UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-K
  (Mark One)þ
                
                ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2009oro
                
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 (NO FEE REQUIRED)For
      the transition period from ____________ to
  ____________
 
 Commission
File Number 0-53149
  
  SERVISFIRST
BANCSHARES, INC.
 (Exact
Name of Registrant as Specified in Its Charter)
  Delaware
                
                26-0734029(State
      or Other Jurisdiction of
                
                (I.R.S.
      EmployerIncorporation
      or Organization)
                
                Identification
      No.)850
      Shades Creek Parkway, Suite 200
                
                35209Birmingham,
      Alabama
                
                (Zip
      Code)(Address
      of Principal Executive Offices)
 (205)
949-0302
 (Registrant’s
Telephone Number, Including Area Code)
 Securities
registered pursuant to Section 12(b) of the Act:
 NONE
 Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, par value $.001 per share
 (Titles
of Class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes  o    
No  þ
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes  o    
No  þ
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes þ   No o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes  o    
No  o
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  o
 
 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 definitions of “larger accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.  (Check one):
 
 Large
      accelerated filer o
              Accelerated
      filer þNon-accelerated
      filer  o
              Smaller
      reporting company o
 (Do not
check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company Yes  o    
No  þ
 
 As of
June 30, 2009, the aggregate market value of the voting common stock held by
non-affiliates of the registrant, based on a price of $25.00 per share of Common
Stock, was $122,195,000.
 
 Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock as of the latest practicable date: the number of shares outstanding as of
February 28, 2010, of the registrant’s only issued and outstanding class of
common stock, its $.001 per share par value common stock, was
5,513,482.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions of the registrant’s definitive
proxy statement to be filed with the Securities and Exchange Commission in
connection with its 2010 Annual Meeting of Stockholders are incorporated by
reference in Part III of this annual report on Form 10-K.
  
  SERVISFIRST
BANCSHARES, INC.
 
 TABLE
OF CONTENTS
 
 FORM
10-K
 
 DECEMBER
31, 2009
 
 CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
                                                    
                                                    1PART
      I
                                                    
                                                    2ITEM
      1.
                                                    BUSINESS
                                                    
                                                    2ITEM
      1A.
                                                    RISK
      FACTORS.
                                                    
                                                    21ITEM
      1B.
                                                    UNRESOLVED
      STAFF COMMENTS.
                                                    
                                                    29ITEM
      2.
                                                    PROPERTIES.
                                                    
                                                    29ITEM
      3.
                                                    LEGAL
      PROCEEDINGS.
                                                    
                                                    30ITEM
      4.
                                                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                                                    
                                                    30PART
      II
                                                    
                                                    30ITEM
      5.
                                                    MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
                                                    
                                                    30ITEM
      6.
                                                    SELECTED
      FINANCIAL DATA.
                                                    
                                                    33ITEM
      7.
                                                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                                                    
                                                    35ITEM
      7A.
                                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                                                    
                                                    56ITEM
      8.
                                                    FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.
                                                    
                                                    58ITEM
      9.
                                                    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
                                                    
                                                    102ITEM
      9A.
                                                    CONTROLS
      AND PROCEDURES.
                                                    
                                                    102ITEM
      9B.
                                                    OTHER
      INFORMATION.
                                                    
                                                    103PART
      III
                                                    
                                                    103ITEM
      10.
                                                    DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
                                                    
                                                    103ITEM
      11.
                                                    EXECUTIVE
      COMPENSATION.
                                                    
                                                    104ITEM
      12.
                                                    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
                                                    
                                                    104ITEM
      13.
                                                    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
                                                    
                                                    104ITEM
      14.
                                                    PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
                                                    
                                                    104PART
      IV
                                                    
                                                    104ITEM
      15.
                                                    FINANCIAL
      STATEMENTS AND EXHIBITS.
                                                    
                                                    104SIGNATURES
                                                    
                                                    107EXHIBIT
      INDEX
                                                    
                                                    i
  i
  CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Some of our statements contained in
this Form 10-K, including matters discussed under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
beginning on page 35, are “forward-looking statements” that are based upon our
current expectations and projections about future
events.  Forward-looking statements relate to future events or our
future financial performance and include statements about the competitiveness of
the banking industry, potential regulatory obligations, our entrance and
expansion into other markets, our other business strategies and other statements
that are not historical facts. Forward-looking statements are not guarantees of
performance or results.  When we use words like “may,” “plan,”
“contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,”
“project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and
similar expressions, you should consider them as identifying forward-looking
statements, although we may use other phrasing.  These forward-looking
statements involve risks and uncertainties and are based on our beliefs and
assumptions, and on the information available to us at the time that these
disclosures were prepared and may not be realized due to a variety of factors,
including, but not limited to, the following:
 
 •
              the
      effects of the current economic recession and the possible continued
      deterioration of the United States economy, particularly deterioration of
      the economy in Alabama and the communities in which we
      operate;
 
 •
              the
      effects of continued deleveraging of United States citizens and
      businesses;
 
 •
              the
      current financial and banking crisis resulting in the massive devaluation
      of the assets and shareholders’ equity of many of the United States’
      financial and banking institutions;
 
 •
              the
      effects of continued compression of the residential housing industry, the
      subprime mortgage crisis and rising
  unemployment;
 
 •
              credit
      risks, including credit risks resulting from the devaluation of
      collateralized debt obligations (CDOs) and/or structured investment
      vehicles to which we currently have no direct
  exposure;
 
 •
              the
      effects of the Emergency Economic Stabilization Act of 2008, including its
      Troubled Asset Relief Program (TARP), the American Recovery and
      Reinvestment Act of 2009, and other governmental monetary and fiscal
      policies and legislative and regulatory
changes;
 
 •
              the
      effect of changes in interest rates on the level and composition of
      deposits, loan demand and the values of loan collateral, securities and
      interest sensitive assets and
liabilities;
 
 •
              the
      effects of terrorism and efforts to combat
it;
 
 •
              the
      effects of competition from other commercial banks, thrifts, mortgage
      banking firms, consumer finance companies, credit unions, securities
      brokerage firms, insurance companies, money market and other mutual funds
      and other financial institutions operating in our market area and
      elsewhere, including institutions operating regionally, nationally and
      internationally, together with competitors offering banking products and
      services by mail, telephone and the
Internet;
 
 •
              the
      effect of any merger, acquisition or other transaction to which we or our
      subsidiary may from time to time be a party, including our ability to
      successfully integrate any business that we acquire;
  and
 
 •
              failure
      of our assumptions underlying the establishment of our loan loss
      reserves.
  All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by this
Cautionary Note.  Our actual results may differ significantly from
those we discuss in these forward-looking statements.  For certain
other factors, risks and uncertainties that could cause our actual results to
differ materially from estimates and projections contained in these
forward-looking statements, please read the “Risk Factors” in Item 1A beginning
on page 21.
  1
  PART I
  ITEM
1.  BUSINESS
  Overview
 
 We are a bank holding company within
the meaning of the Bank Holding Company Act of 1956 headquartered in Birmingham,
Alabama. Through our wholly-owned subsidiary bank, we operate 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. As of December 31, 2009, we had
total assets of approximately $1.6 billion, total loans of approximately $1.2
billion, total deposits of approximately $1.4 billion and total stockholders’
equity of approximately $98 million.
 
 We were originally incorporated as a
Delaware corporation in August 2007 for the purpose of acquiring all of the
common stock of ServisFirst Bank, an Alabama banking corporation (separately
referred to herein as the “Bank”), which was formed on April 28, 2005 and
commenced operations on May 2, 2005. On November 29, 2007, we became the sole
shareholder of the Bank by virtue of a plan of reorganization and agreement of
merger pursuant to which (i) a wholly-owned subsidiary formed for the purpose of
the reorganization was merged with and into the Bank, with the Bank surviving,
and (ii) each shareholder of the Bank exchanged their shares of the Bank’s
common stock for an equal number of shares of our common stock.
 
 We were organized to facilitate the
Bank’s ability to serve its customers’ requirements for financial services. The
holding company structure provides flexibility for expansion of our banking
business through the possible acquisition of other financial institutions, the
provision of additional banking-related services which the traditional
commercial bank may not provide under current law, and additional financing
alternatives such as the issuance of trust preferred securities. We have no
current plans to acquire any operating subsidiaries in addition to the Bank, but
we may make acquisitions in the future if we deem them to be in the best
interest of our stockholders. Any such acquisitions would be subject to
applicable regulatory approvals and requirements.
 
 Our principal business is to accept
deposits from the public and to make loans and other investments. Our principal
sources of funds for loans and investments are demand, time, savings, and other
deposits (including negotiable orders of withdrawal, or NOW accounts) and the
amortization and prepayment of loans and borrowings. Our principal sources of
income are interest and fees collected on loans, interest and dividends
collected on other investments and service charges. Our principal expenses are
interest paid on savings and other deposits (including NOW accounts), interest
paid on our other borrowings, employee compensation, office expenses and other
overhead expenses.
 
 We are headquartered at 850 Shades
Creek Parkway, Suite 200, Birmingham, Alabama 35209 (Jefferson County). In
addition to the Jefferson County headquarters, the Bank currently operates
through two offices in the Birmingham-Hoover, Alabama MSA (one office in
Jefferson County and one office in North Shelby County), two offices in the
Huntsville, Alabama MSA (Madison County), two offices in the Montgomery, Alabama
MSA (Montgomery County) and one office in the Dothan,
Alabama MSA (Houston County). These MSAs constitute our primary service
areas, and we also serve certain areas adjacent to our primary service areas.
 
 Markets
 
 Service Areas
 
 Birmingham is located in central
Alabama approximately 90 miles northwest of Montgomery, Alabama, 146 miles west
of Atlanta, Georgia, and 148 miles southwest of Chattanooga, Tennessee.
Birmingham is intersected by U.S. Interstates 20, 59 and 65. Jefferson County
includes the major business area of downtown Birmingham. North Shelby County
also encompasses a growing business community and affluent residential areas.
With two offices in Jefferson County and one in north Shelby County, we believe
we are well positioned to access the most affluent areas of the
Birmingham-Hoover MSA.
  2
 
 We also operate in the Huntsville,
Alabama MSA, the Montgomery, Alabama MSA and the Dothan, Alabama MSA. We believe
the Huntsville market offers substantial growth as one of the strongest
technology economies in the nation, with over 300 companies performing
sophisticated government, commercial and university research. Huntsville has one
of the highest concentrations of engineers in the United States, as well as one
of the highest concentrations of Ph.D.s. Huntsville is located in North Alabama
off U.S. Interstate 65 between Birmingham and Nashville, Tennessee. Montgomery
is the capital and one of the largest cities in Alabama and home to the Hyundai
Motor Manufacturing plant, which began production in May 2005. Montgomery is
located in central Alabama between Birmingham and Mobile, Alabama and is
intersected by U.S. Interstates 65 (connecting Birmingham and Mobile, Alabama)
and 85 (connecting Montgomery to Atlanta, Georgia). Dothan is located in the
southeastern corner of the State of Alabama near the Georgia and Florida state
lines and is 35 miles from U.S. Interstate 10 which runs through the panhandle
of Florida and connections Mobile, Alabama to Tallahassee, Florida. Dothan is
also intersected by U.S. Highways 231, 431 and 84, which are common trucking
lanes, and has access to railroad and the Chattahoochee River. With two offices
in each of Madison and Montgomery Counties and one in Houston County, we believe
that we have a base of banking resources to serve such counties.
 
 We conduct a general consumer and
commercial banking business, emphasizing personal banking services to commercial
firms, professionals and affluent consumers located in our service areas. We
believe the current market, as well as the prospects for the future, presents
opportunity for a locally owned and operated financial institution.
Specifically, we believe that our primary service areas will be in need of local
institutions to respond to customer and deposit attrition resulting from the
acquisitions during the last few years of Alabama-headquartered banks, including
the acquisitions of SouthTrust Corporation by Wachovia Corporation (which has
now been acquired by Wells Fargo & Company), AmSouth Bancorporation by
Regions Financial Corporation, Compass Bancshares, Inc. by Banco Bilbao Vizcaya
Argentaria and Alabama National Bancorporation (operating as First American
Bank) by RBC Centura Banks. We believe that a community-based bank such as the
Bank can better identify and serve local relationship banking needs than can an
office or subsidiary of such larger banking institutions.
 
 Local Economy of Service
Areas
 
 Birmingham. We believe that
Jefferson and Shelby Counties offer us a growing and diverse economic base in
which to operate. From 2000 to 2009, Jefferson and Shelby Counties’ population
increased a combined 7.3%. From 2009 to 2014, the total population of Jefferson
and Shelby Counties is projected to grow from 855,000 to 881,000, representing a
3.0% total growth rate, and the number of households in the Birmingham area is
expected to expand by approximately 4.9% between 2008 and 2013. As measured by
population, Jefferson County is the largest county in Alabama, largely due to
the size of the city of Birmingham.
 
 The median household income in
Jefferson and Shelby Counties in 2009 was $43,571 and $68,877, respectively.
From 2000 to 2009, the average household income rose 19.5% in Jefferson and
Shelby Counties.
 
 The economic makeup of the Birmingham
area is very diverse. Even though Birmingham once depended on the steel industry
to provide most of the employment in the city, it is now home to a diverse array
of industries. Birmingham is a center for finance, health care, education,
manufacturing, research, engineering, transportation, construction and
distribution. Despite the recent acquisitions of SouthTrust Corporation, AmSouth
Bancorporation and Compass Bancshares, Inc., Birmingham still serves as the
headquarters for four Fortune 1,000 companies, Regions Financial Corporation,
Vulcan Materials, HealthSouth Corporation and Protective Life Corp., and
continues to foster a well-rounded business community that we believe will
continue to attract businesses to the area. Moreover, Birmingham serves as
headquarters to six of the country’s top-performing private companies on the
elite Forbes 500 list, including O’Neal Steel and Drummond Coal.
 
 In recent years, Birmingham’s
technology, health care and manufacturing sectors have grown substantially.
Birmingham is home to the largest nonprofit independent research laboratory in
the Southeast, Southern Research Institute. Additionally, the University of
Alabama at Birmingham ranks among the top medical centers in securing federal
research and development funds. Finally, Mercedes-Benz U.S. International and
Honda Motor Company have each built automobile assembly plants in the areas that
have provided substantial growth in Birmingham’s manufacturing sector. The
presence of these firms provides an opportunity for us to market our products
and services to businesses and professionals.
 
 Unless otherwise stated, the foregoing
and other pertinent data can be found on the websites of the Birmingham Regional
Chamber of Commerce and the Federal Deposit Insurance Corporation (the
“FDIC”).
 
 Huntsville.Huntsville,
Madison County, is the life-center for North Alabama and has seen steady growth
since the 1960's. Today there are nearly one million people within a 50-mile
radius of Huntsville. The metropolitan population is diverse and rich in
culture, with many residents moving into the area as a technology destination
from all 50 states and numerous countries, including Japan, Switzerland, Korea,
Germany and the UK. In 2009, the Huntsville, Alabama MSA (which includes Madison
and Limestone Counties) had a population of 397,000 people, up 16.0% from the
2000 U.S. Census, and Madison County's population was 321,000, up 16.1% from the
2000 Census. The Huntsville metro population grew at over twice the rate of the
rest of Alabama and nearly twice the rate of the U.S. as a whole. According to a
2008 estimate, the average household income was $71,267 for the Huntsville,
Alabama MSA, $73,430 for Madison County and $65,159 for the City of Huntsville.
The City of Madison reported an average household income of $72,432 according to
the 2000 U.S. Census.
  3
 
 We believe that Huntsville offers
substantial growth as one of the strongest technology economies in the nation
and one of the highest concentrations of engineers and Ph.D.s in the United
States.  Huntsville has a number of major government programs,
including NASA programs such as the Space Station and Space Shuttle Propulsion
and U.S. Army programs such as the National Space and Missile Defense Command,
Army Aviation and Foreign Military Sales.  Cummings Research Park in
Huntsville is now the second largest research park in the United States and the
fourth largest research park in the world.  Huntsville was ranked
number one in the state for announced new and expanding jobs from 2004 to 2008,
according to the Alabama Development Office.  Huntsville was named as
Forbes magazine’s “Best
Place to Live to Weather the Economy” in November 2008.  Further,
Forbes named Huntsville
one of its “Leading Cities for Business” six years in a row, including 2008, as
well as one of the “10 Smartest Cities in the World” in 2009.  Fortune Small Business
Magazine named Huntsville as the country’s “Top Mid – sized City to
Launch and Grow a Business” and Kiplinger Magazine named
Huntsville as the nation’s “Best City” in 2009.  Huntsville is home to
the highest concentration of Inc. 500 Companies in the
United States and also a number of offices of Fortune 500
companies.  Major employers in Huntsville include the U.S.
Army/Redstone Arsenal, the Boeing Company, NASA/Marshall Space Flight Center,
Intergraph Corporation, Benchmark Electronics, ADTRAN, Inc., Northrop Grumman,
Cinram, SAIC, DirecTV, LG Electronics, Inc., Lockheed Martin, and Toyota Motor
Manufacturing of Alabama.  Job growth in the Huntsville metro has been
strong, with over 29,000 new workers added since 2000, which accounts for 46% of
the state’s net job growth during that same period of time.  The
Huntsville metro area’s employment growth rate of 15.8% is almost four times the
U.S. average. Professional and business service employment in the Huntsville
metro area grew by 41.7% from 2000-2008, adding a total of 13,900 workers
primarily in professional, scientific and technical fields.
 
 In September 2005, the Base Realignment
and Closure Commission, or BRAC, approved the relocation of the majority of the
United States Missile Defense Agency's development and management work, along
with the headquarters of the U.S. Army Space & Missile Defense Command, the
U.S. Army Materiel Command and the U.S. Army Security Assistance Command, to
Huntsville.  The relocation of jobs to Huntsville began in 2007 and
will bring up to 5,000 jobs.  All moves are scheduled to be completed
by 2011.  In addition to these jobs, the move is expected to bring
another 5,000 support jobs.
 
 The Hudson-Alpha Institute for
Biotechnology opened its 260,000-square foot facility in November 2007, housing
17 biotechnology companies representing the for-profit side of development
focused on using the code generated by the Human Genome Project to produce drugs
and treatment.  The institute has provided the Huntsville community
with over 900 new jobs, and the new 22,000-square foot Jackson Conference Center
was constructed there in 2008.  Verizon Wireless has built a
152,000-square foot Alabama headquarters and customer service center in Thornton
Research Park, in which it has invested $44 million and created nearly 1,300 new
jobs.  Expanding the plant at Toyota Manufacturing led to the creation
of 240 jobs as well as total capital investment of $147
million.  Other notable expansions include Raytheon, DHS Systems,
Aegis Technologies, System Studies and Simulation and Lockheed
Martin.  In total, new and expanding industry in Huntsville/Madison
County in 2009 amounted to 32 projects, 2,027 jobs, and over $219 million in
capital investment.  Additionally, plans are underway to construct a
$1 billion office park just outside of the gates at Redstone Arsenal, which will
ultimately contain hotels, restaurants and 4 million square feet of office
space.
 
 The foregoing and other pertinent data
is available on the Huntsville/Madison County Chamber of Commerce's and the
FDIC's websites.
 
 Montgomery.  Montgomery
is Alabama’s second largest city and is the capital of Alabama.  We
have identified Montgomery as a high-growth market for us, as it led Alabama in
job growth from 1990 to 2006.  Over that 17-year period, the
Montgomery County employment base has grown by 22%, the number of unemployed
persons has dropped by 31% and the labor force has increased by
19%.  The area’s per capita income grew from $18,500 in 1990 to
$35,130 in 2005, an increase of 90%.  Montgomery County is the fourth
most populous county in Alabama.
 
 More than $1 billion has been spent on
the revitalization of downtown Montgomery and the Riverfront development,
including over $180 million on a downtown four-star hotel complex as well as $29
million on the renovation of the adjacent Convention Center.  Downtown
Montgomery also opened a new baseball stadium in 2004, and the Montgomery
Regional Airport completed a $40 million renovation and expansion project in
2006.
  4
 
 As its capital city, the State of
Alabama employs approximately 9,500 persons in Montgomery, as well as numerous
service providers.  Montgomery is also home to Maxwell Gunter Air
Force Base, which employs 12,280 persons, and the Air University, the worldwide
center for U.S. Air Force education.  In May of 2005, Hyundai Motor
Manufacturing Alabama opened its Montgomery manufacturing plant, which was built
with a capital investment of over $1.4 billion.  That plant now
employs over 3,500 people and is now producing two Hyundai models and has been
further expanded with the addition of a new engine plant.  That engine
plant will also serve the new Kia manufacturing facility currently being built
in West Point, Georgia.  The area has also benefited from the nearly
30 top tier Hyundai suppliers who have invested over $550 million in new plant
facilities producing almost 8,000 additional jobs.
 
 The foregoing and other pertinent data
can be found on the Montgomery Area Chamber of Commerce’s and the FDIC’s
websites and recent publications of the Montgomery Area Chamber of Commerce,
including an article written for them by Dr. Keivan Deravi, Ph. D., a professor
of economics at Auburn University at Montgomery.
 
 Dothan.  Dothan, in
Houston County, is located in the southeastern corner of Alabama and is
conveniently placed near the Florida panhandle and Georgia state
line.  We believe that this market has great potential due to its
central hub, its accessibility to large distribution centers, its home to
several major corporations, and its lack of personalized banking services
currently being provided.  According to the FDIC, Dothan’s deposit
base has grown 36.2% during the past six years.  Furthermore, Dothan’s
two largest deposit holders are Regions Bank and Wachovia Bank (formerly
SouthTrust Bank and now part of Wells Fargo & Company), each of which has
undergone substantial changes in recent years, which we believe provides an
opportunity for a new bank such as us.  We believe the citizens of
Dothan demand the personal service provided by the Bank, making it a more viable
option for the current residents than local branches of larger regional
competitors.
 
 In 2009,
the Dothan, Alabama MSA had a population of 142,000 people.  Houston
County had a population of 99,000, showing a 11.5% increase from
2000.
 
 We
believe Dothan to be a growing market with greater needs considering the wide
array of industries being serviced.  The Dothan area, while being
known as the peanut capital, is also home to facilities of several major
corporations, including Michelin, Pemco World Aviation, International Paper,
Globe Motors, AAA Cooper-Headquarters, and many more.  Also, the
strong presence of trucking and its strategic positioning in the Southeast
market attracts distribution-related projects to the Dothan MSA.  For
example, the development of the Houston County Distribution Park has allowed
companies to take advantage of the 352-acre tract to serve consumers in the
Southeast region of the United States.  Being only minutes from the
Florida state line, the large lots can serve distribution-related projects up to
1.2 million square feet in size.
 
 Dothan is
a hub of healthcare for southeast Alabama, southwest Georgia and north Florida
areas, with two regional hospitals, Southeast Alabama Regional Medical Center
employing over 2,000 medical professionals and support staff, and Flowers
Hospital employing 1,400 medical professionals and support staff.  The
area also has a strong history in the expansion of aviation jobs in Alabama
through Enterprise-Ozark Community College (avionics and aviation mechanic
training) and Fort Rucker-the Army Aviation Center of the United
States.  The highly specialized Dothan Airport Industrial Park offers
the land and infrastructure to house aviation related projects with runway
access to facilities. The existence of these industries and the constant growth
allows an opportunity for the Bank to increase its presence and penetration in
this market. The foregoing and other pertinent data can be found on the Dothan
Chamber of Commerce’s and the FDIC’s websites.
 
