ServisFirst Bancshares, Inc. - Quarter Report: 2010 September (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

¨ 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.)

(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, 2010
	Common stock, $.001 par value		5,518,482

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	21
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	38
Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	40
Item 5.	Other Information	40
Item 6.	Exhibits	40

EX-31.01 SECTION 302, CERTIFICATION OF THE CEO
EX-31.02 SECTION 302, CERTIFICATION OF THE CFO
EX-31.01 SECTION 906, CERTIFICATION OF THE CEO
EX-31.01 SECTION 906, CERTIFICATION OF THE CFO

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

(In thousands, except share and per share amounts)

	September 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	30,371		$	26,982
Interest-bearing balances due from depository institutions		119,470			48,544
Federal funds sold		2,213			680
Cash and cash equivalents		152,054			76,206
Debt securities:
Available for sale		249,207			255,453
Held to maturity		2,631			645
Restricted equity securities		3,510			3,241
Mortgage loans held for sale		8,708			6,202
Loans		1,345,502			1,207,084
Less allowance for loan losses		(16,903	)		(14,737	)
Loans, net		1,328,599			1,192,347
Premises and equipment, net		4,484			5,088
Accrued interest and dividends receivable		6,834			6,200
Deferred tax assets		2,347			4,872
Other real estate owned		8,170			12,525
Other assets		9,980			10,718
Total assets	$	1,776,524		$	1,573,497

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	224,537		$	211,307
Interest-bearing		1,377,020			1,221,048
Total deposits		1,601,557			1,432,355
Other borrowings		24,933			24,922
Trust preferred securities		30,384			15,228
Accrued interest payable		914			1,026
Other liabilities		2,559			2,344
Total liabilities		1,660,347			1,475,875
Stockholders' equity:
Common stock, par value $.001 per share; 15,000,000 shares authorized; 5,518,482 shares issued and outstanding at September 30, 2010 and 5,513,482 shares issued and outstanding at December 31, 2009		6			6
Preferred stock, par value $.001 per share; 1,000,000 shares authorized; no shares outstanding		-			-
Additional paid-in capital		75,637			75,078
Retained earnings		33,798			20,965
Accumulated other comprehensive income		6,736			1,573
Total stockholders' equity		116,177			97,622
Total liabilities and stockholders' equity	$	1,776,524		$	1,573,497

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except share and per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest income:
Interest and fees on loans	$	17,715	$	14,598	$	50,669	$	40,690
Taxable securities		1,575		1,006		4,997		3,117
Nontaxable securities		582		402		1,650		1,022
Federal funds sold		23		77		41		148
Other interest and dividends		64		9		100		30
Total interest income		19,959		16,092		57,457		45,007
Interest expense:
Deposits		3,113		4,031		8,795		12,391
Borrowed funds		859		617		2,461		1,626
Total interest expense		3,972		4,648		11,256		14,017
Net interest income		15,987		11,444		46,201		30,990
Provision for loan losses		2,537		3,209		7,612		8,277
Net interest income after provision for loan losses		13,450		8,235		38,589		22,713
Noninterest income:
Service charges on deposit accounts		564		419		1,718		1,151
Securities gains		-		-		53		-
Other operating income		784		548		1,713		2,018
Total noninterest income		1,348		967		3,484		3,169
Noninterest expenses:
Salaries and employee benefits		3,547		3,398		10,176		10,354
Equipment and occupancy expense		814		767		2,368		1,977
Professional services		220		228		625		657
Other operating expenses		2,886		2,579		9,291		7,299
Total noninterest expenses		7,467		6,972		22,460		20,287
Income before income taxes		7,331		2,230		19,613		5,595
Provision for income taxes		2,532		622		6,780		1,708
Net income	$	4,799	$	1,608	$	12,833	$	3,887

Basic earnings per share	$	0.87	$	0.29	$	2.33	$	0.71

Diluted earnings per share	$	0.77	$	0.28	$	2.11	$	0.67

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
Net income	$	4,799	$	1,608	$	12,833		$	3,887

Other comprehensive income, net of tax:
Unrealized holding gains arising during period from securities available for sale, net of tax of $1,124 and $2,817 for the three and nine months ended September 30, 2010, respectively, and $1,304 and $1,330 for the three and nine months ended September 30, 2009		2,087		2,532		5,197			2,582
Reclassification adjustment for net gains on sale of securities in net income, net of tax of $19 for the nine months ended September 30, 2010		-		-		(34	)		-
Reclassification adjustment for net gains realized on derivatives in net income, net of tax benefit of $93 for the nine months ended September 30, 2009		-		-		-			(180	)
Other comprehensive income, net of tax		2,087		2,532		5,163			2,402
Comprehensive income	$	6,886	$	4,140	$	17,996		$	6,289

See Notes to Consolidated Financial Statements

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2010

(Unaudited)

(In thousands, except share amounts)

	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance, December 31, 2009		6		75,078		20,965		1,573		97,622
Other comprehensive income		-		-		-		5,163		5,163
Exercise of stock options		-		50		-		-		50
Stock-based compensation expense		-		509		-		-		509
Net income		-		-		12,833		-		12,833
Balance, September 30, 2010	$	6	$	75,637	$	33,798	$	6,736	$	116,177

See Notes to Consolidated Financial Statements

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands) (Unaudited)

	2010			2009
OPERATING ACTIVITIES
Net income	$	12,833		$	3,887
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax benefit		(292	)		(909	)
Provision for loan losses		7,612			8,277
Depreciation and amortization		800			802
Net amortization (accretion) of investments		565			(326	)
Amortized gain on derivative		-			(272	)
Market value adjustment of interest rate cap		40			-
Increase in accrued interest and dividends receivable		(634	)		(1,137	)
Stock compensation expense		509			584
Decrease in accrued interest payable		(112	)		(177	)
Proceeds from sale of mortgage loans held for sale		112,068			148,071
Originations of mortgage loans held for sale		(115,361	)		(151,699	)
Gain on sale of securities available for sale		(53	)		(42	)
Net loss on sale of other real estate owned		180			817
Write down of other real estate owned		853			622
Decrease in special prepaid FDIC insurance assessments		1,963			-
Loss on disposal of premises and equipment		-			2
Net change in other assets, liabilities, and other operating activities		(773	)		(1,079	)
Net cash provided by operating activities		20,198			7,421
INVESTMENT ACTIVITIES
Purchase of securities available for sale		(40,817	)		(45,913	)
Proceeds from maturities, calls and paydowns of securities available for sale		23,517			12,825
Purchase of securities held to maturity		(1,986	)		-
Increase in loans		(147,150	)		(197,275	)
Purchase of premises and equipment		(196	)		(2,144	)
Purchase of restricted equity securities		(269	)		(582	)
Purchase of interest rate cap		(160	)		-
Proceeds from sale of securities available for sale		31,014			2,083
Proceeds from disposal of premises and equipment		-			1
Proceeds from sale of other real estate owned and repossessions		7,470			5,249
Additions to other real estate owned		(75	)		-
Net cash used in investing activities		(128,652	)		(225,756	)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits		13,230			53,630
Net increase in interest-bearing deposits		155,972			270,534
Proceeds from issuance of trust preferred securities		15,050			-
Proceeds from other borrowings		-			5,000
Proceeds from sale of stock, net		-			3,479
Proceeds from exercise of stock options		50			-
Net cash provided by financing activities		184,302			332,643

