UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

10-K/A
Amendment No. 1
(Mark One)
(Mark One)
þxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
OR
For the fiscal year ended December 31, 2011
¨Or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________

For the transition period from  to 
Commission File Number 0-53149

file number 000-53149

 
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.)
850 Shades Creek Parkway Suite 200, Birmingham, Alabama
35209
Birmingham, Alabama(Zip Code)
(Address of Principal Executive Offices)
(Zip Code)

(205) 949-0302

(Registrant’sRegistrant's Telephone Number, Including Area Code)

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

NONE

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

Common Stock, par value $.001 per share

(Titles of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes¨ Noþx

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes¨ Noþx

Indicate by check mark whether the registrantregistrant: (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.
Yesþx No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the  preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx No¨     No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendmentamendments to this Form 10-K.
¨

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

Large accelerated filer¨
Accelerated filerþx
Non-accelerated filer¨Smaller reporting company¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes£¨ NoRx

Asof June 30, 2011, the2013, the aggregate market value of the voting common stock held by non-affiliates of the registrant,,based on a stock price of $30.00$41.50 per share of Common Stock, was $160,408,500.

$257,793,684.

Indicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock, as of the latest practicable date: the number of shares outstanding as of February 28, 2012, of the registrant’s only issued and outstanding class of common stock, its $.001 per share par value common stock, was 5,947,182.

date.

Class
Outstanding as of February 28, 2014
Common stock, $.001 par value7,420,812
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 20122014 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on Form 10-K.

EXPLANATORY NOTE
In this Amendment No. 1 to Annual Report on Form 10-K, or this 10-K/A, unless otherwise indicated, we refer to ServisFirst Bancshares, Inc., a Delaware corporation, as“we,” ”our,” “us,” “the Company,” “ServisFirst Bancshares” or “ServisFirst” and to ServisFirst Bancshares, Inc., and its subsidiaries, including ServisFirst Bank, as “our bank subsidiary” or “the Bank.”
We are filing this Form 10-K/A to amend certain disclosures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as originally filed with the Securities and Exchange Commission on March 7, 2014 (our “Report”), to correct certain inadvertent typographical and clerical errors. The principal changes to our Report effected by this amendment are the following:
In Part I, Item 1A (Risk Factors), of our Report, we amended the risk factor related to the fair value of our investment securities portfolio as of December 31, 2013, from $257.5 million to $297.5 million.
In Part II, Item 5 (Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities), of our Report, we revised the amount of shares of our common stock subject to outstanding options to purchase shares of our common stock as of December 31, 2013, from 816,500 to 776,300.
Part II, Item 6 (Selected Financial Data), of our Report, we revised the following line items to the following amounts as of and for the corresponding years ended December 31:
·“Book value,” changing the amount from 26.34 to 26.35 for 2011
·“Actual shares outstanding,” changing the amount from 7,346,512 to 7,350,012 for 2013
·“Return on average stockholders’ equity,” changing the amount from 15.55 to 15.54 for 2013
·“Efficiency ratio,” changing the amount from 59.57 to 59.93 for 2009
·“Allowance for loan losses to total gross loans,” changing the amount from 1.24 to 1.22 for 2009
·“Allowance for loan losses to total non-performing loans,” changing the amount from 122.34 to 120.91 for 2009
·“Net average loans to average earning assets,” changing the amount from 84.65 to 84.80 for 2013, and from 79.82 to 79.89 for 2012
·“Noninterest-bearing deposits to total deposits,” changing the amount from 16.96 to 19.54 for 2011
·“Stockholders’ equity to total assets,” changing the amount from 7.97 to 7.98 for 2011
·“Percentage change in net income,” changing the amount from (16.10) to (16.09) for 2009

In Part II, Item 6 (Selected Financial Data), of our Report, we revised the “Net average loans to average assets” line item for the years ended December 31, 2013 and 2012, changing the ratios from 84.65% to 84.80% and 79.82% to 79.89%, respectively.

In Part II, Item 8 (Financial Statements and Supplementary Data), of our Report, with respect to the line items “Dividends on preferred stock” and “Net income available to common stockholders” in our Consolidated Statements of Income for the year ended December 31, 2013, we revised “Dividends on preferred stock,” changing the amount from 400 to 416 (in thousands) and “Net income available to common stockholders” from 41,217 to 41,201 (in thousands).
In part II, Item 8 (Financial Statements and Supplementary Data), of our Report, with respect to the line items “Net income available to common stockholders” and “Net income available to common stockholders, adjusted for effect of debt conversion,” in our Note 20 Earnings Per Common Share for the year ended December 31, 2013, we revised “Net income available to common stockholders,” changing the amount from 41,217 to 41,201 (in thousands) and “Net income available to common stockholders, adjusted for effect of debt conversion,” changing the amount from 41,332 to 41,316 (in thousands).
As required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are being filed as exhibits herewith.
As further required by Rule 12b-15, this Form 10-K/A sets forth the complete text of each item as amended. This Form 10-K/A does not affect any section of our Report not specifically discussed herein and continues to speak as of the date of our Report. Other than as specially reflected in this Form 10-K/A, this Form 10-K/A does not reflect events occurring after the filing of our Report or modify or update any related disclosures. Accordingly, this Form 10-K/A should be read in conjunction with our other filings made with the SEC subsequent to the filing of ourReport.
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SERVISFIRST BANCSHARES, INC.

TABLE OF CONTENTS

FORM 10-K

DECEMBER 31, 2011

2013
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS1
PART I2
ITEM 1.  BUSINESS2
ITEM 1A.  RISK FACTORS23
ITEM 1B.  UNRESOLVED STAFF COMMENTS31
ITEM 2.   PROPERTIES31
ITEM 3.    LEGAL PROCEEDINGS32
ITEM 4.  MINE SAFETY DISCLOSURES323
   
PART III.
324
  
ITEM 1.BUSINESS4
ITEM 1A.RISK FACTORS25
ITEM 1B.UNRESOLVED STAFF COMMENTS38
ITEM 2.PROPERTIES38
ITEM 3.LEGAL PROCEEDINGS39
ITEM 4.MINE SAFETY DISCLOSURES40
 
PART II.
40
ITEM 5.  5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES3240
ITEM 6.SELECTED FINANCIAL DATA3542
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS3744
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK5962
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA6165
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREDISCLOSURES115107
ITEM 9A.CONTROLS AND PROCEDURES115107
ITEM 9B.OTHER INFORMATION116108
  
PART IIIIII.
116108
  
 
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE116108
ITEM 11.EXECUTIVE COMPENSATION117108
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS117108
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE117108
ITEM 14.PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES117108
  
PART IVIV.
118109
  
 
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES118109
  
SIGNATURES121111
  
EXHIBIT INDEX122112

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of our statements contained in this

This annual report on Form 10-K including matters discussed undercontains forward-looking statements within the caption “Management’s Discussionmeaning of Section 27A of the Securities Act of 1933, as amended, and AnalysisSection 21E of Financial Condition and Results of Operations” beginning on page 37, arethe Securities Exchange Act. These “forward-looking statements” that are based uponreflect our current expectations and projections about future events. Forward-looking statements relateviews with respect to, among other things, future events orand our future financial performance and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we useperformance. The words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and similar expressions you should consider them as identifyingare intended to identify such forward-looking statements, although webut other statements not based on historical information may use other phrasing. Thesealso be considered forward-looking. All forward-looking statements involveare subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from any results expressed or implied by such forward-looking statements. These statements should be considered subject to various risks and uncertainties, and are made based on our beliefsupon management’s belief as well as assumptions made by, and assumptions, and on the information currently available to, us atmanagement pursuant to “safe harbor” provisions of the time that these disclosures were preparedPrivate Securities Litigation Reform Act of 1995. Such risks include, without limitation:
·the effects of the continued slow economic recovery and high unemployment;
·the effects of continued deleveraging of United States citizens and businesses;
·the effects of potential federal spending cuts due to the United States financial budgetary “sequester”;
·the effects of continued depression of residential housing values and the slow market for sales and resales;
·credit risks, including credit risks resulting from the devaluation of collateralized debt obligations (CDOs) and/or structured investment vehicles to which we currently have no direct exposure;
·the effects of governmental monetary and fiscal policies and legislative and regulatory changes;
·the effects of hazardous weather such as the tornados that struck the state of Alabama in April 2011 and January 2012;
·the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the internet;
·the effect of any merger, acquisition or other transaction to which we or any of our subsidiaries may from time to time be a party, including our ability to successfully integrate any business that we acquire;
·deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;
·the effect of changes in interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;
·the effects of terrorism and efforts to combat it;
·the results of regulatory examinations;
·changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
·the effect of inaccuracies in our assumptions underlying the establishment of our loan loss reserves; and
·other factors that are discussed in the section titled “Risk Factors” in Item 1A.
The foregoing factors should not be realized dueconstrued as exhaustive and should be read together with the other cautionary statements included in this annual report on Form 10-K. If one or more events related to a variety of factors, including, butthese or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not limited to, the following:

the effectsplace undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the current economic recessiondate on which it is made, and the possible continued deteriorationwe do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of the United States economy, particularly deterioration of the economy in Alabama, Florida and the communities in which we operate;

the effects of continued deleveraging of United States citizens and businesses;

the current financial and banking crisis resulting in the massive devaluation of the assets and shareholders’ equity of many of the United States’ financial and banking institutions;

the effects of continued compression of the residential housing industry, the continued recession and recovery and lasting high unemployment;

credit risks, including credit risks resulting from the devaluation of collateralized debt obligations (CDOs) and/new information, future developments or structured investment vehicles to which we currently have no direct exposure;

the effects of the Emergency Economic Stabilization Act of 2008, including its Troubled Asset Relief Program (TARP), the American Recovery and Reinvestment Act of 2009, and other governmental monetary and fiscal policies and legislative and regulatory changes;

the effect of changes in interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;

the effects of terrorism and efforts to combat it;

the effects of hazardous weather such as the tornados that struck the state of Alabama in April 2011 and January 2012;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;

the effect of any merger, acquisition or other transaction to which we or our subsidiary mayotherwise. New factors emerge from time to time, be a party, includingand it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our abilitybusiness or the extent to successfully integratewhich any business that we acquire; and

the effectfactor, or combination of inaccuracies in our assumptions underlying the establishment of our loan loss reserves.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual resultsfactors, may differ significantly from those we discuss in these forward-looking statements. For certain other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projectionsthose contained in theseany forward-looking statements, please readstatements.

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PART I
Unless this Form 10-K indicates otherwise, the “Risk Factors” in Item 1A beginning on page 23.

PART I

terms “we,” ”our,” “us,” “the Company,” “ServisFirst Bancshares” or “ServisFirst” as used herein refer to ServisFirst Bancshares, Inc., and its subsidiaries, including ServisFirst Bank, which sometimes is referred to as “our bank subsidiary” or “the Bank” and its other subsidiaries. References herein to the fiscal years 2009, 2010, 2011, 2012 and 2013 mean our fiscal years ended December 31, 2009, 2010, 2011, 2012 and 2013, respectively.

ITEM 1. BUSINESS

Overview

We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 and are headquartered in Birmingham, Alabama. Through ourOur wholly-owned subsidiary, bank, weoperate tenServisFirst Bank, an Alabama banking corporation, provides commercial banking services through 12 full-service banking offices located in Jefferson, Shelby, Madison, Montgomery and Houston Counties of Alabama and the panhandle of Florida, as well as a loan production office in Escambia County Florida inNashville, Tennessee. Through the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, MontgomeryBank, we originate commercial, consumer and Dothan, Alabama,other loans and Pensacola-Ferry Pass-Brent, Florida.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. As of December 31, 2011,2013, we had total assets of approximately $2.46$3.5 billion, total loans of approximately $1.83$2.9 billion, total deposits of approximately $2.14$3.0 billion and total stockholders’ equity of approximately $196.3$297 million.

We were originally incorporated as a Delaware corporation inAugust 2007 for the purpose of acquiring all of the common stock of ServisFirst Bank, an Alabama banking corporation (separately referred to herein as the “Bank”), which was formed on April 28, 2005 and commenced operations on May 2, 2005. On November 29, 2007, we became the sole shareholder ofoperate the Bank using a simple business model based on organic loan and deposit growth, generated by virtuehigh quality customer service, delivered by a team of experienced bankers focused on developing and maintaining long-term banking relationships with our target customers. We utilize a planuniform, centralized back office risk and credit platform to support a decentralized decision-making process executed locally by our regional chief executive officers. Rather than relying on a more typical traditional, retail bank strategy of reorganizationoperating a broad base of multiple brick and agreementmortar branch locations in each market, our strategy focuses on operating a limited and efficient branch network with sizable aggregate balances of merger pursuanttotal loans and deposits housed in each branch office. We believe that this approach more appropriately addresses our customers’ banking needs and reflects a best-of-class delivery strategy for commercial banking services. This strategy allows us to which (i) a wholly-owned subsidiary formed fordeliver targeted, high quality customer service, while achieving significantly lower efficiency ratios relative to the purpose of the reorganization was merged with and into the Bank, with the Bank surviving, and (ii) each shareholder of the Bank exchanged their shares of the Bank’s common stock for an equal number of shares of our common stock.

We were organized to facilitate the Bank’s ability to serve its customers’ requirements for financial services. banking industry.

The holding company structure provides flexibility for expansion of our banking business through the possible acquisition of other financial institutions, the provision of additional banking-related services which thea traditional commercial bank may not provide under current law, and additional financing alternatives such as the issuance of trust preferred securities. We have no current plans to acquire any operating subsidiaries in addition to the Bank, but we may make acquisitions in the future if we deem them to be in the best interest of our stockholders. Any such acquisitions would be subject to applicable regulatory approvals and requirements.

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 (including negotiable orders of withdrawal, or NOW accounts) and the amortization and prepayment of loans and borrowings. 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 (including NOW accounts), interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.

In January 2012, we formed SF Holding 1, Inc., an Alabama corporation, and its majority-owned subsidiary, SF Realty 1, Inc., an Alabama corporation. In November 2013, SF FLA Realty, Inc. was established as another majority-owned subsidiary of SF Holding 1, and is also an Alabama corporation. SF Realty 1 and SF FLA Realty both elected to be treated as a real estate investment trust (“REIT”) for U.S. income tax purposes. The companies hold and manage participations in residential mortgages and commercial real estate loans originated by ServisFirst Bank. SF Holding 1, Inc. and its two subsidiaries are consolidated into the Company.
History
The Bank was founded by our President and Chief Executive Officer, Thomas A. Broughton, III, and commenced banking operations in May 2005 following an initial capital raise of $35 million. We are headquartered at 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209 (Jefferson County).were incorporated as a Delaware corporation in August 2007 for the purpose of acquiring all of the common stock of the Bank, and in November 2007 our holding company became the sole shareholder of the Bank by virtue of a plan of reorganization and agreement of merger. In May 2008, following our filing of a registration statement on Form 10 with the Securities and Exchange Commission (or, “SEC”), we became a reporting company within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”) and have been filing annual, quarterly, and current reports, proxy statements and other information with the SEC since 2008.
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Since inception, our bank has achieved significant growth, all of which has been generated organically. We achieved total asset milestones of $1 billion in 2008, $2 billion in 2011 and $3 billion in 2013. In addition to the Jefferson County headquarters, the Bank currently operatesthrough threetotal asset milestones, we have opened offices in six new markets, and raised an aggregate of approximately $55.1 million to support our growth in these new locations through five separate private placements of our common stock to predominately local, individual investors.
Business Strategy
We operate a full service commercial bank focused on providing competitive products, state of the Birmingham-Hoover, Alabama MSA (two officesart technology and quality service. Our business philosophy is to operate as a metropolitan community bank emphasizing prompt, personalized customer service to the individuals and businesses located in Jefferson County and one office in north Shelby County), two offices in the Huntsville, Alabama MSA (Madison County), two offices in the Montgomery, Alabama MSA (Montgomery County),two offices in the Dothan, Alabama MSA (Houston County) and one office inthe Pensacola-Ferry Pass-Brent, Florida MSA (Escambia County). These MSAs constitute our primary service areas, and we also serve certain areas adjacentmarkets. We aggressively market to our primary service areas.

Markets

Service Areas

Birmingham is locatedtarget customers, which include privately held businesses with $2 million to $250 million in central Alabama approximately 90 miles northwest of Montgomery, Alabama, 146 miles west of Atlanta, Georgia, and 148 miles southwest of Chattanooga, Tennessee. Birmingham is intersected by U.S. Interstates 20, 59 and 65. Jefferson County includes the major business area of downtown Birmingham. North Shelby County also encompasses a growing business community and affluent residential areas. With two offices in Jefferson County and one in north Shelby County, we believe we are well positioned to access the most affluent areas of the Birmingham-Hoover MSA.

We also operate in the Huntsville, Alabama MSA, the Montgomery, Alabama MSA and the Dothan, Alabama MSA. We believe the Huntsville market offers substantial growth as one of the strongest technology economies in the nation, with over 300 companies performing sophisticated government, commercial and university research. Huntsville has one of the highest concentrations of engineers in the United States, as well as one of the highest concentrations of Ph.D.s. Huntsville is located in North Alabama off U.S. Interstate 65 between Birmingham and Nashville, Tennessee. Montgomery is the capital and one of the largest cities in Alabama and home to the Hyundai Motor Manufacturing plant, which began production in May 2005. Montgomery is located in central Alabama between Birmingham and Mobile, Alabama and is intersected by U.S. Interstates 65 (connecting Birmingham and Mobile) and 85 (connecting Montgomery to Atlanta, Georgia). Dothan is located in the southeastern corner of Alabama near the Georgia and Florida state lines and is 35 miles from U.S. Interstate 10 which runs through the panhandle of Florida and connects Mobile, Alabama to Tallahassee and Jacksonville, Florida. Dothan is also intersected by U.S. Highways 231, 431 and 84, which are common trucking lanes, and has local access to rail transportation and the Chattahoochee River. With two offices in each of Madison, Montgomery and Houston Counties, we believe that we have a base of banking resources to serve such counties.

In April 2011 we opened our first office outside of Alabama in Pensacola, Florida. We hired an experienced team of veteran Pensacola bankers to help us establish this office. Pensacola is located in the Florida panhandle approximately 50 miles east of Mobile, Alabama, and 40 miles west of Fort Walton, Florida, with easy access to U.S. Interstate 10 just minutes away.  Pensacola is a regional hub for healthcare and retail, with an important manufacturing sector, military presence, a strong tourism presence and a broadly diversified economy.

We conduct a general consumer and commercial banking business, emphasizing personal banking services to commercial firms,annual sales, professionals and affluent consumers who we believe are underserved by the large regional banks that operate in our markets. We also seek to capitalize on the extensive relationships that our management, directors, advisory directors and stockholders have with the businesses and professionals in our markets. We believe this philosophy has attracted and will continue to attract customers and capture market share historically controlled by other financial institutions operating in our markets.  

Focus on Core Banking Business
We deliver a broad array of core banking products to our customers. Our management and employees focus on recognizing customers’ needs and providing products and services to meet those needs. We emphasize an internal culture of keeping our operating costs as low as possible, which in turn leads to greater operational efficiency. Additionally, our centralized technology and process infrastructure contribute to our low operating costs. We believe this combination of products, operating efficiency and technology make us attractive to customers in our markets. In addition, in 2011 we began providing correspondent banking services to various smaller community banks in our markets, and currently act as a correspondent bank to approximately 150 community banks located throughout the southeastern United States. We provide a source of clearing and liquidity to our correspondent bank customers, as well as a wide array of account, credit, settlement and international services. This service is of a scale and quality that is unique for a bank our size and provides us with a core deposit base, solid revenue stream and a low cost of funds.
Commercial Bank Emphasis
We have historically focused on people as opposed to places. This strategy translates into a smaller number of brick and mortar branch locations relative to our size, but larger overall branch sizes in terms of total deposits. As a result, our branches (excluding those branches that have been open less than three years) average approximately $341 million in total deposits. Whereas, in the more typical retail banking model, branch banks continue to lose traffic to other banking channels which may prove to be an impediment to earnings growth for those banks that have invested in large branch networks. We place a strong emphasis on commercial and industrial loans, which comprised 44.7% of our total loan portfolio as of December 31, 2013. Our focus has been to expand opportunistically when we identify a strong banking team in a market with appropriate economies and market demographics where we believe we can achieve a minimum of $300 million in deposits. We seek to differentiate the Bank through our people, processes and technology. We do not believe that a traditional brick and mortar, retail-oriented branch network model is required to succeed in the current marketplace. Our experience is that our services and operating philosophy are attractive to customers in our markets who do not require numerous branch banks in a single market.
Scalable, Decentralized Business Model
We emphasize local decision-making by experienced bankers supported by centralized risk and credit oversight. We believe that the delivery by our bankers of in-market customer decisions coupled with risk and credit support from our corporate headquarters, allows us to serve customers directly and in person, while managing risk centrally and on a uniform basis. We intend to grow by repeating this scalable model in each market where we are able to identify a strong banking team. Our goal in each market is to employ the highest quality bankers in that market. We then empower those bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service possible. We focus on a geographic model of organizational structure as opposed to a line of business model employed by most regional banks. This structure gives significant responsibility and accountability to our regional chief executive officers which we believe will aid in our growth and success. We have developed a business culture whereby our management, from the top down, is actively involved in sales, which is a key differentiator from our competition. All calling officers are required to actively solicit new customers, who are primarily non-borrowers from our bank, to build core deposits. 
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Identify Opportunities in Vibrant Markets
Since opening our original banking facility in Birmingham in 2005, we have expanded into six additional markets. There are two primary factors we consider when determining whether to enter a new market:
·the availability of successful, experienced bankers with strong reputations in the market; and
·the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit-related attributes of the potential market.
Prior to entering a new market, we identify and build a team of experienced, successful bankers with market-specific knowledge to lead the bank’s operations in that market, including a regional chief executive officer. Generally, we or members of our senior management are familiar with these individuals based on prior work experience and reputation, and strongly believe in the ability of such individuals to successfully execute our business model. We also identify and build a non-voting advisory board of directors in each market, comprised of directors representing a broad spectrum of business experience and community involvement in the market. We currently have advisory boards in each of the Huntsville, Montgomery, Dothan, Mobile and Pensacola markets. While we currently have a loan production office in Nashville, Tennessee with three experienced bankers (one of whom was hired in January 2014), we anticipate expanding this office into a full-service branch in the future, assuming that we are able to identify and retain a full team of experienced bankers whom we believe can effectively execute our business model.
Prior to opening a full-service banking office in a new market, historically we have raised capital through private placements to investors in the local market, many of whom are also customers of our bank in such market. We believe having many of our customers as stockholders provides us with a strong source of core deposits, aligns our and our customers’ interests, and fosters a platform for developing and maintaining the long-term banking relationships we seek.
In addition to organic expansion, we may seek to expand through targeted acquisitions. Although we have not yet identified any specific acquisition opportunity that meets our strict requirements, including a limited number of branches serving a vibrant market with a strong deposit base, a premier banking team with individuals whom we believe can execute our business model, and at a price that we believe provides attractive risk-adjusted returns, we routinely evaluate potential acquisition opportunities that we believe would be complementary to our business. We do not, however, have any immediate plans, arrangements or understandings relating to any acquisition, and we do not believe an acquisition is necessary to successfully implement our business model.
Market Growth and Competition
Our philosophy is to operate as a metropolitan community bank emphasizing prompt, personalized customer service to the individuals and businesses located in our service areas. We believe the current market for financial services, as wellprimary markets. Our primary markets are broadly defined as the prospects for the future, present opportunity for a locally ownedmetropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery, Dothan and operated financial institution. Specifically, we believe that our primary service areas will be in need of local institutions to respond to customer and deposit attrition resulting from the acquisitions during the last few years of Alabama-headquartered banks, including the acquisitions of SouthTrust Corporation by Wachovia Corporation (which has now been acquired by Wells Fargo & Company), AmSouth Bancorporation by Regions Financial Corporation, Compass Bancshares, Inc. by Banco Bilbao Vizcaya Argentaria andMobile, Alabama, National Bancorporation (operating as First American Bank) by RBC Centura Banks (which is being acquired by PNC Financial Services Group). We believe that a community-based bank such as the Bank can better identify and serve local relationship banking needs than can an office or subsidiary of such larger banking institutions.

Local Economy of Service Areas

Birmingham. Jefferson and Shelby Counties are the primary counties for the seven-county Birmingham-Hoover MSA, which had a 2011 population of 1,134,536. With a 2011 population of 656,717, Jefferson County includes Alabama’s largest city – Birmingham and is Alabama’s most populated county. Shelby County has a population of 200,582 and is among the fastest growing counties in the U.S. Between 2000 and 2011, Shelby County’s population increased 40%.

Jefferson and Shelby Counties have the highest population density in the Birmingham-Hoover MSA and accounts for 76% of the population in the entire seven-county region. In 2011, the combined population of Jefferson and Shelby Counties was 857,299 with 335,614 households. Between 2000 and 2011, the counties’ combined population increased 51,959. The projected growth rate for the two counties between 2011 and 2016 is 4% or an additional 33,304 residents, which will bring the total population of the two counties to 890,603.

Serving as the core of the Birmingham-Hoover MSA, Jefferson and Shelby Counties have an employment base of 469,025 – more than 88% of the Birmingham-Hoover MSA’s total employment. The counties combined 2011 average household income is $72,705 and experienced a 40% increase since 2000. The counties’ 2000 to 2011 average household income growth rate is considerably higher than the U.S. average household income growth rate of 28%.

The economic composition of the Birmingham-Hoover MSA is a diverse mixture of traditional and emerging employment sectors. Metals manufacturing is an important historical sector; finance and insurance, healthcare services and distribution are the region’s core economic sectors; and biological; and medical technology; entertainment and diverse manufacturing have been identified as the regions emerging economic sectors.

Finance and insurance is a core economic sector and is among the most specialized economic sectors in the Birmingham-Hoover MSA. Several banks and insurance companies have corporate or regional headquarters in the region, including: Regions Financial Corporation, BBVA Compass, Protective Life, Infinity Insurance and State Farm.

Other major corporations headquartered or with a major presence in the Birmingham-Hoover MSA include: HealthSouth Corporation, Vulcan Materials and AT&T. Moreover, Birmingham serves as the headquarters to six of the country’s top-performing private companies on the elite Forbes 500 list, including O’Neal Steel and Drummond Company.

Healthcare services are also a core economic sector of Metropolitan Birmingham and are highly regarded. The University of Alabama at Birmingham (UAB) is Alabama’s largest employer with more than 19,000 employees and is among the elite healthcare centers in the U.S. UAB’s annual economic impact is estimated at more than $4.6 billion; in 2009, UAB received $489 million in outside research funding. Additionally, Birmingham is home to the largest nonprofit independent research laboratory in the Southeast – Southern Research Institute. These two institutions provide the basis of the region’s growing biotechnology sector.

Diverse manufacturing is an emerging economic sector and is spearheaded by the presence of two major automotive manufacturing facilities – Mercedes Benz U.S. International and Honda Manufacturing of Alabama. These automotive manufacturing facilities together employ more than 7,000 and serve as the basis for the region’s growth in transportation equipment manufacturing.

Unless otherwise stated, the foregoing and other pertinent data can be found on the websites of the Birmingham Regional Chamber of Commerce and the Federal Deposit Insurance Corporation (the “FDIC”).

Huntsville.Huntsville, Madison County, is the life-center for North Alabama and has seen steady growth since the 1960’s. Today there are nearly one million people within a 50-mile radius of Huntsville. The metropolitan population is diverse and rich in culture, with many residents moving into the area as a technology destination from all 50 states and numerous countries, including Japan, Switzerland, Korea, Germany and the U.K. In 2010, the Huntsville, Alabama MSA (which includes Madison and Limestone Counties) was the second largest metropolitan area in the state with a population of 417,593 people, up 21.5% from the 2000 U.S. Census. Madison County’s population was 334,811, up 20.5% from the 2000 Census. The Huntsville MSA population grew at over twice the rate of the rest of Alabama and the U.S. as a whole. According to a 2009 estimate, the average household income was $73,316 for the Huntsville MSA, $75,911 for Madison County, $71,775 for the City of Huntsville, and $96,219 for the City of Madison.

Huntsville offers substantial growth as one of the strongest technology economies in the nation with one of the highest concentrations of engineers and Ph.D’s in the United States. Huntsville has a number of major government programs, including NASA programs such as the Space Station and Space Shuttle Propulsion and U.S. Army programs such as the National Space and Missile Defense Command, Army Aviation and Foreign Military Sales. Cummings Research Park in Huntsville is now the second largest research park in the United States and the fourth largest research park in the world. Huntsville was ranked number one in the state for announced new and expanding jobs from 2004 to 2008 as well as for 2010, according to the Alabama Development Office. Huntsville was named asForbes magazine’s “Best Place to Live to Weather the Economy” in November 2008. Further,Forbes named Huntsville one of its “Leading Cities for Business” six years in a row, including 2008, as well as one of the “10 Smartest Cities in the World” in 2009.Fortune Small Business Magazine named Huntsville as the country’s “Top Mid-sized City to Launch and Grow a Business” andKiplinger Magazine named Huntsville as the nation’s “Best City” in 2009. Huntsville has one of the highest concentrations ofInc.5000 Companies in the United States and also has a number of offices of Fortune 500 companies. Major employers in Huntsville include the U.S. Army/Redstone Arsenal, the Boeing Company, NASA/Marshall Space Flight Center, Intergraph Corporation, ADTRAN, Inc., Northrop Grumman, Cinram, SAIC, DirecTV, Lockheed Martin, and Toyota Motor Manufacturing of Alabama. Job growth in the Huntsville metro area has been strong, with 23,300 net new jobs since 2000 compared to a net loss of jobs during that same period of time for Alabama and the United States. Professional and business service employment in the Huntsville metro area grew by 45.9% from 2000-2010, adding a total of 15,300 workers primarily in professional, scientific and technical fields. This accounts for approximately 70% of the total U.S. professional & business service growth this decade.

In total, new and expanding industry in Huntsville/Madison County in 2010 amounted to 61 projects, 2,901 jobs, and almost $153 million in capital investment. Major projects include new government contracts in missile defense with Lockheed Martin’s Integrated Test Center, Raytheon’s Standard Missile Production facility and new growth at APT Research and Northrop Grumman. Dynetics broke ground on the company’s new prototype engineering center in Cummings Research Park, in which it has invested $52 million and created 350 new jobs. Integration Innovation Inc. also expanded in the park. New government operations included the continued implementation of BRAC as well as the arrival of the U.S. Army Contracting Command and the Defense Acquisition University. Additionally, leaders with Redstone Arsenal and the city of Huntsville presented the designs for Redstone Gateway, a 468-acre development that will help with growth on Redstone Arsenal and from new contractors coming because of BRAC 2005. The office park will be located just outside of gate 9 at Redstone Arsenal, and will ultimately contain hotels, restaurants and 4.4 million square feet of office space.

The foregoing and other pertinent data are available on the Huntsville/Madison County Chamber of Commerce’s and the FDIC’s websites.

Montgomery. Montgomery is Alabama’s second largest city and is the capital of Alabama. We have identified Montgomery as a high-growth market for us, second in the state of Alabama only to Huntsville in the growth of new jobs from 2000-2007. A recent competitive assessment conducted by Market Street Services on behalf of the Montgomery Area Chamber of Commerce shows Montgomery outpacing the State of Alabama as a whole, as well as the benchmark cities of Richmond, Virginia, Little Rock, Arkansas, and Shreveport, Louisiana, with an 11.1% increase in net new jobs during the same period. It is also noteworthy that, according to Market Street, Montgomery had more jobs in March 2010 than it did in March 2000, unlike Richmond, the State of Alabama, and the United States.

The Montgomery MSA comprises 367,475 residents, and is the fourth most populous MSA in Alabama. Over the past 15 years 16,500 jobs have been created in the metro area, an increase of 11%. The area’s wealth has more than doubled since 1990, with a total personal income of $13.2 billion for the Montgomery MSA in 2008. The average median family income grew 25% from 1990 to 2008, from $45,182 to $56,400. The area’s per capita income grew from $18,500 in 1990 to $35,973 in 2009, an increase of 94%.

Recent developments in Montgomery include the more than $1 billion that has been spent on the revitalization of downtown Montgomery and the Riverfront District, including over $200 million on a downtown four-star hotel, performing arts theatre, and convention center complex. Downtown Montgomery also opened a new minor league baseball stadium in 2004, and the Montgomery Regional Airport completed a $40 million renovation and expansion project in 2006.

As its capital city, the State of Alabama employs approximately 9,500 persons in Montgomery, as well as numerous service providers. Montgomery is also home to Maxwell Gunter Air Force Base, which employs more than 12,000 persons, including Air University, the worldwide center for U.S. Air Force leadership and education, in addition to global information technology support systems. In 2010 a new Network Operations Squadron for Air Force Cyber Command and worldwide Air Force Enterprise Call Center created 370 new high-paying civilian and military jobs while strengthening the overall mission of Maxwell/Gunter.

In May of 2005, Hyundai Motor Manufacturing Alabama (HMMA) opened its Montgomery manufacturing plant, which was built with a capital investment of over $1.4 billion. That plant, which now employs over 3,500 people and produces two Hyundai models, has been further expanded with the addition of a new engine plant. That engine plant will also serve the new Kia manufacturing facility in West Point, Georgia. The area has also benefited from the nearly 30 top-tier Hyundai suppliers who have invested over $550 million in new plant facilities, producing almost 8,000 additional jobs. In 2010, HMMA announced an additional $50 million capital investment in order to prepare for the addition of the 2011 Elantra production line.

In 2010, Montgomery led the state in announced new and expanding industries. Hyundai Power Transformers USA will create 1,000 new jobs and invest more than $125 million in Montgomery, the largest project in the State of Alabama for 2010 and the company’s first American manufacturing facility. In addition, approximately 400 new jobs and more than $150 million in capital investment were announced in 2010 as a result of existing industry expansions. Two additional corporate headquarters announced their locations in Montgomery in 2010, Hausted Patient Handling Services and Community Newspaper Holdings Inc.

The foregoing and other pertinent data can be found on the Montgomery Area Chamber of Commerce’s and the FDIC’s websites and recent publications of the Montgomery Area Chamber of Commerce, particularly theMontgomery Business Journal(complete archived editions available at montgomerychamber.com).

Dothan, Dothan, in Houston County, is located in the southeastern corner of Alabama and is conveniently placed near the Florida panhandle and Georgia state line. We believe that this market continues to have great potential due to its central hub, its accessibility to large distribution centers, its home to several major corporations, and its current low level of personalized banking services. According to the FDIC, Dothan’s deposit base has grown 28% during the past five years. Furthermore, Dothan’s two largest deposit holders are Regions Bank and Wells Fargo Bank (formerly SouthTrust Bank and more recently Wachovia Bank), each of which has undergone substantial changes in recent years. These changes continue to provide an opportunity for service oriented banks such as ServisFirst. We believe the citizens of Dothan demand the personal service provided by the Bank, making it a more viable option for the current residents than local branches of larger regional competitors. The Bank’s two offices are strategically located in the southeastern and western areas of Dothan, which are growing areas of business activity and development.

In 2009, the Dothan, Alabama MSA had a population of 142,000 people, a 9.8% increase from 2000. Houston County had a population of 99,000, an 11.5% increase from 2000, while the city of Dothan has experienced a 16.8% increase in population since 2000.

We believe Dothan to be a growing market with increased banking needs considering the wide array of industries being serviced. The Dothan area, while being known as the peanut capital, is also home to facilities of several major corporations, including Michelin, Pemco World Aviation, International Paper, Globe Motors, AAA Cooper-Headquarters, and many more. Also, the strong presence of trucking and its strategic positioning in the Southeast market attracts distribution-related projects to the Dothan MSA. For example, the development of the Houston County Distribution Park has allowed companies to take advantage of the 352-acre tract to serve consumers in the Southeast region of the United States. Being only minutes from the Florida state line, the large lots can serve distribution-related projects up to 1.2 million square feet in size.

Dothan is a hub of healthcare for southeast Alabama, southwest Georgia and northwest Florida areas, with two regional hospitals, Southeast Alabama Medical Center employing over 2,000 medical professionals and support staff, and Flowers Hospital employing 1,400 medical professionals and support staff. In January 2012, construction began on the Alabama College of Osteopathic Medicine, a four-year medical college partnering with and located near; the Southeast Alabama Medical Center. The initial construction budget is $60 million, employment will be 80-100 and the first class will begin in the fall of 2013.

The area also has a strong history in the expansion of aviation jobs in Alabama through Enterprise-Ozark Community College (avionics and aviation mechanic training) and Fort Rucker, the Army Aviation Center of the United States. The highly specialized Dothan Airport Industrial Park offers the land and infrastructure to house aviation related projects with runway access to facilities.

Lastly, the agriculture and agribusiness industries are thriving, and the area is home to many of the successful farmers and related businesses. In addition, the agricultural communities in northwestPensacola-Ferry Pass-Brent, Florida, and southwest Georgia are nearbyNashville, Tennessee. We draw most of our deposits from, and conduct most of our lending transactions in, many cases, use Dothan as their hub.

The existence of these industries and the continuing growth in the area allows an opportunity for the Bank to increase its presence and penetration in this market.

The foregoing and other pertinent data can be found on the Dothan Chamber of Commerce’s and the FDIC’s websites.

Pensacola. The Pensacola-Ferry Pass-Brent MSA (Escambia and Santa Rosa Counties) has a population of more than 450,000, up from 412,000 in 2000.  Population in the Pensacola city limits totals 53,752, down from 56,255 in 2000. Pensacola is served by the Pensacola Gulf Coast Regional Airport, which transports over 1.5 million passengers per year, representing more traffic than the airports in Mobile and Fort Walton combined. 

The Pensacola and Northwest Florida economies are driven by tourism, military, health services, and medical technologies industries.  Five major military bases are located in northwest Florida:  Eglin Air Force Base, Hurlburt Field, Pensacola Whiting Field, Pensacola Naval Air Station and Corry Station.  Pensacola, the cradle of naval aviation, is home to the U.S. Navy’s precision flight team, the Blue Angels, and has trained naval aviators for decades.  Defense spending by these bases totals nearly $5 billion annually.  Other major employers in the area include Sacred Heart Health System, Baptist Healthcare, West Florida Regional Hospital, Gulf Power Company (Southern Company), the University of West Florida, International Paper, Ascend Performance Materials (Solutia), GE Wind Energy, Armstrong World Industries, and Wayne Dalton Corporation.  The Pensacola Bay area is also home to the Andrews Institute for Orthopaedics and Sports Medicine, a world-leading surgical and research center for human performance enhancement.  A vibrant small business sector operates in all areas of the economy.

According to the FDIC, Pensacola MSA Market deposits as of June 30, 2011 totaled approximately $5.1 billion (not including credit union deposits) among 24 banks.  Currently, only large regional or national banks dominate Pensacola’s market share.  Top market share performers include Regions Bank (22.2%), Wells Fargo Bank (15.2%), Synovus Bank (11.8%), Whitney/Hancock Bank (9.3%), Bank of America (8.4%) and Suntrust Bank (6.4%).  We believe this creates the opportunity for a service-oriented community bank such as ServisFirst to not only establish itself but to flourish. 

The foregoing and other pertinent data can be found on the Pensacola Chamber of Commerce’s and the FDIC’s websites.

markets.Deposit Growth in Our Markets

The markets in which we operate have enjoyed steady expansion in their deposit base until being negatively affected by the current recession and credit crisis.base. We believe that the long-term growth potential of each of our markets will continue to growis substantial, and further believe that many local affluent professionals and small business customersowners will do their banking with local, autonomous institutions that offer a higher level of personalized service. According to FDIC reports, total deposits in each of our market areas have expanded from 20012003 to 20112013 (deposit data reflects totals as reported by financial institutions as of June 30th of each year) as follows:

  2011  2001  Compound
Annual
Growth
Rate		 
  (Dollars in Billions) 
Jefferson/Shelby County, Alabama $26.5  $14.5   6.22%
Madison County, Alabama  5.9   3.2   6.31%
Montgomery County, Alabama  5.9   2.9   7.36%
Houston County, Alabama  2.1   1.3   4.91%
Escambia County, Florida  3.8   2.6   3.87%

Competition

        Compound 
        Annual 
  2013 2003 Growth Rate 
  (Dollars in Billions) 
Jefferson/Shelby County, Alabama $24.8 $16.3 4.29%
Madison County, Alabama  6.1  3.7 5.13%
Montgomery County, Alabama  6.5  3.6 6.09%
Houston County, Alabama  2.2  1.3 5.40%
Mobile County, Alabama  6.0  4.7 2.47%
Escambia County, Florida  3.5  3.1 1.22%
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The Bank is subject to intense competition from various financial institutions and other financial service providers.  The Bank competes for deposits with other local and regional commercial banks, savings and loan associations, credit unions and issuers of commercial paper and other securities, such as money-market and mutual funds.  In making loans, the Bank competes with other commercial banks, savings and loan associations, consumer finance companies, credit unions, leasing companies and other lenders.

The following table illustrates our market share, by insured deposits, in our primary service areas at June 30, 2011,2013, as reported by the FDIC:

Market Number of
Branches		  Our Market Deposits  Total
Market
Deposits		  Ranking  Market Share
Percentage		 
  (Dollars in Millions) 
Alabama:                    
Birmingham-Hoover MSA  3  $860.0  $29,285.0   6   2.94%
Huntsville MSA  2   429.5   6,638.7   7   6.47%
Montgomery MSA  2   284.9   7,214.7   9   3.95%
Dothan MSA  2   208.6   2,791.4   3   7.47%
Florida:                    
Pensacola-Ferry Pass-Brent MSA  1   24.9   5,076.6   20   0.49%

          Market 
  Number of Our Market Total Market   Share 
Market Branches Deposits Deposits Ranking Percentage 
  (Dollars in Millions) 
Alabama:             
Birmingham-Hoover MSA 3 $1,217.3 $30,175.1 5 4.03%
Huntsville MSA 2  540.8  6,805.7 5 7.95%
Montgomery MSA 2  374.2  7,810.1 7 4.79%
Dothan MSA 2  327.1  2,883.9 3 11.34%
Mobile MSA 1  15.2  6,041.6 18 0.25%
Florida:             
Pensacola-Ferry Pass-Brent MSA 2  202.9  4,638.0 8 4.38%
Together, deposits for all institutions in Jefferson, Shelby, Madison, Montgomery, Madison,Houston and HoustonMobile Counties represented approximately 47.94%56.04% of all the deposits in the State of Alabama at June 30, 2011.

2013. Deposits for all institutions in Escambia County represent approximately 0.79% of all the deposits in the state of Florida at June 30, 2013.

Our retail and commercial divisions operate in highly competitive markets. We compete directly in retail and commercial banking markets with other commercial banks, savings and loan associations, credit unions, mortgage brokers and mortgage companies, mutual funds, securities brokers, consumer finance companies, other lenders and insurance companies, locally, regionally and nationally. Many of our competitors compete by using offerings by mail, telephone, computer and/or the Internet. Interest rates, both on loans and deposits, and prices of services are significant competitive factors among financial institutions generally. Providing convenient locations, desired financial products and services, convenient office hours, quality customer service, quick local decision making, a strong community reputation and long-term personal relationships are all important competitive factors that we emphasize.

In our primary service areas, our five largest competitors are Regions Bank, Wells Fargo Bank, BBVA Compass Bank, BB&T and RBC Bank USA (soon to be acquired by PNC Financial Services Group).Synovus Bank. These institutions, as well as other competitors of ours, have greater resources, serve broader geographic markets, have higher lending limits, offer various services that we do not offer and can better afford, and make broader use of, media advertising, support services, and electronic technology than we can. To offset these competitive disadvantages, we depend on our reputation for greater personal service, consistency, and flexibility and the ability to make credit and other business decisions quickly.

Business Strategy

Management Philosophy

Our philosophy is to operate as an urban community bank emphasizing prompt, personalized customer service to the individuals and businesses located in our primary service areas. We believe this philosophy has attracted and will continue to attract customers and capture market share historically controlled by other financial institutions operating in our market. Our management and employees focus on recognizing customers’ needs and delivering products and services to meet those needs. We aggressively market to businesses, professionals and affluent consumers that may be underserved by the large regional banks that operate in their service areas. We believe that local ownership and control allows us to serve customers more efficiently and effectively and will aid in our growth and success.

Operating Strategy

In order for us to achieve the level of prompt, responsive service necessary to attract customers and to develop our image as an urban bank with a community focus, we have employed the following operating strategies:

·Quality Employees. We strive to hire a highly trained and experienced staff. Employees are trained to answer questions about all of our products and services, so that the first employee the customer encounters can usually resolve most questions the customer may have.

·Experienced Senior Management. Our senior management has extensive experience in the banking industry and substantial business and banking contacts in our markets.

·Relationship Banking. We focus on cross-selling financial products and services to our customers. Our customer-contact employees are highly trained to recognize customer needs and to meet those needs with a sophisticated array of products and services. We view cross-selling as a means to leverage relationships and help provide useful financial services to retain customers, attract new customers and remain competitive.

·Community-Oriented Directors. The boards of directors for the holding company and the Bank currently consist of residents of Birmingham, but we also have a non-voting advisory board of directors in each of the Huntsville, Montgomery, Dothan and Pensacola markets. These advisory directors represent a broad spectrum of business experience and community involvement in the service areas where they live. As residents of our primary service areas, they are sensitive and responsive to the needs of our customers and prospects in their respective areas. In addition, our directors and advisory directors bring substantial business and banking contacts to us.

·Highly Visible Offices. Our local headquarters buildings are highly visible in Birmingham’s south Jefferson County, and in the metropolitan areas of Huntsville, Montgomery, Dothan and Pensacola. We believe that a highly visible headquarters building gives us a powerful presence in each local market.

·Individual Customer Focus. We focus on providing individual service and attention to our target customers, which include privately held businesses with $2 million to $250 million in sales, professionals, and affluent consumers. As our officers and directors become familiar with our customers on an individual basis, they are able to respond to credit requests quickly.
·Market Segmentation and Advertising. We utilize traditional advertising media, such as local periodicals and event sponsorships, to increase our public visibility. The majority of our marketing and advertising efforts, however, are focused on leveraging our management’s, directors’, advisory directors’ and stockholders’ existing relationship networks.

·Telephone and Internet Banking Services. We offer various banking services by telephone through 24-hour voice response and through internet banking.

Growth Strategy

Because we believe that growth and expansion of our operations are significant factors in our success, we have implemented the following growth strategies:

·Capitalize on Community Orientation. We seek to capitalize on the extensive relationships that our management, directors, advisory directors and stockholders have with businesses and professionals in our markets. We believe that these market sectors are not adequately served by the existing banks in such areas.

·Emphasize Local Decision-Making. We emphasize local decision-making by experienced bankers. We believe this helps us attract local businesses and service-minded customers.

·Offer Fee-Generating Products and Services. Our range of services, pricing strategies, interest rates paid and charged, and hours of operation are structured to attract our target customers and increase our market share. We strive to offer the businessperson, professional, entrepreneur and consumer the best loan services available while pricing these services competitively.

·Office Location Strategy. We located our offices within each of our local markets in areas that we believe provide visibility, convenience and access to our target customers.

Lending Services

Lending Policy

Our lending policies are established to support the credit needs of our primary market areas. Consequently, we aggressively seek high-quality borrowers within a limited geographic area and in competition with other well-established financial institutions in our primary service areas that have greater resources and lending limits than we have.

Loan Approval and Review

Our loan approval policies set various levels of officer lending authority. When the total amount of loans to a single borrower exceeds an individual officer’s lending authority, further approval must be obtained from the Regional CEO and/or our Chief Executive Officer, Chief Risk Officer or Chief Credit Officer, based on our loan policies.

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Commercial Loans

Our commercial lending activity is directed principally toward businesses and professional service firms whose demand for funds fallfalls within our legal lending limits.We make loans to small- and medium-sized businesses in our primary service areas for the purpose of upgrading plant and equipment, buying inventory and for general working capital.Typically, targeted business borrowers have annual sales between $2 million and $250 million. This category of loans includes loans made to individual, partnership or corporate borrowers, and such loans are obtained for a variety of business purposes. We offer a variety of commercial lending products to meet the needs of business and professional service firms in our service areas. These commercial lending products include seasonal loans, bridge loans and term loans for working capital, expansion of the business, or acquisition of property, plant and equipment. We also offer commercial lines of credit. The repayment terms of our commercial loans will vary according to the needs of each customer.

Our commercial loans usually will usually be collateralized. Generally, collateral consists of business assets, including any or all of general intangibles, accounts receivables,receivable, inventory, equipment, or real estate. Collateral is subject to the risk that we may have difficulty converting it to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility and general collectability in a default situation. To mitigate this risk, we underwrite collateral to strict standards, including valuations and general acceptability based on our ability to monitor its ongoing condition and value.

We underwrite our commercial loans primarily on the basis of the borrower’s cash flow, ability to service debt, and degree of management expertise. As a general practice, we take as collateral a security interest in any available real estate, equipment or personal property. Under limited circumstances, we may make commercial loans on an unsecured basis.This type loan may be subject to many different types of risks, includingfraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates such as have occurred in the recent economic recession and credit market crisis. Perceived risks may differ depending on the particular industry in which a borrower operates in.operates. General risks to an industry, such as the recent economic recession and credit market crisis, or to a particular segment of an industry are monitored by senior management on an ongoing basis. When warranted, loans to individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed by the credit review committee or board of directors. Commercial and industrial borrowers are required to submit financial statements to us on a regular basis. We analyze these statements, looking for weaknesses and trends, and will assign the loan a risk grade accordingly. Based on this risk grade, the loan may receive an increased degree of scrutiny by management, up to and including additional loss reserves being required.

Real Estate Loans

We make commercial real estate loans, construction and development loans and residential real estate loans.

Commercial Real Estate. Commercial real estate loans are generally limited to terms of five years or less, although payments are usually structured on the basis of a longer amortization. Interest rates may be fixed or adjustable, although rates generally will not be fixed for a period exceeding five years. In addition, we generally will require personal guarantees from the principal owners of the property supported by a review by our management of the principal owners’ personal financial statements.