 Deposit Growth in Our
Markets
 
 According to FDIC reports, total
deposits in Jefferson and Shelby Counties grew from approximately $14.5 billion
in June 2001 to approximately $24.9 billion in June 2009, representing a
compound average annual growth rate of approximately 6.99% over the
period.  Deposits in Madison County grew from approximately $3.2
billion in June 2001 to approximately $6.3 billion in June 2009, representing a
compound average annual growth rate of approximately 8.84% over the
period.  Deposits in Montgomery County grew from approximately $2.9
billion in June 2001 to approximately $6.5 billion in June 2009, representing a
compound average annual growth rate of approximately 10.62% over the
period.  Deposits in Houston County grew from approximately $1.3
billion in June 2001 to approximately $2.1 billion in June 2009, representing a
compound average annual growth rate of approximately 6.18% over the
period.  While our markets have been negatively affected by the
current recession and credit crisis, we believe that each of our markets will
continue to grow and believe that many local affluent professionals and small
business customers will do their banking with local, autonomous institutions
that offer a higher level of personalized service.
  5
 
 Competition
  We are
subject to intense competition from various financial institutions and other
companies that offer financial services.  The Bank competes for deposits
with other commercial banks, savings and loan associations, credit unions and
issuers of commercial paper and other securities, such as money-market and
mutual funds.  In making loans, the Bank competes with other commercial
banks, savings and loan associations, consumer finance companies, credit unions,
leasing companies and other lenders.
 
 We currently conduct business
principally through our eight banking offices.  Based upon the latest
data available on the FDIC’s website as of June 30, 2009, and our records,
our total deposits in the Birmingham-Hoover MSA ranked 10th among 51 financial
institutions and represented approximately 2.10% of the total deposits in the
Birmingham-Hoover MSA.  Our total deposits in the Huntsville MSA
ranked us 8th among 25 financial institutions and represented approximately
4.50% of the total deposits in the Huntsville MSA.  Our total deposits
in the Montgomery MSA ranked us 10th among 22 financial institutions and
represented approximately 2.50% of the total deposits in the Montgomery MSA. Our
total deposits in the Dothan MSA, our newest service area, ranked us 10thamong
21 financial institutions and represented approximately 4.00% of the total
deposits in the Dothan MSA.  Together, deposits for all institutions
in Jefferson, Shelby, Montgomery, Madison, and Houston Counties represented
approximately 47.62% of all the deposits in the State of Alabama at June 30,
2009.  Since that date, three Alabama-based banks – Colonial Bank,
CapitalSouth Bank and New South Federal Savings Bank – have failed, so the
relative market shares of the financial institutions operating in Alabama may
have changed, perhaps materially, since that date.
 
 The following table illustrates our
market share, by insured deposits, in our primary service areas at June 30,
2009, as reported by the FDIC:
  Number
                          
                          
                          
                          
                          
                          Total
                          
                          
                          
                          
                          
                          Marketof
                          
                          
                          Our
      Market
                          
                          
                          Market
                          
                          
                          
                          
                          
                          ShareMarket
                          
                          Branches
                          
                          
                          Deposits
                          
                          
                          Deposits
                          
                          
                          Ranking
                          
                          
                          Percentage(Dollar
      amounts in millions)Alabama:Birmingham-Hoover
      MSA
                          
                          
                          3
                          
                          
                          $
                          582.5
                          
                          
                          $
                          27,724.1
                          
                          
                          
                          10
                          
                          
                          
                          2.10
                          %Montgomery
      MSA
                          
                          
                          2
                          
                          
                          
                          194.0
                          
                          
                          
                          7,753.7
                          
                          
                          
                          10
                          
                          
                          
                          2.50
                          %Huntsville
      MSA
                          
                          
                          2
                          
                          
                          
                          319.2
                          
                          
                          
                          7,091.6
                          
                          
                          
                          8
                          
                          
                          
                          4.50
                          %Dothan
      MSA
                          
                          
                          1
                          
                          
                          
                          111.3
                          
                          
                          
                          2,779.4
                          
                          
                          
                          10
                          
                          
                          
                          4.00
                          %
 Our retail and commercial divisions
operate in highly competitive markets.  We compete directly in retail
and commercial banking markets with other commercial banks, savings and loan
associations, credit unions, mortgage brokers and mortgage companies, mutual
funds, securities brokers, consumer finance companies, other lenders and
insurance companies, locally, regionally and nationally.  Many of our
competitors compete by using offerings by mail, telephone, computer and/or the
Internet. Interest rates, both on loans and deposits, and prices of services are
significant competitive factors among financial institutions
generally.  Office locations, types and quality of services and
products, office hours, customer service, a local presence, community reputation
and continuity of personnel are also important competitive factors that we
emphasize.
  Many other commercial or savings
institutions currently have offices in our primary service
areas.  These institutions include many of the largest banks operating
in Alabama, including some of the largest banks in the country. Many of our
competitors serve the same counties we serve.  Virtually every type of
competitor for business of the type we serve has offices in each of our primary
markets. In our service areas, our five largest competitors are generally
Regions Bank, Wachovia Bank (now a subsidiary of Wells Fargo & Company),
Compass Bank (now a subsidiary of Banco Bilboa Vizcaya Argentaria), BB&T
(which acquired Colonial Bank in 2009) and RBC Bank USA.  These
institutions, as well as other competitors of ours, have greater resources,
serve broader geographic markets, have higher lending limits, offer various
services that we do not offer and can better afford and make broader use of
media advertising, support services, and electronic technology than we
can.  To offset these competitive disadvantages, we depend on our
reputation for greater personal service, consistency, and flexibility and the
ability to make credit and other business decisions quickly.
 
 Business
Strategy
 
 Management Philosophy
 
 Our philosophy is to operate as an
urban community bank emphasizing prompt, personalized customer service to the
individuals and businesses located in our primary service areas.  We
believe this philosophy has attracted and will continue to attract customers and
capture market share historically controlled by other financial institutions
operating in our market.  Our management and employees focus on
recognizing customers’ needs and delivering products and services to meet those
targeted needs.  We aggressively market to businesses, professionals
and affluent consumers that may be underserved by the large regional banks that
operate in their service areas.  We believe that local ownership and
control allows us to serve customers more efficiently and effectively and will
aid in our growth and success.
  6
 
 Operating Strategy
 
 In order to achieve the level of
prompt, responsive service that we believe is necessary to attract customers and
to develop our image as an urban bank with a community focus, we have employed
the following operating strategies:
 
 ·
              Quality
      Employees.  We strive to hire highly trained and seasoned
      staff.  Staff are trained to answer questions about all of our
      products and services, so that the first employee the customer encounters
      can usually resolve most questions the customer may
  have.
 
 ·
              Experienced Senior
      Management.  Our senior management has extensive
      experience in the banking industry, as well as substantial business and
      banking contacts in our markets.
 
 ·
              Relationship
      Banking.  We focus on cross-selling financial products
      and services to our customers.  Our customer-contact employees
      are highly trained to recognize customer needs and to meet those needs
      with a sophisticated array of products and services.  We view
      cross-selling as a means to leverage relationships and help provide useful
      financial services to retain customers, attract new customers and remain
      competitive.
 
 ·
              Community-Oriented
      Directors.  The boards of directors for the holding
      company and the Bank currently consist of residents of Birmingham, but we
      also have a non-voting advisory board of directors in each of the
      Huntsville, Montgomery and Dothan markets.  These advisory
      directors represent a wide array of business experience and community
      involvement in the service areas where they live.  As residents
      of our primary service areas, they are sensitive and responsive to the
      needs of our customers and potential customers.  In addition,
      our directors and advisory directors bring substantial business and
      banking contacts to us.
 
 ·
              Highly Visible
      Offices.  Our local headquarters buildings are highly
      visible in Birmingham’s south Jefferson County, downtown Huntsville,
      downtown Montgomery and downtown Dothan.  We believe that a
      highly visible headquarters building gives us a powerful presence in each
      local market.
 
 ·
              Individual Customer
      Focus.  We focus on providing individual service and
      attention to our target customers, which include privately held businesses
      with $2 million to $250 million in sales, professionals, and affluent
      consumers.  As our employees, officers and directors become
      familiar with our customers on an individual basis, they are able to
      respond to credit requests quickly.
 
 ·
              Market Segmentation and
      Advertising.  We utilize traditional advertising media,
      such as local periodicals and local event sponsorships, to increase our
      public visibility.  The majority of our marketing and
      advertising efforts, however, are focused on leveraging our management’s,
      directors’, advisory directors’ and stockholders’ existing relationship
      networks.
 
 ·
              Telephone and Internet Banking
      Services.  We offer various banking services by telephone
      through a 24-hour voice response unit and through Internet banking
      arrangements.
 
 Growth Strategy
 
 Because we believe that growth and
expansion of our operations are significant factors in our success, we have
implemented the following growth strategies:
 
 ·
              Capitalize on Community
      Orientation.  We seek to capitalize on the extensive
      relationships that our management, directors, advisory directors and
      stockholders have with businesses and professionals in our
      markets.  We believe that these market sectors are not
      adequately served by the existing banks in such
  areas.
 
 ·
              Emphasize Local
      Decision-Making.  We emphasize local decision-making by
      experienced bankers.  We believe this helps us attract local
      businesses and service-minded
customers.
 
 ·
              Offer Fee-Generating Products
      and Services.  Our range of services, pricing strategies,
      interest rates paid and charged, and hours of operation are structured to
      attract our target customers and increase our market share.  We
      strive to offer the businessperson, professional, entrepreneur and
      consumer the best loan services available while pricing these services
      competitively.
  7
 
 ·
              Office Location
      Strategy.  We have opened our offices in each of our
      local markets in areas that we believe provide visibility, convenience and
      access to our target customers.
 
 Lending
Services
 
 Lending Policy
 
 Our lending policies have been
established to support the banking needs of our primary market
areas.  Consequently, we aggressively seek high-quality loans within a
limited geographic area and in competition with other well-established financial
institutions in our primary service areas that have greater resources and
lending limits than we have.
 
 Loan Approval and Review
 
 Our loan approval policies provide for
various levels of officer lending authority.  When the total amount of
loans to a single borrower exceeds an individual officer’s lending authority,
further approval must be obtained from the regional CEO and/or our Chief
Executive Officer, Chief Risk Officer or Chief Credit Officer, based on our loan
policies.
 
 Commercial Loans
 
 Our commercial lending activity is
directed principally toward businesses and professional service firms whose
demand for funds falls within our legal lending limits.  We also make
loans to small- to medium-sized businesses in our primary service areas for
purposes such as new or upgraded plant and equipment, inventory acquisition and
various working capital purposes.  Typically, targeted borrowers have
annual sales between $2 and $250 million.  This category of loans
includes loans made to individual, partnership or corporate borrowers, and such
loans are obtained for a variety of business purposes.  We offer a
variety of commercial lending products to meet the needs of business and
professional service firms in our service areas.  These commercial
lending products include seasonal loans, bridge loans and term loans for working
capital, expansion of the business, or acquisition of property, plant and
equipment.  We also offer business lines of credit.  The
repayment terms of our commercial loans will vary according to the needs of each
customer.
 
 Our commercial loans will usually be
collateralized.  Generally, collateral consists of business assets,
including any or all of general intangibles, accounts receivables, inventory,
equipment, or real estate.  Collateral is subject to  the risk
that we may have difficulty converting it to a liquid asset if necessary, as
well as risks associated with degree of specialization, mobility and general
collectability in a default situation.  To mitigate this risk, we
underwrite collateral to strict standards, including valuations and general
acceptability based on our ability to monitor its ongoing health and
value.
 
 We underwrite our commercial loans
primarily on the basis of the borrower’s cash flow, expected ability to service
its debt from income and degree of management expertise.  As a general
practice, we take as collateral a security interest in any available real
estate, equipment or other personal property, although in limited circumstances
we may make some commercial loans on an unsecured basis.  This type
loan may be subject to many different types of risk, which will differ depending
on the particular industry a borrower is engaged in, including fraud,
bankruptcy, economic downturn, deteriorated or non-existent collateral, and
changes in interest rates such as have occurred in the recent economic recession
and credit market crisis.  General risks to an industry, such as the recent
economic recession and credit market crisis, or to a particular segment of an
industry are monitored by senior management on an ongoing basis.  When
warranted, individual borrowers who may be at risk due to an industry condition
may be more closely analyzed and reviewed at the credit review committee or
board of directors level.  On a regular basis, commercial and industrial
borrowers are required to submit statements of financial condition relative to
their business to us for review.  We analyze these statements for
trends and assign the loan a risk grade accordingly.  Based on this risk
grade, the loan may receive an increased degree of scrutiny by management, up to
and including additional loss reserves being required.
 
 Real Estate Loans
 
 We make commercial real estate loans,
construction and development loans and residential real estate
loans.
 
 Commercial Real
Estate.  Commercial real estate loans are generally limited to
terms of five years or less, although payments are usually structured on the
basis of a longer amortization.  Interest rates may be fixed or
adjustable, although rates generally will not be fixed for a period exceeding
five years.  In addition, we generally will require personal
guarantees from the principal owners of the property supported by a review by
our management of the principal owners’ personal financial
statements.
  8
 
 Commercial real estate offers some
risks not found in traditional residential real estate lending. Repayment is
dependent upon successful management and marketing of properties and on the
level of expense necessary to maintain the property. Repayment of these loans
may be adversely affected by conditions in the real estate market or the general
economy. Also, commercial real estate loans typically involve relatively large
loan balances to a single borrower. To mitigate these risks, we monitor our loan
concentration. This type loan generally has a shorter maturity than other loan
types, giving us an opportunity to reprice, restructure or decline to renew the
credit. As with other loans, all commercial real estate loans are graded
depending upon strength of credit and performance. A higher risk grade will
bring increased scrutiny by our management and the board of
directors.
 
 Construction and Development
Loans. We make construction and development loans both on a pre-sold and
speculative basis. If the borrower has entered into an agreement to sell the
property prior to beginning construction, then the loan is considered to be on a
pre-sold basis. If the borrower has not entered into an agreement to sell the
property prior to beginning construction, then the loan is considered to be on a
speculative basis. Construction and development loans are generally made with a
term of 12 to 24 months, and interest is paid monthly. The ratio of the loan
principal to the value of the collateral as established by independent appraisal
typically will not exceed 80% of residential construction loans. Speculative
construction loans will be based on the borrower’s financial strength and cash
flow position. Development loans are generally limited to 75% of appraised
value. Loan proceeds will be disbursed based on the percentage of completion and
only after the project has been inspected by an experienced construction lender
or third-party inspector. During times of economic stress, this type loan has
typically had a greater degree of risk than other loan types, as has been
evident in the current credit crisis. During 2008 and 2009, there were numerous
construction loan defaults among many commercial bank loan portfolios, including
a number of Alabama-based banks such as Regions Financial Corporation and
Colonial Bancgroup, Inc. To mitigate that risk, our board of directors and
management reviews the entire portfolio on a periodic basis and we internally
track and monitor these loans closely. On a quarterly basis, the portfolio is
segmented by market area to allow analysis of exposure and a comparison to
current inventory levels in these areas. We have increased our allocation within
our loan loss reserve for construction loans from $5.5 million at the end of
2008 to $6.3 million at the end of 2009 as charge-offs for construction loans
increased from $2.3 million for 2008 to $3.8 million for 2009.
 
 Residential Real Estate
Loans. Our residential real estate loans consist of residential second
mortgage loans, residential construction loans and traditional mortgage lending
for one-to-four family residences. We will originate and maintain fixed rate
mortgages with long-term maturity and balloon payments generally not exceeding
five years. The majority of our fixed-rate loans are sold in the secondary
mortgage market. All loans are made in accordance with our appraisal policy,
with the ratio of the loan principal to the value of collateral as established
by independent appraisal generally not exceeding 80%. Risks associated with
these loans are generally less significant than those of other loans and involve
fluctuations in the value of real estate, bankruptcies, economic downturn and
customer financial problems. Real estate has recently experienced a period of
declining prices which negatively affects real estate collateralized loans, but
this negative effect has to date been more prevalent in regions of the United
States other than our primary service areas; however, homes in our primary
service areas may experience significant price declines in the future. We have
not made and do not expect to make any Alt-A or subprime loans.
 
 Consumer Loans
 
 We offer a variety of loans to retail
customers in the communities we serve. Consumer loans in general carry a
moderate degree of risk compared to other loans. They are generally more risky
than traditional residential real estate loans but less risky than commercial
loans. Risk of default is usually determined by the well-being of the local
economies. During times of economic stress, there is usually some level of job
loss both nationally and locally, which directly affects the ability of the
consumer to repay debt. Risk on consumer-type loans is generally managed though
policy limitations on debt levels consumer borrowers may carry and limitations
on loan terms and amounts depending upon collateral type.
 
 Our consumer loans include home equity
loans (open- and closed-end); vehicle financing; loans secured by deposits; and
secured and unsecured personal loans. These various types of consumer loans all
carry varying degrees of risk:
 
 ·
              Loans
      secured by deposits carry little or no risk.
 
 ·
              Home
      equity lines carry additional risk because of the increased difficulty of
      converting real estate to cash in the event of a default and have become
      particularly risky as housing prices decline, thereby reducing and in some
      cases eliminating a home owner’s equity relative to their primary
      mortgage. To date, homes in our primary service areas have not experienced
      the severe price declines of homes in other regions of the United States;
      however, homes in our service areas have experienced some price declines
      in the past two years. Our current underwriting policy allows home equity
      lines in amounts less than 90% of current market value. Although this
      appears high, our historical losses for home equity lines have been less
      than losses on the loan portfolio as a whole (52 basis points for the year
      ended December 31, 2009). We also require the customer to carry adequate
      insurance coverage to pay all mortgage debt in full if the collateral is
      destroyed.
  9
 
 ·
              Vehicle
      financing carries additional risks over loans secured by real estate in
      that the collateral is declining in value over the life of the loan and is
      mobile. We manage the risks inherent in vehicle financing by matching the
      loan term with the age and remaining useful life of the collateral to try
      to ensure the customer always has an equity position and is never “upside
      down.” To protect the collateral, we require the customer to carry
      insurance showing us as loss payee. We also have a blanket policy that
      covers us in the event of a lapse in the borrower’s coverage and also
      provides assistance in locating collateral when necessary.
 
 ·
              Secured
      personal loans carry additional risks over the other types identified
      above in that they are generally smaller and made to borrowers with
      somewhat limited financial resources and credit histories. These loans are
      secured by a variety of collateral with varying degrees of marketability
      in the event of default. Risk on these types of loans is managed primarily
      at the underwriting level with strict adherence to debt to income ratio
      limitations and conservative collateral valuations. Unsecured personal
      loans carry the greatest degree of risk in the consumer portfolio. Without
      collateral, we are completely dependent on the commitment of the borrower
      to repay and the stability of the borrower’s income stream. Again, primary
      risk management occurs at the underwriting stage, with strict adherence to
      debt-to-income ratios, time in present job and in industry and policy
      guidelines relative to loan size as a percentage of net worth and liquid
      assets.
 
 Commitments and
Contingencies
 
 As of December 31, 2009, we had
commitments to extend credit beyond current fundings of approximately $409.8
million, had issued standby letters of credit in the amount of approximately
$39.2 million, and had commitments for credit card arrangements of approximately
$19.1 million.
 
 Policy for Determining the Loan Loss
Allowance
 
 The allowance for loan losses
represents our management’s assessment of the risk associated with extending
credit and its evaluation of the quality of the loan portfolio. In calculating
the adequacy of the loan loss allowance, our management evaluates the following
factors:
 
 ·
              the
      asset quality of individual loans;
 
 ·
              changes
      in the national and local economy and business conditions/development,
      including underwriting standards, collections, and charge-off and recovery
      practices;
 
 ·
              changes
      in the nature and volume of the loan
portfolio;
 
 ·
              changes
      in the experience, ability and depth of our lending staff and
      management;
 
 ·
              changes
      in the trend of the volume and severity of past-due loans and classified
      loans, and trends in the volume of non-accrual loans, troubled debt
      restructurings and other modifications, as has occurred in the residential
      mortgage markets and particularly for residential construction and
      development loans;
 
 ·
              possible
      deterioration in collateral segments or other portfolio
      concentrations;
 
 ·
              historical
      loss experience (when available) used for pools of loans (i.e. collateral
      types, borrowers, purposes, etc.);
 
 ·
              changes
      in the quality of our loan review system and the degree of oversight by
      our board of directors; and
 
 ·
              the
      effect of external factors such as competition and the legal and
      regulatory requirement on the level of estimated credit losses in our
      current loan portfolio
  10
 
 These factors are evaluated monthly and
changes in the asset quality of individual loans are evaluated as
needed.
 
 We assign all of our loans individual
risk grades when they are underwritten. We have established minimum general
reserves based on the asset quality grade of the loan. We also apply general
reserve factors based on historical losses, management’s experience and common
industry and regulatory guidelines.
 
 After a loan is underwritten and
booked, it is monitored or reviewed by the account officer, management, internal
loan review, and external loan review personnel during the life of the loan.
Payment performance is monitored monthly for the entire loan portfolio; account
officers contact customers during the regular course of business and may be able
to ascertain if weaknesses are developing with the borrower; independent loan
consultants perform an independent review annually; and federal and state
banking regulators perform annual reviews of the loan portfolio. If we detect
weaknesses that have developed in an individual loan relationship, we downgrade
the loan and assign higher reserves based upon management’s assessment of the
weaknesses in the loan that may affect full collection of the debt. If a loan
does not appear to be fully collectible as to principal and interest, the loan
is recorded as a non-accruing loan and further accrual of interest is
discontinued while previously accrued but uncollected interest is reversed
against income. If a loan will not be collected in full, we increase the
allowance for loan losses to reflect our management’s estimate of potential
exposure of loss.
 
 Our net loan losses to average total
loans increased to 0.60% for the year ended December 31, 2009 from 0.41% for the
year ended December 31, 2008 and 0.23% for the year ended December 21, 2007.
Historical performance, however, is not an indicator of future performance, and
our future results could differ materially, particularly in the current real
estate environment, economic recession and credit crisis. As of December 31,
2009, we had $11.9 million of non-accrual loans, all of which are secured real
estate loans. We have allocated approximately $6.3 million of our allowance for
loan losses to real estate construction, acquisition and development, and lot
loans, and have a total loan loss reserve as of December 31, 2009 allocable to
specific loan types of $10.8 million. We also currently maintain a general
reserve, which is not tied to any particular type of loan, in the amount of
approximately $4.1 million as of December 31, 2009, resulting in a total loan
loss reserve of $14.9 million. Our management believes that, based upon
historical performance, known factors, overall judgment, and regulatory
methodologies, the current methodology used to determine the adequacy of the
allowance for loan losses is reasonable even in the face of the current
residential housing market defaults and business failures (particularly of real
estate developers) plaguing financial institutions in general.
 
 Our allowance for loan losses is also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance for loan losses in
comparison to a group of peer banks identified by the regulators. During their
routine examinations of banks, regulatory agencies may require a bank to make
additional provisions to its allowance for loan losses when, in the opinion of
the regulators, credit evaluations and allowance for loan loss methodology
differ materially from those of management.
 
 While it is our policy to charge off in
the current period loans for which a loss is considered probable, there are
additional risks of future losses that cannot be quantified precisely or
attributed to particular loans or classes of loans. Because these risks include
the state of the economy, our management’s judgment as to the adequacy of the
allowance is necessarily approximate and imprecise.
 
 Investments
 
 In addition to loans, we make
investments in securities, primarily in mortgage-backed securities and state and
municipal securities. No investment in any of those instruments will exceed any
applicable limitation imposed by law or regulation. The Company’s board of
directors reviews the investment portfolio on an ongoing basis in order to
ensure that the investments conform to the policy as set by the board of
directors. The Company’s investment policy provides that no more than 50% of its
total investment portfolio may be composed of municipal securities.
 
