UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 


FORM 10-Q

(Mark one)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

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

Commission file number 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, Birmingham, Alabama
 
35209
(Address of Principal Executive Offices)
 
(Zip Code)

(205) 949-0302
(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the  preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨

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

   Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
 
Class
 
Outstanding as of October 29, 2011
Common stock, $.001 par value
 
5,895,682
 


 
 

 
 
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
49
Item 4.
Controls and Procedures
49
     
PART II. OTHER INFORMATION
Item 1
Legal Proceedings
50
Item 1A.
Risk Factors
50
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
50
Item 3.
Defaults Upon Senior Securities
50
Item 5.
Other Information
50
Item 6.
Exhibits
50

EX-31.01 SECTION 302 CERTIFICATION OF THE CEO
EX-31.02 SECTION 302 CERTIFICATION OF THE CFO
EX-32.01 SECTION 906 CERTIFICATION OF THE CEO
EX-32.02 SECTION 906 CERTIFICATION OF THE CFO
 
 
2

 
 
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SERVISFIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2011 AND DECEMBER 31, 2010
(In thousands, except share and per share amounts)

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Cash and due from banks
  $ 35,624     $ 27,454  
Interest-bearing balances due from depository institutions
    57,739       204,178  
Federal funds sold
    91,315       346  
Cash and cash equivalents
    184,678       231,978  
Available for sale debt securities, at fair value
    296,826       276,959  
Held to maturity debt securities (fair value of $16,141 and $4,963 at
               
September 30, 2011 and December 31, 2010, respectively)
    15,355       5,234  
Restricted equity securities
    3,708       3,510  
Mortgage loans held for sale
    9,114       7,875  
Loans
    1,695,476       1,394,818  
Less allowance for loan losses
    (21,466 )     (18,077 )
Loans, net
    1,674,010       1,376,741  
Premises and equipment, net
    4,499       4,450  
Accrued interest and dividends receivable
    7,529       6,990  
Deferred tax assets
    4,889       6,366  
Other real estate owned
    10,044       6,966  
Bank owned life insurance contracts
    40,000       -  
Other assets
    6,678       8,097  
Total assets
  $ 2,257,330     $ 1,935,166  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Liabilities:
               
Deposits:
               
Noninterest-bearing
  $ 382,095     $ 250,490  
Interest-bearing
    1,629,186       1,508,226  
Total deposits
    2,011,281       1,758,716  
Federal funds purchased
    16,400       -  
Other borrowings
    4,949       24,937  
Trust preferred securities
    30,514       30,420  
Accrued interest payable
    1,043       898  
Other liabilities
    3,670       3,095  
Total liabilities Total liabilities
    2,067,857       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 September 30, 2011 and no shares authorized, issued and outstanding at December 31, 2011
    39,958       -  
Preferred stock, undesignated, par value $.001 per share; 1,000,000shares authorized; no shares outstanding
    -       -  
Common stock, par value $.001 per share; 15,000,000 shares authorized; 5,890,482 shares issued and outstanding at September 30, 2011 and 5,527,482 shares issued and outstanding at December 31, 2010
    6       6  
Additional paid-in capital
    87,043       75,914  
Retained earnings
    55,095       38,343  
Accumulated other comprehensive income
    7,371       2,837  
Total stockholders' equity
    189,473       117,100  
Total liabilities and shareholders' equity
  $ 2,257,330     $ 1,935,166  

See Notes to Consolidated Financial  Statements.
 
 
3

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

   
Three Months Ended September
30,
   
Nine Months Ended September
30,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income:
                       
Interest and fees on loans
  $ 21,043     $ 17,715     $ 59,509     $ 50,669  
Taxable securities
    1,374       1,575       4,360       4,997  
Nontaxable securities
    742       582       2,175       1,650  
Federal funds sold
    54       23       125       41  
Other interest and dividends
    99       64       184       100  
Total interest income
    23,312       19,959       66,353       57,457  
Interest expense:
                               
Deposits
    3,382       3,113       9,780       8,795  
Borrowed funds
    711       859       2,330       2,461  
Total interest expense
    4,093       3,972       12,110       11,256  
Net interest income
    19,219       15,987       54,243       46,201  
Provision for loan losses
    2,740       2,537       6,465       7,612  
Net interest income after provision for loan losses
    16,479       13,450       47,778       38,589  
Noninterest income:
                               
Service charges on deposit accounts
    569       564       1,683       1,718  
Mortgage banking
    814       589       1,641       1,336  
Securities gains
    -       -       666       53  
Other operating income
    425       195       871       377  
Total noninterest income
    1,808       1,348       4,861       3,484  
Noninterest expenses:
                               
Salaries and employee benefits
    4,723       3,547       13,963       10,176  
Equipment and occupancy expense
    923       814       2,743       2,368  
Professional services
    337       220       928       625  
FDIC and other regulatory assessments
    403       626       1,377       2,276  
OREO expense
    115       483       504       1,543  
Other operating expenses
    2,331       1,777       7,283       5,472  
Total noninterest expenses
    8,832       7,467       26,798       22,460  
Income before income taxes
    9,455       7,331       25,841       19,613  
Provision for income taxes
    3,320       2,532       8,990       6,780  
Net income
    6,135       4,799       16,851       12,833  
Preferred stock dividends
    100       -       100       -  
Net income available to common stockholders
  $ 6,035     $ 4,799     $ 16,751     $ 12,833  
                                 
Basic earnings per common share
  $ 1.03     $ 0.87     $ 2.93     $ 2.33  
                                 
Diluted earnings per common share
  $ 0.90     $ 0.77     $ 2.58     $ 2.11  
 
 
4

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income
  $ 6,135     $ 4,799     $ 16,851     $ 12,833  
Other comprehensive income, net of tax:
                               
Unrealized holding gains arising during period from securities available for sale, net of tax of $1,473 and $3,186 for the three and nine months ended September 30, 2011, respectively, and $1,124 and $2,817 for the three and nine months ended September 30, 2010, respectively
    1,784       2,087       4,966       5,197  
Reclassification adjustment for net gains on sale of securities in net income, net of tax of $234 and $19 for the nine months ended September 30, 2011 and 2010, respectively
    -       -       (432 )     (34 )
Other comprehensive income, net of tax
    1,784       2,087       4,534       5,163  
Comprehensive income
  $ 7,919     $ 6,886     $ 21,385     $ 17,996  

See Notes to Consolidated Financial Statements
 
 
5

 
 
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2011
(In thousands, except share amounts)
(Unaudited)

   
Preferred Stock
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Total
Stockholders'
Equity
 
Balance, December 31, 2010
    -       6       75,913       38,344       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
    -       -       -       (100 )     -       (100 )
Exercise 23,000 stock options
    -       -       252       -       -       252  
Other comprehensive income
    -       -       -       -       4,534       4,534  
Stock-based compensation expense
    -       -       719       -       -       719  
Net income
    -       -       -       16,851       -       16,851  
Balance, September 30, 2011
  $ 39,958     $ 6     $ 87,043     $ 55,095     $ 7,371     $ 189,473  

See Notes to Consolidated Financial Statements
 
 
6

 
 
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(In thousands) (Unaudited)

   
2011
   
2010
 
OPERATING ACTIVITIES
           
Net income
  $ 16,851     $ 12,833  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Deferred tax benefit
    (1,476 )     (292 )
Provision for loan losses
    6,465       7,612  
Depreciation and amortization
    844       800  
Net amortization of investments
    648       565  
Market value adjustment of interest rate cap
    98       40  
Increase in accrued interest and dividends receivable
    (539 )     (634 )
Stock-based compensation expense
    719       509  
Increase (decrease) in accrued interest payable
    145       (112 )
Proceeds from sale of mortgage loans held for sale
    115,329       113,404  
Originations of mortgage loans held for sale
    (115,344 )     (115,361 )
Gain on sale of securities available for sale
    (666 )     (53 )
Gain on sale of mortgage loans held for sale
    (1,641 )     (1,336 )
Net (gain) loss on sale of other real estate owned
    (87 )     180  
Write down of other real estate owned
    181       853  
Decrease in special prepaid FDIC insurance assessments
    1,126       1,963  
Loss on prepayment of other borrowings
    738       -  
Net change in other assets, liabilities, and other
               
operating activities
    966       (773 )
Net cash provided by operating activities
    24,357       20,198  
INVESTMENT ACTIVITIES
               
Purchase of securities available for sale
    (95,311 )     (40,817 )
Proceeds from maturities, calls and paydowns of securities
               
available for sale
    19,679       23,517  
Purchase of securities held to maturity
    (11,188 )     (1,986 )
Proceeds from maturities, calls and paydowns of securities
               
held to maturity
    1,067       -  
Increase in loans
    (309,529 )     (147,150 )
Purchase of premises and equipment
    (893 )     (196 )
Purchase of restricted equity securities
    (543 )     (269 )
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       31,014  
Proceeds from sale of restricted equity securities
    345       -  
Proceeds from sale of other real estate owned and repossessions
    2,950       7,470  
Additions to other real estate owned
    -       (75 )
Net cash used in investing activities
    (370,153 )     (128,652 )
FINANCING ACTIVITIES
               
Net increase in noninterest-bearing deposits
    131,605       13,230  
Net decrease in interest-bearing deposits
    120,960       155,972  
Net increase in federal funds purchased
    16,400       -  
Proceeds from issuance of trust preferred securities
    -       15,050  
Proceeds from sale of common stock, net
    10,411       50  
Proceeds from sale of preferred stock, net
    39,958       -  
Repayment of other borrowings
    (20,738 )     -  
Dividends on preferred stock
    (100 )     -  
Net cash provided by financing activities
    298,496       184,302  
Net (decrease) increase in cash and cash equivalents
    (47,300 )     75,848  
Cash and cash equivalents at beginning of year
    231,978       76,206  
Cash and cash equivalents at end of year
  $ 184,678     $ 152,054  
SUPPLEMENTAL DISCLOSURE
               
Cash paid for:
               
Interest
  $ 11,965     $ 11,368  
Income taxes
    10,136       6,958  
NONCASH TRANSACTIONS
               
Transfers of loans from held for sale to held for investment
  $ 417     $ 787  
Other real estate acquired in settlement of loans
    6,263       5,156  
Internally financed sales of other real estate owned
    141       1,083  

See Notes to Consolidated Financial Statements.
 
