 12,140,991 Special Mention 699 3,289 14,616 9,122 12,663 24,193 23,928 - 88,510 Substandard - accruing 2,604 1,712 9,444 8,310 413 39,967 7,375 - 69,825 Substandard -Non-accrual 429 2,975 570 3,299 1,266 20,943 3,972 - 33,454 Total Loans $ 1,109,199 $ 998,413 $ 3,317,090 $ 2,395,691 $ 944,255 $ 1,812,846 $ 1,753,846 $ 1,440 $ 12,332,780 Current-period gross write-offs $ - $ 1,010 $ 19 $ 162 $ 675 $ 2,577 $ 1,146 $ - $ 5,589 13 Loans by credit quality indicator, loan type and based on year of origination as of December 31, 2023 were as follows: December 31, 2023 2024 2023 2022 2021 2020 Prior Revolving Revolving lines of credit converted to term loans Total (In Thousands) Commercial, financial and agricultural Pass $ 341,335 $ 455,281 $ 354,034 $ 162,543 $ 100,032 $ 151,527 $ 1,161,324 $ 491 $ 2,726,567 Special Mention 4,275 1,982 5,105 5,765 1,320 3,549 21,769 7 43,772 Substandard - accruing 1,410 - 2,830 368 9,501 27,962 4,360 - 46,431 Substandard -Non-accrual - 2 767 206 - 3,336 2,905 - 7,216 Total Commercial, financial and agricultural $ 347,020 $ 457,265 $ 362,736 $ 168,882 $ 110,853 $ 186,374 $ 1,190,358 $ 498 $ 2,823,986 Current-period gross write-offs $ 1,213 $ 4,690 $ 2,531 $ 779 $ 4 $ 2,014 $ 1,998 $ - $ 13,229 Real estate - construction Pass $ 216,745 $ 874,903 $ 283,012 $ 49,668 $ 4,866 $ 16,558 $ 72,156 $ - $ 1,517,908 Special Mention 589 - - - - - - - 589 Substandard - accruing - 33 - - - 978 - - 1,011 Substandard -Non-accrual - - - - - - - 111 111 Total Real estate - construction $ 217,334 $ 874,936 $ 283,012 $ 49,668 $ 4,866 $ 17,536 $ 72,156 $ 111 $ 1,519,619 Current-period gross write-offs $ - $ - $ 19 $ - $ - $ - $ - $ 89 $ 108 Owner-occupied commercial Pass $ 148,915 $ 478,364 $ 517,667 $ 300,978 $ 181,864 $ 512,752 $ 64,170 $ 844 $ 2,205,554 Special Mention 5,369 1,411 7,705 8,317 8,530 7,539 - - 38,871 Substandard - accruing 1,358 - - - - 4,292 - - 5,650 Substandard -Non-accrual - - - - 2,329 4,759 - - 7,088 Total Owner-occupied commercial $ 155,642 $ 479,775 $ 525,372 $ 309,295 $ 192,723 $ 529,342 $ 64,170 $ 844 $ 2,257,163 Current-period gross write-offs $ - $ - $ - $ - $ 117 $ - $ - $ - $ 117 1-4 family mortgage Pass $ 166,927 $ 376,964 $ 228,183 $ 75,104 $ 40,697 $ 61,046 $ 286,066 $ - $ 1,234,987 Special Mention 574 721 2,504 1,009 3,865 439 727 - 9,839 Substandard - accruing - - - - - 425 261 - 686 Substandard -Non-accrual 155 380 741 572 877 901 800 - 4,426 Total 1-4 family mortgage $ 167,656 $ 378,065 $ 231,428 $ 76,685 $ 45,439 $ 62,811 $ 287,854 $ - $ 1,249,938 Current-period gross write-offs $ - $ 40 $ - $ - $ - $ 14 $ - $ - $ 54 Other mortgage Pass $ 162,418 $ 1,119,609 $ 1,106,055 $ 448,781 $ 249,059 $ 540,325 $ 100,516 $ 247 $ 3,727,010 Special Mention - - - - - - 850 - 850 Substandard - accruing - 4,975 - - - 11,005 - - 15,980 Substandard -Non-accrual - - - - 130 376 - - 506 Total Other mortgage $ 162,418 $ 1,124,584 $ 1,106,055 $ 448,781 $ 249,189 $ 551,706 $ 101,366 $ 247 $ 3,744,346 Current-period gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Consumer Pass $ 22,227 $ 3,890 $ 4,542 $ 1,794 $ 1,295 $ 2,687 $ 27,342 $ - $ 63,777 Special Mention - - - - - - - - - Substandard - accruing - - - - - - - - - Substandard -Non-accrual - - - - - - - - - Total Consumer $ 22,227 $ 3,890 $ 4,542 $ 1,794 $ 1,295 $ 2,687 $ 27,342 $ - $ 63,777 Current-period gross write-offs $ - $ - $ - $ - $ 4 $ 49 $ 1,020 $ - $ 1,073 Total Loans Pass $ 1,058,567 $ 3,309,011 $ 2,493,493 $ 1,038,868 $ 577,813 $ 1,284,895 $ 1,711,574 $ 1,582 $ 11,475,803 Special Mention 10,807 4,114 15,314 15,091 13,715 11,527 23,346 7 93,921 Substandard - accruing 2,768 5,008 2,830 368 9,501 44,662 4,621 - 69,758 Substandard -Non-accrual 155 382 1,508 778 3,336 9,372 3,705 111 19,347 Total Loans $ 1,072,297 $ 3,318,515 $ 2,513,145 $ 1,055,105 $ 604,365 $ 1,350,456 $ 1,743,246 $ 1,700 $ 11,658,829 Current-period gross write-offs $ 1,213 $ 4,730 $ 2,550 $ 779 $ 125 $ 2,077 $ 3,018 $ 89 $ 14,581 14 Loans by performance status as of June 30, 2024 and December 31, 2023 were as follows: June 30, 2024 Performing Nonperforming Total (In Thousands) Commercial, financial and agricultural $ 2,913,771 $ 21,806 $ 2,935,577 Real estate - construction 1,510,677 - 1,510,677 Real estate - mortgage: Owner-occupied commercial 2,393,239 6,405 2,399,644 1-4 family mortgage 1,344,233 6,195 1,350,428 Other mortgage 4,071,509 498 4,072,007 Total real estate mortgage 7,808,981 13,098 7,822,079 Consumer 64,415 32 64,447 Total $ 12,297,844 $ 34,936 $ 12,332,780 December 31, 2023 Performing Nonperforming Total (In Thousands) Commercial, financial and agricultural $ 2,816,599 $ 7,387 $ 2,823,986 Real estate - construction 1,519,508 111 1,519,619 Real estate - mortgage: Owner-occupied commercial 2,250,074 7,089 2,257,163 1-4 family mortgage 1,243,603 6,335 1,249,938 Other mortgage 3,743,840 506 3,744,346 Total real estate mortgage 7,237,517 13,930 7,251,447 Consumer 63,672 105 63,777 Total $ 11,637,296 $ 21,533 $ 11,658,829 Loans by past due status as of June 30, 2024 and December 31, 2023 were as follows: June 30, 2024 Past Due Status (Accruing Loans) Total Past Total Nonaccrual 30-59 Days 60-89 Days 90+ Days Due Nonaccrual Current Total Loans With no ACL (In Thousands) Commercial, financial and agricultural $ 10,049 $ 2,941 $ 585 $ 13,575 $ 21,221 $ 2,900,781 $ 2,935,577 $ 13,636 Real estate - construction 590 - - 590 - 1,510,087 1,510,677 - Real estate - mortgage: Owner-occupied commercial 3,127 81 - 3,208 6,405 2,390,031 2,399,644 6,404 1-4 family mortgage 1,220 2,863 867 4,950 5,328 1,340,150 1,350,428 2,624 Other mortgage - 5,459 - 5,459 498 4,066,050 4,072,007 498 Total real estate - mortgage 4,347 8,403 867 13,617 12,231 7,796,231 7,822,079 9,526 Consumer 96 35 30 161 2 64,284 64,447 2 Total $ 15,082 $ 11,379 $ 1,482 $ 27,943 $ 33,454 $ 12,271,383 $ 12,332,780 $ 23,164 15 December 31, 2023 Past Due Status (Accruing Loans) Total Past Total Nonaccrual 30-59 Days 60-89 Days 90+ Days Due Nonaccrual Current Total Loans With no ACL (In Thousands) Commercial, financial and agricultural $ 3,418 $ 3,718 $ 170 $ 7,306 $ 7,217 $ 2,809,463 $ 2,823,986 $ 5,028 Real estate - construction - 34 - 34 111 1,519,474 1,519,619 - Real estate - mortgage: Owner-occupied commercial - - - - 7,089 2,250,074 2,257,163 7,089 1-4 family mortgage 540 4,920 1,909 7,369 4,426 1,238,143 1,249,938 1,224 Other mortgage 676 10,703 - 11,379 506 3,732,461 3,744,346 506 Total real estate - mortgage 1,216 15,623 1,909 18,748 12,021 7,220,678 7,251,447 8,819 Consumer 58 31 105 194 - 63,583 63,777 - Total $ 4,692 $ 19,406 $ 2,184 $ 26,282 $ 19,349 $ 11,613,198 $ 11,658,829 $ 13,847 Under the current expected credit losses (“CECL”) methodology, the ACL is measured on a collective basis for pools of loans with similar risk characteristics. For loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. For all loan segments collectively evaluated, losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable forecast period losses are reverted to long-term historical averages. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The Company uses the discounted cash flow (“DCF”) method to estimate ACL for all loan pools except for commercial and industrial ("C&I") revolving lines of credit and credit cards. C&I revolving lines of credit and credit cards are members of the Commercial, financial and agricultural and Consumer portfolios, respectively. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment rate as a loss driver. The Company also utilizes and forecasts GDP growth as a second loss driver for its agricultural and consumer loan pools. Consistent forecasts of the loss drivers are used across the loan segments. At June 30, 2024 and December 31, 2023, the Company utilized a reasonable and supportable forecast period of twelve months followed by a six-month straight-line reversion to long term averages. The Company leveraged economic projections from reputable and independent sources to inform its loss driver forecasts. The Company expects the national unemployment rate to fall and the national GDP growth rate to rise compared to the December 31, 2023 forecast. The Company uses a loss-rate method to estimate expected credit losses for its C&I revolving lines of credit and credit card pools. The C&I revolving lines of credit pool incorporates a probability of default (“PD”) and loss given default (“LGD”) modeling approach. This approach involves estimating the pool average life and then using historical correlations of default and loss experience over time to calculate the lifetime PD and LGD. These two inputs are then applied to the outstanding pool balance. The credit card pool incorporates a remaining life modeling approach, which utilizes an attrition-based method to estimate the remaining life of the pool. A quarterly average loss rate is then calculated using the Company’s historical loss data. The model reduces the pool balance quarterly on a straight-line basis over the estimated life of the pool. The quarterly loss rate is multiplied by the outstanding balance at each period-end resulting in an estimated loss for each quarter. The sum of estimated loss for all quarters is the total calculated reserve for the pool. Management has applied the loss-rate method to C&I lines of credit and to credit cards due to their generally short-term nature. An expected loss ratio is applied based on internal and peer historical losses. Each loan pool is adjusted for qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. 