ServisFirst Bancshares, Inc. - Quarter Report: 2008 March (Form 10-Q)

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)
(In thousands, except per share amounts)

		2008				2007
Interest income:
Interest and fees on loans		$	12,374			$	9,469
Taxable securities			906				256
Nontaxable securities			215				133
Federal funds sold			273				953
Other interest and dividends			67				14
Total interest income			13,835				10,825
Interest expense:
Deposits			5,722				5,225
Borrowed funds			26				0
Total interest expense			5,748				5,225
Net interest income			8,087				5,600
Provision for loan losses			1,383				643
Net interest income after provision for loan losses			6,704				4,957
Noninterest income:
Service charges on deposit accounts			256				113
Other operating income			288				150
Total noninterest income			544				263
Noninterest expenses:
Salaries and employee benefits			2,826				1,866
Equipment and occupancy expense			530				335
Professional services			316				101
Other operating expenses			1,158				603
Total noninterest expenses			4,830				2,905
Income before income taxes			2,418				2,315
Provision for income taxes			848				808
Net income		$	1,570			$	1,507
Basic earnings per share		$	0.31			$	0.33
Diluted earnings per share		$	0.30			$	0.33

See Notes to Unaudited Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)
(In thousands)

		2008				2007
Net income		$	1,570			$	1,507
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period from securities available for sale, net of tax (benefit) of $352, and $(19) for 2008, and 2007, respectively			687				(37	)
Unrealized holding gains arising during period from derivative, net of tax of $35 and $8 for 2008 and 2007, respectively			68				18
Reclassification adjustment for net gains realized on derivatives in net income, net of tax of $(46)			(90	)
Other comprehensive income (loss)			665				(19	)
Comprehensive income		$	2,235			$	1,488

See Notes to Unaudited Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)

														Accumulated
						Additional								Other				Total
		Common				Paid-in				Retained				Comprehensive				Shareholders’
		Stock				Capital				Earnings				Income				Equity
Balance, December 31, 2007		$	5			$	63,159			$	8,082			$	1,001			$	72,247
Other comprehensive income			—				—				—				665				665
Stock based compensation expense			—				161				—				—				161
Net income			—				—				1,570				—				1,570
Balance, March 31, 2008		$	5			$	63,320			$	9,652			$	1,666			$	74,643

See Notes to Unaudited Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)
(In thousands)

		2008				2007
OPERATING ACTIVITIES
Net income		$	1,570			$	1,507
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred tax benefit			(174	)			(50	)
Provision for loan losses			1,383				643
Depreciation and amortization			225				123
Net amortization (accretion) of investments			(77	)			34
Amortized gain on derivative			(136	)			—
(Increase) decrease in accrued interest and dividends receivable			13				(151	)
Stock compensation expense			161				119
Increase in accrued interest payable			118				172
Proceeds from sale of mortgages held for sale			16,873				10,833
Originations of mortgages held for sale			(19,178	)			(9,003	)
Net change in other operating activities			(977	)			(813	)
Net cash provided by (used in) operating activities			(199	)			3,414
INVESTING ACTIVITIES
Purchases of securities available for sale			(2,825	)			(10,383	)
Proceeds from maturities/calls, pay downs of securities available for sale			2,201				660
Increase in loans			(82,620	)			(26,898	)
Purchase of premises and equipment			(119	)			(272	)
Purchase of restricted equity securities			(1,456	)			(397	)
Proceeds from sale of derivative			1,000				—
Net cash used in investing activities			(83,819	)			(37,290	)
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits			3,595				10,014
Net increase in interest bearing deposits			96,493				105,587
Proceeds from other borrowings			20,202				—
Net cash provided by financing activities			120,290				115,601
Net increase in cash and cash equivalents			36,272				81,725
Cash and cash equivalents at beginning of period			66,422				53,335
Cash and cash equivalents at end of period		$	102,694			$	135,060

See Notes to Unaudited Consolidated Financial Statements.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — General

     The accompanying condensed 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 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 report on Form 10-A for the year ended December 31, 2007.