Net increase in cash and cash equivalents		75,848			114,308

Cash and cash equivalents at beginning of year		76,206			72,918

Cash and cash equivalents at end of year	$	152,054		$	187,226

SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest	$	11,368		$	14,194
Income taxes		6,958			3,117

NONCASH TRANSACTIONS
Transfers of loans from held for sale to held for investment	$	787		$	1,861
Other real estate acquired in settlement of loans		5,156			9,464
Internally financed sales of other real estate owned		1,083			468

See Notes to Consolidated Financial Statements.

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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 Form 10-K for the year ended December 31, 2009.

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

Certain reclassifications have been made in the December 31, 2009 Consolidated Balance Sheet to conform to classifications used in 2010. There was no effect on total assets, liabilities or stockholders’ equity.

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.

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 10 to the Consolidated Financial Statements.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In Thousands, Except Shares and Per Share Data)
Earnings Per Share
Weighted average common shares outstanding		5,515,384		5,513,482		5,513,482		5,476,701
Net income	$	4,799	$	1,608	$	12,833	$	3,887
Basic earnings per share	$	0.87	$	0.29	$	2.33	$	0.71

Weighted average common shares outstanding		5,515,384		5,513,482		5,513,482		5,476,701
Dilutive effects of assumed conversions and exercise of stock options, warrants, and convertible debt		902,563		307,849		735,377		297,740
Weighted average common and dilutive potential common shares outstanding		6,417,947		5,821,331		6,248,859		5,774,441
Net income	$	4,799	$	1,608	$	12,833	$	3,887
Effect of interest expense on convertible debt, net of tax and discretionary expenditures related to conversion		150		-		323		-
Net income, adjusted for effect of debt conversion	$	4,949	$	1,608	$	13,156	$	3,887
Diluted earnings per share	$	0.77	$	0.28	$	2.11	$	0.67

NOTE 4 - SECURITIES

The amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2010 and December 31, 2009 are summarized as follows:

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In Thousands)
September 30, 2010:
Securities Available for Sale
U.S. Treasury and government sponsored agencies	$	60,648	$	3,465	$	-		$	64,113
Mortgage-backed securities		110,381		4,079		(81	)		114,379
State and municipal securities		65,804		2,907		(216	)		68,495
Corporate debt		2,011		209		-			2,220
Total	$	238,844	$	10,660	$	(297	)	$	249,207
Securities Held to Maturity
State and municipal securities	$	2,631	$	76	$	(3	)	$	2,704
Total	$	2,631	$	76	$	(3	)	$	2,704

December 31, 2009:
Securities Available for Sale
U.S. Treasury and government sponsored agencies	$	92,368	$	412	$	(453	)	$	92,327
Mortgage-backed securities		99,608		2,717		(625	)		101,700
State and municipal securities		58,090		876		(567	)		58,399
Corporate debt		3,004		36		(13	)		3,027
Total	$	253,070	$	4,041	$	(1,658	)	$	255,453
Securities Held to Maturity
State and municipal securities	$	645	$	1	$	(3	)	$	643
Total	$	645	$	1	$	(3	)	$	643

All 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, 2010 and December 31, 2009, 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. The Company has the ability and intent to hold its securities until such time as lost value is recovered, or the securities mature. Further, the Company believes any deterioration in value on 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
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In Thousands)
September 30, 2010:
Mortgage-backed securities	$	(81	)	$	13,292	$	-		$	-
State and municipal securities		(131	)		4,269		(88	)		3,028
	$	(212	)	$	17,561	$	(88	)	$	3,028

December 31, 2009:
U.S. Treasury and government sponsored agencies	$	(453	)	$	44,910	$	-		$	-
Mortgage-backed securities		(625	)		44,993		-			-
State and municipal securities		(570	)		20,479		-			-
Corporate debt		-			-		(13	)		986
	$	(1,648	)	$	110,382	$	(13	)	$	986

At September 30, 2010, 14 of the Company’s 375 debt securities had been in an unrealized loss position for 12 or more months. The Company does not believe these unrealized losses are “other than temporary” since it has the ability and intent to hold the investments for a period of time sufficient to allow for a recovery in market value, and it is not probable that the Company will be unable to collect all of the amounts contractually due. The Company has not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

NOTE 5 - EMPLOYEE AND DIRECTOR BENEFITS

Stock Options

At September 30, 2010, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $195,000 and $509,000 for the three and nine months ended September 30, 2010 and $189,000 and $584,000 for three and nine months ended September 30, 2009, 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 10 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 assumptions of expected volatility, dividends paid on the Company’s stock, term, and the risk-free rate. 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. Assumptions for each component input into the model for options granted are as follows:

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

The following table summarizes stock option activity during the nine months ended September 30, 2010 and 2009:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
								(In Thousands)
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

Nine Months Ended September 30, 2009:
Outstanding at January 1, 2009		826,000		$	14.70		7.7	$	8,513
Granted		40,000			25.00		9.4		-
Exercised		-			-		-		-
Forfeited		(2,500	)		15.00		7.2		-
Outstanding at September 30, 2009		863,500			15.17		7.1	$	8,488

Exercisable at September 30, 2009		146,862		$	12.40		6.5	$	1,851

Restricted Stock

During the first quarter of 2010, 10,000 shares of restricted stock were awarded to employees. During the fourth quarter of 2009, 20,000 shares of restricted stock were awarded to a key executive. 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, 2010, there was $623,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 4.2 years of the restricted stock’s vesting period.

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 $10.00 per share, 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 warrants outstanding at September 30, 2010 and 2009 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 9.

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 11.

NOTE 6 - DERIVATIVES

During 2008, the Company entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company entered into offsetting positions with a regional correspondent bank in order to minimize the risk to the Company. As of September 30, 2010, the Company was party to two swaps with notional amounts totaling approximately $12.0 million with customers, and two swaps with notional amounts totaling approximately $12.0 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 $1,032,000 in offsetting entries in other assets and other liabilities.