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Commercial real estate lending presents risks not found in traditional residential real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense 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. To mitigate these risks, we closely monitor our borrower concentration. These loans generally have shorter maturities than other loans, giving us an opportunity to reprice, restructure or decline renewal. As with other loans, all commercial real estate loans are graded depending upon strength of credit and performance. A higher risk grade will bring increased scrutiny by our management, the credit review committee and the board of directors.

Construction and Development Loans.  We make construction and development loans both on a pre-sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a speculative basis. Construction and development loans are generally made with a term of 12 to 24 months, and interest is paid monthly. The ratio of the loan principal to the value of the collateral as established by independent appraisal typically will not exceed 80% of residential construction loans. Speculative construction loans will be based on the borrower’s financial strength and cash flow position. Development loans are generally limited to 75% of appraised value. Loan proceeds will be disbursed based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector.During times of economic stress, this type loan has typically had a greater degree of risk than other loan types, as has been evident in the currentrecent credit crisis.

StartingBeginning in 2008, there have been numerous construction loan defaults among many commercial bank loan portfolios, including a number of Alabama-based banks. To mitigate the risk of such defaults in our portfolio, the board of directors and management tracks and monitors these loans closely. TWhile totalotal construction loans decreased $20.8$6.5 million in 2011, we maintain our2013. Our allocation of loan loss reserve for constructionthese loans decreased $0.7 million to $5.8 million at approximately $6.5 million,December 31, 2013 compared to $6.4$6.5 million at the end of 2010.2012. Charge-offs for construction loans decreasedincreased from $3.5$3.1 million for 20102012 to $2.6$4.8 million for 2011.

2013, but the overall quality of the construction loan portfolio has improved with $9.2 million rated as substandard at December 31, 2013 compared to $14.4 million at December 31, 2012.

Residential Real Estate Loans. Our residential real estate loans consist primarily of residential second mortgage loans, residential construction loans and traditional mortgage lending for one-to-four family residences. We will originate fixed ratefixed-rate mortgages with long-term maturitymaturities and balloon payments generally not exceeding five years. The majority of our fixed-rate loans are sold in the secondary mortgage market. All loans are made in accordance with our appraisal policy, with the ratio of the loan principal to the value of collateral as established by independent appraisal generally not exceeding 80%. Risks associated with these loans are generally less significant than those of other loans and involve fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems. Real estate has recently experienced a period of declining prices which negatively affects real estate collateralized loans, but this negative effect has to date been more prevalent in regions of the United States other than our primary service areas; however, homes in our primary service areas may experience significant price declines in the future. We have not made and do not expect to make any Alt-A“Alt-A” or subprime loans.

Consumer Loans

We offer a variety of loans to retail customers in the communities we serve. Consumer loans in general 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. Risk on consumer-type loans is generally managed though policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.

Our consumer loans include home equity loans (open- and closed-end); vehicle financing; loans secured by deposits; and secured and unsecured personal loans. These various types of consumer loans all carry varying degrees of risk.

Commitments and Contingencies

As of December 31, 2011,2013, we had commitments to extend credit beyond current fundings of approximately $698.9 million,$1.1 billion, had issued standby letters of credit in the amount of approximately $42.9$40.4 million, and had commitments for credit card arrangements of approximately $19.7$38.1 million.

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Policy for Determining the Loan Loss Allowance

The allowance for loan losses represents our management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. In calculating the adequacy of the loan loss allowance, our management evaluates the following factors:

·the asset quality of individual loans;

·changes in the national and local economy and business conditions/development, including underwriting standards, collections, and charge-off and recovery practices;

·changes in the nature and volume of the loan portfolio;

·changes in the experience, ability and depth of our lending staff and management;

·changes in the trend of the volume and severity of past-due loans and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings and other modifications, as has occurred in the residential mortgage markets and particularly for residential construction and development loans;

·possible deterioration in collateral segments or other portfolio concentrations;

·historical loss experience (when available) used for pools of loans (i.e. collateral types, borrowers, purposes, etc.);

·changes in the quality of our loan review system and the degree of oversight by our board of directors; and

·the effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in our current loan portfolioportfolio.

These factors are evaluated monthly, and changes in the asset quality of individual loans are evaluated as needed.

We assign all of our loans individual risk grades when they are underwritten. We have established minimum general reserves based on the asset qualityrisk grade of the loan. We also apply general reserve factors based on historical losses, management’s experience and common industry and regulatory guidelines.

After a loan is underwritten and booked,granted, it is monitored or reviewed by the account officer, management, internal loan review, and representatives of our independent external loan review personnel duringfirm over the life of the loan. Payment performance is monitored monthly for the entire loan portfolio; account officers contact customers during the regular course of business and may be able to ascertain ifwhether weaknesses are developing with the borrower; independent loan consultants perform a review annually; and federal and state banking regulators perform annual reviews of the loan portfolio. If we detect weaknesses that have developed in an individual loan relationship, we downgrade the loan and assign higher reserves based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt. We have established a policy to discontinue accrual of interest (non-accrual status) after theany loan 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 actively process of collection. In addition, a loan will be placed on non-accrual status before it becomes 90 days delinquent if management believes that the borrower’s financial condition is such that the collection of interest or principal is doubtful. 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 non-accrual loans is recognized only as received. If a loan will not be collected in full, we increase the allowance for loan losses to reflect our management’s estimate of any potential exposure or loss.

Our net loan losses to average total loans decreasedincreased to 0.33% for the year ended December 31, 2013 from 0.24% for the year ended December 31, 2012, which was down from 0.32% for the year ended December 31, 2011 from 0.55% for the year ended December 31, 2010, which was down from 0.60% for the year ended December 31, 2009.2011. Historical performance, however, is not an indicator of future performance, and our future results could differ materially, particularly in the current real estate environment and economic recession.materially. As of December 31, 2011,2013, we had $13.8$9.6 million of non-accrual loans, of which 89%76% are secured real estate loans. We have allocated approximately $6.5$5.8 million of our allowance for loan losses to real estate construction, acquisition and development, and lot loans and $6.6$11.2 million to commercial and industrial loans, and have a total loan loss reserve as of December 31, 20112013 allocable to specific loan types of $17.0$25.4 million. We also currently maintain a general reserve,portion of the allowance for loan losses, which is not tied to any particular typemanagement’s evaluation of loan,potential future losses that would arise in the amountloan portfolio should management’s assumption about qualitative and environmental conditions materialize. The qualitative factor portion of approximately $5.0the allowance for loan losses is based on management’s judgment regarding various external and internal factors including macroeconomic trends, management’s assessment of the Company’s loan growth prospects and evaluations of internal risk controls. This qualitative factor portion of the allowance for loan losses totaled $5.3 million, as of December 31, 2011, resulting in a total allowance for loan loss reservelosses of $22.0 million.$30.7 million at December 31, 2013. Our management believes, based upon historical performance, known factors, overall judgment, and regulatory methodologies, that the current methodology used to determine the adequacy of the allowance for loan losses is reasonable, including after considering the effect of the current residential housing market defaults and business failures (particularly of real estate developers) plaguing financial institutions in general.

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Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management.

While it is our policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, our management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

Investments

In addition to loans, we purchase investments in securities, primarily in mortgage-backed securities and state and municipal securities. No investment in any of those instruments will exceed any applicable limitation imposed by law or regulation. Our board of directors reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to the policy as set by the board of directors. Our investment policy provides that no more than 50%60% of our total investment portfolio may be composed of municipal securities. All securities held are traded in liquid markets, and we have no auction-rate securities. We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity at December 31, 2011.

2013.

Deposit Services

We seek to establish solid core deposits, including checking accounts, money market accounts, savings accounts and a variety of certificates of deposit and IRA accounts. We currently have no brokered deposits. To attract deposits, we employ an aggressive marketing plan throughout our service areas that features a broad product line and competitive services. The primary sources of core deposits are residents of, and businesses, and their employees located in, our market areas. We have obtained deposits primarily through personal solicitation by our officers and directors, through reinvestment in the community, and through our stockholders, who have been a substantial source of deposits and referrals. We make deposit services accessible to customers by offering direct deposit, wire transfer, night depository, banking-by-mail and remote capture for non-cash items. The Bank is a member of the FDIC, and thus our deposits are FDIC-insured. The Dodd-Frank Wall Street Reform and Consumer Protection Act extended the FDIC’s full guarantee of noninterest-bearing transaction accounts through the end of 2012. This guarantee does not include any interest-bearing accounts.

Other Banking Services

Given client demand for increased convenience and account access, we offer a range of products and services, including 24-hour telephone banking, direct deposit, Internet banking, mobile banking, traveler’s checks, safe deposit boxes, attorney trust accounts and automatic account transfers. We also participate in a shared network of automated teller machines and a debit card system that our customers are able to use throughout Alabama and in other states and, in certain accounts subject to certain conditions, we rebate to the customer the ATM fees automatically after each business day. Additionally, we offer Visa® credit cards.

Asset, Liability and Risk Management

We manage our assets and liabilities with the aim of providing an optimum and stable net interest margin, a profitable after-tax return on assets and return on equity, and adequate liquidity. These management functions are conducted within the framework of written loan and investment policies. To monitor and manage the interest rate margin and related interest rate risk, we have established policies and procedures to monitor and report on interest rate risk, devise strategies to manage interest rate risk, monitor loan originations and deposit activity and approve all pricing strategies. We attempt to maintain a balanced position between rate-sensitive assets and rate-sensitive liabilities. Specifically, we chart assets and liabilities on a matrix by maturity, effective duration, and interest adjustment period, and endeavor to manage any gaps in maturity ranges.

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Seasonality and Cycles

We do not consider our commercial banking business to be seasonal.

Employees

We had 210262 full-time equivalent employees as of December 31, 2011.2013. We consider our employee relations to be good, and we have no collective bargaining agreements with any employees.

Supervision and Regulation

Both we and the Bank are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws and regulations require compliance with various consumer protection provisions applicable to lending, deposits, brokerage and fiduciary activities. These guidelinesThey also impose capital adequacy requirements and restrict our ability to repurchase our stock orand receive dividends from the Bank. These laws and regulations generally are intended to protect depositors and notcustomers, rather than stockholders. The following discussion describes the material elements of the regulatory framework that applies to us.

 However, the description below is not intended to summarize all laws and regulations applicable to us.

Bank Holding Company Regulation

Since we own all of the capital stock of the Bank, we are a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

Acquisition of Banks

The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:

·acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will, directly or indirectly, own or control more than 5% of the bank’s voting shares;

·acquiring all or substantially all of the assets of any bank; or

·merging or consolidating with any other bank holding company.

Additionally, the BHC Act provides that the Federal Reserve may not approve any of these transactions if such transaction would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the BHC Act, if adequately capitalized and adequately managed, we or any other bank holding company located in Alabama may purchase a bank located outside of Alabama. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Alabama may purchase a bank located inside Alabama. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.

Change in Bank Control.

Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person’s or company’s acquiring “control” of a bank holding company.Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the BHC Act before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over the bank holding company.

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Permitted Activities

Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

·banking or managing or controlling banks; and

·any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

·factoring accounts receivable;

·making, acquiring, brokering or servicing loans and usual related activities;

·leasing personal or real property;

·operating a non-bank depository institution, such as a savings association;

·trust company functions;
·financial and investment advisory activities;

·discount securities brokerage activities;

·underwriting and dealing in government obligations and money market instruments;

·providing specified management consulting and counseling activities;

·performing selected data processing services and support services;

·acting as an agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

·performing selected insurance underwriting activities.

Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.

In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity. The BHC Act expressly lists the following activities as financial in nature:

·lending, trust and other banking activities;

·insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;

·providing financial, investment, or advisory services;

·issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

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·underwriting, dealing in or making a market in securities;

·other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;

·foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;

·merchant banking through securities or insurance affiliates; and

·insurance company portfolio investments.

For us to qualify to become a financial holding company, the Bank and any other depository institution subsidiary of ours must be well-capitalized and well-managed and must have a Community Reinvestment Act rating of at least “satisfactory”. Additionally, we must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days’days written notice prior to engaging in a permitted financial activity. We have not elected to become a financial holding company at this time.

Support of Subsidiary Institutions

 

Under

The Federal Deposit Insurance Act and Federal Reserve policy we are expectedrequire a bank holding company to act as a source of financial and managerial strength for the Bankto its bank subsidiaries and to commit resourcestake measures to supportpreserve and protect its bank subsidiaries in situations where additional investments in a troubled bank may not otherwise be warranted. In addition, where a bank holding company has more than one bank or thrift subsidiary, each of the Bank. This supportbank holding company’s subsidiary depository institutions are responsible for any losses to the FDIC as a result of an affiliated depository institution’s failure. As a result, a bank holding company may be required at times when we might not be inclined to provide itloan money to a bank subsidiary in the absenceform of this policy. In addition,subordinate capital notes or other instruments which qualify as capital under bank regulatory rules. However, any capital loans made by usfrom the holding company to the Banksuch subsidiary banks likely will be repaid in full. In the unlikely event of our bankruptcy, any commitment by usunsecured and subordinated to a federal bank regulatory agencysuch bank’s depositors and perhaps to maintain the capitalother creditors of the Bank will be assumedbank.
Repurchase or Redemption of Securities
A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or redemption of its own then-outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the bankruptcy trustee and entitledFederal Reserve. The Federal Reserve has adopted an exception to a priority of payment.

this approval requirement for well-capitalized bank holding companies that meet certain conditions.

Bank Regulation and Supervision

The Bank is subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws and regulations are generally intended to protect depositors and notthe Bank’s customers, rather than our stockholders. The following discussion describes the material elements of the regulatory framework that applies to the Bank.

Since the Bank is a commercial bank chartered under the laws of the State of Alabama and is not a member of the Federal Reserve System, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Alabama Department of Banking (the “Alabama Banking Department”). The FDIC and the Alabama Banking Department regularly examine the Bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to prevent the development or continuance of unsafe or unsound banking practices or other violations of law. Additionally, the Bank’s deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.

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Branching

Under current Alabama law, the Bank may open branch offices throughout Alabama with the prior approval of the Alabama Banking Department. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Alabama. While prior law imposed various limits on the ability of banks to establish new branches in states other than their home state, the Dodd-Frank Wall Street Reform and Consumer Protection Act allows a bank to branch into a new state by acquiring a branch of an existing institution or by setting up a new branch, without merging with an existing institution in the target state, if, under the laws of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch. This makes it much simpler for banks to opende novo branches in other states. We opened our Pensacola, Florida branch using this mechanism.

 

FDIC Insurance Assessments
The Bank’s deposits are insured by the FDIC to the full extent provided in the Federal Deposit Insurance Act, and the bank pays assessments to the FDIC for that coverage. Under the FDIC’s risk-based deposit insurance assessment system, an insured institution’s deposit insurance premium is computed by multiplying the institution’s assessment base by the institution’s assessment rate. The following information applies to an institution’s assessment base and assessment rate:
·Assessment Base. An institution’s assessment base equals the institution’s average consolidated total assets during a particular assessment period, minus the institution’s average tangible equity capital (i.e., Tier 1 capital) during such period. 
·Assessment Rate. An institution’s assessment rate is assigned by the FDIC on a quarterly basis. To assign an assessment rate, the FDIC designates an institution as falling into one of four risk categories, or as being a large and highly complex financial institution. The FDIC determines an institution’s risk category based on the level of the institution’s capitalization and on supervisory evaluations provided to the FDIC by the institution’s primary federal regulator. Each risk category designation contains upward and downward adjustment factors based on long-term unsecured debt and brokered deposits. Assessment rates currently range from 0.025% per annum for an institution in the lowest risk category with the maximum downward adjustment, to 0.45% per annum for an institution in the highest risk category with the maximum upward adjustment. For the fourth quarter of 2013, the Bank’s assessment rate was set at $0.0133, or $0.0532 annually, per $100 of assessment base.
In addition to its risk-based insurance assessments, the FDIC also imposes Financing Corporation (“FICO”) assessments to help pay the $780 million in annual interest payments on the $8 billion of bonds issued in the late 1980s as part of the government rescue of the savings and loan industry. For the fourth quarter of 2013, the FICO assessment was equal to $0.0016, or $0.0064 annually, per $100 of assessment base. These assessments will continue until the bonds mature in 2019.
The FDIC is responsible for maintaining the adequacy of the Deposit Insurance Fund and the amount the bank pays for deposit insurance is affected not only by the risk the bank poses to the Deposit Insurance Fund, but also by the adequacy of the fund to cover the risk posed by all insured institutions. In recent years, systemic economic problems and changes in law have put pressure on the Deposit Insurance Fund. In this regard, from 2008 to 2013, the United States experienced an unusually high number of bank failures, resulting in significant losses to the Deposit Insurance Fund. Moreover, the Dodd-Frank Act permanently increased the standard maximum deposit insurance amount from $100,000 to $250,000, and raised the minimum required Deposit Insurance Fund reserve ratio (i.e., the ratio of the amount on reserve in the Deposit Insurance Fund to the total estimated insured deposits) from 1.15% to 1.35%. To support the Deposit Insurance Fund in light of these types of pressures, the FDIC took several actions in 2009 to supplement the revenues received from its annual deposit insurance premium assessments. Such actions included imposing a one-time special assessment on insured institutions and requiring that insured institutions prepay their regular quarterly assessments for the fourth quarter of 2009 through 2012. The FDIC’s possible need to increase assessment rates, charge additional one-time assessment fees, and take other extraordinary actions to support the Deposit Insurance Fund is generally considered to be greater in the current economic climate. If the FDIC were to take these types of actions in the future, they could have a negative impact on the bank’s earnings.
Termination of Deposit Insurance
The FDIC may terminate its insurance of deposits of a bank if it finds that the bank has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. 
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Liability of Commonly Controlled Depository Institutions
Under the Federal Deposit Insurance Act, an FDIC-insured depository institution can be held liable for any loss incurred by, or reasonably expected, to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution in danger of default. “Default” is defined generally as the appointment of a conservator or receiver, and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The FDIC’s claim for damage is superior to claims of stockholders of the insured depository institution but is subordinate to claims of depositors, secured creditors, other general and senior creditors, and holders of subordinated debt (other than affiliates) of the institution.
       Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC will evaluate the record of each financial institution in meeting the needs of its local community, including low and moderate-income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open an office or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, we must publicly disclose the terms of various CRA-related agreements.
Interest Rate Limitations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.
Federal Laws Applicable to Consumer Credit and Deposit Transactions
The Bank’s loan and deposit operations are subject to a number of federal consumer protection laws, including:
·the Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
·the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
·the Equal Credit Opportunity Act, prohibiting discrimination on the basis ofrace, color, religion, national origin, sex, marital status or certain other prohibited factors in all aspects of credit transactions;
·the Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
·the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by debt collectors;
·the Servicemembers’ Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service;
·Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. 
·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
·the Electronic Funds Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Capital Adequacy
The federal banking regulators view capital levels as important indicators of an institution’s financial soundness. In this regard, we and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve (in the case of ServisFirst Bancshares, Inc.) and the FDIC and the Alabama Banking Department (in the case of the Bank). The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The FDIC has established substantially similar measures for banks.
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The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.
The current risk-based capital guidelines, commonly referred to as Basel I, are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (“Basel Committee”), an international committee of central banks and bank supervisors, as implemented by the U.S. federal banking agencies. As discussed further below, the federal banking agencies have adopted separate risk-based capital guidelines for so-called “core banks” based upon the Revised Framework for the International Convergence of Capital Measurement and Capital Standards (“Basel II”) issued by the Basel Committee in November 2005, and recently adopted rules implementing the revised standards referred to as Basel III.
Basel I
Under Federal Reserve regulations implementing the Basel I standards, the minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital. At December 31, 2013, our consolidated ratio of total capital to risk-weighted assets was 11.73%, and our ratio of Tier 1 capital to risk-weighted assets was 10.00%.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2013, our leverage ratio was 8.48%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.
As of December 31, 2013, the Bank’s most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of 10%, 6% and 5%, respectively. Our Bank was well-capitalized under the prompt corrective action provisions as of December 31, 2013.
In addition to the foregoing federal requirements, the Bank is subject to a requirement of the Alabama Banking Department that the Bank maintain a leverage ratio of 8%. At December 31, 2013, the Bank’s leverage ratio was 8.98%.
       Basel II
Under the final U.S. Basel II rules issued by the federal banking agencies, there are a small number of “core” banking organizations that have been required to use the advanced approaches under Basel II for calculating risk-based capital related to credit risk and operational risk, instead of the methodology reflected in the regulations effective prior to adoption of Basel II. The rules also require core banking organizations to have rigorous processes for assessing overall capital adequacy in relation to their total risk profiles, and to publicly disclose certain information about their risk profiles and capital adequacy. Neither we nor the bank are among the core banking organizations required to use Basel II advanced approaches.
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On December 16, 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, known as Basel III. The Basel III calibration and phase-in arrangements were previously endorsed by the Seoul G20 Leaders Summit in November 2010. Under these standards, when fully phased-in on January 1, 2019, banking institutions would be required to satisfy three risk-based capital ratios:
·A new common equity tier 1 capital to risk-weighted assets ratio of at least 7.0%, inclusive of a 4.5% minimum common equity tier 1 capital ratio, net of regulatory deductions, and a new 2.5% “capital conservation buffer” of common equity to risk-weighted assets;
·A tier 1 capital ratio of at least 8.5%, inclusive of the 2.5% capital conservation buffer; and
·A total capital ratio of at least 10.5%, inclusive of the 2.5% capital conservation buffer.
Basel III places more emphasis than current capital adequacy requirements on common equity tier 1 capital, or “CET1”, which is predominately made up of retained earnings and common stock instruments. Basel III also introduces a capital conservation buffer, which is designed to absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above the minimum but below the capital conservation buffer may face constraints on dividends, equity repurchases, and compensation based on the amount of such shortfall. The Basel Committee also announced that a “countercyclical buffer” of 0% to 2.5% of CET1 or other loss-absorbing capital “will be implemented according to national circumstances” as an “extension” of the conservation buffer during periods of excess credit growth.
Basel III also introduced a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets. The Basel Committee had initially planned for member nations to begin implementing the Basel III requirements by January 1, 2013, with full implementation by January 1, 2019. On November 9, 2012, U.S. regulators announced that implementation of Basel III’s first requirements would be delayed.
       United States Implementation of Basel III
In July 2013, the federal banking agencies published final rules (the “Basel III Capital Rules”) that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to implement, in part, agreements reached by the Basel Committee and certain provisions of the Dodd-Frank Act. The Basel III Capital Rules will apply to banking organizations, including us and the bank.
Among other things, the Basel III Capital Rules: (i) introduce CET1; (ii) specify that tier 1 capital consists of CET1 and additional financial instruments satisfying specified requirements that permit inclusion in tier 1 capital; (iii) define CET1 narrowly by requiring that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions or adjustments from capital as compared to the existing regulations. The Basel III Capital Rules also provide a permanent exemption from the proposed phase out of existing trust preferred securities and cumulative perpetual preferred stock from regulatory capital for banking organizations with less than $15 billion in total consolidated assets as of December 31, 2009.
The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios:
·4.5% based upon CET1;
·6.0% based upon tier 1 capital; and
·8.0% based upon total regulatory capital.
A minimum leverage ratio (tier 1 capital as a percentage of total assets) of 4.0% is also required under the Basel III Capital Rules (even for highly rated institutions). The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer of 2.5% above these required minimum capital ratio levels. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers.
As a result of the enactment of the Basel III Capital Rules, we and the bank could be subject to increased required capital levels. The Basel III Capital Rules become effective as applied to us and the bank on January 1, 2015, with a phase in period that generally extends from January 1, 2015, through January 1, 2019.
The ultimate impact of the new capital standards on us and the bank is currently being reviewed and will depend on a number of factors, including the implementation of the new Basel III Capital Rules and any additional related rulemaking by the U.S. banking agencies.
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Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of “prompt corrective action” to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levelsthresholds for each of those categories. When effective, the other categories.Basel III Capital Rules will amend those thresholds to reflect both (i) the generally heightened requirements for regulatory capital ratios, and (ii) the introduction of the CET1 capital measure. At December 31, 2011,2013, the Bankbank qualified for the well-capitalized category.

Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of (i) 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized and (ii) the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

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Liquidity

FDIC Insurance Assessments

The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution’s primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. In February 2011 the FDIC adopted its final rule relating to the deposit insurance assessment base, assessment rate adjustments, deposit insurance assessment rates, and dividends. Many of the changes to the rules were made as a result of provisions contained in the Dodd-Frank Act and went into effect April 1, 2011. Under the new rules, the base for deposit insurance assessment purposes is defined as average consolidated assets during the assessment period less average tangible equity capital during the assessment period. Insured depository

Financial institutions are potentially allowed a reduction insubject to significant regulatory scrutiny regarding their assessment rates for unsecured debt. The unsecured debt adjustment is capped atliquidity positions. This scrutiny has increased during recent years, as the lesser of 5 basis points or 50% of its initial base assessment rate. Currently, annual deposit insurance assessments range from $.03 to $.45 per $100 of assessable base, depending on which risk group an insured depository institution falls into. This assessment rate is adjusted quarterly, and our rate has been set at $.0163, or $.0652 annually, per $100 of assessment base for the fourth quarter of 2011.

The FDIC also imposes Financing Corporation (“FICO”) assessments to help pay the $780 million in annual interest payments on the $8 billion of bonds issuedeconomic downturn that began in the late 1980s as part2000s negatively affected the liquidity of many financial institutions. Various bank regulatory publications, including FDIC Financial Institution Letter FIL-13-2010 (Funding and Liquidity Risk Management) and FDIC Financial Institution Letter FIL-84-2008 (Liquidity Risk Management), address the government rescueidentification, measurement, monitoring and control of funding and liquidity risk by financial institutions. 

Basel III also addresses liquidity management by proposing two new liquidity metrics for financial institutions. The first metric is the thrift industry. For the fourth quarter of 2011, the FICO assessment is equal“Liquidity Coverage Ratio”, and it aims to $.0017 cents per $100 of assessment base. These assessments will continue until the bonds mature in 2019.

The FDIC may terminate its insurance of deposits ofrequire a bank if it finds that the bank has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.Under the Federal Deposit Insurance Act, an FDIC-insured depository institution can be held liable for any loss incurred by, or reasonably expected, to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or receiver, and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The FDIC’s claim for damage is superior to claims of stockholders of the insured depository institution but is subordinate to claims of depositors, secured creditors, and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution.

Community Reinvestment Act

The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC will evaluate the record of each financial institution in meetingto maintain sufficient high quality liquid resources to survive an acute stress scenario that lasts for one month. The second metric is the credit needs of“Net Stable Funding Ratio”, and its local community, including low and moderate-income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applicationsobjective is to open an office or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, we must publicly disclose the terms of various CRA-related agreements.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.

Federal Laws Applicable to Credit Transactions

The Bank’s loan operations are subject to federal laws applicable to credit transactions, including:

·the Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

·the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whetherrequire a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
·the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

·the Fair Credit Reporting Act of 1978, governing the use and provisions of information to credit reporting agencies;

·the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

·the Service Members’ Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

·Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Federal Laws Applicable to Deposit Transactions

The deposit operations of the Bank are subject to:

·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

·the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Capital Adequacy

We and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve (in the case of the holding company) and the FDIC (in the case of the Bank). The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2011, our consolidated ratio of total capital to risk-weighted assets was 12.79%, and our ratio of Tier 1 Capital to risk-weighted assets was 11.39%.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2011, our leverage ratio was 9.17%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

As of December 31, 2011, the Bank’s most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that the Bank is well-capitalized under the prompt corrective action provisions as of December 31, 2011.

        To Be Well Capitalized 
     For Capital Adequacy  Under Prompt Corrective 
  Actual  Purposes  Action Provisions 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of December 31, 2011:                        
Total Capital to Risk Weighted Assets:                        
Consolidated $246,334   12.79% $154,094   8.00%  N/A   N/A 
ServisFirst Bank  243,279   12.63%  154,070   8.00% $192,588   10.00%
Tier I Capital to Risk Weighted Assets:                        
Consolidated  219,350   11.39%  77,047   4.00%  N/A   N/A 
ServisFirst Bank  216,295   11.23%  77,035   4.00%  115,553   6.00%
Tier I Capital to Average Assets:                        
Consolidated  219,350   9.17%  95,642   4.00%  N/A   N/A 
ServisFirst Bank  216,295   9.06%  95,481   4.00%  119,352   5.00%

Potential Changes in Capital Adequacy Requirements

On December 15, 2010, the Basel Committee on Banking Supervision, a group representing the central banking authorities of 27 nations that formulates recommendations on banking supervisory policy, released its final framework for strengthening international capital and liquidity regulation, known as “Basel III”. Although the Basel III framework is not directly binding on the U.S. bank regulatory agencies, it has been predicted that the regulatory agencies will likely implement changes to the capital adequacy standards applicable to the insured depository institutions and their holding companies in light of Basel III. When fully phased in on January 1, 2019, Basel III will require banks to maintain the following new standards and introduces a new capital measure “Common Equity Tier 1”, or “CET1”. Basel III increases the CET1 to risk-weighted assets to 4.5%, and introduces a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target CET1 to risk-weighted assets ratio to 7%. It requires banks to maintain a minimum ratioamount of Tier 1 capitalstable sources relative to risk weightedthe liquidity profiles of the institution’s assets, of at least 6.0%, plusas well as the capital conservation buffer effectively resulting in Tier 1 capital ratio of 8.5%. Basel III increases the minimum total capital ratio to 8.0% plus the capital conservation buffer, increasing the minimum total capital ratio to 10.5%. Basel III also introduces a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and newpotential for contingent liquidity standards. The Basel III capital and liquidity standards will be phased inneeds arising from off-balance sheet commitments, over a multi-year period, but the implementation of the new framework will commence January 1, 2013. On that date, to the extentone-year horizon.

In the Basel III standards are adopted byCapital Rules, the applicablefederal banking regulators did not address either the Liquidity Coverage Ratio or the Net Stable Funding Ratio. However, on November 29, 2013, the Federal Reserve, FDIC and Office of the Comptroller of the Currency jointly issued a proposed rule implementing a Liquidity Coverage Ratio requirement in the United States for larger banking organizations. Neither we nor the bank would be subject to such requirement as proposed. 
The Liquidity Coverage Ratio and the Net Stable Funding Ratio continue to be monitored for implementation, and we cannot yet provide concrete estimates as to how those requirements, or any other regulatory agencies, banks willpositions regarding liquidity and funding, might affect us or our bank. However, we note that increased liquidity requirements generally would be requiredexpected to meetcause the following minimum capital ratios: 3.5% CET1bank to risk-weightedinvest its assets 4.5% Tier 1 capital to risk-weighted assets more conservatively—and 8.0% total capital to risk-weighted assets.

therefore at lower yields—than it otherwise might invest. Such lower-yield investments likely would reduce the bank’s revenue stream, and in turn its earnings potential.

Payment of Dividends

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

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The Alabama Banking Department also regulates the Bank’s dividend payments and must approve any dividends that would exceed 50% of the Bank’s net income for the prior year.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. Ascapital (our bank’s surplus currently exceeds 20% of December 31, 2011, the Bank’s surplus was equal to 57.0% of the Bank’s capital. The Bankits capital). Moreover, our bank is also required by Alabama law to obtain the prior approval of the Superintendent of Banks (the “Superintendent”) for its payment of dividends if the total of all dividends declared by the Bankour bank in any calendar year will exceed the total of (1) the Bank’sour bank’s net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the preceding two years, less any required transfers to surplus. Based on this, the Bankour bank would be limited to paying $61.0$110.9 million in dividends as of December 31, 2011.2013. In addition, no dividends, withdrawals or transfers may be made from the Bank’sour bank’s surplus without the prior written approval of the Superintendent.

The Bank’s

Our 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 FDICFederal Deposit Corporation Insurance 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.

We have never paid any dividends and we do not plan to pay dividends in the near future. We anticipate that our earnings, if any, will be held for purposes of enhancing our capital.

Restrictions on Transactions with Affiliates and Insiders

We are subject to Section 23A of the Federal Reserve Act, which places limits on the amount of:

·a bank’s loans or extensions of credit to affiliates;

·a bank’s investment in affiliates;

·assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

·loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and

·a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate;
·a bank’s transactions with an affiliate involving the borrowing or lending of securities to the extent they create credit exposure to the affiliate; and
·a bank’s derivative transactions with an affiliate to the extent they create credit exposure to the affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, eachcertain of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

We are also subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The BankOur bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1)(i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (2)(ii) must not involve more than the normal risk of repayment or present other unfavorable features.There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Alabama state banking laws also have similar provisions.

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Lending Limits
Under Alabama law, the amount of loans which may be made by a bank in the aggregate to one person is limited. Alabama law provides that unsecured loans by a bank to one person may not exceed an amount equal to 10% of the capital and unimpaired surplus of the bank or 20% in the case of secured loans. For purposes of calculating these limits, loans to various business interests of the borrower, including companies in which a substantial portion of the stock is owned or partnerships in which a person is a partner, must be aggregated with those made to the borrower individually. Loans secured by certain readily marketable collateral are exempt from these limitations, as are loans secured by deposits and certain government securities.
       Commercial Real Estate Concentration Limits
In December, 2006, the U.S. bank regulatory agencies issued guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” to address increased concentrations in commercial real estate (“CRE”) loans. The Guidance describes the criteria the Agencies will use as indicators to indentify institutions potentially exposed to CRE concentration risk. An institution that has (1) experienced rapid growth in CRE lending, (2) notable exposure to a specific type of CRE, (3) total reported loans for construction, land development, and other land representing 100% or more of the institution’s capital, or (4) total CRE loans representing 300% or more of the institution’s capital, and the outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.
Privacy

Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customersnon-public personal information of their consumer customers. Consumer customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrowcertain circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoringoffering a product or service with a nonaffiliated third party.financial institution. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

Consumer Credit Reporting

On December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act, which amended the federal

The Fair Credit Reporting Act (the “FCRA”). These amendments to the FCRA (the “FCRA Amendments”) became effective in 2004.

The FCRA Amendments include, imposes, among other things:

·requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;

·requirements for entities that furnish information to consumer reporting agencies (which would include the Bank), requirementsour bank) to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and

·requirements for mortgage lenders to disclose credit scores to consumers.consumers; and

The FCRA Amendments also prohibit a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the “opt-out”), subject to certain exceptions. We do not share consumer information between us and the Bank for marketing purposes, except as allowed under exceptions to the notice and opt-out requirements. Because we do not share consumer information between us and the Bank, the limitations on sharing of information for marketing purposes do not have a significant impact on us.

·limitations on the ability of a business that receives consumer information from an affiliate to use that information for marketing purposes.
Anti-Terrorism and Money Laundering Legislation

The Bank

Our bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the “USA PATRIOT Act”), the Bank Secrecy Act, and rules and regulationsthe requirements of the Office of Foreign Assets Control (the “OFAC”(“OFAC”). These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and account and other relationships intended to guard against money laundering and terrorism financing. The BankOur bank has established a customer identification program pursuant to Section 326 of the USA PATRIOT Act and maintains records of cash purchases of negotiable instruments, files reports of certain cash transactions exceeding $10,000 (daily aggregate amount), and reports suspicious activity that might signify money laundering, tax evasion, or other criminal activities pursuant to the Bank Secrecy Act, andAct. Our bank otherwise has implemented policies and procedures to comply with the foregoing rules.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

requirements.

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Effect of Governmental Monetary Policies

The Bank’s

Our bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict, and have no control over, the nature or impact of future changes in monetary and fiscal policies.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered, or that file reports, under the Securities Exchange Act of 1934.Act. In particular, the act established (i) requirements for audit committees, including independence, expertise and responsibilities; (ii) responsibilities regarding financial statements for the chief executive officer and chief financial officer of the reporting company and new requirements for them to certify the accuracy of periodic reports; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) civil and criminal penalties for violations of the federal securities laws. The legislation also established a new accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their public company audit clients.

RecentOverdraft Fees
The Federal Legislation relatingReserve has adopted amendments under its Regulation E that impose restrictions on banks’ abilities to Financialcharge overdraft fees. The rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those type of transactions.
       Interchange Fees
The Dodd-Frank Act, through a provision known as the Durbin Amendment, required the Federal Reserve to establish standards for interchange fees that are “reasonable and proportional” to the cost of processing the debit card transaction and imposes other requirements on card networks. Institutions like the bank with less than $10 billion in assets are exempt. However, while we are under the $10 billion level that caps income per transaction, we have been affected by federal regulations that prohibit network exclusivity arrangements and routing restrictions. Essentially, issuers and networks must allow transaction processing through a minimum of two unaffiliated networks.
       The Volcker Rule

On December 10, 2013, five U.S. financial regulators, including the Federal Reserve and the FDIC, adopted a final rule implementing the so-called “Volcker Rule.” The Volcker Rule was created by Section 619 of the Dodd-Frank Act and prohibits “banking entities” from engaging in “proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds.” Although the final rule provides some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including us and the bank. The final rule becomes effective April 1, 2014, but the Federal Reserve has extended the conformance period for all banking entities until July 21, 2015.
While the final rule and its accompanying materials comprise approximately 1,000 pages, banking entities that do not engage in any of the activities covered by the Volcker Rule (other than with respect to certain U.S. government obligations) are not required to adopt any formal compliance program specific to the Volcker Rule. We are currently reviewing the scope of the final rule to determine its impact on our operations.
       The Dodd-Frank Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. As final rules and regulations implementing the Dodd-Frank Act are adopted, this new law is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act eliminated

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A number of the federal prohibitions on paying interest on demand deposits effective one year after the dateeffects of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts and certain attorney’s trust accounts have unlimited deposit insurance through December 31, 2012.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizesare described or otherwise accounted for in various parts of thisSupervision and Regulationsection. The following items provide a brief description of certain other provisions of the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials and directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.

The Dodd-Frank Act created a new Bureau of Consumer Financial Protection with broad powersthat may be relevant to superviseus and enforce consumer protection laws. The Bureau now has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Savings institutions with less than $10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.

bank.

·The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Bureau now has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Institutions with less than $10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.
·The Dodd-Frank Act imposed new requirements regarding the origination and servicing of residential mortgage loans. The law created a variety of new consumer protections, including limitations on the manner by which loan originators may be compensated and an obligation on the part of lenders to verify a borrower’s “ability to repay” a residential mortgage loan. Final rules implementing these latter statutory requirements are effective in 2014.
·The Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
·The Dodd-Frank Act addresses many aspects of investor protection, corporate governance and executive compensation that will affect most U.S. publicly traded companies. The Dodd-Frank Act (i) requires publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments; (ii) enhances independence requirements for compensation committee members; (iii) requires companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers; (iv) authorizes the Securities and Exchange Commission (the “SEC”) to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.
·While insured depository institutions have long been subject to the FDIC’s resolution process, the Dodd-Frank Act creates a new mechanism for the FDIC to conduct the orderly liquidation of certain “covered financial companies,” including bank holding companies and systemically significant non-bank financial companies. Upon certain findings being made, the FDIC may be appointed receiver for a covered financial company, and would conduct an orderly liquidation of the entity. The FDIC liquidation process is modeled on the existing Federal Deposit Insurance Act bank resolution process, and generally gives the FDIC more discretion than in the traditional bankruptcy context. The FDIC has issued final rules implementing the orderly liquidation authority.
As noted above, many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations clearly will result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition and results of operations.

Other Legislation and Regulatory Action relating to Financial Institutions
Recent government efforts to strengthen the U.S. financial system, including the implementation of the American Recovery and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act (“EESA”), the Dodd-Frank Act, and special assessments imposed by the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance requirements, restrictions on executive compensation, restrictions on declaring or paying dividends, restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions against golden parachute payments. These fees, requirements and restrictions, as well as any others that may be imposed in the future, may have a material adverse effect on our business, financial condition, and results of operations.

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New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States and the states in which we do business. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Both we and the Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations. These regulations require compliance with various consumer protection provisions applicable to lending, deposits, brokerage and fiduciary activities. These guidelines also impose capital adequacy requirements and restrict our ability to repurchase our stock and receive dividends from the Bank. These laws generally are intended to protect depositors and not stockholders. The following discussion describes the material elements of the regulatory framework that applies to us.
Available Information

Our corporate website iswww.servisfirstbank.com. We have direct links on this website to our Code of Ethics and the charters for our Audit, Compensation and Corporate Governance and Nominations Committees by clicking on the “Investor Relations” tab.tab. We also have direct links to our filings with the Securities and Exchange Commission (SEC), including, but not limited to, our annual reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments to these filings.   You may also obtain a copy of any such report from us free of charge from us by requesting such copy in writing to 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209, Attention: Chief Financial Officer. This annual report and accompanying exhibits and all other reports and filings that we file with the SEC will be available for the public to view and copy (at prescribed rates) at the SEC’s Public Reference Room at 100 F Street, Washington, D.C. 20549. You may also obtain copies of such information at the prescribed rates from the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains such reports, proxy and information statements, and other information as we file electronically with the SECSEC. You may access this website by clicking onhttp://www.sec.gov.

Executive Officers of the Registrant
The business experience of our executive officers who are not also directors is set forth below.
William M. Foshee (59) – Mr. Foshee has served as our Executive Vice President, Chief Financial Officer, Treasurer and Secretary since 2007 and as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Bank since 2005. Mr. Foshee served as the Chief Financial Officer of Heritage Financial Holding Corporation from 2002 until it was acquired in 2005. Mr. Foshee is a Certified Public Accountant.
Clarence C. Pouncey, III (57) – Mr. Pouncey has served as our Executive Vice President and Chief Operating Officer since 2007 and Executive Vice President and Chief Operating Officer of the Bank since November 2006 and also served as Chief Risk Officer of the Bank from March 2006 until November 2006. Prior to joining the Company, Mr. Pouncey was employed by SouthTrust Bank (now Wells Fargo Bank) in various capacities from 1978 to 2006, most recently as the Senior Vice President and Regional Manager of Real Estate Financial Services. 
Andrew N. Kattos (44) – Mr. Kattos has served as Executive Vice President and Huntsville President and Chief Executive Officer of the Bank since April 2006. Prior to joining the Company, Mr. Kattos was employed by First Commercial Bank for 14 years, most recently as an Executive Vice President and Senior Lender in the Commercial Lending Department. Mr. Kattos also serves on the advisory council of the University of Alabama in Huntsville School of Business.
G. Carlton Barker (65) – Mr. Barker has served as Executive Vice President and Montgomery President and Chief Executive Officer of the Bank since February 1, 2007. Prior to joining the Company, Mr. Barker was employed by Regions Bank for 19 years in various capacities, most recently as the Regional President for the Southeast Alabama Region. Mr. Barker serves on the Huntingdon College Board of Trustee.
Ronald A. DeVane(62)–Mr. DeVane has served as Executive Vice President and Dothan President and Chief Executive Officer of the Bank since August 2008. Prior to joining the Company, Mr. DeVane held various positions with Wachovia Bank and SouthTrust Bank until his retirement in 2006, including CEO for the Wachovia Midsouth Region, which encompassed Alabama, Tennessee, Mississippi and the Florida panhandle, from September 2004 until 2006, CEO of the Community Bank Division of SouthTrust from January 2004 until September 2004, and CEO for SouthTrust Bank of Atlanta and North Georgia from July 2002 until December 2003. Mr. DeVane is a Trustee at Samford University, a member of the Troy University Foundation Board, a Trustee of the Southeast Alabama Medical Center Foundation Board, and a Board Member of the National Peanut Festival Association.
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Rex D. McKinney(51)–Mr. McKinney has served as Executive Vice President and Pensacola President and Chief Executive Officer of the Bank since January 2011. Prior to joining the Company, Mr. McKinney held several leadership positions at First American Bank/Coastal Bank and Trust (owned by Synovus Financial Corporation) starting in 1997. Mr. McKinney is on the Membership Committee and a Past Board Member of the Rotary Club of Pensacola. He is Past President of the Pensacola Sports Association, Board Member and Finance Committee Member for the United Way of Escambia County, Finance Committee Member for Christ Episcopal Church, Finance Committee Member for the Pensacola Country Club, Member of the Irish Politicians Club, and Board Member of the Order of Tristan.
William B. Lamar (70) - Mr. Lamar has served as Executive Vice President and Mobile President and Chief Executive Officer of the Bank since March 2013.  Prior to joining the Company, Mr. Lamar was employed by Merchants National, now Regions Bank where he spent more than 20 years in various leadership roles.  Most recently, Mr. Lamar was the CEO of BankTrust for over 20 years.  He has served on the Alabama State Banking Board for 15 years and was formerly President of Alabama Banker’s Association. 

ITEM 1A. RISK FACTORS.

An investment in our common stock involves risks. Before deciding to invest in our common stock, you should carefully consider the risks described below, together with our consolidated financial statements and the related notes and the other information included in this annual report. The discussion below presents material risks associated with an investment in our common stock. Our business, financial condition and results of operation could be harmed by any of the following risks or by other risks identified in this annual report, as well as by other risks we may not have anticipated or viewed as material. In such a case, the value of our common stock could decline, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” on page 1..

Risks Related To Our Business
As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.
Our businesses and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro and other currencies, could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Our Industry

Recently enacted financial reform legislation will, amongbusiness is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new regulationsfactors that are likelybeyond our control. Adverse economic conditions and government policy responses to increase our costs of operations.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. As rules and regulations implementing the Dodd-Frank Act are adopted, this new law is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts and certain attorney’s trust accounts have unlimited deposit insurance through December 31, 2012.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials and directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.

The Dodd-Frank Act created a new Bureau of Consumer Financial Protection with broad powers to supervise and enforce consumer protection laws. The Bureau now has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Savings institutions with less than $10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.

As noted above, many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations clearly will result in additional operating and compliance costs thatsuch conditions could have a material adverse effect on our business, financial condition, and results of operations.

operations and prospects.

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Additional regulatory requirements especially those imposed under ARRA, EESA or other legislation intended to strengthenWe are dependent on the U.S. financial system, could adversely affect us.

Recent government efforts to strengthen the U.S. financial system, including the implementationservices of the American Recoveryour management team and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act (“EESA”), the Dodd-Frank Act, and special assessments imposed by the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance requirements, restrictions on executive compensation, restrictions on declaring or paying dividends, restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions against golden parachute payments. These fees, requirements and restrictions, as well as any others that may be imposed in the future, may have a material and adverse effect on our business, financial condition, and resultsboard of operations.

Current market conditions have adversely affected, and may continue to adversely affect, us, our customers and our industry.

Because our business is focused exclusively in the southeastern United States, we are particularly exposed to downturns in the U.S. economy in general and in the southeastern economy in particular. Dramatic declines in the housing market over the past three years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generallydirectors, and the strengthunexpected loss of counterparties, many lenders and institutional investors have reducedkey officers or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and businesses and lack of confidence in the financial markets may adversely affect our customers and thus our business, financial condition, and results of operations. A worsening of these conditions would likely exacerbate any adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Current market volatility and industry developmentsdirectors may adversely affect our business and financial results.operations.

The volatility

We are led by an experienced core management team with substantial experience in the capitalmarkets that we serve, and credit markets, alongour operating strategy focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense, and the process of locating key personnel with the housing declines overcombination of skills and attributes required to execute our business plan may be lengthy.If any of our or the past four years,bank’s executive officers, other key personnel, or directors leaves us or the bank, our operations may be adversely affected. In particular, we believe that Thomas A. Broughton, III, Clarence C. Pouncey, III and William M. Foshee are extremely important to our success and the success of our bank. Mr. Broughton has resulted in significant pressure onextensive executive-level banking experience and is the President and Chief Executive Officer of us and the bank. Mr. Pouncey has extensive operating banking experience and is an Executive Vice President and the Chief Operating Officer of us and the bank. Mr. Foshee has extensive financial services industry. We have experienced a higher leveland accounting banking experience and is an Executive Vice President and the Chief Financial Officer of foreclosuresus and higher losses upon foreclosure than we have historically.the bank. If current volatilityany of Mr. Broughton, Mr. Pouncey or Mr. Foshee leaves his position for any reason, our financial condition and market conditions continue or worsen, there can be no assurance that our industry, results of operations or our business will not be significantly adversely impacted. We may have further increases in loan losses, deteriorationsuffer. The bank is the beneficiary of capital or limitationsa key man life insurance policy on our access to funding or capital, if needed.

Further, if other, particularly larger, financial institutions continue to fail to be adequately capitalized or funded, it may negatively impact our business and financial results. We routinely interact with numerous financial institutionsthe life of Mr. Broughton in the ordinary courseamount of business$5 million. Also, we have hired key officers to run our banking offices in each of the Huntsville, Montgomery, Mobile and are therefore exposed to operational and credit risk to those institutions. Failures of such institutions may significantly adversely impact our operations.

Our profitability is vulnerable to interest rate fluctuations.

As a financial institution, our earnings can be significantly affected by changes in interest rates, particularly our net interest income, the rate of loan prepayments, the volume and type of loans originated or produced, the sales of loans on the secondary marketDothan, Alabama markets and the valuePensacola, Florida market, who are extremely important to our success in such markets. If any of them leaves for any reason, our results of operations could suffer in such markets. With the exception of the key officers in charge of our mortgage servicing rights. Our profitability is dependent to a large extent on our net interest income, which is the difference between our income on interest-earning assetsHuntsville, Montgomery and our expense on interest-bearing liabilities. We are affected by changes in general interest rate levels and by other economic factors beyond our control.

Changes in interest rates also affect the average life of loans and mortgage-backed securities. The relatively lower interest rates in recent periodsDothan banking offices, we do not have resulted in increased prepayments of loans and mortgage-backed securities as borrowers have refinanced their mortgages to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to reinvest such prepayments at rates which are comparable to the rates on the prepaid loansemployment agreements or securities.