16 Inherent risks in the loan portfolio will differ based on type of loan. Specific risk characteristics by loan portfolio segment are listed below: Commercial, financial and agricultural loans include risks associated with the borrower’s cash flow, debt service coverage, and management’s expertise. These loans are subject to the risk that the Company may have difficulty converting collateral to a liquid asset if necessary, as well as risks associated with the degree of specialization, mobility, and general collectability in a default situation. These commercial loans may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates. Real estate construction loans include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the proposed project. Construction lending is also subject to risks associated with sub-market dynamics, including population, employment trends and household income. During times of economic stress, this type of loan has typically had a greater degree of risk than other loan types. Real estate mortgage loans consist of loans secured by commercial and residential real estate. Commercial real estate lending is dependent upon successful management, marketing and expense supervision necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to a single borrower. Residential real estate lending risks are generally less significant than those of other loans. Real estate lending risks include fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems. Consumer loans carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans but less risky than commercial loans. Risk of default is usually determined by the well-being of the local economies. During times of economic stress, there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. The following table presents changes in the ACL, segregated by loan type, for the three and six months ended June 30, 2024 and 2023. Commercial, financial and Real estate - Real estate - agricultural construction mortgage Consumer Total (In Thousands) Three Months Ended June 30, 2024 Allowance for credit losses: Balance at April 1, 2024 $ 51,022 $ 45,689 $ 57,640 $ 1,541 $ 155,892 Charge-offs ( 3,355 ) - ( 119 ) ( 108 ) ( 3,582 ) Recoveries 406 8 - 15 429 Provision 8,143 ( 5,247 ) 2,163 294 5,353 Balance at June 30, 2024 $ 56,216 $ 40,450 $ 59,684 $ 1,742 $ 158,092 Three Months Ended June 30, 2023 Allowance for credit losses: Balance at April 1, 2023 $ 42,895 $ 40,483 $ 63,157 $ 2,430 $ 148,965 Charge-offs ( 4,358 ) - ( 131 ) ( 111 ) ( 4,600 ) Recoveries 1,232 - - 21 1,253 Provision 3,696 ( 40 ) 3,211 ( 213 ) 6,654 Balance at June 30, 2023 $ 43,465 $ 40,443 $ 66,237 $ 2,127 $ 152,272 Six Months Ended June 30, 2024 Allowance for credit losses: Balance at January 1, 2024 $ 52,121 $ 44,658 $ 55,126 $ 1,412 $ 153,317 Charge-offs ( 5,197 ) - ( 186 ) ( 206 ) ( 5,589 ) Recoveries 605 8 6 24 643 Provision 8,687 ( 4,216 ) 4,738 512 9,721 Balance at June 30, 2024 $ 56,216 $ 40,450 $ 59,684 $ 1,742 $ 158,092 Six Months Ended June 30, 2023 Allowance for credit losses: Balance at January 1, 2023 $ 42,830 $ 42,889 $ 58,652 $ 1,926 $ 146,297 Charge-offs ( 5,615 ) - ( 157 ) ( 501 ) ( 6,273 ) Recoveries 1,360 3 1 32 1,396 Provision 4,890 ( 2,449 ) 7,740 670 10,851 Balance at June 30, 2023 $ 43,465 $ 40,443 $ 66,237 $ 2,127 $ 152,272 17 We maintain an ACL on unfunded lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a drawdown on the commitment. The ACL on unfunded loan commitments is classified as a liability account on the Consolidated Balance Sheet within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The ACL on unfunded commitments was $ 1.1 million at June 30, 2024 and $ 575,000 at December 31, 2023. Provision expense was $ 336,000 and $ 503,000 for the three and six months ended June 30, 2024, respectively, and there was no provision expense for the three and six months ended June 30, 2023, respectively. Loans that no longer share similar risk characteristics with collectively evaluated pools are estimated on an individual basis. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows: Accounts ACL June 30, 2024 Real Estate Receivable Equipment Other Total Allocation (In Thousands) Commercial, financial and agricultural $ 19,482 $ 4,003 $ 3,852 $ 34,354 $ 61,691 $ 19,044 Real estate - construction 2,000 - - 972 2,972 - Real estate - mortgage: Owner-occupied commercial 17,288 - - - 17,288 - 1-4 family mortgage 14,784 - - - 14,784 83 Other mortgage 4,837 - 854 779 6,470 587 Total real estate - mortgage 36,909 - 854 779 38,542 670 Consumer - - 2 50 52 50 Total $ 58,391 $ 4,003 $ 4,708 $ 36,155 $ 103,257 $ 19,764 Accounts ACL December 31, 2023 Real Estate Receivable Equipment Other Total Allocation (In Thousands) Commercial, financial and agricultural $ 20,266 $ 7,240 $ 2,126 $ 24,016 $ 53,648 $ 16,189 Real estate - construction 145 - - 978 1,123 1 Real estate - mortgage: Owner-occupied commercial 12,038 - - 698 12,736 475 1-4 family mortgage 15,694 - - - 15,694 1,058 Other mortgage 5,062 - - 800 5,862 603 Total real estate - mortgage 32,794 - - 1,498 34,292 2,136 Consumer - - - - - - Total $ 53,205 $ 7,240 $ 2,126 $ 26,492 $ 89,063 $ 18,326 18 The table below details the amortized cost basis at the end of the reporting period for loans made to borrowers experiencing financial difficulty that were modified during the three and six months ended June 30, 2024 and 2023: Three Months Ended June 30, 2024 Payment Deferral Term and Term Percentage of Extensions Extensions Total Total Loans (In Thousands) Commercial, financial and agricultural $ 6,964 $ 1,014 $ 7,978 0.06 % Owner-occupied commercial 637 1,158 1,795 0.01 % 1-4 family mortgage - 43 43 - % Total $ 7,601 $ 2,215 $ 9,816 0.08 % Six Months Ended June 30, 2024 Payment Deferral Term and Term Percentage of Extensions Extensions Total Total Loans (In Thousands) Commercial, financial and agricultural $ 9,363 $ 1,014 $ 10,377 0.08 % Real estate - construction 973 - 973 0.01 % Owner-occupied commercial 2,109 1,158 3,267 0.03 % 1-4 family mortgage 420 43 463 - % Other mortgage 9,797 - 9,797 0.08 % Total $ 22,662 $ 2,215 $ 24,877 0.20 % Three months ended June 30, 2023 Payment Deferral Term and Term Percentage of Extensions Extensions Total Total Loans (In Thousands) Commercial, financial and agricultural $ 2,855 $ - $ 2,855 0.02 % Owner-occupied commercial 2,511 - 2,511 0.02 % Total $ 5,366 $ - $ 5,366 0.05 % Six months ended June 30, 2023 Payment Deferral Term and Term Percentage of Extensions Extensions Total Total Loans (In Thousands) Commercial, financial and agricultural $ 29,556 $ - $ 29,556 0.25 % Owner-occupied commercial 2,511 701 3,212 0.03 % 1-4 family mortgage 210 - 210 - % Other mortgage 11,258 359 11,617 0.10 % Total $ 43,535 $ 1,060 $ 44,595 0.38 % The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2024 and 2023: Three Months Ended June 30, 2024 Total Payment Term Extensions Deferral (In months) (In Thousands) Commercial, financial and agricultural 2 to 60 $ 125 Real estate - construction - - Owner-occupied commercial 5 to 60 16 1-4 family mortgage 121 2 Other mortgage - - 19 Six Months Ended June 30, 2024 Total Payment Term Extensions Deferral (In months) (In Thousands) Commercial, financial and agricultural 2 to 60 $ 125 Real estate - construction 12 - Owner-occupied commercial 5 to 60 16 1-4 family mortgage 12 to 121 2 Other mortgage 11 - Three Months Ended June 30, 2023 Total Payment Term Extensions Deferral (In months) (In Thousands) Commercial, financial and agricultural 9 to 65 $ - Real estate - construction - - Owner-occupied commercial 9 to 60 - 1-4 family mortgage - - Other mortgage - - Six Months Ended June 30, 2023 Total Payment Term Extensions Deferral (In months) (In Thousands) Commercial, financial and agricultural 1 to 65 $ - Real estate - construction - - Owner-occupied commercial 3 to 60 49 1-4 family mortgage 3 - Other mortgage 3 to 36 59 No loans modified on or after June 30, 2023 were past due greater than 30 days or on non-accrual as of June 30, 2024. As of June 30, 2024, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2024 that subsequently defaulted. For purposes of this disclosure, default is defined as 90 days past due and still accruing or placement on nonaccrual status. Adjustments have been made to both the three months and six months ended June 30, 2023 tables, due to the refinement of our policy surrounding the definition of borrowers experiencing financial difficulty. NOTE 6 - LEASES The Company leases space under non-cancelable operating leases for several of its banking offices and certain office equipment. The leases have remaining terms up to 15 years. At June 30, 2024, the Company had lease right-of-use assets and lease liabilities totaling $ 24.5 million and $ 26.5 million, respectively, compared to $ 26.5 million and $ 27.4 million, respectively, at December 31, 2023 which are reflected in other assets and other liabilities, respectively, in the Company’s Consolidated Balance Sheets. Maturities of operating lease liabilities as of June 30, 2024 are as follows: June 30, 2024 (In Thousands) 2024 (remaining) $ 2,759 2025 5,362 2026 4,509 2027 3,946 2028 3,098 thereafter 12,086 Total lease payments 31,760 Less: imputed interest ( 5,246 ) Present value of operating lease liabilities $ 26,514 20 As of June 30, 2024, the weighted average remaining term of operating leases is 7.9 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.74 %. Operating cash outflows related to leases were $ 1.4 million and $ 2.8 million for the three and six months ended June 30, 2024, respectively, compared to $ 1.3 million and $ 2.5 million for the three and six months ended June 30, 2023, respectively. Lease costs during the three and six months ended June 30, 2024 and June 30, 2023 were as follows (in thousands): Three Months Ended June 30, 2024 2023 Operating lease cost $ 1,401 $ 1,269 Short-term lease cost - - Variable lease cost 220 192 Sublease income ( 5 ) ( 8 ) Net lease cost $ 1,616 $ 1,453 Six Months Ended June 30, 2024 2023 Operating lease cost $ 2,795 $ 2,499 Short-term lease cost - - Variable lease cost 433 383 Sublease income ( 11 ) ( 16 ) Net lease cost $ 3,217 $ 2,866 NOTE 7 - EMPLOYEE AND DIRECTOR BENEFITS Stock Incentive Plan The Company has a stock incentive plan as described below. The compensation cost that has been charged to earnings for the plan was approximately $ 879,000 and $ 1.8 million for the three and six months ended June 30, 2024, respectively, and $ 982,000 and $ 1.8 million for the three and six months ended June 30, 2023, respectively. 