 
7

 
 
SERVISFIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

NOTE 1 - GENERAL

The accompanying consolidated financial statements in this report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including Regulation S-X and the instructions for Form 10-Q, and have not been audited. These consolidated financial statements do not include all of the information and footnotes required by U. S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position and the consolidated results of operations for the interim periods have been made. All such adjustments are of a normal nature. The consolidated results of operations are not necessarily indicative of the consolidated results of operations which ServisFirst Bancshares, Inc. (the “Company”) may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2010.

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

NOTE 2 - CASH AND CASH EQUIVALENTS

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

NOTE 3 - EARNINGS PER COMMON SHARE

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and warrants, as well as the potential common stock issuable upon possible conversion of the preferred securities described in Note 11 to the consolidated financial statements.
 
 
8

 
   
Three Months Ended September
30,
   
Nine Months Ended September
30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In Thousands, Except Shares and Per Share Data)
 
Earnings Per Common Share
                       
Weighted average common shares outstanding
    5,886,178       5,515,384       5,709,334       5,513,482  
Net income available to common stockholders
  $ 6,035     $ 4,799     $ 16,751     $ 12,833  
Basic earnings per common share
  $ 1.03     $ 0.87     $ 2.93     $ 2.33  
                                 
Weighted average common shares outstanding
    5,886,178       5,515,384       5,709,334       5,513,482  
Dilutive effects of assumed conversions and
                               
exercise of stock options and warrants
    996,631       902,563       962,579       735,377  
Weighted average common and dilutive potential
                               
common shares outstanding
    6,882,809       6,417,947       6,671,913       6,248,859  
Net income, available to common stockholders
  $ 6,035     $ 4,799     $ 16,751     $ 12,833  
Effect of interest expense on covertible debt, net of tax and
                               
discretionary expenditures related to conversion
    150       150       444       323  
Net income, adjusted for effect of debt conversion
  $ 6,185     $ 4,949     $ 17,195     $ 13,156  
Diluted earnings per common share
  $ 0.90     $ 0.77     $ 2.58     $ 2.11  

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2011 and  December 31, 2010 are summarized as follows:

   
Amortized Cost
   
Gross
Unrealized
Gain
   
Gross
Unrealized
Loss
   
Market Value
 
 
 
(In Thousands)
 
September 30, 2011:
                       
Securities Available for Sale
                       
U.S. Treasury and government sponsored agencies
  $ 95,191     $ 1,715     $ (92 )   $ 96,814  
Mortgage-backed securities
    96,565       5,094       -       101,659  
State and municipal securities
    92,191       5,091       (38 )     97,244  
Corporate debt
    1,027       82       -       1,109  
Total
  $ 284,974     $ 11,982     $ (130 )   $ 296,826  
Securities Held to Maturity
                               
Mortgage-backed securities
  $ 9,824     $ 410     $ -     $ 10,234  
State and municipal securities
    5,531       376       -       5,907  
Total
  $ 15,355     $ 786     $ -     $ 16,141  
                                 
December 31, 2010:
                               
Securities Available for Sale
                               
U.S. Treasury and government sponsored 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  
 
 
9

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

The following table identifies, as of September 30, 2011 and December 31, 2010, the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months.  At September 30, 2011, two of the Company’s 493 debt securities had been in an unrealized loss position for 12 or more months. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity; accordingly, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2011.  Further, the Company believes any deterioration in value of its current investment securities is attributable to changes in market interest rates and not credit quality of the issuer.

   
Less Than Twelve Months
   
Twelve Months or More
   
Total
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In Thousands)
 
September 30, 2011:
                                   
U.S. Treasury and government
                                   
sponsored agencies
  $ -     $ -     $ -     $ -     $ -     $ -  
Mortgage-backed securities
    (92 )     14,049       -       -       (92 )     14,049  
State and municipal securities
    (27 )     2,730       (11 )     395       (38 )     3,125  
Corporate debt
    -       -       -       -       -       -  
Total
  $ (119 )   $ 16,779     $ (11 )   $ 395     $ (130 )   $ 17,174  
                                                 
December 31, 2010:
                                               
U.S. Treasury and government
                                               
sponsored agencies
  $ (224 )   $ 24,217     $ -     $ -     $ (224 )   $ 24,217  
Mortgage-backed securities
    (268 )     16,417       -       -       (268 )     16,417  
State and municipal securities
    (1,034 )     33,282       (288 )     3,674       (1,322 )     36,956  
Corporate debt
    -       -       -       -       -       -  
Total
  $ (1,526 )   $ 73,916     $ (288 )   $ 3,674     $ (1,814 )   $ 77,590  
 
 
10

 
 
NOTE 5 – LOANS

The following table details the Company’s loans at September 30, 2011 and December 31, 2010:

   
September 30, 
2011
   
December 31, 
2010
 
   
(Dollars In Thousands)
 
Commercial, financial and agricultural
  $ 699,616     $ 536,620  
Real estate - construction
    160,171       172,055  
Real estate - mortgage:
               
Owner-occupied commercial
    364,590       270,767  
1-4 family mortgage
    204,866       199,236  
Other mortgage
    223,294       178,793  
Subtotal: Real estate - mortgage
    792,750       648,796  
Consumer
    42,939       37,347  
Total Loans
    1,695,476       1,394,818  
Less: Allowance for loan losses
    (21,466 )     (18,077 )
Net Loans
  $ 1,674,010     $ 1,376,741  
                 
Commercial, financial and agricultural
    41.26 %     38.47 %
Real estate - construction
    9.45 %     12.34 %
Real estate - mortgage:
               
Owner-occupied commercial
    21.50 %     19.41 %
1-4 family mortgage
    12.09 %     14.28 %
Other mortgage
    13.17 %     12.82 %
Subtotal: Real estate - mortgage
    46.76 %     46.51 %
Consumer
    2.53 %     2.68 %
Total Loans
    100.00 %     100.00 %

Loans by credit quality indicator as of September 30, 2011 were as follows:

   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(In Thousands)
 
Commercial, financial
                             
and agricultural
  $ 678,924     $ 11,980     $ 8,712     $ -     $ 699,616  
Real estate - construction
    125,811       12,638       21,722       -       160,171  
Real estate - mortgage:
                                       
Owner-occupied
                                       
commercial
    351,031       7,693       5,866       -       364,590  
1-4 family mortgage
    194,254       4,870       5,742       -       204,866  
other mortgage
    214,791       5,030       3,473       -       223,294  
Total real estate mortgage
    760,076       17,593       15,081       -       792,750  
Consumer
    41,741       101       1,097       -       42,939  
Total
  $ 1,606,552     $ 42,312     $ 46,612     $ -     $ 1,695,476  
 
 
11

 
 
Loans by performance status as of September 30, 2011 were as follows:

   
Performing
   
Nonperforming
   
Total
 
   
(In Thousands)
 
Commercial, financial and agricultural
  $ 698,576     $ 1,040     $ 699,616  
Real estate - construction
    146,031       14,140       160,171  
Real estate - mortgage:
                       
Owner-occupied commercial
    363,968       622       364,590  
1-4 family mortgage
    203,404       1,462       204,866  
other mortgage
    222,716       578       223,294  
Total real estate mortgage
    790,088       2,662       792,750  
Consumer
    42,360       579       42,939  
Total
  $ 1,677,055     $ 18,421     $ 1,695,476  

Loans by past-due status as of September 30, 2011 were as follows:

   
Past Due Status (Accruing Loans)
                   
   
30-59 Days
   
60-89 Days
   
90+ Days
   
Total Past
Due
   
Non-Accrual
   
Current
   
Total Loans
 
   
(In Thousands)
 
Commercial, financial and agricultural
  $ 604     $ -     $ -     $ 604     $ 1,040     $ 697,972     $ 699,616  
Real estate - construction
    480       -       500       980       13,640       145,551       160,171  
Real estate - mortgage:
                                                       
Owner-occupied commercial
    1,593       -       -       1,593       622       362,375       364,590  
1-4 family mortgage
    278       -       291       569       1,171       203,126       204,866  
Other mortgage
    751       -       578       1,329       -       221,965       223,294  
Total real estate - mortgage
    2,622       -       869       3,491       1,793       787,466       792,750  
Consumer
    -       6       -       6       579       42,354       42,939  
Total
  $ 3,706     $ 6     $ 1,369     $ 5,081     $ 17,052     $ 1,673,343     $ 1,695,476  

 
12

 
 
The following table presents an analysis of the allowance for loan losses by portfolio segment as of September 30, 2011 and December 31, 2010.  The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated.

   
Commercial,
financial and
agricultural
   
Real estate -
construction
   
Real estate -
mortgage
   
Consumer
   
Unallocated
   
Total
 
   
(In Thousands)
 
   
Three Months Ended September 30, 2011
 
Allowance for loan losses:
                                   
Balance at June 30, 2011
  $ 5,809     $ 6,468     $ 3,185     $ 566     $ 3,488     $ 19,516  
Chargeoffs
    (37 )     (678 )     (88 )     (11 )     -       (814 )
Recoveries
    12       10       1       1       -       24  
Provision
    464       479       964       482       351       2,740  
Balance at September 30, 2011
  $ 6,248     $ 6,279     $ 4,062     $ 1,038     $ 3,839     $ 21,466  
                                                 
   
Nine Months Ended September 30, 2011
 
Allowance for loan losses:
                                               
Balance at December 31, 2010
  $ 5,348     $ 6,373     $ 2,443     $ 749     $ 3,164     $ 18,077  
Chargeoffs
    (897 )     (1,999 )     (103 )     (340 )     -       (3,339 )
Recoveries
    12       174       2       75       -       263  
Provision
    1,785       1,731       1,720       554       675       6,465  
Balance at September 30, 2011
  $ 6,248     $ 6,279     $ 4,062     $ 1,038     $ 3,839     $ 21,466  
                                                 
   
September 30, 2011
 
Individually Evaluated for Impairment
  $ 1,249     $ 1,809     $ 1,741     $ 828     $ -     $ 5,627  
Collectively Evaluated for Impairment
    4,999       4,470       2,321       210       3,839       15,839  
                                                 
Loans:
                                               
Ending Balance
  $ 699,616     $ 160,171     $ 792,750     $ 42,939             $ 1,695,476  
Individually Evaluated for Impairment
    8,712       21,722       15,081       1,097               46,612  
Collectively Evaluated for Impairment
    690,904       138,449       777,669       41,842               1,648,864  
                                                 
   
December 31, 2010
 
   
Commercial,
financial and
agricultural
   
Real estate -
construction
   
Real estate -
mortgage
   
Consumer
   
Unallocated
   
Total
 
                                                 
Allowance for loan losses:
  $ 5,348     $ 6,373     $ 2,443     $ 749     $ 3,164     $ 18,077  
                                                 
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
    14,018       28,710       15,093       1,319               59,140  
Collectively Evaluated for Impairment
    522,602       143,345       633,703       36,028               1,335,678  

 
13

 

The following table presents details of the Company’s impaired loans as of September 30, 2011 and December 31, 2010, respectively.  Loans which have been fully charged off do not appear in the tables.