On August 24, 2010, the Company entered into an interest rate cap with a notional value of $100,000,000. 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 cap was marked down by $40,000 during the quarter ended September 30, 2010, and is currently valued at $120,000.

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, 2010 and December 31, 2009 were not material.

NOTE 7 - ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued two related accounting pronouncements changing the accounting principles and disclosure requirements for securitizations and special purpose entities. The pronouncements remove the concept of a “qualifying special-purpose entity”, change the requirements for derecognizing financial assets and change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated. These pronouncements also expand existing disclosure requirements to include more information about transfers of financial assets and where companies have exposure to the risks related to transfers of financial assets. The Company adopted the provisions of these pronouncements as of January 1, 2010, but neither had a material impact on the consolidated financial statements.

During January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 – “Improving Disclosures About Fair Value Measurements”, which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended September 30, 2010. The adoption of these provisions of this ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s consolidated financial statements. See Note 8 to the Consolidated Financial Statements for the disclosures required by this ASU.

This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements of assets measured at fair value on a recurring basis be presented on a gross basis rather than as a net number, as currently permitted. This provision of the ASU is effective for the Company’s reporting period ending June 30, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s consolidated financial statements.

During February 2010, the FASB updated ASU No. 2010-09, Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements. This guidance amends FASB ASC Topic 855, Subsequent Events, so that issuers filing periodic reports with the Securities and Exchange Commission (“SEC filers”) no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. SEC filers must evaluate subsequent events through the date the financial statements are issued.

During July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance requires disclosures regarding loans and the allowance for loan losses that are disaggregated by portfolio segment and class of financing receivable. Required enhancements to current disclosures include a rollforward of the allowance for loans losses by portfolio segment, with the ending balance broken out by basis of impairment method, as well as the recorded investment in the respective loans. Nonaccrual and impaired loans by class must also be shown. Disclosure requirements also include: 1) credit quality indicators by class, 2) aging of past due loans by class, 3) troubled debt restructurings (“TDRs”) by class and their effect on the allowance for loan losses, 4) defaults on TDRs by class and their effect on the allowance for loan losses, and 5) significant purchases and sales of loans disaggregated by portfolio segment. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010, for end of period disclosures. Activity related disclosures are required for interim and annual reporting periods beginning on or after December 15, 2010. While impacting its disclosures, this ASU will not have an impact on the Company’s consolidated financial statements.

NOTE 8 - FAIR VALUE MEASUREMENT

Measurement of fair value under United States generally accepted accounting principles (“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.

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 certain cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.

Derivatives – 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 expected. 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. 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 $1,248,000 and $5,100,000 during the three and nine months ended September 30, 2010, respectively, and $1,586,000 and $4,919,000 for the three and nine months ended September 30, 2009, 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. The amount charged to earnings was $372,000 and $1,031,000 during the three and nine months ended September 30, 2010, respectively, and $359,000 and $1,326,000 during the three and nine months ended September 30, 2009. These charges were for write-downs in the value of OREO and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy.

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:

			Fair Value Measurements at September 30, 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	$	-	$	249,207	$	-	$	249,207
Interest rate swap agreements		-		1,032				1,032
Interest rate cap				120				120
Total assets at fair value	$	-	$	250,359	$	-	$	250,359

Liabilities Measured on a Recurring Basis:
Interest rate swap agreements	$	-	$	1,032	$	-	$	1,032

			Fair Value Measurements at December 31, 2009 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	$	-	$	255,453	$	-	$	255,453
Interest rate swap agreements		-		413				413
Total assets at fair value	$	-	$	255,866	$	-	$	255,866

Liabilities Measured on a Recurring Basis:
Interest rate swap agreements	$	-	$	413	$	-	$	413

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of September 30, 2010 and December 31, 2009:

			Fair Value Measurements at September 30, 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	$	-	$	-	$	13,790	$	13,790
Other real estate owned		-		-		8,170		8,170
Total assets at fair value	$	-	$	-	$	21,960	$	21,960

			Fair Value Measurements at December 31, 2009 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	$	-	$	-	$	8,003	$	8,003
Other real estate owned		-		-		12,525		12,525
Total assets at fair value	$	-	$	-	$	20,528	$	20,528

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 non-recurring basis, at September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Financial Assets:
Cash and cash equivalents	$	152,054	$	152,054	$	76,206	$	76,206
Investment securities available for sale		249,207		249,207		255,453		255,453
Investment securities held to maturity		2,631		2,704		645		643
Restricted equity securities		3,510		3,510		3,241		3,241
Mortgage loans held for sale		8,708		8,708		6,202		6,202
Loans, net		1,328,599		1,328,336		1,192,173		1,193,202
Accrued interest and dividends receivable		6,834		6,834		6,200		6,200
Interest rate swaps		1,032		1,032		413		413
Interest rate cap		120		120		-		-

Financial Liabilities:
Deposits	$	1,601,557	$	1,603,162	$	1,432,355	$	1,435,387
Borrowings		24,933		26,343		24,922		25,981
Trust preferred securities		30,384		27,087		15,228		12,681
Accrued interest payable		914		914		1,026		1,026
Interest rate swaps		1,032		1,032		413		413

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 option-adjusted spread rates tied to the LIBOR swap curve, with term structures matching each loan being valued. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair value for impaired loans is estimated using underlying collateral values, where applicable, or discounted cash flow analysis.

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.

Deposits: The fair values of 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 analysis based on option-adjusted spread rates tied to the LIBOR swap curve, with term structures matching each certificate of deposit being valued.

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 instruments consist of non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

NOTE 9 - 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 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”). 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 Indenture. If payments are deferred, holders accumulate additional distributions thereon at 8.5%, compounded quarterly, to the extent permitted by law.

In addition, the Company issued a total of 75,000 warrants, each representing 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 debentures 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 (i) prior to September 1, 2011, in whole upon the occurrence of a Special Event, as defined in the Indenture, or (ii) in whole or in part on or after September 1, 2011 for any reason. In the event of the redemption of the trust preferred securities prior to September 1, 2011, the holders of the trust preferred securities will be entitled to $1,050 per share, plus accumulated and unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment. In the event of the redemption of the trust preferred securities on or after September 1, 2011, 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 Trust. This right is optional and wholly within the Company’s discretion as set forth in the 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 Trust (the “Preferred Securities Guarantee”). The Preferred Securities Guarantee, when taken together with the Company’s other obligations under the debentures, 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 10 – JUNIOR SUBORDINATED MANDATORY CONVERTIBLE DEFERRABLE INTEREST DEBENTURES DUE MARCH 15, 2040

On February 9, 2010 the Company established a new Delaware statutory trust subsidiary, ServisFirst Capital Trust II (the “2010 Trust”), which issued 15,000 shares of its 6.0% Mandatory Convertible Trust Preferred Securities (the “Preferred Securities”) for $15,000,000, or $1,000 per Preferred Security, on March 15, 2010. The 2010 Trust simultaneously issued 50,000 shares of its common securities to the Company for a purchase price of $50,000, or $1.00 per share, which together with the Preferred Securities constitute all 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”). The Preferred Securities were offered and sold to accredited investors in a private placement.