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, Non-stock Share Equivalents, Performance Shares or Performance Units. The plan allows for the grant of incentive stock options and non-qualified stock options, and option awards are granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plan is ten years. The Company estimates the fair value of each stock option award using a Black-Scholes-Merton valuation model. Expected volatilities are based on the Company’s trading price history. 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. There have not been any grants of stock options since October of 2019. 21 The following table summarizes stock option activity during the six months ended June 30, 2024 and 2023: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term (years) Value (In Thousands) Six Months Ended June 30, 2024: Outstanding at January 1, 2024 165,800 $ 24.35 2.9 $ 7,211 Exercised ( 23,050 ) 16.20 0.7 6,261 Outstanding at June 30, 2024 142,750 $ 25.67 2.6 $ 5,507 Exercisable at June 30, 2024 127,250 $ 23.54 2.0 $ 5,014 Six Months Ended June 30, 2023: Outstanding at January 1, 2023 280,000 $ 19.43 3.0 $ 14,088 Exercised ( 87,700 ) 12.04 1.0 2,533 Forfeited ( 1,000 ) 34.09 5.6 7 Outstanding at June 30, 2023 191,300 $ 22.65 3.4 $ 6,235 Exercisable at June 30, 2023 137,800 $ 16.83 1.9 $ 3,432 As of June 30, 2024, there was $ 19,000 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 three months. Restricted Stock and Performance Shares The Company periodically grants restricted stock awards that vest upon time-based 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, 2024, there was $ 4.9 million of total unrecognized compensation cost related to non-vested time-based restricted stock. The cost is expected to be recognized evenly over the remaining 2.0 years of the restricted stock’s vesting period. The Company periodically grants performance shares that give plan participants the opportunity to earn between 0 % and 150 % of the number of performance shares granted based on achieving certain market conditions. The number of performance shares earned is determined by reference to the Company’s total shareholder return relative to a peer group of other publicly traded banks and bank holding companies during the performance period. The performance period is generally three years starting on the grant date. The fair value of the performance shares is determined using a Monte Carlo simulation model on the grant date. As of June 30, 2024, there was $ 1.0 million of total unrecognized compensation cost related to non-vested performance shares. As of June 30, 2024, non-vested performance shares had a weighted average remaining time to vest of 2.0 years. Restricted Stock Performance Shares Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Six Months Ended June 30, 2024: Non-vested at January 1, 2024 158,298 $ 58.08 31,944 $ 58.25 Granted 27,361 66.72 8,894 67.90 Vested ( 45,619 ) 45.49 ( 18,653 ) 37.05 Forfeited ( 3,989 ) 71.34 ( 2,318 ) 72.18 Non-vested at June 30, 2024 136,051 $ 63.65 19,867 $ 80.85 Six Months Ended June 30, 2023: Non-vested at January 1, 2023 141,580 $ 56.39 23,852 $ 54.16 Granted 47,309 60.40 8,091 70.29 Vested ( 29,852 ) 52.27 - - Forfeited ( 10,041 ) 63.90 - - Non-vested at June 30, 2023 148,996 $ 57.98 31,943 $ 58.25 NOTE 8 - DERIVATIVES The Company has entered into forward loan sale commitments with secondary market investors to deliver loans on a “best efforts delivery” basis, which do not meet the definition of a derivative instrument. 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 with customers 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, 2024 and December 31, 2023 were not material. 22 NOTE 9 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments expanded the permitted use of the proportional amortization method, which was previously only available to low-income housing tax credit investments, to other tax equity investments if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the income tax benefits received and both the amortization of the investment and the income tax benefits received are recognized as a component of income tax expense. ASU 2023-02 was adopted on a modified retrospective basis of transition or, for certain changes, a prospective basis. The Company had not completed its analysis of the individual credits by the filing date of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, but had determined the policy election did not have a material impact on the consolidated financial statements. To correct an immaterial error, activity for the three months ended March 31, 2024, under the proportional amortization method has been recorded in the three months ended June 30, 2024. As a result, the six months ending June 30, 2024, accurately present the results for that period under the proportional amortization method. During the second quarter, the analysis was completed and a reduction to retained earnings as of January 1, 2024, of $ 2.3 million was recorded. NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . ASU 2023-09 requires enhanced income tax disclosures primarily related to the rate reconciliation and income taxes paid information to provide more transparency by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliation table and (ii) income taxes paid, net of refunds, to be disaggregated by jurisdiction based on an established threshold. The amendments in this standard will be effective for the Company on January 1, 2025. The Company is currently evaluating the impact the amendments will have the consolidated financial statements and related disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting — Improvements to Reportable Segment Disclosures. This amendment is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other decision makers for additional, more detailed information about a reportable segment’s expenses. The amendment applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 31, 2024. Early adoption is permitted. The amendments are to be applied retrospectively to all periods presented and segment expense categories should be based on the categories identified at adoption. The Company does not currently expect adoption of the amendment to have a material impact on its consolidated financial statements. NOTE 11 - FAIR VALUE MEASUREMENT Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described below: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value. Debt Securities. Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing 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, as in the case of certain corporate securities, these securities are classified in Level 3 of the hierarchy. 23 Derivative instruments. The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate curves, adjusted for counterparty credit risk. These measurements are classified as level 2 within the valuation hierarchy. Loans Individually Evaluated. Loans individually evaluated are measured and reported at fair value when full payment under the loan terms is not probable. Loans individually evaluated are carried at the present value of expected future cash flows using 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. Loans individually evaluated are subject to nonrecurring fair value adjustment upon initial recognition or subsequent individual evaluation. A portion of the ACL is allocated to loans individually evaluated if the value of such loans is deemed to be less than the unpaid balance. The range of fair value adjustments and weighted average adjustment as of June 30, 2024 was 0 % to 75 % and 29 %, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2023 was 0 % to 66 % and 25 % respectively. Loans individually evaluated 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 to write-down individually evaluated loans that are measured at fair value on a nonrecurring basis was $ 4.8 million and $ 5.8 million during the three and six months ended June 30, 2024, respectively, and $ 4.1 million and $ 6.3 million during the three and six months ended June 30, 2023, respectively. Other Real Estate Owned . Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the ACL subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. The range of fair value adjustments and weighted average adjustment as of June 30, 2024 was 10 % to 100 % and 27 %, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2023 was 25 % to 100 % and 38.3 %, respectively. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO and repossessed assets of $ 1,000 and $ 96,000 was recognized for the three and six months ended June 30, 2024, respectively, and $ 5,000 for the three and six months ended June 30, 2023. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy. There were four residential real estate loans with a balance of $ 529,000 foreclosed and classified as OREO as of June 30, 2024, compared to three residential real estate loan foreclosures for $ 360,000 as of December 31, 2023. Four residential real estate loans totaling $ 426,000 were in the process of being foreclosed as of June 30, 2024. There were three residential real estate loans for $ 292,000 that were in the process of being foreclosed as of December 31, 2023. The following table presents the Company’s financial assets carried at fair value on a recurring basis as of June 30, 2024 and December 31, 2023. There were no liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023. Fair Value Measurements at June 30, 2024 Using Quoted Prices in Active Markets Significant Other Significant for Identical Observable Inputs Unobservable Assets (Level 1) (Level 2) Inputs (Level 3) Total Assets Measured on a Recurring Basis: (In Thousands) Available for sale debt securities: U.S. Treasury securities $ 608,821 $ - $ - $ 608,821 Mortgage-backed securities - 241,363 - 241,363 State and municipal securities - 9,979 - 9,979 Corporate debt - 314,223 - 314,223 Total available-for-sale debt securities 608,821 565,565 - 1,174,386 Total assets at fair value $ 608,821 $ 565,565 $ - $ 1,174,386 24 Fair Value Measurements at December 31, 2023 Using Quoted Prices in Active Markets Significant Other Significant for Identical Observable Inputs Unobservable Assets (Level 1) (Level 2) Inputs (Level 3) Total Assets Measured on a Recurring Basis: (In Thousands) Available for sale debt securities: U.S. Treasury securities $ 340,807 $ - $ - $ 340,807 Government agency securities - - - - Mortgage-backed securities - 215,485 - 215,485 State and municipal securities - 10,223 - 10,223 Corporate debt - 326,808 6,860 333,668 Total available-for-sale debt securities 340,807 552,516 6,860 900,183 Total assets at fair value $ 340,807 $ 552,516 $ 6,860 $ 900,183 The following table presents the Company’s financial assets carried at fair value on a nonrecurring basis as of June 30, 2024 and December 31, 2023: Fair Value Measurements at June 30, 2024 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) Loans individually evaluated $ - $ - $ 83,493 $ 83,493 Other real estate owned and repossessed assets - - 1,458 1,458 Total assets at fair value $ - $ - $ 84,951 $ 84,951 Fair Value Measurements at December 31, 2023 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) Loans individually evaluated $ - $ - $ 70,737 $ 70,737 Other real estate owned and repossessed assets - - 995 995 Total assets at fair value $ - $ - $ 71,732 $ 71,732 There were no liabilities measured at fair value on a non-recurring basis as of June 30, 2024 and December 31, 2023. In the case of the debt securities portfolio, the Company monitors the portfolio to ascertain when transfers between levels have been affected. For the six months ended June 30, 2024, there were two transfers out of Level 3 into Level 2. The table below includes a roll forward of the balance sheet amounts for the three and six months ended June 30, 2024 and June 30, 2023 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology: 25 For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Available-for-sale Securities Available-for-sale Securities Available-for-sale Securities Available-for-sale Securities (In Thousands) Fair value, beginning of period $ - $ 6,860 $ 6,860 $ 10,860 Transfers into Level 3 - - - Total realized gains included in income - - - - Changes in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at period-end - - ( 1,329 ) 160 Purchases - - - - Transfers out of Level 3 - - ( 5,531 ) ( 4,160 ) Fair value, end of period $ - $ 6,860 $ - $ 6,860 The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis as of June 30, 2024 and December 31, 2023 were as follows: June 30, 2024 December 31, 2023 Carrying Carrying Amount Fair Value Amount Fair Value (In Thousands) Financial Assets: Level 1 Inputs: Cash and cash equivalents $ 1,265,633 $ 1,265,633 $ 2,030,513 $ 2,030,513 Held to maturity U.S. Treasury securities 274,270 250,338 508,985 484,267 Level 2 Inputs: Federal funds sold 11,132 11,132 100,575 100,575 Held to maturity debt securities 492,735 433,646 473,429 422,674 Mortgage loans held for sale 11,174 11,174 5,071 5,071 Restricted equity securities 11,300 11,300 10,226 10,226 Level 3 Inputs: Held to maturity debt securities 250 250 250 250 Loans, net 12,174,688 11,736,227 11,505,512 11,032,819 Financial Liabilities: Level 2 Inputs: Deposits $ 13,259,392 $ 13,252,073 $ 13,273,511 $ 13,266,640 Federal funds purchased 1,097,154 1,097,154 1,256,724 1,256,724 Other borrowings 64,739 58,595 64,735 58,083 ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of and for the three and six months ended June 30, 2024 and June 30, 2023. 26 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, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “could,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this Quarterly Report on Form 10-Q or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including, but not limited to: general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes as a result of our reclassification as a large financial institution by the FDIC; changes in our loan portfolio and the deposit base; credit issues associated with the efficacy of return to office policies; possible changes in laws and regulations and governmental monetary and fiscal policies, including, but not limited to, Federal Reserve policies in connection with continued inflationary pressures and the ability of the U.S. Congress to increase the U.S. statutory debt limit as needed; computer hacking or cyber-attacks resulting in unauthorized access to confidential or proprietary information; substantial, unexpected or prolonged changes in the level or cost of liquidity; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-bank financial institutions. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K, our subsequent Quarterly Reports on Form 10-Q and our other SEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time. Business We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides business and personal financial services through full-service banking offices located in Alabama, Florida, Georgia, North and South Carolina, Tennessee, and Virginia. We also operate loan production offices in Florida and 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. Second quarter highlights ● Diluted earnings per common share of $ 0.95 for the second quarter of 2024, a decrease of 3.1%, from the second quarter 2023. ● Average loans of $12.06 billion for the second quarter of 2024, an increase of $463.7 million, or 4.0%, from the second quarter 2023. ● Average deposits of $12.86 billion for the second quarter of 2024, an increase of $1.28 billion, or 11.0%, from the second quarter 2023. ● Net interest income of $105.9 million for the second quarter of 2024, an increase of $4.6 million, or 4.5%, from the second quarter 2023. ● Net interest margin of 2.79% for second quarter of 2024, decreased 14 bps from 2.93% in the second quarter 2023. Overview As of June 30, 2024, we had consolidated total assets of $16.05 billion, a decrease of $79.9 million, or .5%, from $16.13 billion at December 31, 2023. Total loans were $12.33 billion, an increase of $674.0 million, or 5.8%, from $11.66 billion at December 31, 2023. Total deposits were $13.26 billion, a decrease of $14.1 million, or .1%, from $13.27 billion at December 31, 2023. Net income and net income available to common stockholders of $52.1 million for the quarter ended June 30, 2024, compared to net income of $53.5 million and net income available to common stockholders of $53.4 million for the second quarter of 2023. Basic and diluted earnings per common share were $0.96 and $0.95, respectively, for the three months ended June 30, 2024, compared to $0.98 for both in the corresponding period in 2023. 27 Net income of $102.2 million and net income available to common stockholders of $102.1 million for the six months ended June 30, 2024, compared to net income and net income available to common stockholders of $111.4 million for the six months ended June 30, 2023. Basic and diluted earnings per common share were both $1.87 for the six months ended June 30, 2024, compared to $2.05 and $2.04, respectively, for the corresponding period in 2023. Changes in income and expenses are more fully explained in “Results of Operations” below Performance Ratios The following table presents selected ratios of our results of operations for the three and six months ended June 30, 2024, and 2023. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Return on average assets 1.34 % 1.50 % 1.30 % 1.57 % Return on average common stockholders' equity 14.08 % 15.85 % 13.96 % 16.83 % Dividend payout ratio 31.44 % 28.56 % 31.44 % 27.41 % Net interest margin (1) 2.79 % 2.93 % 2.73 % 3.04 % Efficiency ratio (2) 37.31 % 35.02 % 39.42 % 34.81 % Average stockholders' equity to average total assets 9.48 % 9.46 % 9.29 % 9.31 % (1) Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets. (2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income. Financial Condition Cash and Cash Equivalents At June 30, 2024, we had $11.1 million in federal funds sold, compared to $100.6 million at December 31, 2023. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2024, we had $1.12 billion in balances at the Federal Reserve, compared to $1.89 billion at December 31, 2023. Investment Securities Debt securities available-for-sale totaled $1.17 billion at June 30, 2024 and $900.2 million at December 31, 2023. Investment securities held to maturity totaled $767.3 million at June 30, 2024 and $982.7 million at December 31, 2023. We had paydowns of $47.7 million on mortgage-backed securities and government agencies, maturities of $592.1 million on municipal bonds, corporate securities and treasury securities, and calls of $2.0 million on corporate securities during the six months ended June 30, 2024. We purchased $95.3 million in mortgage-backed securities, and $591.5 million in U.S. Treasury securities during the six months ended June 30, 2024. For a tabular presentation of debt securities available for sale and held to maturity at June 30, 2024 and December 31, 2023, see “Note 4 – Securities” in our Notes to Consolidated Financial Statements. The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer-term securities purchased to generate level income for us over periods of interest rate fluctuations. All investment securities in an unrealized loss position as of June 30, 2024 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is not due to credit-related factors. In addition, we have the ability to hold these securities within the portfolio until maturity or until the value recovers, and we believe that it is not likely that we will be required to sell these securities prior to recovery. We continue to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods. 28 The Company does not invest in collateralized debt obligations (“CDOs”). As of June 30, 2024, we had $314.2 million of bank holding company subordinated notes. If rated, all such bonds were rated BBB or better by Kroll Bond Rating Agency at the time of our initial investment. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio has a combined average credit rating of AA as of June 30, 2024. The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $1.59 billion and $1.49 billion as of June 30, 2024 and December 31, 2023, respectively. Loans We had total loans of $12.33 billion, an increase of $674.0 million, or 5.8%, from $11.66 billion at December 31, 2023. Other mortgage increased $385.6 million from last year, and increased $294.2 million during the quarter, making up over half of total loan growth for both periods. Our loan pipeline has expanded and indicates that loan demand is improving in our market areas. Asset Quality The Company assesses the adequacy of its allowance for credit losses ("ACL") at the end of each calendar quarter. The level of ACL is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors. The ACL is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. The ACL is believed adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio. Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. See “Note 1 – General” and “Note 5 – Loans” in the Notes to Consolidated Financial Statements included in Item 1. Consolidated Financial Statements elsewhere in this report. The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, and certain modified loans. Specific allocations of the ACL are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows. As of and for the Three Months Ended As of and for the Six Months Ended June 30, June 30, June 30, 2024 2023 2024 2023 (Dollars in thousands) Total loans outstanding, net of unearned income $ 12,332,780 $ 11,604,894 $ 12,332,780 $ 11,604,894 Average loans outstanding, net of unearned income $ 12,062,973 $ 11,599,320 $ 11,901,985 $ 11,625,224 Allowance for credit losses at beginning of period 155,892 148,965 153,317 146,297 Charge-offs: Commercial, financial and agricultural loans 3,355 4,358 5,197 5,615 Real estate - construction - - - - Real estate - mortgage 119 131 186 157 Consumer loans 108 111 206 501 Total charge-offs 3,582 4,600 5,589 6,273 Recoveries: Commercial, financial and agricultural loans 406 1,233 605 1,361 Real estate - construction 8 - 8 3 Real estate - mortgage - - 6 1 Consumer loans 15 21 24 32 Total recoveries 429 1,254 643 1,397 Net charge-offs 3,153 3,346 4,946 4,876 Provision for credit losses 5,353 6,654 9,721 10,851 Allowance for credit losses at period end $ 158,092 $ 152,272 $ 158,092 $ 152,272 Allowance for credit losses to period end loans 1.28 % 1.31 % 1.28 % 1.31 % Net charge-offs to average loans 0.10 % 0.11 % 0.08 % 0.08 % 29 Percentage of loans in each category June 30, 2024 Amount to total loans (In Thousands) Commercial, financial and agricultural $ 56,216 33.22 % Real estate - construction 40,450 10.08 % Real estate - mortgage 59,684 55.97 % Consumer 1,742 0.73 % Total $ 158,092 100.00 % Percentage of loans in each category December 31, 2023 Amount to total loans (In Thousands) Commercial, financial and agricultural $ 52,121 31.30 % Real estate - construction 44,658 11.57 % Real estate - mortgage 55,126 56.43 % Consumer 1,412 0.70 % Total $ 153,317 100.00 % Nonperforming Assets Total nonperforming loans at June 30, 2024, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased $13.4 million, or 62.2%, to $34.9 million from $21.5 million at December 31, 2023. Of this total, nonaccrual loans of $33.5 million at June 30, 2024 represented a net increase of $14.1 million from nonaccrual loans at December 31, 2023. The increase in non-performing assets to total assets can be attributed to a single relationship that moved to non-accrual status during the first quarter of 2024. This relationship has been closely monitored and is well-collateralized. Excluding credit card accounts, there were no loans 90 or more days past due and still accruing at June 30, 2024, compared to nine loans totaling $1.9 million at December 31, 2023. Loans made to borrowers experiencing financial difficulty that were modified during the three months ended June 30, 2024 and 2023 were $9.8 million and $40.9 million, respectively. 30 The following table details our nonperforming assets at June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 Number of Number of Balance Loans Balance Loans (Dollar Amounts In Thousands) Nonaccrual loans: Commercial, financial and agricultural $ 21,221 49 $ 7,217 35 Real estate - construction - - 111 1 Real estate - mortgage: Owner-occupied commercial 6,405 11 7,089 14 1-4 family mortgage 5,328 42 4,426 41 Other mortgage 498 2 506 2 Total real estate - mortgage 12,231 55 12,021 57 Consumer 2 1 - - Total Nonaccrual loans: $ 33,454 105 $ 19,349 93 90+ days past due and accruing: Commercial, financial and agricultural $ 585 25 $ 170 8 Real estate - construction - - - - Real estate - mortgage: Owner-occupied commercial - - - - 1-4 family mortgage 867 6 1,909 9 Other mortgage - - - - Total real estate - mortgage 867 6 1,909 9 Consumer 30 11 105 16 Total 90+ days past due and accruing: $ 1,482 42 $ 2,184 33 Total Nonperforming Loans: $ 34,936 147 $ 21,533 126 Plus: Other real estate owned and repossessions 1,458 9 995 7 Total Nonperforming Assets $ 36,394 156 $ 22,528 133 Ratios: Nonperforming loans to total loans 0.28 % 0.18 % Nonperforming assets to total loans plus other real estate owned and repossessions 0.30 % 0.19 % Nonperforming assets plus restructured accruing loans to total loans plus other real estate owned and repossessions 0.30 % 0.19 % OREO and repossessed assets at June 30, 2024 were $1.5 million, an increase of $463,000, or 46.5%, from $995,000 at December 31, 2023. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, June 30, 2024 2023 (In thousands) Balance at beginning of period $ 995 $ 248 Transfers from loans and capitalized expenses 1,148 737 Proceeds from sales (780 ) (158 ) Write-downs / net gain (loss) on sales 95 5 Balance at end of period $ 1,458 $ 832 31 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 ACL to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. Deposits We rely on increasing our deposit base to fund loan and other asset growth. Each of our markets is highly competitive. We compete for local deposits by offering attractive products with competitive rates. We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network. Our management’s strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. We have promoted electronic banking services by providing them without charge and by offering in-bank customer training. At June 30, 2024, our total deposits were $13.26 billion, a decrease of $14.1 million, or .1%, from $13.27 billion at December 31, 2023. The following table summarizes balances of our deposits and the percentage of each type to the total at June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 Noninterest-bearing demand $ 2,475,415 18.67 % $ 2,643,101 19.91 % Interest-bearing demand 2,374,848 17.91 % 2,698,430 20.33 % Money market 7,146,835 53.90 % 6,669,033 50.24 % Savings 104,101 0.79 % 107,227 0.81 % Time deposits , $250,000 and under 473,680 3.57 % 424,730 3.20 % Time deposits, over $250,000 684,513 5.16 % 730,990 5.51 % $ 13,259,392 100.00 % $ 13,273,511 100.00 % At June 30, 2024 and December 31, 2023, we estimate that we had approximately $8.95 billion and $8.76 billion, respectively, in uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit. The uninsured deposit data for 2024 and 2023 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations. Other Borrowings Our borrowings consist of federal funds purchased and subordinated notes payable. We had $1.10 billion and $1.26 billion at June 30, 2024 and December 31, 2023, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 5.50% for the quarter ended June 30, 2024. Other borrowings consist of the following: ● $30.0 million of the Company’s 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually. The Notes may be prepaid by the Company; and ● $34.75 million of the Company’s 4% Subordinated Notes due October 21, 2030, which were issued in a private placement in October 2020 and pay interest semi-annually. The Notes may not be prepaid by the Company prior to October 21, 2025. 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 was to decline due to deposit withdrawals, 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, 2024, our liquid assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $1.62 billion. The Bank had loans pledged to both the FHLB and the Federal Reserve Bank of Atlanta, which provided approximately $2.88 billion and $2.15 billion, respectively, in available funding. The Bank’s policy limits on brokered deposits would allow for up to $4.01 billion in available funding for brokered deposits. Additionally, the Bank had approximately $547.0 million in available unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, to meet short term funding needs. 