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

Note 2 — Cash and Cash Flows

     Cash on hand, cash items in process of collection, amounts due from banks, and Federal funds sold are included in cash and cash equivalents. The following supplemental cash flow information addresses certain cash payments and noncash transactions for the three months ended March 31, 2008 and 2007, respectively.

		March 31,
		2008				2007
		(In Thousands)
Interest paid		$	5,630			$	5,053
Income taxes paid		$	1,250			$	850
Transfers of loans to other real estate owned		$	2,085			$	—

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.

		March 31,
		2008				2007
		(Thousands, Except Share and
		Per Share Amounts)
Weighted average common shares outstanding			5,113,482				4,463,606
Net income		$	1,570			$	1,507
Basic earnings per common share		$	0.31			$	0.33
Weighted average common shares outstanding			5,113,482				4,463,606
Dilutive effects of assumed conversions and exercises of stock options and warrants			170,435				14,784
Weighted average common and dilutive potential common shares outstanding			5,283,917				4,478,390
Net income		$	1,570			$	1,507
Diluted earnings per common share		$	0.30			$	0.33

Note 4 — Employee and Director Benefits

     Stock Options. At March 31, 2008, the Company has stock-based compensation plans, which are described below. The compensation cost that has been charged against income for the plan was approximately $161,000 and $120,000 for the three months ended March 31, 2008 and 2007, respectively. Included in stock-based compensation for 2008 and 2007 is expense recognized related to option and warrants granted in 2005, the fair value of which were determined using a Black-Scholes-Merton valuation model.

     Under the Company’s 2005 Amended and Restated Stock Option Plan (the “Plan”), there are 1,025,000 shares authorized for issuance. Option 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 plan is ten years.

     The Company has granted non-plan options to certain key 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 10 years. These options are non-qualified and not part of the 2005 Amended and Restated Stock Option 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 Alabama traded community 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.

		March 31,
		2008				2007
Expected volatility			20.00	%			20.00	%
Expected dividends			.50	%			.50	%
Expected term in years		7 years				7 years
Risk-free rate			2.93	%			4.47	%

     The following table summarizes stock option activity during the three months ended March 31, 2008:

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual				Aggregate
						Exercise				Term				Intrinsic
		Shares				Price				(years)				Value
														(In Thousands)
Outstanding January 1, 2008			712,500			$	13.12				8.43			$	4,905
Granted			13,500				20.00				—				—
Exercised			—				—				—				—
Forfeited			—				—				—				—
Outstanding at March 31, 2008			726,000			$	13.24				8.24				4,905
Exercisable at March 31, 2008			20,000			$	10.00				7.14			$	200

     Stock Warrants. In recognition of the efforts and financial risks undertaken by the Bank’s organizers 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 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 incorporate date. The total number of warrants outstanding at March 31, 2008 and 2007 was 60,000.

     The fair value of each stock warrants granted in 2005 was estimated on the date of grant using a Black-Scholes-Merton valuation model using the assumptions noted in the following table.

		Year Ended
		December 31,
		2005
Expected volatility			20.00	%
Expected dividends			0.00	%
Expected term (in years)		3 years
Risk-free rate			3.69	%

     There were no stock warrants granted, exercised, or forfeited during the three months ended March 31, 2008. No stock warrants became exercisable during the three months ended March 31, 2008.

Note 5 — Adoption of New Accounting Interpretations

     Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 159 The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

Under SFAS No. 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other financial accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. The Company chose not to elect the fair value option for its financial assets and financial liabilities existing at January 1, 2008 and did not elect the fair value option on financial assets and financial liabilities transacted in the three months ended March 31, 2008. Therefore, the adoption of SFAS No. 159 had no impact on the Company’s consolidated financial statements.