 All securities held are traded in
liquid markets, and we have no auction-rate securities. As of December 31, 2009,
we owned certain restricted securities of the Federal Home Loan Bank with an
aggregate book value of $2.9 million and certain restricted securities of First
National Bankers Bank in which we invested $250,000. Neither of these securities
had contractual maturities or quoted fair values, and no ready market exists for
either of these securities. We had no investments in any one security,
restricted or liquid, in excess of 10% of our stockholders’ equity at December
31, 2009.
  11
 
 Deposit
Services
 
 We seek to establish solid core
deposits, including checking accounts, money market accounts, savings accounts
and a variety of certificates of deposit and IRA accounts.  We
currently have no brokered deposits.  To attract deposits, the Company
employs an aggressive marketing plan throughout its service areas that features
a broad product line and competitive services.  The primary sources of
core deposits are residents of, and businesses and their employees located in,
our market areas.  We have obtained deposits primarily through
personal solicitation by our officers and directors, through reinvestment in the
community, and through our stockholders, who have been a substantial source of
deposits and referrals.  We make deposit services accessible to
customers by offering direct deposit, wire transfer, night depository, banking
by mail and remote capture for non-cash items.  The Bank is a member
of the FDIC, and thus our deposits are FDIC-insured.  With regard to
noninterest-bearing transaction accounts, the Bank opted into the Temporary
Liquidity Guarantee Program by which the FDIC guarantees non-interest bearing
deposit transaction accounts and NOW accounts with interest rates less than or
equal to 0.50% through June 30, 2010.
  The scheduled maturities of time
deposits at December 31, 2009 are as follows:
 
 Maturity
                  
                  $100,000 or more
                  
                  
                  Less than
                    $100,000
                  
                  
                  Total(Dollars
      in Thousands)Three
      months or less
                  
                  $
                  61,124
                  
                  
                  $
                  12,264
                  
                  
                  $
                  73,388Over
      three through six months
                  
                  
                  39,125
                  
                  
                  
                  7,672
                  
                  
                  
                  46,797Over
      six months through one year
                  
                  
                  64,193
                  
                  
                  
                  15,251
                  
                  
                  
                  79,444Over
      one year
                  
                  
                  45,979
                  
                  
                  
                  8,326
                  
                  
                  
                  54,305Total
                  
                  $
                  210,421
                  
                  
                  $
                  43,513
                  
                  
                  $
                  253,934
 
 Other
Banking Services
  Given client demand for increased
convenience and account access, we offer a range of products and services,
including 24-hour telephone banking, direct deposit, Internet banking,
traveler’s checks, safe deposit boxes, attorney trust accounts and automatic
account transfers.  We also participate in a shared network of
automated teller machines and a debit card system that our customers are able to
use throughout Alabama and in other states and, in certain accounts subject to
certain conditions, we rebate to the customer the ATM fees automatically after
each business day.  Additionally, we offer Visa® credit
card services through a correspondent bank as our agent.
 
 Asset,
Liability and Risk Management
  We manage our assets and liabilities
with the aim of providing an optimum and stable net interest margin, a
profitable after-tax return on assets and return on equity, and adequate
liquidity.  These management functions are conducted within the
framework of written loan and investment policies.  To monitor and
manage the interest rate margin and related interest rate risk, we have
established policies and procedures to monitor and report on interest rate risk,
devise strategies to manage interest rate risk, monitor loan originations and
deposit activity and approve all pricing strategies.  We attempt to
maintain a balanced position between rate-sensitive assets and rate-sensitive
liabilities.  Specifically, we chart assets and liabilities on a
matrix by maturity, effective duration, and interest adjustment period, and
endeavor to manage any gaps in maturity ranges.
  Seasonality
and Cycles
  We do not consider our commercial
banking business to be seasonal.
 
 Employees
 
 We had 156 full-time equivalent
employees as of December 31, 2009. We consider our employee relations to be
good, and we have no collective bargaining agreements with any
employees.
 
 Supervision
and Regulation
 
 Both we and the Bank are subject to
extensive state and federal banking regulations that impose restrictions on and
provide for general regulatory oversight of our operations. These regulations
require compliance with various consumer protection provisions applicable to
lending, deposits, brokerage and fiduciary activities. These guidelines also
impose capital adequacy requirements and restrict our ability to repurchase
stock or receive dividends from the Bank.   These laws generally are
intended to protect depositors and not stockholders.  The following
discussion describes the material elements of the regulatory framework that
applies to us.
  12
 
 Bank Holding Company
Regulation
 
 Since we own all of the capital stock
of the Bank, we are a bank holding company under the federal Bank Holding
Company Act of 1956 (the “BHC Act”).  As a result, we are primarily subject
to the supervision, examination and reporting requirements of the BHC Act and
the regulations of the Board of Governors of the Federal Reserve System (the
“Federal Reserve”).
 
 Acquisition of
Banks
 
 The BHC Act requires every bank holding
company to obtain the Federal Reserve’s prior approval before:
 
 ·
              acquiring
      direct or indirect ownership or control of any voting shares of any bank
      if, after the acquisition, the bank holding company will, directly or
      indirectly, own or control more than 5% of the bank’s voting
      shares;
 
 ·
              acquiring
      all or substantially all of the assets of any bank;
  or
 
 ·
              merging
      or consolidating with any other bank holding
  company.
 
 Additionally, the BHC Act provides that
the Federal Reserve may not approve any of these transactions if such
transaction would result in or tend to create a monopoly or substantially lessen
competition or otherwise function as a restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served.  The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and
banks concerned and the convenience and needs of the community to be served.
 The Federal Reserve’s consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
 
 Under the BHC Act, if adequately
capitalized and adequately managed, we or any other bank holding company located
in Alabama may purchase a bank located outside of Alabama.  Conversely, an
adequately capitalized and adequately managed bank holding company located
outside of Alabama may purchase a bank located inside Alabama.  In each
case, however, restrictions may be placed on the acquisition of a bank that has
only been in existence for a limited amount of time or will result in specified
concentrations of deposits.  Currently, Alabama law prohibits acquisitions
of banks that have been chartered for less than five years.  As a result,
no bank holding company may acquire control of the Bank until after the fifth
anniversary date of the Bank’s incorporation, which is April 28,
2010.
 
 Change in Bank Control.
 
 Subject to various exceptions, the BHC
Act and the Change in Bank Control Act, together with related regulations,
require Federal Reserve approval prior to any person’s or company’s acquiring
“control” of a bank holding company.  Under a rebuttable presumption
established by the Federal Reserve, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act would, under the circumstances set
forth in the presumption, constitute acquisition of control of the bank holding
company. In addition, any person or group of persons must obtain the approval of
the Federal Reserve under the BHC Act before acquiring 25% (5% in the case of an
acquirer that is already a bank holding company) or more of the outstanding
common stock of a bank holding company, or otherwise obtaining control or a
“controlling influence” over the bank holding company.
 
 Permitted Activities
 
 Under the BHC Act, a bank holding
company is generally permitted to engage in or acquire direct or indirect
control of more than 5% of the voting shares of any company engaged in the
following activities:
 
 ·
              banking
      or managing or controlling banks;
and
 
 ·
              any
      activity that the Federal Reserve determines to be so closely related to
      banking as to be a proper incident to the business of
    banking.
 
 Activities
that the Federal Reserve has found to be so closely related to banking as to be
a proper incident to the business of banking include:
  13
  ·
              factoring
      accounts receivable;
 
 ·
              making,
      acquiring, brokering or servicing loans and usual related
      activities;
 
 ·
              leasing
      personal or real property;
 
 ·
              operating
      a non-bank depository institution, such as a savings
      association;
 
 ·
              trust
      company functions;
 
 ·
              financial
      and investment advisory activities;
 
 ·
              discount
      securities brokerage activities;
 
 ·
              underwriting
      and dealing in government obligations and money market
      instruments;
 
 ·
              providing
      specified management consulting and counseling
  activities;
 
 ·
              performing
      selected data processing services and support
  services;
 
 ·
              acting
      as an agent or broker in selling credit life insurance and other types of
      insurance in connection with credit transactions;
  and
 
 ·
              performing
      selected insurance underwriting
activities.
 
 Despite prior approval, the Federal
Reserve may order a bank holding company or its subsidiaries to terminate any of
these activities or to terminate its ownership or control of any subsidiary when
it has reasonable cause to believe that the bank holding company’s continued
ownership, activity or control constitutes a serious risk to the financial
safety, soundness, or stability of it or any of its bank
subsidiaries.
 
 In addition to the permissible bank
holding company activities listed above, a bank holding company may qualify and
elect to become a financial holding company, permitting the bank holding company
to engage in activities that are financial in nature or incidental or
complementary to financial activity.  The BHC Act expressly lists the
following activities as financial in nature:
 
 ·
              lending,
      trust and other banking activities;
 
 ·
              insuring,
      guaranteeing, or indemnifying against loss or harm, or providing and
      issuing annuities, and acting as principal, agent, or broker for these
      purposes, in any state;
 
 ·
              providing
      financial, investment, or advisory
services;
 
 ·
              issuing
      or selling instruments representing interests in pools of assets
      permissible for a bank to hold
directly;
 
 ·
              underwriting,
      dealing in or making a market in
securities;
 
 ·
              other
      activities that the Federal Reserve may determine to be so closely related
      to banking or managing or controlling banks as to be a proper incident to
      managing or controlling banks;
 
 ·
              foreign
      activities permitted outside of the United States if the Federal Reserve
      has determined them to be usual in connection with banking operations
      abroad;
 
 ·
              merchant
      banking through securities or insurance affiliates;
  and
 
 ·
              insurance
      company portfolio investments.
 
 For us to qualify to become a financial
holding company, the Bank and any other depository institution subsidiary of
ours must be well-capitalized and well-managed and must have a Community
Reinvestment Act rating of at least “satisfactory”.  Additionally, we
must file an election with the Federal Reserve to become a financial holding
company and must provide the Federal Reserve with 30 days’ written notice prior
to engaging in a permitted financial activity.  We have not elected to
become a financial holding company at this time.
  14
 
 Support of Subsidiary
Institutions
 
 Under Federal Reserve policy, we are
expected to act as a source of financial strength for the Bank and to commit
resources to support the Bank.  This support may be required at times
when we might not be inclined to provide it in the absence of this policy.
 In addition, any capital loans made by us to the Bank will be repaid in
full.  In the unlikely event of our bankruptcy, any commitment by us to a
federal bank regulatory agency to maintain the capital of the Bank will be
assumed by the bankruptcy trustee and entitled to a priority of
payment.
  Bank
Regulation and Supervision
 
 The Bank is subject to extensive state
and federal banking regulations that impose restrictions on and provide for
general regulatory oversight of our operations.  These laws are generally
intended to protect depositors and not stockholders.  The following
discussion describes the material elements of the regulatory framework that
applies to the Bank.
 
 Since the Bank is a commercial bank
chartered under the laws of the State of Alabama, it is primarily subject to the
supervision, examination and reporting requirements of the FDIC and the Alabama
Department of Banking (the “Alabama Banking Department”).  The FDIC and the
Alabama Banking Department regularly examine the Bank’s operations and have the
authority to approve or disapprove mergers, the establishment of branches and
similar corporate actions.  Both regulatory agencies have the power to
prevent the development or continuance of unsafe or unsound banking practices or
other violations of law.  Additionally, the Bank’s deposits are insured by
the FDIC to the maximum extent provided by law.  The Bank is also subject
to numerous state and federal statutes and regulations that affect its business,
activities and operations.
 
 Branching
 
 Under current Alabama law, the Bank may
open branch offices throughout Alabama with the prior approval of the Alabama
Banking Department.  In addition, with prior regulatory approval, the Bank
may acquire branches of existing banks located in Alabama.  The Bank and
any other national or state-chartered bank generally may branch across state
lines by merging with banks in other states if allowed by the laws of the
applicable states.  Alabama law, with limited exceptions, currently
permits branching across state lines through interstate mergers.
 
 Under the Federal Deposit Insurance
Act, states may “opt-in” and allow out-of-state banks to branch into their state
by establishing a de
novo branch in the state.  Alabama law now provides for such
branching by out-of-state banks in the state; conversely, the law provides that
an Alabama state bank, such as the Bank, may establish, operate and maintain one
or more branches in another state on a de novobasis without having to
purchase another bank or its charter in that state.  While this
relatively new law will increase competition in Alabama by out-of-state banks
and financial institutions establishing de novo banks in Alabama, it
will also allow us to establish start-up branches in other states without having
to incur the expense and costs of a merger or acquisition.
 
 Prompt Corrective Action
 
 The Federal Deposit Insurance
Corporation Improvement Act of 1991 establishes a system of “prompt corrective
action” to resolve the problems of undercapitalized financial institutions.
 Under this system, the federal banking regulators have established five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) into which all
institutions are placed.  The federal banking agencies have also specified
by regulation the relevant capital levels for each of the other categories.
 At December 31, 2009, the Bank qualified for the well-capitalized
category.
 
 Federal banking regulators are required
to take various mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions in the three undercapitalized
categories.  The severity of the action depends upon the capital category
in which the institution is placed.  Generally, subject to a narrow
exception, the banking regulator must appoint a receiver or conservator for an
institution that is critically undercapitalized.
  15
 
 An institution that is categorized as
undercapitalized, significantly undercapitalized, or critically undercapitalized
is required to submit an acceptable capital restoration plan to its appropriate
federal banking agency.  A bank holding company must guarantee that a
subsidiary depository institution meets its capital restoration plan, subject to
various limitations.  The controlling holding company’s obligation to fund
a capital restoration plan is limited to the lesser of (i) 5% of an
undercapitalized subsidiary’s assets at the time it became undercapitalized and
(ii) the amount required to meet regulatory capital requirements.  An
undercapitalized institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches or engaging
in any new line of business, except under an accepted capital restoration plan
or with FDIC approval.  The regulations also establish procedures for
downgrading an institution to a lower capital category based on supervisory
factors other than capital.
 
 FDIC Insurance Assessments
 
 The FDIC has adopted a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities.  The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3)
undercapitalized.  These three categories are substantially similar to the
prompt corrective action categories described above, with the “undercapitalized”
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes.  The FDIC also assigns an institution to one of three supervisory
subgroups based on a supervisory evaluation that the institution’s primary
federal regulator provides to the FDIC and information that the FDIC determines
to be relevant to the institution’s financial condition and the risk posed to
the deposit insurance funds.  Currently, annual deposit insurance
assessments range from $.07 to $.77 per $100 of assessable deposits, depending
on the institution’s capital group and supervisory subgroup.
   This assessment rate is adjusted quarterly, and our rate has
been set at $.0395, or $.1581 annually, per $100 of deposits for the fourth
quarter of 2009.
 
 As part of the Deposit Insurance Fund
Restoration Plan adopted by the FDIC in October 2008, the FDIC adopted the final
rule modifying risk-based assessment system in February 2009. The final rule set
initial base assessment rates between 12 and 45 basis points beginning April 1,
2009.  The FDIC imposed an emergency special assessment on June 30,
2009, which was collected on September 30, 2009.  In addition, in
September 2009, the FDIC adopted a final rule requiring prepayment of 13
quarters of FDIC premiums on December 30, 2009.  Our required
prepayment aggregated $8.1 million in December 2009.
 
 The FDIC also imposes Financing
Corporation (“FICO”) assessments to help pay the $780 million in annual interest
payments on the $8 billion of bonds issued in the late 1980s as part of the
government rescue of the thrift industry.  For the fourth quarter of
2009, the FICO assessment is equal to $.106 cents per $100 in assessable
deposits.  These assessments will continue until the bonds mature in
2019.
 
 The FDIC may terminate its insurance of
deposits of a bank if it finds that the bank has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC.  Under the Federal Deposit Insurance Act, an FDIC-insured depository
institution can be held liable for any loss incurred by, or reasonably expected,
to be incurred by, the FDIC in connection with (1) the default of a commonly
controlled FDIC-insured depository institution or (2) any assistance provided by
the FDIC to any commonly controlled FDIC-insured depository institution “in
danger of default.” “Default” is defined generally as the appointment of a
conservator or receiver, and “in danger of default” is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.  The FDIC’s claim for damage is
superior to claims of stockholders of the insured depository institution but is
subordinate to claims of depositors, secured creditors, and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
 
 In October 2008, the FDIC inaugurated
the Temporary Liquidity Guarantee Program (“TLG Program”).  The TLG
Program consists of two basic components: (1) a guarantee of newly issued senior
unsecured debt of banks, thrifts, and certain holding companies; and (2) a full
guarantee of non-interest bearing deposit transaction accounts.  We
opted into the transaction account guarantee portion of the TLG Program, which
will insure all balances in non-interest bearing transaction accounts and NOW
accounts with interest rates less than or equal to 0.50% through June 30,
2010.  The FDIC premiums paid by the Bank increased by the amount of
assessment charged on the balances in such accounts that are in excess of the
maximum insured balances under normal FDIC coverage.  We opted out of
the senior unsecured debt guarantee portion of the TLG Program.
 
 Community Reinvestment Act
 
 The Community Reinvestment Act (“CRA”)
requires that, in connection with examinations of financial institutions within
their respective jurisdictions, the Federal Reserve or the FDIC will evaluate
the record of each financial institution in meeting the credit needs of its
local community, including low and moderate-income neighborhoods.  These
factors are also considered in evaluating mergers, acquisitions, and
applications to open an office or facility.  Failure to adequately meet
these criteria could impose additional requirements and limitations on the Bank.
Additionally, we must publicly disclose the terms of various CRA-related
agreements.
  16
 
 Other Regulations
 
 Interest and other charges collected or
contracted for by the Bank are subject to state usury laws and federal laws
concerning interest rates.
 
 Federal Laws Applicable to Credit
Transactions
 
 The Bank’s loan operations are subject
to federal laws applicable to credit transactions, including:
 
 ·
              the
      Federal Truth-In-Lending Act, governing disclosures of credit terms to
      consumer borrowers;
 
 ·
              the
      Home Mortgage Disclosure Act of 1975, requiring financial institutions to
      provide information to enable the public and public officials to determine
      whether a financial institution is fulfilling its obligation to help meet
      the housing needs of the community it
serves;
 
 ·
              the
      Equal Credit Opportunity Act, prohibiting discrimination on the basis of
      race, creed or other prohibited factors in extending
    credit;
 
 ·
              the
      Fair Credit Reporting Act of 1978, governing the use and provisions of
      information to credit reporting
agencies;
 
 ·
              the
      Fair Debt Collection Act, governing the manner in which consumer debts may
      be collected by collection
agencies;
 
 ·
              the
      Service Members’ Civil Relief Act, which amended the Soldiers’ and
      Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and
      property rights underlying, secured obligations of persons in military
      service; and
 
 ·
              Rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing these federal
  laws.
 
 Federal Laws Applicable to Deposit
Transactions
 
 The deposit operations of the Bank are
subject to:
 
 ·
              the
      Right to Financial Privacy Act, which imposes a duty to maintain
      confidentiality of consumer financial records and prescribes procedures
      for complying with administrative subpoenas of financial records;
      and
 
 ·
              the
      Electronic Funds Transfer Act and Regulation E issued by the Federal
      Reserve to implement that act, which govern automatic deposits to and
      withdrawals from deposit accounts and customers’ rights and liabilities
      arising from the use of automated teller machines and other electronic
      banking services.
 
 Capital Adequacy
 
 We and the Bank are required to comply
with the capital adequacy standards established by the Federal Reserve (in the
case of the holding company) and the FDIC (in the case of the Bank).  The
Federal Reserve has established a risk-based and a leverage measure of capital
adequacy for bank holding companies.  The Bank is also subject to
risk-based and leverage capital requirements adopted by the FDIC, which are
substantially similar to those adopted by the Federal Reserve for bank holding
companies.
 
 The risk-based capital standards are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies, to account for
off-balance-sheet exposure, and to minimize disincentives for holding liquid
assets.  Assets and off-balance-sheet items, such as letters of credit and
unfunded loan commitments, are assigned to broad risk categories, each with
appropriate risk weights.  The resulting capital ratios represent capital
as a percentage of total risk-weighted assets and off-balance-sheet
items.
  17





The minimum guideline for the ratio of
total capital to risk-weighted assets is 8%.  Total capital consists of two
components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists
of common stock, minority interests in the equity accounts of consolidated
subsidiaries, noncumulative perpetual preferred stock, and a limited amount of
qualifying cumulative perpetual preferred stock, less goodwill and other
specified intangible assets.  Tier 1 Capital must equal at least 4% of
risk-weighted assets.  Tier 2 Capital generally consists of subordinated
debt, other preferred stock, and a limited amount of loan loss reserves.
 The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital.
 At December 31, 2009, our consolidated ratio of total capital to
risk-weighted assets was 10.48%, and our ratio of Tier 1 Capital to
risk-weighted assets was 8.89%.





In addition, the Federal Reserve has
established minimum leverage ratio guidelines for bank holding companies.
 These guidelines provide for a minimum ratio of Tier 1 Capital to average
assets, less goodwill and other specified intangible assets, of 3% for bank
holding companies that meet specified criteria, including having the highest
regulatory rating and implementing the Federal Reserve’s risk-based capital
measure for market risk.  All other bank holding companies generally
are required to maintain a leverage ratio of at least 4%.  At December 31,
2009, our leverage ratio was 6.97%.  The guidelines also provide that bank
holding companies experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without reliance on intangible assets.  The Federal
Reserve considers the leverage ratio and other indicators of capital strength in
evaluating proposals for expansion or new activities.





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





As of December 31, 2009, the Bank’s
most recent notification from the FDIC categorized the Bank as well-capitalized
under the regulatory framework for prompt corrective action.  To
remain categorized as well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the
table below.  Our management believes that it is well-capitalized
under the prompt corrective action provisions as of December 31,
2009.




Actual
                
                
                For Capital Adequacy
                  Purposes
                
                
                To Be Well-Capitalized
                  Under Prompt Corrective
                  Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio(Dollars
      in Thousands)As
      of December 31, 2009:Total
      Capital to Risk-Weighted Assets:Consolidated
                
                $
                130,882
                
                
                
                10.48
                %
                
                $
                99,903
                
                
                
                8.00
                %
                
                $
                124,879
                
                
                
                10.00
                %ServisFirst
      Bank
                
                
                130,426
                
                
                
                10.45
                %
                
                
                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
                %
                
                
                63,737
                
                
                
                4.00
                %
                
                
                79,672
                
                
                
                5.00
                %ServisFirst
      Bank
                
                
                110,593
                
                
                
                6.94
                %
                
                
                63,737
                
                
                
                4.00
                %
                
                
                79,672
                
                
                
                5.00
                %





Payment of Dividends





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





The Alabama Banking Department also
regulates the Bank’s dividend payments and must approve any dividends that would
exceed 50% of the Bank’s net income for the prior year.  Under Alabama
law, a state-chartered bank may not pay a dividend in excess of 90% of its net
earnings until the bank’s surplus is equal to at least 20% of its
capital.  As of December 31, 2009, the Bank’s surplus was equal to
56.7% of the Bank’s capital.  The Bank is also required by Alabama law
to obtain the prior approval of the Superintendent of Banks (the
“Superintendent”) for its payment of dividends if the total of all dividends
declared by the Bank in any calendar year will exceed the total of (1) the
Bank’s net earnings (as defined by statute) for that year, plus (2) its retained
net earnings for the preceding two years, less any required transfers to
surplus.  Based on this, the Bank would be limited to paying $21.4
million in dividends as of December 31, 2009.  In addition, no
dividends, withdrawals or transfers may be made from the Bank’s surplus without
the prior written approval of the Superintendent.


18





The Bank’s payment of dividends may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.  The federal
banking agencies have indicated that paying dividends that deplete a depository
institution’s capital base to an inadequate level would be an unsafe and unsound
banking practice.  Under the FDIC Improvement Act of 1991, a depository
institution may not pay any dividends if payment would cause it to become
undercapitalized or if it already is undercapitalized. Moreover, the federal
agencies have issued policy statements that provide that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings.  If, in the opinion of the federal banking
regulators, the Bank were engaged in or about to engage in an unsafe or unsound
practice, the federal banking regulators could require, after notice and a
hearing, that the Bank stop or refrain from engaging in the questioned
practice.





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





Restrictions on Transactions with
Affiliates





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





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





·
            a
      bank’s investment in affiliates;





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





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





·
            a
      bank’s guarantee, acceptance or letter of credit issued on behalf of an
      affiliate.





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





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





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





Privacy





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


19


Consumer Credit Reporting





On December 4, 2003, President Bush
signed the Fair and Accurate Credit Transactions Act amending the federal Fair
Credit Reporting Act (the “FCRA”).  These amendments to the FCRA (the “FCRA
Amendments”) became effective in 2004.





The FCRA Amendments include, among
other things:





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





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





·
            a
      requirement for mortgage lenders to disclose credit scores to
      consumers.