Holders of the Preferred Securities will be 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 Indenture governing the Subordinated Debentures; provided, however, that, while any of the Preferred Securities remain outstanding, the Company shall not incur any additional senior debt in excess of 0.5% of the Company’s average assets for the fiscal year immediately preceding, unless approved by the holders of a majority of the outstanding Preferred Securities. The Company has the right to defer payments of interest on the Subordinated Debentures from time to time, for up to 20 consecutive quarterly periods for each deferral period. During any deferral period, the Company may not (i) pay dividends on or redeem any 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 Indenture), or upon earlier redemption of the Subordinated Debentures. The Subordinated Debentures are redeemable by the Company at any time in whole, but not in part, upon the occurrence of a special event, as defined in the Indenture.

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

NOTE 11 - SUBORDINATED NOTE DUE SEPTEMBER 1, 2016

On June 23, 2009, the Bank issued $5,000,000 aggregate principal amount of its 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 September 1, December 1, March 1 and June 1, commencing on 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 $5.71. 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.

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, 2010 and for the three and nine months ended September 30, 2010 and 2009.

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. ServisFirst Bancshares, Inc. cautions that such forward-looking statements, wherever they occur in this press release or in other statements attributable to ServisFirst Bancshares, Inc., are necessarily estimates reflecting the judgment of ServisFirst Bancshares, Inc.’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 collectibility of loans and the value of collateral; the effect of natural disasters, such as hurricanes, 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 in Birmingham, Alabama. Through the Bank, we operate eight full-service banking offices located in Jefferson, Shelby, Madison, Montgomery and Houston counties in the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama.

We are headquartered at 850 Shades Creek Parkway, Birmingham, Alabama 35209 (Jefferson County). In addition to the Jefferson County headquarters, the Bank currently operates through two offices in the Birmingham-Hoover MSA (one office in Jefferson County and one office in North Shelby County), two offices in the Huntsville MSA (Madison County), two offices in the Montgomery MSA (Montgomery County) and one office in the Dothan MSA (Houston County), which constitute our primary service areas. 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, 2010, the Company had total consolidated assets of $1,776,524,000, an increase of $203,027,000, or 12.90%, over $1,573,497,000 at December 31, 2009. Total loans were $1,345,502,000 at September 30, 2010, an increase of $138,418,000, or 11.47%, over $1,207,084,000 at December 31, 2009. Total deposits were $1,601,557,000 at September 30, 2010, an increase of $169,202,000, or 11.81%, over $1,432,355,000 at December 31, 2009.

Net income for the quarter ended September 30, 2010 was $4,799,000, an increase of $3,191,000, or 198.45%, from $1,608,000 for the quarter ended September 30, 2009. Basic and fully diluted earnings per common share were $.87 and $.77, respectively, for the three months ended September 30, 2010, compared with $.29 and $.28, respectively, for the same period in 2009. This increase was primarily attributable to a higher net interest margin and an improved efficiency ratio, both of which are explained in detail under the captions “Net Interest Income” and “Noninterest Expense”, respectively, below.

Net income for the nine months ended September 30, 2010 was $12,833,000, an increase of $8,946,000, or 230.15%, from $3,887,000 for the nine months ended September 30, 2009. Basic and fully diluted earnings per share were $2.33 and $2.11, respectively, for the nine months ended September 30, 2010, compared with $.71 and $.67, respectively for the same period in 2009. Again, this increase was primarily attributable to a higher net interest margin and an improved efficiency ratio, as explained below.

Critical 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, 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, 2009.

Financial Condition

Investment Securities

Investment securities available for sale totaled $249,207,000 at September 30, 2010 and $255,453,000 at December 31, 2009. Investment securities held to maturity totaled $2,631,000 at September 30, 2010 and $645,000 at December 31, 2009. Approximately $34,597,000 in callable agency securities were sold or called during the first nine months of 2010, and were replaced by the purchase of $31,030,000 in mortgage-backed securities and $10,354,000 in municipal debt securities. The purchased securities will increase the portfolio yield and will also provide monthly principal cash flow.

Each quarter, management assesses whether there have been events or economic circumstances to indicate 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 the Company currently has the ability to hold its investment securities for the foreseeable future, no declines are deemed to be other than temporary. The Company will continue to evaluate its investment securities for possible other-than-temporary impairment, which could result in a future non-cash charge to earnings.

The following table shows the amortized cost of the Company’s investment securities by their stated maturity at September 30, 2010:

	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	$	-		$	28,551		$	21,367		$	10,730		$	60,648
Mortgage-backed securities		-			1,265			18,771			90,345			110,381
State and municipal securities		165			6,539			45,907			15,824			68,435
Corporate debt		-			-			2,011			-			2,011
	$	165		$	36,355		$	88,056		$	116,899		$	241,475

Taxable-equivalent Yield		6.96	%		2.80	%		4.85	%		4.16	%		4.21	%

All securities held are traded in liquid markets. As of September 30, 2010, we owned certain restricted securities of the Federal Home Loan Bank with an aggregate book value and market value of $3,260,000 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’s investment portfolio consists of mortgage-backed pass-through securities, tax-exempt securities and corporate bonds. The Bank does not invest in collateralized debt obligations (“CDOs”). All corporate bonds have a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The September 30, 2010 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 $108,620,000 and $117,377,000 as of September 30, 2010 and December 31, 2009, respectively.

At September 30, 2010, we had $2,213,000 in federal funds sold, compared with $680,000 at December 31, 2009.

Loans

We had total loans of $1,345,502,000 at September 30, 2010, an increase of $138,418,000, or 11.47%, compared to $1,207,084,000 at December 31, 2009. At September 30, 2010, 50% of our loans were in our Birmingham offices, 24% in our Huntsville offices, 15% in our Montgomery offices, and 11% in our Dothan office.