     Effective January 1, 2008, the Company adopted SFAS No. 157 Fair Value Measurements, for financial assets and financial liabilities and any other assets and liabilities carried at fair value. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. On November 14, 2007, FASB issued SFAS 157-2, Effective Date FASB Statement No. 157. FASB No. 157-2 delays the effective date of Statement No. 157 for other non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. The company’s adoption of SFAS No. 157 did not have a material effect on the Company’s consolidated financial statements for financial assets and financial liabilities and any other assets or liabilities carried at fair value.

Note 6 — Recent Accounting Pronouncements

     In March, 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosure about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedging items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedging items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this Statement at the beginning of the Company’s fiscal year ending December 31, 2009. The Company has not determined the effect that the adoption of FAS 161 will have on its financial statement disclosures.

Note 7 — Fair Value Measurement

     Effective January 1, 2008, the Company adopted the methods of fair value as described in SFAS No. 157, Fair value Measurements, to value its financial assets and financial liabilities measured at fair value. As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No.157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

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

     The following table presents the fair value hierarchy of financial assets and financial liabilities measured at fair value as of March 31, 2008:

		Fair Value Measurement at March 31, 2008
		Quoted
		Prices in
		Active
		Markets				Significant
		for				Other				Significant
		Identical				Observable				Unobservable
		Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
		(Dollar amounts in thousands)
Assets Measured on a Recurring Basis:
Available-for-sale securities (1)		$	—			$	88,975				—			$	88,975
Total assets at fair value		$	—			$	88,975				—			$	88,975
Assets measured on a Nonrecurring Basis:
Impaired loans		$	—				—			$	13,502			$	13,502

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

     The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements for the three months ended March 31, 2008 and March 31, 2007. All significant intercompany accounts and transactions have been eliminated. Our accounting and reporting policies conform to generally accepted accounting principles applicable to financial institutions.

Forward Looking Statements

     We may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and reports to stockholders. Statements made in this report on Form 10-Q, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon our management’s belief as well as assumptions made by, and information currently available to, our management. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking business from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans, and other factors. We caution that such factors are not exclusive. We do not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, us.

Overview

     The entire banking industry is operating in an adverse environment for maximizing short-term performance. Housing softness, the challenging credit cycle, negative media analysis, weakened consumer confidence and dramatic Federal Reserve rate reductions are all factors that create a drag on performance. Our management is responding to these challenges while maintaining its focus on the Company’s long-term goals.

     We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 headquartered in Birmingham, Alabama. Through our wholly-owned bank subsidiary, ServisFirst Bank, an Alabama banking corporation (the “Bank”), we operate seven full service banking offices located in the metropolitan statistical areas of Birmingham-Hoover, Huntsville, and Montgomery, Alabama.

     We are headquartered at 3300 Cahaba Road, Suite 300, Birmingham, Alabama 35223. In addition, the Bank currently operates through two offices in the Birmingham-Hoover, Alabama MSA (one office in Jefferson County and one office in North Shelby County), two offices in the Huntsville, Alabama MSA (Madison County) and two offices in the Montgomery, Alabama MSA (Montgomery County) which constitute our primary service areas. We also serve certain adjacent areas to our primary service areas. Our principal business is to accept deposits from the public and to make loans and other investments. Our principal source of funds for loans and investments are demand, time, savings, and other

deposits (including negotiable orders of withdrawal, or NOW accounts) and the amortization and prepayment of loans and borrowings. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits (including NOW accounts), interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.

     As of March 31, 2008, the Company had total consolidated assets of $960,215,000 an increase of $121,965,000 or 14.55 % over the $838,250,000 reported at December 31, 2007. Total loans were $755,534,000 at March 31, 2008, an $80,253,000 or 11.88 % increase over the $675,281,000 at December 31, 2007. Total deposits were $862,771,000 at March 31, 2008, an increase of $100,088,000 or 13.12 % over the $762,683,000 at December 31, 2007. The increase in loans and deposits was from organic growth in existing branches in Birmingham and Huntsville, Alabama, and our expansion beginning in 2007 into the Montgomery, Alabama market.