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





Anti-Terrorism and Money Laundering
Legislation





The Bank is subject to the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act (the “USA PATRIOT Act”), the Bank Secrecy Act, and rules
and regulations of the Office of Foreign Assets Control (the “OFAC”).
 These statutes and related rules and regulations impose requirements and
limitations on specified financial transactions and account relationships,
intended to guard against money laundering and terrorism financing.  The
Bank has established a customer identification program pursuant to Section 326
of the USA PATRIOT Act and the Bank Secrecy Act, and otherwise has implemented
policies and procedures to comply with the foregoing rules.





Proposed Legislation and Regulatory
Action





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





Effect of Governmental Monetary
Policies





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


20




Sarbanes-Oxley Act of 2002




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




Emergency
Economic Stabilization Act of 2008 and Temporary Liquidity Guarantee
Program




In
response to the financial crisis affecting the banking and financial markets, in
October 2008 the Emergency Economic Stabilization Act of 2008 (“EESA”) was
signed into law. Pursuant to EESA, the U.S. Treasury has the authority to, among
other things, purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U. S. financial
markets.




In
addition, the Treasury was authorized to purchase equity stakes in U. S.
financial institutions.  Under the program, known as the Troubled
Asset Relief Program (“TARP”) Capital Purchase Program (the “CPP”), capital was
made available to U.S. financial institutions through the purchase of preferred
stock and warrants from those institutions, in exchange for which participating
financial institutions were required to adopt the Treasury’s standards for
executive compensation and corporate governance and to agree to certain
restrictions on dividends and common stock repurchases. We made a decision to
not participate in the CPP due to our financial position and our capital and
liquidity positions and are therefore not subject to such regulation; provided,
however, that we are expecting that additional material regulation will result
from the EESA and subsequent acts which will affect all financial institutions
whether or not they obtained funds from the CPP.





In addition, the Temporary Liquidity
Guarantee Program was adopted pursuant to EESA.  See “FDIC Insurance
Assessments”, above. In February 2009, President Obama signed into law the
American Recovery and Reinvestment Act of 2009 (“ARRA”).  ARRA amends
the TARP program legislation by directing the Treasury to issue regulations
implementing strict limitations on compensation paid or accrued by financial
institutions participating in the TARP, which regulations do not apply to the
Company.




Available
Information





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





ITEM 1A.  RISK
FACTORS.




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


21





Risks
Related to Our Industry





There
can be no assurance that the Emergency Economic Stabilization Act of 2008 and
other recently enacted government programs will help stabilize the U.S.
financial system.





On October 3, 2008, President Bush
signed into law the Emergency Economic Stabilization Act of 2008, as amended
(the "EESA"). The legislation was the result of a proposal by Treasury Secretary
Henry Paulson to the U.S. Congress on September 20, 2008 in response to the
financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions. The U.S.
Treasury and federal banking regulators are implementing a number of programs
under this legislation and otherwise to address capital and liquidity issues in
the banking system, including the Capital Purchase Program (CPP). The Company on
November 17, 2008 publicly announced that it was not participating in the
program.  In addition, other regulators have taken steps to attempt to
stabilize and add liquidity to the financial markets, such as the FDIC's
Temporary Liquidity Guarantee Program.





On February 10, 2009, Treasury
Secretary Timothy Geithner announced the Financial Stability Plan, which
earmarks the second $350 billion originally authorized under the EESA. The
Financial Stability Plan is intended to, among other things, make capital
available to financial institutions, purchase certain legacy loans and assets
from financial institutions, restart securitization markets for loans to
consumers and businesses and relieve certain pressures on the housing market,
including the reduction of mortgage payments and interest rates.





In addition, the American Recovery and
Reinvestment Act of 2009 (the "ARRA"), which was signed into law on
February 17, 2009, includes, among other things, extensive new restrictions
on the compensation arrangements of financial institutions participating in
TARP.





There can be no assurance, however, as
to the actual impact that the EESA, as supplemented by the Financial Stability
Plan, the ARRA and other programs will have on the financial markets, including
the extreme levels of volatility and limited credit availability currently being
experienced. The failure of the EESA, the ARRA, the Financial Stability Plan and
other programs to stabilize the financial markets and a continuation or
worsening of current financial market conditions could materially and adversely
affect our businesses, financial condition, results of operations, access to
credit, or our common stock.





The EESA, the ARRA and the Financial
Stability Plan are relatively new initiatives and, as such, are subject to
change and evolving interpretation. There can be no assurances as to the effects
that any further changes will have on the effectiveness of the government's
efforts to stabilize the credit markets or on our businesses, financial
condition or results of operations.





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





Given the
significance of our business in the United States, we are particularly exposed
to downturns in the U.S. economy. Dramatic declines in the housing market over
the past year, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the credit
performance of mortgage loans and resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities as
well as major commercial and investment banks. These write-downs, initially of
mortgage-backed securities but spreading to credit default swaps and other
derivative and cash securities, in turn, have caused many financial institutions
to seek additional capital, to merge with larger and stronger institutions and,
in some cases, to fail. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding to borrowers,
including to other financial institutions. This market turmoil and tightening of
credit has led to an increased level of commercial and consumer delinquencies,
lack of consumer confidence, increased market volatility and widespread
reduction of business activity generally. The resulting economic pressure on
consumers and businesses and lack of confidence in the financial markets may
adversely affect our customers and thus our business, financial condition, and
results of operations. We do not expect that the difficult conditions in the
financial markets are likely to improve in the near future. A worsening of these
conditions would likely exacerbate any adverse effects of these difficult market
conditions on us and others in the financial institutions
industry.


22





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





The volatility in the capital and
credit markets, along with the housing declines during the last year, has
resulted in significant pressure on the financial services
industry.  We have experienced a higher level of foreclosures and
higher losses upon foreclosure than we have historically.  If current
volatility and market conditions continue or worsen, there can be no assurance
that our industry, results of operations or our business will not be
significantly adversely impacted.  We may have further increases in
loan losses, deterioration of capital or limitations on our access to funding or
capital, if needed.





Further, if other, particularly larger,
financial institutions continue to fail to be adequately capitalized or funded,
it may negatively impact our business and financial results.  We
routinely interact with numerous financial institutions in the ordinary course
of business and are therefore exposed to operational and credit risk to those
institutions.  Failures of such institutions may significantly
adversely impact our operations.





Recent
unfavorable developments in the residential mortgage and related markets and the
economy may adversely affect our business.





Recently, the residential mortgage
market in the United States has experienced an economic downturn that may
adversely affect the performance and market value of our residential
construction and mortgage loans.  Across the United States,
delinquencies, foreclosures and losses with respect to residential construction
and mortgage loans generally have increased in recent months and may continue to
increase.  In addition, in recent months, housing prices and appraisal
values in many states have declined or at least stopped appreciating after an
extended period of significant appreciation resulting in stagnant or declining
housing values in the near term.  An extended period of flat or
declining housing values may result in increased delinquencies and losses on
residential construction and mortgage loans.  For more detail, see
“Risks Related to Our Business” below.





Our
profitability is vulnerable to interest rate fluctuations.





As a financial institution, our
earnings can be significantly affected by changes in interest rates,
particularly our net interest income, the rate of loan prepayments, the volume
and type of loans originated or produced, the sales of loans on the secondary
market and the value of our mortgage servicing rights.  Our
profitability is dependent to a large extent on our net interest income, which
is the difference between our income on interest-earning assets and our expense
on interest-bearing liabilities.  We are affected by changes in
general interest rate levels and by other economic factors beyond our
control.





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





We
are subject to extensive regulation that could limit or restrict our activities
and impose financial requirements or limitations on the conduct of our business,
which limitations or restrictions could have a material adverse effect on our
profitability.





We operate in a highly regulated
industry and are subject to examination, supervision and comprehensive
regulation by various federal and state agencies including the Federal Reserve,
the FDIC and the Alabama Banking Department.  Regulatory compliance is
costly and restricts certain of our activities, including payment of dividends,
mergers and acquisitions, investments, loans and interest rates charged, and
interest rates paid on deposits.  We are also subject to
capitalization guidelines established by our regulators, which require us to
maintain adequate capital to support our growth.  Violations of
various laws, even if unintentional, may result in significant fines or other
penalties, including restrictions on branching or bank
acquisitions.  Recently, banks generally have faced increased
regulatory sanctions and scrutiny particularly with respect to the USA Patriot
Act and other statutes relating to anti-money laundering compliance and customer
privacy.  The current recession and credit crisis has had major
adverse effects on the banking and financial industry, many of which have lost
well over 50% of their market capitalization during the past two years due to
material and substantial losses in their loan portfolios and substantial write
downs of their asset values.  President Bush signed into law the EESA,
which includes the TARP, through which the United States Treasury has been
authorized to invest up to $700 billion in United States banking and financial
institutions.  Such amounts have been substantially increased by
ARRA.  Banks that accept TARP money and other stimulus money will be
subjected to greater regulations related thereto.  While we did not
take any TARP money and are thus not subject to any such related regulation, we
may still be affected as Congress and regulators may still adopt material
regulation which is generally applicable to all  banks and financial
institutions regardless of whether they accepted money from the
TARP.


23





The laws and regulations applicable to
the banking industry could change at any time, and we cannot predict the effects
of these changes on our business and profitability.  Because
government regulation greatly affects the business and financial results of all
commercial banks and bank holding companies, our cost of compliance could
adversely affect our ability to operate profitably.  As a relatively
new public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“SOX”), and the
related rules and regulations promulgated by the Securities and Exchange
Commission.  These laws and regulations increase the scope, complexity
and cost of corporate governance, reporting and disclosure
practices.  Despite our conducting business in a highly regulated
environment, these laws and regulations have different requirements for
compliance than we have previously experienced.  Our expenses related
to services rendered by our accountants, legal counsel and consultants will
increase in order to ensure compliance with these laws and regulations that we
will be subject to as a public company. In addition, it is possible that the
sudden application of these requirements to our business will result in some
cultural adjustments and strain our management resources.





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





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





Risks
Related To Our Business





Our
construction and land development loan portfolio is subject to unique risks that
could adversely affect earnings.





Recently, the residential mortgage
market in the United States has experienced an economic downturn that may
adversely affect the performance and market value of our residential loans,
particularly construction and land development loans.  Our
construction and land development loan portfolio was $224.2 million at December
31, 2009, comprising 18.57% of our total loans.  Construction loans
are often riskier than home equity loans or residential mortgage loans to
individuals.  In the event of a general economic slowdown like the one
we are currently experiencing, these loans sometimes represent higher risk due
to slower sales and reduced cash flow that could negatively affect the
borrowers’ ability to repay on a timely basis.  We, as well as our
competition, have experienced a significant increase in impaired and non-accrual
construction and land development loans for which we believe we have adequately
reserved.  Primarily as a result of the continued weakness in
residential construction in our market areas, our total impaired loans increased
to $21.5 million at December 31, 2009, compared to $15.9 million at December 31,
2008.  Of this $21.5 million of impaired loans, $11.0 million were
real estate construction loans.





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





If
we fail to maintain effective internal controls over financial reporting or
remediate any future material weakness in our internal control over financial
reporting, we may be unable to accurately report our financial results or
prevent fraud, which could have a material adverse effect on our financial
condition and results of operations.





Our internal controls over financial
reporting are designed to provide reasonable assurance regarding the reliability
of the financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.  Effective internal controls over financial reporting are
necessary for us to provide reliable reports and prevent fraud.


24





We believe that a control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.  Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been
detected.  We cannot guarantee that we will identify significant
deficiencies and/or material weaknesses in our internal controls in the future,
and our failure to maintain effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our financial condition and results of
operations.





Our
decisions regarding credit risk could be inaccurate and our allowance for loan
losses may be inadequate, which could materially and adversely affect our
business, financial condition, results of operations and future
prospects.





Our earnings are affected by our
ability to make loans, and thus we could sustain significant loan losses and
consequently significant net losses if we incorrectly assess either the
creditworthiness of our borrowers resulting in loans to borrowers who fail to
repay their loans in accordance with the loan terms or the value of the
collateral securing the repayment of their loans, or we fail to detect or
respond to a deterioration in our loan quality in a timely
manner.  Management makes various assumptions and judgments about the
collectability of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans.  We maintain an
allowance for loan losses that we consider adequate to absorb losses inherent in
the loan portfolio based on our assessment of the information
available.  In determining the size of our allowance for loan losses,
we rely on an analysis of our loan portfolio based on historical loss
experience, volume and types of loans, trends in classification, volume and
trends in delinquencies and non-accruals, national and local economic conditions
and other pertinent information.  We target small and medium-sized
businesses as loan customers.  Because of their size, these borrowers
may be less able to withstand competitive or economic pressures than larger
borrowers in periods of economic weakness.  Also, as we expand into
new markets, our determination of the size of the allowance could be understated
due to our lack of familiarity with market-specific factors.  Despite
the recent credit crisis, we believe our allowance for loan losses is
adequate.  Our allowance for loan losses as of December 31, 2009 was
$14.9 million.





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





However, even if our assumptions are
accurate, federal and state regulators periodically review our allowance for
loan losses and could require us to materially increase our allowance for loan
losses or recognize further loan charge-offs based on judgments different than
those of our management.  Any material increase in our allowance for
loan losses or loan charge-offs as required by these regulatory agencies could
consequently materially and adversely affect our business, financial condition,
results of operations and future prospects.





Our
business strategy includes the continuation of our growth plans, and our
financial condition and results of operations could be negatively affected if we
fail to grow or fail to manage our growth effectively.





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





·
            maintaining
      loan quality;





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





·
            maintaining
      adequate control and compliance functions;
and





·
            securing
      capital and liquidity needed to support anticipated
  growth.





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


25


Our
continued pace of growth will require us to raise additional capital in the
future to fund such growth, and the unavailability of additional capital or on
terms acceptable to us could adversely affect our growth and/or our financial
condition and results of operations.





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





·
            the
      sale of $15,000,000 of trust preferred securities by our initial statutory
      trust, ServisFirst Capital Trust I, on September 2,
  2008;


·
            the
      sale of  an aggregate of 400,000 shares of our common stock at
      $25 per share, or $10,000,000, in a private placement completed in part on
      December 31, 2008 and in part on March 13, 2009;
  and


·
            the
      sale of $5,000,000 aggregate principal amount of the Bank’s 8.25%
      Subordinated Notes due June 1, 2016 in a private placement to an
      institutional investor in June
2009.





In addition, we are in the process of
completing a private offering of up to $15 million in 6.0% Mandatory Convertible
Trust Preferred Securities, which we currently expect to close on or about March
15, 2010.





After giving effect to these
transactions, we believe that we will have sufficient capital to meet our
capital needs for our immediate growth plans.  However, we will
continue to need capital as we grow in the future.  If capital is not
available on favorable terms when we need it, we will have to either issue
additional trust preferred securities, common stock or other securities on less
than desirable terms or reduce our rate of growth until market conditions become
more favorable.  In either of such events, our financial condition and
results of operations may be negatively affected due to more expensive capital
or our inability to maintain our growth.





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





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





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





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





Unpredictable
economic conditions or a natural disaster in the State of Alabama, particularly
the Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama MSAs, may have
a material adverse effect on our financial performance.





The majority of our borrowers and
depositors are individuals and businesses located and doing business in
Jefferson and Shelby Counties of the Birmingham-Hoover, Alabama
MSA.  We also have added borrowers and depositors in Madison County in
the Huntsville, Alabama MSA since opening offices in Huntsville in 2006; in
Montgomery County in the Montgomery, Alabama MSA since opening offices in
Montgomery in 2007, and in Houston County in the Dothan, Alabama MSA since
opening our office in Dothan in 2008.  Therefore, our success will
depend on the general economic conditions in the State of Alabama, and more
particularly in Jefferson, Shelby, Madison, Houston and Montgomery Counties in
Alabama, which we cannot predict with certainty.  Unlike many of our
larger competitors, the majority of our borrowers are commercial firms,
professionals and affluent consumers located and doing business in such local
markets.  As a result, our operations and profitability may be more
adversely affected by a local economic downturn or natural disaster in Alabama,
particularly in such markets, than those of larger, more geographically diverse
competitors.  For example, a downturn in the economy of any of our
MSAs could make it more difficult for our borrowers in those markets to repay
their loans and may lead to loan losses that we cannot offset through operations
in other markets until we can expand our markets further.


26


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





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





Lower
lending limits than many of our competitors may limit our ability to attract
borrowers.




During our early years of operation,
and likely for many years thereafter, our legally mandated lending limits will
be lower than those of many of our competitors because we will have less capital
than such competitors.  Our lower lending limits may discourage
borrowers with lending needs that exceed those limits from doing business with
us.  While we may try to serve these borrowers by selling loan
participations to other financial institutions, this strategy may not
succeed.





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





We have opened new offices and
operations in three primary markets in the past three
years:  Huntsville, Montgomery and Dothan, Alabama.  We may
not be able to successfully manage this growth with sufficient human resources,
training and operational, financial and technological resources.  Any
such failure could have a material adverse effect on our operating results and
financial condition and our ability to expand into new markets.





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





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





We
are dependent on the services of our management team and board of directors, and
the unexpected loss of key officers or directors may adversely affect our
operations.





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


27


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





Our directors and executive officers,
as a group, beneficially owned approximately 16.32% of our outstanding common
stock as of December 31, 2009.  As a result of their ownership, the
directors and executive officers will have the ability, by voting their shares
in concert, to influence the outcome of all matters submitted to our
stockholders for approval, including the election of directors.





We
are subject to environmental liability risk associated with lending
activities.





A significant portion of our loan
portfolio is secured by real property.  During the ordinary course of
business, we may foreclose on and take title to properties securing certain
loans.  In doing so, there is a risk that hazardous or toxic
substances could be found on these properties.  If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage.  Environmental laws may require
us to incur substantial expenses and may materially reduce the affected
property’s value or limit our ability to use or sell the affected
property.  The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on
our financial condition and results of operations.  In addition,
future laws or more stringent interpretations or enforcement policies with
respect to existing laws may increase our exposure to environmental
liability.  Although management has policies and procedures to perform
an environmental review before the loan is recorded and before initiating any
foreclosure action on real property, these reviews may not be sufficient to
detect environmental hazards.





Risks
Related to Our Common Stock





We
have no current plans to pay dividends on our common stock.





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





Under Alabama law, a state bank may not
pay a dividend in excess of 90% of its net earnings until the bank’s surplus is
equal to at least 20% of its capital.  As of December 31, 2009, the
Bank’s surplus was equal to 56.7% of the Bank’s capital.  The Bank is
also required by Alabama law to obtain the prior approval of the Alabama
Superintendent of Banks (the “Superintendent”) for its payment of dividends if
the total of all dividends declared by the Bank in any calendar year will exceed
the total of (1) the Bank’s net earnings (as defined by statute) for that year,
plus (2) its retained net earnings for the preceding two years, less any
required transfers to surplus.  In addition, no dividends, withdrawals
or transfers may be made from the Bank’s surplus without the prior written
approval of the Superintendent.





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





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





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





In many cases, stockholders receive a
premium for their shares when one company purchases another.  However,
under Alabama Banking Code Section 5-13B-23(c), no bank or bank holding company
may acquire control of the Bank until it has been incorporated for at least five
years (which is April 28, 2010 for the Bank).  In addition, Alabama
and Delaware law makes it difficult for anyone to purchase the Bank or us
without approval of our board of directors.  Thus, your ability to
realize the potential benefits of any sale by us may be limited, even if such
sale would represent a greater value for stockholders than our continued
independent operation.


28


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





Our Certificate of Incorporation
authorizes the board of directors to issue up to 1,000,000 shares of preferred
stock without any further action on the part of our shareholders.  Our
board of directors also has the power, without shareholder approval, to set the
terms of any series of preferred stock that may be issued, including voting
rights, dividend rights, and preferences over our common stock with respect to
dividends or in the event of a dissolution, liquidation or winding up and other
terms.  In the event that we issue preferred stock in the future that
has preference over our common stock with respect to payment of dividends or
upon our liquidation, dissolution or winding up, or if we issue preferred stock
with voting rights that dilute the voting power of our common stock, the rights
of the holders of our common stock or the market price of our common stock could
be adversely affected.  In addition, the ability of our board of
directors to issue shares of preferred stock without any action on the part of
the shareholders may impede a takeover of us and prevent a transaction favorable
to our shareholders.





An
investment in our common stock is not an insured deposit.





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





ITEM
1B.  UNRESOLVED STAFF COMMENTS.




None.





ITEM
2.   PROPERTIES.




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





StateMSA
                                                        
                                                        
                                                        
                                                        Zip
                                                        
                                                        Owned
      or
                                                        
                                                        DateOffice
      Address
                                                        
                                                        City
                                                        
                                                        Code
                                                        
                                                        Leased
                                                        
                                                        OpenedAlabama:Birmingham-Hoover
      MSA:850
      Shades Creek Parkway, Suite 200 (1)
                                                        
                                                        Birmingham
                                                        
                                                        35209
                                                        
                                                        Leased
                                                        
                                                        03/02/2005324
      Richard Arrington Jr. Boulevard North
                                                        
                                                        Birmingham
                                                        
                                                        35203
                                                        
                                                        Leased
                                                        
                                                        12/19/20055403
      Highway 280, Suite 401
                                                        
                                                        Birmingham
                                                        
                                                        35242
                                                        
                                                        Leased
                                                        
                                                        08/15/2006Total:
                                                        
                                                        
                                                        
                                                        3
      Office(s)Huntsville
      MSA:401
      Meridian Street, Suite 100
                                                        
                                                        Huntsville
                                                        
                                                        35801
                                                        
                                                        Leased
                                                        
                                                        11/21/20061267
      Enterprise Way, Suite A (1)
                                                        
                                                        Huntsville
                                                        
                                                        35806
                                                        
                                                        Leased
                                                        
                                                        08/21/2006Total:
                                                        
                                                        
                                                        
                                                        2
      Office(s)Montgomery
      MSA:1
      Commerce Street, Suite 200
                                                        
                                                        Montgomery
                                                        
                                                        36104
                                                        
                                                        Leased
                                                        
                                                        06/04/20078117
      Vaughn Road, Unit 20
                                                        
                                                        Montgomery
                                                        
                                                        36116
                                                        
                                                        Leased
                                                        
                                                        09/26/2007Total:
                                                        
                                                        
                                                        
                                                        2
      Office(s)Dothan
      MSA:4801
      West Main Street (1)
                                                        
                                                        Dothan
                                                        
                                                        36305
                                                        
                                                        Leased
                                                        
                                                        10/17/2008Total:
                                                        
                                                        
                                                        
                                                        1
      OfficeTotal
      Offices in Alabama:
                                                        
                                                        
                                                        
                                                        8
      Office(s)




(1)
            Office
      relocated to this address in 2009.  Original office opened on
      date indicated.




29




Since mid-2009, our corporate
headquarters has been located in 28,900 square feet of leased space in a
50,000-square foot building near the intersection of Cahaba Road and Shades
Creek Parkway.  This building was newly constructed by a joint venture
between Protective Life Corp., whose home offices are adjacent to the land, and
Birmingham-based construction company B.L. Harbert International and opened in
2009.





ITEM
3.    LEGAL PROCEEDINGS.




There is currently no material
litigation to which we or the Bank are subject other than as described below and
such legal proceedings as are in the normal course of business for the Bank such
as claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank’s business. Management
does not believe that there are any threatened proceedings against us or the
Bank which, if determined adversely, would have a material effect on our or the
Bank’s business, financial position or results of operations.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.




No matter was submitted to a vote of
security holders during the fourth quarter of 2009 through the solicitation of
proxies or otherwise.





PART II




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




There is no public market for our
common stock, and we have no current plans to list our common stock on any
public market.  Consequently, there have only been a very few
secondary trades in our common stock.  The most recent sale of our
common stock was at $25 per share on January 25, 2009.  As of
December 31, 2009, we had approximately 1,037 stockholders of record
holding 5,513,482 outstanding shares of our common stock, and we had 833,500
shares of our common stock presently subject to outstanding options to purchase
such shares under the 2005 Amended and Restated Stock Incentive Plan, 20,000
shares of our common stock presently subject to restricted stock granted to our
CEO under the 2009 Stock Incentive Plan, as well as 55,000 shares of common
stock subject to other outstanding options. and outstanding warrants to purchase
150,000 shares of our common stock.