We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conductnon-competition agreements with any of our executive officers, including Messrs. Broughton, Pouncey and Foshee. In the absence of these types of agreements, our executive officers are free to resign their employment at any time and accept an offer of employment from another company, including a competitor. Additionally, our directors’ and advisory board members’ community involvement and diverse and extensive local business which limitationsrelationships are important to our success. Any material change in the composition of our board of directors or restrictionsthe respective advisory boards of the bank could have a material adverse effect on our profitability.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies including the Federal Reserve, the FDIC and the Alabama Banking Department. Regulatory compliance is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and interest rates paid on deposits. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. Violations of various laws, even if unintentional, may result in significant fines or other penalties, including restrictions on branching or bank acquisitions. Recently, banks generally have faced increased regulatory sanctions and scrutiny particularly with respect to the USA Patriot Act and other statutes relating to anti-money laundering compliance and customer privacy. The current recession has had major adverse effects on the banking andbusiness, financial industry, many of which have lost well over 50% of their market capitalization during the past three years due to material and substantial losses in their loan portfolios and substantial write downs of their asset values. As described above, recent legislation has substantially changed, and increased, federal regulation of financial institutions, and there may be significant future legislation (and regulations under existing legislation) that could have a further material effect on banks and bank holding companies like us.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financialcondition, results of all commercial banksoperations and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably. We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and the related rules and regulations promulgated by the Securities and Exchange Commission. These laws and regulations increase the scope, complexity and cost of corporate governance, reporting and disclosure practices over those of non-public companies. Despite our conducting business in a highly regulated environment, these laws and regulations have different requirements for compliance than we experienced prior to becoming a public company. Our expenses related to services rendered by our accountants, legal counsel and consultants will increase in order to ensure compliance with these laws and regulations that we will be subject to as a public company and may increase further as we grow in size.

prospects.

Changes in monetary policies may have a material adverse effect on our business.

Like all regulated financial institutions, we are affected by monetary policies implemented by the Federal Reserve and other federal instrumentalities. A primary instrument of monetary policy employed by the Federal Reserve is the restriction or expansion of the money supply through open market operations. This instrument of monetary policy frequently causes volatile fluctuations in interest rates, and it can have a direct, material adverse effect on the operating results of financial institutions including our business. Borrowings by the United States government to finance government debt may also cause fluctuations in interest rates and have similar effects on the operating results of such institutions.

Risks Related To Our Business

Our construction and land development loan portfolio and commercial and industrial loan portfolio are both subject to unique risks that could have a material adverse effect on our business, financial condition, and results of operations.operations and prospects.

The severity of the decline in the U.S. economy has adversely affected the performance and market value of many of our loans. Several yearsYears of decline and stagnation following steep declines in the residential housing market have directly affected our construction and land development loans, while sustained high unemployment and general economic weakness have adversely affected parts of our commercial and industrial loan portfolio. Our construction and land development loan portfolio was $151.2comprised $151.9 million, or 5.3% of our total loans, at December 31, 2011, comprising 8.3% of our total loans.2013. Our commercial and industrial loans were $799.5 million$1.3 billion at December 31, 2011, comprising 43.7%2013, or 44.7% of our total loans. Construction loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown like the one we are currently experiencing,have recently experienced, these loans sometimes represent higher risk due to slower sales and reduced cash flow that could negatively affect the borrowers’ ability to repay on a timely basis. We, as well as our competitors, have experienced a significant increase in impaired and non-accrual construction and land development loans and commercial and industrial loans. We believe we have established adequate reserves with respect to such loans, although there can be no assurance that our actual loan losses will not be greater or less than we have anticipated in establishing such reserves. At December 31, 2011,2013, we had an allowance for loan losses of $22.0$30.7 million, of which $6.5$5.8 million, or 29.5%18.9%, was allocated to real estate construction loans, and $6.6$11.2 million, or 30.0%36.5%, was allocated to commercial and industrial loans.

In addition, although regulations and regulatory policies affecting banks and financial services companies undergo continuous change and we cannot predict when changes will occur or the ultimate effect of any changes, there has been recent regulatory focus on construction, development and other commercial real estate lending. Recent changes in the federal policies applicable to construction, development or other commercial real estate loans subject us to substantial limitations with respect to making such loans, increase the costs of making such loans, and require us to have a greater amount of capital to support this kind of lending, all of which could have a material adverse effect on our business, financial condition, and results of operations.

operations and prospects.

A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2013, approximately 48.3% of our loan portfolio was composed of commercial and consumer real estate loans. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The recent recession has adversely affected real estate market values across the country and values may continue to decline. A further decline in real estate values could further impair the value of our collateral and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our provision for loan losses. In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. If we failare required to maintain effective internal controls over financial reportingre-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or remediate any future material weakness into increase our internal control over financial reporting, we mayallowance for loan losses, our profitability could be unable to accurately report our financial results or prevent fraud,adversely affected, which could have a material adverse effect on our business, financial condition, and results of operations.operations and prospects.
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Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.

Our internal controls

As a result of our growth over financial reporting are designedthe past several years, a large portion of loans in our loan portfolio and of our lending relationships is of relatively recent origin. In general, loans do not begin to provide reasonable assurance regarding the reliabilityshow signs of the financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Effective internal controls over financial reporting are necessary for us to provide reliable reports and prevent fraud.

We believe that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a companycredit deterioration or default until they have been detected. We cannot guaranteeoutstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we will identify significant deficiencies and/or material weaknesses inmay be required to increase our internal controls in the future, and our failure to maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Actprovision for loan losses, which could have a material adverse effect on our business, financial condition, and results of operations.

operations and prospects.

Our high concentration of large loans to certain borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to originate and retain large loans. Many of these loans have been made to a small number of borrowers, resulting in a high concentration of large loans to certain borrowers. As of December 31, 2013, our 10 largest borrowing relationships ranged from approximately $17.2 million to $21.9 million (including unfunded commitments) and averaged approximately $19.0 million in total commitments. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death, our nonperforming loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be inadequate, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Our earnings are affected by our ability to make loans, and thus we could sustain significant loan losses and consequently significant net losses if we incorrectly assess either the creditworthiness of our borrowers resulting in loans to borrowers who fail to repay their loans in accordance with the loan terms, or theincorrectly value of the collateral securing the repayment of their loans, or we fail to detect or respond to a deterioration in our loan quality in a timely manner. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses that we consider adequate to absorb losses inherent in the loan portfolio based on our assessment of the information available. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information. We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. Also, as we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors. Despite the effects of the ongoingsustained economic decline,weakness, we believe our allowance for loan losses is adequate. Our allowance for loan losses as of December 31, 20112013 was $22.0$30.7 million, or 1.20%1.07% of total gross loans as of year-end.

loans.

If our assumptions are inaccurate, we may incur loan losses in excess of our current allowance for loan losses and be required to make material additions to our allowance for loan losses which could consequently materially and adversely affecthave a material adverse effect on our business, financial condition, results of operations and future prospects.

However, even if our assumptions are accurate, federal and state regulators periodically review our allowance for loan losses and could require us to materially increase our allowance for loan losses or recognize further loan charge-offs based on judgments different than those of our management. Any material increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could consequently materially and adversely affecthave a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail to design, implement and maintain effective internal controls over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Effective internal controls over financial reporting are necessary for us to provide reliable reports and prevent fraud.
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We believe that a control system, no matter how well designed and managed, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. We cannot guarantee that we will not identify significant deficiencies and/or material weaknesses in our internal controls in the future, and our failure to maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our business strategy includes the continuation of our growth plans, and our business, financial condition, and results of operations and prospects could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to continue pursuing our growth strategy for our business through organic growth of our loan portfolio. Our prospects must be considered in light of the risks, expenses and difficulties that can be encountered by financial service companies in rapid growth stages, which include the risks associated with the following:

·maintaining loan quality;

·maintaining adequate management personnel and information systems to oversee such growth;

·maintaining adequate control and compliance functions; and

·securing capital and liquidity needed to support anticipated growth.

We may not be able to expand our presence in our existing markets or successfully enter new markets, and any expansion could adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Our ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth.

Failure to manage our growth effectively could adversely affect our ability to successfully implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may not be able to successfully expand into new markets.
We have opened new offices in three primary markets (Pensacola, Florida, Mobile, Alabama and Nashville, Tennessee) in the past four years. We may not be able to successfully manage this growth with sufficient human resources, training and operational, financial and technological resources. Any such failure could limit our ability to be successful in these new markets and may have a material adverse effect on our business, financial condition, results of operations and prospects.
Our continued pace of growth will require us to raise additional capital in the future to fund such growth, and the unavailability of additional capital or on terms acceptable to us could adversely affect our growth and/or our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To support our recent and ongoing growth, we have completed a series of capital transactions during the past three years, including:

·the sale of an aggregate of 400,00040,000 shares of our commonsenior non-cumulative perpetual preferred stock, at $25Series A, par value $.001 per share or $10,000,000, in a private placement completed in part on December 31, 2008 and in part on March 13, 2009;
·(or “Series A Preferred Stock”) to the sale of $5,000,000 aggregate principal amountUnited States Department of the Bank’s 8.25% Subordinated Notes dueTreasury (“Treasury”) in connection with the Treasury’s Small Business Lending Fund program for gross proceeds of $40,000,000 on June 1, 2016 in a private placement to an institutional investor in June 2009; and21, 2011;
·the sale of $15,000,000 in 6.0% Mandatory Convertible Trust Preferred Securities by our second statutory trust, ServisFirst Capital Trust II, on March 15, 2010; and
·the sale of an aggregate of 340,000 shares of our common stock at $30 per share, or $10,200,000, in a private placement completed on June 30, 2011.2011;

·the sale of $20,000,000 in 5.5% subordinated notes due November 9, 2022 to accredited investor purchasers, the proceeds of which were used to pay off $15,000,000 in our 8.5% subordinated debentures; and
·the sale of an aggregate of 250,000 shares of our common stock at $41.50 per share, or $10,375,000, in a private placement completed on December 2, 2013.
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After giving effect to these transactions, we believe that we will have sufficient capital to meet our capital needs for our immediate growth plans. However, we willstill continue to need capital to support our longer-term growth plans. If capital is not available on favorable terms when we need it, we will have to either issue common stock or other securities on less than desirable terms or reduce our rate of growth until market conditions become more favorable. In eitherEither of such events could have a material adverse effect on our business, financial condition, and results of operations may be adversely affected.

and prospects.   

Competition from financial institutions and other financial service providers may adversely affect our profitability.

The banking business is highly competitive, and we experience competition in our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in our service areas.

Additionally, we face competition in our service areas fromde novo community banks, including those with senior management who were previously affiliated with other local or regional banks or those controlled by investor groups with strong local business and community ties. These new, smaller competitors are likely to cater to the same small and medium-size business clientele and with similar relationship-based approaches as we do. Moreover, with their initial capital base to deploy, they could seek to rapidly gain market share by under-pricing the current market rates for loans and paying higher rates for deposits. Thesede novo community banks may offer higher deposit rates or lower cost loans in an effort to attract our customers, and may attempt to hire our management and employees.

We compete with these other financial institutions both in attracting deposits and in making loans. In addition, we must attract our customer base from other existing financial institutions and from new residents. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete with an array of financial institutions in our service areas.

Our ability to compete successfully will depend on a number of factors, including, among other things:
·our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices;
·the scope, relevance and pricing of products and services that we offer;
·customer satisfaction with our products and services;
·industry and general economic trends; and
·our ability to keep pace with technological advances and to invest in new technology.
Increased competition could require us to increase the rates that we pay on deposits or lower the rates that we offer on loans, which could reduce our profitability. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Unpredictable economic conditions or a natural disaster in the Statestate of Alabama, or the panhandle of the Statestate of Florida or the Nashville, Tennessee area, particularly the Birmingham-Hoover, Huntsville, Montgomery, Mobile and Dothan, Alabama MSAs, or the Pensacola-Ferry Pass-Brent, Florida MSA or the Nashville, Tennessee MSA, may have a material adverse effect on our financial performance.

Substantially all of our borrowers and depositors are individuals and businesses located and doing business in our primary service areas within the state of Alabama, and the panhandle of the state of Florida.Florida and the Nashville, Tennessee MSA. Therefore, our success will depend on the general economic conditions in Alabama and Florida, and more particularly in Jefferson, Shelby, Madison, Houston and Montgomery Counties in Alabama and Escambia and Santa Rosa Counties in Florida,these areas, which we cannot predict with certainty. Unlike with many of our larger competitors, the majority of our borrowers are commercial firms, professionals and affluent consumers located and doing business in such local markets. As a result, our operations and profitability may be more adversely affected by a local economic downturn or natural disaster in Alabama, Florida or Florida,Tennessee, particularly in such markets, than those of larger, more geographically diverse competitors. For example, a downturn in the economy of any of our MSAs could make it more difficult for our borrowers in those markets to repay their loans and may lead to loan losses that we cannot offset through operations in other markets until we can expand our markets further. Our entry into the Pensacola, marketFlorida and Mobile, Alabama markets increased our exposure to potential losses associated with hurricanes and similar natural disasters that are more common on the Gulf Coast than in our historicalother markets.

Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects Alabama, the panhandle of Florida or the Nashville, Tennessee MSA, or existing or prospective property or borrowers in such areas, may affect us and our profitability more significantly and more adversely than our more geographically diverse competitors, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

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We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements.

 

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.As these technologies are improved in the future, we may, in order to remain competitive, be required to make significant capital expenditures, which may increase our overall expenses and have a material adverse effect on our net income.

results of operations.

Lower lending limits thanWe depend on our information technology and telecommunications systems and third-party servicers, and any systems failures or interruptions could adversely affect our operations and financial condition.
Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our competitors may limitmajor systems, such as data processing, loan servicing and deposit processing systems. For example, Jack Henry & Associates, Inc. provides our entire core banking system through a service bureau arrangement. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to attract borrowers.

Duringoperate effectively, damage our early yearsreputation, result in a loss of operation,customer business, and likelysubject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may bear costs associated with the proliferation of computer theft and cybercrime.
We necessarily collect, use and hold data concerning individuals and businesses with whom we have a banking relationship. Threats to data security, including unauthorized access and cyber attacks, rapidly emerge and change, exposing us to additional costs for many years thereafter,protection or remediation and competing time constraints to secure our legally mandated lending limits willdata in accordance with customer expectations and statutory and regulatory requirements. It is difficult and near impossible to defend against every risk being posed by changing technologies as well as criminals intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach of our data security. Patching and other measures to protect existing systems and servers could be lower thaninadequate, especially on systems that are being retired. Controls employed by our information technology department and third-party vendors could prove inadequate. We could also experience a breach by intentional or negligent conduct on the part of our employees or other internal sources. Our systems and those of manyour third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.
A breach of our competitors because we willsecurity that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage, any of which could individually or in the aggregate have less capital than such competitors. Our lower lending limits may discourage borrowers with lending needs that exceed those limits from doinga material adverse effect on our business, with us. While we may try to serve these borrowers by selling loan participations to otherresults of operations, financial institutions, this strategy may not succeed.

condition and prospects.

We may not be able to successfully expand into new markets.

We have opened new offices and operations in twothree primary markets (Dothan,(Pensacola, Florida, Mobile, Alabama and Pensacola, Florida)Nashville, Tennessee) in the past four years. We may not be able to successfully manage this growth with sufficient human resources, training and operational, financial and technological resources. Any such failure could have a material adverse effect on our operating results and financial condition and our ability to expand into new markets.

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Our recent results may not be indicative of our future results, and may not provide guidance to assess the risk of an investment in our common stock.

We may not be able to sustain our historical rate of growth and may not even be able to expand our business at all. In addition, our recent growth may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of several factors that were favorable until late 2008, such as a rising interest rate environment, a strong residential housing market or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. As a small commercial bank, we have different lending risks than larger banks. We provide services to our local communities; thus, our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to small to medium-sized businesses, which may expose us to greater lending risks than those faced by banks lending to larger, better-capitalized businesses with longer operating histories. We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through our loan approval and review procedures. Our use of historical and objective information in determining and managing credit exposure may not be accurate in assessing our risk.

We are dependent on Our failure to sustain our historical rate of growth or adequately manage the services of our management team and board of directors, and the unexpected loss of key officers or directors may adversely affect our operations.

If any of our or the Bank’s executive officers, other key personnel, or directors leaves us or the Bank, our operations may be adversely affected. In particular, we believefactors that Thomas A. Broughton III is extremely importanthave contributed to our success and the Bank. Mr. Broughton has extensive executive-level banking experience and is the President and Chief Executive Officer of us and the Bank. If he leaves his position for any reason,growth could have a material adverse effect on our business, financial condition, and results of operations may suffer. The Bank is the beneficiary of a key man life insurance policy on the life of Mr. Broughton in the amount of $5 million. Also, we have hired key officers to run our banking offices in each of the Huntsville, Montgomery and Dothan, Alabama markets and the Pensacola, Florida market, who are extremely important to our success in such markets. If any of them leaves for any reason, our results of operations could suffer in such markets. With the exception of the key officers in charge of our Huntsville, Montgomery and Dothan banking offices, we do not have employment agreements or non-competition agreements with any of our executive officers, including Mr. Broughton. In the absence of these types of agreements, our executive officers are free to resign their employment at any time and accept an offer of employment from another company, including a competitor. Additionally, our directors’ and advisory board members’ community involvement and diverse and extensive local business relationships are important to our success. If the composition of our board of directors changes materially, our business may also suffer. Similarly, if the composition of the respective advisory boards of the Bank change materially, our business may suffer in such markets.

prospects.

Our directors and executive officers own a significant portion of our common stock and can exert influence over our business and corporate affairs.

Our directors and executive officers, as a group, beneficially owned approximately 16.21%16.46% of our outstanding common stock as of December 31, 2011.2013. As a result of their ownership, the directors and executive officers will have the ability, by voting their shares in concert, to influence the outcome of all matters submitted to our stockholders for approval, including the election of directors.

We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs associated with the ownership of the real property.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate.
The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to:
·general or local economic conditions;
·environmental cleanup liability;
·neighborhood assessments;
·interest rates;
·real estate tax rates;
·operating expenses of the mortgaged properties;
·supply of and demand for rental units or properties;
·ability to obtain and maintain adequate occupancy of the properties;
·zoning laws;
·governmental and regulatory rules;
·fiscal policies; and
·natural disasters.
Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.
The federal bank regulatory agencies have indicated their view that banks with high concentrations of loans secured by commercial real estate are subject to increased risk and should hold higher capital than regulatory minimums to maintain an appropriate cushion against loss that is commensurate with the perceived risk. Because a significant portion of our loan portfolio is dependent on commercial real estate, a change in the regulatory capital requirements applicable to us as a result of these policies could limit our ability to leverage our capital, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
The dividend rate on our Series A Preferred Stock fluctuates based on the changes in our “qualified small business lending” and other factors and may increase, which could adversely affect income to common stockholders.
We issued $40.0 million in Series A Preferred Stock to the Treasury on June 21, 2011 in connection with the Treasury’s Small Business Lending Fund program. Dividends on each share of our Series A Preferred Stock are payable on the liquidation amount at an annual rate calculated based upon the “percentage change in qualified lending” of the bank between each dividend period and the “baseline” level of “qualified small business lending” of the bank. Such dividend rate may vary from 1% per annum to 7% per annum for the eleventh through the eighteenth dividend periods and that portion of the nineteenth dividend period ending on the four and one-half year anniversary of the date of issuance of the Series A Preferred Stock (or, the dividend periods from October 1, 2013 through and including December 20, 2015). The dividend rate increases to a fixed rate of 9% after 4.5 years from the issuance of our Series A Preferred Stock (or, on December 21, 2015), regardless of the previous rate, until all of the preferred shares are redeemed. If we are unable to maintain our “qualified small business lending” at certain levels, if we fail to comply with certain other terms of our Series A Preferred Stock, or if we are unable to redeem our Series A Preferred Stock within 4.5 years following issuance, the dividend rate on our Series A Preferred Stock could result in materially greater dividend payments, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects. 
We are subject to interest rate risk, which could adversely affect our profitability.
Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. We have positioned our asset portfolio to benefit in a higher or lower interest rate environment, but this may not remain true in the future. Our interest sensitivity profile was somewhat asset sensitive as of December 31, 2013, meaning that our net interest income and economic value of equity would increase more from rising interest rates than from falling interest rates. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System (or, the “Federal Reserve”). Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for loan losses which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. In particular, approximately 74.0% of the bank’s liabilities as of December 31, 2013 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, 81.2% of the assets of the bank were loans, which cannot be called or sold in the same time frame. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations and fund asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences. Any substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on our ability to meet deposit withdrawals and other customer needs, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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The fair value of our investment securities can fluctuate due to factors outside of our control.
As of December 31, 2013, the fair value of our investment securities portfolio was approximately $297.5 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Our failure to assess any currency impairments or losses with respect to our securities could have a material adverse effect on our business, financial condition, results of operations and prospects.
Deterioration in the fiscal position of the U.S. federal government and downgrades in Treasury and federal agency securities could adversely affect us and our banking operations.
The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies. However, in addition to causing economic and financial market disruptions, any future downgrade, failure to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Also, the adverse consequences of any downgrade could extend to those to whom we extend credit and could adversely affect their ability to repay their loans. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are subject to environmental liability risk associated with our lending activities.

A significant portion

In the course of our loan portfolio is secured bybusiness, we may purchase real property. During the ordinary course of business,estate, or we may foreclose on and take title to properties securing certain loans. In doing so, there isreal estate. As a risk thatresult, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be found on these properties. If hazardoussubstantial. In addition, if we are the owner or toxic substances are found,former owner of a contaminated site, we may be liable for remediationsubject to common law claims by third parties based on damages and costs as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduceresulting from environmental contamination emanating from the affected property’s value or limit our ability to use or sell the affected property. The remediation costs and any other financialAny significant environmental liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Risks Related to Our Industry
We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could have a material adverse effect on our profitability.
We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies including the Federal Reserve, the FDIC and the Alabama Banking Department. Regulatory compliance is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and interest rates paid on deposits. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. Violations of various laws, even if unintentional, may result in significant fines or other penalties, including restrictions on branching or bank acquisitions. Recently, banks generally have faced increased regulatory sanctions and scrutiny particularly with respect to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA Patriot Act”) and other statutes relating to anti-money laundering compliance and customer privacy. The recent recession had major adverse effects on the banking and financial industry, during which time many institutions saw a significant amount of their market capitalization erode as they charged off loans and wrote down the value of other assets. As described above, recent legislation has substantially changed, and increased, federal regulation of financial institutions, and there may be significant future legislation (and regulations under existing legislation) that could have a further material effect on banks and bank holding companies like us.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than "small bank holding companies" (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most of the required minimum regulatory capital ratios, they introduce a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 capital (that is, Tier 1 capital in addition to common equity) and Tier 2 capital. A number of instruments that now generally qualify as Tier 1 capital will not qualify or their qualifications will change when the Basel III Rules are fully implemented. However, the Basel III Rules permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the common equity Tier 1 capital ratio. In order to be a "well-capitalized" depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. Generally, financial institutions will become subject to the Basel III Rules on January 1, 2015 with a phase-in period through 2019 for many of the changes.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably. We are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the Securities and Exchange Commission (or, the “SEC”). These laws and regulations increase the scope, complexity and cost of corporate governance, reporting and disclosure practices over those of non-public or non-reporting companies. Despite our conducting business in a highly regulated environment, these laws and regulations have different requirements for compliance than we experienced prior to becoming a reporting company. Our expenses related to services rendered by our accountants, legal counsel and consultants have increased in order to ensure compliance with these laws and regulations that we became subject to as a reporting company and may increase further as we become a public company and grow in size. These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to us may impact the profitability of our business activities and may change certain of our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC and the Alabama Banking Department periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal or state banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our FDIC deposit insurance premiums and assessments may increase.
The deposits of the bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. The bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. High levels of bank failures since the beginning of the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (“OFAC”). If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and prospects.
Financial reform legislation will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new regulations that are likely to increase our costs of operations.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. As final rules and regulations implementing the Dodd-Frank Act are adopted, this law is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many years.
36

The Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts and certain attorney’s trust accounts had unlimited deposit insurance through December 31, 2012.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials and directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Bureau now has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Institutions with less than $10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.
As noted above, many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations will result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and prospects.
Additional regulatory requirements especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us.
Recent government efforts to strengthen the U.S. financial system, including the implementation of the American Recovery and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act (“EESA”), the Dodd-Frank Act, and special assessments imposed by the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance requirements, restrictions on executive compensation, restrictions on declaring or paying dividends, restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions against golden parachute payments. These fees, requirements and restrictions, as well as any others that may be imposed in the future, may have a material adverse effect on our business, financial condition, and results of operations and prospects.
Recent market conditions have adversely affected, and may continue to adversely affect, us, our customers and our industry.
Because our business is focused exclusively in the southeastern United States, we are particularly exposed to downturns in the U.S. economy in general and in the southeastern economy in particular. Beginning with the economic recession in 2008 and continuing through 2010, falling home prices, increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and businesses and lack of confidence in the financial markets may adversely affect our customers and thus our business, financial condition, and results of operations. In addition,A return of these conditions in the near future lawswould likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry, and have a material adverse effect on our business, financial condition, results of operations and prospects.
37

Current market volatility and industry developments may adversely affect our business and financial results.
The volatility in the capital and credit markets, along with the housing declines over the past years, has resulted in significant pressure on the financial services industry. We have experienced a higher level of foreclosures and higher losses upon foreclosure than we have historically. If current volatility and market conditions continue or more stringent interpretationsworsen, there can be no assurance that our industry, results of operations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although management has policies and procedures to perform an environmental review before the loan is recorded and before initiating any foreclosure action on real property, these reviews maybusiness will not be sufficientsignificantly adversely impacted. We may have further increases in loan losses, deterioration of capital or limitations on our access to detect environmental hazards.

funding or capital, if needed.           

Further, if other, particularly larger, financial institutions continue to fail to be adequately capitalized or funded, it may negatively impact our business and financial results. We routinely interact with numerous financial institutions in the ordinary course of business and are therefore exposed to operational and credit risk to those institutions. Failures of such institutions may significantly adversely impact our operations and have a material adverse effect on our business, financial condition, results of operations and prospects.
Our profitability is vulnerable to interest rate fluctuations.
As a financial institution, our earnings can be significantly affected by changes in interest rates, particularly our net interest income, the rate of loan prepayments, the volume and type of loans originated or produced, the sales of loans on the secondary market and the value of our mortgage servicing rights. Our profitability is dependent to a large extent on our net interest income, which is the difference between our income on interest-earning assets and our expense on interest-bearing liabilities. We are affected by changes in general interest rate levels and by other economic factors beyond our control.
Changes in interest rates also affect the average life of loans and mortgage-backed securities. The relatively lower interest rates in recent periods have resulted in increased prepayments of loans and mortgage-backed securities as borrowers have refinanced their mortgages to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to reinvest such prepayments at rates which are comparable to the rates on the prepaid loans or securities. Our inability to manage interest rate risk and fluctuations could have a material adverse effect on our business, financial condition, results of operations and prospects.
Changes in monetary policies may have a material adverse effect on our business.
Like all regulated financial institutions, we are affected by monetary policies implemented by the Federal Reserve and other federal instrumentalities. A primary instrument of monetary policy employed by the Federal Reserve is the restriction or expansion of the money supply through open market operations. This instrument of monetary policy frequently causes volatile fluctuations in interest rates, and it can have a direct, material adverse effect on the operating results of financial institutions including our business. Borrowings by the United States government to finance government debt may also cause fluctuations in interest rates and have similar effects on the operating results of such institutions. We do not have any control over monetary policies implemented by the Federal Reserve or otherwise and any changes in these policies could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Our Common Stock

The rights of our common stockholders are subordinate to the rights of the holders of our Series A Preferred Stock and any debt securities that we may issue and may be subordinate to the holders of any other class of preferred stock that we may issue in the future.
We have no current plansissued 40,000 shares of our Series A Preferred Stock to the Treasury in connection with our participation in the Small Business Lending Fund program. These shares have certain rights that are senior to our common stock. As a result, we must make payments on the preferred stock before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the Series A Preferred Stock must be satisfied in full before any distributions can be made to the holders of our common stock. Our board of directors has the authority to issue in the aggregate up to one million shares of preferred stock, and to determine the terms of each issue of preferred stock, without stockholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue in the future will also be senior to our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts is uncertain. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
38

We and our banking subsidiary are subject to capital and other requirements which restrict our ability to pay dividends.
On September 19, 2013, we announced the approval of the initiation of quarterly cash dividends beginning in 2014. Future declarations of quarterly dividends will be subject to the approval of our board of directors, subject to limits imposed on us by our regulators. In order to pay any dividends, we will need to receive dividends from our bank or have other sources of funds. Under Alabama law, our bank is subject to restrictions on the payment of dividends to us, which are similar to those applicable to national banks. In addition, the bank must maintain certain capital levels, which may restrict the ability of the bank to pay dividends on our common stock.

We have never declared or paid cash dividends on our common stock. We have no current intentions to pay dividends. In addition,us and our ability to pay dividends is subject to regulatory limitations.

Under Alabama law, a state 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 stockholders. As of December 31, 2011, the Bank’s surplus was equal2013, our bank could pay approximately $110.9 million of dividends to 57.0% of the Bank’s capital. The Bank is also required by Alabama law to obtain theus without prior approval of the Alabama Superintendent of Banks of the Alabama Banking Department (the “Superintendent”) for its. However, the payment of dividends is also subject to declaration by our board of directors, which takes into account our financial condition, earnings, general economic conditions and other factors, including statutory and regulatory restrictions. There can be no assurance that dividends will in fact be paid on our common stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

Alabama and Delaware law limit the totalability of all dividends declaredothers to acquire the bank, which may restrict your ability to fully realize the value of your common stock.
In many cases, stockholders receive a premium for their shares when one company purchases another. Alabama and Delaware law make it difficult for anyone to purchase the bank or us without approval of our board of directors. Thus, your ability to realize the potential benefits of any sale by the Bank in any calendar year will exceed the total of (1) the Bank’s net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, no dividends, withdrawals or transfersus may be made from the Bank’s surplus without the prior written approval of the Superintendent.

limited, even if such sale would represent a greater value for stockholders than our continued independent operation.

There are limitations on your ability to transfer your common stock.

There currently is no public trading market for the shares of our common stock, and we have no current plans to list our common stock on any exchange.stock. However, a brokerage firm may create a market for our common stock on the OTC/Bulletin Board or Pink Sheets without our participation or approval upon the filing and approval by the FINRA OTC Compliance Unit of a Form 211. As a result, unless a Form 211 is filed and approved or we register shares of our common stock with the SEC and list such shares on a national exchange, stockholders who may wish or need to dispose of all or part of their investment in our common stock may not be able to do so effectively except by private direct negotiations with third parties, assuming that third parties are willing to purchase our common stock.

Alabama and Delaware law limit the ability of others to acquire the Bank, which may restrict your ability to fully realize the value of your common stock.

In many cases, stockholders receive a premium for their shares when one company purchases another. Alabama and Delaware law makes it difficult for anyone to purchase the Bank or us without approval of our board of directors. Thus, your ability to realize the potential benefits of any sale by us may be limited, even if such sale would represent a greater value for stockholders than our continued independent operation.

Our Certificate of Incorporation, as amended, authorizes the issuance of preferred stock which could adversely affect holders of our common stock and discourage a takeover of us by a third party.

Our Certificatecertificate of Incorporationincorporation, as amended (or, our “charter”) authorizes theour board of directors to issue up to 1,000,000 shares of preferred stock without any further action on the part of our shareholders.stockholders. In 2011, we issued 40,000 shares of Senior Non-cumulative Perpetualour Series A Preferred Stock with certain rights and preferences set forth in the Certificatecertificate of Designationdesignation for such preferred stock. Our board of directors also has the power, without shareholderstockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of the shareholdersstockholders may impede a takeover of us and prevent a transaction favorable to our shareholders.

stockholders.

An investment in our common stock is not an insured deposit.deposit and is subject to risk of loss.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors”“Risk Factors” section and elsewhere in this MemorandumAnnual Report on Form 10-K (including the documents incorporated herein by reference) and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of such investor’s investment in our common stock.

Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover more difficult
Certain provisions of our charter and bylaws, as amended, and corporate and federal banking laws, could make it more difficult for a third party to acquire control of our organization, even if those events were perceived by many of our stockholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:
39

·provide that special meetings of stockholders may be called at any time by the Chairman of our board of directors, by the President or by order of the board of directors;
·enable our board of directors to issue preferred stock up to the authorized amount, with such preferences, limitations and relative rights, including voting rights, as may be determined from time to time by the board;
·enable our board of directors to increase the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at the meeting;
·enable our board of directors to amend our bylaws without stockholder approval; and
·do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose).
These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances in which our stockholders might otherwise receive a premium over the market price of our shares.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.  PROPERTIES.

We operate through ten13 banking offices.offices, including our loan production office in Nashville Tennessee. Our Shades Creek Parkway office also includes our corporate headquarters. We believe that our banking offices are in good condition, are suitable to our needs and, for the most part, are relatively new. The following table summarizesgives pertinent details ofabout our banking offices, all of which are leased.

offices.
State         
MSA     Owned
MSAZipor  Date 
Office Address City Zip Code Leased Date Opened 
Alabama:         
Birmingham-Hoover MSA:Birmingham-Hoover:         
850 Shades Creek Parkway, Suite 200 (1) Birmingham 35209  Leased 03/02/3/2/2005 
324 Richard Arrington Jr. Boulevard North Birmingham 35203  35203Leased 12/19/2005 
5403 Highway 280, Suite 401 Birmingham 35242  Leased 08/8/15/2006 
Total:Total   3 Offices     
          
Huntsville MSA:Huntsville:         
401 Meridian Street, Suite 100 Huntsville 35801  35801Leased 11/21/2006 
1267 Enterprise Way, Suite A (1) Huntsville 35806  Leased 08/8/21/2006 
Total:Total   2 Offices     
          
Montgomery MSA:Montgomery:         
1 Commerce Street, Suite 200 Montgomery 36104  Leased 06/04/6/4/2007 
8117 Vaughn Road, Unit 20 Montgomery 36116  Leased 09/9/26/2007 
Total:Total   2 Offices     
          
Dothan MSA:Dothan:         
4801 West Main Street (1) Dothan 36305  36305Leased 10/17/2008 
1640 Ross Clark Circle Dothan 36301  36301Leased 2/1/2011 
Total:Total   2 Offices     
          
Total Offices in Alabama:9 OfficesMobile:         
64 North Royal StreetMobile36602 Leased7/9/2012
1 Office      
Total Offices in Alabama 10 Offices
          
Florida:         
Pensacola-Ferry Pass-Brent MSA:Pass-Brent:         
316 South Balen Street Pensacola32502 Leased4/1/2011
4980 North 12th Avenue Pensacola32504 Owned8/27/2012
Total   32502Leased04/01/2011
Total:2 Offices     
 1 Office         
Tennessee:
Nashville:
611 Commerce Street (2)Nashville37203 Leased6/4/2013
1 Office 
Total offices13 Offices

(1) Offices relocated to this address. Original offices opened on date indicated.
(2) Office is a loan production office only.
(1)40Office relocated to this address in 2009. Original office opened on date indicated.

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ITEM 3. LEGAL PROCEEDINGS.

Neither we nor the Bank is currently subject to any material legal proceedings. In the ordinary course of business, the Bank is involved in routine litigation, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. Management does not believe that there are any threatened proceedings against us or the Bank which, if determined adversely, would have a material effect on our or the Bank’s business, financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURE

None. 

Not applicable.
PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

There is no public market for our common stock, andstock. Consequently, we have no current plans to list our common stock on any public market. Consequently, there have only been a very fewinfrequent secondary trades in our common stock. The most recent sale of our common stock was at $30$41.50 per share on February 7, 2012.4, 2014. As of December 31, 2011,February 28, 2014, we had approximately 1,2171,562 stockholders of record holding 5,932,1827,420,812 outstanding shares of our common stock, andstock. As of December 31, 2013, we had 792,300776,300 shares of our common stock currently subject to outstanding options to purchase such shares under the 2005 Amended and Restated Stock Incentive Plan 226,500 shares of our common stock currently subject to outstanding options to purchase such shares underand the 2009 Stock Incentive Plan 22,000and 78,500 shares issued with restrictions under our 2009 Stock Incentive Plan, 55,000 shares.
Dividends
We paid a cash dividend of $0.50 per common stock subjectshare on December 31, 2012 and $0.50 per common share on December 16, 2013. In September 2013, we announced a plan to other outstanding options, 40,000 sharesinitiate the payment of a quarterly cash dividend beginning in 2014. The first quarterly cash dividend of $0.15 per common stock currently subject to outstanding warrants to purchase such shares, 75,000 shares of common stock reserved for issuance upon conversion of outstanding mandatory convertible trust preferred securities and 15,000 shares of common stock currently reserved for issuance upon conversion of an outstanding convertible subordinated note.

Dividends

We have never declared or paid dividends on our common stock,and we do not expect to pay dividends to common stockholders in the near future.We anticipate that our earnings, if any,share will be held for purposespayable on April 14, 2014 to stockholders of enhancing our capital. Our paymentrecord as of April 7, 2014. Future declarations of quarterly cash dividends to common stockholders iswill be subject to the discretionapproval of ourthe Board of Directors and the Bank’s ability to pay dividends.may be adjusted as business needs or market conditions change. The principal source of our cash flow, including cash flow to pay dividends, comes from dividends that the Bank pays to us as its sole shareholder.stockholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us, as well as our payment of dividends to our stockholders. For a more complete discussion on the restrictions on dividends, see “Supervision and Regulation - Payment of Dividends” in Item 1. We doalso pay quarterly dividends on our 40,000 shares of outstanding Non-cumulative Perpetual Preferred Stock pursuant to itits Certificate of Designation.

Recent Sales of Unregistered Securities

We had no sales of unregistered securities in 20112013 other than those previously reported in our reports filed with the Securities and Exchange Commission.

41

Purchases of Equity Securities by the Registrant and Affiliated Purchasers

We made no repurchases of our equity securities, and no “affiliated purchasers” (as defined in Rule 10b-18(a) (3) under the Securities Exchange Act of 1934) purchased any shares of our equity securities during the fourth quarter of the fiscal year ended December 31, 2011.

2013.

Equity Compensation Plan Information

The following table sets forth certain information as of December 31, 20112013 relating to stock options granted under our 2005 Amended and Restated Stock Incentive Plan and our 2009 Stock Incentive Plan and other options or warrants issued outside of such plans.

Plan Category Number of securities
issued/to be issued
upon exercise of
outstanding options,
 warrants and rights		  Weighted-average
exercise price of
outstanding options,
warrants and rights		  Number of securities
remaining available for
 future issuance under
equity compensation plans		 
Equity compensation awards  plans approved  by security holders  1,048,800   18.59   401,200 
Equity compensation awards plans not approved by security holders  55,000   17.27   - 
Total  1,103,800   18.52   401,200 

Plan Category Number of Securities
Issued/To Be Issued
Upon Exercise of
Outstanding Awards		  Weighted-average
Exercise Price of
Outstanding Awards		 Number of Securities
Remaining Available For
Future Issuance Under
Equity Compensation Plans		 
Equity Compensation Award-Plans Approved by Security Holders 806,500 $24.15 217,670 
Equity Compensation Awards-Plans Not Approved by Security Holders 48,300  17.59 - 
Total 854,800 $23.77 217,670 
We grantaward stock options as incentive to employees, officers, directors and consultants to attract or retain these individuals, to maintain and enhance our long-term performance and profitability, and to allow these individuals to acquire an ownership interest in our company.Company. Our compensation committee administers this program, making all decisions regarding grants and amendments to these awards. An incentive stock option may not be exercised later than 90 days after an option holder terminates his or her employment with us unless such termination is a consequence of such option holder’s death or disability, in which case the option period may be extended for up to one year after termination of employment. All of our issued options will vest immediately upon a transaction in which we merge or consolidate with or into any other corporation (unless we are the surviving corporation), or sell or otherwise transfer our property, assets or business substantially in its entirety to a successor corporation. At that time, upon the exercise of an option, the option holder will receive the number of shares of stock or other securities or property, including cash, to which the holder of a like number of shares of common stock would have been entitled upon the merger, consolidation, sale or transfer if such option had been exercised in full immediately prior thereto. All of our issued options have a term of 10 years. This means the options must be exercised within 10 years from the date of the grant. At December 31, 2011, we had issued and outstanding options to purchase 1,048,800
We have granted 78,500 shares of our common stock.

Uponrestricted stock under the formation2009 Stock Incentive Plan. These shares generally vest between three and five years from the date of grant, subject to earlier vesting in the event of a merger, consolidation, sale or transfer of the Bank in May 2005, we issued to eachCompany or substantially all of our directorsits assets and business.

We granted warrants to purchase up to 10,00015,000 shares of our common stock or 60,000 in the aggregate, for a purchase price of $10.00 per share, expiring in ten years. These warrants became fully vested in May 2008.

On September 2, 2008, we granted warrants to purchase up to 75,000 shares of our common stock for a purchasewith an exercise price of $25.00 per share in relation to the issuancesecond quarter of our Subordinated Deferrable Interest Debentures.

On June 23, 2009, we granted2009. These warrants to purchase up to 15,000 shareswere issued in connection with the sale of our common stock for a purchase price$5,000,000 subordinated note of $25.00 per share in relation to the issuance of our Subordinated Note dueBank, which was paid off on June 1, 2016 as more fully described in Note 11 to the Consolidated Financial Statements.

2012.

On September 21, 2006, we granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of 30,000 shares of our common stock for a purchasewith an exercise price of $15.00 per share. On November 2, 2007, we granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of 25,000 shares of our common stock for a purchasewith an exercise price of $20.00 per share. These stock options are non-qualified and are not part of either of our stock incentive plans. They vest 100% in a lump sum five years after their date of grantare fully vested and expire 10 years after their date of grant.

On October 26, 2009, we made a restricted stock award under the 2009 Stock Incentive Plan of 20,000 shares of common stock to Thomas A. Broughton III, President and Chief Executive Officer. These shares vest in five equal installments commencing on the first anniversary of the grant date, subject to earlier vesting in the event of a merger, consolidation, sale or transfer as described in the first paragraph under the table above.

On February 9, 2010, we made restricted stock awards under the 2009 Stock Incentive Plan of 2,000 shares of common stock to each of five employees, for a total of 10,000 shares. These shares vest five years from the date of grant, subject to earlier vesting in the event of a merger, consolidation, sale or transfer as described in the first paragraph under the table above.

On November 28, 2011, we granted 10,000 non-qualified stock options to each Company director, or a total of 60,000 options, to purchase shares at a price of $30. The options vest 100% at the end of five years.

Performance Graph

The information included under the caption “Performance Graph” in this Item 5 of this Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filings we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

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The following graph compares the change in cumulative total stockholder return on our common stock with the cumulative total return of the NASDAQ Banks Index and the S&P Stock Index from December 31, 20062008 through December 31, 2011.2013. This comparison assumes $100 invested on December 31, 20062008 in (a) our common stock, (b) the NASDAQ Banks Index, and (c) the NASDAQ Composite Stock Index. Our common stock is not traded on any exchange or national market system, and prices for our stock are determined based on actual prices at which our stock has been sold in arm’s-length private placements completed prior to each point in time represented in the graph. Such prices are not necessarily indicative of the prices that would result from transactions conducted on an exchange.

  Date 
Index: 12/31/2006  12/31/2007  12/31/2008  12/31/2009  12/31/2010  12/31/2011 
ServisFirst Bancshares, Inc.  100.00   133.00   167.00   167.00   167.00   200.00 
NASDAQ Composite  100.00   109.81   65.29   93.95   109.84   107.86 
NASDAQ Bank  100.00   77.93   59.29   48.32   54.06   47.34 
  Date 
Index: 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 
ServisFirst Bancshares, Inc. 100.00 100.00 100.00 120.00 123.00 166.00 
NASDAQ Composite 100.00 143.89 168.22 165.19 191.47 264.84 
NASDAQ Bank 100.00 81.50 91.18 79.85 92.46 128.43 

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected historical consolidated financial data from our consolidated financial statements and should be read in conjunction with our consolidated financial statements including the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included below. Except for the data under “Selected Performance Ratios”, “Asset Quality Ratios”, “Liquidity Ratios”, “Capital Adequacy Ratios” and “Growth Ratios”, the selected historical consolidated financial data as of December 31, 2013, 2012, 2011, 2010 2009, 2008, and 20072009 and for the years ended December 31, 2013, 2012, 2011, 2010 2009, 2008, and 20072009 are derived from our audited consolidated financial statements and related notes.

  As of and for the years ended December 31, 
                
  2011  2010  2009  2008  2007 
  (Dollars in thousands except for share and per share data) 
Selected Balance Sheet Data:                    
Total assets $2,460,785  $1,935,166  $1,573,497  $1,162,272  $838,250 
Total loans  1,830,742   1,394,818   1,207,084   968,233   675,281 
Loans, net  1,808,712   1,376,741   1,192,173   957,631   667,549 
Securities available for sale  293,809   276,959   255,453   102,339   87,233 
Securities held to maturity  15,209   5,234   645   -   - 
Cash and due from banks  43,018   27,454   26,982   22,844   15,756 
Interest-bearing balances with banks  99,350   204,278   48,544   30,774   34,068 
Fed funds sold  100,565   346   680   19,300   16,598 
Mortgage loans held for sale  17,859   7,875   6,202   3,320   2,463 
Restricted equity securities  3,501   3,510   3,241   2,659   1,202 
Bank owned life insurance contracts  40,390   -   -   -   - 
Premises and equipment, net  4,591   4,450   5,088   3,884   4,176 
Deposits  2,143,887   1,758,716   1,432,355   1,037,319   762,683 
Other borrowings  84,219   24,937   24,922   20,000   73 
Trust preferred securities  30,514   30,420   15,228   15,087   - 
Other liabilities  5,873   3,993   3,370   3,082   2,465 
Stockholders' equity  196,292   117,100   97,622   86,784   72,247 
Selected income Statement Data:                    
Interest Income $91,411  $78,146  $62,197  $55,450  $51,417 
Interest expense  16,080   15,260   18,337   20,474   25,872 
Net interest income  75,331   62,886   43,860   34,976   25,545 
Provision for loan losses  8,972   10,350   10,685   6,274   3,541 
Net interest income after provision                    
for loan losses  66,359   52,536   33,175   28,702   22,004 
Noninterest income  6,926   5,169   4,413   2,704   1,441 
Noninterest expense  37,458   30,969   28,930   20,576   14,796 
Income before income taxes  35,827   26,736   8,658   10,830   8,649 
Income taxes expenses  12,389   9,358   2,780   3,825   3,152 
Net income  23,438   17,378   5,878   7,005   5,497 
Per common Share Data:                    
Net Income, basic $4.03  $3.15  $1.07  $1.37  $1.19 
Net income, diluted  3.53   2.84   1.02   1.31   1.16 
Book value  26.35   21.19   17.71   16.15   14.13 
Weighted average shares outstanding:                    
Basic  5,759,524   5,519,151   5,485,972   5,114,194   4,631,047 
Diluted  6,749,163   6,294,604   5,787,643   5,338,883   4,721,864 
Actual shares outstanding  5,932,182   5,527,482   5,513,482   5,374,022   5,113,482 
  As of and for the years ended December 31, 
                
  2011  2010  2009  2008  2007 
Selected Performance Ratios:                    
Return on average assets  1.08%  1.04%  0.43%  0.71%  0.78%
Return on average stockholders' equity  14.73%  15.86%  6.33%  9.28%  9.40%
Net interest margin (1)  3.79%  3.94%  3.31%  3.70%  3.78%
Efficiency ratio (2)  45.54%  45.51%  59.57%  54.61%  54.83%
Asset quality Ratios:                    
Net charge-offs to average loans outstanding  0.32%  0.55%  0.60%  0.41%  0.23%
Non-performing loans to totals loans  0.75%  1.03%  1.01%  1.02%  0.66%
Non-performing assets to total assets  1.06%  1.10%  1.57%  1.74%  0.73%
Allowance for loan losses to total gross loans  1.20%  1.30%  1.24%  1.09%  1.15%
Allowance for loan losses to total non-performing loans  159.96%  126.00%  122.34%  108.17%  173.94%
Liquidity Ratios:                    
Net loans to total deposits  84.37%  78.28%  83.23%  92.32%  87.53%
Net average loans to average earning assets  76.71%  78.04%  80.06%  85.84%  77.19%
Noninterest-bearing deposits to                    
total deposits  16.96%  14.24%  14.75%  11.71%  11.15%
Capital Adequacy Ratios:                    
Stockholders' equity to total assets  7.97%  6.05%  6.20%  7.47%  8.62%
Total risked-based capital (3)  12.79%  11.82%  10.48%  11.25%  11.22%
Tier I capital (4)  11.39%  10.22%  8.89%  10.18%  10.12%
Leverage ratio (5)  9.17%  7.77%  6.97%  9.01%  8.40%
Growth Ratios:                    
Percentage change in net income  34.87%  195.64%  -16.10%  27.43%  35.00%
Percentage change in diluted net income per share  24.30%  178.43%  -22.50%  12.93%  13.21%
Percentage change in assets  27.16%  22.99%  35.38%  38.65%  58.59%
Percentage change in net loans  31.38%  15.46%  24.49%  45.45%  53.43%
Percentage change in deposits  21.90%  22.78%  38.08%  36.00%  61.13%
Percentage change in equity  67.63%  19.95%  12.49%  20.12%  38.18%

43

  As of and for the years ended December 31, 
  2013  2012  2011  2010  2009 
  (Dollars in thousands except for share and per share data) 
Selected Balance Sheet Data:                    
Total Assets $3,520,699  $2,906,314  $2,460,785  $1,935,166  $1,573,497 
Total Loans  2,858,868   2,363,182   1,830,742   1,394,818   1,207,084 
Loans, net  2,828,205   2,336,924   1,808,712   1,376,741   1,192,173 
Securities available for sale  266,220   233,877   293,809   276,959   255,453 
Securities held to maturity  32,274   25,967   15,209   5,234   645 
Cash and due from banks  61,370   58,031   43,018   27,454   26,982 
Interest-bearing balances with banks  188,411   119,423   99,350   204,278   48,544 
Fed funds sold  8,634   3,291   100,565   346   680 
Mortgage loans held for sale  8,134   25,826   17,859   7,875   6,202 
Restricted equity securities  3,738   3,941   3,501   3,510   3,241 
Premises and equipment, net  8,351   8,847   4,591   4,450   5,088 
Deposits  3,019,642   2,511,572   2,143,887   1,758,716   1,432,355 
Other borrowings  194,320   136,982   84,219   24,937   24,922 
Subordinated debentures  -   15,050   30,514   30,420   15,228 
Other liabilities  9,545   9,453   5,873   3,993   3,370 
Stockholders' Equity  297,192   233,257   196,292   117,100   97,622 
Selected income Statement Data:                    
Interest income $126,081  $109,023  $91,411  $78,146  $62,197 
Interest expense  13,619   14,901   16,080   15,260   18,337 
Net interest income  112,462   94,122   75,331   62,886   43,860 
Provision for loan losses  13,008   9,100   8,972   10,350   10,685 
Net interest income after provision for loan losses  99,454   85,022   66,359   52,536   33,175 
Noninterest income  10,010   9,643   6,926   5,169   4,413 
Noninterest expense  47,489   43,100   37,458   30,969   28,930 
Income before income taxes  61,975   51,565   35,827   26,736   8,658 
Income taxes expenses  20,358   17,120   12,389   9,358   2,780 
Net income  41,617   34,445   23,438   17,378   5,878 
Net income available to common stockholders  41,201   34,045   23,238   17,378   5,878 
Per common Share Data:                    
Net income, basic $6.00  $5.68  $4.03  $3.15  $1.07 
Net income, diluted  5.69   4.99  $3.53  $2.84  $1.02 
Book value  35.00   30.84  $26.35  $21.19  $17.71 
Weighted average shares outstanding:                    
Basic  6,869,071   5,996,437   5,759,524   5,519,151   5,485,972 
Diluted  7,268,675   6,941,752   6,749,163   6,294,604   5,787,643 
Actual shares outstanding  7,350,012   6,268,812   5,932,182   5,527,482   5,513,482 
Selected Performance Ratios:                    
Return on average assets  1.31%  1.30%  1.11%  1.04%  0.43%
Return on average stockholders' equity  15.54%  15.81%  14.73%  15.86%  6.33%
Dividend payout ratio  8.79%  10.02%  -%  -%  -%
Net interest margin (1)  3.80%  3.80%  3.79%  3.94%  3.31%
Efficiency ratio (2)  38.78%  41.54%  45.54%  45.51%  59.93%
Asset quality Ratios:                    
Net charge-offs to average loans outstanding  0.33%  0.24%  0.32%  0.55%  0.60%
Non-performing loans to totals loans  0.34%  0.44%  0.75%  1.03%  1.01%
Non-performing assets to total assets  0.64%  0.69%  1.06%  1.10%  1.57%
Allowance for loan losses to total gross loans  1.07%  1.11%  1.20%  1.30%  1.22%
Allowance for loan losses to total non-performing loans  314.94%  253.50%  159.96%  126.00%  120.91%
Liquidity Ratios:                    
Net loans to total deposits  93.66%  93.05%  84.37%  78.28%  83.23%
Net average loans to average earning assets  84.80%  79.89%  76.71%  78.04%  80.06%
Noninterest-bearing deposits to total deposits  21.54%  21.71%  19.54%  14.24%  14.75%
Capital Adequacy Ratios:                    
Stockholders' Equity to total assets  8.44%  8.03%  7.98%  6.05%  6.20%
Total risked-based capital (3)  11.73%  11.78%  12.79%  11.82%  10.48%
Tier 1 capital (4)  10.00%  9.89%  11.39%  10.22%  8.89%
Leverage ratio (5)  8.48%  8.43%  9.17%  7.77%  6.97%
Growth Ratios:                    
Percentage change in net income  20.82%  46.96%  34.87%  195.64%  (16.09)%
Percentage change in diluted net income per share  14.03%  41.36%  24.30%  178.43%  (22.14)%
Percentage change in assets  21.14%  18.11%  27.16%  22.99%  35.38%
Percentage change in net loans  21.02%  29.20%  31.38%  15.48%  24.49%
Percentage change in deposits  20.23%  17.15%  21.90%  22.78%  38.08%
Percentage change in equity  27.41%  18.83%  67.63%  19.95%  12.49%
Percentage change in equity
(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.

income

(3) Total stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets plus allowance for loan losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. The FDIC-requiredFDIC required minimum to be well capitalized is 10%.