September 30, 2011
 
                     
For the three months ended
September 30, 2011
   
For the nine months ended
September 30, 2011
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
in Period
   
Average
Recorded
Investment
   
Interest
Income
Recognized
in Period
 
   
(In Thousands)
 
With no allowance recorded:
                                         
Commercial, financial and agricultural
  $ 1,655     $ 1,705     $ -     $ 1,758     $ 21     $ 1,679     $ 62  
Real estate - construction
    16,026       17,132       -       17,541       90       17,367       335  
Real estate - mortgage:
                                                       
Owner-occupied commercial
    2,334       2,334       -       2,352       43       2,358       120  
1-4 family mortgage
    725       725       -       630       3       655       14  
Other mortgage
    1,928       1,929       -       1,862       24       1,883       80  
Total real estate - mortgage
    4,987       4,988       -       4,844       70       4,896       214  
Consumer
    173       173       -       173       2       173       5  
Total with no allowance recorded
    22,841       23,998       -       24,316       183       24,115       616  
                                                         
With an allowance recorded:
                                                       
Commercial, financial and agricultural
    5,212       5,212       1,249       5,501       73       5,480       225  
Real estate - construction
    5,696       5,696       1,809       6,141       4       6,085       75  
Real estate - mortgage:
                                                       
Owner-occupied commercial
    3,184       3,184       117       3,141       62       3,156       199  
1-4 family mortgage
    4,552       4,589       1,624       4,710       37       4,670       127  
Other mortgage
    334       334       -       339       6       339       18  
Total real estate - mortgage
    8,070       8,107       1,741       8,190       105       8,165       344  
Consumer
    894       914       828       975       4       946       16  
Total with allowance recorded
    19,872       19,929       5,627       20,807       186       20,676       660  
                                                         
Total Impaired Loans:
                                                       
Commercial, financial and agricultural
    6,867       6,917       1,249       7,259       94       7,159       287  
Real estate - construction
    21,722       22,828       1,809       23,682       94       23,452       410  
Real estate - mortgage:
                                                       
Owner-occupied commercial
    5,518       5,518       117       5,493       105       5,514       319  
1-4 family mortgage
    5,277       5,314       1,624       5,340       40       5,325       141  
Other mortgage
    2,262       2,263       -       2,201       30       2,222       98  
Total real estate - mortgage
    13,057       13,095       1,741       13,034       175       13,061       558  
Consumer
    1,067       1,087       828       1,148       6       1,119       21  
Total impaired loans
  $ 42,713     $ 43,927     $ 5,627     $ 45,123     $ 369     $ 44,791     $ 1,276  

 
14

 

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  

During the third quarter of 2011, the Company adopted the provisions of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“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 September 30, 2011, December 31, 2010 and September 30, 2010 totaled $4.5 million, $2.4 million and $0.7 million, respectively.  At September 30, 2011, the Company had a related allowance for loan losses of $297,000 allocated to these TDRs, compared to $486,000 at December 31, 2010 and $0 at September 30, 2010.  All loans classified as TDRs as of September 30, 2011 are performing as agreed under the terms of their restructured plans.  For the three and nine month periods ended September 30, 2011 and September 30, 2010, there were no loans modified as a TDR within the preceding twelve months for which there was a payment default during the period.  The following table presents an analysis of TDRs as of September 30, 2011 and September 30, 2010.

 
15

 

   
September 30, 2011
   
September 30, 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
 
   
(In Thousands)
 
Troubled Debt Restructurings
                                   
Commercial, financial and agricultural
    5     $ 1,831     $ 1,831       -     $ -     $ -  
Real estate - construction
    -       -       -       -       -       -  
Real estate - mortgage:
                                               
Owner-occupied commercial
    1       2,357       2,357       1       660       660  
1-4 family mortgage
    -       -       -       -       -       -  
Other mortgage
    1       334       334       -       -       -  
Total real estate mortgage
    2       2,691       2,691       1       660       660  
Consumer
    -       -       -       -       -       -  
      7     $ 4,522     $ 4,522       1     $ 660     $ 660  

NOTE 6 - EMPLOYEE AND DIRECTOR BENEFITS

Stock Options

At September 30, 2011, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $254,000 and $719,000 for the three and nine months ended September 30, 2011 and $195,000 and $509,000 for the three and nine months ended September 30, 2010, respectively.

The Company’s 2005 Amended and Restated Stock Option Plan allows for the grant of stock options to purchase up to 1,025,000 shares of the Company’s common stock. The Company’s 2009 Stock Incentive Plan authorizes the grant of up to 425,000 shares and allows for the issuance of Stock Appreciation Rights, Restricted Stock, Stock Options, Non-stock Share Equivalents, Performance Shares or Performance Units.  Both plans allow for the grant of incentive stock options and non-qualified stock options, and awards are generally granted with an exercise price equal to the estimated fair market value of the Company’s common stock at the date of grant. The maximum term of the options granted under the plans is ten years.

The Company has granted non-plan options to certain persons representing key business relationships to purchase up to an aggregate amount of 55,000 shares of the Company’s common stock at between $15.00 and $20.00 per share for ten years. These options are non-qualified and not part of either plan.

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

 
16

 

   
2011
   
2010
 
Expected volatility
    29.00 %     25.00 %
Expected dividends
    0.50 %     0.50 %
Expected term (in years)
 
7 years
   
7 years
 
Risk-free rate
    2.70 %     2.32 %

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2011 and September 30, 2010 was $8.54 and $7.43, respectively.

The following table summarizes stock option activity during the nine months ended September 30, 2011 and September 30, 2010:

   
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
                     
(In Thousands)
 
Nine Months Ended September 30, 2011:
                       
Outstanding at January 1, 2011
    881,000     $ 15.65       6.9     $ 8,238  
Granted
    166,500       26.05       9.6       -  
Exercised
    (23,000 )     10.89       4.5       -  
Forfeited
    -       -       -       -  
Outstanding at September 30, 2011
    1,024,500       17.34       6.0     $ 12,861  
                                 
Exercisable at September 30, 2011
    418,974     $ 12.81       4.5     $ 7,200  
                                 
Nine Months Ended September 30, 2010:
                               
Outstanding at January 1, 2010
    863,500     $ 15.17       6.8     $ 8,488  
Granted
    37,500       25.00       9.8       -  
Exercised
    (5,000 )     10.00       -       -  
Forfeited
    (10,000 )     15.00       6.6       -  
Outstanding at September 30, 2010
    886,000       15.62       6.3     $ 8,313  
                                 
Exercisable at September 30, 2010
    272,627     $ 11.96       5.3     $ 3,555  

As of September 30, 2011, there was $2,033,000 of total unrecognized compensation cost related to non-vested stock options.  The cost is expected to be recognized on the straight-line method over the next 5.9 years.

Restricted Stock

The Company has issued restricted stock to a certain executive officer and five other employees, and currently has 26,000 non-vested shares issued.  The value of restricted stock awards is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period, which is five years from the date of grant.  As of September 30, 2011, there was $473,000 of total unrecognized compensation cost related to non-vested restricted stock.  The cost is expected to be recognized evenly over the remaining 3.2 years of the restricted stock’s vesting period.

 
17

 

Stock Warrants

In recognition of the efforts and financial risks undertaken by the organizers of ServisFirst Bank (the “Bank”) in 2005, the Bank granted warrants to organizers 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 date of the grant. The warrants became warrants to purchase a like number of shares of the Company’s common stock upon the formation of the Company as a holding company for the Bank.  The warrants vest in equal annual increments over a three-year period commencing on the first anniversary date of the Bank’s incorporation and will terminate on the tenth anniversary of the incorporation date. The total number of these warrants outstanding at September 30, 2011 and September 30, 2010 was 60,000.

The Company issued warrants for 75,000 shares of common stock at a price of $25 per share in the third quarter of 2008. These warrants were issued in connection with the trust preferred securities that are discussed in detail in Note 10.

The Company issued warrants for 15,000 shares of common stock at a price of $25 per share in the second quarter of 2009.  These warrants were issued in connection with the issuance and sale of the Bank’s 8.25% Subordinated Note discussed in detail in Note 12.

NOTE 7 - DERIVATIVES

During 2008, the Company entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet customer 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 September 30, 2011, the Company was party to two swaps with notional amounts totaling approximately $11.7 million with customers, and two swaps with notional amounts totaling approximately $11.7 million with a regional correspondent bank.  These swaps qualify as derivatives, but are not designated as hedging instruments.  The Company has recorded the value of these swaps at $734,000 in offsetting entries in other assets and other liabilities.

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 interest expense.  The Company recognized a decrease to interest expense of $1,000 related to marking the cap to market for the three months ended September 30, 2011 and $98,000 of interest expense related to marking the cap to market for the nine months ended September 30, 2011.

The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor. The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of the Company’s agreements with investors and rate lock commitments to customers as of September 30, 2011 and December 31, 2010 were not material.
 
 
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NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS

In April 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 ASU 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 ASU 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 ASU 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 International Accounting Standards Board (“IASB”) to consistently define fair value and to come up with a set of consistent disclosures for fair value.  The amendments in this ASU 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 ASU 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.

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 is evaluating its timing of adoption, but will adopt these amendments retrospectively by the effective date.

NOTE 9 - FAIR VALUE MEASUREMENT

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described below:

Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2:
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3:
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.