32 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, 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 “Borrowings” and have various other sources of liquidity as discussed herein. We believe these sources of funding are adequate to meet both our immediate (within the next 12 months) and our longer term anticipated funding needs. However, we may need additional funding if we are successful in maintaining our current growth rate into the future. We are subject to general FDIC guidelines that require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. The following table illustrates, during the periods presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $15.70 billion and $15.83 billion, respectively, for the three and six months ended June 30, 2024. For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Sources of Funds: Deposits: Non-interest-bearing 16.2 % 20.1 % 16.3 % 20.7 % Interest-bearing 65.5 60.7 65.0 59.5 Federal funds purchased 7.6 8.3 8.2 9.0 Long term debt and other borrowings 0.4 0.7 0.4 0.7 Other liabilities 0.6 0.5 0.5 0.5 Equity capital 9.8 9.8 9.6 9.6 Total sources 100.0 % 100.0 % 100.0 % 100.0 % Uses of Funds: Loans 76.9 % 81.3 % 75.3 % 81.1 % Securities 12.4 12.3 12.5 12.2 Interest-bearing balances with banks 7.6 3.2 9.1 3.4 Federal funds sold 0.3 0.1 0.2 0.2 Other assets 2.9 3.1 2.9 3.1 Total uses 100.0 % 100.0 % 100.0 % 100.0 % Capital Adequacy Total stockholders’ equity attributable to us at June 30, 2024 was $1.36 billion, or 9.04% of total assets. At December 31, 2023, total stockholders’ equity attributable to us was $1.30 billion, or 8.89% of total assets. As of June 30, 2024, 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 Common Equity Tier 1, Tier 1 risk-based, total 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, 2024. The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios, not including the applicable 2.5% capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of June 30, 2024, December 31, 2023 and June 30, 2023: 33 To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of June 30, 2024 CET 1 Capital to Risk-Weighted Assets: Consolidated $ 1,542,982 10.93 % $ 635,346 4.50 % N/A N/A ServisFirst Bank 1,599,370 11.33 % 635,291 4.50 % $ 917,642 6.50 % Tier 1 Capital to Risk-Weighted Assets: Consolidated 1,543,482 10.93 % 847,127 6.00 % N/A N/A ServisFirst Bank 1,599,870 11.33 % 847,054 6.00 % 1,129,406 8.00 % Total Capital to Risk-Weighted Assets: Consolidated 1,755,391 12.43 % 1,129,503 8.00 % N/A N/A ServisFirst Bank 1,759,040 12.46 % 1,129,406 8.00 % 1,411,757 10.00 Tier 1 Capital to Average Assets: Consolidated 1,543,482 9.81 % 629,272 4.00 % N/A N/A ServisFirst Bank 1,599,870 10.17 % 629,231 4.00 % 786,539 5.00 % As of December 31, 2023 CET 1 Capital to Risk-Weighted Assets: Consolidated $ 1,473,885 10.91 % $ 607,690 4.50 % N/A N/A ServisFirst Bank 1,535,757 11.37 % 607,665 4.50 % $ 877,738 6.50 % Tier 1 Capital to Risk-Weighted Assets: Consolidated 1,474,385 10.92 % 810,253 6.00 % N/A N/A ServisFirst Bank 1,536,257 11.38 % 810,220 6.00 % 1,080,293 8.00 % Total Capital to Risk-Weighted Assets: Consolidated 1,681,028 12.45 % 1,080,338 8.00 % N/A N/A ServisFirst Bank 1,690,149 12.52 % 1,080,293 8.00 % 1,350,366 10.00 % Tier 1 Capital to Average Assets: Consolidated 1,474,385 9.12 % 646,710 4.00 % N/A N/A ServisFirst Bank 1,536,257 9.50 % 646,675 4.00 % 808,343 5.00 % As of June 30, 2023 CET 1 Capital to Risk-Weighted Assets: Consolidated $ 1,408,063 10.37 % $ 610,829 4.50 % N/A N/A ServisFirst Bank 1,467,567 10.81 % 610,852 4.50 % $ 882,341 6.50 % Tier 1 Capital to Risk-Weighted Assets: Consolidated 1,408,563 10.38 % 814,438 6.00 % N/A N/A ServisFirst Bank 1,468,067 10.81 % 814,469 6.00 % 1,085,958 8.00 % Total Capital to Risk-Weighted Assets: Consolidated 1,620,827 11.94 % 1,085,918 8.00 % N/A N/A ServisFirst Bank 1,620,914 11.94 % 1,085,958 8.00 % 1,357,448 10.00 % Tier 1 Capital to Average Assets: Consolidated 1,408,563 9.83 % 572,997 4.00 % N/A N/A ServisFirst Bank 1,468,067 10.25 % 572,997 4.00 % 716,246 5.00 % We are a legal entity separate and distinct from the Bank. Our principal source of cash flow, including cash flow to pay dividends to our stockholders, are dividends the Bank pays to us as the Bank’s sole stockholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us as well 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 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. 34 The Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. If, in the opinion of the federal banking regulators, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulators could require, after notice and a hearing, that the Bank stop or refrain from engaging in the questioned practice. Commitments and Contingencies 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 arrangements. All such credit arrangements bear interest at variable rates and we have no such credit arrangements that bear interest at fixed rates. Our exposure to credit loss for commitments to extend credit, credit card arrangements and standby letters of credit is represented by the contractual or notional amount of these instruments in the event of non-performance by the other party to such financial instrument. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. 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. Financial instruments whose unfunded contract amounts represent credit risk at June 30, 2024 are as follows: June 30, 2024 (In Thousands) Commitments to extend credit $ 3,597,298 Credit card arrangements 418,865 Standby letters of credit 119,265 $ 4,135,428 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. 35 Results of Operations Summary of Net Income Net income and net income available to common stockholders of $52.1 million for the quarter ended June 30, 2024, compared to net income of $53.5 million and net income available to common stockholders of $53.4 million for the second quarter of 2023. The decrease in net income for the three months ended June 30, 2024 compared to 2023 was primarily attributable increases in non-interest expenses and provision for income taxes that were partially offset by the growth net interest income. Net income of $102.2 million and net income available to common stockholders of $102.1 million for the six months ended June 30, 2024, compared to net income and net income available to common stockholders of $111.4 million for the six months ended June 30, 2023. The decrease in net income for the six months ended June 30, 2024 compared to 2023 was primarily attributable to an increase in non-interest expenses. Basic and diluted earnings per common share were $0.96 and $0.95, respectively, for the three months ended June 30, 2024, compared to $0.98 for both in the corresponding period in 2023. Basic and diluted earnings per common share were both $1.87 for the six months ended June 30, 2024, compared to $2.05 and $2.04, respectively, for the corresponding period in 2023. Return on average assets for the three and six months ended June 30, 2024 was 1.34% and 1.30% compared to 1.50% and 1.57%, respectively, for the corresponding periods in 2023. Return on average common stockholders’ equity for the three and six months ended June 30, 2024 was 14.08% and 13.96%, respectively, compared to 15.85% and 16.83%, respectively, for the corresponding periods in 2023. Net Interest Income and Net Interest Margin Analysis Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. The major factors which affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings. Taxable-equivalent net interest income increased $4.6 million, or 4.5%, to $105.9 million for the three months ended June 30, 2024 compared to $101.3 million for the corresponding period in 2023, and decreased $1.3 million, or 0.6%, to $208.4 million for the six months ended June 30, 2024 compared to $209.7 million for the corresponding period in 2023. The taxable-equivalent yield on interest-earning assets increased to 6.01% for the three months ended June 30, 2024 from 5.49% for the corresponding period in 2023, and increased to 5.94% for the six months ended June 30, 2024 from 5.38% for the corresponding period in 2023. The yield on loans for the three months ended June 30, 2024 was 6.48% compared to 5.94% for the corresponding period in 2023, and 6.44% compared to 5.82% for the six months ended June 30, 2024 and June 30, 2023, respectively. The cost of total interest-bearing liabilities increased to 4.23% for the three months ended June 30, 2024 compared to 3.55% for the corresponding period in 2023, and increased to 4.23% for the six months ended June 30, 2024 from 3.27% for the corresponding period in 2023. Net interest margin for the three months ended June 30, 2024 was 2.79% compared to 2.93% for the corresponding period in 2023, and 2.73% for the six months ended June 30, 2024 compared to 3.04% for the corresponding period in 2023. The Federal Reserve Bank increased their targeted federal funds rate from 5.00 – 5.25% at June 30, 2023 to its current range as of June 30, 2024 of 5.25 – 5.50%. Our cost of funding has increased as a result of deposit pricing pressures resulting from these rate increases. The following tables show, for the three and six months ended June 30, 2024 and June 30, 2023, 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: 36 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) 2024 2023 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 $ 12,045,743 $ 194,128 6.48 % $ 11,581,008 $ 171,474 5.94 % Tax-exempt (3) 17,230 89 2.08 18,312 220 4.82 Total loans, net of unearned income 12,062,973 194,217 6.48 11,599,320 171,694 5.94 Mortgage loans held for sale 6,761 103 6.13 5,014 64 5.12 Investment securities: Taxable 1,936,818 16,102 3.33 1,757,397 11,616 2.64 Tax-exempt (3) 1,209 11 3.64 2,960 18 2.43 Total investment securities (4) 1,938,027 16,113 3.33 1,760,357 11,634 2.64 Federal funds sold 38,475 538 5.62 15,908 227 5.72 Restricted equity securities 11,290 