(4)Total stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets divided by total risk-weighted.risk-weighted assets. The FDIC-requiredFDIC required minimum to be well-capitalized is 6%.

(5) Total stockholders' equity excluding unrealized losses on securities available for sale, net of taxes, and intangible assets divided by average assets less intangible assets. The FDIC-required minimum to be well-capitalized is 5%; however, the Alabama Banking Department has required that the Bank maintain a Tier 1 capital leverage ratio of 8%.

44

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OPERATIONS

The following is a narrative discussion and analysis of significant changes in our results of operations and financial condition.The purpose of this discussion is to focus on information about our financial condition and results of operations that is not otherwise apparent from the audited financial statements. Analysis of the results presented should be made in the context of our relatively short history.This discussion should be read in conjunction with the financial statements and selected financial data included elsewhere in this document.

Forward-Looking Statements

We may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and reports to stockholders. Statements made in this annual report, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon our management’s belief as well as assumptions made by, and information currently available to, our management. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking business from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans, and other factors. We caution that such factors are not exclusive. We do not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, us. See also “Cautionary Note Regarding Forward Looking Statements” on page 1.

Overview

We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 headquartered in Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate ten12 full service banking offices located in Jefferson, Shelby, Madison, Montgomery, Mobile and Houston Counties in Alabama, and in Escambia County in Florida. These offices operate in the Birmingham-Hoover, Huntsville, Montgomery, Mobile and Dothan, Alabama MSAs, and in the Pensacola-Ferry Pass-Brent, Florida MSA. Additionally, we opened a loan production office in Nashville, Tennessee in June 2013.Our principal business is to accept deposits from the public and to make loans and other investments. Our principal source of funds for loans and investments are demand, time, savings, and other deposits and the amortization and prepayment of loans and borrowings. 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.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the Notes to the Consolidated Financial Statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.

45

Allowance for Loan Losses

The allowance for loan losses, sometimes referred to as the “ALLL”, is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.

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

Investment Securities Impairment

Periodically, we may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In any such instance, we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).

Other Real Estate Owned

Other real estate owned (“OREO”), consisting of assets that have been acquired through foreclosure, is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. Other real estate owned is revalued on an annual basis or more often if market conditions necessitate. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to net income as OREO expense. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced in recent years. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate.

Results of Operations

Net Income

Net income for the year ended December 31, 2011available to common stockholders was $23.4 million, compared to net income of $17.4$41.2 million for the year ended December 31, 2010.2013, compared to $34.0 million for the year ended December 31, 2012. This increase in net income is primarily attributable to a significantan increase in net interest income, which increased $12.4$18.4 million, or 19.8%19.6%, to $75.3$112.5 million in 20112013 from $62.9$94.1 million in 2010.2012. Noninterest income increased $1.8$0.4 million, or 34.0%4.2%, to $6.9$10.0 million in 20112013 from $5.2$9.6 million in 2010.2012. Noninterest expense increased by $6.5$4.4 million, or 21.0%10.2%, to $37.5$47.5 million in 20112013 from $31.0$43.1 million in 2010.2012. Basic and diluted net income per common share were $6.00 and $5.69, respectively, for the year ended December 31, 2013, compared to $5.68 and $4.99, respectively, for the year ended December 31, 2012. Return on average assets was 1.31% in 2013, compared to 1.30% in 2012, and return on average stockholders’ equity was 15.54% in 2013, compared to 15.81% in 2012.
Net income for the year ended December 31, 2012 was $34.0 million, compared to net income of $23.2 million for the year ended December 31, 2011. This increase in net income is primarily attributable to an increase in net interest income, which increased $18.8 million, or 25.0%, to $94.1 million in 2012 from $75.3 million in 2011. Noninterest income increased $2.7 million, or 39.1%, to $9.6 million in 2012 from $6.9 million in 2011. Noninterest expense increased by $5.6 million, or 14.9%, to $43.1 million in 2012 from $37.5 million in 2011. Basic and diluted net income per common share were $5.68 and $4.99, respectively, for the year ended December 31, 2012, compared to $4.03 and $3.53, respectively, for the year ended December 31, 2011, compared to $3.15 and $2.84, respectively, for the year ended December 31, 2010.2011. Return on average assets was 1.08%1.30% in 2011,2012, compared to 1.04%1.11% in 2010,2011, and return on average stockholders’ equity was 15.81% in 2012, compared to 14.73% in 2011, compared to 15.86% in 2010.

Net income2011.

46

The following table presents some ratios of our results of operations for the yearyears ended December 31, 2010 was $17.4 million, compared to net2013, 2012 and 2011.
  For the years ended December 31, 
  2013 2012 2011 
Return on average assets 1.31%1.30%1.11%
Return on average stockholders' equity 15.54%15.81%14.73%
Dividend payout ratio 8.79%10.02%-%
Average stockholders' equity to
    average total assets		 8.43%8.19%7.56%
The following tables present a summary of our statements of income, of $5.9 millionincluding the percent change in each category, for the yearyears ended December 31, 2009. This increase in net income is primarily attributable2013 compared to a significant increase in net interest income, which increased $19.0 million, or 43.4%, to $62.9 million in 2010 from $43.9 million in 2009. Noninterest income increased $756,000, or 17.1%, to $5.2 million in 2010 from $4.4 million in 2009. Noninterest expense increased by $2.0 million, or 7.1%, to $31.0 million in 2010 from $28.9 million in 2009. Basic2012, and diluted net income per common share were $3.15 and $2.84, respectively, for the yearyears ended December 31, 2010,2012 compared to $1.07 and $1.02, respectively, for the year ended December 31, 2009. Return on average assets was 1.04% in 2010, compared to 0.43% in 2009, and return on average stockholders’ equity was 15.86% in 2010, compared to 6.33% in 2009.

  Year Ended December 31,    
  2011  2010  Change from
the Prior
Year		 
  (Dollars in Thousands)    
Interest income $91,411  $78,146   16.97%
Interest expense  16,080   15,260   5.37%
Net interest income  75,331   62,886   19.79%
Provision for loan losses  8,972   10,350   -13.31%
Net interest income after            
provision for loan losses  66,359   52,536   26.31%
Noninterest income  6,926   5,169   33.99%
Noninterest expense  37,458   30,969   20.95%
Net income before taxes  35,827   26,736   34.00%
Taxes  12,389   9,358   32.39%
Net income  23,438   17,378   34.87%
Dividends on preferred stock  200   -   NM 
Net income available to            
common stockholders $23,238  $17,378   33.72%

  Year Ended December 31,    
  2010  2009  Change from
the Prior
Year		 
  (Dollars in Thousands)    
Interest income $78,146  $62,197   25.64%
Interest expense  15,260   18,337   -16.78%
Net interest income  62,886   43,860   43.38%
Provision for loan losses  10,350   10,685   -3.14%
Net interest income after provision for loan losses  52,536   33,175   58.36%
Noninterest income  5,169   4,413   17.13%
Noninterest expense  30,969   28,930   7.05%
Net income before taxes  26,736   8,658   208.80%
Taxes  9,358   2,780   236.62%
Net income  17,378   5,878   195.64%
Dividends on preferred stock  -   -   NM 
Net income available to common stockholders $17,378  $5,878   195.64%

2011, respectively.

   Year Ended December 31,    
   2013  2012 Change from
the Prior Year		 
   (Dollars in Thousands)    
Interest income  $126,081  $109,023  15.65%
Interest expense   13,619   14,901  -8.60%
Net interest income   112,462   94,122  19.49%
Provision for loan losses   13,008   9,100  42.95%
Net interest income after
    provision for loan losses		   99,454   85,022  16.97%
Noninterest income   10,010   9,643  3.81%
Noninterest expense   47,489   43,100  10.18%
Net income before taxes   61,975   51,565  20.19%
Taxes   20,358   17,120  18.91%
Net income   41,617   34,445  20.82%
Dividends on preferred stock   416   400  4.00%
Net income available to
    common stockholders		  $41,201  $34,045  21.02%
  Year Ended December 31,    
  2012 2011 Change from
the Prior Year		 
  (Dollars in Thousands)    
Interest income $109,023 $91,411  19.27%
Interest expense  14,901  16,080  -7.33%
Net interest income  94,122  75,331  24.94%
Provision for loan losses  9,100  8,972  1.43%
Net interest income after
    provision for loan losses		  85,022  66,359  28.12%
Noninterest income  9,643  6,926  39.23%
Noninterest expense  43,100  37,458  15.06%
Net income before taxes  51,565  35,827  43.93%
Taxes  17,120  12,389  38.19%
Net income  34,445  23,438  46.96%
Dividends on preferred stock  400  200  100.00%
Net income available to
    common stockholders		 $34,045 $23,238  46.51%
47

Net Interest Income

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

Beginning in mid-2004, the Federal Reserve Open Market Committee, or FOMC, increased interest rates 400 basis points through mid-2006, where interest rates remained constant until September 2007. In September 2007, the FOMC started lowering interest rates in an effort to stabilize a declining real estate market and to ease recessionary pressures. Over the next five quarters, the FOMC would drop rates a total of 500 basis points. Rates have remained extremely low since bottoming out in December 2008. During this time of falling market interest rates, our management maintained a moderately liability-sensitive balance sheet position, meaning that more liabilities are scheduled to reprice within the next year than assets, thereby taking advantage of the decreasing rates.

Net interest income increased $12.4$18.4 million, or 19.8%19.5%, to $75.3$112.5 million for the year ended December 31, 20112013 from $62.9$94.1 million for the year ended December 31, 2010.2012. This was due to an increase in total interest income of $13.3$17.1 million, or 17.0%15.6%, and a decrease in total interest expense of $1.3 million, or a 8.6% reduction. The increase in total interest income was primarily attributable to a 26.50% increase in average loans outstanding from 2012 to 2013, which was the result of growth in all of our markets, including in Mobile, Alabama and Nashville, Tennessee, our two newest markets.
Net interest income increased $18.8 million, or 24.9%, to $94.1 million for the year ended December 31, 2012 from $75.3 million for the year ended December 31, 2011. This was due to an increase in total interest income of $17.6 million, or 19.3%, and a decrease in total interest expense of $820,000,$1.2 million, or 5.4%-7.3%. The increase in total interest income was primarily attributable to a 22.6%29.30% increase in average loans outstanding from 20102011 to 2011,2012, which was the result of growth in all of our markets, including in Pensacola, Florida, our newest market.

Net interest income increased $19.0 million, or 43.4%, to $62.9 million for the year ended December 31, 2010 from $43.9 million for the year ended December 31, 2009. This was due to an increasemarket entrance in total interest income of $15.9 million, or 25.6%, and a decrease in total interest expense of $3.1 million, or 16.8%. The increase in total interest income was primarily attributable to a 17.9% increase in average loans outstanding from 2009 to 2010, which was the result of growth in all four of our Alabama markets, but primarily market share expansion in our younger markets of Montgomery and Dothan.

2011.

Investments

We view the investment portfolio as a source of income and liquidity. Our investment strategy is to accept a lower immediate yield in the investment portfolio by targeting shorter term investments. Our investment policy provides that no more than 40% of our total investment portfolio should be composed of municipal securities.

The investment portfolio at December 31, 2011 was $309.0 million, compared to $282.2 million at December 31, 2010. The interest earned on investments decreased slightly, from $8.8 million in 2010 to $8.7 million in 2011. The lower income was a result of lower yields on new securities purchased during 2011. The average taxable-equivalent yield on the investment portfolio decreased from 4.08% in 2010 to 3.70% in 2011, or 38 basis points.

The investment portfolio at December 31, 2010 was $282.2 million, compared to $256.1 million at December 31, 2009. The interest earned on investments rose to $8.8 million in 2010 from $6.0 million in 2009. That was a result of higher average portfolio balances due to our growth. The average taxable-equivalent yield on the investment portfolio decreased from 5.06% in 2009 to 4.08% in 2010, or 98 basis points.

Net Interest Margin Analysis

The net interest margin is impacted by the average volumes of interest-sensitive assets and interest-sensitive liabilities and by the difference between the yield on interest-sensitive assets and the cost of interest-sensitive liabilities (spread). Loan fees collected at origination represent an additional adjustment to the yield on loans. Our spread can be affected by economic conditions, the competitive environment, loan demand, and deposit flows. The net yield on earning assets is an indicator of effectiveness of our ability to manage the net interest margin by managing the overall yield on assets and cost of funding those assets.

The following table shows, for the twelve months ended December 31, 2011, 20102013, 2012 and 2009,2011, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue, and the change in interest income and interest expense segregated into amounts attributable to changes in volume and changes in rates. This table is presented on a taxable equivalent basis, if applicable.

48

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Year Ended December 31,

(Dollats in Thousands)

  2011  2010  2009 
  Average
Balance		  Interest
Earned /
Paid		  Average
Yield /
Rate		  Average
Balance		  Interest
Earned /
Paid		  Average
Yield /
Rate		  Average
Balance		  Interest
Earned /
Paid		  Average
Yield /
Rate		 
Assets:                                    
Interest-earning assets:                                    
Loans, net of unearned income (1) $1,573,500  $82,083   5.22% $1,283,204  $68,889   5.37% $1,088,437  $55,625   5.11%
Mortgage loans held for sale  7,556   211   2.79   6,275   226   3.60   6,195   265   4.28 
Securities:                                    
Taxable  188,315   5,721   3.04   180,045   6,482   3.60   92,903   4,517   4.86 
Tax-exempt(2)  82,239   4,275   5.20   59,812   3,314   5.72   38,834   2,151   5.54 
Total securities (3)  270,554   10,006   3.70   239,857   9,796   4.08   131,737   6,668   5.06 
Federal funds sold  85,825   176   0.21   47,581   104   0.22   88,651   257   0.29 
Restricted equity securities  4,259   74   1.50   3,448   56   1.62   3,101   10   0.32 
Interest-bearing balances with banks  83,152   203   0.24   42,675   115   0.27   24,987   24   0.10 
Total interest-earning assets  2,024,846   92,743   4.58%  1,623,040   79,186   4.88%  1,343,108   62,849   4.68%
Non-interest-earning assets:                                    
Cash and due from banks  28,304           24,837           18,337         
Net premises and equipment  4,813           4,914           4,503         
Allowance for loan losses, accrued interest and other assets  29,094           23,087           10,534         
Total assets  2,087,057           1,675,878           1,376,482         
                                     
Interest-bearing liabilities:                                    
Interest-bearing deposits:                                    
Checking $303,165  $1,134   0.37% $264,591  $1,253   0.47% $178,232  $1,599   0.90%
Savings  10,088   47   0.47   2,978   15   0.50   972   5   0.51 
Money market  902,290   6,675   0.74   775,544   5,994   0.77   704,112   8,859   1.26 
Time deposits  330,221   5,192   1.57   255,326   4,679   1.83   218,087   5,624   2.58 
Federal funds purchased  19,335   49   0.25   4,901   31   0.63   -   -   - 
Other borrowings  41,866   2,983   7.13   52,186   3,288   6.30   37,705   2,250   5.97 
Total interest-bearing                                    
liabilities  1,606,965   16,080   1.00%  1,355,526   15,260   1.13%  1,139,108   18,337   1.61%
Non-interest-bearing liabilities:                                    
Non-interest-bearing checking  315,781           207,399           140,660         
Other liabilites  6,580           3,412           3,785         
Stockholders' equity  157,731           109,541           92,929         
Total liabilities and                                    
stockholders' equity  2,087,057           1,675,878           1,376,482         
Net interest spread          3.58%          3.75%          3.07%
Net interest margin          3.79%          3.94%          3.31%

In thousands, except Average Yields and Rates)
  2013 2012 2011 
  Average
Balance		 Interest
Earned /
Paid		 Average
Yield /
Rate		 Average
Balance		 Interest
Earned /
Paid		 Average
Yield /
Rate		 Average
Balance		 Interest
Earned /
Paid		 Average
Yield /
Rate		 
Assets:                         
Interest-earning assets:                         
Loans, net of unearned income                         
                          
Taxable (1) $2,573,621 $118,032 4.59%$2,034,478 $100,143 4.92%$1,573,500 $82,083 5.22%
Tax-exempt (2)  3,274  170 5.19  1,631  95 5.82  -  - - 
Mortgage loans held for sale  12,953  306 2.36  17,905  349 1.95  7,556  211 2.79 
Securities:                         
Taxable  149,996  3,906 2.60  184,174  4,815 2.61  188,315  5,721 3.04 
Tax-exempt (2)  115,829  4,884 4.22  100,926  4,683 4.64  82,239  4,275 5.20 
Total securities (3)  265,825  8,790 3.31  285,100  9,498 3.33  270,554  9,996 3.69 
Federal funds sold  44,106  110 0.25  94,425  196 0.21  85,825  176 0.21 
Restricted equity securities  4,299  93 2.16  4,434  104 2.35  4,259  74 1.74 
Interest-bearing balances with banks  100,417  280 0.28  80,170  200 0.25  83,152  203 0.24 
                          
Total interest-earning assets $3,004,495 $127,781 4.25%$2,518,143 $110,585 4.39%$2,024,846 $92,743 4.58%
Non-interest-earning assets:                         
Cash and due from banks  45,528       38,467       28,304      
Net premises and equipment  9,148       6,074       4,813      
Allowance for loan losses,                         
accrued interest and                         
other assets  84,297       65,504       29,094      
Total assets $3,143,468      $2,628,188      $2,087,057      
                          
Interest-bearing liabilities:                         
Interest-bearing deposits:                         
Checking $433,931 $1,201 0.28%$351,975 $1,074 0.31%$303,165 $1,133 0.37%
Savings  21,793  61 0.28  17,081  48 0.28  10,088  47 0.47 
                          
Money market  1,244,957  5,810 0.47  1,042,870  5,820 0.56  902,290  6,675 0.74 
Time deposits  404,927  4,758 1.18  398,552  5,307 1.33  330,221  5,192 1.57 
Federal funds purchased  167,063  462 0.28  88,732  222 0.25  19,335  49 0.25 
Other borrowings  21,780  1,327 6.09  33,126  2,430 7.34  41,866  2,984 7.13 
                          
Total interest-bearing liabilities $2,294,451 $13,619 0.59%$1,932,336 $14,901 0.77%$1,606,965 $16,080 1.00%
Non-interest-bearing liabilities:                         
                          
Non-interest-bearing
    checking		  576,072       474,284       315,781      
Other liabilities  7,835       6,200       6,580      
Stockholders' equity  259,631       207,656       145,050      
Unrealized gains on securities
    and derivatives		  5,479       7,712       12,681      
                          
Total liabilities and
    stockholders' equity		 $3,143,468      $2,628,188      $2,087,057      
Net interest spread       3.66%      3.62%      3.58%
Net interest margin       3.80%      3.80%      3.79%
(1)Non-accrual loans are included in average loan balances in all periods. Loan fees of $538,000 , $750,000$551,000, $372,000 and $730,000$538,000 are included in interest income in 2011, 20102013, 2012 and 2009,2011, respectively.
(2)Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35% in 2011,35% in 2010, and 34% in 2009..
(3)Unrealized gains of $7,624,000, $6,717,000$8,408,000, $11,998,000 and $1,197,000$7,624,000 are excluded from the yield calculation in 2011, 20102013, 2012 and 2009,2011, respectively.

49

The following table reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-bearing assets and liabilities.

  For the Year Ended December 31, 
  2011 Compared to 2010 Increase (Decrease)
in Interest Income and Expense Due to
Changes in:		  2010 Compared to 2009 Increase (Decrease)
in Interest Income and Expense Due to
Changes in:		 
  Volume  Rate  Total  Volume  Rate  Total 
Interest-earning assets:                        
Loans, net of unearned income  15,193   (1,999)  13,194   10,346   2,918   13,264 
Mortgages held for sale  41   (56)  (15)  4   (43)  (39)
Securities:                        
Taxable  287   (1,048)  (761)  3,374   (1,409)  1,965 
Tax-exempt  1,177   (216)  961   1,162   1   1,163 
Federal funds sold  78   (6)  72   (100)  (53)  (153)
Restricted equity securities  14   4   18   1   45   46 
Interest-bearing balances with banks  100   (12)  88   26   65   91 
Total interest-earning assets  16,890   (3,333)  13,557   14,813   1,524   16,337 
                         
Interest-bearing liabilities:                        
Checking  166   (285)  (119)  590   (936)  (346)
Savings  33   (1)  32   10   -   10 
Money market  947   (266)  681   827   (3,692)  (2,865)
Time deposits  1,242   (729)  513   857   (1,802)  (945)
Federal funds purchased  47   (29)  18   31   -   31 
Other borrowed funds  (701)  396   (305)  906   132   1,038 
Total interest-bearing liabilities  1,734   (914)  820   3,221   (6,298)  (3,077)
Increase in net interest income  15,156   (2,419)  12,737   11,592   7,822   19,414 

  For the Year Ended December 31, 
  2013 Compared to 2012 Increase (Decrease) in Interest
Income and Expense Due to Changes in:		 2012 Compared to 2011 Increase (Decrease) in Interest
Income and Expense Due to Changes in:		 
  Volume Rate Total Volume Rate Total 
Interest-earning assets:                   
Loans, net of unearned income                   
Taxable $25,097 $(7,208) $17,889 $22,910 $(4,850) $18,060 
Tax-exempt  86  (11)  75  95  -  95 
Mortgages held for sale  (108)  65  (43)  218  (80)  138 
Taxable  (890)  (19)  (909)  (124)  (782)  (906) 
Tax-exempt  652  (451)  201  900  (492)  408 
Federal funds sold  (119)  33  (86)  18  2  20 
Restricted equity securities  (3)  (8)  (11)  3  27  30 
Interest-bearing balances
    with banks		  54  26  80  (7)  4  (3) 
Total interest-earning assets  24,769  (7,573)  17,196  24,013  (6,171)  17,842 
                    
Interest-bearing liabilities:                   
Interest-bearing demand deposits  234  (107)  127  167  (226)  (59) 
Savings  13  -  13  25  (24)  1 
Money market  1,028  (1,038)  (10)  941  (1,796)  (855) 
Time deposits  84  (633)  (549)  980  (865)  115 
Federal funds purchased  215  25  240  174  (1)  173 
Other borrowed funds  (738)  (365)  (1,103)  (641)  87  (554) 
Total interest-bearing
    liabilities		  836  (2,118)  (1,282)  1,646  (2,825)  (1,179) 
Increase in net interest income $23,933 $(5,455) $18,478 $22,367 $(3,346) $19,021 
In the table above, changes in net interest income are attributable to (a) changes in average balances (volume variance), (b) changes in rates (rate variance), or (c) changes in rate and average balances (rate/volume variance). The volume variance is calculated as the change in average balances times the old rate. The rate variance is calculated as the change in rates times the old average balance. The rate/volume variance is calculated as the change in rates times the change in average balances. The rate/volume variance is allocated on a pro rata basis between the volume variance and the rate variance in the table above.
The two primary factors that make up the spread are the interest rates received on loans and the interest rates paid on deposits. We have been disciplined in raising interest rates on deposits only as the market demanded and thereby managing our cost of funds. Also, we have not competed for new loans on interest rate alone, but rather we have relied significantly on effective marketing to business customers.

Our net interest spread and net interest margin were 3.66% and 3.80%, respectively, for the year ended December 31, 2013, compared to 3.62% and 3.80%, respectively, for the year ended December 31, 2012. Our average interest-earning assets for the year ended December 31, 2013 increased $486.4 million, or 19.3%, to $3.0 billion from $2.5 billion for the year ended December 31, 2012. This increase in our average interest-earning assets was due to continued core growth in all of our markets and increased loan production. Our average interest-bearing liabilities increased $362.1 million, or 18.7%, to $2.3 billion for the year ended December 31, 2013 from $1.9 billion for the year ended December 31, 2012. This increase in our average interest-bearing liabilities was primarily due to an increase in interest-bearing deposits in all our markets. The ratio of our average interest-earning assets to average interest-bearing liabilities was 130.9% and 130.3% for the years ended December 31, 2013 and 2012, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.25% for the year ended December 31, 2013, compared to 4.39% for the year ended December 31, 2012. The average rate paid on interest-bearing liabilities was 0.59% for the year ended December 31, 2013, compared to 0.77% for the year ended December 31, 2012.
50

Our net interest spread and net interest margin were 3.62% and 3.80%, respectively, for the year ended December 31, 2012, compared to 3.58% and 3.79%, respectively, for the year ended December 31, 2011, compared to 3.75% and 3.94%, respectively, for the year ended December 31, 2010.2011. Our average interest-earning assets for the year ended December 31, 20112012 increased $401.8$493.3 million, or 24.8%24.4%, to $2.025$2.5 billion from $1.623$2.0 billion for the year ended December 31, 2010.2011. This increase in our average interest-earning assets was due to continued core growth in all of our markets, increased loan production and increases in investment securities, federal funds sold and interest-bearing balances with other banks. Our average interest-bearing liabilities increased $251.4$325.4 million, or 18.5%20.2%, to $1.607$1.9 billion for the year ended December 31, 20112012 from $1.356$1.6 billion for the year ended December 31, 2010.2011. This increase in our average interest-bearing liabilities was primarily due to an increase in interest-bearing deposits in all our markets. We paid off two advances from the Federal Home Loan Bank totaling $20.0prepaid our $5 million during the first half of 2011. The average rate paid8.25% subordinated note on these advances was 3.13%.June 2, 2012 and our $15 million 8.5% subordinated debenture on November 8, 2012. We issued $20 million in 5.5% subordinated notes due in November 9, 2022 in a private placement with accredited investors. The ratio of our average interest-earning assets to average interest-bearing liabilities was 126.0%130.3% and 119.7%126.0% for the years ended December 31, 2012 and 2011, and 2010, respectively.

Our average interest-earning assets produced a taxable equivalent yield of 4.39% for the year ended December 31, 2012, compared to 4.58% for the year ended December 31, 2011, compared to 4.88% for the year ended December 31, 2010.2011. The average rate paid on interest-bearing liabilities was 0.77% for the year ended December 31, 2012, compared to 1.00% for the year ended December 31, 2011, compared to 1.13% for the year ended December 31, 2010.

Our net interest spread and net interest margin were 3.75% and 3.94%, respectively, for the year ended December 31, 2010, compared to 3.07% and 3.31%, respectively, for the year ended December 31, 2009. Our average interest-earning assets for the year ended December 31, 2010 increased $279.9 million, or 20.8%, to $1.623 billion from $1.343 billion for the year ended December 31, 2009. This increase in our average interest-earning assets was due to continued core growth in all of our markets, increased loan production and increased investment securities. Our average interest-bearing liabilities increased $217.0 million, or 19.0%, to $1.356 billion for the year ended December 31, 2010 from $1.139 billion for the year ended December 31, 2009. This increase in our average interest-bearing liabilities was primarily due to an increase in interest-bearing deposits in all our markets. The ratio of our average interest-earning assets to average interest-bearing liabilities was 119.7% and 117.9% for the years ended December 31, 2010 and 2009, respectively.

Our average interest-earning assets produced a taxable equivalent yield of 4.88% for the year ended December 31, 2010, compared to 4.68% for the year ended December 31, 2009. The average rate paid on interest-bearing liabilities was 1.13% for the year ended December 31, 2010, compared to 1.61% for the year ended December 31, 2009.

2011.

Provision for Loan Losses

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. Based on these processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some general allocation of reserve based on these grades. At December 31, 2011,2013, total loans rated Special Mention, Substandard, and Doubtful were $88.9$93.2 million, or 5.2%3.3% of total loans, compared to $98.3$100.7 million, or 7.1%4.3% of total loans, at December 31, 2010.2012. Impaired loans are reviewed specifically and separately under FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

The provision expense for loan losses was $9.0$13.0 million for the year ended December 31, 2011, a decrease2013, an increase of $1.4$3.9 million from $10.4$9.1 million in 2010.Also,2012. This increase in provision expense for loan losses is primarily attributable to growth in the loan portfolio and elevated net charge-offs for 2013 compared to 2012. Our management maintains a proactive approach in managing nonperforming loans, which decreased to $13.8$9.7 million, or 0.75%0.34%, of total loans at December 31, 20112013 from $14.3$10.4 million, or 1.03%0.44%, of total loans at December 31, 2010.2012. During 2011,2013, we had net charged-off loans totaling $5.0$8.6 million, compared to net charged-off loans of $7.0$4.9 million for 2010.2012. The ratio of net charged-off loans to average loans was 0.32%0.33% for 20112013 compared to 0.55%0.24% for 2010.2012. The allowance for loan losses totaled $30.7 million, or 1.07% of loans, net of unearned income, at December 31, 2013, compared to $26.3 million, or 1.11% of loans, net of unearned income, at December 31, 2012.
The provision expense for loan losses was $9.1 million for the year ended December 31, 2012, an increase of $0.1 million from $9.0 million in 2011.Also, nonperforming loans decreased to $10.4 million, or 0.44% of total loans, at December 31, 2012, from $13.8 million, or 0.75% of total loans, at December 31, 2011. During 2012, we had net charged-off loans totaling $4.9 million, compared to net charged-off loans of $5.0 million for 2011. The ratio of net charged-off loans to average loans was 0.24% for 2012 compared to 0.32% for 2011. The allowance for loan losses totaled $26.3 million, or 1.11% of loans, net of unearned income, at December 31, 2012, compared to $22.0 million, or 1.20% of loans, net of unearned income, at December 31, 2011, compared to $18.1 million, or 1.30% of loans, net of unearned income, at December 31, 2010.

The provision expense for loan losses was $10.4 million for the year ended December 31, 2010, a decrease of $300,000 from $10.7 million in 2009.Also, nonperforming loans increased to $14.3 million, or 1.03% of total loans at December 31, 2010, from $12.2 million, or 1.01% of total loans at December 31, 2009. During 2010, we had net charged-off loans totaling $7.0 million, compared to net charged-off loans of $6.6 million for 2009. The ratio of net charged-off loans to average loans was 0.55% for 2010 compared to 0.60% for 2009. The allowance for loan losses totaled $18.1 million, or 1.30% of loans, net of unearned income, at December 31, 2010, compared to $14.9 million, or 1.24% of loans, net of unearned income, at December 31, 2009.

2011.

Noninterest Income

Noninterest income increased $1.8$0.4 million, or 34.0%4.2%, to $6.9$10.0 million in 20112013 from $5.2$9.6 million in 2010. Noninterest income2012. Service charges on deposit accounts increased $.8$0.4 million, or 17.1%14.3%, to $5.2$3.2 million in 2010 from $4.4 million2013 compared to 2012 due to increases in 2009.the number of accounts. Increases in the cash surrender value of bank-owned life insurance contracts purchasedwere up $0.4 million, or 25.0%, to $2.0 million in 2013 compared to 2012 which is the result of additional investment of $10.0 million in such contracts in September 2013. Other operating income increased $0.4 million, or 23.5%, to $2.1 million in 2013 compared to 2012. Mortgage banking income decreased $1.1 million, or 30.6%, to $2.5 million in 2013 compared to 2012. Higher mortgage rates and a general slow-down in refinance activity during 2013 compared to 2012 lead to lower mortgage banking revenue.
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Noninterest income increased $2.7 million, or 39.1%, to $9.6 million in 2012 from $6.9 million in 2011. Increases in the third quartercash surrender value of bank-owned life insurance contracts of $1.6 million in 2012, compared to $0.4 million in 2011, contributed towas a major component of the increase in noninterest income by $390,000 duringfrom 2011 to 2012. Service charges on deposit accounts increased $0.5 million, or 21.7%, to $2.8 million in 2012 compared to 2011. GainsThe average balances on transaction deposit accounts, from which service fees are derived, were up $354.9 million, or 23.2%, from 2012 to 2013. We also dropped our earnings credit rate paid on deposits in April 2012 from 0.50% to 0.35%, which contributed to somewhat higher service fee income. Interchange income from credit card activity increased from $0.5 million in 2011 to $1.0 million in 2012, resulting from increases in the number of cards sold, and from increased spending on existing cards. There were no gains on the sale of available-for-sale securities during 2012, compared to $0.7 million during 2011.
Noninterest Expense
Noninterest expenses increased from $108,000 in 2010 to $666,000 in 2011. Also, the Bank partnered with a different credit card servicing company in June 2011, and interchange income on credit card transactions has increased significantly, with total noninterest income from credit cards increasing from $30,000 in 2010 to $481,000 in 2011. Gains of $76,000 on the sale of OREO during 2011 compared favorably to losses of $203,000 during 2010 and losses of $441,000 during 2009.

Income from mortgage banking operations continued to be bolstered by refinancing activity in 2011 as the result of low interest rates. For the year ended December 31, 2011, mortgage banking income increased $0.2$4.4 million, or 9.1%10.2%, to $2.4 million from $2.2$47.5 million for the year ended December 31, 2010. Income2013 from mortgage banking operations for the year ended December 31, 2010 was unchanged at $2.2 million from the year ended December 31, 2009. Income from service charges on deposit accounts for the year ended December 31, 2011 remained relatively flat at $2.3 million when compared to the year ended December 31, 2010. Despite the fact that average balances in transaction accounts increased by approximately $280.8 million, or 22.5%, there was minimal growth in the balances in accounts that are tied to analysis fees. Income from service charges on deposit accounts for the year ended December 31, 2010 increased $685,000, or 42.0%, to $2.3 million from $1.6$43.1 million for the year ended December 31, 2009. Our management2012. This increase is currently pursuing new accountslargely attributable to increased salary and customers through direct marketingemployee benefits expense, which is a result of staff additions related to our expansion, increased incentive pay, and other promotional effortsgeneral merit increases. We had 262 full-time equivalent employees at December 31, 2013 compared to increase this source of revenue.

Noninterest Expense

Noninterest234 at December 31, 2012. Equipment and occupancy expense increased $6.5$1.2 million, or 21.0%30.0%, to $5.2 million in 2013 compared to $4.0 million in 2012. Much of this increase is the result of operating an airplane we purchased in the fourth quarter of 2012. Additionally, we opened a new loan production office in Nashville, Tennessee and expanded our space in our Mobile, Alabama office. FDIC assessments were up $0.2 million, or 12.5%, to $1.8 million in 2013 from $1.6 million in 2012, mostly a result of increases in total assets, which is the major component of our assessment base. OREO expense decreased $1.3 million, or 48.1%, to $1.4 million in 2013 from $2.7 million in 2012. This large decrease was the result of fewer write-downs in residential development properties during 2013 compared to 2012. Other noninterest expenses increased $0.2 million, or 1.9 %, to $10.9 million compared to $10.7 million in 2012.

Noninterest expenses increased $5.6 million, or 14.9%, to $43.1 million for the year ended December 31, 2012 from $37.5 million for the year ended December 31, 2011 from $31.0 million for the year ended December 31, 2010.2011. This increase is largely attributable to increased salary and employee benefits expense, which is a result of staff additions related to our expansion. We had 210234 full-time equivalent employees at December 31, 20112012 compared to 170210 at December 31, 2010.2011. Equipment and occupancy expense also increased from $3.2$0.3 million, in 2010 to $3.7 million in 2011,or 8.1% as a result of the opening of a new office in our expansion into Pensacola, Florida and the expansion of existing offices to accommodate new staff.market. This office is housed in an owned facility. FDIC insurance assessments decreasedexpensed during 2012 were down $0.2 million, or 11.1%, from $2.9 million in 2010 to $1.8 million in 2011 due to $1.6 million in 2012. This was the result of changes by the FDIC, under the Dodd-Frank Act, in how the assessment base is determined, and at what rates underassessments are charged. These changes took effect during the Dodd-Frank Act.second quarter of 2011. OREO expenses decreasedexpense increased $1.9 million, or 237.5%, from $2.0$0.8 million in 20102011 to $820,000$2.7 million in 2011 due to2012. This increase was the completionresult of construction projectsincreased write-downs in 2010, and the salevalue of several piecesresidential development properties in various stages of OREO during 2010 and 2011.completion. Other noninterest expenses increased $3.1$0.3 million, or 43.0%2.9%, to $10.7 million for the year ended December 31, 2012 from $10.4 million for the year ended December 31, 2011. Other expenses in 2011 from $7.3 million during the year ended December 31, 2010. A large part of this increase was theincluded $738,000 in prepayment penalties incurred when we paid off our advances to the FHLB in 2011. Recording fees and bank-paid loan expenses increased during 2011 as a result of our prepayment of FHLB debt. Offsetting this during 2012 were increases in credit card processing expenses and other loan growth and a greater proportion of loans for which the Bank agreed to pay various expenses related to closing. More details of changes in other noninterest expenses can be seen in Note 18 to the Consolidated Financial Statements.

Noninterestexpenses.

Income Tax Expense
Income tax expense increased $2.0 million, or 7.1%, to $31.0was $20.4 million for the year ended December 31, 2010 from $28.9 million for the year ended December 31, 2009. This increase is largely attributable to increased salary and employee benefits expense, which is a result of staff additions related to our expansion. We had 170 full-time equivalent employees at December 31, 20102013 compared to 156 at December 31, 2009. Also, loan expenses increased $490,000.

Income Tax Expense

Income tax expense was$17.1 million in 2012 and $12.4 million for the year ended December 31, 2011 compared to $9.4 million in 2010 and $2.8 million in 2009.2011. Our effective tax rates for 2013, 2012 and 2011 2010were 32.85%, 33.20% and 2009 were 34.59%, 35.00% and 32.11%34.58%, respectively. Our primary permanent differences are related to tax exempt income on securities and, Alabama income tax benefits on real estate investment trust dividends and incentive stock option expensesexpenses.

We invested $65.0 million in bank-owned life insurance for certain named officers of the Bank. The periodic increases in cash surrender value of those policies are tax exempt and tax-freetherefore contribute to a larger permanent difference between book income and taxable income.

We created real estate investment trusts for the purposes of isolating certain real estate loans in Alabama and Florida for tracking purposes. The trusts are wholly-owned subsidiaries of a trust holding company, which in turn is a wholly-owned subsidiary of the Bank. The trusts pay a dividend of their net earnings, primarily interest income derived from the loans they hold, to the Bank, which receives a deduction for state income tax.
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Financial Condition

Assets

Total assets at December 31, 2011,2013, were $2.461$3.5 billion, an increase of $525.6 million,$0.6 billion, or 27.2%20.7% over total assets of $1.935$2.9 billion at December 31, 2010.2012. Average assets for the year ended December 31, 20112013 were $2.087$3.1 billion, an increase of $411.2 million,$0.5 billion, or 24.5%23.8%, over average assets of $1.676$2.6 billion for the year ended December 31, 2010.2012. Loan growth was the primary reason for the increase. Year-end 2011 net2013 loans were $1.809$2.9 billion, up $432.0 million,$0.5 billion, or 31.4%20.8%, over the year-end 20102012 total net loans of $1.377$2.4 billion.

Total assets at December 31, 2010,2012, were $1.935$2.9 billion, an increase of $361.7 million,$0.4 billion, or 23.0%,16.0% over total assets of $1.573$2.5 billion at December 31, 2009.2011. Average assets for the year ended December 31, 20102012 were $1.676$2.6 billion, an increase of $299.4 million,$0.5 billion, or 21.74%23.8%, over average assets of $1.376$2.1 billion for the year ended December 31, 2009.2011. Loan growth was the primary reason for the increase. Year-end 2010 net2012 loans were $1.377$2.4 billion, up $184.4 million,$0.6 billion, or 15.5%33.3%, over the year-end 20092011 total net loans of $1.192$1.8 billion.

Earning assets include loans, securities, short-term investments and bank-owned life insurance contracts.  We maintain a higher level of earning assets in our business model than do our peers because we allocate fewer of our resources to facilities, ATMs, cash and due-from-bank accounts used for transaction processing. Earning assets at December 31, 20112013 were $2.401$3.4 billion, or 97.6% of total assets of $2.461$3.5 billion. Earning assets at December 31, 20102012 were $1.893$2.8 billion, or 97.8%97.5% of total assets of $1.935$2.9 billion. We believe this ratio is expected to generally continue at these levels, although it may be affected by economic factors beyond our control.

Investment Portfolio

We view the investment portfolio as a source of income and liquidity. Our investment strategy is to accept a lower immediate yield in the investment portfolio by targeting shorter-termshorter term investments. Our investment policy provides that no more than 40%60% of our total investment portfolio should be composed of municipal securities. At December 31, 2011,2013, mortgage-backed securities represented 31%39% of the investment portfolio, state and municipal securities represented 34%45% of the investment portfolio, U.S. Treasury and government agencies represented 35%11% of the investment portfolio, and corporate debt represented less than 1%5% of the investment portfolio. Our investment portfolio at December 31, 2011, 2010 and 2009 consisted of the following:

  Amortized
Cost		  Gross
Unrealized
Gain		  Gross
Unrealized
Loss		  Market
Value		 
  (In Thousands) 
December 31, 2011:                
Securities Available for Sale                
U.S. Treasury and government agencies $98,169  $1,512  $(59) $99,622 
Mortgage-backed securities  88,118   4,462   -   92,580 
State and municipal securities  95,331   5,230   (35)  100,526 
Corporate debt  1,029   52   -   1,081 
Total $282,647  $11,256  $(94) $293,809 
Securities Held to Maturity                
Mortgage-backed securities $9,676  $410  $-  $10,086 
State and municipal securities  5,533   380   -   5,913 
Total $15,209  $790  $-  $15,999 
                 
December 31, 2010:                
Securities Available for Sale                
U.S. Treasury and government agencies $90,631  $1,887  $(224) $92,294 
Mortgage-backed securities  101,709   2,783   (268)  104,224 
State and municipal securities  78,241   1,076   (1,051)  78,266 
Corporate debt  2,013   162   -   2,175 
Total $272,594  $5,908  $(1,543) $276,959 
Securities Held to Maturity                
State and municipal securities $5,234  $-  $(271)  4,963 
Total $5,234  $-  $(271) $4,963 
                 
December 31, 2009:                
Securities Available for Sale                
U.S. Treasury and government agencies $92,368  $412  $(453) $92,327 
Mortgage-backed securities  99,608   2,717   (625)  101,700 
State and municipal securities  58,090   876   (567)  58,399 
Corporate debt  3,004   36   (13)  3,027 
Total $253,070  $4,041  $(1,658) $255,453 
Securities Held to Maturity                
State and municipal securities $645  $1  $(3) $643 
Total $645  $1  $(3) $643 

All of our investments in mortgage-backed securities are pass-through mortgage-backed securities. We do not currently, and did not have at December 31, 2011,2013, any structured investment vehicles or any private-label mortgage-backed securities. The amortized cost of securities in our portfolio totaled $297.9$292.5 million at December 31, 2011,2013, compared to $277.8$248.6 million at December 31, 2010.2012. All such securities held are traded in liquid markets. The following table providespresents the amortized cost of securities available for sale and held to maturity by type at December 31, 2013, 2012 and 2011.
  December 31, 
  2013 2012 2011 
Securities Available for Sale          
U.S. Treasury and government agencies $31,641 $27,360 $98,169 
Mortgage-backed securities  85,764  69,298  88,118 
State and municipal securities  127,083  112,319  95,331 
Corporate debt  15,738  13,677  1,030 
Total $260,226 $222,654 $282,648 
Securities Held to Maturity          
Mortgage-backed securities $26,730 $20,429 $9,676 
State and municipal securities  5,544  5,538  5,533 
Total $32,274 $25,967 $15,209 
The following table presents the amortized cost of our securities as of December 31, 20112013 by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the taxable equivalent yields for each maturity range. All such securities held
53

Maturity of Debt Securities - Amortized Cost 
                     
  Less Than One
Year		  One Year through
Five Years		  Six Years
through Ten
Years		  More Than Ten
Years		  Total 
  (In Thousands) 
At December 31, 2013:                    
Securities Available for Sale:                    
U.S. Treasury and government agencies $59  $22,676  $8,906  $-  $31,641 
Mortgage-backed securities  195   83,929   1,147   493   85,764 
State and municipal securities  5,600   70,106   50,283   1,094   127,083 
Corporate debt  -   9,753   5,985   -   15,738 
Total $5,854  $186,464  $66,321  $1,587  $260,226 
                     
Tax-equivalent Yield                    
U.S. Treasury and government agencies  5.02%  2.17%  2.31%  -%  2.21%
Mortgage-backed securities  8.47   2.99   3.51   3.46   3.01 
State and municipal securities  4.95   3.54   4.53   6.17   4.02 
Corporate debt  -   1.33   1.17   -   1.27 
Weighted average yield  5.07%  3.01%  3.91%  5.33%  3.30%
                     
Securities Held to Maturity:                    
Mortgage-backed securities $-  $2,382  $24,348  $-  $26,730 
State and municipal securities  -   -   -   5,544   5,544 
Total $-  $2,382  $24,348  $5,544  $32,274 
                     
Tax-equivalent Yield                    
Mortgage-backed securities  -%  3.94%  2.69%  -%  2.80%
State and municipal securities  -   -   -   6.27   6.27 
Weighted average yield  -%  3.94%  2.69%  6.27%  3.40%
 (1) Yields are traded in liquid markets.

Maturitypresented on a fully-taxable equivalent basis using a tax rate of Investment Securities - Amortized Cost 

  Less Than
One Year		  One Year through Five Years  Six Years
through Ten Years		  More Than
Ten Years		  Total 
  (Dollars in Thousands) 
Securities Available for Sale:                    
U.S. Treasury and government agencies $10,014  $83,251  $4,257  $647  $98,169 
Mortgage-backed securities  735   868   30,111   56,404   88,118 
State and municipal securities  650   29,236   60,222   5,223   95,331 
Corporate debt  -   -   1,029   -   1,029 
Total $11,399  $113,355  $95,619  $62,274  $282,647 
                     
Tax-equivalent Yield                    
U.S. Treasury and government agencies  1.52%  1.57%  3.77%  5.09%  1.68%
Mortgage-backed securities  4.96   5.26   3.39   3.99   3.81 
State and municipal securities  5.16   3.83   5.45   6.20   4.99 
Corporate debt  -   -   7.08   -   7.08 
Weighted average yield  1.95%  2.18%  4.74%  4.19%  3.48%
                     
Securities Held to Maturity:                    
Mortgage-backed securities $-  $-  $-  $9,676  $9,676 
State and municipal securities  -   -   -   5,533   5,533 
Total $-  $-  $-  $15,209  $15,209 
                     
Tax-equivalent Yield                    
Mortgage-backed securities  -%   -%   -%   3.51%  3.51%
State and municipal securities  -   -   -   6.39   6.39 
Weighted average yield  - %  -%  -%   4.56%  4.56%

35%.