 
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Securities.  Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy.  Level 1 securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities.  For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on prices obtained from independent vendors.  Securities measured with these techniques are classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available.  Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities.  In cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.

Interest Rate Swap and Cap 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.

Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable.  Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of the collateral if the loan is collateral-dependent.  Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.  The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $1,431,000 and $4,567,000 during the three and nine months ended September 30, 2011, respectively, and $1,248,000 and $5,100,000 during the three and nine months ended September 30, 2011, respectively.  Impaired loans are classified within Level 3 of the hierarchy.

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.  A net gain on the sale of OREO of $39,000 was recognized during the three months ended September 30, 2011, and  the amount charged to earnings was $105,000 during the nine months ended September 30, 2011 and $372,000 and $1,031,000 during the three and nine months ended September 30, 2010, respectively.  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.

 
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The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of September 30, 2011 and December 31, 2010:

         
Fair Value Measurements at September 30, 2011 Using
 
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
   
(In Thousands)
 
Assets Measured on a Recurring Basis:
                       
Available-for-sale securities:
                       
U.S. Treasury and government sponsored agencies
  $ -     $ 96,814     $ -     $ 96,814  
Mortgage-backed securities
    -       101,659       -       101,659  
State and municipal securities
    -       97,244       -       97,244  
Corporate debt
    -       1,109       -       1,109  
Interest rate swap agreements
    -       734       -       734  
Interest rate cap
    -       18       -       18  
Total assets at fair value
  $ -     $ 297,578     $ -     $ 297,578  
                                 
Liabilities Measured on a Recurring Basis:
                               
Interest rate swap agreements
  $ -     $ 734     $ -     $ 734  

         
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
 
   
(In Thousands)
 
Assets Measured on a Recurring Basis:
                       
Available-for-sale securities
                       
U.S. Treasury and government sponsored 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  
 
 
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The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of September 30, 2011 and December 31, 2010:

         
Fair Value Measurements at September 30, 2011 Using
 
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
   
(In Thousands)
 
Assets Measured on a Nonrecurring Basis:
                       
Impaired loans
  $ -     $ -     $ 10,016     $ 10,016  
Other real estate owned and repossessed assets
    -       -       10,134       10,134  
Total assets at fair value
  $ -     $ -     $ 20,150     $ 20,150  

         
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
 
   
(In Thousands)
 
Assets Measured on a Nonrecurring Basis:
                       
Impaired loans
  $ -     $ -     $ 35,183     $ 35,183  
Other real estate owned
    -       -       6,966       6,966  
Total assets at fair value
  $ -     $ -     $ 42,149     $ 42,149  

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 carrying amount and estimated fair value of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at September 30, 2011 and December 31, 2010 were as follows:

 
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September 30, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Fair Value
   
Carrying
Amount
   
Fair Value
 
   
(In Thousands)
 
Financial Assets:
                       
Cash and cash equivalents
  $ 184,678     $ 184,678     $ 231,978     $ 231,978  
Investment securities available for sale
    296,826       296,826       276,959       276,959  
Investment securities held to maturity
    15,355       16,141       5,234       4,963  
Restricted equity securities
    3,708       3,708       3,510       3,510  
Mortgage loans held for sale
    9,114       9,114       7,875       7,875  
Loans, net
    1,674,010       1,673,538       1,376,741       1,388,154  
Accrued interest and dividends receivable
    7,529       7,529       6,990       6,990  
Derivative
    752       752       918       918  
                                 
Financial Liabilities:
                               
Deposits
  $ 2,011,281     $ 2,014,751     $ 1,758,716     $ 1,761,906  
Federal funds purchased
    16,400       16,400       -       -  
Borrowings
    4,949       5,385       24,937       25,717  
Trust preferred securities
    30,514       27,402       30,420       27,989  
Accrued interest payable
    1,043       1,043       898       898  
Derivative
    734       734       803       803  

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.

Investment securities:  Fair values for investment securities are based on quoted market prices, where available.  If a quoted market price is not available, fair value is based on quoted market prices of comparable instruments.

Restricted equity securities:  Fair values for other investments are considered to be their cost.

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) 820 and generally produces a higher value than an exit-price approach.  Fair value for impaired loans is estimated using discounted cash flow analysis, or underlying collateral values, where applicable.

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 values of the derivative agreements are based on quoted prices from an outside third party.

Accrued interest and dividends receivable:  The carrying amount of accrued interest and dividends receivable approximates its fair value.

 
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Deposits:  The fair values disclosed for demand deposits 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.

Federal funds purchased:  The carrying amounts of federal funds purchased approximate their market value.

Other borrowings:  The fair values of other 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.

Trust preferred securities:  The fair values of trust preferred securities 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.

Accrued interest payable:  The carrying amount of accrued interest payable approximates its fair value.

Loan commitments:  The fair values of the Company’s off-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-sheet financial instruments consist of non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

NOTE 10 - SUBORDINATED DEFERRABLE INTEREST DEBENTURES

On September 2, 2008, ServisFirst Capital Trust I, a subsidiary of the Company (the “2008 Trust”), sold 15,000 shares of its 8.5% trust preferred securities to accredited investors for $15,000,000 or $1,000 per share and 463,918 shares of its common securities to the Company for $463,918 or $1.00 per share. The 2008 Trust invested the $15,463,918 of the proceeds from such sale in the Company’s 8.5% junior subordinated deferrable interest debenture due September 1, 2038 in the principal amount of $15,463,918 (the “Debenture”) which was issued pursuant to an Indenture dated as of September 2, 2008 between the Company and Wilmington Trust Company as trustee (the “2008 Indenture”). The Debenture bears a fixed rate of interest at 8.5% per annum and is subordinate and junior in right of payment to all of the Company’s senior debt; provided, however, the Company will not incur any additional senior debt in excess of 0.5% of the Company’s average assets for the fiscal year immediately preceding, unless such incurrence is approved by a majority of the holders of the outstanding trust preferred securities.

Holders of the trust preferred securities are entitled to receive distributions accruing from the original date of issuance. The distributions are payable quarterly in arrears on December 1, March 1, June 1 and September 1 of each year, commencing December 1, 2008. The distributions accrue at an annual fixed rate of 8.5%. Payments of distributions on the trust preferred securities will be deferred in the event interest payments on the Debenture is deferred, which may occur at any time and from time to time, for up to 20 consecutive quarterly  periods.  During any deferral period, the Company may not pay dividends or make certain other distributions or payments as provided for in the 2008 Indenture.  If payments are deferred, holders accumulate additional distributions thereon at 8.5%, compounded quarterly, to the extent permitted by law.

 
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In addition, the Company issued a total of 75,000 warrants, each with the right to purchase one share of the Company’s common stock for a purchase price of $25.00. The warrants were issued in increments of 500 for each $100,000 of trust preferred securities purchased. Each warrant is exercisable for a period beginning upon its date of issuance and ending upon the later to occur of either (i) September 1, 2013 or (ii) 60 days following the date upon which the Company’s common stock becomes listed for trading upon a “national securities exchange” as defined under the Securities Exchange Act of 1934. The Company estimated the fair value of each warrant using a Black-Scholes-Merton valuation model and determined the fair value per warrant to be $5.65. This total value of $423,000 was recorded as a discount and reduced the net book value of the Debenture to $15,052,000 with an offsetting increase to the Company’s additional paid-in capital. The discount will be amortized over a three-year period.

The trust preferred securities are subject to mandatory redemption upon repayment of the Debenture at its maturity, September 1, 2038, or its earlier redemption. The Debenture is redeemable by the Company for any reason.  In the event of the redemption of the trust preferred securities, the holders of the trust preferred securities will be entitled to receive $1,000 per share plus accumulated and unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment.

The Company has the right at any time to terminate the 2008 Trust and cause the Debenture to be distributed to the holders of the trust preferred securities in liquidation of the 2008 Trust. This right is optional and wholly within the Company’s discretion as set forth in the 2008 Indenture.

Payment of periodic cash distributions and payment upon liquidation or redemption with respect to the trust preferred securities are guaranteed by the Company to the extent of funds held by the 2008 Trust (the “Preferred Securities Guarantee”). The Preferred Securities Guarantee, when taken together with the Company’s other obligations under the Debenture, constitutes a full and unconditional guarantee, on a subordinated basis, by the Company of payments due on the trust preferred securities.

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– 
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, constitutes all 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% Junior Subordinated Mandatory Convertible Deferrable Interest Debentures due March 15, 2040 in the principal amount of $15,050,000 (the “Subordinated Debentures”) which were issued pursuant to an Indenture dated as of March 15, 2010 between the Company and Wilmington Trust Company, as trustee (the  “2010 Indenture”).  The Preferred Securities were offered and sold to accredited investors in a private placement.

 
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Holders of the Preferred Securities are entitled to receive distributions accruing from March 15, 2010, and payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing June 15, 2010 unless 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, but such payments are financially immaterial since they simply represent a return of funds to the Company.

The Subordinated Debentures are subordinate and junior in right of payment to all of the Company’s senior debt, as defined in the 2010 Indenture; 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 of its capital stock, (ii) pay principal of or interest on any debt securities ranking pari passu with 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 ranks pari passu with 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 2010 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 2010 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.

 
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NOTE 12 - SUBORDINATED NOTE DUE SEPTEMBER 1, 2016

On June 23, 2009, the Bank issued a $5,000,000 aggregate principal amount 8.25% Subordinated Note due June 1, 2016 to an accredited investor at 100% of par.  The note is subordinate and junior in right of payment upon any liquidation of the Bank as to principal, interest and premium to obligations to the Bank’s depositors and other obligations to its general and secured creditors.  Interest payments are due and payable on each March 1, June 1, September 1 and December 1, commencing September 1, 2009.  Interest accrues at an annual rate of 8.25%.  The proceeds from the note payable are included in Tier 2 capital of the Bank and the Company.

In addition, 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 upon its date of issuance and ending on June 1, 2016.  The Company estimated the fair value of each warrant using a Black-Scholes-Merton valuation model and determined the fair value per warrant to be $5.41. This total value of $86,000 was recorded as a discount and reduced the net book value of the debentures 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 13 – 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 Treasury 40,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), for aggregate proceeds of $40,000,000.  The issuance was pursuant to the Treasury’s Small Business Lending Fund program, a $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 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% 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% per annum to 5% per annum for the second through tenth dividend periods, and from 1% per annum to 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%.  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 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.