201 7.16 8,834 134 6.08 Interest-bearing balances with banks 1,183,482 16,390 5.57 460,893 5,989 5.21 Total interest-earning assets $ 15,241,008 $ 227,562 6.01 $ 13,850,326 $ 189,742 5.49 Non-interest-earning assets: Cash and due from banks 96,646 101,188 Net fixed assets and equipment 59,653 60,499 Allowance for credit losses, accrued interest and other assets 300,521 279,860 Total assets $ 15,697,828 $ 14,291,873 Liabilities and stockholders' equity: Interest-bearing liabilities: Interest-bearing demand deposits $ 2,227,527 $ 15,765 2.85 % $ 1,628,936 $ 6,853 1.69 % Savings deposits 105,955 451 1.71 122,050 421 1.38 Money market accounts 6,810,799 75,597 4.46 5,971,639 56,251 3.78 Time deposits 1,157,528 12,859 4.47 983,582 8,446 3.44 Total interest-bearing deposits 10,301,809 104,672 4.09 8,706,207 71,971 3.32 Federal funds purchased 1,193,190 16,307 5.50 1,191,582 15,270 5.14 Other borrowings 64,738 687 4.27 100,998 1,164 4.62 Total interest-bearing liabilities $ 11,559,737 $ 121,666 4.23 % $ 9,998,787 $ 88,405 3.55 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 2,560,245 2,876,225 Other liabilities 89,418 64,917 Stockholders' equity 1,536,013 1,399,578 Accumulated other comprehensive loss (47,584 ) (47,634 ) Total liabilities and stockholders' equity $ 15,697,828 $ 14,291,873 Net interest income $ 105,896 $ 101,337 Net interest spread 1.78 % 1.94 % Net interest margin 2.79 % 2.93 % (1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $3,317 and $3,318 are included in interest income in the second quarter of 2024 and 2023, respectively. Loan fees include accretion of PPP loan fees. (2) Amortization of acquired loan premiums of $46 and $49 is included in interest income in 2024 and 2023, respectively. (3) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%. (4) Unrealized losses of $(66,663) and $(69,498) are excluded from the yield calculation in the second quarter of 2024 and 2023, respectively. 37 For the Three Months Ended June 30, 2024 Compared to 2023 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 $ 6,911 $ 15,743 $ 22,654 Tax-exempt (12 ) (119 ) (131 ) Total loans, net of unearned income 6,899 15,624 22,523 Mortgages held for sale 25 14 39 Debt securities: Taxable 1,261 3,225 4,486 Tax-exempt (14 ) 7 (7 ) Total debt securities 1,247 3,232 4,479 Federal funds sold 315 (4 ) 311 Restricted equity securities 44 24 68 Interest-bearing balances with banks 9,965 436 10,401 Total interest-earning assets $ 18,495 $ 19,326 $ 37,821 Interest-bearing liabilities: Interest-bearing demand deposits $ 3,106 $ 5,806 $ 8,912 Savings (60 ) 90 30 Money market accounts 8,441 10,905 19,346 Time deposits 1,646 2,767 4,413 Total interest-bearing deposits 13,133 19,568 32,701 Federal funds purchased 20 1,017 1,037 Other borrowed funds (393 ) (84 ) (477 ) Total interest-bearing liabilities 12,760 20,501 33,261 Increase in net interest income $ 5,735 $ (1,175 ) $ 4,560 Our growth in loans and interest-bearing balances with banks drove the favorable volume component change. The rate component was unfavorable as loan yields increased 54 basis points and average rates paid on interest-bearing liabilities increased 77 basis points. An increase in average equity contributed to a favorable volume component but was partially offset by a decrease in average non-interest-bearing deposits during the three months ended June 30, 2024 compared to the same period in 2023. 38 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) 2024 2023 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 $ 11,884,567 $ 380,867 6.44 % $ 11,606,581 $ 335,049 5.82 % Tax-exempt (3) 17,418 308 3.56 18,643 386 4.18 Total loans, net of unearned income 11,901,985 381,175 6.44 11,625,224 335,435 5.82 Mortgage loans held for sale 5,765 169 5.90 3,278 88 5.41 Investment securities: Taxable 1,975,056 32,082 3.27 1,741,050 22,508 2.61 Tax-exempt (3) 1,252 23 3.69 3,369 46 2.75 Total debt securities (4) 1,976,308 32,105 3.27 1,744,419 22,554 2.61 Federal funds sold 37,887 1,078 5.72 33,121 841 5.12 Restricted equity securities 10,854 397 7 9,374 322 7 Interest-bearing balances with banks 1,435,730 39,340 6 485,524 11,863 5.38 Total interest-earning assets $ 15,368,529 $ 454,264 5.94 % $ 13,900,940 $ 371,103 5.38 % Non-interest-earning assets: Cash and due from banks 97,730 103,601 Net fixed assets and equipment 59,889 60,558 Allowance for credit losses, accrued interest and other assets 301,891 279,650 Total assets $ 15,828,039 $ 14,344,749 Liabilities and stockholders' equity: Interest-bearing liabilities: Interest-bearing demand deposits $ 2,227,302 $ 31,427 2.84 % $ 1,652,064 $ 12,004 1.47 % Savings deposits 106,439 919 1.74 128,326 733 1.15 Money market accounts 6,825,800 150,870 4.44 5,864,734 101,229 3.48 Time deposits 1,160,866 25,522 4.42 917,478 13,718 3.02 Total interest-bearing deposits 10,320,407 208,738 4.07 8,562,602 127,684 3.01 Federal funds purchased 1,308,009 35,769 5.50 1,289,854 31,273 4.89 Other borrowings 64,737 1,374 4.27 107,826 2,469 4.62 Total interest-bearing liabilities $ 11,693,153 $ 245,881 4.23 % $ 9,960,282 $ 161,426 3.27 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 2,600,448 2,981,512 Other liabilities 63,390 67,688 Stockholders' equity 1,518,491 1,379,196 Accumulated other comprehensive loss (47,443 ) (43,929 ) Total liabilities and stockholders' equity $ 15,828,039 $ 14,344,749 Net interest income $ 208,383 $ 209,677 Net interest spread 1.71 % 2.11 % Net interest margin 2.73 % 3.04 % (1) Non-accrual loans are included in average loan balances in all periods. Loan fees of 6,972 and $6,581 are included in interest income in 2024, and 2023, respectively. Loan fees include accretion of PPP loan fees of $40 in 2023. (2) Amortization of acquired loan premiums of $96 and $98 is included in interest income in 2024 and 2023, respectively. (3) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%. (4) Unrealized losses of $(67,413) and $(64,645) are excluded from the yield calculation in 2024 and 2023, respectively. 39 For the Six Months Ended June 30, 2024 Compared to 2023 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 $ 8,375 $ 37,443 $ 45,818 Tax-exempt (24 ) (54 ) (78 ) Total loans, net of unearned income 8,351 37,389 45,740 Mortgages held for sale 72 9 81 Debt securities: Taxable 3,322 6,252 9,574 Tax-exempt (35 ) 12 (23 ) Total debt securities 3,287 6,264 9,551 Federal funds sold 130 107 237 Restricted equity securities 10 65 75 Interest-bearing balances with banks 25,910 1,567 27,477 Total interest-earning assets $ 37,760 $ 45,401 $ 83,161 Interest-bearing liabilities: Interest-bearing demand deposits $ 5,264 $ 14,159 $ 19,423 Savings (141 ) 327 186 Money market accounts 18,452 31,189 49,641 Time deposits 4,280 7,524 11,804 Total interest-bearing deposits 27,855 53,199 81,054 Federal funds purchased 455 4,041 4,496 Other borrowed funds (921 ) (174 ) (1,095 ) Total interest-bearing liabilities 27,389 57,066 84,455 Increase in net interest income $ 10,371 $ (11,665 ) $ (1,294 ) Our growth in loans and interest-bearing balances with banks drove the favorable volume component change. The rate component was unfavorable as loan yields increased 62 basis points and average rates paid on interest-bearing liabilities increased 96 basis points. An increase in average equity contributed to a favorable volume component but was partially offset by a decrease in average non-interest-bearing deposits during the six months ended June 30, 2024 compared to the same period in 2023. Provision for Credit Losses The provision for credit losses was $5.4 million for the three months ended June 30, 2024, a decrease of $1.3 million from $6.7 million for the three months ended June 30, 2023, and was $9.7 million for the six months ended June 30, 2024, a decrease of $1.1 million from $10.9 million for the six months ended June 30, 2023. The ACL as of June 30, 2024, March 31, 2024, and June 30, 2023, totaled $158.1 million, $155.9 million, and $152.3 million, or 1.28%, 1.31%, and 1.31% of loans, net of unearned income, respectively. Annualized net credit charge-offs to quarter-to-date average loans were 0.10% for the three months ended June 30, 2024, a basis point decrease compared to 0.11% for the first quarter of 2023. Annualized net credit charge-offs to year-to-date average loans were 0.08% for the six months ended June 30, 2024, compared to 0.08% for the corresponding period in 2023. Nonperforming loans decreased to $34.9 million, or 0.28% of total loans, at June 30, 2024 from $34.8 million, or 0.29% of total loans at December 31, 2023, and increased compared to $22.8 million, or 0.20% of total loans, at June 30, 2023. See the section captioned “Asset Quality” located elsewhere in this item for additional discussion related to provision for credit losses. Noninterest Income Three Months Ended June 30, Six Months Ended June 30, 2024 2023 $ change % change 2024 2023 $ change % change Noninterest income: Service charges on deposit accounts $ 2,293 $ 2,142 $ 151 7.0 % $ 4,443 $ 4,076 $ 367 9.0 % Mortgage banking 1,379 696 683 98.1 % 2,057 1,138 919 80.8 % Credit card income 2,333 2,406 (73 ) (3.0 )% 4,488 4,095 393 9.6 % Increase in cash surrender value life insurance 2,058 2,496 (438 ) (17.5 )% 5,289 4,117 1,172 28.5 % Other operating income 828 842 (14 ) (1.7 )% 1,427 1,477 (50 ) (3.4 )% Total non-interest income $ 8,891 $ 8,582 $ 309 3.6 % $ 17,704 $ 14,903 $ 2,801 18.8 % 40 Noninterest income totaled $8.9 million for the three months ended June 30, 2024, an increase of $309,000, or 3.6%, compared to the corresponding period in 2023, and totaled $17.7 million for the six months ended June 30, 2024, an increase of $2.8 million, or 18.8%, from to the corresponding period in 2023. Service charges on deposit accounts increased $151,000, or 7.0%, to $2.3 million for the three months