     Net income for the quarter ended March 31, 2008 was $1,570,000 an increase of $63,000 or 4.18 % compared to the $1,507,000 for the quarter ended March 31, 2007. Basic earnings per common share were $0.31 for the three months ended March 31, 2008 compared with $0.33 for the same period in 2007.

Significant Accounting Policies

     The accounting and financial policies of the Company conform to accounting principles generally accepted in the United States and to general practices within the banking industry. To prepare consolidated financial statements in conformity with accounting principles generally accepted in the United States, 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 and fair value of financial instruments are particularly subject to change.

Financial Condition

Investment Securities

     Investment securities available for sale totaled $88,975,000 at March 31, 2008, and $87,233,000 at December 31, 2007. The investment portfolio at March 31, 2008, and December 31, 2007 consisted of the following:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
		Cost				Gain				Loss				Value
		(In Thousands)
As of March 31, 2008:
Securities available for sale:
Mortgage backed securities		$	61,300			$	1,531			$	(23	)		$	62,808
State and municipal securities			25,839				427				(99	)			26,167
Total		$	87,139			$	1,958			$	(122	)		$	88,975
As of December 31, 2007:
Securities available for sale:
Mortgage backed securities		$	62,162			$	471			$	(30	)		$	62,603
State and municipal securities			24,271				374				(15	)			24,630
Total		$	86,433			$	845			$	(45	)		$	87,233

     The following table shows the amortized cost of the Company’s investment securities by their stated maturity at March 31, 2008.

		Less
		than								Five				More
		one				One year to				years to				than ten
		year				five years				ten years				years				Total
		(In Thousands)
As of March 31, 2008
Mortgage backed securities		$	—			$	3,227			$	29,314			$	28,759			$	61,300
State and municipal securities		$	—			$	823			$	25,016			$	—			$	25,839
Total		$	—			$	4,050			$	54,330			$	28,759			$	87,139

     All securities held are traded in liquid markets. As of March 31, 2008, we owned certain restricted securities from the Federal Home Loan Bank with an aggregate book value and market value of $2,409,000 and 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.

     At March 31, 2008, we had $83,455,000 in federal funds sold, compared with $16,598,000 at December 31, 2007.

Loans

     We had total loans of $755,534,000 at March 31, 2008 compared to $675,281,000 at December 31, 2007, an increase of $80,253,000 or 11.88%. As almost all of the loan portfolio is concentrated in the Birmingham-Hoover, Alabama MSA, Huntsville, Alabama MSA and Montgomery, Alabama MSA, with 68.75% of that in the Birmingham-Hoover, Alabama MSA, there is risk that our borrowers’ ability to repay their loans from us could be affected by changes in local economic conditions. The following table details our loans at March 31, 2008 and December 31, 2007:

		March 31,				December 31,
		2008				2007
		(In Thousands)
Commercial, financial and agricultural		$	239,266			$	219,684
Real estate — construction			220,940				195,238
Real estate — mortgage:
Owner occupied			91,148				89,014
1-4 family			79,872				64,325
Other			97,210				83,663
Total real estate mortgage			268,230				237,002
Consumer			27,098				23,357
Total loans			755,534				675,281
Less allowance for loan losses			(8,852	)			(7,732	)
Net loans		$	746,682			$	667,549

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. Management feels that the allowance is adequate at March 31, 2008.

     The following table presents a summary of changes in the allowances for loan losses for the quarters ended March 31, 2008 and 2007, respectively. The largest balance of our charge-offs are on real estate construction loans. Real estate construction loans represent 29.24% of our loan portfolio.