At December 31, 2011,2013, we had $100.6$8.6 million in federal funds sold, compared with $346,000$3.3 million at December 31, 2010.

2012. At the end of each of the two years, we shifted balances held at correspondent banks to our reserve account at the Federal Reserve Bank of Atlanta to gain favorable capital treatment. At year-end 2013, there were no holdings of securities of any issuer, other than US government and its agencies, in an amount greater than 10% of stockholders’ equity.

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.

Loan Portfolio

We had total loans of approximately $1.831$2.859 billion at December 31, 2011.2013. The following table shows the percentage of our total loan portfolio by MSA. With our loan portfolio concentrated in a limited number of markets, there is a risk that our borrowers’ ability to repay their loans from us could be affected by changes in local and regional economic conditions.

  Percentage
of
Total
Loans in

MSA		 
Birmingham-Hoover, AL MSA 5150%
Huntsville, AL MSA 1915%
Montgomery, AL MSA 1210%
Dothan, AL MSA 1314%
Mobile, AL MSA3%
Total Alabama MSAs 9691%
Pensacola, FL MSA 84%
Nashville, TN MSA1%

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The following table details our loans at December 31, 2013, 2012, 2011, 2010 and 2009:

  2011  2010  2009 
  (Dollars in Thousands) 
Commercial, financial and            
agricultural $799,464  $536,620  $461,088 
Real estate - construction  151,218   172,055   224,178 
Real estate - mortgage:            
Owner-occupied commercial  398,601   270,767   203,983 
1-4 family mortgage  205,182   199,236   165,512 
Other mortgage  235,251   178,793   119,749 
Total real estate - mortgage  839,034   648,796   489,244 
Consumer  41,026   37,347   32,574 
Total loans  1,830,742   1,394,818   1,207,084 
Less: Allowance for loan losses  (22,030)  (18,077)  (14,737)
Net loans $1,808,712  $1,376,741  $1,192,347 

  2013 2012 2011 2010 2009 
  (Dollars in Thousands) 
Commercial, financial and agricultural $1,278,649 $1,030,990 $799,464 $536,620 $461,088 
Real estate - construction  151,868  158,361  151,218  172,055  224,178 
Real estate - mortgage:                
Owner-occupied commercial  710,372  568,041  398,601  270,767  203,983 
1-4 family mortgage  278,621  235,909  205,182  199,236  165,512 
Other mortgage  391,396  323,599  235,251  178,793  119,749 
Total real estate - mortgage  1,380,389  1,127,549  839,034  648,796  489,244 
Consumer  47,962  46,282  41,026  37,347  32,574 
Total Loans  2,858,868  2,363,182  1,830,742  1,394,818  1,207,084 
Less: Allowance for loan losses  (30,663)  (26,258)  (22,030)  (18,077)  (14,737) 
Net Loans $2,828,205 $2,336,924 $1,808,712 $1,376,741 $1,192,347 
The following table details the percentage composition of our loan portfolio by type at December 31, 2013, 2012, 2011, 2010 and 2009:

  2011  2010  2009 
Commercial, financial and agricultural  43.67%  38.47%  38.20%
Real estate - construction  8.26%  12.34%  18.57%
Real estate - mortgage:            
Owner-occupied commercial  21.77%  19.41%  16.90%
1-4 family mortgage  11.21%  14.28%  13.71%
Other mortgage  12.85%  12.82%  9.92%
Total real estate - mortgage  45.83%  46.51%  40.53%
Consumer  2.24%  2.68%  2.70%
Total loans  100.00%  100.00%  100.00%

  2013 2012 2011 2010 2009 
Commercial, financial and agricultural 44.73%43.63%43.67%38.47%38.20%
Real estate - construction 5.31 6.70 8.26 12.34 18.57 
Real estate - mortgage:           
Owner-occupied commercial 24.85 24.04 21.77 19.41 16.90 
1-4 family mortgage 9.74 9.98 11.21 14.28 13.71 
Other mortgage 13.69 13.69 12.85 12.82 9.92 
Total real estate - mortgage 48.28 47.71 45.83 46.51 40.53 
Consumer 1.68 1.96 2.24 2.68 2.70 
Total Loans 100.00%100.00%100.00%100.00%100.00%
The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2011:

Type of Loan(1) Due in 1
year or less		  Due in 1 to 5
years		  Due after 5
years		  Total 
  (Dollars in Thousands)
Commercial, financial and agricultural $477,605  $297,816  $24,043  $799,464 
Real estate - construction  97,117   53,951   150   151,218 
Real estate - mortgage:                
Owner-occupied commercial  58,928   275,821   63,852   398,601 
1-4 family mortgage  33,340   120,124   51,718   205,182 
Other mortgage  87,560   125,618   22,073   235,251 
Total real estate - mortgage  179,828   521,563   137,643   839,034 
Consumer  26,662   14,306   58   41,026 
Total loans $781,212  $887,636  $161,894  $1,830,742 
Less: allowance for loan losses              (22,030)
Net loans             $1,808,712 
Interest rate sensitivity:                
Fixed interest rates $158,198  $536,447  $56,868  $751,513 
Floating or adjustable rates  623,014   351,189   105,026   1,079,229 
Total $781,212  $887,636  $161,894  $1,830,742 
(1) includes nonaccrual loans                

2013:

  Due in 1 Due in 1 to 5 Due after 5    
  year or less years years Total 
  (in Thousands) 
Commercial, financial and agricultural $717,845 $482,849 $77,955 $1,278,649 
Real estate - construction  81,886  56,776  13,206  151,868 
Real estate - mortgage:             
Owner-occupied commercial  71,785  405,715  232,872  710,372 
1-4 family mortgage  42,147  204,955  31,519  278,621 
Other mortgage  75,648  261,341  54,407  391,396 
Total Real estate - mortgage  189,580  872,011  318,798  1,380,389 
Consumer  33,369  13,996  597  47,962 
Total Loans $1,022,680 $1,425,632 $410,556 $2,858,868 
Less: Allowance for loan losses           (30,663) 
Net Loans          $2,828,205 
              
Interest rate sensitivity:             
Fixed interest rates $197,627 $933,986 $263,538 $1,395,151 
Floating or adjustable rates  825,053  491,646  147,018  1,463,717 
Total $1,022,680 $1,425,632 $410,556 $2,858,868 
55

Asset Quality

The following table presents a summary of changes in the allowancesallowance for loan losses over the past threefive fiscal years. Our net charge-offs as a percentage of average loans for 20112013 was lowerthan 2010 at 0.32%0.33%, compared to 0.55%.0.24% for 2012. The largest balance of our charge-offs is on real estate construction loans. Real estate construction loans represent 8.26%5.31% of our loan portfolio.

  For the Years Ended December 31,
  2011  2010  2009 
  (Dollars in Thousands) 
Allowance for loan losses:            
Beginning of year $18,077  $14,737  $10,602 
Charge-offs:            
Commercial, financial and agricultural  (1,096)  (1,667)  (2,616)
Real estate - construction  (2,594)  (3,488)  (3,322)
Real estate - mortgage:            
Owner occupied commercial  -   (548)  - 
1-4 family mortgage  (1,096)  (1,227)  (522)
Other mortgage  -   -  (9)
Total real estate mortgage  (1,096)  (1,775)  (531)
Consumer  (867)  (278)  (207)
Total charge-offs  (5,653)  (7,208)  (6,676)
Recoveries:            
Commercial, financial and agricultural  361   97   - 
Real estate - construction  180   53   108 
Real estate - mortgage:            
Owner occupied commercial  12   12   - 
1-4 family mortgage  -   20   3 
Other mortgage  -   -   - 
Total real estate mortgage  12   32   3 
Consumer  81   16   15 
Total recoveries  634   198   126 
             
Net charge-offs  (5,019)  (7,010)  (6,550)
             
Provision for loan losses charged to expense  8,972   10,350   10,685 
             
Allowance for loan losses at end of period $22,030  $18,077  $14,737 
             
As a percent of year to date average loans:            
Net charge-offs  0.32%  0.55%  0.60%
Provision for loan losses  0.57%  0.81%  1.00%
Allowance for loan losses as a percentage of:            
Year-end loans  1.20%  1.30%  1.24%
Nonperforming assets  84.48%  84.82%  60.34%

Analysis of the Allowance for Loan Losses 
  2013  2012  2011  2010  2009 
  (Dollars in Thousands) 
Allowance for loan losses:                    
Beginning of year $26,258  $22,030  $18,077  $14,737  $10,602 
Charge-offs:                    
Commercial, financial and agricultural  (1,932)   (1,106)   (1,096)   (1,667)   (2,616) 
Real estate - construction  (4,829)   (3,088)   (2,594)   (3,488)   (3,322) 
Real estate - mortgage:                    
Owner occupied commercial  (1,100)   (250)   -   (548)   - 
1-4 family mortgage  (941)   (311)   (1,096)   (1,227)   (522) 
Other mortgage  -   (99)   -   -   (9) 
Total real estate mortgage  (2,041)   (660)   (1,096)   (1,775)   (531) 
Consumer  (210)   (901)   (867)   (278)   (207) 
Total charge-offs  (9,012)   (5,755)   (5,653)   (7,208)   (6,676) 
Recoveries:                    
Commercial, financial and agricultural  66   125   361   97   - 
Real estate - construction  296   58   180   53   108 
Real estate - mortgage:                    
Owner occupied commercial  32   -   12   12   - 
1-4 family mortgage  4   692   -   20   3 
Other mortgage  -   -   -   -   - 
Total real estate mortgage  36   692   12   32   3 
Consumer  11   8   81   16   15 
Total recoveries  409   883   634   198   126 
                     
Net charge-offs  (8,603)   (4,872)   (5,019)   (7,010)   (6,550) 
                     
Provision for loan losses charged to expense  13,008   9,100   8,972   10,350   10,685 
                     
Allowance for loan losses at end of period $30,663  $26,258  $22,030  $18,077  $14,737 
                     
As a percent of year to date average loans:                    
Net charge-offs  0.33%  0.24%  0.32%  0.55%  0.60%
Provision for loan losses  0.50%  0.45%  0.57%  0.81%  1.00%
Allowance for loan losses as a percentage of:                    
Year-end loans  1.07%  1.11%  1.20%  1.30%  1.24%
Nonperforming assets  135.70%  130.77%  84.48%  84.82%  60.34%
The allowance for loan losses is established and maintained at levels needed to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. Our management’s assessmentIn assessing the adequacy of the allowance for loan losses, includes anmanagement considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to provide assurance thatmaintain the allowance isat an adequate in amount.level. Our management feels that the allowance was adequate at December 31, 2011.

2013.

56

The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percent of loans in each category to total loans.

  For the Years Ended December 31, 
  2011   2010    2009 
  Amount  Percentage
of loans in
each
category to
total loans		  Amount  Percentage
of loans in
each
category to
total loans		  Amount  Percentage
of loans in
each
category to
total loans		 
  (Dollars in Thousands) 
Commercial, financial and                        
agricultural $6,627   43.67% $5,348   38.47% $3,135   38.20%
Real estate - construction  6,542   8.26%  6,373   12.34%  6,295   18.57%
Real estate - mortgage  3,295   45.83%  2,443   46.51%  2,102   40.53%
Consumer  531   2.24%  749   2.68%  115   2.70%
Unallocated  5,035   0.00%  3,164   0.00%  3,090   0.00%
Total $22,030   100.00% $18,077   100.00% $14,737   100.00%

  For the Years Ended December 31, 
  2013  2012  2011  2010  2009 
     Percentage     Percentage     Percentage     Percentage     Percentage 
     of loans in     of loans in     of loans in     of loans in     of loans in 
     each     each     each     each     each 
     category to     category to     category to     category to     category to 
  Amount total loans  Amount total loans  Amount total loans  Amount total loans  Amount total loans 
  (Dollars in Thousands) 
Commercial, financial and
    agricultural		 $11,170 44.73% $8,233 43.63% $6,627 43.67% $5,348 38.47% $3,135 38.20%
Real estate -                              
construction  5,809 5.31   6,511 6.70   6,542 8.26   6,373 12.34   6,295 18.57 
Real estate -
     mortgage		  7,495 48.28   4,912 47.71   3,295 45.83   2,443 46.51   2,102 40.53 
                               
Consumer  855 1.68   199 1.96   531 2.24   749 2.68   115 2.70 
Qualitative factors  5,334 -   6,403 -   5,035 -   3,164 -   3,090 - 
Total $30,663 100.00% $26,258 100.00% $22,030 100.00% $18,077 100.00% $14,737 100.00%
We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur toat a level where the loan loss reserve is not sufficient to cover actual loan losses, our earnings will decrease. Additionally, weWe use an independent consulting firm to review our loans annually for quality in addition to the reviews that may be conducted by bank regulatory agencies as part of their usual examination process.

As of December 31, 2011,2013, we had impaired loans of $37.3$32.0 million inclusive of nonaccrual loans, a decrease of $14.2$5.4 million from $51.5$37.4 million as of December 31, 2010.2012. We allocated $4.2$6.3 million of our allowance for loan losses at December 31, 20112013 to these impaired loans. We had previous write-downs against impaired loans of $1.2$1.3 million at December 31, 2011,2013, compared to $3.2$2.6 million at December 31, 2010.2012. The average balance for 20112013 of loans impaired as of December 31, 20112013 was $35.5$30.7 million. Interest income foregone throughout the year on these impaired loans was $608,000$972,000 for the year ended December 31, 2011,2013, and we recognized $1.6$1.1 million of interest income on these impaired loans for the year ended December 31, 2011.2013. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of any initial impairment and subsequent changes in impairment are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are allocated to these loans.

Of the $37.3$32.0 million of impaired loans reported as of December 31, 2011, $16.32013, $9.2 million were real estate construction loans, $5.7$12.3 million were residential real estate loans, $5.6$3.9 million were commercial and industrial loans, $6.0$2.1 million were commercial real estate loans and $3.2$3.8 million were other mortgage loans. Of the $16.3$9.2 million of impaired real estate construction loans, $5.3$7.3 million (a total of 1823 loans with eightsix builders) were residential construction loans, and $4.4 million$135,000 consisted of various residential lot loans to sixtwo builders.

57

The Bank has procedures and processes in place intended to ensure that losses do not exceed the potential amounts documented in the Bank’s impairment analyses and reduce potential losses in the remaining performing loans within our real estate construction portfolio. These include the following:

·We closely monitor the past due and overdraft reports on a weekly basis to identify deterioration as early as possible and the placement of identified loans on the watch list.

·We perform extensive monthly credit review for all watch list/classified loans, including formulation of aggressive workout or action plans. When a workout is not achievable, we move to collection/foreclosure proceedings to obtain control of the underlying collateral as rapidly as possible to minimize the deterioration of collateral and/or the loss of its value.

51

·We require updated financial information, global inventory aging and interest carry analysis for existing builders to help identify potential future loan payment problems.

·We generally limit loans for new construction to established builders and developers that have an established record of turning their inventories, and we restrict our funding of undeveloped lots and land.

Nonperforming Assets

Nonaccrual loans totaled $13.8 million, $14.3 million and $11.9 million as of December 31, 2011, 2010 and 2009, respectively.

The table below summarizes our nonperforming assets at December 31, 2013, 2012, 2011, 2010 and 2009:

  For the Years Ended December 31, 
  2011  2010  2009 
  (Dollars in Thousands)
  Balance  Number
of Loans		  Balance  Number
of Loans		  Balance  Number
of Loans		 
Nonaccrual loans:                        
Commercial, financial and agricultural $1,179   7  $2,164   8  $2,032   2 
Real estate - construction  10,063   21   10,722   24   8,100   13 
Real estate - mortgage:                        
Owner-occupied commercial  792   2   635   1   909   2 
1-4 family mortgage  670   4   202   1   265   2 
Other mortgage  693   1   -   -   615   1 
Total real estate - mortgage  2,155   7   837   2   1,789   5 
Consumer  375   1   624   1   -   - 
Total nonaccrual loans: $13,772   36  $14,347   35  $11,921   20 
                         
90+ days past due and accruing:                        
Commercial, financial and agricultural $-   -  $-   -  $14   1 
Real estate - construction  -   -   -   -   -   - 
Real estate - mortgage:                        
Owner-occupied commercial  -   -   -   -   -   - 
1-4 family mortgage  -   -   -   -   253   1 
Other mortgage  -   -   -   -   -   - 
Total real estate - mortgage  -   -   -   -   253   1 
Consumer  -   -   -   -   -   - 
Total 90+ days past due and accruing: $-   -  $-   -  $267   2 
Total nonperforming loans: $13,772   36  $14,347   35  $12,188   22 
Plus: Other real estate owned and repossessions  12,305   39   6,966   39   12,525   51 
Total nonperforming assets $26,077   75  $21,313   74  $24,713   73 
                         
Restructured accruing loans:                        
Commercial, financial and agricultural $1,369   2  $2,398   9  $-   - 
Real estate - construction  -   -   -   -   -   - 
Real estate - mortgage:                        
Owner-occupied commercial  2,785   3   -   -   845   1 
1-4 family mortgage  -   -   -   -   -   - 
Other mortgage  331   1   -   -   -   - 
Total real estate - mortgage  3,116   4   -   -   845   1 
Consumer  -   -   -   -   -   - 
Total restructured accruing loans: $4,485   6  $2,398   9  $845   1 
Total nonperforming assets and                        
restructured accruing loans $30,562   81  $23,711   83  $25,558   74 
                         
Gross interest income foregone on nonaccrual                        
loans throughout year $1,371      $510      $647     
Interest income recognized on nonaccrual loans                        
throughout year $263      $418      $310     
Ratios:                        
Nonperforming loans to total loans  0.75%      1.03%      1.01%    
Nonperforming assets to total loans plus                        
other real estate owned and repossessions  1.41%      1.52%      2.02%    
Nonperforming loans plus restructured accruing                        
loans to total loans plus other real estate                        
owned and repossessions  0.99%      1.19%      1.06%    

  2013 2012 2011 2010 2009 
      Number     Number     Number     Number     Number 
  Balance  of Loans Balance  of Loans Balance  of Loans Balance  of Loans Balance  of Loans 
  (Dollars in Thousands) 
Nonaccrual loans:                               
Commercial, financial                               
and agricultural $1,714  9 $276  2 $1,179  7 $2,164  8 $2,032  2 
Real estate -                               
construction  3,749  14  6,460  19  10,063  21  10,722  24  8,100  13 
Real estate - mortgage:                               
Owner-occupied                               
commercial  1,435  3  2,786  3  792  2  635  1  909  2 
1-4 family mortgage  1,878  3  453  2  670  4  202  1  265  2 
Other mortgage  243  1  240  1  693  1  -  -  615  1 
Total real estate -                               
mortgage  3,556  7  3,479  6  2,155  7  837  2  1,789  5 
Consumer  602  4  135  2  375  1  624  1  -  - 
Total nonaccrual loans $9,621  34 $10,350  29 $13,772  36 $14,347  35 $11,921  20 
                                
90+ days past due                               
and accruing:                               
Commercial, financial                               
and agricultural $-  - $-  - $-  - $-  - $14  1 
Real estate -                               
construction  -  -  -  -  -  -  -  -  -  - 
Real estate - mortgage:                               
Owner-occupied                               
commercial  -  -  -  -  -  -  -  -  -  - 
1-4 family mortgage  19  1  -  -  -  -  -  -  253  1 
Other mortgage  -  -  -  -  -  -  -  -  -  - 
Total real estate                               
mortgage  19  1  -  -  -  -  -  -  253  1 
Consumer  96  1  8  4  -  -  -  -  -  - 
Total 90+ days past due                               
and accruing $115  2 $8  4 $-  - $-  - $267  2 
Total nonperforming                               
loans $9,736  36 $10,358  33 $13,772  36 $14,347  35 $12,188  22 
Plus: Other real estate                               
owned and repossessions  12,861  51  9,721  38  12,305  39  6,966  39  12,525  51 
Total nonperforming                               
assets $22,597  87 $20,079  71 $26,077  75 $21,313  74 $24,713  73 
                                
Restructured accruing loans:                               
Commercial, financial                               
and agricultural $962  2 $1,168  2 $1,369  2 $2,398  9 $-  - 
Real estate -                               
construction  217  1  3,213  15  -  -  -  -  -  - 
Real estate - mortgage:                               
Owner-occupied                               
commercial  -  -  3,121  3  2,785  3  -  -  845  1 
1-4 family mortgage  8,225  2  1,709  5  -  -  -  -  -  - 
Other mortgage  285  1  302  1  331  1  -  -  -  - 
Total real estate -                               
mortgage  8,510  3  5,132  9  3,116  4  -  -  845  1 
Consumer  -  -  -  -  -  -  -  -  -  - 
Total restructured                               
accruing loans $9,689  6 $9,513  26 $4,485  6 $2,398  9 $845  1 
Total nonperforming                               
assets and restructured                               
accruing loans $32,286  93 $29,592  97 $30,562  81 $23,711  83 $25,558  74 
                                
Gross interest income                               
foregone on nonaccrual                               
loans througout year $972    $850    $1,371    $510    $647    
Interest income                               
recognized on nonaccrual                               
loans througout year $433    $155    $263    $418    $310    
                                
Ratios:                               
Nonperforming loans                               
to total loans  0.34%    0.44%    0.75%    1.03%    1.01%   
Nonperforming assets to                               
total loans plus other                               
real estate owned  0.79%    0.85%    1.41%    1.52%    2.02%   
Nonperforming loans plus                               
restructured accruing                               
loans to total loans                               
plus other real estate                               
owned and repossessions  0.68%    0.84%    0.99%    1.19%    1.06%   
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 non-accrualnonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well- collateralizedwell-collateralized and is actively in the process of collection. In addition, a loan will be placed on non-accrualnonaccrual status before it becomes 90 days delinquent ifunless management believes that the borrower’s financial condition is such that the collection of interest or principal is doubtful.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 non-accrualnonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for loan losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on non-accrualnonaccrual loans are applied directly to principal.

 There are not any loans, outside of those included in the table above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms.

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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 premiumcompetitive 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. The following table presents the average balance and average rate paid on each of the following deposit categories at the Bank level for years ended 2011, 20102013, 2012 and 2009:

  Average Deposits 
  Average for Years Ended December 31, 
  2011  2010  2009 
  Average
Balance		  Average
Rate
Paid		  Average
Balance		  Average
Rate
Paid		  Average
Balance		  Average
Rate
Paid		 
Types of Deposits: (Dollars in Thousands) 
Non-interest-bearing checking $315,781   -% $207,399   -% $140,660   -%
Interest-bearing checking  303,165   0.37%  264,591   0.47%  178,232   0.90%
Money market  902,290   0.74%  775,544   0.77%  704,112   1.26%
Savings  10,088   0.47%  2,978   0.50%  972   0.51%
Time deposits  65,484   1.44%  47,026   1.76%  35,804   2.63%
Time deposits, $100,000 and over  264,737   1.60%  208,300   1.85%  182,283   2.57%
Total deposits $1,861,545      $1,505,838      $1,242,063     

2011:

  Average Deposits 
  Average for Years Ended December 31, 
  2013  2012  2011 
  Average 
Balance		 Average Rate 
Paid		  Average 
Balance		 Average Rate 
Paid		  Average 
Balance		 Average Rate 
Paid		 
Types of Deposits: (Dollars in Thousands) 
Non-interest-bearing demand deposits $576,072 -% $474,284 -% $315,781 -%
Interest-bearing demand deposits  433,931 0.28%  351,975 0.31%  303,165 0.37%
Money market accounts  1,244,957 0.47%  1,042,870 0.56%  902,290 0.74%
Savings accounts  21,793 0.28%  17,081 0.28%  10,088 0.47%
Time deposits  69,247 1.01%  69,906 1.24%  65,484 1.44%
Time deposits, $100,000 and over  335,680 1.13%  328,646 1.35%  264,737 1.60%
Total deposits $2,681,680    $2,284,762    $1,861,545   
The scheduledfollowing table presents the maturities of time deposits atour certificates of deposit as of December 31, 2011 are as follows:

  $100,000 or more  Less than $100,000  Total 
Maturity (In Thousands) 
Three months or less $42,952  $14,508  $57,460 
Over three through six months  49,965   12,821   62,786 
Over six months through one year  89,340   20,552   109,892 
Over one year  130,363   23,487   153,850 
Total $312,620  $71,368  $383,988 

2013 and 2012.

At December 31, 2013 $100,000 or more Less than $100,000 Total 
Maturity (In Thousands)       
Three months or less $56,566 $15,105 $71,671 
Over three through six months  62,916  12,863  75,779 
Over six months through one year  90,609  22,429  113,038 
Over one year  134,214  19,918  154,132 
Total $344,305 $70,315 $414,620 
At December 31, 2012 $100,000 or more Less than $100,000 Total 
Maturity (In Thousands)       
Three months or less $81,299 $20,910 $102,209 
Over three through six months  33,712  9,351  43,063 
Over six months through one year  89,215  17,236  106,451 
Over one year  122,275  21,682  143,957 
Total $326,501 $69,179 $395,680 
Total average deposits for the year ended December 31, 20112013 were $1.862$2.7 billion, an increase of $355.7 million,$0.4 billion, or 23.6%21.1%, over total average deposits of $1.506$2.3 billion for the year ended December 31, 2010.2012. Average noninterest-bearing deposits increased by $108.4 million,$0.1 billion, or 52.2%20.0%, from $207.4 million$0.5 billion for the year ended December 31, 20102012 to $315.8 million$0.6 billion for the year ended December 31, 2011.

2013.

Total average deposits for the year ended December 31, 20102012 were $1.506$2.3 billion, an increase of $263.8 million,$0.4 billion, or 21.2%21.1%, over total average deposits of $1.242$1.9 billion for the year ended December 31, 2009.2011. Average noninterest-bearing deposits increased by $66.7 million,$0.2 billion, or 47.4%66.7%, from $140.7 million$0.3 billion for the year ended December 31, 20092011 to $207.4 million$0.5 billion for the year ended December 31, 2010.

2012.

We have never had no brokered deposits in 2011, 2010 or 2009.

deposits.

Borrowed Funds

We had available approximately $140$130 million in unused federal funds lines of credit with regional banks as of December 31, 2011,2013 and 2012. These lines are subject to certain restrictions and collateral requirements.

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Stockholders’ Equity

Stockholders’ equity increased $79.2$63.9 million during 2011,2013, to $196.3$297.2 million at December 31, 20112013 from $117.1$233.3 million at December 31, 2010.2012. The increase in stockholders’ equity resulted primarilyfrom net income of $41.2 million during the year ended December 31, 2013, $15.0 million from the mandatory conversion of our mandatorily convertible subordinated debentures on March 15, 2013, $10.3 million from the sale of 340,000250,000 common shares in a private placement on December 2, 2013 and $3.3 million equity contributed upon the exercise of stock options and warrants during 2013. These increases were partially offset when we paid a $0.50 cash dividend on each share of our common stock inon December 16, 2013 for a private placement related to our entry into the Pensacola, Florida market, the saletotal dividend paid out of $40.0 million in preferred shares to the United States Treasury Department as part of their Small Business Lending Fund, and net income of $23.2$3.7 million.

We issuedgranted to each of our directors upon the formation of the Bankbank in May 2005 warrants to purchase up to 10,000 shares of our common stock, or 60,000 in the aggregate, for a purchasedpurchase price of $10.00 per share, expiring in ten years. These warrants became fully vested in May 2008.

We issuedgranted warrants to purchase 75,000 shares of our common stock at awith an exercise price of $25.00 per share in the third quarter of 2008. These warrants were issued in connection with theour 8.5% trust preferred securities, that are discussed in detail in Note 10 to the Consolidated Financial Statements.

which were redeemed on November 8, 2012.

We issuedgranted warrants to purchase 15,000 shares of our common stock at awith an exercise price of $25.00 per share in the second quarter of 2009. These warrants were issued in connection with the sale of a $5,000,000 subordinated note of the Bank, as discussed in detail in Note 12 to the Consolidated Financial Statements.

which was paid off on June 1, 2012.

On September 21, 2006, we granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of 30,000 shares of our common stock for a purchasewith an exercise price of $15.00 per share. On November 2, 2007, we granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of 25,000 shares of our common stock for a purchasewith an exercise price of $20.00 per share. These stock options are non-qualified and are not part of either of our stock incentive plans. They vest 100% in a lump sum five years after their date of grantare fully vested and expire 10 years after their date of grant.

On December 20, 2007, we granted 10,000 stock options to purchase shares of our common stock to each of our directors, or 60,000 in the aggregate, for a purchasewith an exercise price of $20.00 per share, expiring in ten years. These are non-qualified stock options that became fully vestvested on December 19, 2012.

On October 26, 2009, we made a 50,000 of these options were exercised in December 2012.

We have granted 78,500 shares of restricted stock award under the 2009 Stock Incentive Plan of 20,000 shares of common stock to Thomas A. Broughton III, President and Chief Executive Officer.Plan. These shares generally vest inbetween three and five equal installments commencing onyears from the first anniversarydate of the grant, date, subject to earlier vesting in the event of a merger, consolidation, sale or transfer of the Company or substantially all of its assets and business.

On February 9, 2010, we made restricted stock awards under the 2009 Stock Incentive Plan of 2,000 shares of common stock to each of five employees, for a total of 10,000 shares. These shares vest five years from the date of grant, subject to earlier vesting in the event of a merger, consolidation, sale or transfer as described in the first paragraph under the table above.

On November 28, 2011, we granted 10,000 non-qualified stock options to each Company director, or a total of 60,000 options, to purchase shares at awith an exercise price of $30.$30.00 per share. The options vest 100% at the end of five years.

On December 16, 2013, we granted options to persons representing key business relationships to purchase up to an aggregate of 35,000 shares of our common stock with an exercise price of $41.50 per share.��These stock options are non-qualified and fully vest on the fifth anniversary of their grant.
Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial credit arrangements with off-balance sheet risk to meet the financing needs of our customers.  These financial credit arrangements include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit and financial guarantees.  Those credit arrangements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial credit arrangements. All such credit arrangements bear interest at variable rates and we have no such credit arrangements which bear interest at fixed rates.

Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, credit card arrangements and standby letters of credit is represented by the contractual or notional amount of those instruments.  We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

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The following table sets forth our credit arrangements and financial instruments whose contract amounts represent credit risk as of December 31, 2011, 20102013, 2012 and 2009:

  2011  2010  2009 
  (In Thousands) 
Commitments to extend credit $697,939  $538,719  $409,760 
Credit card arrangements  19,686   17,601   19,059 
Standby letters of credit and            
financial guarantees  42,937   47,103   39,205 
Total $760,562  $603,423  $468,024 

2011:

  2013 2012 2011 
  (In Thousands) 
Commitments to extend credit $1,052,902 $860,421 $697,939 
Credit card arrangements  38,122  25,699  19,686 
Standby letters of credit and financial guarantees  40,371  36,374  42,937 
Total $1,131,395 $922,494 $760,562 
Commitments to extend credit beyond current fundings are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  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.

Derivatives

Prior to 2008, we entered into an interest rate floor with a notional amount of $50 million in order to fix the minimum interest rate on a corresponding amount of our floating-rate loans. The interest rate floor was sold in January 2008 and the related gain of $817,000 was deferred and amortized to income over the remaining term of the original agreement, which terminated on June 22, 2009. A gain of $272,000 was recognized in interest income for the year ended December 31, 2009.

During 2008, the Bank entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Bank entered into offsetting positions with a regional correspondent bank in order to minimize the risk to the Bank. As of December 31, 2011 and 2010, the Bank was party to two swaps with notional amounts totaling approximately $11.8 million with customers, and two swaps with notional amounts totaling approximately $11.8 million with a regional correspondent bank. These swaps qualify as derivatives, but are not designated as hedging instruments.

During 2010, the Bank entered into an interest rate cap with a notional value of $100 million. The cap has a strike rate of 2.00% and is indexed to the three month London Interbank Offered Rate (“LIBOR”). The cap does not qualify for hedge accounting treatment, and is marked to market, with changes in market value reflected in the income statement. For the year ended December 31, 2010, the Company recognized $45,000 in expense related to marking the cap to market.

The Bank has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with our investor for our customer for a 30-day period. In the event the loan is not delivered to the investor, the Bank has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of our agreements with investors and rate lock commitments to customers as of December 31, 20112013 and 20102012 were not material.

Asset and Liability Management

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap 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. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.

Our asset liability and investment committee is charged with monitoring our liquidity and funds position. The committee regularly reviews the rate sensitivity position on a three-month, six-month and one-year time horizon; loans-to-deposits ratios; and average maturities for certain categories of liabilities. The asset liability committee uses a computer model to analyze the maturities of rate-sensitive assets and liabilities. The model 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. Gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than “one,” then the dollar value of assets exceeds the dollar value of liabilities and the balance sheet is “asset sensitive.” Conversely, if the value of liabilities exceeds the dollar value of assets, then the ratio is less than one and the balance sheet is “liability sensitive.” Our internal policy requires our management to maintain the gap such that net interest margins will not change more than 10% if interest rates change by 100 basis points or more than 15% if interest rates change by 200 basis points. As of December 31, 2011,2013, our gap was within such ranges. See “—Quantitative and Qualitative Analysis of Market Risk” below in Item 7A for additional information.

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Liquidity and Capital Adequacy

Liquidity

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

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of liquidity at both levels is critical, because the Company and the Bank have different funding needs and sources, and each are subject to regulatory guidelines and requirements. We are subject to general FDIC guidelines which require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity increasing or decreasing in any material manner.

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. In the event of compression in liquidity due to a run-off in deposits, we have a liquidity policy and procedure that provides for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans and the curtailment of loan commitments and funding. At December 31, 2011,2013, our liquid assets, represented by cash and due from banks, federal funds sold and available-for-sale securities, totaled $536.7$414.6 million. Additionally, at such date we had available to us approximately $140.0$130.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, to meet short term funding needs. We believe these sources of funding are adequate to meet immediate anticipated funding needs, but we will need additional capital to maintain our current growth. Our management meets on a weekly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity, and we have increased our focus on the generation of core deposit funding to supplement our liquidity position. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals.

To help finance our continued growth and planned expansion activities, the Bank issued its 8.25% Subordinated Note due June 1, 2016 in the principal amount of $5.0 million inwe completed a private placement on June 23, 2009. Also, in connection with a private placement andof stock pursuant to subscription agreements effective December 31, 2008 weand issued and sold 139,460 shares of our common stock for $25.00 per share in January 2009 for an aggregate purchase price of $3,479,000.$3.5 million. In addition, on March 15, 2010, we completed a private placement of $15.0 million in 6.0% Mandatory Convertible Trust Preferred Securities.Securities which converted into shares of our common stock on March 15, 2013. In June 2011, we completed a private placement of 340,000 shares of our common stock at an offering price of $30 per share. Also in 2011, we completed a private placement of 40,000 shares of our Non-cumulative Perpetual Senior Preferred Stock for an aggregate purchase price of $39,958,000. $40.0 million. Also, on November 9, 2012, we completed the private placement of $20.0 million in 5.5% Subordinated Notes due November 9, 2022. The proceeds from these notes were used to pay off our 8.5% subordinated debentures. Additionally, on September 12, 2013, we issued and sold in a private placement 35, 035 shares of our common stock for $41.50 per share, for an aggregate purchase price of $1,453,952.50, and on December 2, 2013, we held a second and final closing under such private placement, in which we issued and sold 214,965 shares of our common stock for $41.50 per share, for an aggregate purchase price of $8,921,047.50.
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.

The following table reflects the contractual maturities of our term liabilities as of December 31, 2011.2013. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

  Payments due by Period 
  Total  1 year or less  Over 1 - 3
years		  Over 3 - 5
years		  Over 5 years 
Contractual Obligations (1): (In Thousands) 
Deposits without a stated maturity $1,759,899  $-  $-  $-  $- 
Certificates of deposit (2)  383,988   230,138   121,065   32,785   - 
Subordinated debentures  30,514   -   -   -   30,514 
Subordinated note payable  4,914   -   -   4,914   - 
Operating lease commitments  17,078   2,068   3,900   3,909   7,201 
Total $2,196,393  $232,206  $124,965  $41,608  $37,715 

  Payments due by Period 
        Over 1 - 3 Over 3 - 5    
  Total 1 year or less years years Over 5 years 
  (In Thousands) 
Contractual Obligations (1)                
                 
Deposits without a stated maturity $2,605,022 $- $- $- $- 
Certificates of deposit (2)  414,620  260,489  106,796  47,335  - 
Federal funds purchased  174,380  174,380  -  -  - 
Other borrowings  19,940  -  -  -  19,940 
Operating lease commitments  16,064  2,453  4,891  4,098  4,622 
Total $3,230,026 $437,322 $111,687 $51,433 $24,562 
(1) Excludes interest

(2) Certificates of deposit give customers the right to early withdrawal. Early withdrawals may be subject to penalties.

The penalty amount depends on the remaining time to maturity at the time of early withdrawal.

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Capital Adequacy

As of December 31, 2011,2013, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of December 31, 2011.2013. In addition, the Alabama Banking Department has required that the Bank maintain a leverage ratio of 8.00%.

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement to be maintained by the Bank in order to maintain “well-capitalized” status and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of December 31, 2011.

  Well-Capitalized  Actual at December
31, 2011		 
Total risk-based capital  10.00%  12.79%
Tier 1 capital  6.00%  11.39%
Leverage ratio  5.00%  9.17%

2013.

  Well-
Capitalized		 Actual at
 December 31,
2013		 
Total risk-based capital 10.00%11.73%
Tier 1 capital 6.00%10.00%
Leverage ratio 5.00%8.48%
For a description of capital ratios see Note 16 of15 to “Notes to Consolidated Financial Statements” for the period ending December 31, 2011.

.

Impact of Inflation

Our consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and stockholders’ equity. Mortgage originations and refinancing tend to slow as interest rates increase, and likely will reduce our volume of such activities and the income from the sale of residential mortgage loans in the secondary market.

Adoption of Recent Accounting Pronouncements

New accounting standards are discussed in Note 1 theto “Notes to Consolidated Financial Statements.

Statements”.

ITEM 7A.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,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 twelve months. The asset liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors.

63

The asset liability committee employs multiple modeling scenarios to analyze the maturities of rate-sensitive assets and liabilities. The model 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. As of December 31, 2011,2013, our gap was within such ranges.

The model measures scheduled maturities in periods of three months, four to twelve months, one to five years and over five years. The chart below illustrates our rate-sensitive position at December 31, 2011.2013. Management uses the one year gap as the appropriate time period for setting strategy.

Rate Sensitivity Gap Analysis

  1-3   Months  4-12
Months		  2-5 
Years		  Over 5
Years		  Total 
  (Dollars in Thousands)  
Interest-earning assets:                    
Loans, including mortgages                    
held for sale $1,176,579  $174,359  $432,587  $65,076  $1,848,601 
Securities  21,845   82,791   127,916   79,967   312,519 
Federal funds sold  100,565   -   -   -   100,565 
Interest bearing balances                    
with banks  97,145   -   2,205   -   99,350 
Total interest-earning assets $1,396,134  $257,150  $562,708  $145,043  $2,361,035 
                     
Interest-bearing liabilities:                    
Deposits:                    
Interest-bearing checking $354,112  $-  $-  $-  $354,112 
Money market and savings  986,975   -   -   -   986,975 
Time deposits  57,339   172,801   153,850   -   383,990 
Federal funds purchased  79,265               79,265 
Other borrowings  -   -   4,954   -   4,954 
Trust preferred securities  -   -   15,050   15,464   30,514 
Total interest-bearing liabilities $1,477,691  $172,801  $173,854  $15,464  $1,839,810 
Interest sensitivity gap $(81,557) $84,349  $388,854  $129,579  $521,225 
Cumulative sensitivity gap $(81,557) $2,792  $391,646  $521,225     
Percent of cumulative sensitivity Gap                    
to total interest-earning assets  (5.8)%  0.2%  17.7%  22.1%    

  Rate Sensitive Gap Analysis         
  1-3 Months  4-12 Months  1-5 Years  Over 5 Years  Total 
  (Dollars in Thousands) 
Interest-earning assets:                    
Loans, including mortgages                    
held for sale $1,589,067  $318,304  $849,949  $109,682  $2,867,002 
Securities  28,893   23,324   174,084   75,931   302,232 
Federal funds sold  8,634   -   -   -   8,634 
Interest bearing balances                    
with banks  186,206   1,715   490   -   188,411 
Total interest-earning assets $1,812,800  $343,343  $1,024,523  $185,613  $3,366,279 
                     
Interest-bearing liabilities:                    
Deposits:                    
Interest-bearing checking $500,128  $-  $-  $-  $500,128 
Money market and savings  1,454,438   -   -   -   1,454,438 
Time deposits  71,671   188,817   154,140   (8)   414,620 
Federal funds purchased  174,380   -   -   -   174,380 
Other borrowings  -   -   -   19,940   19,940 
Total interest-bearing liabilities  2,200,617   188,817   154,140   19,932   2,563,506 
Interest sensitivity gap $(387,817)  $154,526  $870,383  $165,681  $802,773 
Cumulative sensitivity gap $(387,817)  $(233,291)  $637,092  $802,773  $- 
Percent of cumulative sensitivity Gap                    
to total interest-earning assets  (11.5)%  (6.9)%  18.9%  23.8%    
The interest rate risk model that defines the gap position also performs a “rate shock” test of the balance sheet.  The rate shock procedure measures the impact on the economic value of equity (EVE) which is a measure of long term interest rate risk. EVE is the difference between the market value of our assets and the liabilities and is our liquidation value. In this analysis, the model calculates the discounted cash flow or market value of each category on the balance sheet. The percent change in EVE is a measure of the volatility of risk. Regulatory guidelines specify a maximum change of 30% for a 200 basis points rate change. Short term rates dropped to historically low levels during 2009 and have remained at those low levels. We could not assume further drops in interest rates in our model, and as a result feel the down rate shock scenarios are not meaningful. At December 31, 2011,2013, the 4.28%-0.63% change for a 200 basis points rate change is well within the regulatory guidance range.

64

The chart below identifies the EVE impact of an upward shift in rates of 100 and 200 basis points.

Economic Value of Equity Under Rate Shock
At December 31, 2011
          
  0 bps  +100 bps  +200 bps 
  (Dollars in Thousands) 
Economic value of equity $196,292  $200,022  $204,693 
             
Actual dollar change     $3,730  $8,401 
             
Percent change      1.90%  4.28%

Economic Value of Equity Under Rate Shock
At December 31, 2013
  0 bps +100 bps  +200 bps 
  (Dollars in Thousands) 
Economic value of equity $297,192 $297,341  $298,054 
            
Actual dollar change    $149  $862 
            
Percent change     0.05%  0.29%
The one year gap ratio of 0.2%negative 6.9% indicates that we would show a very slight increasedecrease in net interest income in a rising rate environment, and the EVE rate shock shows that the EVE would increase in a rising rate environment. The EVE simulation model is a static model which provides information only at a certain point in time. For example, in a rising rate environment, the model does not take into account actions which management might take to change the impact of rising rates on us. Given that limitation, it is still useful in assessing the impact of an unanticipated movement in interest rates.

The above analysis may not on its own be an entirely accurate indicator of how net interest income or EVE will be affected by changes in interest rates. Income associated with interest earning assets and costs associated with interest bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. Our asset liability committee develops its view of future rate trends by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet and conducts a quarterly analysis of the rate sensitivity position.  The results of the analysis are reported to our board of directors.

65

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

DATA

The financial statements and supplementary data required by Regulations S-X and by Item 302 of Regulation S-K are set forth in the pages listed below.

Page

Report of Independent Registered Public Accounting Firm on

Consolidated Financial Statements

62

Report of Independent Registered Public Accounting Firm on

Consolidated Financial Statements

6366
Report of Management on Internal Control over Financial Reporting6467

Report of Independent Registered Public Accounting Firm on

Internal Control over Financial Reporting

65

68
Consolidated Balance Sheets at December 31, 20112013 and 201020126669

Consolidated Statements of Income for the Years Ended December 31,

2011, 2010 2013, 2012 and 2009

2011

67

70

Consolidated Statements of Comprehensive Income for the Years Ended

December 31, 2011, 20102013, 2012 and 2009

2011

68

71

Consolidated Statements of Stockholders’Stockholders' Equity for the Years Ended

December 31, 2011, 20102013, 2012 and 2009

2011

69

72

Consolidated Statements of Cash Flows for the Years Ended

December 31, 2011, 20102013, 2012 and 2009

2011

70

73
Notes to Consolidated Financial Statements7174

66

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

ServisFirst Bancshares, Inc.:

We have audited the accompanying consolidated balance sheetsheets of ServisFirst Bancshares, Inc. and subsidiaries as of December 31, 2011,2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the year then ended.years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditaudits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ServisFirst Bancshares, Inc. and subsidiaries as of December 31, 2011,2013 and 2012, and the results of their operations and their cash flows for each of the year thenyears in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ServisFirst Banchsares, Inc.’s internal control over financial reporting as of December 31, 2011,2013, based on criteria established inInternal Control — Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 7, 20122014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Birmingham, Alabama

March 7, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

ServisFirst Bancshares, Inc.

Birmingham, Alabama

We have audited the accompanying consolidated balance sheet of ServisFirst Bancshares, Inc., as of December 31, 2010, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the two years in the period then ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ServisFirst Bancshares, Inc. as of December 31, 2010, and the results of their operations and their cash flows for each of the two years in the period then ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

Birmingham, Alabama

March 8, 2011

63/s/ KPMG LLP
Birmingham, Alabama
March 7, 2014 

67

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We, as members of the Management of ServisFirst Bancshares, Inc. (the “Company”), are responsible for establishing and maintaining effective internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

All internal controls systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements in the Company’s financial statements, including the possibility of circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2011.2013. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in itsInternal Control—Integrated Framework.Framework (1992).  Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2011,2013, based on these criteria.

The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on the following page.

  
SERVISFIRST BANCSHARES, INCINC.
   
 by/s/THOMAS A. BROUGHTON, III
  THOMAS A. BROUGHTON, III
  President and Chief Executive Officer
   
 by/s/WILLIAM M. FOSHEE
  WILLIAM M. FOSHEE
  Chief Financial Officer

64
68

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

ServisFirst Bancshares, Inc.:

We have audited ServisFirst Bancshares, Inc. internal control over financial reporting as of December 31, 2011,2013, based on criteria established inInternal Control — Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ServisFirst Bancshares, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ServisFirst Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2013, based on criteria established inInternal Control — Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsheets of ServisFirst Bancshares, Inc. as of December 31, 2011,2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the year thenyears in the three-year period ended December 31, 2013, and our report datedMarch 7, 20122014 expressed an unqualified opinion on these consolidated financial statements.