The following table details our loans at September 30, 2010 and December 31, 2009:

	September 30, 2010			December 31, 2009
	(In Thousands)
Commercial, financial and agricultural	$	510,176		$	461,088
Real estate - construction (1)		217,666			224,178
Real estate - mortgage:
Owner occupied		259,224			203,983
1-4 Family		192,145			165,512
Other		132,819			119,749
Total Real Estate Mortgage		584,188			489,244
Consumer		33,472			32,574
Total Loans		1,345,502			1,207,084
Allowance for loan losses		(16,903	)		(14,737	)
Total Loans, Net	$	1,328,599		$	1,192,347

(1)

includes Owner Occupied real estate construction loans in the amount of $4,911 and $10,045 at September 30, 2010 and December 31, 2009, respectively

Asset Quality

We establish and maintain the allowance for loan losses 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 believes that the allowance is adequate at September 30, 2010.

A loan is considered impaired when it is probable, based on current information and events, that 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 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 in impairments 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 non-accrual status. At September 30, 2010, we evaluated $53,841,000 in loans for impairment, including all non-accrual loans. As a result of such evaluation, $3,671,000 of the Company’s allowance for loan losses was specifically allocated to $17,461,000 of these loans as impairment. During the third quarter of 2010, $3,004,000 in loans received specific allocations of the allowance for loan losses for the first time. At December 31, 2009, we evaluated $21,524,000 of the Company’s loans for impairment, including all nonaccrual loans. As a result of such evaluation, $3,082,000 of the Company’s allowance for loan losses was specifically allocated to $11,085,000 of these loans as impairment. The increase in impaired loans from December 31, 2009 to September 30, 2010 relates to management’s determination to increase the number of loans evaluated on a loan-by-loan basis to encompass all loans classified as substandard or below (see “Provision for Loan Losses” below), coupled with prevailing economic conditions.

The following table presents a summary of changes in the allowances for loan losses for the three and nine months ended September 30, 2010 and 2009, respectively. The largest balance of our charge-offs during the three and nine months ended September 30, 2010, $1,586,000 and $1,924,000, respectively, were in real estate construction loans. $1,515,000 of the charge-offs in real estate construction loans during the three months ended September 30, 2010 were of residential lot development loans. Real estate construction loans represent 16.17% of our loan portfolio at September 30, 2010.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In Thousands)						(In Thousands)
Allowance for Loan Losses
Balance, beginning of period	$	15,713		$	13,567		$	14,737		$	10,602
Charge-offs:
Commercial, financial and agricultural		-			(1,089	)		(1,013	)		(1,897	)
Real estate - construction		(820	)		(832	)		(2,744	)		(2,040	)
Real estate - mortgage:
Owner Occupied		-			-			(548	)		-
1-4 family mortgage		(535	)		(172	)		(1,229	)		(212	)
Other		-			(9	)		-			(9	)
Total real estate mortgage		(535	)		(181	)		(1,777	)		(221	)
Consumer		(5	)		(81	)		(79	)		(167	)
Total charge-offs		(1,360	)		(2,183	)		(5,613	)		(4,325	)
Recoveries:
Commercial, financial and agricultural		3			-			97			-
Real estate - construction		6			-			50			39
Real estate - mortgage:
Owner Occupied		-			-			12			-
1-4 family mortgage		-			-			3			-
Other		-			-			-			-
Total real estate mortgage		-			-			15			-
Consumer		4			3			5			3
Total recoveries		13			3			167			42
Net charge-offs		(1,347	)		(2,180	)		(5,446	)		(4,283	)
Provision for loan losses charged to expense		2,537			3,209			7,612			8,277
Balance, end of period	$	16,903		$	14,596		$	16,903		$	14,596

As a percent of year to date average loans:
Annualized net charge-offs		0.41	%		0.76	%		0.58	%		0.54	%
Annualized provision for loan losses		0.77	%		1.12	%		0.81	%		1.04	%

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. We believe the comprehensive allowance analysis performed by our credit administration group is in compliance with all current regulatory guidelines.

	September 30, 2010					December 31, 2009					September 30, 2009
	Amount		Percentage of Loans in Each Category of Total Loans			Amount		Percentage of Loans in Each Category of Total Loans			Amount		Percentage of Loans in Each Category of Total Loans
	(In Thousands)					(In Thousands)					(In Thousands)
Commercial, financial and agricultural	$	4,709		37.92	%	$	3,058		38.20	%	$	3,252		38.15	%
Real estate - construction		6,274		16.18	%		6,295		18.57	%		6,290		19.74	%
Real estate - mortgage		804		43.42	%		1,242		40.53	%		895		39.51	%
Consumer		79		2.48	%		1		2.70	%		2		2.60	%
Other		5,037		-			4,141		-			4,157		-
Total	$	16,903		100.00	%	$	14,737		100.00	%	$	14,596		100.00	%

Nonperforming Assets

It is our policy to classify loans as non-accrual when they are past due in principal or interest payments for more than 90 days or if we believe it is otherwise not reasonable to expect collection of principal and interest due under the original terms. Exceptions are allowed for 90-day past due loans when such loans are secured by real estate or negotiable collateral and are in the process of collection. Generally, payments received on non-accrual loans are applied directly to principal.

Nonperforming assets, comprising non-accrual loans, loans 90 days or more past due and still accruing, other real estate owned (“OREO”), and troubled debt restructurings in which the loan was not current when the terms were restructured, totaled $22,585,000 at September 30, 2010, compared to $24,713,000 at December 31, 2009 and $29,321,000 at September 30, 2009. Non-accrual loans were $14,306,000 at September 30, 2010, an increase of $2,385,000 from non-accrual loans of $11,921,000 at December 31, 2009 and an increase of $512,000 from non-accrual loans of $13,794,000 at September 30, 2009. Loans 90 days past due and still accruing totaled $109,000 at September 30, 2010, compared to $267,000 at December 31, 2009 and $1,324,000 at September 30, 2009.

A summary of nonperforming assets as of September 30, 2010, December 31, 2009 and September 30, 2009 follows:

	September 30, 2010		December 31, 2009		September 30, 2009
	(In Thousands)
Nonaccrual loans	$	14,306	$	11,921	$	13,794
Past due 90 days and still accruing		109		267		1,324
All other real estate owned		8,170		12,525		13,453
Troubled debt restructures		-		-		750
Total non-performing assets	$	22,585	$	24,713	$	29,321

At September 30, 2010, we had one troubled debt restructure that was current at the time it was restructured, and is performing under the terms of the restructured agreement at this time. This loan has a carrying value of $660,000.

The increase in nonaccrual loans from December 31, 2009 to September 30, 2010 was primarily the result of additions to nonaccrual status in commercial loans and acquisition, development and construction loans. The decrease in OREO from December 31, 2009 to September 30, 2010 was the result of sales exceeding amounts transferred in, and, to a lesser extent, write-downs in the value of OREO.