		Three Months
		Ended March 31,
		2008				2007
Allowance for Loan Losses
Balance at beginning of period		$	7,732			$	5,418
Charge-offs:
Commercial, financial and agricultural			(1	)			(21	)
Real estate — construction			(279	)			—
Real estate — mortgage			—				—
Owner occupied			—				—
1-4 family mortgage			—				—
Other			—				—
Total real estate mortgage			—				—
Consumer			(2	)			(2	)
Total charge-offs			(282	)			(23	)
Recoveries:
Commercial, financial and agricultural			19				—
Real estate — construction			—				—
Real estate — mortgage			—				—
Owner occupied			—				—
1-4 family mortgage			—				—
Other			—				—
Total real estate mortgage			—				—
Consumer			—				—
Total recoveries			19				—
Net charge — offs			(263	)			(23	)
Provision for loan losses charged to expense			1,383				643
Allowance for loan losses at end of period		$	8,852			$	6,038
As a percentage of year to date average loans:
Annualized net charge-offs			0.15	%			0.02	%
Annualized provision for loan losses			0.77	%			0.57	%

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

		March 31,																December 31,
		2008											2007								2007
						Percentage								Percentage								Percentage
						of loans in								of loans in								of loans in
						each								each								each
						category of								category of								category of
		Amount				total loans				Amount				total loans				Amount				total loans
		(Dollars in Thousands)
Commercial, financial and agricultural		$	1,633				31.50	%		$	2,192				35.60	%		$	1,714				32.53	%
Real estate — construction			4,133				29.24	%			3,415				36.55	%			3,487				28.91	%
Real estate — mortgage			408				35.67	%			320				24.70	%			340				35.10	%
Consumer			10				3.59	%			104				3.15	%			12				3.46	%
Other			2,668				—				7				—				2,179				—
Total		$	8,852				100.00	%		$	6,038				100.00	%		$	7,732				100.00	%

Non-performing Assets

     It is our policy to classify loans as non-accrual when they are past due in principal or interest payments for more than ninety days or if it is otherwise not reasonable to expect collection of principal and interest due under the original terms. Exceptions are allowed for ninety day past due loans when such loans are secured by real estate or negotiable collateral and in the process of collection. Generally, payments received on non-accrual loans are applied directly to principal.

     We have adopted the principles of Financial Accounting Standards Board (FASB) SFAS No. 114 and No. 118 relating to accounting for impaired loans and as of March 31, 2008, our impaired loans, inclusive of non-accrual loans, totaled $13,502,000, and had associated reserves of approximately $1,428,000. This compares to impaired loans and associated reserves of $11,612,000 and $1,370,000, respectively at December 31, 2007. A loan is considered impaired when it is probable, based on current information and events, the company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependant. 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.

     Non-performing assets, comprised of non-accrual loans and other real estate owned totaled $6,126,000 at March 31, 2008, compared to $6,094,000 at December 31, 2007. Non-accrual loans were $2,683,000 at March 31, 2008, a decrease of $1,601,000 from non-accrual loans of $4,284,000 at December 31, 2007. The Company had no loans ninety days past due and still accruing at March 31, 2008. Other real estate owned totaled $3,443,000 as of March 31, 2008, compared to $1,623,000 at December 31, 2007.

     A summary of nonperforming assets as of March 31, 2008, March 31, 2007 and December 31, 2007 follows:

		March 31,				December 31,				March 31,
		2008				2007				2007
		(Dollars in Thousands)
Non-accrual loans		$	2,683				4,284				2
Loans 90 days or more past due and still accruing		$	0				187				128
All other real estate owned		$	3,443				1,623				369
Total non-performing assets		$	6,126				6,094				499

     The decrease to our non-accrual loans during the first quarter of 2008 is the net result of transfers to OREO.

     Our OREO procedures currently determine disposition value, the value used to place the property into OREO, based on the most recent appraisal of the property that we have at the time, less estimated costs to sell the property. Any difference between the disposition value and the loan balance is for charged off. Once the property is in OREO sales efforts begin.