/s/ KPMG LLP

Birmingham, Alabama

March 7, 2012

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2011 AND 2010

(In thousands, except share and per share amounts)

  2011  2010 
Cash and due from banks $43,018  $27,454 
Interest-bearing balances due from depository institutions  99,350   204,178 
Federal funds sold  100,565   346 
Cash and cash equivalents  242,933   231,978 
Available for sale debt securities, at fair value  293,809   276,959 
Held to maturity debt securities (fair value of $15,999 and $4,963 at        
December 31, 2011 and 2010, respectively)  15,209   5,234 
Restricted equity securities  3,501   3,510 
Mortgage loans held for sale  17,859   7,875 
Loans  1,830,742   1,394,818 
Less allowance for loan losses  (22,030)  (18,077)
Loans, net  1,808,712   1,376,741 
Premises and equipment, net  4,591   4,450 
Accrued interest and dividends receivable  8,192   6,990 
Deferred tax assets  4,914   6,366 
Other real estate owned  12,275   6,966 
Bank owned life insurance contracts  40,390   - 
Other assets  8,400   8,097 
Total assets $2,460,785  $1,935,166 
LIABILITIES AND STOCKHOLDERS' EQUITY        
Liabilities:        
Deposits:        
Noninterest-bearing $418,810  $250,490 
Interest-bearing  1,725,077   1,508,226 
Total deposits  2,143,887   1,758,716 
Federal funds purchased  79,265   - 
Other borrowings  4,954   24,937 
Subordinated debentures  30,514   30,420 
Accrued interest payable  945   898 
Other liabilities  4,928   3,095 
Total liabilities  2,264,493   1,818,066 
Stockholders' equity:        
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001
(liquidation preference $1,000), net of discount; 40,000 shares authorized,
40,000 shares issued and outstanding at December 31, 2011
and no sharesauthorized, issued and outstanding at December 31, 2010		  39,958   - 
Preferred stock, undesignated, par value $.001 per share; 1,000,000        
shares authorized; no shares outstanding  -   - 
Common stock, par value $.001 per share; 15,000,000 shares authorized;        
5,932,182 shares issued and outstanding at December 31, 2011 and        
5,527,482 shares issued and outstanding at December 31, 2010  6   6 
Additional paid-in capital  87,805   75,914 
Retained earnings  61,581   38,343 
Accumulated other comprehensive income  6,942   2,837 
Total stockholders' equity  196,292   117,100 
Total liabilities and shareholders' equity $2,460,785  $1,935,166 

/s/ KPMG LLP
Birmingham, Alabama
March 7, 2014
69

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 
(In thousands, except share and per share amounts) 
        
  December 31, 2013 December 31, 2012 
    
ASSETS       
Cash and due from banks $61,370 $58,031 
Interest-bearing balances due from depository institutions  188,411  119,423 
Federal funds sold  8,634  3,291 
Cash and cash equivalents  258,415  180,745 
Available for sale debt securities, at fair value  266,220  233,877 
Held to maturity debt securities (fair value of $31,315 and $27,350 at       
December 31, 2013 and 2012, respectively)  32,274  25,967 
Restricted equity securities  3,738  3,941 
Mortgage loans held for sale  8,134  25,826 
Loans  2,858,868  2,363,182 
Less allowance for loan losses  (30,663)  (26,258) 
Loans, net  2,828,205  2,336,924 
Premises and equipment, net  8,351  8,847 
Accrued interest and dividends receivable  10,262  9,158 
Deferred tax asset, net  11,018  7,386 
Other real estate owned  12,861  9,685 
Bank owned life insurance contracts  69,008  57,014 
Other assets  12,213  6,944 
Total assets $3,520,699 $2,906,314 
LIABILITIES AND STOCKHOLDERS' EQUITY       
Liabilities:       
Deposits:       
Noninterest-bearing $650,456 $545,174 
Interest-bearing  2,369,186  1,966,398 
Total deposits  3,019,642  2,511,572 
Federal funds purchased  174,380  117,065 
Other borrowings  19,940  19,917 
Subordinated debentures  -  15,050 
Accrued interest payable  769  942 
Other liabilities  8,776  8,511 
Total liabilities  3,223,507  2,673,057 
Stockholders' equity:       
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $0.001       
(liquidation preference $1,000), net of discount; 40,000 shares authorized,       
40,000 shares issued and outstanding at December 31, 2013 and at       
December 31, 2012  39,958  39,958 
Preferred stock, par value $0.001 per share; 1,000,000 authorized and       
960,000 currently undesignated  -  - 
Common stock, par value $0.001 per share; 50,000,000 shares authorized;       
7,350,012 shares issued and outstanding at December 31, 2013 and       
6,268,812 shares issued and outstanding at December 31, 2012  7  6 
Additional paid-in capital  123,325  93,505 
Retained earnings  130,011  92,492 
Accumulated other comprehensive income  3,891  7,296 
Total stockholders' equity  297,192  233,257 
Total liabilities and stockholders' equity $3,520,699 $2,906,314 
See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

  Year Ended December 31, 
  2011  2010  2009 
Interest income:            
Interest and fees on loans $82,294  $69,115  $55,890 
Taxable securities  5,721   6,482   4,516 
Nontaxable securities  2,943   2,274   1,500 
Federal funds sold  176   104   257 
Other interest and dividends  277   171   34 
Total interest income  91,411   78,146   62,197 
Interest expense:            
Deposits  13,047   11,941   16,087 
Borrowed funds  3,033   3,319   2,250 
Total interest expense  16,080   15,260   18,337 
Net interest income  75,331   62,886   43,860 
Provision for loan losses  8,972   10,350   10,685 
Net interest income after provision for loan losses  66,359   52,536   33,175 
Noninterest income:            
Service charges on deposit accounts  2,290   2,316   1,631 
Mortgage banking  2,373   2,174   2,222 
Securities gains  666   108   193 
Other operating income  1,597   571   367 
Total noninterest income  6,926   5,169   4,413 
Noninterest expenses:            
Salaries and employee benefits  19,518   14,669   13,581 
Equipment and occupancy expense  3,697   3,184   2,749 
Professional services  1,213   925   848 
FDIC and other regulatory assessments  1,796   2,944   2,815 
Other real estate owned expense  820   1,964   2,745 
Other operating expenses  10,414   7,283   6,192 
Total noninterest expenses  37,458   30,969   28,930 
Income before income taxes  35,827   26,736   8,658 
Provision for income taxes  12,389   9,358   2,780 
Net income  23,438   17,378   5,878 
Dividends on preferred stock  200   -   - 
Net income available to common stockholders $23,238  $17,378  $5,878 
             
Basic earnings per common share $4.03  $3.15  $1.07 
             
Diluted earnings per common share $3.53  $2.84  $1.02 

70

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF INCOME 
(In thousands, except per share amounts) 
          
 Year Ended December 31, 
 2013 2012 2011 
Interest income:         
Interest and fees on loans$118,285 $100,462 $82,294 
Taxable securities 3,888  4,814  5,721 
Nontaxable securities 3,407  3,246  2,943 
Federal funds sold 128  196  176 
Other interest and dividends 373  305  277 
Total interest income 126,081  109,023  91,411 
Interest expense:         
Deposits 11,830  12,249  13,047 
Borrowed funds 1,789  2,652  3,033 
Total interest expense 13,619  14,901  16,080 
Net interest income 112,462  94,122  75,331 
Provision for loan losses 13,008  9,100  8,972 
Net interest income after provision for loan losses 99,454  85,022  66,359 
Noninterest income:         
Service charges on deposit accounts 3,228  2,756  2,290 
Mortgage banking 2,513  3,560  2,373 
Securities gains 131  -  666 
Increase in cash surrender value life insurance 1,994  1,624  390 
Other operating income 2,144  1,703  1,207 
Total noninterest income 10,010  9,643  6,926 
Noninterest expenses:         
Salaries and employee benefits 26,324  22,587  19,518 
Equipment and occupancy expense 5,202  4,014  3,697 
Professional services 1,809  1,455  1,213 
FDIC and other regulatory assessments 1,799  1,595  1,796 
Other real estate owned expense 1,426  2,727  820 
Other operating expenses 10,929  10,722  10,414 
Total noninterest expenses 47,489  43,100  37,458 
Income before income taxes 61,975  51,565  35,827 
Provision for income taxes 20,358  17,120  12,389 
Net income 41,617  34,445  23,438 
Dividends on preferred stock 416  400  200 
Net income available to common stockholders$41,201 $34,045 $23,238 
          
Basic earnings per common share$6.00 $5.68 $4.03 
          
Diluted earnings per common share$5.69 $4.99 $3.53 
See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.71
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands)
           
  2013 2012 2011 
Net income $41,617 $34,445 $23,438 
Other comprehensive (loss) income, net of tax:          
Unrealized holding (losses) gains arising during period from          
securities available for sale, net of tax (benefit) of $(1,781),          
$191 and $2,944 for 2013, 2012 and 2011, respectively  (3,319)  354  4,519 
Reclassification adjustment for net gains on sale of securities in          
net income, net of tax of $45 and $252 for 2013          
and 2011, respectively  (86)  -  (414) 
Other comprehensive (loss) income, net of tax  (3,405)  354  4,105 
Comprehensive income $38,212 $34,799 $27,543 
           
See Notes to Consolidated Financial Statements          
72
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 
(In thousands, except share amounts) 
                    
  Preferred
 Stock		 Common
 Stock		 Additional 
Paid-in
 Capital		 Retained
 Earnings		 Accumulated
 Other
 Comprehensive
 Income		 Total 
Stockholders'
Equity		 
Balance, December 31, 2010 $- $6 $75,914 $38,343 $2,837 $117,100 
Sale of 340,000 shares of common
    stock		  -  -  10,159  -  -  10,159 
Sale of 40,000 shares of preferred
    stock, net		  39,958  -  -  -  -  39,958 
Preferred dividends paid  -  -  -  (200)  -  (200) 
Exercise 64,700 stock options, including
    tax benefit		  -  -  757  -  -  757 
Stock-based compensation expense  -  -  975  -  -  975 
Other comprehensive income  -  -  -  -  4,105  4,105 
Net income  -  -  -  23,438  -  23,438 
Balance, December 31, 2011  39,958  6  87,805  61,581  6,942  196,292 
Dividends paid  -  -  -  (3,134)  -  (3,134) 
Preferred dividends paid  -  -  -  (400)  -  (400) 
Exercise 332,630 stock options
    and warrants, including tax
    benefit		  -  -  4,651  -  -  4,651 
Stock-based compensation expense  -  -  1,049  -  -  1,049 
Other comprehensive income  -  -  -  -  354  354 
Net income  -  -  -  34,445  -  34,445 
Balance, December 31, 2012  39,958  6  93,505  92,492  7,296  233,257 
Sale of 250,000 shares of common
    stock		  -  -  10,337  -  -  10,337 
Dividends paid  -  -  -  (3,682)  -  (3,682) 
Preferred dividends paid  -  -  -  (416)  -  (416) 
Exercise 164,700 stock options and
    warrants, including tax benefit		  -  -  3,279  -  -  3,279 
Issuance of 600,000 shares upon
    mandatory conversion of
    subordinated mandatorily
    convertible debentures		  -  1  14,999  -  -  15,000 
Stock-based compensation expense  -  -  1,205  -  -  1,205 
Other comprehensive loss  -  -  -  -  (3,405)  (3,405) 
Net income  -  -  -  41,617  -  41,617 
Balance, December 31, 2013 $39,958 $7 $123,325 $130,011 $3,891 $297,192 
See Notes to Consolidated Financial Statements
73
(In thousands)

  2011  2010  2009 
Net income $23,438  $17,378  $5,878 
Other comprehensive income (loss), net of tax (benefit):            
Unrealized holding gains arising during period from securities available for sale,            
net of tax of $2,944, $755 and $472 for 2011, 2010 and 2009, respectively  4,519   1,334   918 
Reclassification adjustment for net gains on sale of securities in net income, net            
of tax (benefit) of $(252), $(39) and $(65) for 2011, 2010 and 2009, respectively  (414)  (70)  (128)
Reclassification adjustment for net gains realized on derivatives in net income,            
net of tax benefit of $93 for 2009  -   -   (179)
Other comprehensive income, net of tax  4,105   1,264   611 
Comprehensive income $27,543  $18,642  $6,489 
             
See Notes to Consolidated Financial Statements            

SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 
(In thousands) 
           
  2013 2012 2011 
OPERATING ACTIVITIES          
Net income $41,617 $34,445 $23,438 
Adjustments to reconcile net income to net cash provided by          
Deferred tax benefit  (1,805)  (2,181)  (1,240) 
Provision for loan losses  13,008  9,100  8,972 
Depreciation and amortization  1,841  1,218  1,173 
Net amortization of investments  1,122  1,079  958 
Market value adjustment of interest rate cap  -  9  106 
Increase in accrued interest and dividends receivable  (1,104)  (966)  (1,202) 
Stock-based compensation expense  1,205  1,049  975 
(Decrease) increase in accrued interest payable  (173)  (3)  47 
Proceeds from sale of mortgage loans held for sale  192,576  239,292  169,172 
Originations of mortgage loans held for sale  (172,371)  (243,699)  (177,200) 
Gain on sale of securities available for sale  (131)  -  (666) 
Gain on sale of mortgage loans held for sale  (2,513)  (3,560)  (2,373) 
Net loss (gain) on sale of other real estate owned  159  105  (76) 
Write down of other real estate owned  433  2,189  326 
Decrease in special prepaid FDIC insurance assessments  2,498  1,322  1,492 
Increase in cash surrender value of life insurance contracts  (1,994)  (1,624)  (390) 
Loss on prepayment of other borrowings  -  -  738 
Excess tax benefits from the exercise of warrants  (262)  (381)  (127) 
Net change in other assets, liabilities, and other          
operating activities  92  3,790  200 
Net cash provided by operating activities  74,198  41,184  24,323 
INVESTMENT ACTIVITIES          
Purchase of securities available for sale  (83,455)  (47,867)  (102,190) 
Proceeds from maturities, calls and paydowns of securities          
available for sale  40,959  106,783  28,575 
Purchase of securities held to maturity  (10,668)  (11,701)  (15,441) 
Proceeds from maturities, calls and paydowns of securities          
held to maturity  4,361  943  5,466 
Increase in loans  (515,644)  (540,019)  (449,449) 
Purchase of premises and equipment  (1,346)  (5,474)  (1,314) 
Purchase of restricted equity securities  -  (787)  (543) 
Purchase of bank-owned life insurance contracts  (10,000)  (15,000)  (40,000) 
Proceeds from sale of securities available for sale  4,140  -  63,270 
Proceeds from sale of restricted equity securities  203  347  552 
Proceeds from sale of other real estate owned and repossessed assets  7,664  2,967  3,334 
Investment in tax credit partnerships  (7,907)  -  - 
Net cash used in investing activities  (571,693)  (509,808)  (507,740) 
FINANCING ACTIVITIES          
Net increase in noninterest-bearing deposits  105,282  126,364  168,320 
Net increase in interest-bearing deposits  402,788  241,321  216,851 
Net increase in federal funds purchased  57,315  37,800  79,265 
Proceeds from other borrowings  -  19,917  - 
Redemption of subordinated debentures  -  (15,464)  - 
Proceeds from sale of common stock, net  10,337  -  10,032 
Proceeds from sale of preferred stock, net  -  -  39,958 
Proceeds from exercise of stock options and warrants  3,279  4,651  757 
Excess tax benefits from exercise of stock options and warrants  262  381  127 
Repayment of other borrowings  -  (5,000)  (20,738) 
Dividends on common stock  (3,682)  (3,134)  - 
Dividends on preferred stock  (416)  (400)  (200) 
Net cash provided by financing activities  575,165  406,436  494,372 
Net increase (decrease) in cash and cash equivalents  77,670  (62,188)  10,955 
Cash and cash equivalents at beginning of year  180,745  242,933  231,978 
Cash and cash equivalents at end of year $258,415 $180,745 $242,933 
SUPPLEMENTAL DISCLOSURE          
Cash paid for:          
Interest $13,792 $14,904 $16,033 
Income taxes  20,878  13,134  15,837 
NONCASH TRANSACTIONS          
Conversion of mandatorily convertible subordinated debentures $(15,000) $- $- 
Transfers of loans from held for sale to held for investment  -  -  417 
Other real estate acquired in settlement of loans  11,355  2,695  9,029 
Internally financed sales of other real estate owned  -  24  136 
See Notes to Consolidated Financial Statements.
74

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In thousands, except share amounts)

   Preferred
Stock		   Common
Stock		   Additional Paid-in
Capital		   Retained Earnings   Accumulated Other Comprehensive Income   Total Stockholders' Equity 
Balance, December 31, 2008  -   5   70,729   15,087   962   86,783 
Sale of 139,460 shares  -   1   3,478   -   -   3,479 
Other comprehensive income  -   -   -   -   611   611 
Stock based compensation expense  -   -   785   -   -   785 
Issuance of warrants related to                        
subordinated notes payable  -   -   86   -   -   86 
Net income  -   -   -   5,878   -   5,878 
Balance, December 31, 2009  -   6   75,078   20,965   1,573   97,622 
Other comprehensive income  -   -   -   -   1,264   1,264 
Exercise of stock options, including tax benefit  -   -   123   -   -   123 
Stock-based compensation expense  -   -   713   -   -   713 
Net income  -   -   -   17,378   -   17,378 
Balance, December 31, 2010  -   6   75,914   38,343   2,837   117,100 
Sale of 340,000 shares of common                        
stock, net  -   -   10,159   -   -   10,159 
Sale of 40,000 shares of preferred                        
stock, net  39,958   -   -   -   -   39,958 
Preferred dividends paid  -   -   -   (200)  -   (200)
Exercise 64,700 stock options, including tax benefit  -   -   757   -   -   757 
Other comprehensive income  -   -   -   -   4,105   4,105 
Stock-based compensation expense  -   -   975   -   -   975 
Net income  -   -   -   23,438   -   23,438 
Balance, December 31, 2011 $39,958  $6  $87,805  $61,581  $6,942  $196,292 

See Notes to Consolidated Financial Statements

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In thousands)

  2011  2010  2009 
OPERATING ACTIVITIES            
Net income $23,438  $17,378  $5,878 
Adjustments to reconcile net income to net cash provided by            
operating activities:            
Deferred tax benefit  (1,240)  (2,212)  (1,601)
Provision for loan losses  8,972   10,350   10,685 
Depreciation and amortization  1,173   1,066   1,087 
Net amortization (accretion) of investments  958   823   (318)
Amortized gain on derivative  -   -   (272)
Market value adjustment of interest rate cap  106   45   - 
Increase in accrued interest and dividends receivable  (1,202)  (790)  (2,174)
Stock-based compensation expense  975   713   785 
Increase (decrease) in accrued interest payable  47   (128)  (254)
Proceeds from sale of mortgage loans held for sale  169,172   174,760   198,622 
Originations of mortgage loans held for sale  (177,200)  (175,046)  (201,143)
Gain on sale of securities available for sale  (666)  (108)  (193)
Gain on sale of mortgage loans held for sale  (2,373)  (2,174)  (2,222)
Net (gain) loss on sale of other real estate owned  (76)  203   441 
Write down of other real estate owned  326   1,051   1,802 
Decrease in special prepaid FDIC insurance assessments  1,492   2,538   (7,850)
Loss on prepayment of other borrowings  738   -   - 
Increase in cash surrender value of life insurance contracts  (390)  -   - 
Excess tax benefits from the exercise of warrants  (127)  -   - 
Net change in other assets, liabilities, and other operating activities  200   1,106   (810)
Net cash provided by operating activities  24,323   29,575   2,463 
INVESTMENT ACTIVITIES            
Purchase of securities available for sale  (102,190)  (84,425)  (200,558)
Proceeds from maturities, calls and paydowns of securities available for sale  28,575   31,889   16,585 
Purchase of securities held to maturity  (15,441)  (4,589)  (645)
Proceeds from maturities, calls and paydowns of securities held to maturity  5,466   -   - 
Increase in loans  (449,449)  (197,572)  (253,172)
Purchase of premises and equipment  (1,314)  (428)  (2,294)
Purchase of restricted equity securities  (543)  (269)  (582)
Purchase of interest rate cap  -   (160)  - 
Purchase of bank-owned life insurance contracts  (40,000)  -   - 
Proceeds from sale of securities available for sale  63,270   32,297   32,567 
Proceeds from sale of restricted equity securities  552   -   - 
Proceeds from sale of other real estate owned and repossessions  3,334   7,995   6,314 
Additions to other real estate owned  -   (75)  (905)
Net cash used in investing activities  (507,740)  (215,337)  (402,690)
FINANCING ACTIVITIES            
Net increase in noninterest-bearing deposits  168,320   39,183   89,848 
Net increase in interest-bearing deposits  216,851   287,178   305,188 
Net increase in federal funds purchased  79,265   -   - 
Proceeds from issuance of trust preferred securities  -   15,050   - 
Proceeds from other borrowings  -   -   5,000 
Proceeds from sale of common stock, net  10,159   -   3,479 
Proceeds from sale of preferred stock, net  39,958   -   - 
Proceeds from exercise of stock options  757   123   - 
Excess tax benefits from the exercise of warrants  127   -   - 
Repayment of other borrowings  (20,738)  -   - 
Dividends on preferred stock  (200)  -   - 
Net cash provided by financing activities  494,499   341,534   403,515 
             
Net increase in cash and cash equivalents  10,955   155,772   3,288 
             
Cash and cash equivalents at beginning of year  231,978   76,206   72,918 
             
Cash and cash equivalents at end of year $242,933  $231,978  $76,206 
             
SUPPLEMENTAL DISCLOSURE            
Cash paid for:            
Interest $16,033  $15,388  $18,591 
Income taxes  15,837   6,958   4,317 
NONCASH TRANSACTIONS            
Transfers of loans from held for sale to held for investment $417  $787  $1,861 
Other real estate acquired in settlement of loans  9,029   5,372   10,198 
Internally financed sales of other real estate owned  136   1,757   566 
             
See Notes to Consolidated Financial Statements            

SERVISFIRST BANCSHARES, INC.

SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations

ServisFirst Bancshares, Inc. (the “Company”) was formed on August 16, 2007 and is a bank holding company whose business is conducted by its wholly-owned subsidiary ServisFirst Bank (the “Bank”). The Bank is headquartered in Birmingham, Alabama, and provides a full range of banking services to individual and corporate customers throughout the Birmingham market since opening for business in May 2005. The Bank has since expanded into the Huntsville, Montgomery and Dothan, Alabama markets, and most recently into the Mobile, Alabama and Pensacola, Florida market.

markets. The Bank has a subsidiary, SF Holding 1, Inc., which has a subsidiary, SF Realty 1, Inc., which operates as a real estate investment trust. More details about SF Holding 1, Inc. and SF Realty 1, Inc. are included in Note 10.

Basis of Presentation and Accounting Estimates

To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate, deferred taxes, and fair values of financial instruments are particularly subject to change. All numbers are in thousands except share and per share data.

Cash, Due from Banks, Interest-Bearing Balances due from Financial Institutions

Cash and due from banks includes cash on hand, cash items in process of collection, amounts due from banks and interest bearing balances due from financial institutions. For purposes of cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Cash flows from loans, mortgage loans held for sale, federal funds sold, and deposits are reported net.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits. The total of those reserve balances was approximately $7,472,000$24.4 million at December 31, 20112013 and $5,456,000$16.0 million at December 31, 2010.

Investment2012.

Debt Securities

Securities are classified as available-for-sale when they might be sold before maturity. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of stockholders’ equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific-identification method. The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are reported at amortized cost.In determining the existence of other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investments in Restricted Equity Securities Carried at Cost

Investments in restricted equity securities without a readily determinable market value are carried at cost.

Mortgage Loans Held for Sale

Investments in Restricted Equity Securities Carried at Cost
Investments in restricted equity securities without a readily determinable market value are carried at cost.
Mortgage Loans Held for Sale
The Company classifies certain residential mortgage loans as held for sale.  Typically mortgage loans held for sale are sold to a third party investor within a very short time period andperiod.  The loans are sold without recourse.recourse and servicing is not retained.  Net fees earned from this banking service are recorded in noninterest income.

75

In the course of originating mortgage loans and selling those loans in the secondary market, the Company makes various representations and warranties to the purchaser of the mortgage loans.  EveryEach loan closed by the Bank’s mortgage center is run through aunderwritten using government agency automated underwriting system. guidelines.Any exceptions noted during this process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Company within the specified period following discovery. The Company continues to experience a manageableinsignificant level of investor repurchase demands. There were no expenses incurred as part of these buyback obligations for the yearyears ended December 31, 20112013 and $104,000 for the year ended December 31, 2010.

2012.
Loans
Loans

Loans are reported at unpaid principal balances, less unearned fees and the allowance for loan losses.Interest on all loans is recognized as income based upon the applicable rate applied to the daily outstanding principal balance of the loans. Interest income on nonaccrual loans is recognized on a cash basis or cost recovery basis until the loan is returned to accrual status. A loan may be returned to accrual status if the Company is reasonably assured of repayment of principal and interest and the borrower has demonstrated sustained performance for a period of at least six months.Loan fees, net of direct costs, are reflected as an adjustment to the yield of the related loan over the term of the loan.The Company does not have a concentration of loans to any one industry or geographic market.

The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-collateralized and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status are reversed against current interest income. Interest collections on nonaccrual loans are generally applied as principal reductions. The Company determines past due or delinquency status of a loan based on contractual payment terms.

A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business management grants concessions to borrowers, which would not otherwise be considered, where the borrowers are experiencing financial difficulty. The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan. In some cases, the conditions of the credit also warrant nonaccrual status, even after the restructure occurs. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure. TDR loans may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower.

Allowance for Loan Losses

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

Foreclosed Real Estate

Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property’s new basis. Any write downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in other operating expenses.

76

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Assets which are disposed of are removed from the accounts and the resulting gains or losses are recorded in operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets (3(3 to10 years).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements.

Derivatives and Hedging Activities

As part of its overall interest rate risk management, the Company uses derivative instruments, which can include interest rate swaps, caps, and floors.Financial Accounting Standards Board (“FASB”) ASC 815-10, Derivatives and Hedging, requires all derivative instruments to be carried at fair value on the balance sheet.This accounting standard provides special accounting provisions for derivative instruments that qualify for hedge accounting.To be eligible, the Company must specifically identify a derivative as a hedging instrument and identify the risk being hedged.The derivative instrument must be shown to meet specific requirements under this accounting standard.

The Company designates the derivative on the date the derivative contract is entered into as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair-value” hedge) or (2) a hedge of a forecasted transaction of the variability of cash flows to be received or paid related to a recognized asset or liability (a “cash-flow” hedge).Changes in the fair value of a derivative that is highly effective as a fair-value hedge, and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings.The effective portion of the changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge is recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings).The remaining gain or loss on the derivative, if any, in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in earnings.

Derivatives and Hedging Activities (Continued)

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assessed, both at the hedge’s inception and on an ongoing basis (if the hedges do not qualify for short-cut accounting), whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is re-designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, hedge accounting is discontinued prospectively and the derivative will continue to be carried on the balance sheet at its fair value with all changes in fair value being recorded in earnings but with no offsetting being recorded on the hedged item or in other comprehensive income for cash flow hedges.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company uses derivatives to hedge interest rate exposures associated with mortgage loans held for sale and mortgage loans in process. The Company regularly enters into derivative financial instruments in the form of forward contracts, as part of its normal asset/liability management strategies. The Company’s obligations under forward contracts consist of “best effort” commitments to deliver mortgage loans originated in the secondary market at a future date. Interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. In the normal course of business, the Company regularly extends these rate lock commitments to customers during the loan origination process. The fair values of the Company’s forward contract and rate lock commitments to customers as of December 31, 20112013 and 20102012 were not material and have not been recorded.

During 2008 the Company entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company entered into offsetting positions with a regional correspondent bank in order to minimize the risk to the Company. As of December 31, 2011, the Company was party to two swaps with notional amounts totaling approximately $11.5 million with customers, and two swaps with notional amounts totaling approximately $11.5 million with a regional correspondent bank. These swaps qualify as derivatives, but are not designated as hedging instruments.

During 2010 the Company entered into an interest rate cap with a notional value of $100 million. The cap has a strike rate of 2.00% and is indexed to the three month London Interbank Offered Rate (“LIBOR”). The cap does not qualify for hedge accounting treatment, and is marked to market.

77Income Taxes

Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The Company follows the provisions of ASC 740-10,Income Taxes.  ASC 740-10 establishes a single model to address accounting for uncertain tax positions.  ASC 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  ASC 740-10 also provides guidance on derecognition measurement classification interest and penalties, accounting in interim periods, disclosure, and transition.  ASC 740-10 provides a two-step process in the evaluation of a tax position.  The first step is recognition.  A Company determines whether it is more likely than not that a tax position will be sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the position.  The second step is measurement.  A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than50% likely of being realized upon ultimate settlement.
Stock-Based Compensation

Stock-Based Compensation

At December 31, 2011,2013, the Company had two stock-based employee compensation plans for grants of optionsequity compensation to key employees.These plans have been accounted for under the provisions of FASB ASC 718-10, Compensation – Stock Compensation.The stock-based employee compensation plans are more fully described in Note 14.13.

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 and warrants.

Loan Commitments and Related Financial Instruments

Financial instruments, which include credit card arrangements, commitments to make loans and standby letters of credit, are issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10. The fair value of these financial guarantees is not material. funded. Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10. The fair value of these financial guarantees is not material.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 23. 22.Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.Changes in assumptions or in market conditions could significantly affect the estimates.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). income.Accumulated comprehensive income, (loss), which is recognized as a separate component of equity, includes unrealized gains and losses on securities available for sale as well as the interest rate floor contract that qualified for cash flow hedge accounting.sale.

Advertising

Advertising costs are expensed as incurred.Advertising expense for the years ended December 31, 2013, 2012 and 2011 2010was $532,000, $454,000 and 2009 was $406,000, $313,000$406,000, respectively.Advertising typically consists of local print media aimed at businesses that the Company targets as well as sponsorships of local events that the Company’s clients and $276,000, respectively.prospects are involved with. 
78

Recent

Recently Adopted Accounting Pronouncements

In AprilDecember 2011, the FASB issued ASU No. 2011-03,Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements,which removes from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed-upon terms, even in the event of default by the transferee. The amendments in this update also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement assets. The amendments in this update are effective for interim and annual periods beginning after December 31, 2011, with prospective application to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt these amendments when required, and does not anticipate that the update will have a material effect on its financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which outlines the collaborative effort of the FASB and the InternationalFinancial Accounting Standards Board (“IASB”FASB”) to consistently define fair value and to come up with a set of consistent disclosures for fair value. The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 31, 2011. Early application is not permitted. The Company will adopt these amendments when required, and does not believe the application will have a material effect on its financial position or results of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In June 2011, the FASB issued ASU No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends existing standards to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Any changes pursuant to the options allowed in the amendments should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company has evaluated the impact of this update on its financial statements and determined that there will be no change.

In December 2011, the FASB issued ASU No. 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05,which defers the effective date pertaining to reclassification adjustments out of other accumulated comprehensive income in ASU 2011-05, until the FASB is able to reconsider those requirements. All other requirements of ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011, which coincide with the effective dates of the requirements in ASU 2011-05 amended by this Update. The Company has evaluated the impact of this Update on its financial statements and determined that there will be no change.

In December 2011, the FASB issued ASU No. 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which amendsamended disclosures by requiring improved information about financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet.  Reporting entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of international financial reporting standards (“IFRS”).  Companies arewere required to apply the amendmentsthis amendment for fiscal years beginning on or after January 1, 2013, and interim periods within those years.  Retrospective disclosures are required. The Company does not believehas adopted this update, will have a materialbut such adoption had no impact on its financial position or results of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2013, the FASB issued ASU No. 2013-02,Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires a reporting entity to provide information about the amounts reclassified out of accumulated comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts.  Companies were required to apply this amendment prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.
In July 2013, the FASB issued ASU No. 2013-10,Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the U.S. Treasury and London Interbank Offered Rate. The ASU also amends previous rules by removing the restriction on using different benchmark rates for similar hedges. This amendment applies to all entities that elect to apply hedge accounting of the benchmark interest rate. The amendments in this ASU were effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-04,Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, which provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The amendments in this ASU are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company will evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.
In July 2013, the FASB issued ASU No. 2013-11,Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments in this ASU are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company will evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.
In January 2014, the FASB issued ASU No. 2014-1,Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  It permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, an entity amortizes the initial investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  The amendments are effective for public entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and are effective for all entities other than public entities for annual periods beginning after December 15, 2014, and interim reporting periods within annual periods beginning after December 15, 2015.  Early adoption is permitted and retrospective application is required for all periods presented.  The Company does not currently invest in such affordable housing projects, but will elect an accounting policy to apply the amendments if, and when, it does invest in such affordable housing projects.
NOTE 2.79INVESTMENT SECURITIES

In January 2014, the FASB issued ASU No. 2014-4,Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).  The guidance clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a portion of the loan should be derecognized and the real estate property recognized.  ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure.  The amendments of ASU 2014-04 are effective for interim and annual periods beginning after December 15, 2014, and may be applied using either a modified retrospective transition method or a prospective transition method as described in ASU 2014-04.  The Company will evaluate this amendment but does not believe they will have an impact on its financial position or results of operations. 

NOTE 2.              DEBT SECURITIES
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2013 and 2012 are summarized as follows:

  Amortized
Cost		  Gross
Unrealized
Gain		  Gross
Unrealized
Loss		  Fair Value 
  (In Thousands) 
December 31, 2011:                
Securities Available for Sale                
U.S. Treasury and government agencies $98,169  $1,512  $(59) $99,622 
Mortgage-backed securities  88,118   4,462   -   92,580 
State and municipal securities  95,331   5,230   (35)  100,526 
Corporate debt  1,029   52   -   1,081 
Total $282,647  $11,256  $(94) $293,809 
Securities Held to Maturity                
Mortgage-backed securities $9,676  $410  $-  $10,086 
State and municipal securities  5,533   380   -   5,913 
Total $15,209  $790  $-  $15,999 
                 
December 31, 2010:                
Securities Available for Sale                
U.S. Treasury and government agencies $90,631  $1,887  $(224) $92,294 
Mortgage-backed securities  101,709   2,783   (268)  104,224 
State and municipal securities  78,241   1,076   (1,051)  78,266 
Corporate debt  2,013   162   -   2,175 
Total $272,594  $5,908  $(1,543) $276,959 
Securities Held to Maturity                
State and municipal securities $5,234  $-  $(271) $4,963 
Total $5,234  $-  $(271) $4,963 

78
     Gross Gross  �� 
  Amortized Unrealized Unrealized Market 
  Cost Gain Loss Value 
  (In Thousands) 
December 31, 2013   
Securities Available for Sale             
U.S. Treasury and government sponsored agencies $31,641 $674 $(41) $32,274 
Mortgage-backed securities  85,764  2,574  (98)  88,240 
State and municipal securities  127,083  3,430  (682)  129,831 
Corporate debt  15,738  163  (26)  15,875 
Total  260,226  6,841  (847)  266,220 
Securities Held to Maturity             
Mortgage-backed securities  26,730  266  (1,422)  25,574 
State and municipal securities  5,544  197  -  5,741 
Total $32,274 $463 $(1,422) $31,315 
              
December 31, 2012             
Securities Available for Sale             
U.S. Treasury and government sponsored agencies $27,360 $1,026 $- $28,386 
Mortgage-backed securities  69,298  4,168  -  73,466 
State and municipal securities  112,319  5,941  (83)  118,177 
Corporate debt  13,677  210  (39)  13,848 
Total  222,654  11,345  (122)  233,877 
Securities Held to Maturity             
Mortgage-backed securities  20,429  768  (40)  21,157 
State and municipal securities  5,538  655  -  6,193 
Total $25,967 $1,423 $(40) $27,350 
80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.INVESTMENT SECURITIES (Continued)

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

At year-end 20112013 and 2010,2012, there were no holdings of securities of any issuer, other than the U.S. Governmentgovernment and its agencies, in an amount greater than 10% of stockholders’ equity.

The amortized cost and fair value of securities as of December 31, 20112013 and 2012 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

  Amortized
Cost		  Fair Value 
  (In Thousands) 
Securities available for sale        
Due within one year $10,664  $10,762 
Due from one to five years  112,488   114,227 
Due from five to ten years  65,509   69,864 
Due after ten years  5,868   6,376 
Mortgage-backed securities  88,118   92,580 
  $282,647  $293,809 
         
Securities held to maturity        
Due after ten years $5,533  $5,913 
Mortgage-backed securities  9,676   10,086 
  $15,209  $15,999 

  December 31, 2013 December 31, 2012 
  Amortized Cost Market Value Amortized Cost Market Value 
              
  (In Thousands) 
Securities available for sale             
Due within one year $5,659 $5,717 $11,971 $12,052 
Due from one to five years  102,535  104,887  79,192  81,940 
Due from five to ten years  65,174  66,229  59,825  63,801 
Due after ten years  1,094  1,147  2,368  2,618 
Mortgage-backed securities  85,764  88,240  69,298  73,466 
  $260,226 $266,220 $222,654 $233,877 
              
Securities held to maturity             
Due after ten years $5,544 $5,741 $5,538 $6,193 
Mortgage-backed securities  26,730  25,574  20,429  21,157 
  $32,274 $31,315 $25,967 $27,350 
The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 20112013 and 2010.2012. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The unrealized losses shown in the following table are primarily due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2011.2013. There were no other-than-temporary impairments for the years ended December 31, 2011, 20102013, 2012 and 2009.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2011.
  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) 
December 31, 2013                   
U.S. Treasury and government                   
sponsored agencies $(41) $5,854 $- $- $(41) $5,854 
Mortgage-backed securities  (852)  21,365  (668)  6,691  (1,520)  28,056 
State and municipal securities  (607)  30,666  (75)  3,443  (682)  34,109 
Corporate debt  (26)  5,958  -  -  (26)  5,958 
Total $(1,526) $63,843 $(743) $10,134 $(2,269) $73,977 
                    
December 31, 2012                   
U.S. Treasury and government sponsored agencies                   
Mortgage-backed securities  (40)  4,439  -  -  (40)  4,439 
State and municipal securities  (83)  8,801  -  166  (83)  8,967 
Corporate debt  (39)  4,882  -  -  (39)  4,882 
Total $(162) $18,122 $- $166 $(162) $18,288 
NOTE 2.81INVESTMENT SECURITIES (Continued)

  Less Than Twelve Months  Twelve Months or More 
  Gross
Unrealized
Losses		  Fair Value  Gross
Unrealized
Losses		  Fair Value 
  (In Thousands) 
December 31, 2011:                
U.S. Treasury and government agencies $(59) $15,074  $-  $- 
Mortgage-backed securities  -   -   -   - 
State and municipal securities  (35)  4,559   -   - 
Corporate debt  -   -   -   - 
  $(94) $19,633  $-  $- 
                 
December 31, 2010:                
U.S. Treasury and government agencies $(224) $24,217  $-  $- 
Mortgage-backed securities  (268)  16,417   -   - 
State and municipal securities  (1,034)  33,282   (288)  3,674 
Corporate debt  -   -   -   - 
  $(1,526) $73,916  $(288) $3,674 

At December 31, 2011, none2013, 17 of the Company’s  518664 debt securities were in an unrealized loss position for more than 12 months.

During 2013, 28 government agency sponsored mortgage-backed securities with an amortized cost of $50.0 million and 12 U.S. Treasury securities with an amortized cost of $16.6 million were bought. Two corporate bonds were sold for $4.1 million and a realized gain on sale of $131,000. Two corporate bonds with an amortized cost of $6.0 million were also bought during 2013. During 2012, 10 government agency sponsored mortgage-backed securities with an amortized cost of $23.6 million and one government agency bond with an amortized cost of $1.5 million were bought. 15 government agency securities with a total amortized cost of $61.0 million were called during 2012 and three U.S. Treasury securities with an amortized cost of $10.0 million matured. During 2011, 16 government agency bonds with an amortized cost of $63,156,000$63.2 million and 20 government agency sponsored mortgage-backed securities with an amortized cost of $29,852,000$29.9 million were bought. Nine USU.S. Treasury notes, six government agency bonds and five government agency sponsored mortgage-backed securities were sold with an amortized cost of $56,075,000$56.1 million and a net gain on sale in the amount of $992,000. During 2010, nine government agency bonds with an amortized cost of $31,189,000 and one corporate bond with an amortized cost of $1,000,000 were sold with total recognized gain on sale of $108,000. During 2009, two corporate bonds with an amortized cost of $2,040,000 and three government agency bonds with an amortized cost of $30,334,000 were sold with total recognized gain on sale of $193,000. There were $326,000 in losses on sales of securities during 2011, and no losses on the sale of securities during 2010 or 2009.

$992,000. 

The carrying value of investment securities pledged to secure public funds on deposits and for other purposes as required by law as of December 31, 20112013 and 20102012 was $197,897,000$210.0 million and $111,347,000,$197.9 million, respectively. This increase in the amount of securities pledged was primarily the result of the termination of the FDIC’s Temporary Account Guarantee Program for fully insuring interest-bearing accounts at the end of 2010.

Restricted equity securities include (1) a restricted investment in Federal Home Loan Bank of Atlanta stock for membership requirement and to secure available lines of credit, and (2) an investment in First National Bankers Bank stock. The amount of investment in the Federal Home Loan Bank of Atlanta stock was $3,251,000$3.7 million and $3,260,000$3.3 million at December 31, 20112013 and 2010,2012, respectively. The amount of investment in the First National Bankers Bank stock was $250,000$250,000 at December 31, 20112013 and 2010.

80
2012.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.LOANS


NOTE 3.        LOANS
The composition of loans at December 31, 2013 and 2012 is summarized as follows:

  December 31, 
  2011  2010 
  (In Thousands) 
Commercial, financial and agricultural $799,464  $536,620 
Real estate - construction  151,218   172,055 
Real estate - mortgage:        
Owner occupied commercial  398,601   270,767 
1-4 family mortgage  205,182   199,236 
Other mortgage  235,251   178,793 
Subtotal:  Real estate mortgage  839,034   648,796 
Consumer  41,026   37,347 
Total Loans  1,830,742   1,394,818 
Less:  Allowance for loan losses  (22,030)  (18,077)
Net Loans $1,808,712  $1,376,741 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

  December 31, 
  2013 2012 
  (In Thousands) 
Commercial, financial and agricultural $1,278,649 $1,030,990 
Real estate - construction  151,868  158,361 
Real estate - mortgage:       
Owner-occupied commercial  710,372  568,041 
1-4 family mortgage  278,621  235,909 
Other mortgage  391,396  323,599 
Total real estate - mortgage  1,380,389  1,127,549 
Consumer  47,962  46,282 
Total Loans  2,858,868  2,363,182 
Less: Allowance for loan losses  (30,663)  (26,258) 
Net Loans $2,828,205 $2,336,924 
Changes in the allowance for loan losses during the years ended December 31, 2011, 20102013, 2012 and 2009,2011, respectively are as follows:

  Years Ended December 31, 
  2011  2010  2009 
  (In Thousands) 
Balance, beginning of year $18,077  $14,737  $10,602 
Loans charged off  (5,653)  (7,208)  (6,676)
Recoveries  634   198   126 
Provision for loan losses  8,972   10,350   10,685 
Balance, end of year $22,030  $18,077  $14,737 

  Years Ended December 31, 
  2013 2012 2011 
  (In Thousands) 
Balance, beginning of year $26,258 $22,030 $18,077 
Loans charged off  (9,012)  (5,755)  (5,653) 
Recoveries  409  883  634 
Provision for loan losses  13,008  9,100  8,972 
Balance, end of year $30,663 $26,258 $22,030 
82

The Company assesses the adequacy of its allowance for loan losses prior toat the end of each calendar quarter. The level of the allowance is based on management’s evaluation of the loan portfolios, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance is made for specific loans, but the entire allowance is available for any loan that in management’s judgment deteriorates and is uncollectible. The unallocated portion of the reserve classified as qualitative factors, is management’s evaluation of potential future losses that would arise in the loan portfolio should management’s assumption about qualitative and environmental conditions materialize. The unallocatedThis qualitative factor portion of the allowance for loan losses is based on management’s judgment regarding various external and internal factors including macroeconomic trends, management’s assessment of the Bank’sCompany’s loan growth prospects, and evaluations of internal risk controls.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.               LOANS (Continued)

The following table presents an analysis of the allowance for loan losses by portfolio segment as of December 31, 2013 and 2012. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.
Changes in the allowance for loan losses, segregated by loan type, during the years ended December 31, 20112013 and 2010,2012, respectively, are as follows:

  Commercial,
financial and
agricultural		  Real estate -
construction		  Real estate -
mortgage		  Consumer  Unallocated  Total 
                   
  Year Ended December 31, 2011 
Allowance for loan losses:                        
Balance at December 31, 2010 $5,348  $6,373  $2,443  $749  $3,164  $18,077 
Chargeoffs  (1,096)  (2,594)  (1,096)  (867)  -   (5,653)
Recoveries  361   180   12   81   -   634 
Provision  2,014   2,583   1,936   568   1,871   8,972 
Balance at December 31, 2011  6,627   6,542   3,295   531   5,035   22,030 
                         
    December 31, 2011 
Individually Evaluated for Impairment $1,382  $1,533  $941  $325  $-  $4,181 
Collectively Evaluated for Impairment  5,245   5,009   2,354   206   5,035   17,849 
                         
Loans:                        
Ending Balance $799,464  $151,218  $839,034  $41,026  $-  $1,830,742 
Individually Tested for Impairment  5,578   16,262   14,866   547   -   37,253 
Collectively Evaluated for Impairment  793,886   134,956   824,168   40,479   -   1,793,489 
                         
   Year Ended December 31, 2010 
Allowance for loan losses:                        
Balance at December 31, 2009 $3,135  $6,295  $2,102  $115  $3,090  $14,737 
Chargeoffs  (1,667)  (3,488)  (1,775)  (278)  -   (7,208)
Recoveries  97   53   32   16   -   198 
Provision  3,783   3,513   2,084   896   74  10,350 
Balance at December 31, 2010  5,348   6,373   2,443   749   3,164   18,077 
                         
    December 31, 2010 
Individually Evaluated for Impairment $1,602  $1,855  $415  $554  $-  $4,426 
Collectively Evaluated for Impairment  3,746   4,518   2,028   195   3,164   13,651 
                         
Loans:                        
Ending Balance $536,620  $172,055  $648,796  $37,347      $1,394,818 
Individually Evaluated for Impairment  11,535   28,710   10,310   993   -   51,548 
Collectively Evaluated for Impairment  525,085   143,345   638,486   36,354   -   1,343,270 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

Loans by credit quality indicator as of December 31, 2011 and 2010 are as follows:

December 31, 2011 Pass  Special Mention  Substandard  Doubtful  Total 
                
Commercial, financial and agricultural $780,270  $11,775  $7,419  $-  $799,464 
Real estate - construction  117,244   14,472   19,502   -   151,218 
Real estate - mortgage:                    
Owner occupied commercial  385,084   7,333   6,184   -   398,601 
1-4 family mortgage  194,447   4,835   5,900   -   205,182 
Other mortgage  224,807   7,034   3,410   -   235,251 
Total real estate mortgage  804,338   19,202   15,494   -   839,034 
Consumer  40,353   96   577   -   41,026 
Total $1,742,205  $45,545  $42,992  $-  $1,830,742 

December 31, 2010 Pass  Special Mention  Substandard  Doubtful  Total 
                
Commercial, financial and agricultural $508,376  $14,209  $14,035  $-  $536,620 
Real estate - construction  126,200   17,145   28,710   -   172,055 
Real estate - mortgage:                    
Owner occupied commercial  256,638   6,251   7,878   -   270,767 
1-4 family mortgage  193,365   1,072   4,799   -   199,236 
Other mortgage  175,815   562   2,416   -   178,793 
Total real estate mortgage  625,818   7,885   15,093   -   648,796 
Consumer  36,090   -   1,257   -   37,347 
Total $1,296,484  $39,239  $59,095  $-  $1,394,818 

83

  Commercial,                
  financial and Real estate - Real estate -    Qualitative    
  agricultural construction mortgage Consumer Factors Total 
  (In Thousands) 
  Year Ended December 31, 2013 
Allowance for loan losses:                   
Balance at December 31, 2012 $8,233 $6,511 $4,912 $199 $6,403 $26,258 
Chargeoffs  (1,932)  (4,829)  (2,041)  (210)  -  (9,012) 
Recoveries  66  296  36  11  -  409 
Provision  4,803  3,831  4,588  855  (1,069)  13,008 
Balance at December 31, 2013 $11,170 $5,809 $7,495 $855 $5,334 $30,663 
                    
  December 31, 2013 
Individually Evaluated for Impairment $1,992 $1,597 $1,982 $699 $- $6,270 
Collectively Evaluated for Impairment  9,178  4,212  5,513  156  5,334  24,393 
                    
Loans:                   
Ending Balance $1,278,649 $151,868 $1,380,389 $47,962 $- $2,858,868 
Individually Evaluated for Impairment  3,827  9,238  18,202  699  -  31,966 
Collectively Evaluated for Impairment  1,274,822  142,630  1,362,187  47,263  -  2,826,902 
                    
  Year Ended December 31, 2012 
Allowance for loan losses:                   
Balance at December 31, 2011 $6,627 $6,542 $3,295 $531 $5,035 $22,030 
Chargeoffs  (1,106)  (3,088)  (660)  (901)  -  (5,755) 
Recoveries  125  58  692  8  -  883 
Provision  2,587  2,999  1,585  561  1,368  9,100 
Balance at December 31, 2012 $8,233 $6,511 $4,912 $199 $6,403 $26,258 
                    
  December 31, 2012 
Individually Evaluated for Impairment $577 $1,013 $1,921 $- $- $3,511 
Collectively Evaluated for Impairment  7,656  5,498  2,991  199  6,403  22,747 
                    
Loans:                   
Ending Balance $1,030,990 $158,361 $1,127,549 $46,282 $- $2,363,182 
Individually Evaluated for Impairment  3,910  14,422  18,927  135  -  37,394 
Collectively Evaluated for Impairment  1,027,080  143,939  1,108,622  46,147  -  2,325,788 
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions defined as follows:

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

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

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

·Doubtful
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.
84

Loans by credit quality indicator as of December 31, 2013 and 2012 were as follows:
     Special          
December 31, 2013 Pass Mention Substandard Doubtful Total 
  (In Thousands) 
Commercial, financial                
and agricultural $1,238,109 $34,883 $5,657 $- $1,278,649 
Real estate - construction  139,239  3,392  9,237  -  151,868 
Real estate - mortgage:                
Owner-occupied                
commercial  696,687  11,545  2,140  -  710,372 
1-4 family mortgage  265,019  1,253  12,349  -  278,621 
Other mortgage  379,419  8,179  3,798  -  391,396 
Total real estate mortgage  1,341,125  20,977  18,287  -  1,380,389 
Consumer  47,243  3  716  -  47,962 
Total $2,765,716 $59,255 $33,897 $- $2,858,868 
                 
     Special          
December 31, 2012 Pass Mention Substandard Doubtful Total 
  (In Thousands) 
Commercial, financial                
and agricultural $1,004,043 $19,172 $7,775 $- $1,030,990 
Real estate - construction  121,168  22,771  14,422  -  158,361 
Real estate - mortgage:                
Owner-occupied                
commercial  555,536  4,142  8,363  -  568,041 
1-4 family mortgage  223,152  6,379  6,378  -  235,909 
Other mortgage  312,473  6,674  4,452  -  323,599 
Total real estate mortgage  1,091,161  17,195  19,193  -  1,127,549 
Consumer  46,076  71  135  -  46,282 
Total $2,262,448 $59,209 $41,525 $- $2,363,182 
85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

Loans by performance status as of December 31, 20112013 and 2010 2012are as follows:

December 31, 2011 Performing  Nonperforming  Total 
          
Commercial, financial and agricultural $798,285  $1,179  $799,464 
Real estate - construction  141,155   10,063   151,218 
Real estate - mortgage:            
Owner occupied commercial  397,809   792   398,601 
1-4 family mortgage  204,512   670   205,182 
Other mortgage  234,558   693   235,251 
Total real estate mortgage  836,879   2,155   839,034 
Consumer  40,651   375   41,026 
Total $1,816,970  $13,772  $1,830,742 

December 31, 2010 Performing  Nonperforming  Total 
          
Commercial, financial and agricultural $534,456  $2,164  $536,620 
Real estate - construction  161,333   10,722   172,055 
Real estate - mortgage:            
Owner occupied commercial  270,131   635   270,766 
1-4 family mortgage  199,035   202   199,237 
Other mortgage  178,793   -   178,793 
Total real estate mortgage  647,959   837   648,796 
Consumer  36,723   624   37,347 
Total $1,380,471  $14,347  $1,394,818 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

December 31, 2013 Performing Nonperforming Total 
  (In Thousands) 
Commercial, financial          
and agricultural $1,276,935 $1,714 $1,278,649 
Real estate - construction  148,118  3,750  151,868 
Real estate - mortgage:          
Owner-occupied          
commercial  708,937  1,435  710,372 
1-4 family mortgage  276,725  1,896  278,621 
Other mortgage  391,153  243  391,396 
Total real estate mortgage  1,376,815  3,574  1,380,389 
Consumer  47,264  698  47,962 
Total $2,849,132 $9,736 $2,858,868 
           
December 31, 2012 Performing Nonperforming Total 
  (In Thousands) 
Commercial, financial          
and agricultural $1,030,714 $276 $1,030,990 
Real estate - construction  151,901  6,460  158,361 
Real estate - mortgage:          
Owner-occupied          
commercial  565,255  2,786  568,041 
1-4 family mortgage  235,456  453  235,909 
Other mortgage  323,359  240  323,599 
Total real estate mortgage  1,124,070  3,479  1,127,549 
Consumer  46,139  143  46,282 
Total $2,352,824 $10,358 $2,363,182 
86

Loans by past-duepast due status as of December 31, 20112013 and 2010 2012are as follows:

December 31, 2011 Past Due Status (Accruing Loans)          
  30-59 Days  60-89 Days  90+ Days  Total Past
Due		  Non-
Accrual		  Current  Total Loans 
                      
Commercial, financial and agricultural $-  $-  $-  $-  $1,179  $797,300  $799,464 
Real estate - construction  2,234   -   -   2,234   10,063   138,262   151,218 
Real estate - mortgage:                            
Owner-occupied commercial  -   -   -   -   792   397,966   398,601 
1-4 family mortgage  2,107   -   -   2,107   670   202,873   205,182 
Other mortgage  -   -   -   -   693   235,251   235,251 
Total real estate -mortgage  2,107   -   -   2,107   2,155   836,090   839,034 
Consumer  -   84   -   84   375   40,318   41,026 
Total $4,341  $84  $-  $4,425  $13,772  $1,811,970  $1,830,742 

December 31, 2010 Past Due Status (Accruing Loans)          
  30-59 Days  60-89 Days  90+ Days  Total Past
Due		  Non-
Accrual		  Current  Total Loans 
                      
Commercial, financial and agricultural $205  $575  $-  $780  $2,164  $533,676  $536,620 
Real estate - construction  -   -   -   -   10,722   161,333   172,055 
Real estate - mortgage:                            
Owner-occupied commercial  134   -   -   134   635   269,998   270,767 
1-4 family mortgage  125   -   -   125   202   198,909   199,236 
Other mortgage  -   -   -   -   -   178,793   178,793 
Total real estate -mortgage  259   -   -   259   837   647,700   648,796 
Consumer  13   -   -   13   624   36,710   37,347 
Total $477  $575  $-  $1,052  $14,347  $1,379,419  $1,394,818 

86
December 31, 2013 Past Due Status (Accruing Loans)          
           Total Past          
  30-59 Days 60-89 Days 90+ Days Due Non-Accrual Current Total Loans 
  (In Thousands) 
Commercial, financial                      
and agricultural $73 $- $- $73 $1,714 $1,276,862 $1,278,649 
Real estate - construction  -  -  -  -  3,750  148,118  151,868 
Real estate - mortgage:                      
Owner-occupied                      
commercial  -  -  -  -  1,435  708,937  710,372 
1-4 family mortgage  177  -  19  196  1,877  276,548  278,621 
Other mortgage  -  -  -  -  243  391,153  391,396 
Total real estate -                      
mortgage  177  -  19  196  3,555  1,376,638  1,380,389 
Consumer  89  97  96  282  602  47,078  47,962 
Total $339 $97 $115 $551 $9,621 $2,848,696 $2,858,868 
                       
December 31, 2012 Past Due Status (Accruing Loans)          
           Total Past          
  30-59 Days 60-89 Days 90+ Days Due Non-Accrual Current Total Loans 
  (In Thousands) 
Commercial, financial                      
and agricultural $1,699 $385 $- $2,084 $276 $1,028,630 $1,030,990 
Real estate - construction  -  -  -  -  6,460  151,901  158,361 
Real estate - mortgage:                      
Owner-occupied                      
commercial  1,480  10  -  1,490  2,786  563,765  568,041 
1-4 family mortgage  420  16  -  436  453  235,020  235,909 
Other mortgage  516  -  -  516  240  322,843  323,599 
Total real estate -                      
mortgage  2,416  26  -  2,442  3,479  1,121,628  1,127,549 
Consumer  108  -  8  116  135  46,031  46,282 
Total $4,223 $411 $8 $4,642 $10,350 $2,348,190 $2,363,182 
Fair value estimates for specifically impaired loans are derived from appraised values based on the current market value or as is value of the property, normally from recently received and reviewed appraisals.  Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property.  These appraisals are reviewed by our credit administration department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal.  Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.
87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

The following table presents details of the Company’s impaired loans evaluated for impairment, and those determined to be impaired, as of December 31, 20112013 and December 31, 2010, and for the year ended December 31, 2011.2012, respectively. Loans which have been fully charged off do not appear in the tables.