At September 30, 2010, total nonperforming assets included finished and unfinished homes of $4,421,000, residential lots of $9,389,000, raw land of $4,189,000 and commercial buildings of $1,386,000. Our OREO procedures currently determine disposition value, the value used to place the property into OREO, based on the most recent fair value appraisal of the property that we have at the time, less estimated costs to sell the property.

Deposits

Total deposits increased $169,202,000, or 11.81%, to $1,601,557,000 at September 30, 2010 compared to $1,432,355,000 at December 31, 2009. This increase in deposits is a result of organic growth within our Montgomery and Dothan, Alabama markets. We anticipate long-term sustainable growth in deposits through continued development of market share in our less mature markets and through organic growth in all of our markets.

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

On March 19, 2008, we borrowed $20.0 million from the Federal Home Loan Bank of Atlanta, of which $10.0 million bears interest at 2.995% per annum and is payable on March 19, 2012, and $10.0 million bears interest at 3.275% per annum and is payable on March 19, 2013. As discussed in Note 9 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 $15.3 million as a result of amortization of the discount associated with 75,000 warrants issued to the holders of the Preferred Securities. As discussed in Note 10 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 11 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, 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 are 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, 2010, liquid assets, which are represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $351 million. Additionally, the Bank had additional borrowing availability of approximately $328 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, and had additional borrowing availability of $3 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. 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”.

We are subject to general FDIC guidelines that require a minimum level of liquidity. We believe our liquidity ratios meet or exceed these guidelines. We are 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, 2010. 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	$	1,336,670	$	-	$	-	$	-	$	-
Certificates of deposit (2)		264,887		190,621		58,067		16,199		-
FHLB borrowings		20,000		-		20,000		-		-
Subordinated debentures		30,384		-		-		-		30,384
Subordinated note payable		4,933		-		-		-		4,933
Operating lease commitments		17,118		1,804		3,660		3,781		7,873
Total	$	1,673,992	$	192,425	$	81,727	$	19,980	$	43,190

(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 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 10 to the consolidated financial statements for further discussion of the issuance and sale of the Preferred Securities.

As of September 30, 2010, 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. We believe that we are well-capitalized under the prompt corrective action provisions as of September 30, 2010.

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, 2010, December 31, 2009, and September 30, 2009:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In Thousands)					(In Thousands)					(In Thousands)
As of September 30, 2010:
Total Capital to Risk-Weighted Assets:
Consolidated	$	161,277		11.75	%	$	109,791		8.00	%	$	137,239		10.00	%
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	%		82,343		6.00	%
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	%		68,619		5.00	%
ServisFirst Bank		139,246		8.05	%		54,868		4.00	%		68,585		5.00	%

As of December 31, 2009:
Total Capital to Risk-Weighted Assets:
Consolidated	$	130,708		10.47	%	$	99,903		8.00	%	$	124,879		10.00	%
ServisFirst Bank		130,252		10.44	%		99,851		8.00	%		124,814		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		111,049		8.89	%		49,952		4.00	%		74,927		6.00	%
ServisFirst Bank		110,593		8.86	%		49,926		4.00	%		74,888		6.00	%
Tier 1 Capital to Average Assets:
Consolidated		111,049		6.97	%		63,767		4.00	%		79,709		5.00	%
ServisFirst Bank		110,593		6.94	%		63,737		4.00	%		79,672		5.00	%

As of September 30, 2009:
Total Capital to Risk-Weighted Assets:
Consolidated	$	128,371		10.99	%	$	93,477		8.00	%	$	116,846		10.00	%
ServisFirst Bank		127,649		10.93	%		93,421		8.00	%		116,777		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		108,857		9.32	%		46,738		4.00	%		70,108		6.00	%
ServisFirst Bank		108,135		9.26	%		46,711		4.00	%		70,066		6.00	%
Tier 1 Capital to Average Assets:
Consolidated		108,857		7.64	%		57,017		4.00	%		71,272		5.00	%
ServisFirst Bank		108,135		7.59	%		56,987		4.00	%		71,234		5.00	%

Off-Balance Sheet Arrangements

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

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

Financial instruments whose contract amounts represent credit risk at September 30, 2010 are as follows:

	(In Thousands)
Commitments to extend credit	$	513,817
Credit card arrangements		23,621
Standby letters of credit		39,858
	$	577,296

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 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.

Results of Operations

Summary of Net Income

Net income for the three months ended September 30, 2010 was $4,799,000, compared to net income of $1,608,000 for the three months ended September 30, 2009. Net income for the nine months ended September 30, 2010 was $12,833,000, compared to net income of $3,887,000 for the nine months ended September 30, 2009. The increase in net income was primarily attributable to a higher net interest margin and an improved efficiency ratio. Net interest income for the three months ended September 30, 2010 increased by 39.70% to $15,987,000, compared to $11,444,000 for the same period in 2009. Net interest income for the nine months ended September 30, 2010 increased by 49.08% to $46,201,000, compared to $30,990,000 for the same period in 2009. Operating expenses for the three months ended September 30, 2010 increased by 7.10% to $7,467,000, compared to $6,972,000 in 2009, and for the nine months ended September 30, 2010 increased by 10.71% to $22,460,000, compared to $20,287,000 in 2009. The provision for loan losses decreased by $672,000, to $2,537,000, for the three months ended September 30, 2010 compared to the same period in 2009, and decreased by $665,000, to $7,612,000, for the nine months ended September 30, 2010 compared to the same period in 2009. Noninterest income increased by $381,000, to $1,348,000, for the three months ended September 30, 2010 compared to the same period in 2009, and increased by $315,000, to $3,484,000, for the nine months ended September 30, 2010 compared to the same period in 2009. Basic and diluted net income per common share were $.87 and $.77, respectively, for the three months ended September 30, 2010, compared to $.29 and $.28, respectively, for the same period in 2009. Basic and diluted net income per common share were $2.33 and $2.11, respectively, for the nine months ended September 30, 2010, compared to $.71 and $.67, respectively, for the same period in 2009. Return on average assets for the three and nine months ended September 30, 2010 was 1.10% and 1.06%, respectively, compared to 0.45% and 0.60% in 2009, and return on average stockholders’ equity for the three and nine months ended September 30, 2010 was 16.86% and 16.12%, respectively, compared to 6.75% and 8.60% in 2009.