     Management continually monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on future operating results , liquidity or capital resources have been classified as non-performing. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of non-performing loans.

Deposits

     Total deposits increased $100,088,000 or 13.12% to $862,771,000 at March 31, 2008 compared to $762,683,000 reported at December 31, 2007. We believe our deposits will continue to increase in 2008 as a result of our expansion into the Montgomery market in 2007 and expanded customer relationships in the Birmingham and Huntsville markets.

     For amounts and rates of our deposits by category, see the table “Average Consolidated Balance Sheets and Net Interest Analysis on a Fully Tax Equivalent Basis” under the sub heading “Net Interest Income”

Other Borrowings

     As of March 31, 2008, we had borrowed $275,000 under a $500,000 line of credit with a regional bank. The note is unsecured. The note is due in October 2008 and the interest rate varies at the lender’s base commercial lending rate. The interest rate at March 31, 2008 was 5.25%.

     In addition, on March 19, 2008 we borrowed $20,000,000 from the Federal Home Loan Bank of Atlanta, of which $10,000,000 bears interest at 2.995%, and is payable on March 19, 2012, and $10,000,000 bears interest at 3.275%, and is payable on March 19, 2013.

Liquidity

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

     The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. In the event of compression in liquidity due to a run-off in deposits, we have a liquidity policy and procedure that provides for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and the curtailment of loan commitments and funding. At March 31, 2008, our liquid assets, represented by cash and due from banks, federal funds sold and available-for-sale securities, totaled $191,669,000. Additionally, our subsidiary bank had additional borrowing availability of approximately $78 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, and had additional borrowing availability of $74 million at the Federal Home Loan Bank of Atlanta to meet short term funding needs. We believe these sources of funding are adequate to meet immediate anticipated funding needs, but we will need additional capital to maintain our current growth. Our management meets on a 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.

     To finance our continued growth and planned expansion activities, before our reorganization into a holding company structure, the Bank issued 649,875 shares of common stock in September of 2007 for approximately $13 million in capital before offering expenses. 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. We are also exploring the possibility of issuing trust preferred securities if market conditions become favorable to us.

     Although we have no formal liquidity policy, in the opinion of our management, our liquidity levels are considered adequate. We are subject to general FDIC guidelines which require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity increasing or decreasing in any material manner.

     The following table reflects the contractual maturities of our term liabilities as of March 31, 2008. The amounts shown do not reflect any early withdrawal or prepayment assumptions.

		Payments due by Period
		(In Thousands)
						Less												More
						than 1				1-3				4-5				than 5
		Total				Year				Years				Years				Years
Contractual Obligations (1)
Deposits without a stated maturity		$	736,368				736,368				—				—				—
Certificates of deposit (2)		$	126,403				111,954				11,172				3,277
FHLB borrowings		$	20,000				—								20,000				—
Other borrowings		$	275				275				—				—				—
Operating lease commitments		$	5,971				915				1,509				1,085				2,462
Total		$	889,017				849,512				12,681				24,362				2,462

Capital Adequacy

     As of March 31, 2008, 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 March 31, 2008. Furthermore, the Alabama Banking Department has required that we maintain a leverage ratio of 8% for the first three years of our operations until May 2, 2008 and 7% thereafter.

     The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement to be maintained by us for the first three years of our operations and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of March 31, 2008, December 31, 2007, and March 31, 2007.