December 31, 2011

  Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		  Average
Recorded
Investment		  Interest
Income
Recognized in
Period		 
  (In Thousands) 
With no allowance recorded:                    
Commercial, financial and agricultural $1,264  $1,264  $-  $1,501  $74 
Real estate - construction  11,583   12,573   -   10,406   226 
Real estate - mortgage:                    
Owner-occupied commercial  2,493   2,493   -   2,523   153 
1-4 family mortgage  1,293   1,293   -   1,241   44 
Other mortgage  2,837   2,837   -   2,746   162 
Total real estate - mortgage  6,623   6,623   -   6,510   359 
Consumer  173   173   -   173   6 
Total with no allowance recorded  19,643   20,633   -   18,590   665 
                     
With an allowance recorded:                    
Commercial, financial and agricultural  4,314   4,314   1,382   4,156   226 
Real estate - construction  4,679   4,679   1,482   3,987   94 
Real estate - mortgage:                    
Owner-occupied commercial  3,515   3,515   88   3,504   365 
1-4 family mortgage  4,397   4,397   904   4,484   198 
Other mortgage  331   331   -   337   22 
Total real estate - mortgage  8,243   8,243   992   8,325   585 
Consumer  374   624   325   425   - 
Total with allowance recorded  17,610   17,860   4,181   16,893   905 
                     
Total Impaired Loans:                    
Commercial, financial and agricultural  5,578   5,578   1,382   5,657   300 
Real estate - construction  16,262   17,252   1,482   14,393   320 
Real estate - mortgage:                    
Owner-occupied commercial  6,008   6,008   88   6,027   518 
1-4 family mortgage  5,690   5,690   904   5,725   242 
Other mortgage  3,168   3,168   -   3,083   184 
Total real estate - mortgage  14,866   14,866   992   14,835   944 
Consumer  547   797   325   598   6 
Total impaired loans $37,253  $38,493  $4,181  $35,483  $1,570 

87
  December 31, 2013       
                 
     Unpaid    Average Interest Income 
  Recorded Principal Related Recorded Recognized 
  Investment Balance Allowance Investment in Period 
  (In Thousands) 
With no allowance recorded:                
Commercial, financial                
and agricultural $1,210 $1,210 $- $1,196 $63 
Real estate - construction  1,967  2,405  -  1,363  32 
Real estate - mortgage:                
Owner-occupied commercial  577  577  -  603  32 
1-4 family mortgage  1,198  1,198  -  1,200  55 
Other mortgage  2,311  2,311  -  1,901  123 
Total real estate - mortgage  4,086  4,086  -  3,704  210 
Consumer  -  -  -  -  - 
Total with no allowance recorded  7,263  7,701  -  6,263  305 
                 
With an allowance recorded:                
Commercial, financial                
and agricultural  2,618  2,958  1,992  2,844  98 
Real estate - construction  7,270  7,750  1,597  6,564  200 
Real estate - mortgage:                
Owner-occupied commercial  1,509  1,509  620  1,573  38 
1-4 family mortgage  11,120  11,120  1,210  10,743  342 
Other mortgage  1,487  1,586  152  1,873  96 
Total real estate - mortgage  14,116  14,215  1,982  14,189  476 
Consumer  699  699  699  790  28 
Total with allowance recorded  24,703  25,622  6,270  24,387  802 
                 
Total Impaired Loans:                
Commercial, financial                
and agricultural  3,828  4,168  1,992  4,040  161 
Real estate - construction  9,237  10,155  1,597  7,927  232 
Real estate - mortgage:                
Owner-occupied commercial  2,086  2,086  620  2,176  70 
1-4 family mortgage  12,318  12,318  1,210  11,943  397 
Other mortgage  3,798  3,897  152  3,774  219 
Total real estate - mortgage  18,202  18,301  1,982  17,893  686 
Consumer  699  699  699  790  28 
Total impaired loans $31,966 $33,323 $6,270 $30,650 $1,107 
88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

 December 31, 2010 
  Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		 
  (In Thousands) 
With no allowance recorded:            
Commercial, financial and agricultural $2,345  $2,930  $- 
Real estate - construction  10,532   12,705   - 
Real estate - mortgage:            
Owner-occupied commercial  1,614   1,801   - 
1-4 family mortgage  511   511   - 
Other mortgage  1,817   1,817   - 
Total real estate - mortgage  3,942   4,129   - 
Consumer  289   289   - 
Total with no allowance recorded  17,108   20,053   - 
           �� 
With an allowance recorded:            
Commercial, financial and agricultural  9,190   9,190   1,602 
Real estate - construction  18,178   18,428   1,855 
Real estate - mortgage:            
Owner-occupied commercial  3,373   3,373   55 
1-4 family mortgage  2,995   2,995   360 
Other mortgage  -   -   - 
Total real estate - mortgage  6,368   6,368   415 
Consumer  704   704   554 
Total with allowance recorded  34,440   34,690   4,426 
             
Total Impaired Loans:            
Commercial, financial and agricultural  11,535   12,120   1,602 
Real estate - construction  28,710   31,133   1,855 
Real estate - mortgage:            
Owner-occupied commercial  4,988   5,174   55 
1-4 family mortgage  3,506   3,506   360 
Other mortgage  1,817   1,817   - 
Total real estate - mortgage  10,311   10,497   415 
Consumer  993   993   554 
Total impaired loans $51,549  $54,743  $4,426 

The average amount of impaired loans was $52.1 million during 2010 and $21.8 million during 2009. Interest income recognized on impaired loans was $2.2 million and $584,000 for 2010 and 2009, respectively.

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.             LOANS (Continued)

During the third quarter of 2011, the Company adopted the provisions of the FASB ASU No. 2011-02,Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a

  December 31, 2012       
                 
     Unpaid    Average Interest Income 
  Recorded Principal Related Recorded Recognized in 
  Investment Balance Allowance Investment Period 
  (In Thousands) 
With no allowance recorded:                
Commercial, financial                
and agricultural $2,602 $2,856 $- $2,313 $105 
Real estate - construction  6,872  7,894  -  7,631  188 
Owner-occupied commercial  5,111  5,361  -  5,411  145 
1-4 family mortgage  2,166  2,388  -  2,177  108 
Other mortgage  4,151  4,249  -  4,206  275 
Total real estate - mortgage  11,428  11,998  -  11,794  528 
Consumer  135  344  -  296  6 
Total with no allowance recorded  21,037  23,092  -  22,034  827 
                 
With an allowance recorded:                
Commercial, financial                
and agricultural  1,308  1,308  577  1,325  90 
Real estate - construction  7,550  8,137  1,013  6,961  154 
Real estate - mortgage:                
Owner-occupied commercial  3,195  3,195  779  3,277  77 
1-4 family mortgage  4,002  4,002  1,007  4,001  139 
Other mortgage  302  302  135  307  20 
Total real estate - mortgage  7,499  7,499  1,921  7,585  236 
Total with allowance recorded  16,357  16,944  3,511  15,871  480 
                 
Total Impaired Loans:                
Commercial, financial                
and agricultural  3,910  4,164  577  3,638  195 
Real estate - construction  14,422  16,031  1,013  14,592  342 
Real estate - mortgage:                
Owner-occupied commercial  8,306  8,556  779  8,688  222 
1-4 family mortgage  6,168  6,390  1,007  6,178  247 
Other mortgage  4,453  4,551  135  4,513  295 
Total real estate - mortgage  18,927  19,497  1,921  19,379  764 
Consumer  135  344  -  296  6 
Total impaired loans $37,394 $40,036 $3,511 $37,905 $1,307 
Troubled Debt RestructuringRestructurings (“TDR”).Management applied the guidance on determining whether any restructurings that occurred from January 1, 2011 or later met the definition of a TDR. TDRs at December 31, 20112013 and 20102012 totaled $4.5$14.2 million and $3.1$12.3 million, respectively. The increase primarily consists of one relationship that was added in the fourth quarter totaling $8.0 million offset by pay-offs of $4.9 million and charge-offs of0.9 million during 2013. The Company’s TDRs have resulted primarily from allowing the borrower to pay interest-only for an extended period of time, or through interest rate reductions rather than from debt forgiveness.At December 31, 2011,2013, the Company had a related allowance for loan losses of $439,000$2,411,000 allocated to these TDRs, compared to $487,000$1,442,000 at December 31, 2010.2012. The Company had eleven TDR loans to one borrower in the amount of $4.8 million enter into payment default status during the fourth quarter of 2013. All other loans classified as TDRs as of December 31, 20112013 are performing as agreed under the terms of their restructured plans. For the years ended December 31, 2011 and 2010, there were no loans modified as a TDR for which there was a payment default during the year. The following table presents an analysis of TDRs as of December 31, 20112013 and December 31, 2010.

  December 31, 2011  December 31, 2010 
  Number of
Contracts		  Pre-
Modification
Outstanding
Recorded
Investment		  Post-
Modification
Outstanding
Recorded
Investment		  Number of
Contracts		  Pre-
Modification
Outstanding
Recorded
Investment		  Post-
Modification
Outstanding
Recorded
Investment		 
Troubled Debt Restructurings                        
Commercial, financial and agricultural  2  $1,369  $1,369   9  $2,398  $2,398 
Real estate - construction  -   -   -   -   -   - 
Real estate - mortgage:                        
Owner-occupied commercial  3   2,785   2,785   1   660   660 
1-4 family mortgage  -   -   -   -   -   - 
Other mortgage  1   331   331   -   -   - 
Total real estate mortgage  4   3,116   3,116   1   660   660 
Consumer  -   -   -   -   -   - 
   6  $4,485  $4,485   10  $3,058  $3,058 

2012.

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 December 31, 2013 December 31, 2012 
    Pre- Post-    Pre- Post- 
    Modification Modification    Modification Modification 
    Outstanding Outstanding    Outstanding Outstanding 
 Number of Recorded Recorded Number of Recorded Recorded 
 Contracts Investment Investment Contracts Investment Investment 
 (In Thousands) 
Troubled Debt Restructurings                  
Commercial, financial and                  
agricultural 5 $2,029 $2,029  2 $1,168 $1,168 
Real estate - construction 7  1,781  1,781  15  3,213  3,213 
Real estate - mortgage:                  
Owner-occupied                  
commercial -  -  -  6  5,907  5,907 
1-4 family mortgage 4  10,073  10,073  5  1,709  1,709 
Other mortgage 1  285  285  1  302  302 
Total real estate mortgage 5  10,358  10,358  12  7,918  7,918 
Consumer -  -  -  -  -  - 
  17 $14,168 $14,168  29 $12,299 $12,299 
                   
 Number of Recorded    Number of Recorded    
 Contracts Investment    Contracts Investment    
                   
Troubled Debt Restructurings                  
That Subsequently Defaulted                  
Commercial, financial and                  
agricultural 3 $1,067     - $-    
Real estate - construction 6  1,564     -  -    
Real estate - mortgage:                  
Owner-occupied                  
commercial -  -     3  2,786    
1-4 family mortgage 2  1,848     -  -    
Other mortgage -  -     -  -    
Total real estate - mortgage 2  1,848     3  2,786    
Consumer -  -     -  -    
  11 $4,479     3 $2,786    
In the ordinary course of business, the Company has granted loans to certain related parties, including directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the yearyears ended December 31, 20112013 and 20102012 are as follows:

  Years Ended December 31, 
  2011  2010 
  (In Thousands) 
Balance, beginning of year $6,825  $8,469 
Advances  7,926   9,471 
Repayments  (4,204)  (11,115)
Participation sold  (1,500)  - 
Balance, end of year $9,047  $6,825 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Years Ended December 31, 
  2013 2012 
  (In Thousands) 
Balance, beginning of year $12,400 $9,047 
Advances  4,975  7,630 
Repayments  (4,258)  (8,096) 
Participations  -  3,819 
Balance, end of year $13,117 $12,400 

NOTE 4.        FORECLOSED PROPERTIES

Other real estate and certain other assets acquired in foreclosure are carried at the lower of the recorded investment in the loan or fair value less estimated costs to sell the property.

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An analysis of foreclosed properties (in thousands) for the years ended December 31, 2013, 2012 and 2011 2010 and 2009 follows:

  2011  2010  2009 
Balance at beginning of year $6,966  $12,525  $10,473 
Transfers from loans and capitalized expenses  9,029   5,447   11,103 
Foreclosed properties sold  (3,334)  (7,995)  (6,314)
Writedowns and partial liquidations  (386)  (3,011)  (2,737)
Balance at end of year $12,275  $6,966  $12,525 
  2013 2012 2011 
Balance at beginning of year $9,685 $12,275 $6,966 
Transfers from loans and capitalized expenses  11,244  2,695  9,029 
Foreclosed properties sold  (7,664)  (2,967)  (3,334) 
Writedowns and partial liquidations  (593)  (2,318)  (386) 
Balance at end of year $12,672 $9,685 $12,275 

NOTE 5.     PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

  December 31, 
  2011  2010 
  (In Thousands) 
Furniture and equipment $5,224  $4,441 
Leasehold improvements  4,436   3,920 
   9,660   8,361 
Accumulated depreciation  (5,069)  (3,911)
  $4,591  $4,450 

follows (in thousands):

  December 31, 
  2013 2012 
        
Land and building $1,724 $1,724 
Furniture and equipment  9,579  8,642 
Leasehold improvements  5,131  4,742 
   16,434  15,108 
Accumulated depreciation  (8,083)  (6,261) 
  $8,351 $8,847 
The provisions for depreciation charged to occupancy and equipment expense for the years ended December 31, 2013, 2012 and 2011 2010were$1,841,000, $1,218,000 and  2009 were $1,173,000, $1,066,000 and $1,087,000,$1,173,000, respectively.

The Company leases land and building space under non-cancellable operating leases. Future minimum lease payments under non-cancellable operating leases at December 31, 2013 are summarized as follows:

  (In Thousands) 
2012 $2,068 
2013  1,955 
2014  1,945 
2015  1,974 
2016  1,934 
Thereafter  7,201 
  $17,077 

   (In Thousands) 
2014 $2,453 
2015  2,462 
2016  2,429 
2017  2,164 
2018  1,934 
Thereafter  4,622 
  $16,064 
For the years ended December 31, 2011, 20102013, 2012 and 2009,2011, annual rental expense on operating leases was $2,060,000, $1,734,000$2,488,000, $2,195,000 and $1,447,000,$2,060,000, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.      VARIABLE INTEREST ENTITIES (VIEs)

The Company utilizes special purpose entities (SPEs) that constitute investments in limited partnerships that undertake certain development projects to achieve federal and state tax credits. These SPEs are typically structured as VIEs and are thus subject to consolidation by the reporting enterprise that absorbs the majority of the economic risks and rewards of the VIE. To determine whether it must consolidate a VIE, the Company analyzes the design of the VIE to identify the sources of variability within the VIE, including an assessment of the nature of risks created by the assets and other contractual obligations of the VIE, and determines whether it will absorb a majority of that variability.

The Company has invested in a limited partnership for which it determined it is not the primary beneficiary, and which thus areis not subject to consolidation by the company.Company. The Company reports its investment in this partnership at its net realizable value, estimated to be the discounted value of the remaining amount of tax credits to be received. The amount recorded as investment in this partnership at December 31, 20112013 and 2012 was $504,000,$313,000, and is included in other assets.

On December 31, 2009, the

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The Company entered into ahas invested in limited partnershippartnerships as funding investor.  The partnership is apartnerships are single purpose entityentities that is lendinglend money to a real estate investorinvestors for the purpose of acquiring and operating a multi-tenant office building.commercial property.  The investment qualifiesinvestments qualify for New Market Tax Credits under Internal Revenue Code Section 45D, as amended.  The Company has determined that it is the primary beneficiary of the economic risks and rewards of the VIE,VIEs, and thus has consolidated the partnership’sthese partnership assets and liabilities into its consolidated financial statements.  The amount of recorded as an investment in this partnership atthese partnerships as of December 31, 20112013 and 2012 was $3,403,000,$26,005,000 and $3,192,000, respectively, of which $2,270,000$17,386,000 and $2,270,000 in 2013 and 2012,respectively, is included in loans of the Company. The remaining amount isamounts are included in other assets.


NOTE 7.DEPOSITS

Deposits at December 31, 20112013 and 20102012 were as follows:

  December 31, 
  2011  2010 
  (In Thousands) 
Noninterest-bearing demand $418,810  $250,490 
Interest-bearing checking  1,325,451   1,224,244 
Savings  15,638   5,493 
Time  71,368   55,583 
Time, $100,000 and over  312,620   222,906 
  $2,143,887  $1,758,716 

  December 31, 
  2013 2012 
  (In Thousands) 
Noninterest-bearing demand $650,456 $545,174 
Interest-bearing checking  1,930,676  1,551,158 
Savings  23,890  19,560 
Time  70,316  69,179 
Time, $100,000 and over  344,304  326,501 
  $3,019,642 $2,511,572 
The scheduled maturities of time deposits at December 31, 20112013 were as follows:

  (In Thousands) 
2012 $230,138 
2013  66,036 
2014  55,029 
2015  6,515 
2016  26,270 
  $383,988 

  (In Thousands) 
2014 $260,487 
2015  52,887 
2016  53,911 
2017  16,828 
2018  30,507 
  $414,620 
At December 31, 20112013 and 2010,2012, overdraft deposits reclassified to loans were $876,000$1,602,000 and $1,111,000, $3,860,000, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8.        FEDERAL FUNDS PURCHASED

At December 31, 2011, The2013, the Company had $79.3$174.4 million in federal funds purchased from its respondent banks that are clients of its correspondent banking unit.unit, compared to $117.1 million at December 31, 2012. The Company was paying an interest rate of 0.25%0.25% on these balances at December 31, 2011.

2013.

At December 31, 2011,2013, the Company had available lines of credit totaling approximately $140$130 million with various financial institutions for borrowing on a short-term basis, with no amount outstanding. Available lines with these same banks totaled approximately $130 million at December 31, 2012. These lines are subject to annual renewals with varying interest rates.


NOTE 9.       OTHER BORROWINGS

The Company prepaid both of its advances from Federal Home Loan Bank (“FHLB”) during 2011, one in March and the other in June. Prepayment penalties of $738,000 were paid to the FHLB as part of these prepayments, and is included in other operating expenses.

At December 31, 2011 and 2010, the composition of other
Other borrowings is as follows:

  2011  2010 
  Amount  Weighted Average Rate  Amount  Weighted Average Rate 
FHLB Advances:                
Fixed rate, due 2012 and 2013 $-   0.00% $20,000   3.13%
Subordinated notes payable  4,954   8.25   4,937   8.25 
Total other borrowings $4,954   8.25% $24,937   4.14%

NOTE 10.           JUNIOR SUBORDINATED MANDATORY CONVERTIBLE DEFERRABLE INTEREST DEBENTURES DUE MARCH 15, 2040

On February 9, 2010 the Company established a Delaware statutory trust subsidiary, ServisFirst Capital Trust II (the “2010 Trust”), which issued 15,000 shares of its 6.0% Mandatory Convertible Trust Preferred Securities (the “Preferred Securities”) for $15,000,000, or $1,000 per Preferred Security, on March 15, 2010. The 2010 Trust simultaneously issued 50,000 shares of its common securities to the Company for a purchase price of $50,000, or $1.00 per share, which together with the Preferred Securities constitute all$19.9 million are comprised of the issued and outstanding securities of the 2010 Trust (collectively, the “Trust Securities”).  The 2010 Trust invested all of the proceeds from the sale of the Trust Securities in the Company’s 6.0% Junior5.5% Subordinated Mandatory Convertible Deferrable Interest DebenturesNotes due March 15, 2040 in the principal amount of $15,050,000 (the “Subordinated Debentures”).  The Preferred SecuritiesNovember 9, 2022, which were offered and sold to accredited investorsissued in a private placement.

Holders of the Preferred Securities are entitled to receive distributions accruing from March 15, 2010, and payable quarterlyplacement in arrears on March 15,November 2012. The notes pay interest semi-annually.

On June 15, September 15 and December 15 of each year, commencing June 15, 2010 unless1, 2012, the Company defers interest payments on the Subordinated Debentures.  Distributions accrue at an annual rate equal to 6.0% of the liquidation amount of $1,000 per Preferred Security.  The rate and the distribution dates for the Preferred Securities correspond to the interest rate and payment dates on the Subordinated Debentures, which constitute substantially all the assets of the 2010 Trust.  As a result, if principal or interest is not paid on the Subordinated Debentures, no corresponding amounts will be paid on the Preferred Securities.  The 2010 Trust also pays a distribution on the common securities at an annual rate of 6.0% of the purchase price of the common securities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.        JUNIOR SUBORDINATED MANDATORY CONVERTIBLE DEFERRABLE INTEREST DEBENTURES DUE MARCH 15, 2040 (Continued)

The Subordinated Debentures are subordinate and junior in right of payment to all of the Company’s senior debt, as defined in the Indenture governing the Subordinated Debentures; provided, however, that, while any of the Preferred Securities remain outstanding, the Company shall not incur any additional senior debt in excess of 0.5% of the Company’s average assets for the fiscal year immediately preceding, unless approved by the holders of a majority of the outstanding Preferred Securities.  The Company has the right to defer payments of interest on the Subordinated Debentures from time to time, for up to 20 consecutive quarterly periods for each deferral period.  During any deferral period, the Company may not (i) pay dividends on or redeem any ofoff its capital stock, (ii) pay principal of or interest on any debt securities rankingpari passuwith or subordinate to the Subordinated Debentures or (iii) make any guaranty payments with respect to any guaranty of the debt securities of any of the Company’s subsidiaries if such guaranty rankspari passuwith or junior in right of payment to the Subordinated Debentures.

If not previously redeemed or converted into common stock of the Company, the Preferred Securities will automatically and mandatorily convert into common stock of the Company on March 15, 2013 at a conversion price of $25 per share of common stock.  In addition to such mandatory conversion, the Preferred Securities may be converted into common stock of the Company at the option of the holder at any time prior to the earliest to occur of maturity, redemption or mandatory conversion at the same conversion price.

The Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity (as defined in the Indenture), or upon earlier redemption of the Subordinated Debentures. The Subordinated Debentures are redeemable by the Company at any time in whole, but not in part, upon the occurrence of a special event, as defined in the Indenture.

The Company has the right at any time to terminate the 2010 Trust and cause the Subordinated Debentures to be distributed to the holders of the Preferred Securities in liquidation of the 2010 Trust. This right is optional and wholly within the Company’s discretion.

The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interests, which is included in Tier 1 capital for bank and financial holding companies. In calculating the amount of Tier 1 qualifying capital, the trust preferred securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock.

NOTE 11.           SUBORDINATED NOTE DUE JUNE 1, 2016

On June 23, 2009, the Company issued its 8.25%8.25% Subordinated Note due June 1, 2016 in the aggregate principal amount of $5,000,000$5 million. This note was payable to anone accredited investor at 100%and was issued on June 23, 2009.

On November 8, 2012, the Company redeemed all of par. The note is subordinate and junior in right of payment upon any liquidationits outstanding8.5% Junior Subordinated Deferrable Interest Debentures due 2038, which were held by ServisFirst Capital Trust I. As a result, all of the Company as tooutstanding8.5% Trust Preferred Securities and8.5% Common Securities of the Trust were redeemed. The redemption price for the Trust Preferred Securities was $1,000 per security, for a total principal interest and premium to obligationsamount of $15 million, plus accrued distributions up to the Company’s depositorsredemption date. The Junior Subordinated Debentures were originally issued on September 2, 2008, and other obligationsin accordance with their terms, were subject to its general and secured creditors. Interest payments are due and payableoption redemption by the Company on eachor after September 1, December 1, March 12011. Pursuant to the terms of its Amended and June 1, commencing on September 1, 2009. Interest accrues at an annual rate of 8.25%. TheRestated Trust Agreement, ServisFirst Capital Trust I is required to use the proceeds it receives from the note payable areredemption of the Junior Subordinated Debentures to redeem its Trust Preferred Securities and 8.5% Common Securities on the same day.
92

The Company prepaid both of its advances from Federal Home Loan Bank (“FHLB”) during 2011, one in March and the other in June. Prepayment penaltiesin the amount of $738,000 were paid to the FHLB,which were  included in Tier 2 capital of the Bank and the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

other operating expenses.


NOTE 11.          SUBORDINATED NOTE DUE JUNE10.            SF HOLDING 1, 2016 (Continued)

INC. AND SF REALTY 1, INC.

In addition,January 2012, the Company issued to the investor a total of 15,000 warrants, each representing the right to purchase one share of the Company’s common stock for a purchase price of $25.00. Each warrant is exercisable for a period beginning uponformed SF Holding 1, Inc., an Alabama corporation, and its date of issuance and ending on Junesubsidiary, SF Realty 1, 2016. The Company estimated the fair value of each warrantInc., an Alabama corporation. SF Realty 1 elected to be $5.41 using a Black-Scholes-Merton valuation model. This total value of $86,000 was recordedtreated as a discountreal estate investment trust (“REIT”) for U.S. income tax purposes. SF Realty 1 holds and reducedmanages participations in residential mortgages and commercial real estate loans originated by ServisFirst Bank. SF Holding 1, Inc. and SF Realty 1, Inc. are both consolidated into the net book value of the note to $4,914,000 with an offsetting increase to the Company’s additional paid-in capital. The discount will be amortized over a five-year period.

NOTE 12.           PARTICIPATION IN THE SMALL BUSINESS LENDING FUND OF THE U.S. TREASURY DEPARTMENT

Company. 


NOTE 11.
PARTICIPATION IN THE SMALL BUSINESS LENDING FUND OF THE U.S. TREASURY DEPARTMENT
On June 21, 2011, the Company entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which the Company issued and sold to the Treasury40,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000$1,000 per share (the “Series A Preferred Stock”), for aggregate proceeds of $40,000,000.$40,000,000. The issuance was pursuant to the Treasury’s Small Business Lending Fund program, a $30$30 billion fund established under the Small Business Jobs Act of 2010, which encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10$10 billion. The Series A Preferred Stock is entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1, commencing October 1, 2011. The dividend rate, which is calculated on the aggregate Liquidation Amount, has been initially set at 1%1% per annum based upon the current level of “Qualified Small Business Lending” (“QSBL”) by the Bank. The dividend rate for future dividend periods will be set based upon the percentage change in qualified lending between each dividend period and the baseline QSBL level established at the time the Agreement was entered into. Such dividend rate may vary from 1%1% per annum to 5%5% per annum for the second through tenth dividend periods, and from 1%1% per annum to 7%7% per annum for the eleventh through the first half of the nineteenth dividend periods.  If the Series A Preferred Stock remains outstanding for more than four-and-one-half years, the dividend rate will be fixed at 9%9%.  Prior to that time, in general, the dividend rate decreases as the level of the Bank’s QSBL increases.  Such dividends are not cumulative, but the Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Series A Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series A Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities.  In addition, if (i) the Company has not timely declared and paid dividends on the Series A Preferred Stock for six dividend periods or more, whether or not consecutive, and (ii) shares of Series A Preferred Stock with an aggregate liquidation preference of at least $25,000,000$25,000,000 are still outstanding, the Treasury (or any successor holder of Series A Preferred Stock) may designate two additional directors to be elected to the Company’s Board of Directors.

As is more completely described in the Certificate of Designation, holders of the Series A Preferred Stock have the right to vote as a separate class on certain matters relating to the rights of holders of Series A Preferred Stock and on certain corporate transactions.  Except with respect to such matters and, if applicable, the election of the additional directors described above, the Series A Preferred Stock does not have voting rights.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12.           PARTICIPATION IN THE SMALL BUSINESS LENDING FUND OF THE U.S. TREASURY DEPARTMENT (Continued)

The Company may redeem the shares of Series A Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount per share and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by the Company’s primary federal banking regulator.


NOTE 13.12.            DERIVATIVES

Prior

The Company has entered into agreements with secondary market investors to 2008,deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company entered into an interest rate floorhas no risk or exposure with a notional amount of $50 million in order to fix the minimum interest rate on a corresponding amount of its floating-rate loans.investor. The interest rate floor was sold in January 2008 and the related gain of $817,000 was deferred and amortized to income over the remaining term of the original agreement which would have terminated on June 22, 2009. Gains of $272,000 and $544,000 were recognized for the years ended December 31, 2009 and 2008, respectively.

During 2010, the Company entered into an interest rate cap with a notional value of $100 million. The cap has a strike rate of 2.00% and is indexed to the three month London Interbank Offered Rate (“LIBOR”). The cap does not qualify for hedge accounting treatment, and is marked to market, with changes in market value reflected in the income statement.

The Company uses derivatives to hedge interest rate exposures associated with mortgage loans held for sale and mortgage loans in process. The Company regularly enters into derivative financial instruments in the form of forward contracts, as part of its normal asset/liability management strategies. The Company’s obligations under forward contracts consist of “best effort” commitments to deliver mortgage loans originated in the secondary market at a future date. Interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. In the normal course of business, the Company regularly extends these rate lock commitments to customers during the loan origination process. The fair values of the Company’s forward contractagreements with investors and rate lock commitments to customers as of December 31, 20112013 and 2010December 31, 2012 were not material and have not been recorded.

material.
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NOTE 14.13.             EMPLOYEE AND DIRECTOR BENEFITS

At December 31, 2011,2013, the Company has two share-basedstock-based compensation plans, which are described below. The compensation cost that has been charged against income for the plans was approximately $975,000, $713,000$1,205,000, $1,049,000 and $785,000$975,000 for the years ended December 31, 2013, 2012 and 2011, 2010 and 2009, respectively.

Stock Incentive Plans

The Company’s 2005 Stock Incentive Plan (the “2005 Plan”), originally permitted the grant of stock options to its officers, employees, directors and organizers of the Company for up to525,000 shares of common stock. However, upon shareholderstockholder approval during 2006, the 2005 Plan was amended in order to allow the Company to grant stock options for up to1,025,000 shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the 2005 Plan. Option awards are generally granted with an exercise price equal to the estimated fair market value of the Company’s stock at the date of grant; those option awards vest in varying amounts from 2007 through 20152018 and are based on continuous service during that vesting period and have a ten-year contractual term. Dividends are not paid on unexercised options and dividends are not subject to vesting. The 2005 Plan provides for accelerated vesting if there is a change in control (as defined in the 2005 Plan).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.           EMPLOYEE AND DIRECTOR BENEFITS (Continued)

On March 23, 2009, the Company’s board of directors adopted the 2009 Stock Incentive Plan (the “2009 Plan”), which was effective upon approval by the stockholders at the 2009 Annual Meeting of Stockholders. The 2009 Plan authorizes the grant of Stock Appreciation Rights, Restricted Stock, Options, Non-stock Share Equivalents, Performance Sharesstock appreciation rights, restricted stock, stock options, non-stock share equivalents, performance shares or Performance Unitsperformance units and other equity-based awards.

Both incentive stock options and non-qualified stock options may be granted under the 2009 Plan. Option awards are generally granted with an exercise price equal to the estimated fair market value of the Company’s stock at the date of grant. Up to425,000 shares of common stock of the Company are available for awards under the 2009 Plan.

As of December 31, 2011,2013, there are a total of 401,200166,000 shares available to be granted under both of these plans.

On September 21, 2006, we granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of30,000 shares of our common stock for a purchase price of $15.00$15.00 per share. On November 2, 2007, we granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of25,000 shares of our common stock for a purchase price of $20.00$20.00 per share. These stock options are non-qualified and are not part of either of our stock incentive plans. They vest 100%vested100% in a lump sum five years after their date of grant and expire10 years after their date of grant.

The fair value of each stock option award is estimated on the date of grant using a Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Expected volatilities are based on an index of approximately 8479 publicly traded banks in the southeast United States. The expected term of 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.

  2011  2010  2009 
Expected volatility  26.50%  26.00%  20.00%
Expected dividends  0.37%  0.00%  0.50%
Expected term (in years)  6.5   7   7 
Risk-free rate  2.21%  2.10%  1.70%

  2013  2012  2011  
Expected volatility 18.65% 19.80% 26.50% 
Expected dividends -% -% 0.37% 
Expected term (in years) 7  6  7  
Risk-free rate 1.72% 1.05% 2.21% 
The weighted-averageweighted average grant-date fair value of options granted during the years ended December 31, 2013, December 31, 2012 and December 31, 2011 2010was $9.11, $6.59 and 2009 was $7.82, $7.91 and $5.87,$7.82, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.            EMPLOYEE AND DIRECTOR BENEFITS (Continued)

94

The following tables summarize the status of stock options granted.

  Shares  Weighted
Average
Exercise 
Price		  Weighted
Average
Remaining
Contractual
Term (years)		  Aggregate
Intrinsic 
Value		 
           (In Thousands) 
Year Ended December 31, 2011:                
Outstanding at beginning of year  881,000  $15.65   6.9  $8,238 
Granted  233,500   27.16   9.3   - 
Exercised  (40,700)  10.53   3.8   792 
Forfeited  -   15.00   -   - 
Outstanding at end of year  1,073,800  $18.33   6.0  $12,508 
                 
Exercisable at December 31, 2011  442,940  $13.19   4.4  $7,447 
                 
Year Ended December 31, 2010:                
Outstanding at beginning of year  863,500  $15.17   6.8  $8,483 
Granted  37,500   25.00   9.4   - 
Exercised  (10,000)  10.00   -   150 
Forfeited  (10,000)  15.00   -   - 
Outstanding at end of year  881,000  $15.65   6.9  $8,238 
                 
Exercisable at December 31, 2010  272,627  $11.96   5.1  $3,555 
                 
Year Ended December 31, 2009:                
Outstanding at beginning of year  826,000  $14.70   7.7  $8,513 
Granted  40,000   25.00   9.4   - 
Exercised  -   -   -   - 
Forfeited  (2,500)  15.00   -   - 
Outstanding at end of year  863,500  $15.17   6.8  $8,483 
                 
Exercisable at December 31, 2009  143,530  $11.99   6.1  $1,867 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.            EMPLOYEE AND DIRECTOR BENEFITS (Continued)

option activity:

  Shares Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contractual
Term (years)		 Aggregate
Intrinsic Value		 
         (In Thousands) 
Year Ended December 31, 2013:           
Outstanding at beginning of year 816,500 $20.87 5.8 $9,905 
Granted 60,000  37.96 9.7  213 
Exercised (94,200)  13.44 2.8  2,532 
Forfeited (6,000)  22.50 5.6  - 
Outstanding at end of year 776,300 $23.08 5.5 $14,300 
            
Exercisable at December 31, 2013: 387,244 $16.20 3.2 $9,797 
            
Year Ended December 31, 2012:           
Outstanding at beginning of year 1,073,800 $18.33 6.0 $12,508 
Granted 45,500  30.00 9.3  130 
Exercised (288,130)  12.71 2.4  5,846 
Forfeited (14,670)  24.54 -  - 
Outstanding at end of year 816,500 $20.87 5.8 $9,905 
            
Exercisable at December 31, 2012 412,825 $14.03 3.6 $7,831 
            
Year Ended December 31, 2011:           
Outstanding at beginning of year 881,000 $15.65 6.9 $8,238 
Granted 233,500  27.16 9.3  - 
Exercised (40,700)  10.53 3.8  792 
Forfeited -  15.00 -  - 
Outstanding at end of year 1,073,800 $18.33 6.0 $12,508 
            
Exercisable at December 31, 2011 442,940 $13.19 4.4 $7,447 
Exercisable options at December 31, 20112013 were as follows:

Range of Exercise Price  Shares  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term 
(years)		  Aggregate
Intrinsic Value
                 (In Thousands)
$10.00   146,500  $10.00   3.4  $2,930
 11.00   118,300   11.00   4.3  2,247
 15.00   125,394   15.00   4.9  1,881
 20.00   24,996   20.00   5.7  250
 25.00   27,750   25.00   6.7  139
     442,940  $13.19   4.4  $7,447

Range of
Exercise Price		 Shares Weighted
Average
Exercise Price		 Weighted
Average
Remaining
Contractual
Term (years)		 Aggregate
Intrinsic Value		 
          (In Thousands) 
$10.00 33,000 $10.00 1.4 $1,040 
 11.00 108,000  11.00 2.3  3,294 
 15.00 113,500  15.00 3.0  3,008 
 20.00 52,994  20.00 4.1  1,139 
 25.00 79,750  25.00 4.7  1,316 
   387,244 $16.20 3.2 $9,797 
As of December 31, 2011,2013, there was $2,269,000$1,636,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans.stock options. The cost is expected to be recognized on the straight-line method over a weighted-average period of 2.3the next2.2 years. The total fair value of shares vested during the year ended December 31, 20112013 was $588,000.

$705,000. 

Restricted Stock
The Company granted 20,000has awarded78,500 shares of restricted stock awards to a key executive in October 2009, and granted 2,000 restricted stock awards to eachcertain officers, of five employees in February 2010, for a total of 30,000 shares.which16,000 shares are vested. The value of these awardsrestricted stock is determined to be the current value of the Company’s stock whenat the awards are made,grant date, and this total value iswill be recognized as compensation expense over the vesting period, which is five years from the date of grant. 8,000 shares of restricted stock awarded to the key executive have vested as of December 31, 2011.period. As of December 31, 2011,2013, there was $437,000$1,453,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over a weighted-average period of 2.9 years.

Stock Warrants

In recognitionthe remaining2.1 years of the efforts and financial risks undertaken by the Bank’s organizers, it granted organizers an opportunity to purchase a total 60,000 shares of common stock at a price of $10, which was the fair market value of the Bank’s common stock at the time. The warrants fully vested on May 2, 2008, the third anniversary of the Bank’s incorporation, and will terminate on the tenth anniversary of the incorporation date. The total number of warrants outstanding at December 31, 2011 and 2010 was 40,000 and 60,000.

restricted stock’s vesting period.

95

Stock Warrants
The Company issuedgranted warrants for 75,000 shares of common stock at awith an exercise price of $25 per share in the third quarter of 2008. These warrants were issued in connection with the trust preferred securities that are discussedsecurities. 4,500 of these warrants were exercised in detail2012, and the remaining 70,500 warrants were exercised in Note 10.

2013.

The Company issuedgranted warrants for15,000 shares of common stock at awith an exercise price of $25$25 per share in the second quarter of 2009. These warrants were issued in connection with the saleissuance of the Company’s 8.25% Subordinated Note that is discussed in detail in Note 11.

Note.All of these warrants were outstanding as of December 31, 2013.

As of December 31, 2011,2013, all warrants were fully vested.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.            EMPLOYEE AND DIRECTOR BENEFITS (Continued)

The following tables summarize the status of stock warrants granted under the Company’s stock-based compensation plans.

  Shares  Weighted
Average
Exercise Price		  Weighted
Average
Remaining
Contractual
Term (years)		  Aggregate
Intrinsic 
Value		 
               (In Thousands) 
Year Ended December 31, 2011:                
Outstanding at beginning of year  60,000  $10.00   4.3  $900 
Granted  -   -   -   - 
Exercised  (20,000)  10.00   3.4   400 
Forfeited  -   -   -   - 
Outstanding at end of year  40,000   10.00   3.4  $800 
                 
Exercisable at December 31, 2011  40,000  $10.00   3.4  $800 
                 
Year Ended December 31, 2010:                
Outstanding at beginning of year  60,000  $10.00   5.3  $900 
Granted  -   -   -   - 
Exercised  -   -   -   - 
Forfeited  -   -   -   - 
Outstanding at end of year  60,000   10.00   4.3  $900 
                 
Exercisable at December 31, 2010  60,000  $10.00   4.3  $900 
                 
Year Ended December 31, 2009:                
Outstanding at beginning of year  60,000  $10.00   6.3  $900 
Granted  -   -   -   - 
Exercised  -   -   -   - 
Forfeited  -   -   -   - 
Outstanding at end of year  60,000   10.00   5.3  $900 
                 
Exercisable at December 31, 2009  60,000  $10.00   5.3  $900 

Retirement Plans
The Company has a retirement savings 401(k) and profit-sharing plan in which all employees age 21 and older may participate after completion of one year of service. For employees in service with the Bank at June 15, 2005, the length of service and age requirements were waived. The Company matches employees’ contributions based on a percentage of salary contributed by participants and may make additional discretionary profit sharing contributions. The Company’s expense for the plan was $946,000, $377,000$878,000, $1,167,000 and $341,000$946,000 for 2011, 20102013, 2012 and 2009,2011, respectively. The Company’s board of directors approved an additional 3% matchdiscretionary matches for 2013, 2012 and 2011 based on the profits of the Company during 2011.those years. The expense for this additional match was $432,000,matches were1%,4% and is3%, respectively, and amounted to $200,000, $576,000 and $432,000, respectively, and are included in the 2011 expense above.

expenses above.


NOTE 15.14.            COMMON STOCK

During 2011,2013, the Company completed private placements of 340,000250,000 shares of common stock. The shares were issued and sold at $30$41.50 per share to 105110 accredited investors of which approximately 33,900 shares were purchased by directors, officers and their families, and 2014 non-accredited investors. This sale of stock resulted in net proceeds of $10,159,000.$10,337,000. This includes stock offering expenses of $33,000.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$38,000.

NOTE 16.15.             REGULATORY MATTERS

The Bank is subject to dividend restrictions set forth in the Alabama Banking Code and by the Alabama State Banking Department. Under such restrictions, the Bank may not, without the prior approval of the Alabama State Banking Department, declare dividends in excess of the sum of the current year’s earnings plus the retained earnings from the prior two years. Based on this,these restrictions, the Bank would be limited to paying $61.0$110.9 million in dividends as of December 31, 2011.

2013.

The Bank is subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to adjusted total assets (as defined). Management believes, as of December 31, 2011,2013, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2011,2013, the most recent notification from the Federal Deposit Insurance Corporation categorized ServisFirst Bank as well capitalized under the regulatory framework for prompt corrective.corrective action. To remain categorized as well capitalized;capitalized, the Bank will have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. Management believes that it is well capitalized under the prompt corrective action provisions as of December 31, 2011.