Dividends





We have never declared or paid
dividends and we do not expect to pay dividends to stockholders in the near
future. We anticipate that our earnings, if any, will be held for purposes of
enhancing our capital. Our payment of cash dividends is subject to the
discretion of our Board of Directors and the Bank’s ability to pay
dividends.  The principal source of our cash flow, including cash flow to
pay dividends, comes from dividends that the Bank pays to us as its sole
shareholder.  Statutory and regulatory limitations apply to the Bank’s
payment of dividends to us, as well as our payment of dividends to our
stockholders.  For a more complete discussion on the restrictions on
dividends, see “Supervision and Regulation - Payment of Dividends” in Item
1.




Recent
Sales of Unregistered Securities





We had no sales of unregistered
securities in 2009 other than those previously reported in our reports filed
with the Securities and Exchange Commission.




Purchases
of Equity Securities by the Registrant and Affiliated Purchasers





We made no repurchases of our equity
securities, and no “affiliated purchasers” (as defined in Rule 10b-18(a)
(3) under the Securities Exchange Act of 1934) purchased any shares of our
equity securities during the fourth quarter of the fiscal year ended
December 31, 2009.


30


Equity
Compensation Plan Information





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




Plan Category
                
                Number of securities
                  issued/to be issued
                  upon exercise of
                  outstanding options,
                  warrants and rights
                
                
                Weighted-average
                  exercise price of
                  outstanding options,
                  warrants and rights
                
                
                Number of securities
                  remaining available for
                  future issuance under
                  equity compensation plansEquity
      compensation awards  plans approved  by security
      holders
                
                
                853,500
                
                
                $
                15.23
                
                
                
                651,500Equity
      compensation awards plans not  approved by security
      holders
                
                
                55,000
                
                
                
                17.27
                
                
                
                —Total
                
                
                908,500
                
                
                $
                15.35
                
                
                
                651,500





We grant stock options as incentive to
employees, officers, directors, and consultants to attract or retain these
individuals, to maintain and enhance our long-term performance and
profitability, and to allow these individuals to acquire an ownership interest
in our company.  Our compensation committee administers this program,
making all decisions regarding grants and amendments to these
awards.  All shares to be issued upon the exercise of these options
must be authorized and unissued shares.  If an option holder
terminates employment, we may provide for varying time periods for exercise of
options after such termination provided, that an incentive stock option may not
be exercised later than 90 days after an option holder terminates his or her
employment with us unless such termination is a consequence of such option
holder’s death or disability, in which case the option period may be extended
for up to one year after termination of employment.  All of our issued
options will vest immediately upon a transaction in which we merge or
consolidate with or into any other corporation (unless we are the surviving
corporation), or sell or otherwise transfer our property, assets or business
substantially in its entirety to a successor corporation.  At that
time, upon the exercise of an option, the option holder will receive the number
of shares of stock or other securities or property, including cash, to which the
holder of a like number of shares of common stock would have been entitled upon
the merger, consolidation, sale or transfer if such option had been exercised in
full immediately prior thereto.  All of our issued options have a term
of 10 years.  This means the options must be exercised within 10 years
from the date of the grant.  At December 31, 2009, we have issued and
outstanding options to purchase 833,500 shares of our common stock.




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




On
September 2, 2008, we granted warrants to purchase up to 75,000 shares of our
common stock for a purchase price of $25.00 per share in relation to the
issuance of our Subordinated Deferrable Interest Debentures as more fully
described in Note 10 to the Consolidated Financial Statements.




On June
23, 2009, we granted warrants to purchase up to 15,000 shares of our common
stock for a purchase price of $25.00 per share in relation to the issuance of
our Subordinated Note due June 1, 2016 as more fully described in Note 11 to the
Consolidated Financial Statements.




We
granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 55,000 shares of our common
stock at between $15.00 and $20.00 per share for 10 years.  These
stock options are non-qualified and are not part of our stock incentive
plan.  They vest 100% in a lump sum five years after their date of
grant.




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




Performance
Graph




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


31


The
following graph compares the change in cumulative total stockholder return on
our common stock with the cumulative total return of the NASDAQ Banks Index and
the S&P Stock Index from 2005 through 2009. This comparison assumes $100
invested on May 2, 2005 in (a) our common stock, (b) the NASDAQ Banks Index, and
(c) the NASDAQ Composite Stock Index.









DateIndex:
                
                5/2/2005
                
                
                12/31/2005
                
                
                12/31/2006
                
                
                12/31/2007
                
                
                12/31/2008
                
                
                12/31/2009ServisFirst
      Bancshares, Inc.
                
                
                100.00
                
                
                
                100.00
                
                
                
                150.00
                
                
                
                200.00
                
                
                
                250.00
                
                
                
                250.00NASDAQ
      Composite
                
                
                100.00
                
                
                
                114.35
                
                
                
                125.23
                
                
                
                137.52
                
                
                
                81.77
                
                
                
                117.65NASDAQ
      Bank
                
                
                100.00
                
                
                
                105.91
                
                
                
                117.57
                
                
                
                91.62
                
                
                
                69.70
                
                
                
                56.81


32


ITEM
6.SELECTED FINANCIAL
DATA.




The
following table sets forth selected historical consolidated financial data from
our consolidated financial statements and should be read in conjunction with our
consolidated financial statements including the related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” which
are included below.  Except for the data under “Selected Performance
Ratios”, “Asset Quality Ratios”, “Liquidity Ratios”, “Capital Adequacy Ratios”
and “Growth Ratios”, the selected historical consolidated financial data as of
December 31, 2009, 2008, 2007, 2006 and 2005 and for the years ended
December 31, 2009, 2008, 2007 and 2006 and the period from May 2, 2005
(date of inception) to December 31, 2005 are derived from our audited
consolidated financial statements and related notes.





As of and for the years ended December 31,
                
                
                As of and for
                  the period
                  from May 2,
                  2005 (date of
                  inception) to
                  December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(Dollars in thousands except for share data)Selected
      Balance Sheet Data:Total
      assets
                
                $
                1,573,497
                
                
                $
                1,162,272
                
                
                $
                838,250
                
                
                $
                528,545
                
                
                $
                277,963Total
      loans
                
                
                1,207,084
                
                
                
                968,233
                
                
                
                675,281
                
                
                
                440,489
                
                
                
                249,250Loans,
      net
                
                
                1,192,173
                
                
                
                957,631
                
                
                
                667,549
                
                
                
                435,071
                
                
                
                246,140Securities
      available for sale
                
                
                255,453
                
                
                
                102,339
                
                
                
                87,233
                
                
                
                28,119
                
                
                
                924Securities
      held to maturity
                
                
                645
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Cash
      and due from banks
                
                
                26,982
                
                
                
                22,844
                
                
                
                15,756
                
                
                
                15,706
                
                
                
                4,188Interest-bearing
      balances with banks
                
                
                48,544
                
                
                
                30,774
                
                
                
                34,068
                
                
                
                22
                
                
                
                —Fed
      funds sold
                
                
                680
                
                
                
                19,300
                
                
                
                16,598
                
                
                
                37,607
                
                
                
                20,725Mortgage
      loans held for sale
                
                
                6,202
                
                
                
                3,320
                
                
                
                2,463
                
                
                
                2,902
                
                
                
                1,778Restricted
      equity securities
                
                
                3,241
                
                
                
                2,659
                
                
                
                1,202
                
                
                
                805
                
                
                
                230Premises
      and equipment, net
                
                
                5,088
                
                
                
                3,884
                
                
                
                4,176
                
                
                
                2,605
                
                
                
                1,400Deposits
                
                
                1,432,355
                
                
                
                1,037,319
                
                
                
                762,683
                
                
                
                473,348
                
                
                
                244,048Other
      borrowings
                
                
                24,922
                
                
                
                20,000
                
                
                
                73
                
                
                
                —
                
                
                
                —Trust
      preferred securities
                
                
                15,228
                
                
                
                15,087
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      liabilities
                
                
                3,370
                
                
                
                3,082
                
                
                
                2,465
                
                
                
                2,353
                
                
                
                273Stockholders’
      equity
                
                
                97,622
                
                
                
                86,784
                
                
                
                72,247
                
                
                
                52,288
                
                
                
                33,469Selected
      Income Statement Data:Interest
      income
                
                $
                62,197
                
                
                $
                55,450
                
                
                $
                51,417
                
                
                $
                30,610
                
                
                $
                6,580Interest
      expense
                
                
                18,337
                
                
                
                20,474
                
                
                
                25,872
                
                
                
                13,335
                
                
                
                2,325Net
      interest income
                
                
                43,860
                
                
                
                34,976
                
                
                
                25,545
                
                
                
                17,275
                
                
                
                4,255Provision
      for loan losses
                
                
                10,860
                
                
                
                6,274
                
                
                
                3,541
                
                
                
                3,252
                
                
                
                3,521Net
      interest income after provision for loan losses
                
                
                33,000
                
                
                
                28,702
                
                
                
                22,004
                
                
                
                14,023
                
                
                
                734Noninterest
      income
                
                
                4,413
                
                
                
                2,704
                
                
                
                1,441
                
                
                
                911
                
                
                
                101Noninterest
      expense
                
                
                28,755
                
                
                
                20,576
                
                
                
                14,796
                
                
                
                8,674
                
                
                
                3,161Income
      (loss) before income taxes
                
                
                8,658
                
                
                
                10,830
                
                
                
                8,649
                
                
                
                6,260
                
                
                
                (2,326
                )Income
      taxes expenses (benefit)
                
                
                2,780
                
                
                
                3,825
                
                
                
                3,152
                
                
                
                2,189
                
                
                
                (840
                )Net
      income (loss)
                
                
                5,878
                
                
                
                7,005
                
                
                
                5,497
                
                
                
                4,071
                
                
                
                (1,486
                )Per
      Common Share Data:Net
      income (loss), basic
                
                $
                1.07
                
                
                $
                1.37
                
                
                $
                1.19
                
                
                $
                1.06
                
                
                $
                (0.42
                )Net
      income (loss), diluted
                
                
                1.02
                
                
                
                1.31
                
                
                
                1.16
                
                
                
                1.06
                
                
                
                (0.42
                )Book
      value
                
                
                17.71
                
                
                
                16.15
                
                
                
                14.13
                
                
                
                11.71
                
                
                
                9.56Weighted
      average shares outstanding:Basic
                
                
                5,485,972
                
                
                
                5,114,194
                
                
                
                4,631,047
                
                
                
                3,831,881
                
                
                
                3,500,000Diluted
                
                
                5,787,643
                
                
                
                5,338,883
                
                
                
                4,721,864
                
                
                
                3,846,111
                
                
                
                3,500,000Actual
      shares outstanding
                
                
                5,513,482
                
                
                
                5,374,022
                
                
                
                5,113,482
                
                
                
                4,463,607
                
                
                
                3,500,000


33





As of and for the years ended December 31,
                                            
                                            
                                            As of and for
                                              the period
                                              from May2,2005 (date of
                                              inception) to
                                              December 31,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005Selected
      Performance Ratios:Return
      on average assets
                                            
                                            
                                            0.43
                                            %
                                            
                                            
                                            0.71
                                            %
                                            
                                            
                                            0.78
                                            %
                                            
                                            
                                            1.02
                                            %
                                            
                                            
                                            (1.40
                                            )%Return
      on average stockholders’ equity
                                            
                                            
                                            6.33
                                            %
                                            
                                            
                                            9.28
                                            %
                                            
                                            
                                            9.40
                                            %
                                            
                                            
                                            9.96
                                            %
                                            
                                            
                                            (6.65
                                            )%Net
      interest margin(1)
                                            
                                            
                                            3.31
                                            %
                                            
                                            
                                            3.70
                                            %
                                            
                                            
                                            3.78
                                            %
                                            
                                            
                                            4.60
                                            %
                                            
                                            
                                            4.21
                                            %Efficiency
      ratio(2)
                                            
                                            
                                            59.57
                                            %
                                            
                                            
                                            54.61
                                            %
                                            
                                            
                                            54.83
                                            %
                                            
                                            
                                            50.67
                                            %
                                            
                                            
                                            72.56
                                            %Asset
      Quality Ratios:Net
      charge-offs to average loans outstanding
                                            
                                            
                                            0.60
                                            %
                                            
                                            
                                            0.41
                                            %
                                            
                                            
                                            0.23
                                            %
                                            
                                            
                                            0.28
                                            %
                                            
                                            
                                            0.53
                                            %Non-performing
      loans to total loans
                                            
                                            
                                            1.01
                                            %
                                            
                                            
                                            1.02
                                            %
                                            
                                            
                                            0.66
                                            %
                                            
                                            
                                            0.00
                                            %
                                            
                                            
                                            0.28
                                            %Non-performing
      assets to total assets
                                            
                                            
                                            1.57
                                            %
                                            
                                            
                                            1.74
                                            %
                                            
                                            
                                            0.73
                                            %
                                            
                                            
                                            0.11
                                            %
                                            
                                            
                                            0.25
                                            %Allowance
      for loan losses to total gross loans
                                            
                                            
                                            1.24
                                            %
                                            
                                            
                                            1.09
                                            %
                                            
                                            
                                            1.15
                                            %
                                            
                                            
                                            1.23
                                            %
                                            
                                            
                                            1.25
                                            %Allowance
      for loan losses to total non-performing loans
                                            
                                            
                                            122.34
                                            %
                                            
                                            
                                            108.17
                                            %
                                            
                                            
                                            173.94
                                            %
                                            
                                            
                                            5,418.00
                                            %
                                            
                                            
                                            446.20
                                            %Liquidity
      Ratios:Net
      loans to total deposits
                                            
                                            
                                            83.23
                                            %
                                            
                                            
                                            92.32
                                            %
                                            
                                            
                                            87.53
                                            %
                                            
                                            
                                            91.91
                                            %
                                            
                                            
                                            100.86
                                            %Net
      average loans to average earning assets
                                            
                                            
                                            80.06
                                            %
                                            
                                            
                                            85.84
                                            %
                                            
                                            
                                            77.19
                                            %
                                            
                                            
                                            89.34
                                            %
                                            
                                            
                                            76.35
                                            %Noninterest-bearing
      deposits to total deposits
                                            
                                            
                                            14.75
                                            %
                                            
                                            
                                            11.71
                                            %
                                            
                                            
                                            11.15
                                            %
                                            
                                            
                                            15.05
                                            %
                                            
                                            
                                            20.40
                                            %Capital
      Adequacy Ratios:Stockholders’
      equity to total assets(3)
                                            
                                            
                                            6.10
                                            %
                                            
                                            
                                            7.38
                                            %
                                            
                                            
                                            8.50
                                            %
                                            
                                            
                                            9.89
                                            %
                                            
                                            
                                            12.04
                                            %Total
      risked-based capital(4)
                                            
                                            
                                            10.48
                                            %
                                            
                                            
                                            11.25
                                            %
                                            
                                            
                                            11.22
                                            %
                                            
                                            
                                            11.58
                                            %
                                            
                                            
                                            13.42
                                            %Tier
      I capital(5)
                                            
                                            
                                            8.89
                                            %
                                            
                                            
                                            10.18
                                            %
                                            
                                            
                                            10.12
                                            %
                                            
                                            
                                            10.49
                                            %
                                            
                                            
                                            12.28
                                            %Leverage
      ratio(6)
                                            
                                            
                                            6.97
                                            %
                                            
                                            
                                            9.01
                                            %
                                            
                                            
                                            8.40
                                            %
                                            
                                            
                                            10.32
                                            %
                                            
                                            
                                            14.32
                                            %Growth
      Ratios:Percentage
      change in net income
                                            
                                            
                                            -16.1
                                            %
                                            
                                            
                                            27.43
                                            %
                                            
                                            
                                            35.00
                                            %
                                            
                                            
                                            373.93
                                            %
                                            
                                            
                                            n/aPercentage
      change in diluted net income per share
                                            
                                            
                                            -22.5
                                            %
                                            
                                            
                                            12.93
                                            %
                                            
                                            
                                            13.21
                                            %
                                            
                                            
                                            352.38
                                            %
                                            
                                            
                                            n/aPercentage
      change in assets
                                            
                                            
                                            35.38
                                            %
                                            
                                            
                                            38.65
                                            %
                                            
                                            
                                            58.59
                                            %
                                            
                                            
                                            90.15
                                            %
                                            
                                            
                                            n/aPercentage
      change in net loans
                                            
                                            
                                            24.49
                                            %
                                            
                                            
                                            45.45
                                            %
                                            
                                            
                                            53.43
                                            %
                                            
                                            
                                            76.76
                                            %
                                            
                                            
                                            n/aPercentage
      change in deposits
                                            
                                            
                                            38.08
                                            %
                                            
                                            
                                            36.00
                                            %
                                            
                                            
                                            61.13
                                            %
                                            
                                            
                                            93.96
                                            %
                                            
                                            
                                            n/aPercentage
      change in equity
                                            
                                            
                                            12.49
                                            %
                                            
                                            
                                            20.12
                                            %
                                            
                                            
                                            38.18
                                            %
                                            
                                            
                                            56.23
                                            %
                                            
                                            
                                            n/a







(1)
            Net
      interest margin is the net yield on interest earning assets and is the
      difference between the interest yield earned on interest-earning assets
      and interest rate paid on interest-bearing liabilities, divided by average
      earning assets.


(2)
            Efficiency
      ratio is the result of non-interest expense divided by the sum of net
      interest income and non-interest
income.


(3)
            Total
      stockholders’ equity excluding unrealized losses on securities available
      for sale, net of taxes, divided by total
assets.


(4)
            Total
      stockholders’ equity excluding unrealized losses on securities available
      for sale, net of taxes, and intangible assets plus allowance for loan
      losses (limited to 1.25% of risk-weighted assets) divided by total
      risk-weighted assets.  The FDIC required minimum to be
      well-capitalized is 10%.


(5)
            Total
      stockholders’ equity excluding unrealized losses on securities available
      for sale, net of taxes, and intangible assets divided by total
      risk-weighted assets.  The FDIC required minimum to be
      well-capitalized is 6%.


(6)
            Total
      stockholders’ equity excluding unrealized losses on securities available
      for sale, net of taxes, and intangible assets divided by average assets
      less intangible assets.  The FDIC required minimum to be
      well-capitalized is 5%; however, the Alabama Banking Department has
      required that the Bank maintain a Tier 1 capital leverage ratio of
      7%.


34


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




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





Forward-Looking
Statements





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





Overview





We are a bank holding
company within the meaning of the Bank Holding Company Act of 1956 headquartered
in Birmingham, Alabama.Through our wholly-owned
subsidiary bank, we operate eight full service banking offices located in
Jefferson, Shelby, Madison,Montgomery andHouston
counties in the Birmingham-Hoover, Huntsville,Montgomery andDothan,
Alabama MSAs, respectively.Our principal
business is to accept deposits from the public and to make loans and other
investments. Our principal source of funds for loans and investments are demand,
time, savings, and other deposits and the amortization and prepayment of loans
and borrowings. Our principal sources of income are interest and fees collected
on loans, interest and dividends collected on other investments and service
charges. Our principal expenses are interest paid on savings and other deposits,
interest paid on our other borrowings, employee compensation, office expenses
and other overhead expenses.





Critical
Accounting Policies





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


35


Allowance
for Loan Losses





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





Impairment
of Assets





Loans are considered impaired when,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due according to contractual terms of the loan
agreement. The collection of all amounts due according to contractual terms
means that both the contractual interest and principal payments of a loan will
be collected as scheduled in the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan’s effective interest rate, or, as a practical expedient, at the loan’s
observable market price, or the fair value of the underlying collateral. The
fair value of collateral, reduced by costs to sell on a discounted basis, is
used if a loan is collateral-dependent. Conforming one-to-four family
residential mortgage loans, home equity and second mortgages, and consumer loans
are pooled together as homogeneous loans and, accordingly, are not covered by
the FASB ASC 310-10-35, Subsequent Measurement of Impaired
Loans.





Investment
Securities Impairment





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




Results of Operations





Net Income





Net income for the year ended December
31, 2009 was $5.9 million, compared to net income of $7.0 million for the year
ended December 31, 2008.  This decrease in net income is primarily
attributable to a significant increase in deposit insurance assessments by the
FDIC, and an increase in provision for loan losses.  The expense of
FDIC insurance assessments increased $2.2 million, or 266.7%, to $2.7 million in
2009 from $568,000 in 2008.  This increase was attributable to
increases in both the assessment rates determined by the FDIC and our assessable
deposits, as a result of the Company’s growth in deposits.  Also,
during the fourth quarter of 2009, the Company expensed the first installment of
the 13-quarter prepaid assessment adopted by the FDIC in November
2009.  The provision for loan losses increased $4.6 million, or 73.1%,
from $6.3 million in 2008 to $10.9 million in 2009.  The increase in
provision for loan losses was the result of funding the loan loss reserve to
match growth in the loan portfolio and loan charge-offs.  These
negative effects were partially offset by higher net interest income, which was
due to significant growth of our deposits and loan portfolio resulting from
continued core growth in Birmingham, Huntsville and Montgomery and our expansion
into Dothan in late 2008. Also positively impacting net income in 2009 was an
increase of $1.7 million in noninterest income, up 63.2%, from $2.7 million in
2008 to $4.4 million in 2009.  Basic and diluted net income per common
share were $1.07 and $1.02, respectively, for the year ended December 31, 2009,
compared to $1.37 and $1.31, respectively, for the year ended December 31,
2008.  Return on average assets was 0.43% in 2009, compared to 0.71%
in 2008, and return on average stockholders’ equity was 6.33% in 2009, compared
to 9.28% in 2008.


36


Net income for the year ended December
31, 2008 was $7.0 million, compared to net income of $5.5 million for the year
ended December 31, 2007.  This increase in net income was primarily
attributable to a significant increase in net interest income due to the growth
of our deposits and loan portfolio resulting from continued core growth in
Birmingham, Huntsville and Montgomery and our expansion into
Dothan.  Basic and diluted net income per common share were $1.37 and
$1.31, respectively, for the year ended December 31, 2008, compared to $1.19 and
$1.16, respectively, for the year ended December 31, 2007. Return on average
assets was 0.71% in 2008, compared to 0.78% in 2007, and return on average
stockholders’ equity was 9.28% in 2008, compared to 9.40% in
2007.