														To Be Well
														Capitalized
														Under
										For				Prompt
										Capital				Corrective
										Adequacy				Action
		Actual								Purposes				Provisions
		ServisFirst				ServisFirst
		Bancshares				Bank
March 31, 2008
Total Capital to Risk Weighted Assets			10.26	%			10.28	%			8.00	%			10.00	%
Tier 1 Capital to Risk Weighted Assets			9.15	%			9.17	%			4.00	%			6.00	%
Tier 1 Capital to Average Assets			8.37	%			8.38	%			4.00	%			5.00	%
December 31, 2007
Total Capital to Risk Weighted Assets			11.22	%			11.22	%			8.00	%			10.00	%
Tier 1 Capital to Risk Weighted Assets			10.12	%			10.12	%			4.00	%			6.00	%
Tier 1 Capital to Average Assets			8.40	%			8.40	%			4.00	%			5.00	%
March 31, 2007
Total Capital to Risk Weighted Assets			N/A				11.85	%			8.00	%			10.00	%
Tier 1 Capital to Risk Weighted Assets			N/A				10.66	%			4.00	%			6.00	%
Tier 1 Capital to Average Assets			N/A				9.39	%			4.00	%			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 the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial instruments.

     Our exposure to credit loss in the event of non-performance by the other party to financial instruments for commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit and financial guarantees 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.

     Financial instruments whose contract amounts represent credit risk at March 31, 2008:

		(In Thousands)
Commitments to extend credit beyond current fundings			281,265
Credit card arrangements			6,990
Standby letters of credit and financial guarantees			19,242
Total			307,497

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

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

Derivatives

     Prior to 2008, we entered into an interest rate floor with a notional amount of $50 million in order to fix the minimum interest rate on a corresponding amount of our floating-rate loans. The interest rate floor was sold in January 2008 and the related gain of $817,000 has been deferred and will be amortized to income over the remaining term of the original agreement which would have terminated on June 22, 2009. Management’s decision to sell the interest rate floor was based on changing market conditions. A gain of $136,000 was recognized in interest income for the three months ended March 31, 2008.

Net Income

     Net income for the three months ended March 31, 2008 was $1,570,000, compared to net income of $1,507,000 for the three months ended March 31, 2007. This increase in net income is primarily attributable to a significant increase in net interest income due to significant growth of our deposits and loan portfolio resulting from significant continued core growth in Birmingham and Huntsville and our expansion into Montgomery in 2007. These positive effects were partially offset by a 115.09% increase in the provision for loan losses, from $643,000 in 2007 to $1,383,000 in 2008 and an increase of $1,925,000 in non-interest expense, up 66.27%, from $2,905,000 in 2007 to $4,830,000 in 2008. The increase in provision for loan losses was the result of funding the loan loss reserve to match the growth in the loan portfolio and loan charge-offs. The increase in non-interest expense was due to an increase in personnel and general operating expenses due to our growth. Basic and diluted net income per common share were $0.31 and $0.30, respectively, for the three months ended March 31, 2008, compared to $0.33 per common share for both basic and diluted for the three months ended March 31, 2007. Return on average assets for the three months ended March 31, 2008 was 0.72%, compared to 1.05% in 2007, and return on average stockholders’ equity was 8.53% for the three months ended March 31, 2008, compared to 11.29% in 2007.

Net Interest Income

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

     Beginning in mid-2004, the Federal Reserve Open Market Committee, or FOMC, increased interest rates 400 basis points through mid-2006 where interest rates remained constant until September 2007 when the FOMC began lowering interest rates in reaction to the affects of the sub-prime credit crisis. Since September 2007, the FOMC has lowered interest rates 275 basis points including an emergency 75 basis point decrease in January 2008, 75 basis points at its March 18, 2008 meeting, and 25 basis points at its April 30, 2008 meeting. In anticipation of these decreases in interest rates, our management has placed us in a moderately liability sensitive position. This means that more liabilities are scheduled to reprice within the next year than assets, thereby taking advantage of the anticipated decrease in interest rates.

     Net interest income increased $2,487,000, or 44.41%, to $8,087,000 for the three months ended March 31, 2008 from $5,600,000 for the three months ended March 31, 2007. This was due to an increase in total interest income of $3,010,000, or 27.81%, offset by an increase in total interest expense of $523,000, or 10.01%. The increase in total interest income was primarily attributable to loan growth as a consequence of significant continued core growth in Birmingham and Huntsville and our expansion into Montgomery in 2007.