 
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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.

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 14 – PRIVATE PLACEMENT OF COMMON STOCK

 On June 30, 2011, the Company completed the sale of 340,000 shares of its common stock in a private placement to 105 accredited investors and 20 non-accredited investors for $30.00 per share, for aggregate proceeds of $10,200,000.  The private placement was in conjunction with the Company’s entry into the Pensacola, Florida market.  The offering, completed on June 30, 2011, was exempt from registration under the Securities Act of 1933, and no underwriter or placement agent was involved in the private placement.

NOTE 15 – SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2011, and events which occurred subsequent to September 30, 2011 but were not recognized in the financial statements.  As of the date of this filing, there were no subsequent events that required recognition or disclosure.

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

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and September 30, 2010.

Forward-Looking Statements

Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.  Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including: general economic conditions, especially in the credit markets and in the Southeast; the performance of the capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes in our loan portfolio and the deposit base; possible changes in laws and regulations and governmental monetary and fiscal policies, including, but not limited to, economic stimulus initiatives and so-called “bailout” initiatives; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and non-banks.  The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to “Risk Factors” in our most recent Annual Report on Form 10-K and our other SEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made.

Business

We are a bank holding company under the Bank Holding Company Act of 1956 incorporated in Delaware and headquartered at 850 Shades Creek Parkway, Birmingham, Alabama 35209 (Jefferson County). Through the Bank, we operate ten full-service banking offices, with nine offices located in Jefferson, Shelby, Madison, Montgomery and Houston counties in the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama, and one office located in Escambia County in the Pensacola-Ferry Pass-Brent, Florida MSA, which opened April 1, 2011.  These MSAs constitute our primary service areas.

 
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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). 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.

Overview

As of September 30, 2011, we had consolidated total assets of $2,257,330,000, an increase of $322,164,000, or 16.6%, from $1,935,166,000 at December 31, 2010.  Total loans were $1,695,476,000 at September 30, 2011, up $300,658,000, or 21.6%, over $1,394,818,000 at December 31, 2010. Total deposits were $2,011,281,000 at September 30, 2011, an increase of $252,565,000, or 14.4%, from $1,758,716,000 at December 31, 2010.

Net income for the quarter ended September 30, 2011 was $6,135,000, an increase of $1,336,000, or 27.8%, from $4,799,000 for the quarter ended September 30, 2010.  Basic and diluted earnings per common share were $1.03 and $0.90, respectively, for the three months ended September 30, 2011, compared to $0.87 and $0.77, respectively, for the corresponding period in 2010.  This increase was primarily attributable to a $432,549,000, or 25.7%, increase in average earning assets from the third quarter of 2010 to the third quarter of 2011, and a $225,000, or 38.2%, increase in income from mortgage banking activities, and a $203,000 increase in credit card income as a result of our conversion to another credit card vendor in the second quarter of 2011.

Net income for the nine months ended September 30, 2011 was $16,851,000, an increase of $4,018,000, or 31.3%, from $12,833,000 for the nine months ended September 30, 2010.  Basic and diluted earnings per common share were $2.93 and $2.58, respectively, for the nine months ended September 30, 2011, compared to $2.33 and $2.11, respectively, for the corresponding period in 2010.  This increase was primarily attributable to a $371,474,000, or 23.7%, increase in average earning assets in 2011 from 2010 and a $1,147,000, or 15.1%, decrease in the provision for loan losses from 2010 to 2011.

Critical Accounting Policies

The accounting and financial policies of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. To prepare consolidated financial statements in conformity with U.S. 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 value of financial instruments are particularly subject to change.  Information concerning our accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 
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Financial Condition

Cash and Cash Equivalents

 At September 30, 2011, we had $91,315,000 in federal funds sold and other investments, compared to $346,000 at December 31, 2010.  We assess our risk-weighted capital ratios at each quarter’s end and determine if excess funds need to be maintained at correspondent banks versus the Federal Reserve. We determined as of March 31, 2011, and each reporting date since then, that excess funds could remain at correspondent banks, but we previously had determined as of  December 31, 2010 that it was preferable to keep excess funds at the Federal Reserve at that time.

Investment Securities

Investment securities available for sale totaled $296,826,000 at September 30, 2011 and $276,959,000 at December 31, 2010.  Investment securities held to maturity totaled $15,355,000 at September 30, 2011 and $5,234,000 at December 31, 2010.  Approximately $30,007,000 in U.S. Treasury Notes and $33,263,000 in mortgage-backed securities, government-sponsored agency securities and corporate bonds were sold during the first nine months of 2011.  Purchases of $90,011,000 in mortgage-backed securities and government-sponsored agency securities, and the purchase of $14,684,000 in municipal securities replaced the sold bonds and increased the overall size of the portfolio.

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

The following table shows the amortized cost of our investment securities by their stated maturity at September 30, 2011:

   
Less Than
One Year
   
One Year to
Five Years
   
Five Years to
Ten Years
   
More Than
Ten Years
   
Total
 
   
(In Thousands)
 
U.S. Treasury and government sponsored agencies
  $ 10,020     $ 81,264     $ 3,262     $ 645     $ 95,191  
Mortgage-backed securities
    839       977       32,617       71,956       106,389  
State and municipal securities
    370       23,001       61,531       12,820       97,722  
Corporate debt
    -       -       1,027       -       1,027  
Total
  $ 11,229     $ 105,242     $ 98,437     $ 85,421     $ 300,329  
                                         
Taxable-equivalent Yield
    1.89 %     2.12 %     4.70 %     4.26 %     3.56 %
 
 
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All securities held are traded in liquid markets. As of September 30, 2011, we owned certain restricted securities of the Federal Home Loan Bank with an aggregate book value and market value of $3,458,000 and certain securities of First National Bankers Bank in which we invested $250,000.  We had no investments in any one security, restricted or liquid, in excess of 10% of our stockholders’ equity.

The Bank does not invest in collateralized debt obligations (“CDOs”). All tax-exempt securities currently held are issued by government issuers within the State of Alabama. All corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased.  The September 30, 2011 total investment portfolio has a combined average credit rating of AA.

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $176,385,000 and $111,347,000 as of September 30, 2011 and December 31, 2010, respectively.
 
Loans

We had total loans of $1,695,476,000 at September 30, 2011, an increase of $300,658,000, or 21.6%, compared to $1,394,818,000 at December 31, 2010.  At September 30, 2011, 51% of our loans were in our Birmingham offices, 21% in our Huntsville offices, 11% in our Montgomery offices, 14% in our Dothan offices, and 3% in our Pensacola, Florida office.

Asset Quality

The allowance for loan losses is established and maintained at levels management deems adequate to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. In assessing the adequacy of the allowance for loan losses management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level.  Our management believes that the allowance was adequate at September 30, 2011.

 
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The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percentage of loans in each category to total loans.  Management believes that the comprehensive allowance analysis developed by our credit administration group is in compliance with all current regulatory guidelines.

September 30, 2011
 
Amount
   
Percentage
of loans in
each
category to
total loans
 
   
(In Thousands)
       
Commercial, financial and agricultural
  $ 6,248       41.26 %
Real estate - construction
    6,279       9.45 %
Real estate - mortgage
    4,062       46.76 %
Consumer
    1,038       2.53 %
Other
    3,839       -  
Total
  $ 21,466       100.00 %

December 31, 2010
 
Amount
   
Percentage
of loans in
each
category to
total loans
 
   
(In Thousands)
       
Commercial, financial and agricultural
  $ 5,348       38.47 %
Real estate - construction
    6,373       12.34 %
Real estate - mortgage
    2,443       46.51 %
Consumer
    749       2.68 %
Other
    3,164       -  
Total
  $ 18,077       100.00 %

Nonperforming Assets

Total nonperforming loans, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased to $18.4 million as of September 30, 2011, compared to $14.3 million at December 31, 2010.  Of this total, nonaccrual loans of $17.1 million at September 30, 2011, represented a net increase of $2.8 million over nonaccrual loans of $14.3 million at December 31, 2010.  The largest change to nonaccrual loans was the addition of $6.1 million in loans related to six residential builders and land developers. The Bank had three loans 90 or more days past due and still accruing at September 30, 2011 in the aggregate amount of $1.4 million, compared to zero loans 90 days or more past due at December 31, 2010.  TDRs at September 30, 2011 were $4.5 million compared to $2.4 million at December 31, 2010.  The majority of this increase is attributable to a single commercial relationship. All of the Bank’s TDR loans at both September 30, 2011 and December 31, 2010 have been performing as agreed under the terms of their restructuring plans.

Other real estate owned (OREO) increased to $10.0 million at September 30, 2011, from $7.0 million at December 31, 2010.  The total number of OREO accounts decreased from 39 to 27 over the same period due to increased sales activity.  However, the dollar value of properties increased primarily because of the foreclosure of three large land development and land parcel loans.