Net Interest Income

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

Taxable-equivalent net interest income increased $4,458,000, or 37.88%, to $16,227,000 for the three months ended September 30, 2010 compared to $11,769,000 in 2009, and increased $15,522,000, or 49.38%, to $46,958,000 for the nine months ended September 30, 2010 compared to $31,436,000 in 2009. These increases were attributable to growth in interest-earning assets, higher yields on loans, and lower rates paid on interest-bearing deposits. The taxable-equivalent yield on interest-earning assets increased to 4.77% for the three months ended September 30, 2010 from 4.68% for the same period in 2009, and increased to 4.97% for the nine months ended September 30, 2010 from 4.78% for the same period in 2009. The yield on loans for the three months ended September 30, 2010 was 5.35% compared to 5.10% for the same period in 2009, and was 5.35% compared to 5.09% for the nine months ended September 30, 2010 and 2009, respectively. Loan fees included in the yield calculation increased to $189,000 for the three months ended September 30, 2010 from $145,000 for the same period in 2009, and increased to $587,000 for the nine months ended September 30, 2010 from $454,000 for the same period in 2009. The cost of total interest-bearing liabilities decreased to 1.13% for the three months ended September 30, 2010 from 1.56% for the same period in 2009, and to 1.15% for the nine months ended September 30, 2010 from 1.73% for the same period in 2009. The higher interest rates paid on the subordinated debentures sold in June 2009, 8.25%, and on the junior subordinated mandatory convertible debentures sold in March 2010, 6.00%, limited the decrease in the average rate paid on interest-bearing liabilities.

The following tables show, for the three and nine months ended September 30, 2010 and 2009, 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 if applicable:

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended September 30,

(dollars in thousands)

	2010							2009
	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)	$	1,309,007	$	17,644		5.35	%	$	1,133,506	$	14,560		5.10	%
Mortgage loans held for sale		8,485		72		3.37			3,329		38		4.53
Investment securities:
Taxable		175,493		1,575		3.56			77,267		1,154		5.93
Tax-exempt (2)		59,144		821		5.51			41,835		579		5.49
Total investment securities (3)		234,637		2,396		4.05			119,102		1,733		5.77
Federal funds sold		60,380		31		0.20			126,321		77		0.24
Restricted equity securities		4,024		18		1.77			3,241		9		1.10
Interest-bearing balances with banks		64,409		38		0.23			5,397		-		0.00
Total interest-earning assets	$	1,680,942	$	20,199		4.77	%	$	1,390,896	$	16,417		4.68	%
Noninterest-earning assets:
Cash and due from banks		24,652							19,357
Net fixed assets and equipment		4,782							4,701
Allowance for loan losses, accrued
interest and other assets		20,278							10,478
Total assets	$	1,730,654						$	1,425,432

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	266,553	$	296		0.44	%	$	165,781	$	369		0.88	%
Savings deposits		3,251		4		0.49			991		1		0.40
Money market accounts		814,769		1,658		0.81			741,626		2,202		1.18
Time deposits		257,293		1,155		1.78			232,474		1,459		2.49
Fed funds purchased		-		-		0.00			-		-		0.00
Other borrowings		55,298		859		6.16			40,093		617		6.11
Total interest-bearing liabilities	$	1,397,164	$	3,972		1.13		$	1,180,965	$	4,648		1.56
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		217,086							146,164
Other liabilities		3,502							3,725
Stockholders' equity		106,919							92,959
Unrealized gains on
securities and derivatives		5,983							1,619
Total liabilities and
stockholders' equity	$	1,730,654						$	1,425,432
Net interest spread						3.64	%						3.12	%
Net interest margin						3.83	%						3.36	%

(1)	Non-accrual loans are included in average loan balances in all periods. Loan fees of $189,000 and $145,000 are included in interest income in 2010 and 2009, respectively.

(2)	Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.

(3)	Unrealized gains of $9,204,000 and $2,453,000 are excluded from the yield calculation in 2010 and 2009, respectively.

	Three Months Ended September 30,
	2010 Compared to 2009 Increase (Decrease) in Interest Income and Expense Due to Changes in:
	Volume			Rate			Total
	(In Thousands)
Interest-earning assets:
Loans, net of unearned income	$	2,339		$	745		$	3,084
Mortgages held for sale		46			(12	)		34
Investment securities:
Securities - taxable		1,022			(601	)		421
Securities - tax-exempt		240			2			242
Federal funds sold		(35	)		(11	)		(46	)
Restricted equity securities		3			6			9
Interest-bearing balances with banks		-			38			38
Total interest-earning assets	$	3,615		$	167		$	3,782

Interest-bearing liabilities:
Interest-bearing demand deposits	$	163		$	(236	)	$	(73	)
Savings		3			-			3
Money market accounts		201			(745	)		(544	)
Time deposits		143			(447	)		(304	)
Fed funds purchased		-			-			-
Other borrowed funds		236			6			242
Total interest-bearing liabilities	$	746		$	(1,422	)	$	(676	)
Increases in net interest income	$	2,869		$	1,589		$	4,458

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Nine Months Ended September 30,

(dollars in thousands)

	2010							2009
	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)	$	1,261,839	$	50,521		5.35	%	$	1,064,027	$	40,477		5.09	%
Mortgage loans held for sale		5,386		148		3.67			6,459		213		4.41
Investment securities:
Taxable		178,975		4,997		3.73			74,058		3,117		5.63
Tax-exempt (2)		57,129		2,407		5.63			35,307		1,468		5.56
Total investment securities (3)		236,104		7,404		4.19			109,365		4,585		5.61
Federal funds sold		30,891		49		0.21			79,145		148		0.25
Restricted equity securities		3,933		43		1.46			3,053		10		0.44
Interest-bearing balances with banks		26,900		49		0.24			9,109		20		0.29
Total interest-earning assets	$	1,565,053	$	58,214		4.97	%	$	1,271,158	$	45,453		4.78	%
Noninterest-earning assets:
Cash and due from banks		24,080							18,359
Net fixed assets and equipment		5,013							4,224
Allowance for loan losses, accrued
interest and other assets		21,889							9,381
Total assets	$	1,616,035						$	1,303,122

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	244,244	$	917		0.50	%	$	153,727	$	1,248		1.09	%
Savings deposits		2,514		10		0.53			909		4		0.59
Money market accounts		753,443		4,337		0.77			682,205		6,943		1.36
Time deposits		249,757		3,531		1.89			206,830		4,196		2.71
Fed funds purchased		6,552		31		0.63			-		-		0.00
Other borrowings		51,125		2,430		6.35			36,887		1,626		5.89
Total interest-bearing liabilities	$	1,307,635	$	11,256		1.15		$	1,080,558	$	14,017		1.73
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits		198,028							127,564
Other liabilites		3,957							3,782
Stockholders' equity		102,745							89,839
Unrealized gains on
securities and derivatives		3,670							1,379
Total liabilities and
stockholders' equity	$	1,616,035						$	1,303,122
Net interest spread						3.82	%						3.05	%
Net interest margin						4.01	%						3.31	%

(1)	Non-accrual loans are included in average loan balances in all periods. Loan fees of $587,000 and $454,000 are included in interest income in 2010 and 2009, respectively.