Year Ended
                              December 31,
                            
                            
                            Change from the2009
                            
                            
                            2008
                            
                            
                            Prior Year(Dollars in Thousands)Interest
      income
                            
                            $
                            62,197
                            
                            
                            $
                            55,450
                            
                            
                            
                            12.17
                            %Interest
      expense
                            
                            
                            18,337
                            
                            
                            
                            20,474
                            
                            
                            
                            (10.44
                            )
      %Net
      interest income
                            
                            
                            43,860
                            
                            
                            
                            34,976
                            
                            
                            
                            25.40
                            %Provision
      for loan losses
                            
                            
                            10,860
                            
                            
                            
                            6,274
                            
                            
                            
                            73.10
                            %Net
      interest income after provision for loan losses
                            
                            
                            33,000
                            
                            
                            
                            28,702
                            
                            
                            
                            14.97
                            %Noninterest
      income
                            
                            
                            4,413
                            
                            
                            
                            2,704
                            
                            
                            
                            63.20
                            %Noninterest
      expense
                            
                            
                            28,755
                            
                            
                            
                            20,576
                            
                            
                            
                            39.75
                            %Net
      income before taxes
                            
                            
                            8,658
                            
                            
                            
                            10,830
                            
                            
                            
                            (20.06
                            )
      %Provision
      for income taxes
                            
                            
                            2,780
                            
                            
                            
                            3,825
                            
                            
                            
                            (27.32
                            )
      %Net
      income
                            
                            $
                            5,878
                            
                            
                            $
                            7.005
                            
                            
                            
                            (16.09
                            )
      %





Year Ended
                                December 31,
                              
                              
                              Change from the2008
                              
                              
                              2007
                              
                              
                              Prior Year(Dollars in Thousands)Interest
      income
                              
                              $
                              55,450
                              
                              
                              $
                              51,417
                              
                              
                              
                              7.84
                              %Interest
      expense
                              
                              
                              20,474
                              
                              
                              
                              25,872
                              
                              
                              
                              (20.86
                              )
      %Net
      interest income
                              
                              
                              34,976
                              
                              
                              
                              25,545
                              
                              
                              
                              36.92
                              %Provision
      for loan losses
                              
                              
                              6,274
                              
                              
                              
                              3,541
                              
                              
                              
                              77.18
                              %Net
      interest income after provision for loan losses
                              
                              
                              28,702
                              
                              
                              
                              22,004
                              
                              
                              
                              30.44
                              %Noninterest
      income
                              
                              
                              2,704
                              
                              
                              
                              1,441
                              
                              
                              
                              87.65
                              %Noninterest
      expense
                              
                              
                              20,576
                              
                              
                              
                              14,796
                              
                              
                              
                              39.06
                              %Net
      income before taxes
                              
                              
                              10,830
                              
                              
                              
                              8,649
                              
                              
                              
                              25.22
                              %Provision
      for income taxes
                              
                              
                              3,825
                              
                              
                              
                              3,152
                              
                              
                              
                              21.35
                              %Net
      income
                              
                              $
                              7,005
                              
                              
                              $
                              5,497
                              
                              
                              
                              27.43
                              %




Net Interest Income





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





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





Net interest income increased $8.9
million, or 25.4%, to $43.9 million for the year ended December 31, 2009 from
$35.0 million for the year ended December 31, 2008.  This was due to
an increase in total interest income of $6.7 million, or 12.2%, and a decrease
in total interest expense of $2.1 million, or 10.4%.  The increase in
total interest income was primarily attributable to loan growth as a result of
significant continued core growth in Birmingham, Huntsville and Montgomery and
the relocation of our Dothan office following our expansion into that market in
2008.


37




Net interest income increased $9.5
million, or 36.9%, to $35.0 million for the year ended December 31, 2008 from
$25.5 million for the year ended December 31, 2007.  This was due to
an increase in total interest income of $4.0 million, or 7.8%, and a decrease in
total interest expense of $5.4 million, or 20.9%.  The increase in
total interest income was primarily attributable to loan growth as a consequence
of significant continued core growth in Birmingham, Huntsville and Montgomery
and our expansion into Dothan in 2008.





Investments





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





The investment portfolio at December
31, 2009 was $255.5 million, compared to $102.3 million at December 31,
2008.  The interest earned on investments rose to $6.0 million in 2009
from $4.8 million in 2008.  That was a result of higher average
portfolio balances due to our growth.  The average taxable-equivalent
yield on the investment portfolio decreased from 5.60% in 2008 to 5.06% in 2009,
or 54 basis points.





The investment portfolio at December
31, 2008 was $102.3 million, compared to $87.2 million at December 31,
2007.  The interest earned on investments rose to $4.8 million in 2008
from $2.9 million in 2007.  That was a result of higher average
portfolio balances due to our growth.  The average taxable-equivalent
yield on the investment portfolio increased from 5.55% in 2007 to 5.60% in 2008,
or 5 basis points.





Net Interest Margin
Analysis





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





The following table shows, for the
twelve months ended December 31, 2009, 2008 and 2007, the average balances
of each principal category of our assets, liabilities and stockholders’ equity,
and an analysis of net interest revenue, and the change in interest income and
interest expense segregated into amounts attributable to changes in volume and
changes in rates.  This table is presented on a taxable equivalent
basis, if applicable.


38


Average
Consolidated Balance Sheets and Net Interest Analysis


On
a Fully Taxable-Equivalent Basis


For
the Years Ended December 31


(Dollars
in Thousands)





2009
                                                
                                                2008
                                                
                                                2007Average
                                                  Balance
                                                
                                                Interest
                                                  Earned/
                                                  Paid
                                                
                                                Average
                                                  Yield/
                                                  Rate
                                                
                                                Average
                                                  Balance
                                                
                                                Interest
                                                  Earned/
                                                  Paid
                                                
                                                Average
                                                  Yield/
                                                  Rate
                                                
                                                Average
                                                  Balance
                                                
                                                Interest
                                                  Earned
                                                  /Paid
                                                
                                                
                                                Average
                                                  Yield/
                                                  RateAssetsInterest-earning
      assets:Loans,
      net of unearned income(1)
                                                
                                                $
                                                1,088,437
                                                
                                                $
                                                55,625
                                                
                                                
                                                5.11
                                                %
                                                $
                                                826,957
                                                
                                                $
                                                49,852
                                                
                                                
                                                6.03
                                                %
                                                $
                                                530,478
                                                
                                                $
                                                43,694
                                                
                                                
                                                
                                                8.24
                                                %Mortgage
      loans held for sale
                                                
                                                
                                                6,195
                                                
                                                
                                                265
                                                
                                                
                                                4.28
                                                %
                                                
                                                2,469
                                                
                                                
                                                145
                                                
                                                
                                                5.87
                                                %
                                                
                                                1,802
                                                
                                                
                                                145
                                                
                                                
                                                
                                                8.05
                                                %Investment
      securities:Taxable
                                                
                                                
                                                92,903
                                                
                                                
                                                4,517
                                                
                                                
                                                4.86
                                                %
                                                
                                                68,683
                                                
                                                
                                                3,840
                                                
                                                
                                                5.59
                                                %
                                                
                                                40,665
                                                
                                                
                                                2,235
                                                
                                                
                                                
                                                5.50
                                                %Tax-exempt(2)
                                                
                                                
                                                38,834
                                                
                                                
                                                2,151
                                                
                                                
                                                5.54
                                                %
                                                
                                                23,384
                                                
                                                
                                                1,318
                                                
                                                
                                                5.64
                                                %
                                                
                                                16,972
                                                
                                                
                                                962
                                                
                                                
                                                
                                                5.67
                                                %Total
      investment securities(3)
                                                
                                                
                                                131,737
                                                
                                                
                                                6,668
                                                
                                                
                                                5.06
                                                %
                                                
                                                92,067
                                                
                                                
                                                5,158
                                                
                                                
                                                5.60
                                                %
                                                
                                                57,637
                                                
                                                
                                                3,197
                                                
                                                
                                                
                                                5.55
                                                %Federal
      funds sold
                                                
                                                
                                                88,651
                                                
                                                
                                                257
                                                
                                                
                                                0.29
                                                %
                                                
                                                29,474
                                                
                                                
                                                548
                                                
                                                
                                                1.86
                                                %
                                                
                                                87,592
                                                
                                                
                                                4,379
                                                
                                                
                                                
                                                5.00
                                                %Restricted
      equity securities
                                                
                                                
                                                3,101
                                                
                                                
                                                10
                                                
                                                
                                                0.32
                                                %
                                                
                                                2,454
                                                
                                                
                                                90
                                                
                                                
                                                3.67
                                                %
                                                
                                                1,110
                                                
                                                
                                                45
                                                
                                                
                                                
                                                4.05
                                                %Interest-bearing
      balances with banks
                                                
                                                
                                                24,987
                                                
                                                
                                                24
                                                
                                                
                                                0.10
                                                %
                                                
                                                3,141
                                                
                                                
                                                58
                                                
                                                
                                                1.85
                                                %
                                                
                                                5,286
                                                
                                                
                                                250
                                                
                                                
                                                
                                                4.73
                                                %Total
      interest-   earnings assets
                                                
                                                $
                                                1,343,108
                                                
                                                $
                                                62,849
                                                
                                                
                                                4.68
                                                %
                                                $
                                                956,562
                                                
                                                $
                                                55,851
                                                
                                                
                                                5.84
                                                %
                                                $
                                                683,997
                                                
                                                $
                                                51,710
                                                
                                                
                                                
                                                7.56
                                                %Noninterest-earning
      assets:Cash
      and due from banks
                                                
                                                
                                                18,337
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                18,247
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                14,558Net
      fixed assets and equipment
                                                
                                                
                                                4,503
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,998
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,312Allowance
      for loan losses, accrued interest and other assets
                                                
                                                
                                                10,534
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,514
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (177
                                                )Total
      assets
                                                
                                                $
                                                1,376,482
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                983,321
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                701,690Liabilities  and
      stockholders’ equityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                
                                                $
                                                178,232
                                                
                                                $
                                                1,599
                                                
                                                
                                                0.90
                                                %
                                                $
                                                92,717
                                                
                                                $
                                                1,522
                                                
                                                
                                                1.64
                                                %
                                                $
                                                41,824
                                                
                                                $
                                                1,157
                                                
                                                
                                                
                                                2.77
                                                %Savings
      deposits
                                                
                                                
                                                972
                                                
                                                
                                                5
                                                
                                                
                                                0.51
                                                %
                                                
                                                455
                                                
                                                
                                                3
                                                
                                                
                                                0.66
                                                %
                                                
                                                205
                                                
                                                
                                                3
                                                
                                                
                                                
                                                1.46
                                                %Money
      market accounts
                                                
                                                
                                                704,112
                                                
                                                
                                                8,859
                                                
                                                
                                                1.26
                                                %
                                                
                                                558,313
                                                
                                                
                                                12,411
                                                
                                                
                                                2.22
                                                %
                                                
                                                458,925
                                                
                                                
                                                21,918
                                                
                                                
                                                
                                                4.78
                                                %Time
      deposits
                                                
                                                
                                                218,087
                                                
                                                
                                                5,624
                                                
                                                
                                                2.58
                                                %
                                                
                                                135,128
                                                
                                                
                                                5,439
                                                
                                                
                                                4.03
                                                %
                                                
                                                55,002
                                                
                                                
                                                2,793
                                                
                                                
                                                
                                                5.08
                                                %Fed
      funds purchased
                                                
                                                
                                                —
                                                
                                                
                                                —
                                                
                                                
                                                —
                                                
                                                
                                                4,729
                                                
                                                
                                                119
                                                
                                                
                                                2.52
                                                %
                                                
                                                —
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Other
      borrowings
                                                
                                                
                                                37,705
                                                
                                                
                                                2,250
                                                
                                                
                                                5.96
                                                %
                                                
                                                20,838
                                                
                                                
                                                980
                                                
                                                
                                                4.70
                                                %
                                                
                                                —
                                                
                                                
                                                1
                                                
                                                
                                                
                                                7.50
                                                %Total
      interest-bearing liabilities
                                                
                                                $
                                                1,139,108
                                                
                                                $
                                                18,337
                                                
                                                
                                                1.61
                                                %
                                                $
                                                812,180
                                                
                                                $
                                                20,474
                                                
                                                
                                                2.52
                                                %
                                                $
                                                555,956
                                                
                                                $
                                                25,872
                                                
                                                
                                                
                                                4.65
                                                %Noninterest-
      bearing liabilities:Noninterest-bearing
      demand deposits
                                                
                                                
                                                140,660
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                92,451
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                84,051Other
      liabilities
                                                
                                                
                                                3,785
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,203
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,224Stockholders’
      equity
                                                
                                                
                                                91,188
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                75,034
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                58,553Unrealized
      gain (loss) on securities and derivatives
                                                
                                                
                                                1,741
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                453
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (94
                                                )Total
      liabilities and stockholders’ equity
                                                
                                                $
                                                1,376,482
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                983,321
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                701,690Net
      interest spread
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.07
                                                %
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.32
                                                %
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2.91
                                                %Net
      interest margin
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.31
                                                %
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.70
                                                %
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.78
                                                %







(1)
            Non-accrual
      loans are included in average loan balances in all
      periods.  Loan fees of $730,000, $920,000 and $1,423,000 are
      included in interest income in 2009, 2008 and 2007,
      respectively.


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


(3)
            Unrealized
      gains (losses) of $1,197,000, $376,000 and $233,000 are excluded from the
      yield calculation in 2009, 2008 and 2007,
  respectively.




39




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





Change
      in Interest Income and Expenses on aTaxable-Equivalent
      Basis2009
      Compared to 2008
                                                        
                                                        
                                                        2008
      Compared to 2007Increase
      (Decrease) in
                                                        
                                                        
                                                        Increase
      (Decrease) inInterest
      Income and Expense
                                                        
                                                        
                                                        Interest
      Income and ExpenseDue
      to Changes in:
                                                        
                                                        
                                                        Due
      to Changes in:Volume
                                                        
                                                        
                                                        Rate
                                                        
                                                        
                                                        Total
                                                        
                                                        
                                                        Volume
                                                        
                                                        
                                                        Rate
                                                        
                                                        
                                                        Total(Dollar
      amounts in Thousands)Interest-earning
      assets:Loans,
      net of unearned income
                                                        
                                                        $
                                                        15,763
                                                        
                                                        
                                                        $
                                                        (9,990
                                                        )
                                                        
                                                        $
                                                        5,773
                                                        
                                                        
                                                        $
                                                        24,423
                                                        
                                                        
                                                        $
                                                        (18,265
                                                        )
                                                        
                                                        $
                                                        6,158Mortgages
      held for sale
                                                        
                                                        
                                                        219
                                                        
                                                        
                                                        
                                                        (99
                                                        )
                                                        
                                                        
                                                        120
                                                        
                                                        
                                                        
                                                        54
                                                        
                                                        
                                                        
                                                        (54
                                                        )
                                                        
                                                        
                                                        —Investment
      securities:Taxable
                                                        
                                                        
                                                        1,354
                                                        
                                                        
                                                        
                                                        (677
                                                        )
                                                        
                                                        
                                                        677
                                                        
                                                        
                                                        
                                                        1,541
                                                        
                                                        
                                                        
                                                        64
                                                        
                                                        
                                                        
                                                        1,605Tax-exempt
                                                        
                                                        
                                                        870
                                                        
                                                        
                                                        
                                                        (37
                                                        )
                                                        
                                                        
                                                        833
                                                        
                                                        
                                                        
                                                        363
                                                        
                                                        
                                                        
                                                        (7
                                                        )
                                                        
                                                        
                                                        356Restricted
      equity securities
                                                        
                                                        
                                                        24
                                                        
                                                        
                                                        
                                                        (104
                                                        )
                                                        
                                                        
                                                        (80
                                                        )
                                                        
                                                        
                                                        (101
                                                        )
                                                        
                                                        
                                                        (91
                                                        )
                                                        
                                                        
                                                        (192
                                                        )Interest
      bearing balances with banks
                                                        
                                                        
                                                        403
                                                        
                                                        
                                                        
                                                        (437
                                                        )
                                                        
                                                        
                                                        (34
                                                        )
                                                        
                                                        
                                                        (2,906
                                                        )
                                                        
                                                        
                                                        (925
                                                        )
                                                        
                                                        
                                                        (3,831
                                                        )Federal
      funds sold
                                                        
                                                        
                                                        1,100
                                                        
                                                        
                                                        
                                                        (1,391
                                                        )
                                                        
                                                        
                                                        (291
                                                        )
                                                        
                                                        
                                                        53
                                                        
                                                        
                                                        
                                                        (8
                                                        )
                                                        
                                                        
                                                        45Total
      earning assets
                                                        
                                                        
                                                        19,733
                                                        
                                                        
                                                        
                                                        (12,735
                                                        )
                                                        
                                                        
                                                        6,998
                                                        
                                                        
                                                        
                                                        23,427
                                                        
                                                        
                                                        
                                                        (19,286
                                                        )
                                                        
                                                        
                                                        4,141Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                        
                                                        
                                                        1,404
                                                        
                                                        
                                                        
                                                        (1,327
                                                        )
                                                        
                                                        
                                                        77
                                                        
                                                        
                                                        
                                                        1,408
                                                        
                                                        
                                                        
                                                        (1,043
                                                        )
                                                        
                                                        
                                                        365Savings
      deposits
                                                        
                                                        
                                                        3
                                                        
                                                        
                                                        
                                                        (1
                                                        )
                                                        
                                                        
                                                        2
                                                        
                                                        
                                                        
                                                        4
                                                        
                                                        
                                                        
                                                        (4
                                                        )
                                                        
                                                        
                                                        —Money
      market accounts
                                                        
                                                        
                                                        3,241
                                                        
                                                        
                                                        
                                                        (6,793
                                                        )
                                                        
                                                        
                                                        (3,552
                                                        )
                                                        
                                                        
                                                        4,747
                                                        
                                                        
                                                        
                                                        (14,254
                                                        )
                                                        
                                                        
                                                        (9,507
                                                        )Time
      deposits
                                                        
                                                        
                                                        3,339
                                                        
                                                        
                                                        
                                                        (3,154
                                                        )
                                                        
                                                        
                                                        185
                                                        
                                                        
                                                        
                                                        4,069
                                                        
                                                        
                                                        
                                                        (1,423
                                                        )
                                                        
                                                        
                                                        2,646Federal
      funds purchased
                                                        
                                                        
                                                        (119
                                                        )
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        (119
                                                        )
                                                        
                                                        
                                                        119
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        119Other
      borrowings
                                                        
                                                        
                                                        794
                                                        
                                                        
                                                        
                                                        476
                                                        
                                                        
                                                        
                                                        1,270
                                                        
                                                        
                                                        
                                                        979
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        979Total
      interest-bearing liabilities
                                                        
                                                        
                                                        8,662
                                                        
                                                        
                                                        
                                                        (10,799
                                                        )
                                                        
                                                        
                                                        (2,137
                                                        )
                                                        
                                                        
                                                        11,326
                                                        
                                                        
                                                        
                                                        (16,724
                                                        )
                                                        
                                                        
                                                        (5,398
                                                        )Increase
      in net interest income
                                                        
                                                        $
                                                        11,071
                                                        
                                                        
                                                        $
                                                        (1,936
                                                        )
                                                        
                                                        $
                                                        9,135
                                                        
                                                        
                                                        $
                                                        12,101
                                                        
                                                        
                                                        $
                                                        (2,562
                                                        )
                                                        
                                                        $
                                                        9,539


The two primary factors that make up
the spread are the interest rates received on loans and the interest rates paid
on deposits. We have been disciplined in raising interest rates on deposits only
as the market demanded and thereby managing cost of funds. Also, we have not
competed for new loans on interest rate alone, but rather we have relied on
effective marketing to business customers.


40


Our net interest spread and net
interest margin were 3.07% and 3.31%, respectively, for the year ended December
31, 2009, compared to 3.32% and 3.70%, respectively, for the year ended December
31, 2008.  Our average interest-earning assets for the year ended
December 31, 2009 increased $386.5 million, or 40.4%, to $1.3 billion from
$956.6 million for the year ended December 31, 2008.  This increase in
our average interest-earning assets was due to continued core growth in all of
our markets, increased loan production and increased investment
securities.  Our average interest-bearing liabilities increased $326.9
million, or 40.3%, to $1.1 billion for the year ended December 31, 2009 from
$812.2 million for the year ended December 31, 2008.  This increase in
our average interest-bearing liabilities was primarily due to an increase in
interest-bearing deposits in all our markets, but also reflects the issuance of
$15 million in trust preferred securities in September 2008 and a $5 million
subordinated note in June 2009.  The ratio of our average
interest-earning assets to average interest-bearing liabilities was 117.9% and
117.8% for the years ended December 31, 2009 and 2008,
respectively.





Our average interest-earning assets
produced a taxable equivalent yield of 4.68% for the year ended December 31,
2009, compared to 5.84% for the year ended December 31, 2008.  The
average rate paid on interest-bearing liabilities was 1.61% for the year ended
December 31, 2009, compared to 2.52% for the year ended December 31,
2008.





Our net interest spread and net
interest margin were 3.32% and 3.70%, respectively, for the year ended December
31, 2008, compared to 2.91% and 3.78%, respectively, for the year ended December
31, 2007.  Our average interest-earning assets for the year ended
December 31, 2008 increased $272.6 million, or 39.9%, to $956.6 million from
$684.0 million for the year ended December 31, 2007.  This increase in
our average interest-earning assets was due to continued core growth in
Birmingham, Huntsville and Montgomery and our expansion into Dothan in 2008,
increased loan production and increased investment securities.  Our
average interest-bearing liabilities increased $256.20 million, or 46.1%, to
$812.2 million for the year ended December 31, 2008 from $556.0 million for the
year ended December 31, 2007.  This increase in our average
interest-bearing liabilities was primarily due to an increase in interest
bearing deposits in Birmingham, Huntsville and Montgomery and our expansion into
Dothan which further increased our deposits.  The ratio of our average
interest-earning assets to average interest-bearing liabilities was 117.8% and
123.0% for the years ended December 31, 2008 and 2007,
respectively.





Our average interest-earning assets
produced a taxable equivalent yield of 5.84% for the year ended December 31,
2008, compared to 7.56% for the year ended December 31, 2007.  The
average rate paid on interest-bearing liabilities was 2.52% for the year ended
December 31, 2008, compared to 4.65% for the year ended December 31,
2007.





Provision for Loan Losses





The provision for loan losses
represents the amount determined by management to be necessary to maintain the
allowance for loan losses at a level capable of absorbing inherent losses in the
loan portfolio.  Our management reviews the adequacy of the allowance
for loan losses on a quarterly basis.  The allowance for loan losses
calculation is segregated into various segments that include classified loans,
loans with specific allocations and pass rated loans.  A pass rated
loan is generally characterized by a very low to average risk of default and in
which management perceives there is a minimal risk of loss.  Loans are
rated using a nine-point risk grade scale with loan officers having the primary
responsibility for assigning risk grades and for the timely reporting of changes
in the risk grades.  These processes, and the assigned risk grades,
the criticized and classified loans in the portfolio are segregated into the
following regulatory classifications:  Special Mention, Substandard,
Doubtful or Loss, with some general allocation of reserve based on these
grades.  Impaired loans are reviewed specifically and separately under
FASB ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the
appropriate reserve allocation.  Our management compares the
investment in an impaired loan with the present value of expected future cash
flow discounted at the loan’s effective interest rate, the loan’s observable
market price or the fair value of the collateral, if the loan is
collateral-dependent, to determine the specific reserve
allowance.  Reserve percentages assigned to non-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.


41


The provision expense for loan losses
was $10.9 million for the year ended December 31, 2009, an increase of $4.6
million, in comparison to $6.3 million in 2008.Also, nonperforming loans
increased to $12.2 million, or 1.01%, of total loans at December 31, 2009 from
$9.7 million, or 1.02%, of total loans at December 31, 2008.  During
2009, we had net charged-off loans totaling $6.6 million, compared to net
charged-off loans of $3.4 million for 2008.  The ratio of net
charged-off loans to average loans was 0.60% for 2009, compared to 0.41% for
2008.  The allowance for loan losses totaled $14.9 million, or 1.24%
of loans, net of unearned income, at December 31, 2009, compared to $10.6
million, or 1.10% of loans, net of unearned income, at December 31, 2008.





The provision expense for loan losses
was $6.3 million for the year ended December 31, 2008, an increase of $2.73
million, in comparison to $3.5 million in 2007.Also, nonperforming loans
increased to $9.7 million, or 1.02%, of total loans at December 31, 2008 from
$4.4 million, or 0.66%, of total loans at December 31, 2007.  During
2008, we had net charged-off loans totaling $3.4 million, compared to net
charged-off loans of $1.2 million for 2007.  The ratio of net
charged-off loans to average loans was 0.41% for 2008, compared to 0.23% for
2007.  The allowance for loan losses totaled $10.6 million, or 1.10%,
of loans, net of unearned income, at December 31, 2008, compared to $7.7
million, or 1.15%, of loans, net of unearned income, at December 31,
2008.





Our management continues to maintain a
proactive approach to credit risk management as the economy experiences cycles
and as we continue to grow.





Noninterest Income





Noninterest income increased $1.7
million, or 63.2%, to $4.4 million in 2009 from $2.7 million in
2008.  Noninterest income increased $1.3 million, or 92.9%, to $2.7
million in 2008 from $1.4 million in 2007.  In each case, this
increase was due to our significant growth in deposits and lending
fees.