 
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The following table summarizes our nonperforming assets and TDRs at September 30, 2011 and December 31, 2010:

   
September 30, 2011
   
December 31, 2010
 
   
Balance
   
Number of
Loans
   
Balance
   
Number of
Loans
 
   
(Dollar Amounts In Thousands)
 
Nonaccrual loans:
                       
Commercial, financial and agricultural
  $ 1,040       11     $ 2,164       8  
Real estate - construction
    13,640       39       10,722       24  
Real estate - mortgage:
                               
Owner-occupied commercial
    622       1       635       1  
1-4 family mortgage
    1,171       7       202       1  
Other mortgage
                    -       0  
Total real estate - mortgage
    1,793       8       837       2  
Consumer
    579       2       624       1  
Total Nonaccrual loans:
  $ 17,052       60     $ 14,347       35  
                                 
90+ days past due and accruing:
                               
Commercial, financial and agricultural
  $ -       0     $ -       0  
Real estate - construction
    500       1       -       0  
Real estate - mortgage:
                               
Owner-occupied commercial
    -       0       -       0  
1-4 family mortgage
    291       1       -       0  
Other mortgage
    578       1       -       0  
Total real estate - mortgage
    869       2       -       0  
Consumer
    -       0       -       0  
Total 90+ days past due and accruing:
  $ 1,369       3     $ -       0  
                                 
Total Nonperforming Loans:
  $ 18,421       63     $ 14,347       35  
                                 
Plus: Other real estate owned
    10,044       27       6,966       39  
Total Nonperforming Assets
  $ 28,465       90     $ 21,313       74  
                                 
Restructured accruing loans:
                               
Commercial, financial and agricultural
  $ 1,831       5     $ 2,398       9  
Real estate - construction
                    -       0  
Real estate - mortgage:
                               
Owner-occupied commercial
    2,357       1       -       0  
1-4 family mortgage
    -       0       -       0  
Other mortgage
    334       1       -       0  
Total real estate - mortgage
    2,691       2       -       0  
Consumer
    -       0       -       0  
Total restructured accruing loans:
  $ 4,522       7     $ 2,398       9  
                                 
Total Nonperforming assets and restructured accruing loans
  $ 32,987       97     $ 23,711       83  
                                 
Ratios:
                               
Nonperforming loans to total loans
    1.09 %             1.03 %        
Nonperforming assets to total loans plus other real estate owned
    1.67 %             1.52 %        
Nonperforming loans plus restructured accruing loans to total loans plus other real estate owned
    1.35 %             1.19 %        

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

Impaired Loans and Allowance for Loan Losses

We have allocated approximately $6.3 million of our allowance for loan losses to real estate construction, including acquisition and development and lot loans, $6.2 million to commercial, financial and agricultural loans, and $5.1 million to other loan types. We have a total loan loss reserve as of September 30, 2011 allocable to specific loan types of $17.6 million.  Another $3.8 million of our allowance for loan losses is based on our judgments regarding various external and internal factors, including macroeconomic trends, our assessment of the Bank’s loan growth prospects, and evaluations of internal risk controls.  The total resulting loan loss reserve is $21.5 million.  Based upon historical performance, known factors, overall judgment, and regulatory methodologies, including consideration of the possible effect of current residential housing market defaults and business failures plaguing financial institutions in general, management believes that the current methodology used to determine the adequacy of the allowance for loan losses is reasonable.

As of September 30, 2011, we had impaired loans of $42.7 million inclusive of nonaccrual loans, a decrease of $8.8 million from $51.5 million as of December 31, 2010.  We allocated $5.6 million of our allowance for loan losses at September 30, 2011 to these impaired loans. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement.  Impairment does not always indicate credit loss, but provides an indication of collateral exposure based on prevailing market conditions and third-party valuations.  Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. The amount of impairment, if any, and subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.  Our credit risk management team performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans.

Of the $42.7 million of impaired loans reported as of September 30, 2011, $21.7 million were real estate – construction loans, $6.9 million were commercial, financial, and agricultural loans, $5.5 million were commercial real estate loans, and $5.3 million were residential real estate loans.  The remaining $3.3 million of impaired loans consisted of other mortgages and consumer loans. Of the $21.7 million of impaired real estate – construction loans, $10.3 million (a total of 26 loans with 13 builders) were residential construction loans, and $9.6 million consisted of various residential lot loans to 12 builders.

Deposits

Total deposits increased $252,565,000, or 14.4%, to $2,011,281,000 at September 30, 2011 compared to $1,758,716,000 at December 31, 2010.  We anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in our mature markets.
 
 
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For amounts and rates of our deposits by category, see the table “Average Consolidated Balance Sheets and Net Interest Analysis on a Fully Taxable-equivalent Basis” under the subheading “Net Interest Income”

Other Borrowings

We have paid off our two advances from the Federal Home Loan Bank of Atlanta.  The payoffs occurred in March and June 2011.  As discussed more fully under “Noninterest Expense” below, we incurred prepayment penalties totaling $738,000 by repaying these advances early.  As discussed in Note 10 to the Consolidated Financial Statements, we borrowed $15.5 million through the issuance of trust preferred securities and the related debenture on September 2, 2008.  Both financial instruments bear an identical annual rate of interest of 8.50% and pay interest on March 1, June 1, September 1 and December 1 of each year.  The current book value of this borrowing is $15.4 million as a result of amortization of the discount associated with 75,000 warrants issued to the holders of the trust preferred securities.  As discussed in Note 11 to the Consolidated Financial Statements, we borrowed $15.0 million through the issuance of trust preferred securities and the related debenture on March 15, 2010.  Both financial instruments bear an identical rate of interest of 6.00% and pay interest on March 15, June 15, September 15 and December 15 of each year.  As discussed in Note 12 to the Consolidated Financial Statements, on June 23, 2009, the Bank issued a $5.0 million subordinated note due June 1, 2016 in a private placement.  The note bears interest at an annual rate of 8.25% payable on March 1, June 1, September 1 and December 1 of each year.

Liquidity

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

 The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity were to decline due to a run-off in deposits, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding.  At September 30, 2011, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $317 million.  Additionally, the Bank had additional borrowing availability of approximately $416 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements. We believe these sources of funding are adequate to meet immediate anticipated funding needs, but we will need additional capital to maintain our current growth. Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits.  In addition, we have issued debt as described above under “Other Borrowings”.
 
 
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We are subject to general FDIC guidelines that require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity materially increasing or decreasing.

The following table reflects the contractual maturities of our term liabilities as of September 30, 2011. 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
 
   
(In Thousands)
 
Contractual Obligations (1)
                             
                               
Deposits without a stated maturity
  $ 1,642,243     $ -     $ -     $ -     $ -  
Certificates of deposit (2)
    369,038       213,129       118,262       37,647       -  
Federal funds purchased     16,400       16,400       -       -       -  
Subordinated debentures
    30,000       -       -       -       30,000  
Subordinated note payable
    5,000       -       -       5,000       -  
Operating lease commitments
    17,593       2,067       3,931       3,911       7,684  
Total
  $ 2,080,274     $ 231,596     $ 122,193     $ 46,558     $ 37,684  

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

Capital Adequacy

In the first quarter of 2010, we formed ServisFirst Capital Trust II, which issued 15,000 shares of its 6.0% Mandatory Convertible Trust Preferred Securities (the “Preferred Securities”) for $15,000,000 and 50,000 shares of its common securities for $50,000 (collectively the “Trust Securities”) on March 15, 2010.  The Trust invested all of the proceeds from the sale of the Trust Securities in the Company’s 6.0% Junior Subordinated Mandatory Convertible Deferrable Interest Debentures due March 15, 2040 in the principal amount of $15,050,000 (the “Subordinated Debentures”).  The Preferred Securities were offered and sold to accredited investors in a private placement.  The Federal Reserve Board has deemed these securities to qualify as Tier 1 capital of the Company up to 25% of Tier 1 capital elements.  See Note 11 to the consolidated financial statements for further discussion of the issuance and sale of the Preferred Securities.

On June 30, 2011, we completed the sale of 340,000 shares of our common stock in a private placement to 105 accredited investors and 20 non-accredited investors for $30.00 per share, for aggregate proceeds of $10,200,000.  The private placement was in conjunction with our entry into the Pensacola, Florida market.  The offering, completed on June 30, 2011, was exempt from registration under the Securities Act of 1933, and no underwriter or placement agent was involved in the private placement.
 
 
37

 
 
On June 21, 2011, we entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which we issued and sold to the Treasury 40,000 shares of our Senior Non-Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), for aggregate proceeds of $40,000,000.  The issuance was pursuant to the Treasury’s Small Business Lending Fund program, a $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 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% 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% per annum to 5% per annum for the second through tenth dividend periods and from 1% per annum to 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%.  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) we have 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 are still outstanding, the Treasury (or any successor holder of Series A Preferred Stock) may designate two additional directors to be elected to our 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.

We 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 our primary federal banking regulator.

As of September 30, 2011, 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 September 30, 2011.
 
 
38

 
 
The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of September 30, 2011, December 31, 2010 and September 30, 2010:

   
Actual
   
For Capital Adequacy
Purposes
   
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
As of September 30, 2011:
                                   
Total Capital to Risk-Weighted Assets:
                                   
Consolidated
  $ 238,517       13.40 %   $ 142,450       8.00 %     N/A       N/A  
ServisFirst Bank
    234,967       13.20 %     142,401       8.00 %     178,001       10.00 %
Tier 1 Capital to Risk-Weighted Assets:
                                               
Consolidated
    212,102       11.91 %     71,225       4.00 %     N/A       N/A  
ServisFirst Bank
    208,552       11.72 %     71,200       4.00 %     106,800       6.00 %
Tier 1 Capital to Average Assets:
                                               
Consolidated
    212,102       9.81 %     71,225       4.00 %     N/A       N/A  
ServisFirst Bank
    208,552       9.67 %     71,200       4.00 %     89,000       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 1 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 1 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 %
                                                 
As of September 30, 2010:
                                               
Total Capital to Risk-Weighted Assets:
                                               
Consolidated
  $ 161,277       11.75 %   $ 109,791       8.00 %     N/A       N/A  
ServisFirst Bank
    161,082       11.74 %     109,736       8.00 %     137,170       10.00 %
Tier 1 Capital to Risk-Weighted Assets:
                                               
Consolidated
    139,441       10.16 %     54,895       4.00 %     N/A       N/A  
ServisFirst Bank
    139,246       10.15 %     54,868       4.00 %     82,302       6.00 %
Tier 1 Capital to Average Assets:
                                               
Consolidated
    139,441       8.06 %     54,895       4.00 %     N/A       N/A  
ServisFirst Bank
    139,246       8.05 %     54,868       4.00 %     68,585       5.00 %

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in our balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.
 
 
39

 
 
Our exposure to credit loss in the event of non-performance by the other party to such financial instruments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market.  We continue to experience a manageable level of investor repurchase demands.  For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale.  Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers.  There were no expenses incurred as part of these buyback obligations for the three and nine months ended September 30, 2011, compared to $104,000 for the three and nine months ended September 30, 2010.

Financial instruments whose contract amounts represent credit risk at September 30, 2011 are as follows:

   
September 30, 2011
 
   
(In Thousands)
 
Commitments to extend credit
  $ 627,042  
Credit card arrangements
    18,898  
Standby letters of credit
    53,495  
      699,435  

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

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

Federal funds lines of credit are uncommitted lines issued to downstream correspondent banks for the purpose of providing liquidity to them.  The lines are unsecured, and we have no obligation to sell federal funds to the correspondent, nor does the correspondent have any obligation to request or accept purchases of federal funds from us.
 