     The following table shows for the three months ended March 31, 2008 and 2007, the average balances of each principal category of our assets, liabilities and shareholders’ equity, and an analysis of net interest revenue. The table is presented on a tax equivalent basis if applicable.

		Average Consolidated Balance Sheet and Net Interest Analysis on a Fully
		Tax Equivalent Basis
		Three Months Ended March 31,
						2008												2007
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollar Amounts In Thousands)
Assets:
Interest-earning assets:
Loans, net of unearned income(1)		$	716,095			$	12,341				6.91	%		$	450,234			$	9,436				8.50	%
Mortgage loans held for sale			2,401				33				5.50	%			1,208				33				10.95	%
Investment securities:
Taxable			65,111				906				5.58	%			18,720				256				5.56	%
Tax-exempt (2)(3)			21,871				215				5.67	%			13,391				133				5.79	%
Total investment securities (3)			86,982				1,121				5.68	%			32,111				389				5.65	%
Federal funds sold			38,196				273				2.86	%			74,471				953				5.19	%
Restricted equity securities			1,367				14				4.22	%			831				13				6.59	%
Interest bearing balances with banks			4,752				53				4.41	%			30				1				4.09	%
Total interest-earning assets			849,793				13,835				6.65	%			558,885				10,825				7.90	%
Non-interest earning assets
Cash and due from banks			15,768												12,568
Net fixed assets			4,181												2,688
Allowance for loan losses, accrued interest and other assets			2,198												(418	)
Total assets		$	871,940											$	573,723

		Average Consolidated Balance Sheet and Net Interest Analysis on a Fully
		Tax Equivalent Basis
		Three Months Ended March 31,
						2008												2007
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
		(Dollar Amounts In Thousands)
Liabilities and stockholders equity:
Interest-bearing liabilities:
Interest bearing demand Deposits		$	67,486			$	346				2.06	%		$	43,974			$	257				3.78	%
Savings deposits			376				1				0.99	%			157				1				1.46	%
Money market accounts			546,495				4,217				3.09	%			355,747				4,371				4.98	%
Time deposits			99,830				1,158				4.65	%			46,483				596				5.20	%
Federal funds purchased			0				0				0
Other borrowings			2,858				26				3.13	%			0				0				0
Total interest- bearing Liabilities			717,045				5,748				3.21	%			446,361				5,225				4.75	%
Non-interest liabilities
Non-interest bearing demand deposits			77,859												71,411
Other liabilities			3,411												2,576
Stockholders equity			72,559												53,451
Accumulated other Comprehensive income (loss)			1,066												(76	)
Total liabilities and Stockholders equity		$	871,940											$	573,723
Net interest spread											3.44	%											3.15	%
Net interest margin											3.81	%											3.92	%

     The following table reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-bearing assets and liabilities. Changes as a result of mix or the number of days in the period have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

		Change in Interest Income and Expense on a Tax-Equivalent Basis
		Three Months Ended March 31, 2008
		Compared to Three Months Ended March 31, 2007
		Volume				Rate				Total
		(In thousands)
Interest-earning assets:
Loans, net of unearned income		$	5,572				(2,667	)			2,905
Investment securities:
Taxable			635				15				650
Tax-exempt			84				(2	)			82
Federal funds sold			(464	)			(216	)			(680	)
Restricted equity securities			9				(9	)			0
Other earning assets			33				20				53
Total earning assets		$	5,869				(2,859	)			3,010
Interest-bearing liabilities
Interest-bearing demand deposits		$	137				(48	)			89
Savings deposits			1				(1	)			0
Money market accounts			2,344				(2,499	)			(155	)
Time deposits			685				(122	)			563
Other borrowings			26				0				26
Total interest-bearing liabilities		$	3,193				(2,670	)			523
Increase in net interest income		$	2,676				(189	)			2,487