Income from mortgage banking operations
for the year ended December 31, 2009 increased $1.2 million, or 123.3%, to $2.2
million from $1.0 million for the year ended December 31, 2008.  This
increase was due to increased refinancing activity during 2009, plus the
addition of a loan production officer in the Dothan, Alabama market in October
2009.  Income from mortgage banking operations for the year ended
December 31, 2008 increased $341,000, or 52.1%, to $1.0 million from $654,000
for the year ended December 31, 2007. This increase was the result of higher
originations and refinancings, and the addition of a loan production officer in
the Montgomery, Alabama market in May 2008.  Income from customer
service charges and fees for the year ended December 31, 2009 increased
$361,000, or 28.43%, to $1.6 million from $1.3 million for the year ended
December 31, 2007.  Income from customer service charges and fees for
the year ended December 31, 2008 increased $686,000, or 117.5%, to $1.3 million
from $584,000 for the year ended December 31, 2007.  These increases
are primarily due to a gain of transaction accounts over the past four
years.  Our management is currently pursuing new accounts and
customers through direct marketing and other promotional efforts to increase
this source of revenue.  Merchant service fees for the year ended
December 31, 2009 increased $159,000, or 33.3%, to $636,000 from $477,000 for
the year ended December 31, 2008.  Merchant service fees for the year
ended December 31, 2008 increased $282,000, or 144.6%, to $477,000 from $195,000
for the year ended December 31, 2007.





Noninterest
Expense





Noninterest expense increased $8.2
million, or 39.7%, to $28.8 million for the year ended December 31, 2009 from
$20.6 million for the year ended December 31, 2008.  This increase is
primarily attributable to a significant increase in FDIC deposit insurance
assessments and an increase in the provision for loan losses during
2009.  FDIC insurance assessments increased $2.2 million, or 266.7%,
to $2.7 million in 2009, from $568,000 in 2008.  This increase was
attributable to increases in both the assessment rates determined by the FDIC
and the assessable deposits, as a result of the Company’s growth in
deposits.  Also, during the fourth quarter of 2009, the Company
expensed the first installment of the 13-quarter prepaid assessment adopted by
the FDIC in November 2009.  The provision for loan losses increased
$4.6 million, or 73.1%, from $6.3 million in 2008 to $10.9 million in
2009.  The increase in provision for loan losses was the result of
funding the loan loss reserve to match growth in the loan portfolio and loan
charge-offs.  Noninterest expense increased $5.8 million, or 39.1%, to
$20.6 million for the year ended December 31, 2008 from $14.8 million for the
year ended December 31, 2007, primarily due to our continued growth and
expansion, which has resulted in the addition of personnel and the opening of a
new office in Dothan.  Salaries and employee benefits increased $3.0
million, or 28.71%, to $13.6 million in 2009, compared to $10.6 million in 2008,
and increased $1.2 million, or 13.36%, to $10.6 million in 2008, compared to
$9.3 million in 2007.  These increases are primarily the result of our
increased employee base to 156 employees as of the end of 2009 from 38 as of the
end of 2005 as a consequence of our expansion and growth.  Other
noninterest expenses increased $5.2 million, or 51.4%, to $15.2 million in 2009,
compared with $10.0 million in 2008 and $5.5 million in
2007.  Included in other expenses are expenses to carry other real
estate owned, which was $2.8 million in 2009 compared to $1.6 million in 2008
and just $13,000 in 2007.  This was the result of increases in the
amount of other real estate owned during 2008 and 2009.


42


Income Tax Expense





Income tax expense was $2.8 million in
2009, compared to $3.8 million in 2008 and $3.2 million in 2007. Our effective
tax rates for 2009, 2008 and 2007 were 32.11%, 35.32% and 36.44%,
respectively.  Our primary permanent differences are related to
incentive stock option expenses and tax-free income. Barring legislative tax
changes, we anticipate our effective tax rate to remain consistent with
preceding years.




Financial
Condition





Assets





Total assets at December 31, 2009,
were $1.57 billion, an increase of $411.0 million, or 35.3%, over total assets
of $1.16 billion at December 31, 2008.  Average assets for 2009
were $1.38 billion, an increase of $393.2 million, or 40.0%, over average assets
in 2008.  Loan growth was the primary reason for the
increase.  Year-end 2009 net loans were $1.19 billion, up $234.5
million, or 24.5%, over the year-end 2008 total net loans of $957.6
million.





Total assets at December 31, 2008,
were $1.16 billion, an increase of $324.0 million, or 38.65%, over total assets
of $838.3 million at December 31, 2007.  Average assets for 2008
were $983.7 million, an increase of $282.0 million, or 40.2%, over average
assets in 2007.  Loan growth was the primary reason for the
increase.  Year-end 2008 net loans were $957.6 million, up $290.1
million, or 43.5%, over the year-end 2007 total net loans of $667.5
million.





We believe that our business model
results in a higher level of earning assets than peer banks.  Earning
assets are defined as assets which earn interest income.  Earning assets
include short-term investments, the investment portfolio and net loans.  We
maintain a higher level of earning assets because in our business model, fewer
assets are allocated to facilities, ATMs, cash, and due-from-bank accounts used
for transaction processing than is the case with many of our
peers.  Earning assets at December 31, 2009 were $1.52 billion,
or 96.8% of total assets of $1.57 billion.  Earning assets at December
31, 2008 were $1.1 billion, or 96.1% of total assets of $1.16
billion.  We believe this ratio is expected to generally continue at
these levels, although it may be affected by economic factors beyond our
control.





Investment Portfolio





We view the investment portfolio as a
source of income and liquidity.  Our investment strategy is to accept
a lower immediate yield in the investment portfolio by targeting shorter-term
investments.  Our investment policy provides that no more than 40% of
our total investment portfolio should be composed of municipal
securities.  At year end 2009, mortgage-backed securities represented
40% of the investment portfolio, state and municipal securities represented 23%
of the investment portfolio, U.S. Treasury and government agencies represented
36% of the investment portfolio, and corporate debt represented 1% of the
investment portfolio.  Our investment portfolio at December 31,
2009, 2008, and 2007 consisted of the following:


43





Gross
                              
                              
                              GrossAmortized
                              
                              
                              Unrealized
                              
                              
                              Unrealized
                              
                              
                              MarketCost
                              
                              
                              Gain
                              
                              
                              Loss
                              
                              
                              Value(Dollars
      in Thousands)As
      of December 31, 2009Securities
      available for sale:U.S.
      Treasury and government sponsored agencies
                              
                              $
                              92,368
                              
                              
                              $
                              412
                              
                              
                              $
                              (453
                              )
                              
                              $
                              92,327Mortgage-backed
      securities
                              
                              
                              99,608
                              
                              
                              
                              2,717
                              
                              
                              
                              (625
                              )
                              
                              
                              101,700State
      and municipal securities
                              
                              
                              58,090
                              
                              
                              
                              876
                              
                              
                              
                              (567
                              )
                              
                              
                              58,399Corporate
      debt
                              
                              
                              3,004
                              
                              
                              
                              36
                              
                              
                              
                              (13
                              )
                              
                              
                              3,027Total
                              
                              $
                              253,070
                              
                              
                              $
                              4,041
                              
                              
                              $
                              (1,658
                              )
                              
                              $
                              255,453Securities
      held to maturity:State
      and municipal securities
                              
                              $
                              645
                              
                              
                              $
                              1
                              
                              
                              $
                              (3
                              )
                              
                              $
                              643Total
                              
                              $
                              645
                              
                              
                              $
                              1
                              
                              
                              $
                              (3
                              )
                              
                              $
                              643As
      of December 31, 2008Securities
      available for sale:U.S.
      Treasury and government sponsored agencies
                              
                              $
                              5,093
                              
                              
                              $
                              42
                              
                              
                              $
                              (18
                              )
                              
                              $
                              5,117Mortgage-backed
      securities
                              
                              
                              60,211
                              
                              
                              
                              2,338
                              
                              
                              
                              (5
                              )
                              
                              
                              62,544State
      and municipal securities
                              
                              
                              29,879
                              
                              
                              
                              457
                              
                              
                              
                              (857
                              )
                              
                              
                              29,479Corporate
      debt
                              
                              
                              5,971
                              
                              
                              
                              —
                              
                              
                              
                              (772
                              )
                              
                              
                              5,199Total
                              
                              $
                              101,154
                              
                              
                              $
                              2,837
                              
                              
                              $
                              (1,652
                              )
                              
                              $
                              102,339As
      of December 31, 2007Securities
      available for sale:U.S.
      Treasury and government sponsored agencies
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —Mortgage-backed
      securities
                              
                              
                              62,162
                              
                              
                              
                              471
                              
                              
                              
                              (30
                              )
                              
                              
                              62,603State
      and municipal securities
                              
                              
                              24,271
                              
                              
                              
                              374
                              
                              
                              
                              (15
                              )
                              
                              
                              24,630Corporate
      debt
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Total
                              
                              $
                              86,433
                              
                              
                              $
                              845
                              
                              
                              $
                              (45
                              )
                              
                              $
                              87,233





All of our investments in
mortgage-backed securities are pass-through mortgage-backed
securities.  We do not currently, and did not have at December 31,
2009, any structured investment vehicles as well any private label
mortgage-backed securities.  The amortized cost of securities in our
portfolio totaled $253.7 million at December 31, 2009, compared to
$101.2 million at December 31, 2008.  The following table
provides the amortized cost of our securities as of December 31, 2009 by
their stated maturities (this maturity schedule excludes security prepayment and
call features), as well as the taxable equivalent yields for each maturity
range.  All such securities held are traded in liquid
markets.


44


Maturity
of Investment Securities — Amortized Cost





Less than
                              one year
                            
                            
                            More than
                              One year to
                              five years
                            
                            
                            More than
                              five years to
                              ten years
                            
                            
                            More than
                              ten years
                            
                            
                            Total(Dollars
      in Thousands)Securities
      Available for Sale:U.S.
      Treasury and government agencies
                            
                            $
                            —
                            
                            
                            $
                            54,011
                            
                            
                            $
                            28,032
                            
                            
                            $
                            10,325
                            
                            
                            $
                            92,368Mortgage-backed
      securities
                            
                            
                            —
                            
                            
                            
                            1,846
                            
                            
                            
                            19,341
                            
                            
                            
                            78,421
                            
                            
                            
                            99,608State
      and municipal securities
                            
                            
                            
                            
                            
                            
                            5,359
                            
                            
                            
                            35,740
                            
                            
                            
                            16,991
                            
                            
                            
                            58,090Corporate
      debt
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,991
                            
                            
                            
                            1,013
                            
                            
                            
                            3,004Total
                            
                            $
                            —
                            
                            
                            $
                            61,216
                            
                            
                            $
                            85,104
                            
                            
                            $
                            106,750
                            
                            
                            $
                            253,070Taxable-equivalent
      yieldU.S.
      Treasury and government agencies
                            
                            
                            —
                            
                            
                            
                            1.98
                            %
                            
                            
                            3.77
                            %
                            
                            
                            4.29
                            %
                            
                            
                            2.78
                            %Mortgage-backed
      securities
                            
                            
                            —
                            
                            
                            
                            4.97
                            %
                            
                            
                            4.44
                            %
                            
                            
                            4.35
                            %
                            
                            
                            4.38
                            %State
      and municipal securities
                            
                            
                            —
                            
                            
                            
                            5.13
                            %
                            
                            
                            5.56
                            %
                            
                            
                            5.76
                            %
                            
                            
                            5.58
                            %Corporate
      debt
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            5.90
                            %
                            
                            
                            7.06
                            %
                            
                            
                            6.29
                            %Total
                            
                            
                            —
                            
                            
                            
                            2.35
                            %
                            
                            
                            4.72
                            %
                            
                            
                            4.59
                            %
                            
                            
                            4.09
                            %Securities
      Held to Maturity:State
      and municipal securities
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            645
                            
                            
                            $
                            645Total
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            645
                            
                            
                            $
                            645Taxable-equivalent
      yieldState
      and municipal securities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            6.73
                            %
                            
                            
                            6.73
                            %Total
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            6.73
                            %
                            
                            
                            6.73
                            %





At December 31, 2009, we had
$680,000 in federal funds sold, compared with $19.3 million at December 31,
2008.  This decrease in federal funds sold was the result of
management’s decision to invest liquid funds in the second half of
2009.





The objective of our investment policy
is to invest funds not otherwise needed to meet our loan demand to earn the
maximum return, yet still maintain sufficient liquidity to meet fluctuations in
our loan demand and deposit structure.  In doing so, we balance the
market and credit risks against the potential investment return, make
investments compatible with the pledge requirements of any deposits of public
funds, maintain compliance with regulatory investment requirements, and assist
certain public entities with their financial needs.  The asset
liability and investment committee has full authority over the investment
portfolio and makes decisions on purchases and sales of
securities.  The entire portfolio, along with all investment
transactions occurring since the previous board of directors meeting, is
reviewed by the board at each monthly meeting.  The investment policy
allows portfolio holdings to include short-term securities purchased to provide
us with needed liquidity and longer term securities purchased to generate level
income for us over periods of interest rate fluctuations.




Loan Portfolio





We had total loans of approximately
$1.21 billion at December 31, 2009.  Approximately 52% of our
loan portfolio is concentrated in the Birmingham-Hoover, Alabama, MSA, while
approximately 25% is concentrated in the Huntsville, Alabama MSA.  The
Montgomery, Alabama MSA represents approximately 14% of our loans, and the
Dothan, Alabama MSA represents approximately 10% of our loans.  With
our loan portfolio concentrated in only a few markets, there is a risk that our
borrowers’ ability to repay their loans from us could be affected by changes in
local economic conditions.


45


The following table details our loans
at December 31, 2009, 2008 and 2007:





2009
                      
                      
                      2008
                      
                      
                      2007(Dollars
      in Thousands)Commercial,
      financial and agricultural
                      
                      $
                      461,088
                      
                      
                      $
                      325,968
                      
                      
                      $
                      219,684Real
      estate — construction
                      
                      
                      224,178
                      
                      
                      
                      235,162
                      
                      
                      
                      195,238Real
      estate — mortgage:Owner
      occupied commercial
                      
                      
                      203,983
                      
                      
                      
                      147,197
                      
                      
                      
                      89,0141-4
      family mortgage
                      
                      
                      165,512
                      
                      
                      
                      137,019
                      
                      
                      
                      64,325Other
      mortgage
                      
                      
                      119,749
                      
                      
                      
                      93,412
                      
                      
                      
                      83,663Total
      real estate — mortgage
                      
                      
                      489,244
                      
                      
                      
                      377,628
                      
                      
                      
                      237,002Consumer
                      
                      
                      32,574
                      
                      
                      
                      29,475
                      
                      
                      
                      23,357Total
      loans
                      
                      
                      1,207,084
                      
                      
                      
                      968,233
                      
                      
                      
                      675,281Less:
      allowance for loan losses
                      
                      
                      (14,911
                      )
                      
                      
                      (10,602
                      )
                      
                      
                      (7,732
                      )Net
      loans
                      
                      $
                      1,192,173
                      
                      
                      $
                      957,631
                      
                      
                      $
                      667,549





The following table details the
percentage composition of our loan portfolio by type at December 31, 2009,
2008 and 2007:


December
      31,2009
                    
                    
                    2008
                    
                    
                    2007(Dollars
      in ThousandsCommercial,
      financial and agricultural
                    
                    
                    38.20
                    %
                    
                    
                    33.67
                    %
                    
                    
                    32.53
                    %Real
      estate - construction
                    
                    
                    18.57
                    %
                    
                    
                    24.29
                    %
                    
                    
                    28.91
                    %Real
      estate – mortgage:Owner
      occupied commercial
                    
                    
                    16.90
                    %
                    
                    
                    15.20
                    %
                    
                    
                    13.18
                    %1-4
      family mortgage
                    
                    
                    13.71
                    %
                    
                    
                    14.15
                    %
                    
                    
                    9.53
                    %Other
      mortgage
                    
                    
                    9.92
                    %
                    
                    
                    9.65
                    %
                    
                    
                    12.39
                    %Total
      real estate — mortgage
                    
                    
                    40.53
                    %
                    
                    
                    39.00
                    %
                    
                    
                    35.10
                    %Consumer
                    
                    
                    2.70
                    %
                    
                    
                    3.04
                    %
                    
                    
                    3.46
                    %Total
      loans
                    
                    
                    100.00
                    %
                    
                    
                    100.00
                    %
                    
                    
                    100.00
                    %




The following table details maturities
and sensitivity to interest rate changes for our commercial loans at
December 31, 2009:


Due in 1
                
                
                Due in 1
                
                
                Due afterType of Loan(1)
                
                year or less
                
                
                to 5 years
                
                
                5 Years
                
                
                Total(Dollars in Thousands)Commercial,
      financial and agricultural
                
                $
                275,603
                
                
                $
                165,173
                
                
                $
                20,312
                
                
                $
                461,088Real
      estate – construction
                
                
                146,540
                
                
                
                75,833
                
                
                
                1,805
                
                
                
                224,178Real
      estate – mortgage
                
                
                101,725
                
                
                
                248,581
                
                
                
                138,938
                
                
                
                489,244Consumer
                
                
                19,992
                
                
                
                11,949
                
                
                
                633
                
                
                
                32,574Total
                
                $
                543,860
                
                
                $
                501,536
                
                
                $
                161,688
                
                
                $
                1,207,084Less:
      allowance for loan losses
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (14,911
                )Net
      loans
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,192,173Interest
      rate sensitivity:Fixed
      interest rates
                
                $
                100,285
                
                
                $
                316,811
                
                
                $
                58,729
                
                
                $
                475,825Floating
      or adjustable rates
                
                
                443,575
                
                
                
                184,725
                
                
                
                102,959
                
                
                
                731,259Total
                
                $
                543,860
                
                
                $
                501,536
                
                
                $
                161,688
                
                
                $
                1,207,084





(1)
            Includes
      non-accrual loans.




46





Asset Quality





The following table presents a summary
of changes in the allowances for loan losses over the past three fiscal
years.  Our net charge-offs as a percentage of average loans for 2009
was higher than 2008 and 2007 at 0.60%, compared to 0.41% and 0.23%,
respectively.  The largest balance of our charge-offs is on real
estate construction loans.  Real estate construction loans represent
18.57% of our loan portfolio.





For
      the Years Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007(Dollars
      in Thousands)Allowance
      for loan losses:Beginning
      of year
                      
                      $
                      10,602
                      
                      
                      $
                      7,732
                      
                      
                      $
                      5,418Charge-offs:Commercial,
      financial and agricultural
                      
                      
                      (2,616
                      )
                      
                      
                      (545
                      )
                      
                      
                      (279
                      )Real
      estate – construction
                      
                      
                      (3,322
                      )
                      
                      
                      (2,264
                      )
                      
                      
                      (953
                      )Real
      estate – mortgage:Owner
      occupied commercial
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —1-4
      family mortgage
                      
                      
                      (522
                      )
                      
                      
                      (480
                      )
                      
                      
                      —Other
      mortgages
                      
                      
                      (9
                      )
                      
                      
                      (459
                      )
                      
                      
                      —Total
      real estate – mortgages
                      
                      
                      (531
                      )
                      
                      
                      (939
                      )
                      
                      
                      —Consumer
                      
                      
                      (43
                      )
                      
                      
                      (44
                      )
                      
                      
                      (8
                      )Other
                      
                      
                      (164
                      )
                      
                      
                      (74
                      )
                      
                      
                      —Total
      charge-offs
                      
                      
                      (6,676
                      )
                      
                      
                      (3,866
                      )
                      
                      
                      (1,240
                      )Recoveries:Commercial,
      financial and agricultural
                      
                      
                      —
                      
                      
                      
                      264
                      
                      
                      
                      13Real
      estate – construction
                      
                      
                      107
                      
                      
                      
                      —
                      
                      
                      
                      —Real
      estate – mortgage:Owner
      Occupied
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —1-4
      family mortgage
                      
                      
                      3
                      
                      
                      
                      —
                      
                      
                      
                      —Other
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      real estate – mortgages
                      
                      
                      3
                      
                      
                      
                      —
                      
                      
                      
                      —Consumer
                      
                      
                      15
                      
                      
                      
                      198
                      
                      
                      
                      —Total
      recoveries
                      
                      
                      125
                      
                      
                      
                      462
                      
                      
                      
                      13Net
      charge-offs
                      
                      
                      (6,551
                      )
                      
                      
                      (3,404
                      )
                      
                      
                      (1,227
                      )Provision
      for loan losses charged to expense
                      
                      
                      10,860
                      
                      
                      
                      6,274
                      
                      
                      
                      3,541Allowance
      for loan losses at end of period
                      
                      $
                      14,911
                      
                      
                      $
                      10,602
                      
                      
                      $
                      7,732





2009
                          
                          
                          2008
                          
                          
                          2007As
      a percentage of year-to-date average total loans:Net
      charge-offs
                          
                          
                          0.60
                          %
                          
                          
                          0.41
                          %
                          
                          
                          0.23
                          %Provisions
      for loan losses
                          
                          
                          1.00
                          %
                          
                          
                          0.76
                          %
                          
                          
                          0.67
                          %Allowance
      for loan losses as a percentage of:Year
      end loans
                          
                          
                          1.24
                          %
                          
                          
                          1.09
                          %
                          
                          
                          1.15
                          %Nonperforming
      assets
                          
                          
                          60.34
                          %
                          
                          
                          52.68
                          %
                          
                          
                          126.88
                          %





The allowance for loan losses is
established and maintained at levels management deems adequate to absorb
anticipated credit losses from identified and otherwise inherent risks in the
loan portfolio as of the balance sheet date. In assessing the adequacy of the
allowance for loan losses management considers its evaluation of the loan
portfolio, past due loan experience, collateral values, current economic
conditions and other factors considered necessary to maintain the allowance at
an adequate level.  Our management feels that the allowance was
adequate at December 31, 2009.





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


47


Allocation
of Allowance for Loan Losses





For
      the Years Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007(Dollars in Thousands)
                        
                        Amount
                        
                        
                        Percentage
                          of loans in
                          each
                          category to
                          total loans
                        
                        
                        Amount
                        
                        
                        Percentage
                          of loans in
                          each
                          category to
                          total loans
                        
                        
                        Amount
                        
                        
                        Percentage
                          of loans in
                          each
                          category to
                          total loansCommercial,
      financial and agricultural
                        
                        $
                        3,058
                        
                        
                        
                        38.20
                        %
                        
                        $
                        1,489
                        
                        
                        
                        33.67
                        %
                        
                        $
                        1,714
                        
                        
                        
                        32.53
                        %Real
      estate - construction
                        
                        
                        6,295
                        
                        
                        
                        18.57
                        %
                        
                        
                        5,473
                        
                        
                        
                        24.29
                        %
                        
                        
                        3,487
                        
                        
                        
                        28.91
                        %Real
      estate - mortgage
                        
                        
                        1,416
                        
                        
                        
                        40.53
                        %
                        
                        
                        40
                        
                        
                        
                        39.00
                        %
                        
                        
                        340
                        
                        
                        
                        35.10
                        %Consumer
                        
                        
                        1
                        
                        
                        
                        2.70
                        %
                        
                        
                        5
                        
                        
                        
                        3.04
                        %
                        
                        
                        12
                        
                        
                        
                        3.46
                        %Other
                        
                        
                        4,141
                        
                        
                        
                        —
                        
                        
                        
                        3,595
                        
                        
                        
                        —
                        
                        
                        
                        2,179
                        
                        
                        
                        —Total
                        
                        $
                        14,911
                        
                        
                        
                        100.00
                        %
                        
                        $
                        10,602
                        
                        
                        
                        100.00
                        %
                        
                        $
                        7,732
                        
                        
                        
                        100.00
                        %





We target small and medium-sized
businesses as loan customers.  Because of their size, these borrowers
may be less able to withstand competitive or economic pressures than larger
borrowers in periods of economic weakness.  If loan losses occur to a
level where the loan loss reserve is not sufficient to cover actual loan losses,
our earnings will decrease.  Additionally, we use an independent
consulting firm to review our loans annually for quality in addition to the
reviews that may be conducted by bank regulatory agencies as part of their usual
examination process.