 
40

 
 
Results of Operations

Summary of Net Income

Net income for the three months ended September 30, 2011 was $6,135,000 compared to net income of $4,799,000 for the three months ended September 30, 2010.  Net income for the nine months ended September 30, 2011 was $16,851,000 compared to net income of $12,833,000 for the nine months ended September 30, 2010.  The increase in net income was primarily attributable to increased net interest income as a result of growth in average earning assets and a decrease in the provision for loan losses.  Net interest income for the three months ended September 30, 2011 increased to $19,219,000, or 20.2%, compared to $15,987,000 for the corresponding period in 2010.  Net interest income for the nine months ended September 30, 2011 increased to $54,243,000, or 17.4%, compared to $46,201,000 for the corresponding period in 2010.  The provision for loan losses increased $203,000 to $2,740,000 for the three months ended September 30, 2011 compared to the corresponding period in 2010, and decreased $1,147,000 to $6,465,000 for the nine months ended September 30, 2011 compared to the corresponding period in 2010.  This decrease in provision for loan loss for the nine-month period was primarily due to a decline in net charge-offs compared to recent historical levels, leading to a lower overall reserve requirement.  In addition, improvements in risk ratings and pay-downs on other loans led to smaller than normal increases in specific allocations of loan loss reserves for the first three quarters of 2011.  Noninterest income increased $460,000 to $1,808,000 for the three months ended September 30, 2011 compared to the corresponding period in 2010, and increased $1,377,000 to $4,891,000 for the nine months ended September 30, 2011 compared to the corresponding period in 2010.    This increase is noninterest income was primarily attributable to increased mortgage banking income, as more fully explained in “Noninterest Income” below.  Operating expenses for the three months ended September 30, 2011 increased to $8,832,000, or 18.3%, compared to $7,467,000 for the corresponding period in 2010, and for the nine months ended September 30, 2011 increased to $26,798,000, or 19.3%, compared to $22,460,000 for the corresponding period in 2010.  A portion of the increase in noninterest expense was the result of a $738,000 prepayment fee relating to the prepayment of our two $10 million notes payable to the Federal Home Loan Bank, which is more fully explained in “Other Borrowings” above.  The addition of staff in our new Pensacola location, which opened April 1, and the addition of a correspondent banking team during the first quarter of 2011 also contributed to the increase in operating expenses.

Basic and diluted net income per common share were $1.03 and $0.90, respectively, for the three months ended September 30, 2011, compared to $0.87 and $0.77, respectively, for the corresponding period in 2010.  Basic and diluted net income per common share were $2.93 and $2.58, respectively, for the nine months ended September 30, 2011, compared to $2.33 and $2.11, respectively, for the corresponding period in 2010.  Return on average assets for the three and nine months ended September 30, 2011 was 1.11%  and 1.13%, respectively, compared to 1.10% and 1.06% for the corresponding period in 2010, and return on average stockholders’ equity for the three and nine months ended September 30, 2011 was 16.53% and 16.89%, respectively, compared to 16.86% and 16.12% for the corresponding period in 2010.

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.
 
 
41

 
 
Taxable-equivalent net interest income increased $3,327,000, or 20.5%, to $19,554,000 for the three months ended September 30, 2011 compared to $16,227,000 for the corresponding period in 2010, and increased $8,273,000, or 17.6%, to $55,231,000 for the nine months ended September 30, 2011 compared to $46,958,000 for the corresponding period in 2010.  This increase was primarily attributable to growth in average earning assets.  The taxable-equivalent yield on interest-earning assets decreased to 4.44% for the three months ended September 30, 2011 from 4.77% for the corresponding period in 2010, and decreased to 4.65% for the nine months ended September 30, 2011 from 4.97% for the corresponding period in 2010.  The yield on loans for the three months ended September 30, 2011 was 5.18% compared to 5.35% for the corresponding period in 2010, and 5.24% compared to 5.35% for the nine months ended September 30, 2011 and September 30, 2010, respectively.  Loan fees included in the yield calculation decreased to $116,000 for the three months ended September 30, 2011 from $211,000 for the corresponding period in 2010, and decreased to $420,000 for the nine months ended September 30, 2011 from $587,000 for the corresponding period in 2010.  Loan fees decreased due to the origination of fewer real estate construction loans.  The cost of total interest-bearing liabilities decreased to 0.99% for the three months ended September 30, 2011 from 1.13% for the corresponding period in 2010, and to 1.05% for the nine months ended September 30, 2011 from 1.15% for the corresponding period in 2010.  Net interest margin for the three months ended September 30, 2011 was 3.67% compared to 3.83% for the corresponding period in 2010, and 3.81% for the nine months ended September 30, 2011 compared to 4.01% for the corresponding period in 2010.

The following tables show, for the three and nine months ended September 30, 2011 and September 30, 2010, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue.  The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods.  Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.  The tables are presented on a taxable-equivalent basis where applicable:
 
 
42

 
 
Average Consolidated Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Three Months Ended September 30,
(Dollar Amounts In Thousands)

    
2011
   
2010
 
   
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)
  $ 1,607,567     $ 20,988       5.18 %   $ 1,309,007     $ 17,644       5.35 %
Mortgage loans held for sale
    6,262       54       3.42       8,485       72       3.37  
Investment securities:
                                               
Taxable
    188,813       1,373       2.88       175,493       1,575       3.56  
Tax-exempt (2)
    83,784       1,078       5.10       59,144       821       5.51  
Total investment securities (3)
    272,597       2,451       3.57       234,637       2,396       4.05  
Federal funds sold
    92,717       54       0.23       60,380       31       0.20  
Restricted equity securities
    4,351       22       2.01       4,024       18       1.77  
Interest-bearing balances with banks
    129,997       78       0.24       64,409       38       0.23  
Total interest-earning assets
  $ 2,113,491     $ 23,647       4.44 %   $ 1,680,942     $ 20,199       4.77 %
Non-interest-earning assets:
                                               
Cash and due from banks
    22,112                       24,652                  
Net fixed assets and equipment
    4,755                       4,782                  
Allowance for loan losses, accrued interest and other assets
    21,577                       20,278                  
Total assets
  $ 2,161,935                     $ 1,730,654                  
                                                 
Liabilities and stockholders' equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 286,810     $ 259       0.36 %   $ 266,553     $ 296       0.44 %
Savings deposits
    10,945       14       0.51       3,251       4       0.49  
Money market accounts
    931,168       1,705       0.73       814,769       1,658       0.81  
Time deposits
    351,321       1,405       1.59       257,293       1,155       1.78  
Federal funds purchased
    18,056       12       0.26       -       -       0.00  
Other borrowings
    35,449       698       7.81       55,298       859       6.16  
Total interest-bearing liabilities
  $ 1,633,749     $ 4,093       0.99     $ 1,397,164     $ 3,972       1.13  
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
    338,330                       217,086                  
Other liabilities
    5,059                       3,502                  
Stockholders' equity
    178,881                       106,919                  
Unrealized gains on securities and derivatives
    5,916                       5,983                  
Total liabilities and stockholders' equity
  $ 2,161,935                     $ 1,730,654                  
Net interest spread
                    3.45 %                     3.64 %
Net interest margin
                    3.67 %                     3.83 %

(1)
Non-accrual loans are included in average loan balances in all periods.  Loan fees of $116,000 and $211,000 are included in interest income in 2011 and 2010, respectively.
(2)
Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(3)
Unrealized gains of $1,784,000 and $9,204,000 are excluded from the yield calculation in 2011 and 2010, respectively.
 
 
43

 
 
   
Three Months Ended September 30,
 
   
2011 Compared to 2010 Increase (Decrease)
in Interest Income and Expense Due to 
Changes in:
 
   
Volume
   
Rate
   
Total
 
   
(In Thousands)
 
Interest-earning assets:
                 
Loans, net of unearned income
    3,913       (569 )     3,344  
Mortgages held for sale
    (19 )     1       (18 )
Investment securities:
                       
Securities - taxable
    113       (315 )     (202 )
Securities - non taxable
    321       (64 )     257  
Federal funds sold
    19       4       23  
Restricted equity securities
    2       2       4  
Interest-bearing balances with banks
    39       1       40  
Total interest-earning assets
    4,388       (940 )     3,448  
                         
Interest-bearing liabilities:
                       
Interest-bearing demand deposits
    21       (58 )     (37 )
Savings
    10       -       10  
Money market accounts
    223       (176 )     47  
Time deposits
    387       (137 )     250  
Federal funds purchased
    6       6       12  
Other borrowed funds
    (356 )     195       (161 )
Total interest-bearing liabilities
    291       (170 )     121  
Increase in net interest income
    4,097       (770 )     3,327  
 
 
44

 
 
Average Consolidated Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Nine Months Ended September 30,
(Dollar Amounts In Thousands)

    
2011
   
2010
 
   
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)
  $ 1,515,516     $ 59,386       5.24 %   $ 1,261,839     $ 50,521       5.35 %
Mortgage loans held for sale
    4,609       123       3.57       5,386       148       3.67  
Investment securities:
                                               
Taxable
    179,925       4,358       3.24       178,975       4,997       3.73  
Tax-exempt (2)
    79,800       3,164       5.30       57,129       2,407       5.63  
Total investment securities (3)
    259,725       7,522       3.87       236,104       7,404       4.19  
Federal funds sold
    81,419       126       0.21       30,891       49       0.21  
Restricted equity securities
    4,306       57       1.77       3,933       43       1.46  
Interest-bearing balances with banks
    70,952       127       0.24       26,900       49       0.24  
Total interest-earning assets
  $ 1,936,527     $ 67,341       4.65 %   $ 1,565,053     $ 58,214       4.97 %
Non-interest-earning assets:
                                               
Cash and due from banks
    25,697                       24,080                  
Net fixed assets and equipment
    4,833                       5,013                  
Allowance for loan losses, accrued interest and other assets
    18,030                       21,889                  
Total assets
  $ 1,985,087                     $ 1,616,035                  
                                                 
Liabilities and stockholders' equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 296,292     $ 883       0.40 %   $ 244,244     $ 917       0.50 %
Savings deposits
    8,610       33       0.51       2,514       10       0.53  
Money market accounts
    876,883       5,108       0.78       753,443       4,337       0.77  
Time deposits
    314,106       3,756       1.60       249,757       3,531       1.89  
Federal funds purchased
    6,085       12       0.26       6,552       31       0.63  
Other borrowings
    44,030       2,329       7.07       51,125       2,430       6.35  
Total interest-bearing liabilities
  $ 1,546,006     $ 12,121       1.05     $ 1,307,635     $ 11,256       1.15  
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
    286,488                       198,028                  
Other liabilites
    5,269                       3,957                  
Stockholders' equity
    143,005                       102,745                  
Unrealized gains on securities and derivatives
    4,319                       3,670                  
Total liabilities and stockholders' equity
  $ 1,985,087                     $ 1,616,035                  
Net interest spread
                    3.60 %                     3.82 %
Net interest margin
                    3.81 %                     4.01 %

(1)
Non-accrual loans are included in average loan balances in all periods.  Loan fees of $420,000 and $587,000 are included in interest income in 2011 and 2010, respectively.
(2)
Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(3)
Unrealized gains of $4,937,000 and $5,609,000 are excluded from the yield calculation in 2011 and 2010, respectively.
 