ended June 30, 2024 compared to $2.1 million for the same period in 2023, and increased $367,000, or 9.0%, to $4.4 million for the six months ended June 30, 2024 compared to $4.1 million for the same period in 2023. Mortgage banking income increased $683,000, or 98.1%, to $1.4 million for the three months ended June 30, 2024 compared to $696,000 for the same period in 2023, and increased $919,000, or 80.8%, to $2.1 million for the six months ended June 30, 2024 compared to $1.1 million for the same period in 2023. The increase in mortgage banking revenue was primarily attributed to a combination of favorable market conditions and increased staffing levels. Net credit card income decreased $73,000, or 3.0%, to $2.3 million for the three months ended June 30, 2024 compared to $2.4 million for the same period in 2023, and increased $393,000, or 9.6%, to $4.5 million for the six months ended June 30, 2024 compared to $4.1 million for the same period in 2023. Bank-owned life insurance (“BOLI”) income decreased $438,000, or 17.5%, to $2.1 million for the three months ended June 30, 2024 compared to $2.5 million for the same period in 2023, and increased $1.2 million, or 28.5%, to $5.3 million for the six months ended June 30, 2024 compared to $4.1 million for the same period in 2023. We recognized $1.2 million of income attributed to a death benefit related to a former employee in our BOLI program during the first quarter of 2024, and $890,000 during the second quarter of 2023. Other income decreased $14,000, or 1.7%, to $828,000 for the three months ended June 30, 2024 compared to $842,000 for the same period in 2023, and decreased $50,000, or 3.4%, to $1.4 million for the six months ended June 30, 2024 compared to $1.5 million for the same period in 2023. Merchant service revenue increased $14,000, or 2.3%, to $595,000 for the three months ended June 30, 2024 compared to $581,000 for the same period in 2023, and increased $67,000, or 6.5%, to $1.1 million for the six months ended June 30, 2024 compared to $1.0 million for the same period in 2023. Noninterest Expense Three Months Ended June 30, Six Months Ended June 30, 2024 2023 $ change % change 2024 2023 $ change % change Noninterest expense: Salaries and employee benefits $ 24,213 $ 18,795 $ 5,418 28.8 % $ 47,199 $ 37,861 $ 9,338 24.7 % Equipment and occupancy expense 3,567 3,421 146 4.3 % 7,124 6,856 268 3.9 % Third party processing and other services 7,465 6,198 1,267 20.4 % 14,631 13,482 1,149 8.5 % Professional services 1,741 1,580 161 10.2 % 3,205 3,234 (29 ) (0.9 )% FDIC and other regulatory assessments 2,202 2,242 (40 ) (1.8 )% 6,107 3,759 2,348 62.5 % OREO expense 7 6 1 16.7 % 37 12 25 208.3 % Other operating expense 3,623 6,224 (2,601 ) (41.8 )% 10,818 12,926 (2,108 ) (16.3 )% Total non-interest expense $ 42,818 $ 38,466 $ 4,352 11.3 % $ 89,121 $ 78,130 $ 10,991 14.1 % Noninterest expense totaled $42.8 million for the three months ended June 30, 2024, an increase of $4.4 million, or 11.3%, compared to the corresponding period in 2023, and totaled $89.1 million for the six months ended June 30, 2024, an increase of $11.0 million, or 14.1%, from to the corresponding period in 2023. During the second quarter of 2024, the Company recorded the impact from election of the proportional amortization method to account for historical and new market tax credit investments made primarily for the purpose of receiving income tax credits due to our adoption of Accounting Standards Update 2023-02. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the consolidated income statement as a component of income tax expense. Previously the amortization of the investment was included in other non-interest expenses. Details of expense are as follows: ● Salary and benefit expense increased $5.4 million, or 28.8%, to $24.2 million for the three months ended June 30, 2024 compared to $18.8 million for the same period in 2023, and increased $9.3 million, or 24.7%, to $47.2 million for the six months ended June 30, 2024 compared to $37.9 million for the same period in 2023. The number of FTE employees increased by 48, or 8.3%, to 625 at June 30, 2024 compared to 577 at June 30, 2023. The increase in salary and benefit expense year-over-year was largely due to the normalization of incentives and increased salary expenses due to an increase in FTE employees. Incentives increased approximately $2.7 million, and salaries increased approximately $1.5 million from the second quarter of 2023. ● Equipment and occupancy expense increased $146,000, or 4.3%, to $3.6 million for the three months ended June 30, 2024 compared to $3.4 million for the same period in 2023, and increased $268,000, or 3.9%, to $7.1 million for the six months ended June 30, 2024 compared to $6.9 million for the same period in 2023. 41 ● Third party processing and other services increased $1.3 million, or 20.4%, to $7.5 million for the three months ended June 30, 2024 compared to $6.2 million for the same period in 2023, and increased $1.1 million, or 8.5%, to $14.6 million for the six months ended June 30, 2024 compared to $13.5 million for the same period in 2023. ● Professional services expense increased $161,000, or 10.2%, to $1.7 million for the three months ended June 30, 2024 compared to $1.6 million for the same period in 2023, and decreased $29,000, or .9%, to $3.2 million for the six months ended June 30, 2024 compared to $3.2 million for the same period in 2023. ● FDIC and other regulatory assessments decreased $40,000, or 1.8%, to $2.2 million for the three months ended June 30, 2024 compared to $2.2 million for the same period in 2023, and increased $2.3 million, or 62.5%, to $6.1 million for the six months ended June 30, 2024 compared to $3.8 million for the same period in 2023. In the first quarter of 2024, the FDIC implemented a special assessment adjustment to recapitalize the Deposit Insurance Fund resulting in an expense of $1.8 million. ● Other operating expenses decreased $2.6 million, or 41.8%, to $3.6 million for the three months ended June 30, 2024 compared to $6.2 million for the same period in 2023, and decreased $2.1 million, or 16.3%, to $10.8 million for the six months ended June 30, 2024 compared to $12.9 million for the same period in 2023. The decrease in other operating expenses were largely due to the application of the proportional amortization method to account for historical and new market tax credit investments, discussed above. Income Tax Expense Income tax expense was $14.5 million for the three months ended June 30, 2024 compared to $11.2 million for the same period in 2023, and was $25.1 million for the six months ended June 30, 2024, compared to $24.0 million for the same period in 2023. Our effective tax rate for the three and six months ended June 30, 2024 was 21.71% and 19.7%, respectively, compared to 17.38% and 17.74% for the corresponding periods in 2023, respectively. We recognized excess tax benefits as an income tax 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, 2024 of $396,000 and $600,000, respectively, compared to $139,000 and $1.2 million during the three and six months ended June 30, 2023, 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. Critical Accounting Estimates The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. In management’s opinion, certain accounting policies have a more significant impact than others on the Company’s financial reporting. The allowance for credit losses and income taxes are particularly significant for the Company’s financial reporting. Information concerning our accounting policies and critical accounting estimates 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, 2023. There were no changes to the accounting policies for the allowance for credit losses or income taxes during the three and six months ended June 30, 2024. 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. 42 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, 2023, and there have been no material changes to our sensitivity to changes in interest rates since December 31, 2023, as disclosed in our Annual Report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES 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, 2024. Based upon the Evaluation, our CEO and CFO have concluded that, as of June 30, 2024, our disclosure controls and procedures are effective June 30, 2024. 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, 2023, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 43 ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5. OTHER INFORMATION (a) The Company did not implement any material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors during the quarter ended June 30, 2024. (b) None of the Company’s directors or officers adopted or terminated any Rule 10b5-1 or non-10b5-1 trading arrangements during the quarter ended June 30, 2024. ITEM 6. EXHIBITS Exhibit: Description 3.1 Restated Certificate of Incorporation as amended (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2023). 3.2 Certificate of Elimination of the Senior-Non Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K/A, filed on June 28, 2016). 3.3 Bylaws (Restated for SEC filing purposes only) (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on April 4, 2014). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10, filed on March 28, 2008). 4.2 Revised Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on September 15, 2008, Commission File No. 0-53149). 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 Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SERVISFIRST BANCSHARES, INC. Date: August 5, 2024 By /s/ Thomas A. Broughton III Thomas A. Broughton III President and Chief Executive Officer Date: August 5, 2024 By / s/ Kirk P. Pressley Kirk P. Pressley Chief Financial Officer 44