(2)	Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 34%.

(3)	Unrealized gains of $5,609,000 and $1,992,000 are excluded from the yield calculation in 2010 and 2009, respectively.

	Nine Months Ended September 30,
	2010 Compared to 2009 Increase (Decrease) in Interest Income and Expense Due to Changes in:
	Volume			Rate			Total
	(In Thousands)
Interest-earning assets:
Loans, net of unearned income	$	7,833		$	2,211		$	10,044
Mortgages held for sale		(32	)		(33	)		(65	)
Investment securities:
Securities - taxable		3,214			(1,334	)		1,880
Securities - tax-exempt		919			20			939
Federal funds sold		(79	)		(19	)		(98	)
Restricted equity securities		4			29			33
Interest-bearing balances with banks		32			(4	)		28
Total interest-earning assets	$	11,891		$	870		$	12,761

Interest-bearing liabilities:
Interest-bearing demand deposits		529			(860	)		(331	)
Savings		6			-			6
Money market accounts		664			(3,270	)		(2,606	)
Time deposits		764			(1,429	)		(665	)
Fed funds purchased		15			16			31
Other borrowed funds		669			135			804
Total interest-bearing liabilities	$	2,647		$	(5,408	)	$	(2,761	)
Increases in net interest income	$	9,244		$	6,278		$	15,522

Provision for Loan Losses

The provision expense 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 is a loan 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. These processes, the assigned risk grades, and the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss. Impaired loans are reviewed specifically and separately to determine the appropriate reserve allocation. Our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-rated 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 non-accruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level.

The provision for loan losses was $2,537,000 for the three months ended September 30, 2010, a decrease of $672,000 from $3,209,000 for the three months ended September 30, 2009. The provision for loan losses was $7,612,000 for the nine months ended September 30, 2010, a decrease of $665,000 from $8,277,000 for the nine months ended September 30, 2009. We continue to maintain a proactive approach to credit risk management. Nonperforming loans increased to $14,415,000, or 1.07% of total loans, at September 30, 2010 from $12,188,000, or 1.01% of total loans, at December 31, 2009, and decreased from $15,868,000, or 1.37% of total loans, at September 30, 2009. Impaired loans increased to $53,841,000, or 4.00% of total loans, at September 30, 2010. The increase in impaired loans at September 30, 2010 relates to management’s determination to increase the number of loans evaluated on a loan-by-loan basis to encompass all loans classified as substandard or below, coupled with prevailing economic conditions. The allowance for loan losses totaled $16,903,000, or 1.26% of loans, net of unearned income, at September 30, 2010, compared to $14,737,000, or 1.22% of loans, net of unearned income, at December 31, 2009 and $14,596,000, or 1.26% of loans, net of unearned income, at September 30, 2009.

Noninterest Income

Noninterest income totaled $1,348,000 for the three months ended September 30, 2010, an increase of $381,000, or 39.40%, compared to the same period in 2009, and totaled $3,484,000 for the nine months ended September 30, 2010, an increase of $315,000, or 9.94%, compared to the same period in 2009. Income from mortgage banking operations for the three months ended September 30, 2010 was $589,000, up $170,000, or 40.57%, from $419,000 for the same period in 2009, and for the nine months ended September 30, 2009 was $1,336,000, down $366,000, or 21.50%, from $1,702,000 for the same period in 2009. Recent increases in mortgage income are reflective of the high refinancing volume due to historically low interest rates. Income from customer service charges and fees for the three months ended September 30, 2010 increased $145,000, or 34.61%, to $564,000 from $419,000 for the same period in 2009, and for the nine months ended September 30, 2009 increased $567,000, or 49.26%, to $1,718,000 from $1,151,000 for the same period in 2009. The increase is primarily due to an increase in transaction accounts from 2009 to 2010. Merchant service fees were $88,000 for the three months ended September 30, 2010, a decrease of $88,000, or 50.10%, compared to $176,000 for the same period in 2009, and were $287,000 for the nine months ended September 30, 2010, a decrease of $213,000, or 42.62%, compared to $501,000 for the same period in 2009.

Noninterest Expense

Noninterest expense totaled $7,467,000 for the three months ended September 30, 2010, an increase of $495,000, or 7.10%, compared to $6,972,000 in 2009, and totaled $22,460,000 for the nine months ended September 30, 2010, an increase of $2,173,000, or 10.71%, compared to $20,287,000 in 2009. The increases for the three and nine month periods in 2010 over the same periods in 2009 were primarily due to higher FDIC insurance assessments on our deposits, higher salary expense and mortgage commissions, higher rent and insurance expense related to our move into our new headquarters building in Birmingham in July 2009, and higher data processing charges due to increases in the number of accounts and transaction volume. These increases were partially offset by lower merchant processing expenses.

Income Tax Expense

Income tax expense was $2,532,000 for the three months ended September 30, 2010 compared to $622,000 for the same period in 2009, and was $6,780,000 for the nine months ended September 30, 2010 compared to $1,708,000 for the same period in 2009. Our effective tax rates for the three and nine months ended September 30, 2010 were 34.54% and 34.57%, respectively, compared to 27.89% and 30.53% for the same periods in 2009. Our primary permanent differences are related to SFAS 123(R) option expenses and tax-free income. We increased our marginal accrual rate from 34% to 35% based on anticipated net income for the full year 2010.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.

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.

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, 2010. Based upon the Evaluation, our CEO and CFO have concluded that, as of September 30, 2010, 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, 2009. As disclosed in that report, during the first quarter of 2010, we discovered a material weakness in our internal control over financial reporting relating to the treatment in our financial statements of the Federal Deposit Insurance Corporation’s special three-year prepaid premium assessment for the year ended December 31, 2009. We corrected this material weakness prior to the filing of our Annual Report on Form 10-K, and we have made changes to our internal control over financial reporting that we believe appropriate to ensure that similar changes in FDIC assessments and prepayments are accurately reported.

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, 2009, 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, 2009, 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.

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, 2010		By	/s/ Thomas A. Broughton, III
		Thomas A. Broughton, III
		President and Chief Executive Officer

Date: November 1, 2010		By	/s/ William M. Foshee
		William M. Foshee
		Chief Financial Officer