2013.
100
96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16.            REGULATORY MATTERS (Continued)

The Company’s and Bank’s actual capital amounts and ratios are presented in the following table:

  Actual  For Capital Adequacy
Purposes		  To Be Well Capitalized
Under Prompt
Corrective Action
Provisions		 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of December 31, 2011:                        
Total Capital to Risk Weighted Assets:                        
Consolidated $246,334   12.79% $154,094   8.00%  N/A   N/A 
ServisFirst Bank  243,279   12.63%  154,070   8.00% $192,588   10.00%
Tier I Capital to Risk Weighted Assets:                        
Consolidated  219,350   11.39%  77,047   4.00%  N/A   N/A 
ServisFirst Bank  216,295   11.23%  77,035   4.00%  115,553   6.00%
Tier I Capital to Average Assets:                        
Consolidated  219,350   9.17%  95,642   4.00%  N/A   N/A 
ServisFirst Bank  216,295   9.06%  95,481   4.00%  119,352   5.00%
                         
As of December 31, 2010:                        
Total Capital to Risk Weighted Assets:                        
Consolidated $166,850   11.82% $112,927   8.00%  N/A   N/A 
ServisFirst Bank  166,721   11.81%  112,978   8.00% $141,222   10.00%
Tier I Capital to Risk Weighted Assets:                        
Consolidated  144,263   10.22%  56,464   4.00%  N/A   N/A 
ServisFirst Bank  144,117   10.20%  56,489   4.00%  84,733   6.00%
Tier I Capital to Average Assets:                        
Consolidated  144,263   7.77%  74,266   4.00%  N/A   N/A 
ServisFirst Bank  144,117   7.77%  74,236   4.00%  92,795   5.00%

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Actual  For Capital Adequacy
Purposes		  To Be Well Capitalized Under
Prompt Corrective Action
Provisions		  
  Amount Ratio  Amount Ratio  Amount Ratio  
As of December 31, 2013:                   
Total Capital to Risk
    Weighted Assets:		                   
Consolidated $343,904 11.73% $234,617 8.00%  N/A N/A  
ServisFirst Bank  341,256 11.64%  234,601 8.00% $293,252 10.00% 
Tier I Capital to Risk
    Weighted Assets:		                   
Consolidated  293,301 10.00%  117,308 4.00%  N/A N/A  
ServisFirst Bank  310,593 10.59%  117,301 4.00%  175,951 6.00% 
Tier I Capital to Average
    Assets:		                   
Consolidated  293,301 8.48%  138,373 4.00%  N/A N/A  
ServisFirst Bank  310,593 8.98%  138,331 4.00%  172,913 5.00% 
                    
As of December 31, 2012:                   
Total Capital to Risk
    Weighted Assets:		                   
Consolidated $287,136 11.78% $194,943 8.00%  N/A N/A  
ServisFirst Bank  284,141 11.66%  194,942 8.00% $243,678 10.00% 
Tier I Capital to Risk
    Weighted Assets:		                   
Consolidated  240,961 9.89%  97,472 4.00%  N/A N/A  
ServisFirst Bank  257,883 10.58%  97,471 4.00%  146,207 6.00% 
Tier I Capital to Average
    Assets:		                   
Consolidated  240,961 8.43%  114,323 4.00%  N/A N/A  
ServisFirst Bank  257,883 9.03%  114,227 4.00%  142,784 5.00% 

NOTE 17.16.          OTHER OPERATING INCOME AND EXPENSES

The major components of other operating income and expense included in noninterest income and noninterest expense are as follows:

  Years Ended December 31, 
  2011  2010  2009 
  (In Thousands) 
Other Operating Income            
Gain (loss) on sale of other real estate owned  76   (203)  (441)
Credit card income  481   30   22 
Increase in cash surrender value of life insurance contracts  390   -   - 
Other  650   744   786 
  $1,597  $571  $367 
             
Other Operating Expenses            
Postage $194  $173  $142 
Telephone  409   358   318 
Data processing  2,023   1,983   1,844 
Recording fees and other loan expenses  2,406   1,027   537 
Supplies  356   263   319 
Customer and public relations  689   477   462 
Marketing  406   313   276 
Sales and use tax  208   141   211 
Donations and contributions  437   261   214 
Directors fees  235   216   180 
Prepayment penalties FHLB advances  738   -   - 
Other  2,313   2,071   1,689 
  $10,414  $7,283  $6,192 

  Years Ended December 31, 
  2013 2012 2011 
  (In Thousands) 
Other Operating Income          
(Loss) gain on sale of other real estate owned $(159) $(105) $76 
Credit card income  1,425  1,064  481 
Other  878  744  650 
  $2,144 $1,703 $1,207 
           
Other Operating Expenses          
Postage $195 $159 $194 
Telephone  465  385  409 
Data processing  2,535  2,202  2,023 
Other loan expenses  1,882  2,836  2,406 
Supplies  380  320  356 
Customer and public relations  838  791  689 
Marketing  532  454  406 
Sales and use tax  309  198  208 
Donations and contributions  370  482  437 
Directors fees  341  286  235 
Prepayment penalties FHLB advances  -  -  738 
Other  3,082  2,609  2,313 
  $10,929 $10,722 $10,414 
97

NOTE 18.17.             INCOME TAXES

The components of income tax expense are as follows:

  Years Ended December 31, 
  2011  2010  2009 
  (In Thousands) 
          
Current $13,629  $11,570  $4,381 
Deferred  (1,240)  (2,212)  (1,601)
Income tax expense $12,389  $9,358  $2,780 

  Year Ended December 31, 
  2013 2012 2011 
  (In Thousands) 
Current tax expense:          
Federal $21,264 $17,993 $12,045 
State  899  1,308  1,584 
Total current tax expense  22,163  19,301  13,629 
Deferred tax expense (benefit):          
Federal  (1,616)  (1,999)  (1,100) 
State  (189)  (182)  (140) 
Total deferred tax expense  (1,805)  (2,181)  (1,240) 
Total income tax expense $20,358 $17,120 $12,389 
The Company’s total income tax expense differs from the amounts computed by applying the Federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:

102
  Year Ended December 31, 2013 
  Amount % of Pre-tax
Earnings		 
  (In Thousands)   
Income tax at statutory federal rate $21,691 35.00%
Effect on rate of:      
State income tax, net of federal tax effect  558 0.90%
Tax-exempt income, net of expenses  (1,200) (1.94)%
Bank owned life insurance contracts  (698) (1.13)%
Incentive stock option expense  66 0.11%
Other  (59) (0.09)%
Effective income tax and rate $20,358 32.85%
       
  Year Ended December 31, 2012 
  Amount % of Pre-tax
Earnings		 
  (In Thousands)   
Income tax at statutory federal rate $18,047 35.00%
Effect on rate of:      
State income tax, net of federal tax effect  709 1.37%
Tax-exempt income, net of expenses  (1,007) (1.95)%
Bank owned life insurance contracts  (568) (1.10)%
Incentive stock option expense  121 0.23%
Other  (182) (0.35)%
Effective income tax and rate $17,120 33.20%
       
  Year Ended December 31, 2011 
  Amount % of Pre-tax
Earnings		 
  (In Thousands)   
Income tax at statutory federal rate $12,540 35.00%
Effect on rate of:      
State income tax, net of federal tax effect  967 2.70%
Tax-exempt income, net of expenses  (875) (2.44)%
Bank owned life insurance contracts  (137) (0.38)%
Incentive stock option expense  128 0.36%
Other  (234) (0.65)%
Effective income tax and rate $12,389 34.59%
98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.            INCOME TAXES (Continued)

  Year Ended December 31, 2011 
  Amount  % of Pre-tax
Earnings		 
  (In Thousands) 
Income tax at statutory federal rate $12,540   35.00%
Effect on rate of:        
State income tax, net of federal tax effect  967   2.70%
Tax-exempt income, net of expenses  (875)  -2.44%
Bank owned life insurance contracts  (137)  -0.38%
Incentive stock option expense  128   0.36%
Other  (234)  -0.65%
Effective income tax and rate $12,389   34.59%

  Year Ended December 31, 2010 
  Amount  % of Pre-tax
Earnings		 
  (In Thousands) 
Income tax at statutory federal rate $9,355   35.00%
Effect on rate of:        
State income tax, net of federal tax effect  715   2.68%
Tax-exempt income, net of expenses  (773)  -2.89%
Incentive stock option expense  144   0.54%
Other  (83)  -0.32%
Effective income tax and rate $9,358   35.01%

  Year Ended December 31, 2009 
  Amount  % of Pre-tax
Earnings		 
  (In Thousands) 
Income tax at statutory federal rate $2,944   34.00%
Effect on rate of:        
State income tax, net of federal tax effect  214   2.47%
Tax-exempt income, net of expenses  (477)  -5.51%
Incentive stock option expense  224   2.59%
Other  (125)  -1.44%
Effective income tax and rate $2,780   32.11%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.            INCOME TAXES (Continued)

The components of net deferred tax asset are as follows:

  December 31, 
  2011  2010  2009 
  (In Thousands) 
Other real estate $452  $646  $411 
Start-up costs  115   127   141 
Net unrealized (gains) losses on securities available for sale and cash flow hedge  (4,220)  (1,528)  (810)
Depreciation  (489)  (206)  (304)
Deferred loan fees  (176)  (72)  106 
Allowance for loan losses  8,509   6,974   5,419 
Nonqualified equity awards  436   194   27 
Other  287   231   (118)
Net deferred income tax assets $4,914  $6,366  $4,872 

  December 31,
  2013 2012 
        
  (In Thousands)
Deferred tax assets:       
Allowance for loan losses $11,844 $10,142 
Other real estate owned  1,222  1,064 
Nonqualified equity awards  773  583 
Nonaccrual interest  374  491 
Other deferred tax assets  141  114 
Total deferred tax assets  14,354  12,394 
        
Deferred tax liabilities:       
Net unrealized gain on securities available for sale  2,102  3,929 
Depreciation  514  510 
Prepaid expenses  161  140 
Deferred loan fees  83  237 
Investments  229  93 
Other deferred tax liabilities  247  99 
Total deferred tax liabilities  3,336  5,008 
Net deferred income tax assets $11,018 $7,386 
The Company believes its net deferred tax asset is recoverable as of December 31, 20112013 based on the expectation of future taxable income and other relevant considerations.

ASC 740 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on derecognition, measurement and classification of income tax uncertainties in interim periods. As of December 31, 2011, the Company had no unrecognized tax benefits related to federal or state income tax matters. The Company does not anticipate any material increase or decrease in unrecognized tax benefits during 2012 related to any tax positions taken prior to December 31, 2011. As of December 31, 2011, the Company has accrued no interest or penalties related to uncertain tax positions. It is the Company’s policy to recognize interest and penalties, if any, related to income tax matters in income tax expense.

The Company and its subsidiaries file a consolidated U.S. federal, State of AlabamaFederal income tax return and State of Floridavarious consolidated and separate company state income tax returns. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 20092010 through 2011.2013. The Company is also currently open to audit by the Stateseveral state departments of Alabamarevenue for the years ended December 31, 20092010 through 2011, and open to2013. The audit periods differ depending on the date the Company began business activities in each state. Currently, there are no years for which the Company filed a federal or state income tax return that are under examination by the IRS or any state department of Florida forrevenue.  
Accrued interest and penalties on unrecognized income tax benefits totaled $0 and $6,000 as of January 1, 2013 and December 31, 2013, respectively. Unrecognized income tax benefits as of January 1, 2013 and December 31, 2013, that, if recognized, would impact the year ended 31,effective income tax rate totaled $161,000 and $437,000 (net of the federal benefit on state income tax issues), respectively, which includes interest and penalties of $6,000 and $0, respectively. The Company does not expect any of the uncertain tax positions to be settled or resolved during the next twelve months. 
The following table presents a summary of the changes during 2013, 2012 and 2011 as we opened our first office in the Stateamount of Floridaunrecognized tax benefits that are included in 2011.

the consolidated balance sheets.  
  2013 2012 2011 
           
  (In Thousands) 
Balance, beginning of year $161 $- $- 
Increases related to prior year tax positions  276  -  - 
Decreases related to prior year tax positions  -  -  - 
Increases related to current year tax positions  -  161  - 
Settlements  -  -  - 
Lapse of statute  -  -  - 
Balance, end of year $437 $161 $- 
99

NOTE 19.18.            COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, credit card arrangements, and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. A summary of the Company’s approximate commitments and contingent liabilities is approximately as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  2013 2012 2011 
  (In Thousands) 
Commitments to extend credit $1,052,902 $860,421 $697,939 
Credit card arrangements  38,122  25,699  19,686 
Standby letters of credit and          
financial guarantees  40,371  36,374  42,937 
Total $1,131,395 $922,494 $760,562 
NOTE 19.COMMITMENTS AND CONTINGENCIES (Continued)

  2011  2010  2009 
  (In Thousands) 
Commitments to extend credit $697,939  $538,719  $409,760 
Credit card arrangements  19,686   17,601   19,059 
Standby letters of credit and            
financial guarantees  42,937   47,103   39,205 
Total $760,562  $603,423  $468,024 

Commitments to extend credit, credit card arrangements, commercial letters of credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Company.


NOTE 20.19.             CONCENTRATIONS OF CREDIT

The Company originates primarily commercial, residential, and consumer loans to customers in the Company’s market area. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy in thisthe market area.

The Company’s loan portfolio is concentrated primarily concentrated in loans secured by real estate, of which 54%54% is secured by real estate in the Company’s primary market areas. In addition, a substantial portion of the other real estate owned is located in that same market. Accordingly, the ultimate collectability of the loan portfolio and the recovery of the carrying amount of other real estate owned are susceptible to changes in market conditions in the Company’s primary market area.


105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21.20.             EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of the

Basic earnings per common share andare computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share assuming dilution computations are presented below.

  Years Ended December 31, 
  2011  2010  2009 
  (Dollar Amounts In Thousands Except Per
Share Amounts)		 
Earnings Per Share         
Weighted average common shares outstanding  5,759,524   5,519,151   5,485,972 
Net income available to common stockholders $23,238  $17,378  $5,878 
Basic earnings per common share $4.03  $3.15  $1.07 
             
Weighted average common shares outstanding  5,759,524   5,519,151   5,485,972 
Dilutive effects of assumed conversions and exercise of stock options and warrants  989,639   775,453   301,671 
Weighted average common and dilutive potential common shares outstanding  6,749,163   6,294,604   5,787,643 
Net income available to common stockholders $23,238  $17,378  $5,878 
Effect of interest expense on convertible debt, net of tax and discretionary expenditures related to conversion $568  $473  $- 
Net income availabe to common stockholders, adjusted for effect of debt conversion $23,806  $17,851  $5,878 
Diluted earnings per common share $3.53  $2.84  $1.02 
include the dilutive effect of additional potential common shares issuable under stock options and warrants, as well as the common shares issuable upon conversion of the Company’s6% Mandatory Convertible Trust Preferred Securities due March 15, 2040.
100

  Years Ended December 31, 
  2013 2012 2011 
           
  (Dollar Amounts In Thousands Except Per Share Amounts) 
Earnings Per Share          
Weighted average common shares outstanding  6,869,071  5,996,437  5,759,524 
Net income available to common stockholders $41,201 $34,045 $23,238 
Basic earnings per common share $6.00 $5.68  4.03 
           
Weighted average common shares outstanding  6,869,071  5,996,437  5,759,524 
Dilutive effects of assumed conversions and          
exercise of stock options and warrants  399,604  945,315  989,639 
Weighted average common and dilutive potential          
common shares outstanding  7,268,675  6,941,752  6,749,163 
Net income available to common stockholders $41,201 $34,045 $23,238 
Effect of interest expense on convertible debt, net of tax          
and discretionary expenditures related to conversion $115 $569 $568 
Net income available to common stockholders, adjusted          
for effect of debt conversion $41,316 $34,614 $23,806 
Diluted earnings per common share $5.69 $4.99 $3.53 

NOTE 22.21.     RELATED PARTY TRANSACTIONS

Loans

As more fully described in Note 3, the Company had outstanding loan balances to related parties as of December 31, 20112013 and 20102012 in the amount of $9,047,000$13.1 million and $6,825,000,$12.4 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.            FAIR VALUE MEASUREMENT

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in


NOTE 22.
FAIR VALUE MEASUREMENT
Measurement of fair value measurements, the standardunder U.S. GAAP establishes a fair value 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 as well asand also considers counterparty credit risk in its assessment of fair value.

Debt Securities – where. Where quoted prices are available in an active market, securities are classified within levelLevel 1 of the hierarchy. Level 1 securities include highly liquid government securities such as U.S. Treasuriestreasuries 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 byprices obtained from independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing sourceservice 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 certain cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.

101

Interest Rate Swap Agreements –. The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the hierarchy. These fair value estimations include primarily market observable inputs such as yield curves and option volatilities, and include the value associated with counterparty credit risk.

Interest Rate CapImpaired Loans – The. Impaired loans are measured and reported at fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the hierarchy. These fair value estimations include primarily market observable inputs such as yield curves and option volatilities.

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.            FAIR VALUE MEASUREMENT (Continued)

Impaired Loans-Loans are considered impaired under FASB ASC 310-10-35, Subsequent Measurement of Impaired Loans,when full payment under the loan terms is not expected. Impairednotprobable. Specific allowances for impaired loans are carried atbased on comparisons of the recorded carrying values of the loans to the present value of the estimated future cash flows using theof these loans at each loan’s existingoriginal effective interest rate, or the fair value of the collateral or the observable market prices of the loans. 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 loan is collateral-dependent.market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment.adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $5,419,000$9,589,000 and $7,878,000$4,586,000 during the years ended December 31, 20112013 and 2010,2012, respectively. Impaired loans measured at fair value on a nonrecurring basis are classified within Level 3 of the hierarchy.

Other Real Estate Owned

. Other real estate owned – Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. The amount charged to earningsA net loss on the sale and write-downs of OREO of $868,000 and $2,166,000 was $266,000recognized during the years ended December 31, 2013 and $1,252,000 for 2011 and 2010, respectively.2012. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.            FAIR VALUE MEASUREMENT (Continued)

102

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of December 31, 20112013 and 2010:

     Fair Value Measurements at December 31, 2011 Using 
  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		  Significant Other
Observable Inputs
(Level 2)		  Significant
Unobservable
Inputs (Level 3)		  Total 
Assets Measured on a Recurring Basis: (In Thousands) 
Available-for-sale securities:                
U.S Treasury and government agencies $-  $99,622  $-  $99,622 
Mortgage-backed securities  -   92,580   -   92,580 
State and municipal securities  -   100,526   -   100,526 
Corporate debt  -   1,081   -   1,081 
Interest rate swap agreements  -   617   -   617 
Interest rate cap  -   9   -   9 
Total assets at fair value $-  $294,435  $-  $294,435 
                 
Liabilities Measured on a Recurring Basis:                
Interest rate swap agreements $-  $617  $-  $617 

     Fair Value Measurements at December 31, 2010 Using 
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		  Significant Other
Observable Inputs
(Level 2)		  Significant
Unobservable
Inputs (Level 3)		  Total 
Assets Measured on a Recurring Basis: (In Thousands) 
Available-for-sale securities:                
U.S Treasury and government agencies $-  $92,294  $-  $92,294 
Mortgage-backed securities  -   104,224   -   104,224 
State and municipal securities  -   78,266   -   78,266 
Corporate debt  -   2,175   -   2,175 
Interest rate swap agreements  -   803   -   803 
Interest rate cap  -   115   -   115 
Total assets at fair value $-  $277,877  $-  $277,877 
                 
Liabilities Measured on a Recurring Basis:                
Interest rate swap agreements $-  $803  $-  $803 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.            FAIR VALUE MEASUREMENT (Continued)

December 31, 2012:

    Fair Value Measurements at December 31, 2013 Using 
  Quoted Prices in       
  Active Markets Significant Other Significant   
  for Identical Observable Inputs Unobservable   
  Assets (Level 1) (Level 2) Inputs (Level 3) Total 
  (In Thousands) 
Assets Measured on a Recurring Basis:   
Available-for-sale securities:             
U.S. Treasury and government sponsored
    agencies		 $- $32,274 $- $32,274 
Mortgage-backed securities  -  88,240  -  88,240 
State and municipal securities  -  129,831  -  129,831 
Corporate debt  -  15,875  -  15,875 
Total assets at fair value $- $266,220 $- $266,220 
     Fair Value Measurements at December 31, 2012 Using 
  Quoted Prices in      
  Active Markets Significant Other Significant   
  for Identical Observable Inputs Unobservable   
  Assets (Level 1) (Level 2) Inputs (Level 3) Total 
  (In Thousands) 
Assets Measured on a Recurring Basis:   
Available-for-sale securities             
U.S. Treasury and government sponsored
    agencies		 $- $28,386 $- $28,386 
Mortgage-backed securities  -  73,466  -  73,466 
State and municipal securities  -  118,177  -  118,177 
Corporate debt  -  13,848  -  13,848 
Interest rate swap agreements  -  389  -  389 
Total assets at fair value $- $234,266 $- $234,266 
              
Liabilities Measured on a Recurring Basis:             
Interest rate swap agreements $- $389 $- $389 
103

The following table presentscarrying amount and estimated fair value of the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basisinstruments were as of December 31, 2011 and 2010:

     Fair Value Measurements at December 31, 2011 Using 
  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		  Significant Other
Observable Inputs
(Level 2)		  Significant
Unobservable
Inputs (Level 3)		  Total 
Assets Measured on a Nonrecurring Basis: (In Thousands) 
Impaired loans $-  $-  $33,072  $33,072 
Other real estate owned -  -  12,275  12,275 
Total assets at fair value $-  $-  $45,347  $45,347 

     Fair Value Measurements at December 31, 2010 Using 
  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		  Significant Other
Observable Inputs
(Level 2)		  Significant
Unobservable
Inputs (Level 3)		  Total 
Assets Measured on a Nonrecurring Basis: (In Thousands) 
Impaired loans $-  $-  $35,183  $35,183 
Other real estate owned  -   -   6,966   6,966 
Total assets at fair value $-  $-  $42,149  $42,149 

follows::

     Fair Value Measurements at December 31, 2013 Using 
  Quoted Prices in      
  Active MarketsSignificant Other Significant   
  for IdenticalObservable Unobservable   
  Assets (Level 1) Inputs (Level 2) Inputs (Level 3) Total 
  (In Thousands) 
Assets Measured on a Nonrecurring Basis:   
Impaired loans $- - $25,696 $25,696 
Other real estate owned and repossessed assets  - -  12,861  12,861 
Total assets at fair value  - - $38,557 $38,557 
    Fair Value Measurements at December 31, 2012 Using 
  Quoted Prices in         
  Active Markets Significant Other Significant    
  for Identical Observable Unobservable   
  Assets (Level 1) Inputs (Level 2) Inputs (Level 3) Total 
  (In Thousands) 
Assets Measured on a Nonrecurring Basis:   
Impaired loans $- $- $33,883 $33,883 
Other real estate owned  -  -  9,721  9,721 
Total assets at fair value $- $- $43,604 $43,604 
The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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

Cash and cash equivalents:The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values.

InvestmentDebt securities: Fair values for investment Where quoted prices are available in an active market, securities are based onclassified 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 where available. Ifare not available, the Company generally relies on prices obtained from independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a quoted marketquestionable price exists, the Company investigates further to determine if the price is not available,valid. If needed, other market participants may be utilized to determine the correct fair value is based onvalue. 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 comparable instruments.

states and political subdivisions, and certain corporate, asset-backed and other securities. In cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of thefair value hierarchy.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

104

NOTE 23.            FAIR VALUE MEASUREMENT (Continued)Loans, net:

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and industrial

loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The method of estimating fair value does not incorporate the exit-price concept of fair value as prescribed by FASB Accounting Standards Codification (ASC)ASC 820 and generally produces a higher value than an exit-price approach. FairThe measurement of the fair value for impairedof loans is estimated using discounted cash flow analysis, or underlying collateral values, where applicable.

classified within Level 3 of the fair value hierarchy.

Mortgage loans held for sale: Loans are committed to be delivered to investors on a “best efforts delivery” basis within 30 days of origination. Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values.
Derivatives:The fair value of the derivative agreements are based on quoted pricesestimated by a third party using inputs that are observable or can be corroborated by observable market data. As part of the Company’s procedures, the price provided from an outsidethe third party.

party is evaluated for reasonableness given market changes. These measurements are classified within Level 2 of the fair value hierarchy.

Accrued interest and dividends receivable:The carrying amountamounts in the statements of accrued interest and dividends receivable approximates itscondition approximate these assets’fair value.
Bank owned life insurance contracts:The carrying amounts in the statements of condition approximate these assets’ fairvalue.

Deposits: The fair valuevalues disclosed for demand deposits is,are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that appliesusing interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Other borrowings:for deposits with similar remaining maturities. The fair value of otherthe Company’s time deposits do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. Measurements of the fair value of certificates of deposit are classified within Level 2 of the fair value hierarchy.

Other borrowings: The fair values of borrowings are estimated using discounted cash flow analysis, based on interest rates currently being offered by the Federal Home Loan Bank for borrowings of similar terms as those being valued.

 These measurements are classified as Level 2 in the fair value hierarchy.

Trust preferred securities:Subordinated debentures: The fair valuevalues of trust preferred securitiessubordinated debentures are estimated using a discounted cash flow analysis, based on interest rates currently being offered on the best alternative debt available at the measurement date.

 These measurements are classified as Level 2 in the fair value hierarchy.

Accrued interest payable:The carrying amountamounts in the statements of accrued interest payable approximates itscondition approximate these assets’ fair value.

Loan commitments: The fair values of the Company’s off-balance sheetoff-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company’s other off-balance-sheetfinancialinstruments consistconsists of non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.            FAIR VALUE MEASUREMENT (Continued)

The carrying amount, and estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2013 and December 31, 2012 are presented in the following table. This table includes those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.
105

The Company’s financial assets and financial liabilities which are carried at fair value were as follows:

  December 31, 
  2011  2010 
  Carrying
Amount		  Fair Value  Carrying
Amount		  Fair Value 
  (In Thousands) 
Financial Assets:                
Cash and cash equivalents $242,933  $242,933  $231,978  $231,978 
Investment securities available for sale  293,809   293,809   276,959   276,959 
Investment securities held to maturity  15,209   15,999   5,234   4,963 
Restricted equity securities  3,501   3,501   3,510   3,510 
Mortgage loans held for sale  17,859   17,859   7,875   7,875 
Loans, net  1,808,712   1,811,612   1,376,741   1,388,154 
Accrued interest and dividends receivable  8,192   8,192   6,990   6,990 
Bank owned life insurance contracts  40,390   40,390   -   - 
Derivative  626   626   918   918 
                 
Financial Liabilities:                
Deposits $2,143,887  $2,150,308  $1,758,716  $1,761,906 
Borrowings  4,954   5,377   24,937   25,717 
Trust preferred securities  30,514   27,402   30,420   27,989 
Accrued interest payable  945   945   898   898 
Derivative  617   617   803   803 

NOTE 24.            PARENT COMPANY FINANCIAL INFORMATION

.

  December 31, 
  2013 2012 
  Carrying
Amount		 Fair Value Carrying Amount Fair Value 
              
  (In Thousands) 
Financial Assets:             
Level 2 Inputs:             
Debt securities available for sale $266,220 $266,220 $233,877 $233,877 
Debt securities held to maturity  32,274  31,315  25,967  27,350 
Restricted equity securities  3,738  3,738  3,941  3,941 
Federal funds sold  8,634  8,634  3,291  3,291 
Mortgage loans held for sale  8,134  8,134  25,826  25,826 
Bank owned life insurance contracts  69,008  69,008  57,014  57,014 
Derivatives  -  -  389  389 
              
Level 3 Inputs:             
Loans, net $2,828,205 $2,825,924 $2,336,924 $2,327,780 
              
Financial Liabilities:             
Level 2 Inputs:             
Deposits $3,019,642 $3,021,847 $2,511,572 $2,516,320 
Federal funds purchased  174,380  174,380  117,065  117,065 
Other borrowings  19,940  19,940  19,917  19,917 
Subordinated debentures  -  -  15,050  15,050 
Derivatives  -  -  389  389 

NOTE 23.
PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheetsheets of ServisFirst Bancshares, Inc.the Parent Company as of December 31, 20112013 and 20102012 and the condensed statements of income and cash flows for the years ended December 31, 2011, 20102013, 2012 and 2009.

2011. 
112
CONDENSED BALANCE SHEETS DECEMBER 31, 2013 AND 2012
(In Thousands)
  2013 2012 
ASSETS       
Cash and due from banks $2,562 $3,264 
Investment in subsidiary  314,489  265,229 
Other assets  194  18 
Total assets $317,245 $268,511 
        
LIABILITIES AND STOCKHOLDERS' EQUITY       
Liabilities:       
Other borrowings $19,940 $19,917 
Subordinated debentures  -  15,050 
Other liabilities  113  287 
Total liabilities  20,053  35,254 
Stockholders' equity:       
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001       
(liquidation preference $1,000), net of discount; 40,000 shares authorized,       
40,000 shares issued and outstanding at December 31, 2013 and 2012  39,958  39,958 
Common stock, par value $.001 per share; 50,000,000 shares authorized;       
7,350,012 shares issued and outstanding at December 31, 2013 and       
6,268,812 shares issued and outstanding at December 31, 2012  7  6 
Additional paid-in capital  123,325  93,505 
Retained earnings  130,011  92,492 
Accumulated other comprehensive income  3,891  7,296 
Total stockholders' equity  297,192  233,257 
Total liabilities and stockholders' equity $317,245 $268,511 
106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24.            PARENT COMPANY FINANCIAL INFORMATION (Continued)

BALANCE SHEETS DECEMBER 31, 2011 AND 2010

(In Thousands)

  2011  2010 
ASSETS      
Cash & due from banks $2,908  $51 
Investment in subsidiary  223,753   146,954 
         
Other assets  293   660 
Total assets $226,954  $147,665 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Liabilities:        
Borrowings $30,514  $30,420 
Other liabilities  148   145 
Total liabilities  30,662   30,565 
Stockholders' equity:        
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001 (liquidation preference $1,000), net of discount; 40,000 shares authorized, 40,000 shares issued and outstanding at December 31, 2011 and no shares authorized, issued and outstanding at December 31, 2010  39,958   - 
Common stock, par value $.001 per share; 15,000,000 shares authorized; 5,932,182 shares issued and outstanding at December 31, 2011 and 5,527,482 shares issued and outstanding at December 31, 2010  6   6 
Paid in capital  87,805   75,914 
Retained earnings  61,581   38,343 
Accumulated other comprehensive income  6,942   2,837 
Total stockholders' equity  196,292   117,100 
Total liabilites and stockholders' equity $226,954  $147,665 

STATEMENTS OF INCOME

(In Thousands)

  2011  2010  2009 
Income:            
Dividends received from subsidiary $800  $1,230  $325 
Other income  43   42   40 
Total income  843   1,272   365 
Expense:            
Interest on borrowings  2,345   2,236   1,401 
Other operating expenses  291   295   304 
Total expenses  2,636   2,531   1,705 
Loss before income tax benefit & equity in undistributed earnings of subsidiary  (1,793)  (1,259)  (1,340)
Income tax benefit  (976)  (924)  (614)
Loss before equity in undistributed earnings earnings of subsidiary  (817)  (335)  (726)
Equity in undistributed earnings of subsidiary  24,255   17,713   6,604 
Net income  23,438   17,378   5,878 
Dividends on preferred stock  200   -   - 
Net income available to common stockholders $23,238  $17,378  $5,878 

113
CONDENSED STATEMENTS OF INCOME 
FOR THE YEARS ENDED DECEMBER 31, 
(In Thousands) 
           
  2013 2012 2011 
Income:          
Dividends received from subsidiary $4,750 $- $800 
Other income  1  41  43 
Total income  4,751  41  843 
Expense:          
Other expenses  1,147  1,594  1,660 
Total expenses  1,147  1,594  1,660 
Equity in undistributed earnings of subsidiary  38,013  35,998  24,255 
Net income  41,617  34,445  23,438 
Dividends on preferred stock  400  400  200 
Net income available to common stockholders  41,217  34,045  23,238 
STATEMENT OF CASH FLOWS 
FOR THE YEARS ENDED DECEMBER 31, 
(In Thousands) 
           
  2013 2012 2011 
Operating activities          
Net income $41,617 $34,445 $23,438 
Adjustments to reconcile net income to net cash used
    in operating activities:		          
Other  (224)  878  (50) 
Equity in undistributed earnings of subsidiary  (38,013)  (35,998)  (24,255) 
Net cash (used in) provided by operating activities  3,380  (675)  (867) 
Investing activities          
Investment in subsidiary  (10,499)  -  (46,200) 
Net cash used in investing activities  (10,499)  -  (46,200) 
Financing activities          
Proceeds from other borrowings  -  19,917  - 
Repayment of subordinated debentures  -  (15,464)  - 
Proceeds from issuance of preferred stock  -  -  39,958 
Proceeds from issuance of common stock  10,499  112  10,166 
Dividends on preferred stock  (400)  (400)  (200) 
Dividends on common stock  (3,682)  (3,134)  - 
Net cash provided by financing activities  6,417  1,031  49,924 
(Decrease) increase in cash and cash equivalents $(702) $356 $2,857 
Cash and cash equivalents at beginning of year  3,264  2,908  51 
Cash and cash equivalents at end of year $2,562 $3,264 $2,908 
107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24.            PARENT COMPANY FINANCIAL INFORMATION (Continued)

STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In Thousands)

  2011  2010  2009 
OPERATING ACTIVITIES            
Net income $23,438  $17,378  $5,878 
Adjustments to reconcile net income to net cash used in operating activities:            
Other  (50)  241   260 
Equity in undistributed earnings of subsidiary  (24,255)  (17,713)  (6,604)
Net used in operating activities  (867)  (94)  (466)
INVESTMENT ACTIVITIES            
Investment in subsidiary  (46,200)  (15,000)  (3,479)
Net cash used in investment activities  (46,200)  (15,000)  (3,479)
FINANCING ACTIVITIES            
Proceeds from other borrowings  -   -   - 
Repayment of borrowings  -   -   - 
Proceeds from issuance of trust preferred securities  -   15,050   - 
Proceeds from issuance of preferred stock  39,958   -   - 
Proceeds from issuance of common stock  10,166   -   3,479 
Dividends on preferred stock  (200)  -   - 
Net cash provided by financing activities  49,924   15,050   3,479 
Increase (decrease) in cash & cash equivalents  2,857   (44) $(466)
Cash & cash equivalents at beginning of year  51   95   561 
Cash & cash equivalents at end of year $2,908  $51  $95 

QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth certain unaudited quarterly financial data derived from our consolidated financial statements. Such data is only a summary and should be read in conjunction with our historical consolidated financial statements and related notes continued in this annual report on Form 10-K.

  2011 Quarter Ended 
  (Dollars in thousands, except per share data) 
  March 31  June 30  September 30  December 31 
Interest income $20,961  $22,080  $23,312  $25,058 
Interest expense  3,985   4,032   4,093   3,970 
Net interest income  16,976   18,048   19,219   21,088 
Provision for loan losses  2,231   1,494   2,740   2,507 
Net income available to common stockholders  4,871   5,845   6,035   6,487 
Net income per common share, basic $0.88  $1.02  $1.03  $1.10 
Net income per common share, diluted $0.77  $0.89  $0.90  $0.97 

  2010 Quarter Ended 
  (Dollars in thousands, except per share data) 
  March 31  June 30  September 30  December 31 
Interest income $18,502  $18,996  $19,959  $20,689 
Interest expense  3,596   3,688   3,972   4,004 
Net interest income  14,906   15,308   15,987   16,685 
Provision for loan losses  2,538   2,537   2,537   2,738 
Net income available to common stockholders  4,013   4,021   4,799   4,545 
Net income per common share, basic $0.73  $0.73  $0.87  $0.82 
Net income per common share, diluted $0.69  $0.65  $0.77  $0.73 

  2013 Quarter Ended 
  (Dollars in thousands, except per share data) 
  March 31 June 30 September 30 December 31 
Interest income $29,165 $30,692 $32,499 $33,725 
Interest expense  3,264  3,211  3,534  3,610 
Net interest income  25,901  27,481  28,965  30,115 
Provision for loan losses  4,284  3,334  3,034  2,356 
Net income available to common
    stockholders		  9,151  9,586  10,712  11,752 
Net income per common share, basic $1.44 $1.39 $1.53 $1.64 
Net income per common share, diluted $1.31 $1.34 $1.46 $1.58 
              
  2012 Quarter Ended 
  (Dollars in thousands, except per share data) 
  March 31 June 30 September 30 December 31 
Interest income $25,571 $26,654 $27,743 $29,055 
Interest expense  3,833  3,749  3,695  3,624 
Net interest income  21,738  22,905  24,048  25,431 
Provision for loan losses  2,383  3,083  1,185  2,449 
Net income available to common
    stockholders		  8,155  8,231  9,202  8,457 
Net income per common share, basic $1.37 $1.38 $1.53 $1.40 
Net income per common share, diluted $1.20 $1.21 $1.35 $1.23 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There were no changes in or disagreements with accountants regarding accounting and financial disclosure matters during the year ended December 31, 2011.

2013.

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon that evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011.

2013.

Changes in Internal Control over Financial Reporting

The Chief Executive Officer and Chief Financial Officer have concluded that there were no changes in our internal control over financial reporting identified in the evaluation of the effectiveness of our disclosure controls and procedures that occurred during the fiscal quarter ended December 31, 2011,2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 14d-14(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, 2011,2013, management assessed the effectiveness of our internal control over financial reporting based on criteria for effective internal control over financial reporting established in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2011,2013, based on those criteria.

108

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011,2013, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report herein — “Report of Independent Registered Public Accounting Firm.”

ITEM 9B. OTHER INFORMATION.

At
ITEM 9B.OTHER INFORMATION.

The Company, the 2011 Annual MeetingBank and William M. Foshee entered into an amended and restated change in control agreement on March 5, 2014. This agreement amends and restates in its entirety that certain change in control agreement between the Bank and Mr. Foshee, dated May 20, 2005. The purposes of Stockholders,the amended and restated change in control agreement with Mr. Foshee are to clarify that a “Change in Control”, as defined in the agreement, includes a change in control of the Company in addition to a change in control of the Bank, and to add that a change in control of the board of directors recommended, and 98%composition of the shares represented atCompany, in certain instances as set forth therein, constitutes a change in control.
The Company, the meeting votedBank and Clarence C. Pouncey, III entered into an amended and restated change in favorcontrol agreement on March 5, 2014. This agreement amends and restates in its entirety that certain change in control agreement between the Bank and Mr. Pouncey, dated June 20, 2006.The sole purpose of advisory say-on-pay votes at each annual meetingthe amended and restated change in control agreement with Mr. Pouncey is to clarify that a “Change in Control,” as defined in the agreement, includes a change in control of stockholders. The boardthe Company in addition to a change in control of directors has determined that it will hold the say-on-pay advisory vote at each annual meeting of stockholders.

Bank.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 20122014 Annual Meeting of Shareholders.

Stockholders. Information regarding the Company’s executive officers is provided in Part I, Item 1 of the Form 10-K.

Code of Ethics

Our Board of Directors has adopted a Code of Ethics that applies to all of our employees, officers and directors. The Code of Ethics covers compliance with law; fair and honest dealings with us, with competitors and with others; fair and honest disclosure to the public; and procedures for compliance with the Code of Ethics. A copy of the Code of Ethics is included as Exhibit 14 to this Form 10-K.

Executive Officers of the Registrant

The business experience of our executive officers who are not also directors is set forth below.

William Foshee – Mr. Foshee has served as our Executive Vice President, Chief Financial Officer, Treasurer and Secretary since 2007 and as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Bank since 2005. Mr. Foshee served as the Chief Financial Officer of Heritage Financial Holding Corporation from 2002 until it was acquired in 2005. Mr. Foshee is a Certified Public Accountant.

Clarence C. Pouncey, III – Mr. Pouncey has served as our Executive Vice President and Chief Operating Officer since 2007 and Executive Vice President and Chief Operating Officer of the Bank since November 2006 and also served as Chief Risk Officer of the Bank from March 2006 until November 2006. Prior to joining the Company, Mr. Pouncey was employed by SouthTrust Bank (now Wells Fargo Bank) in various capacities from 1978 to 2006, most recently as the Senior Vice President and Regional Manager of Real Estate Financial Services.

Andrew N. Kattos – Mr. Kattos has served as Executive Vice President and Huntsville President and Chief Executive Officer of the Bank since April 2006. Prior to joining the Company, Mr. Kattos was employed by First Commercial Bank for 14 years, most recently as an Executive Vice President and Senior Lender in the Commercial Lending Department. Mr. Kattos also serves on the advisory council of the University of Alabama in Huntsville School of Business.

G. Carlton Barker – Mr. Barker has served as Executive Vice President and Montgomery President and Chief Executive Officer of the Bank since February 1, 2007. Prior to joining the Company, Mr. Barker was employed by Regions Bank for 19 years in various capacities, most recently as the Regional President for the Southeast Alabama Region. Mr. Barker serves on the Huntingdon College Board of Trustee.

Ronald A. DeVane –Mr. DeVane has served as Executive Vice President and Dothan President and Chief Executive Officer of the Bank since August 2008. Prior to joining the Company, Mr. DeVane held various positions with Wachovia Bank and SouthTrust Bank until his retirement in 2006, including CEO for the Wachovia Midsouth Region, which encompassed Alabama, Tennessee, Mississippi and the Florida panhandle, from September 2004 until 2006, CEO of the Community Bank Division of SouthTrust from January 2004 until September 2004, and CEO for SouthTrust Bank of Atlanta and North Georgia from July 2002 until December 2003. Mr. DeVane is a Trustee at Samford University, a member of the Troy University Foundation Board, a Trustee of the Southeast Alabama Medical Center Foundation Board, and a Board Member of the National Peanut Festival Association.

Rex D. McKinney –Mr. McKinney has served as Executive Vice President and Pensacola President and Chief Executive Officer of the Bank since January 2011. Prior to joining the Company, Mr. McKinney held several leadership positions at First American Bank/Coastal Bank and Trust (owned by Synovus Financial Corporation) starting in 1997. Mr. McKinney is on the Membership Committee and a Past Board Member of the Rotary Club of Pensacola. He is Past President of the Pensacola Sports Association, Board Member and Finance Committee Member for the United Way of Escambia County, Finance Committee Member for Christ Episcopal Church, Finance Committee Member for the Pensacola Country Club, Member of the Irish Politicians Club, and Board Member of the Order of Tristan.

10-K..

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 11.EXECUTIVE COMPENSATION.

We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 20122014 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 20122014 Annual Meeting of Stockholders.

The information called for by this item relating to “Securities Authorized for Issuance Under Equity Compensation Plans” is provided in Part II, Item 5 of this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 20122014 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.

We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 20122014 Annual Meeting of Stockholders.

109

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

ITEM 15.FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
(a)The following financial statements are filed as a part of this registration statement:Annual Report on Form 10-K

 
Page
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements62
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements6366
Report of Management on Internal Control over Financial Reporting6467
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting6568
Consolidated Balance Sheets at December 31, 20112013 and 201020126669
Consolidated Statements of Income for the Years Ended December 31, 2011, 20102013, 2012 and 200920116770
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 20102013, 2012 and 200920116871
Consolidated Statements of Stockholders’Stockholders' Equity for the Years Ended December 31, 2011, 20102013, 2012 and 200920116972
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 20102013, 2012 and 200920117073
Notes to Consolidated Financial Statements7274

(b) The following exhibits are furnished with this Annual Report on Form 10-K
(b)The following exhibits are furnished with this registration statement.

EXHIBIT NO.
NAME OF EXHIBIT
   
2.1 Plan of Reorganization and Agreement of Merger dated August 29, 2007 (1)
   
3.1 Certificate of Incorporation, (1)as amended (Restated for SEC filing purposes only) (2)
   
3.2 Certificate of Amendment to Certificate of Incorporation (1)
3.3Bylaws (Restated for SEC filing purposes only) (1)
   
4.1 Form of Common Stock Certificate (1)
   
4.2 Certain provisions from theRevised Form of Common Stock Certificate of Incorporation (1)(3)
   
4.3Revised Form of Common Stock Certificate (2)
4.4Amended and Restated Trust Agreement of ServisFirst Capital Trust I dated September 2, 2008 (3)
4.5Indenture dated September 2, 2008 (3)
4.6Guarantee Agreement dated September 2, 2008 (3)
4.7 Form of Common Stock Purchase Warrant dated September 2, 2008 (3)
4.8ServisFirst Bank 8.5% Subordinated Note due June 1, 2016 (6)(4)
   
4.94.4 Warrant to Purchase SharesShare of Common Stock dated June 23, 2009 (6)
4.10Amended and Restated Trust Agreement of ServisFirst Capital Trust II, dated March 15, 2010 (7)
   
4.11Indenture, dated March 15, 2010, by and between ServisFirst Bancshares, Inc. and Wilmington Trust Company (7)
4.12Preferred Securities Guaranty Agreement, dated March 15, 2010, by and between ServisFirst Bancshares, Inc. and Wilmington Trust Company (7)
4.134.5 Small Business Fund –- Securities Purchase Agreement dated June 21, 2011 between the Secretary
of the Treasury and ServisFirst Bancshares, Inc. (8)(9)
   
4.144.6 Certificate of Designation of Senior Non-cumulative Perpetual Preferred Stock, Series A of
ServisFirst Bancshares, Inc. (8)(9)
4.7Note Purchase Agreement, dated November 9, 2012, between ServisFirst Bancshares, Inc. and
certain accredited investors (9)
4.8Form of 5.50% Subordinated Note due November 9, 2022 (9)
   
10.1 2005 Amended and Restated Stock Incentive Plan (1)*
   
10.2 Amended and Restated Change in Control Agreement with William M. Foshee dated May 20, 2005 (1)March 5, 2014 (10)*
110

10.3 Amended and Restated Change in Control Agreement with Clarence C. Pouncey III dated June 6, 2006 (1)March 5, 2014 (10)*
   
10.4 Employment Agreement of Andrew N. Kattos dated April 27, 2006 (1)*
   
10.5 Employment Agreement of G. Carlton Barker dated February 1, 2007 (1)*
   
10.6 2009 Stock Incentive Plan (4)(5)*
   
11 Statement Regarding Computation of Earnings Per Share is included herein at Note 2120 to the
Consolidated Financial Statements in Item 8.
   
14 Code of Ethics for Principal Financial Officers (5)(6)
   
21 List of Subsidiaries
   
23.123 Consent of KPMG LLP
23.2Consent of Mauldin & Jenkins
   
24 Power of Attorney
   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
   
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

119
 
101.INSXBRL Instance Document
101.SCHXBRL Schema Documents
101.CALXBRL Calculation Linkbase Document
101.LABXBRL Label Linkbase Document
101.PREXBRL Presentation Linkbase Document
101.DEFXBRL Definition Linkbase Document

(1) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s's Registration Statement on Form 10, as filed with the Securities and Exchange Commission onMarch 28, 2008,, and incorporated herein by reference.

(2) Previously filed as an exhibit toExhibit 3.01 of ServisFirst Bancshares, Inc.’s Current's Quarterly Report on Form 8-K dated10-Q for the quarter ended September 15, 2008,30, 2012, and incorporated herein by reference.

(3) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s's Current Report on Form 8-K dated September 15, 2008, and incorporated herein by reference.
(4) Previously filed as an exhibit to ServisFirst Bancshares, Inc.'s Current Report on Form 8-K dated September 2, 2008, and incorporated herein by reference.

(4)

(5) Previously filed as Appendix Aan exhibit to ServisFirst Bancshares, Inc.’s definitive's Definitive Proxy Statement on Schedule 14A relating to the 2009 Annual Meeting of Stockholders and incorporated herein by reference.

(5)

(6) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and incorporated herein by reference.

(6)

(7) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s's Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and incorporated herein by reference.

(7) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K datedMarch 15, 2010, and incorporated herein by reference.

(8) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s current report's Current Report on Form 8-K dated June 21, 2011, and incorporated herein by reference.

(9) Previously filed as an exhibit to ServisFirst Bancshares, Inc.'s Current Report on Form 8-K dated November 8, 2012, and incorporated herein by reference.
111

(10) Filed herewith
* Management contract or compensatory plan arrangements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
  
 
By:/s/Thomas A. Broughton, III
 
 Thomas A. Broughton, III
 
 President and Chief Executive Officer

Dated: March 7, 2012

17, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature
Title
Date
     
/s/Thomas A. Broughton, III President, Chief Executive March 7, 201217, 2014
Thomas A. Broughton, III Officer and Director (Principal  
  Executive Officer)  
     
/s/ William M. Foshee Executive Vice President March 7, 201217, 2014
William M. Foshee and Chief Financial Officer  
  (Principal Financial Officer and  
  Principal Accounting Officer)  
     
* Chairman of the Board March 7, 201217, 2014
Stanley M. Brock    
     
     
* Director March 7, 201217, 2014
Michael D. Fuller    
     
* Director March 7, 201217, 2014
James J. Filler    
     
* Director March 7, 201217, 2014
Joseph R. Cashio    
     
* Director March 7, 201217, 2014
Hatton C. V. Smith      

 

*The undersigned, acting pursuant to a Power of Attorney, has signed this Amendment No. 1 to Annual Report on Form 10-K for and on behalf of the persons indicated above as such persons’ true and lawful attorney-in-fact and in their names, places and stated, in the capacities indicated above adand on the date indicated below.

/s/ William M. Foshee 
William M. Foshee 
Attorney-in-Fact 

121March 17, 2014
EXHIBIT INDEX
(b) The following exhibits are furnished with this Annual Report on Form 10-K

EXHIBIT INDEX

EXHIBIT NO.
NAME OF EXHIBIT
 
2.1Plan of Reorganization and Agreement of Merger dated August 29, 2007 (1)
3.1Certificate of Incorporation (1)
3.2Certificate of Amendment to Certificate of Incorporation (1)
3.3Bylaws (1)
4.1Form of Common Stock Certificate (1)
4.2Certain provisions from the Certificate of Incorporation (1)
4.3Revised Form of Common Stock Certificate (2)
4.4Amended and Restated Trust Agreement of ServisFirst Capital Trust I dated September 2, 2008 (3)
4.5Indenture dated September 2, 2008 (3)
4.6Guarantee Agreement dated September 2, 2008 (3)
4.7Form of  Common Stock Purchase Warrant dated September 2, 2008 (3)
4.8ServisFirst Bank 8.5% Subordinated Note due June 1, 2016 (6)
4.9Warrant to Purchase Shares of Common Stock dated June 23, 2009 (6)
4.10Amended and Restated Trust Agreement of ServisFirst Capital Trust II, dated March 15, 2010 (7)
4.11Indenture, dated March 15, 2010, by and between ServisFirst Bancshares, Inc. and Wilmington Trust Company (7)
4.12Preferred Securities Guaranty Agreement, dated March 15, 2010, by and between ServisFirst Bancshares, Inc. and Wilmington Trust Company (7)
4.13Small Business Fund – Securities Purchase Agreement dated June 21, 2011 between the Secretary of the Treasury and ServisFirst Bancshares, Inc. (8)
4.14Certificate of Designation of Senior Non-cumulative Perpetual Preferred Stock, Series A of ServisFirst Bancshares, Inc. (8)
10.12005 Amended and Restated Stock Incentive Plan  (1)*
10.2Change in Control Agreement with William M. Foshee dated May 20, 2005 (1)*
10.3Change in Control Agreement with Clarence C. Pouncey III dated June 6, 2006 (1)*
10.4Employment Agreement of Andrew N. Kattos dated April 27, 2006 (1)*
10.5Employment Agreement of G. Carlton Barker dated February 1, 2007 (1)*
10.62009 Stock Incentive Plan (4)*
11Statement Regarding Computation of Earnings Per Share is included herein at Note 21 to the Financial Statements in Item 8.
14Code of Ethics for Principal Financial Officers (5)
   
21 List of Subsidiaries
   
23.123  Consent of KPMG LLP
 
23.2Consent of Mauldin & Jenkins
   
24 Power of Attorney
   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
   
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

(1) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Registration Statement on Form 10, as filed with the Securities and Exchange Commission onMarch 28, 2008, and incorporated herein by reference.

(2) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K datedSeptember 15, 2008, and incorporated herein by reference.

(3) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated September 2, 2008, and incorporated herein by reference.

(4) Previously filed as Appendix A to ServisFirst Bancshares, Inc.’s definitive Proxy Statement on Schedule 14A relating to the 2009 Annual Meeting of Stockholders and incorporated herein by reference.

(5) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and incorporated herein by reference.

(6) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and incorporated herein by reference.

(7) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated March 15, 2010, and incorporated herein by reference.

(8) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s current report on Form 8-K dated June 21, 2011, and incorporated herein by reference.

* Management contract or compensatory plan arrangements.

123
101.INSXBRL Instance Document
101.SCHXBRL Schema Documents
101.CALXBRL Calculation Linkbase Document
101.LABXBRL Label Linkbase Document
101.PREXBRL Presentation Linkbase Document
101.DEFXBRL Definition Linkbase Document