 
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Nine Months Ended September 30,
 
   
2011 Compared to 2010 Increase (Decrease)
in Interest Income and Expense Due to
Changes in:
 
   
Volume
   
Rate
   
Total
 
   
(In Thousands)
 
Interest-earning assets:
                 
Loans, net of unearned income
    9,961       (1,096 )     8,865  
Mortgages held for sale
    (21 )     (4 )     (25 )
Investment securities:
                       
Taxable
    27       (666 )     (639 )
Tax-exempt
    906       (149 )     757  
Federal funds sold
    78       (1 )     77  
Restricted equity securities
    4       10       14  
Interest-bearing balances with banks
    79       (1 )     78  
Total interest-earning assets
    11,034       (1,907 )     9,127  
                         
Interest-bearing liabilities:
                       
Interest-bearing demand deposits
    175       (209 )     (34 )
Savings
    23       -       23  
Money market accounts
    718       53       771  
Time deposits
    821       (596 )     225  
Federal funds purchased
    (2 )     (17 )     (19 )
Other borrowed funds
    (358 )     257       (101 )
Total interest-bearing liabilities
    1,377       (512 )     865  
Increase in net interest income
    9,657       (1,395 )     8,262  

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 September 30, 2011, total loans rated Special Mention, Substandard, and Doubtful were $88.9 million, or 5.2% of total loans, compared to $98.3 million, or 7.1% of total loans, at December 31, 2010.  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.
 
 
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The provision for loan losses was $2,740,000 for the three months ended September 30, 2011, an increase of $203,000 from $2,537,000 for the three months ended September 30, 2010.  The provision for loan losses was $6,465,000 for the nine months ended September 30, 2011, a $1,147,000 decrease, compared to $7,612,000 for the nine months ended September 30, 2010.  Our management continues to maintain a proactive approach to credit risk management. Nonperforming loans increased to $18.4 million, or 1.09% of total loans, at September 30, 2011 from $14.3 million, or 1.02% of total loans, at December 31, 2010, and were also higher than $8.0 million, or 0.62% of total loans, at September 30, 2010.  Impaired loans decreased to $42.7 million, or 2.5% of total loans, at September 30, 2011, compared to $51.5 million, or 3.7% of total loans, at December 31, 2010.  The allowance for loan losses totaled $21.5 million, or 1.27% of total loans, net of unearned income, at September 30, 2011, compared to $18.1 million, or 1.31% of loans, net of unearned income, at December 31, 2010 and $18.1 million, or 1.30% of loans, net of unearned income, at September 30, 2010.

Noninterest Income

Noninterest income totaled $1,808,000 for the three months ended September 30, 2011, an increase of $460,000, or 34.1%, compared to the corresponding period in 2010, and totaled $4,861,000 for the nine months ended September 30, 2011, an increase of $1,377,000, or 39.5%, compared to the corresponding period in 2010. These increases were primarily attributable to gains on the sale of available-for-sale securities in 2011. Income from mortgage banking operations for the three months ended September 30, 2011 was $814,000, up $225,000, or 38.2%, from $589,000 for the corresponding period in 2010, and for the nine months ended September 30, 2011 was $1,641,000, up $305,000, or 22.8%, from $1,336,000 for the corresponding period in 2010.  A drop in mortgage interest rates in early 2011 resulted in another wave of mortgage refinance activity.  The sale of OREO resulted in a gain of $55,000 during the three months ended September 30, 2011 compared to a loss of $5,000 during the corresponding period in 2010, and resulted in a gain of $87,000 for the nine months ended September 30, 2011 compared to a loss of $180,000 during the corresponding period in 2010.  The gain on the sales of OREO was due to a large decrease in the number of sales of OREO properties during the first nine months of 2011 compared to the corresponding period in 2010 and larger write-downs taken on OREO in previous years.

Noninterest Expense

Noninterest expense totaled $8,832,000 for the three months ended September 30, 2011, an increase of $1,365,000, or 18.3%, compared to $7,467,000 in 2010, and totaled $26,798,000 for the nine months ended September 30, 2011, an increase of $4,338,000, or 19.3%, compared to $22,460,000 for the corresponding period in 2010.   The increase was primarily attributable to increased salary and benefit costs and occupancy expense associated with opening a new office in Dothan in 2010, entering the Pensacola, Florida market with a new office in April 2011, and entering the correspondent banking business during the first quarter of 2011.

Further details of expenses are as follows:

 
·
Salary and benefit expense increased $1,176,000, or 33.2%, to $4,723,000 for the three months ended September 30, 2011 from $3,547,000 for the corresponding period in 2010, and increased $3,787,000, or 37.2%, to $13,963,000 for the nine months ended September 30, 2011 from $10,176,000 for the corresponding period in 2010.  We had 202 full-time equivalent employees at September 30, 2011 compared to 162 at December 31, 2010, a 24.7% increase.  Most of this increase in number of employees was due to our expansion into the Pensacola, Florida market and our addition of new business units in Birmingham.
 
 
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·
Occupancy expense increased $109,000, or 13.4%, to $923,000 for the three months ended September 30, 2011 from $814,000 for the corresponding period in 2010 and increased $375,000, or 15.8%, to $2,743,000 for the nine months ended September 30, 2011 from $2,368,000 for the corresponding period in 2010.

 
·
FDIC and other regulatory assessments for the three months ended September 30, 2011 were $403,000, a decrease of $223,000, or 35.6%, from $626,000 during the corresponding period in 2010.  Assessments for the nine months ended September 30, 2011 were $1,377,000, a decrease of $899,000, or 39.5%, from $2,276,000 during the corresponding period in 2010.  The decreases in assessments are due to the combined impact of adjustments made in 2010 related to the prepaid assessments mandated by the FDIC at the end of 2009 and decreases in the FDIC’s assessment rates starting in the second quarter of 2011.

 
·
Expenses related to OREO decreased $368,000 to $115,000 for the three months ended September 30, 2011, from $483,000 for the corresponding period in 2010, and decreased $1,039,000 to $504,000 for the nine months ended September 30, 2011 from $1,543,000 for the corresponding period in 2010.  OREO expenses decreased due to lower write-down of values, which dropped to approximately $181,000 for the nine months ended September 30, 2011 from approximately $917,000 for the corresponding period in 2010, and lower costs to complete in-process construction, which dropped to approximately $65,000 for the nine months ended September 30, 2011 from approximately $287,000 for the corresponding period in 2010.

 
·
We incurred prepayment penalties in connection with the prepayment of our two fixed-rate advances from the Federal Home Loan Bank of Atlanta.  The penalty for the first advance paid off during the first quarter of 2011 was $256,000, and the penalty for the second advance paid off in the second quarter of 2011 was $482,000, for a total cost of $738,000 for the nine months ended September 30, 2011.

Income Tax Expense

Income tax expense was $3,320,000 for the three months ended September 30, 2011 versus $2,532,000 for the same period in 2010, and was $8,990,000 for the nine months ended September 30, 2011 versus $6,780,000 for the corresponding period in 2010.  Our effective tax rate for the three and nine months ended September 30, 2011 was 35.11% and 34.79%, respectively, compared to 34.54% and 34.57%, respectively, for the corresponding period in 2010.  Our primary permanent differences are related to tax exempt income on securities and tax credits.

We invested in bank-owned life insurance for named officers of the Bank on September 30, 2011.  The periodic increase in cash surrender value of those policies will be tax exempt and will therefore contribute to a larger permanent difference between book income and taxable income in future periods.
 
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Like all financial institutions, we are subject to market risk from changes in interest rates. Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short-term rates may be rising while longer-term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates.
 
To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall or remain the same. Our asset-liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next 12 months. The asset-liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors.
 
The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap”, which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points.  There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2010, and there are no significant changes to our sensitivity to changes in interest rates since December 31, 2010 as disclosed in our Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

CEO and CFO Certification.

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

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
 
49

 
 
We conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of September 30, 2011. Based upon the Evaluation, our CEO and CFO have concluded that, as of September 30, 2011, our disclosure controls and procedures are effective to ensure that material information relating to ServisFirst Bancshares, Inc. and its subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we may be a party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any material legal proceedings except as disclosed in Item 3, “Legal Proceedings”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and there has been no material change in any matter described therein.

ITEM 1A. RISK FACTORS

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in the Form 10-K. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see “Forward-Looking Statements” under Part 1, Item 2 above.

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

All information required by this Item has previously been reported on Form 8-K.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6. EXHIBITS
 
(a) Exhibit:
31.01 Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02 Certification of principal financial officer pursuant to Rule 13a-14(a).
32.01 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
 
 
50

 
 
SIGNATURES

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

 
SERVISFIRST BANCSHARES, INC.
     
Date: November 1, 2011
  /s/ Thomas A. Broughton III
   
Thomas A. Broughton III
   
President and Chief Executive Officer
     
Date: November 1, 2011
  /s/ William M. Foshee
   
William M. Foshee
   
Chief Financial Officer

 
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