Nonperforming Assets





Nonaccrual loans totaled $11.9 million,
$7.7 million and $4.3 million as of December 31, 2009, 2008 and 2007,
respectively.  The table below summarizes our nonperforming assets at
December 31, 2009, 2008 and 2007:





Nonperforming
      assetsFor
      the Years Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007(Dollars
      in Thousands)Non-accrual
      loans:Number
                        
                        
                        20
                        
                        
                        
                        27
                        
                        
                        
                        20Amount
                        
                        $
                        11,921
                        
                        
                        $
                        7,713
                        
                        
                        $
                        4,284Accruing
      loans which are contractually past due 90 days or more as to principal and
      interest payments:Number
                        
                        
                        2
                        
                        
                        
                        1
                        
                        
                        
                        2Amount
                        
                        $
                        267
                        
                        
                        $
                        1,939
                        
                        
                        $
                        187Loans
      defined as “troubled debt restructurings”:Number
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Amount
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —Total
      nonperforming loans
                        
                        $
                        12,188
                        
                        
                        $
                        9,652
                        
                        
                        $
                        4,471Other
      real estate owned
                        
                        $
                        12,525
                        
                        
                        $
                        10,473
                        
                        
                        $
                        1,623Total
      nonperforming assets
                        
                        $
                        24,713
                        
                        
                        $
                        20,125
                        
                        
                        $
                        6,094Gross
      interest income lost on the above loans
                        
                        $
                        610
                        
                        
                        $
                        450
                        
                        
                        $
                        177Interest
      income included in net income on the above loans
                        
                        $
                        138
                        
                        
                        $
                        232
                        
                        
                        $
                        —





The balance of nonperforming assets can
fluctuate due to changes in economic conditions.  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 it is otherwise not reasonable to expect
collection of principal and interest due under the original terms. Exceptions
are allowed for ninety days past due loans when such loans are secured by real
estate or negotiable collateral and in the process of collection. Generally,
payments received on non-accrual loans are applied directly to
principal.


48


As of December 31, 2009, we had
impaired loans of $21.5 million inclusive of nonaccrual loans, an increase of
$5.6 million from $15.9 million as of December 31, 2008.  We allocated
$3.1 million of our allowance for loan losses at December 31, 2009 to these
impaired loans. The average balance of all impaired loans in 2009 was $23.9
million.  Interest income foregone for impaired loans was $610,000 for
the year ended December 31, 2009 and there was $599,000 of income recognized on
impaired loans for the year ended December 31, 2009.  A loan is
considered impaired, based on current information and events, if our management
has serious doubts that we will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Impairment does not always indicate credit loss, but
provides an indication of collateral exposure based on prevailing market
conditions and third party valuations.  Impaired loans are measured by
either the present value of expected future cash flows discounted at the loans
effective interest rate, the loan’s obtainable market price, or the fair value
of the collateral if the loan is collateral dependant. The amount of impairment,
if any, and subsequent changes are included in the allowance for loan losses.
Interest on accruing impaired loans is recognized as long as such loans do not
meet the criteria for nonaccrual status.  Our credit risk management
performs verification and testing to ensure appropriate identification of
impaired loans and that proper reserves are held on these loans.





Of the $21.5 million of impaired loans
reported as of December 31, 2009, $11.0 million were real estate – construction
loans, $2.8 million were residential real estate loans, $4.2 million were
commercial and industrial loans and $2.7 million were commercial real estate
loans.  Of the $11.0 million of impaired real estate – construction
loans, $6.1 million (a total of 10 loans with five builders) were residential
construction loans, and $5.0 million consisted of various residential lot loans
from seven builders.





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





·
            Close
      monitoring of the past due and overdraft reports on a weekly basis to
      identify deterioration as early as possible and the placement of
      identified loans on the watchlist;





·
            Extensive
      monthly credit review for all watchlist/classified loans including
      formulation of aggressive workout or action plans.  When a
      workout is not achievable, move immediately to collection/foreclosure mode
      to obtain control of the underlying collateral as rapidly as possible to
      minimize the deterioration/loss of its
value;





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





·
            New
      construction is generally limited to established builders/developers that
      are turning inventory and we have little desire to increase our fundings
      of developed lots and land.





Deposits





We rely on increasing our deposit base
to fund loan and other asset growth.  Each of our markets is highly
competitive. We compete for local deposits by offering attractive products with
premium rates.  We expect to have a higher average cost of funds for local
deposits than competitor banks due to our lack of an extensive branch
network.  Our management’s strategy is to offset the higher cost of funding
with a lower level of operating expense and firm pricing discipline for loan
products.  We have promoted electronic banking services by providing them
without charge and by offering in-bank customer training.  The
following table presents the average balance of and average rate paid on each of
the following deposit categories at the Bank level for years ended 2009, 2008
and 2007:


49





Average DepositsAverage for Years Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Average
                      
                      
                      
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageTypes of Deposits:
                      
                      Average
                        Balance
                      
                      
                      Rate
                        Paid
                      
                      
                      Average
                        Balance
                      
                      
                      Rate
                        Paid
                      
                      
                      Average
                        Balance
                      
                      
                      Rate
                        Paid(Dollars in Thousands)Non-interest-bearing
      demand deposits
                      
                      $
                      140,660
                      
                      
                      
                      —
                      
                      
                      $
                      92,451
                      
                      
                      
                      —
                      
                      
                      $
                      84,051
                      
                      
                      
                      —Interest-bearing
      demand deposits
                      
                      
                      178,232
                      
                      
                      
                      0.90
                      %
                      
                      
                      92,717
                      
                      
                      
                      1.64
                      %
                      
                      
                      41,824
                      
                      
                      
                      2.77
                      %Money
      market accounts
                      
                      
                      704,112
                      
                      
                      
                      1.26
                      %
                      
                      
                      558,313
                      
                      
                      
                      2.22
                      %
                      
                      
                      458,925
                      
                      
                      
                      4.76
                      %Savings
      accounts
                      
                      
                      972
                      
                      
                      
                      0.51
                      %
                      
                      
                      455
                      
                      
                      
                      0.64
                      %
                      
                      
                      205
                      
                      
                      
                      1.54
                      %Time
      deposits
                      
                      
                      35,804
                      
                      
                      
                      2.63
                      %
                      
                      
                      19,144
                      
                      
                      
                      3.99
                      %
                      
                      
                      9,058
                      
                      
                      
                      4.92
                      %Time
      deposits, $100,000 and over
                      
                      
                      182,283
                      
                      
                      
                      2.57
                      %
                      
                      
                      115,984
                      
                      
                      
                      4.04
                      %
                      
                      
                      45,944
                      
                      
                      
                      5.11
                      %Purchased
      time deposits
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      deposits
                      
                      $
                      1,242,063
                      
                      
                      
                      
                      
                      
                      $
                      879,064
                      
                      
                      
                      
                      
                      
                      $
                      640,007




The scheduled maturities of time
deposits at December 31, 2009 are as follows:




Maturity
                
                $100,000 or more
                
                
                Less than
                  $100,000
                
                
                Total(Dollars in Thousands)Three
      months or less
                
                $
                61,124
                
                
                $
                12,264
                
                
                $
                73,388Over
      three through six months
                
                
                39,125
                
                
                
                7,672
                
                
                
                46,797Over
      six months through one year
                
                
                64,193
                
                
                
                15,251
                
                
                
                79,444Over
      one year
                
                
                45,979
                
                
                
                8,326
                
                
                
                54,305Total
                
                $
                210,421
                
                
                $
                43,513
                
                
                $
                253,934





Total average deposits in 2009 were
$1.24 billion, an increase of $363.0 million, or 41.3%, over the total average
deposits of $879.1 million in 2008.  Average noninterest- bearing
deposits increased by $48.2 million, or 52.1%, from $92.5 million in 2008 to
$140.7 million in 2009.  Average interest-bearing deposits increased
by $314.8 million, from $786.6 million in 2008 to $1.10 billion in
2009.





Total average deposits in 2008 were
$879.1 million, an increase of $239.1 million, or 37.4%, over the total average
deposits of $640.0 million in 2007.  Average noninterest-bearing
deposits increased by $8.5 million, or 10.1%, from $84.0 million in 2007 to
$92.5 million in 2008.  Average interest-bearing deposits increased by
$108.9 million, from $677.7 million in 2007 to $786.6 million in
2008.





We had no purchased deposits in 2009,
2008 or 2007.





Stockholders’ Equity





Stockholders’
equity increased $10.8 million during 2009, to $97.6 million at December 31,
2009 from $86.8 million at December 31, 2008.  The increase in
stockholders’ equity resulted primarily from (i) positive earnings of $5.9
million and (ii) a private placement transaction in which we issued and sold
139,460 shares of our common stock for $25.00 per share, or an aggregate
purchase price of $3,479,000.





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




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




We issued warrants to purchase 15,000
shares of our common stock at a price of $25.00 per share in the second quarter
of 2009.  These warrants were issued in connection with the sale of a
$5,000,000 subordinated note of the Bank, as discussed in detail in Note 11 to
the Consolidated Financial Statements.


50


We granted non-plan stock options to
persons representing certain key business relationships to purchase up to an
aggregate of 55,000 shares of our common stock at between $15.00 and $20.00 per
share for 10 years.  These stock options are non-qualified and are not
part of our stock incentive plans.  They vest 100% in a lump sum five
years after their date of grant.




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




Borrowed Funds





We have available approximately $78.0
million in unused federal funds lines of credit with regional banks, subject to
certain restrictions and collateral requirements.





Off-Balance Sheet
Arrangements





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





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





The following table sets forth our
credit arrangements and financial instruments whose contract amounts represent
credit risk as of December 31, 2009, 2008 and 2007:





2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in Thousands)Commitments
      to extend credit
                  
                  $
                  409,760
                  
                  
                  $
                  294,502
                  
                  
                  $
                  291,937Credit
      card arrangements
                  
                  
                  19,059
                  
                  
                  
                  11,323
                  
                  
                  
                  5,849Standby
      letters of credit and financial guarantees
                  
                  
                  39,205
                  
                  
                  
                  32,655
                  
                  
                  
                  21,010Total
                  
                  $
                  468,024
                  
                  
                  $
                  338,480
                  
                  
                  $
                  318,796




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





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


51


Derivatives





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





During 2008 the Bank entered into
interest rate swaps (“swaps”) to facilitate customer transactions and meet their
financing needs. Upon entering into these swaps, the Bank entered into
offsetting positions with a regional correspondent bank in order to minimize the
risk to the Bank.  As of December 31, 2009, the Bank was party to two
swaps with notional amounts totaling approximately $12.1 million with customers,
and two swaps with notional amounts totaling approximately $12.1 million with a
regional correspondent bank.  These swaps qualify as derivatives, but
are not designated as hedging instruments.





The Bank has entered into agreements
with secondary market investors to deliver loans on a “best efforts delivery”
basis. When a rate is committed to a borrower, it is based on the best price
that day and locked with our investor for our customer for a 30-day period. In
the event the loan is not delivered to the investor, the Bank has no risk or
exposure with the investor. The interest rate lock commitments related to loans
that are originated for later sale are classified as derivatives. The fair
values of our agreements with investors and rate lock commitments to customers
as of December 31, 2009 and 2008 were not material.




Liability and Asset
Management




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





Our asset liability and investment
committee of the Bank, which consists of four executive officers of the Bank, is
charged with monitoring our liquidity and funds position.  The
committee regularly reviews the rate sensitivity position on a three-month,
six-month and one-year time horizon; loans-to-deposits ratios; and average
maturities for certain categories of liabilities.  The asset liability
committee uses a computer model to analyze the maturities of rate-sensitive
assets and liabilities.  The model measures the “gap” which is defined
as the difference between the dollar amount of rate-sensitive assets repricing
during a period and the volume of rate-sensitive liabilities repricing during
the same period.  Gap is also expressed as the ratio of rate-sensitive
assets divided by rate-sensitive liabilities.  If the ratio is greater
than “one,” then the dollar value of assets exceeds the dollar value of
liabilities and the balance sheet is “asset sensitive.”  Conversely,
if the value of liabilities exceeds the dollar value of assets, then the ratio
is less than one and the balance sheet is “liability sensitive.”  Our
internal policy requires our management to maintain the gap such that net
interest margins will not change more than 10% if interest rates change by 100
basis points or more than 15% if interest rates change by 200 basis
points.  As of December 31, 2009, our gap was within such
ranges.  See “—Quantitative and Qualitative Analysis of Market Risk”
below in Item 7A for additional information.


52


Liquidity
and Capital Adequacy





Liquidity





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





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





The retention of existing deposits and
attraction of new deposit sources through new and existing customers is critical
to our liquidity position.  In the event of compression in liquidity
due to a run-off in deposits, we have a liquidity policy and procedure that
provides for certain actions under varying liquidity
conditions.  These actions include borrowing from existing
correspondent banks, selling or participating loans, and the curtailment of loan
commitments and funding.  At December 31, 2009, our liquid assets,
represented by cash and due from banks, federal funds sold and
available-for-sale securities, totaled
$331.7 million.  Additionally, at such date we had available to
us approximately $78.0 million in unused federal funds lines of credit with
regional banks, subject to certain restrictions and collateral requirements, to
meet short term funding needs.  On March 19, 2008, we borrowed $20.0
million from the Federal Home Loan Bank against “qualified” loans of the Bank
(as defined by the FHLB). We also have approximately $5.5 million in borrowing
capacity from the FHLB under a blanket pledge of our qualifying residential
mortgages, consumer home equity lines of credit and second mortgage loans, and
our commercial real estate loans.  We believe these sources of funding
are adequate to meet immediate anticipated funding needs, but we will need
additional capital to maintain our current growth.  Our management
meets on a weekly basis to review sources and uses of funding to determine the
appropriate strategy to ensure an appropriate level of liquidity, and we have
increased our focus on the generation of core deposit funding to supplement our
liquidity position.  At the current time, our long-term liquidity
needs primarily relate to funds required to support loan originations and
commitments and deposit withdrawals.




To finance our continued growth and
planned expansion activities, the Bank issued its 8.25% Subordinated Note due
June 1, 2016 in the principal amount of $5.0 million in a private placement on
June 23, 2009.  Also, in connection with a private placement and
pursuant to subscription agreements effective December 31, 2008, we issued and
sold 139,460 shares of our common stock for $25.00 per share in January 2009 for
an aggregate purchase price of $3,479,000.  In addition, in February
2010 we commenced a private placement of up to $15.0 million in 6.0% Mandatory
Convertible Trust Preferred Securities, which is expected to be completed on or
about March 15, 2010.  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.


53


The
following table reflects the contractual maturities of our term liabilities as
of December 31, 2009.  The amounts shown do not reflect any early
withdrawal or prepayment assumptions.





Payments due by PeriodContractual
      Obligations (1):
                  
                  Total
                  
                  
                  Less
      Than
                    1 Year
                  
                  
                  1-3
                    Years
                  
                  
                  More
      than 3
                    to
      5 Years
                  
                  
                  More than
                    5 Years(Dollars in Millions)Deposits without
      a stated maturity
                  
                  $
                  1,178,421
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Certificates
      of deposit(2)
                  
                  
                  253,934
                  
                  
                  
                  199,629
                  
                  
                  
                  43,338
                  
                  
                  
                  10,967
                  
                  
                  
                  —FHLB
      borrowings
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  10,000
                  
                  
                  
                  10,000
                  
                  
                  
                  —Subordinated
      debentures
                  
                  
                  15,228
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,228Subordinated
      note payable
                  
                  
                  4,922
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,922Operating
      lease commitments
                  
                  
                  17,256
                  
                  
                  
                  1,640
                  
                  
                  
                  3,329
                  
                  
                  
                  3,441
                  
                  
                  
                  8,846Total
                  
                  
                  1,489,761
                  
                  
                  $
                  201,269
                  
                  
                  $
                  56,667
                  
                  
                  $
                  24,408
                  
                  
                  $
                  28,996





(1)
            Excludes
      interest.


(2)
            Certificates
      of deposit give customers rights 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





As of December 31, 2009, our most
recent notification from the FDIC categorized us as well-capitalized under the
regulatory framework for prompt corrective action.  To remain
categorized as well-capitalized, we must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as disclosed in the table
below.  Our management believes that we are well-capitalized under the
prompt corrective action provisions as of December 31, 2009.  In
addition, the Alabama Banking Department has required that the Bank maintain a
leverage ratio of 7.00%.





The following table sets forth (i) the
capital ratios required by the FDIC and the Alabama Banking Department’s
leverage ratio requirement to be maintained by us for the first four years of
its operations and (ii) our actual ratios of capital to total regulatory or
risk-weighted assets, as of December 31, 2009.






“Well-Capitalized”
                
                
                Actual at
                  December 31, 2009Total
      risk-based capital
                
                
                10.00
                %
                
                
                10.48
                %Tier
      1 capital
                
                
                6.00
                %
                
                
                8.89
                %Leverage
      ratio
                
                
                5.00
                %
                
                
                6.97
                %





For a
description of capital ratios see Note 16 of “Notes to Consolidated Financial
Statements” for the period ending December 31, 2009.





Impact of Inflation





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





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


54


Adoption
of Recent Accounting Pronouncements





In March 2008, the Financial Accounting
Standards Board (“FASB”) issued an accounting pronouncement that changed the
disclosure requirements for derivative instruments and hedging activities.
Entities are now required to provide enhanced disclosure about (a) how and why
an entity uses derivative instruments, (b) how derivative instruments and
related hedging items are accounted for, and (c) how derivative instruments and
related hedging items affect an entity’s financial position, financial
performance, and cash flows. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.  We adopted this pronouncement effective January 1,
2009.  See Note 12 in “Notes to Consolidated Financial Statements” for
disclosures about our derivative instruments and hedging
activities.





In
September 2008, the FASB issued an accounting pronouncement that
defined whether instruments granted in share-based payment transactions are
participating securities for purposes of computing earnings per
share.  Under the pronouncement, unvested share-based payment awards
that contain rights to receive non-forfeitable dividends (whether paid or
unpaid) are participating securities and should be included in the two-class
method of computing earnings per share. The pronouncement is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those years.  Our adoption of the provisions of this pronouncement
effective January 1, 2009 did not have an impact on our consolidated financial
statements.





In April
2009, the FASB issued three related accounting pronouncements to provide further
application guidance and enhanced disclosures of fair value measurements and
impairments of securities.  These pronouncements provide guidance for
making fair value measurements more consistent with existing accounting
principles when the volume and level of activity for the asset or liability have
significantly decreased.  The pronouncements also enhance consistency
in reporting by increasing the frequency of fair value disclosures and modifies
existing general accounting standards for and disclosure of other-than-temporary
(“OTTI”) losses for impaired debt securities.





The fair
value measurement guidance of these pronouncements reaffirms the need for
entities to use judgment in determining if a formerly active market has become
inactive and in determining fair values when markets have become
inactive.  Prior to these pronouncements, fair value disclosures for
instruments covered by the pronouncements were required for annual statements
only.  These disclosures are now required in interim financial
statements.  The general standards of accounting for OTTI losses were
changed to require the recognition of an OTTI loss in earnings only when an
entity (1) intends to sell the debt security; (2) more likely than not will be
required to sell the security before recovery of its amortized cost basis; or
(3) does not expect to recover the entire amortized cost basis of the
security.  When an entity intends to sell or more likely than not will
be required to sell a security, the entire OTTI loss must be recognized in
earnings.  In all other situations, only the portion of the OTTI
losses representing the credit loss must be recognized in earnings, with the
remaining portion being recognized in other comprehensive income, net of
deferred taxes.





All three
pronouncements were effective for interim and annual reports ending after June
15, 2009.  Early adoption was permitted for interim and annual periods
ending after March 15, 2009, but concurrent adoption of all three was
required.  We adopted the provisions of these pronouncements for the
quarter ended June 30, 2009.  The adoption of these provisions did not
have an impact on our consolidated financial statements.





In May
2009, the FASB issued an accounting pronouncement establishing general standards
of accounting for and disclosure of subsequent events.  The
pronouncement defines “recognized subsequent events” as those that give evidence
of conditions that existed at the balance-sheet date and “non-recognized
subsequent events” as those that provide evidence about conditions that arose
after the balance-sheet date but prior to the issuance of the financial
statements.  Entities must recognize in the financial statements the
effect of recognized subsequent events, but cannot recognize the effects in the
financial statements of non-recognized subsequent events.  This
pronouncement also requires entities to disclose the date through which
subsequent events have been evaluated.  This pronouncement was
effective for interim and annual periods ending after June 30,
2009.  We adopted this pronouncement for the quarter ended June 30,
2009, and adoption did not have an impact on our consolidated financial
statements.


55


In June
2009, the FASB issued an accounting pronouncement establishing the FASB
“Accounting Standards CodificationTM” as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities.  This pronouncement was effective
for financial statements issued for interim and annual periods ending after
September 30, 2009.  On the effective date, this pronouncement
superseded all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative.  We adopted
this new accounting pronouncement effective September 30, 2009.  There
was no impact on the consolidated financial statements from the adoption of this
pronouncement.





Effect
of Newly Issued but Not Yet Effective Accounting Pronouncements





In June 2009, the 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.  These pronouncements must be applied as of the beginning of
each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Earlier
application is prohibited.  We do not anticipate a material impact to
the consolidated financial statements from the adoption of this
standard.





ITEM
7A.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.




Like all financial institutions, we are
subject to market risk from changes in interest rates. Interest rate risk is
inherent in the balance sheet due to the mismatch between the maturities of
rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and
the level of rate-sensitive liabilities exceeds the level of rate-sensitive
assets, the net interest margin will be negatively
impacted.  Conversely, if rates are falling, and the level of
rate-sensitive liabilities is greater than the level of rate-sensitive assets,
the impact on the net interest margin will be favorable. Managing interest rate
risk is further complicated by the fact that all rates do not change at the same
pace, in other words, short term rates may be rising while longer term rates
remain stable. In addition, different types of rate-sensitive assets and
rate-sensitive liabilities react differently to changes in rates.




To manage interest rate risk, we must
take a position on the expected future trend of interest rates. Rates may rise,
fall, or remain the same.  Our asset liability committee develops its
view of future rate trends and strives to manage rate risk within a targeted
range by monitoring economic indicators, examining the views of economists and
other experts, and understanding the current status of our balance
sheet.  Our annual budget reflects the anticipated rate environment
for the next twelve months.  The asset liability committee conducts a
quarterly analysis of the rate sensitivity position and reports its results to
our board of directors.




The asset liability committee employs
multiple modeling scenarios to analyze the maturities of rate-sensitive assets
and liabilities. The model measures the “gap” which is defined as the difference
between the dollar amount of rate-sensitive assets repricing during a period and
the volume of rate-sensitive liabilities repricing during the same
period.  The gap is also expressed as the ratio of rate-sensitive
assets divided by rate-sensitive liabilities. If the ratio is greater than
“one”, the dollar value of assets exceeds the dollar value of liabilities; the
balance sheet is “asset sensitive”.  Conversely, if the value of
liabilities exceeds the value of assets, the ratio is less than one and the
balance sheet is “liability sensitive”.  Our internal policy requires
management to maintain the gap such that net interest margins will not change
more than 10% if interest rates change 100 basis points or more than 15% if
interest rates change 200 basis points.  As of December 31, 2009, our
gap was within such ranges.




The model measures scheduled maturities
in periods of three months, four to twelve months, one to five years and over
five years.  The chart below illustrates our rate-sensitive position
at December 31, 2009.  Management uses the one year gap as the
appropriate time period for setting strategy.


56




Rate
      Sensitivity Gap Analysis0-3
                          Months
                        
                        
                        4-12
                          Months
                        
                        
                        1-5
                          Years
                        
                        
                        Over
                          5 years
                        
                        
                        Total(Dollars
      in Thousands)Interest
      earning assets:Loans
                        
                        $
                        798,274
                        
                        
                        $
                        72,821
                        
                        
                        $
                        295,286
                        
                        
                        $
                        40,703
                        
                        
                        $
                        1,207,084Securities
                        
                        
                        7,915
                        
                        
                        
                        29,692
                        
                        
                        
                        93,884
                        
                        
                        
                        124,607
                        
                        
                        
                        256,098Federal
      funds sold
                        
                        
                        680
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        680Interest
      bearing balances with banks
                        
                        
                        48,544
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        48,544Total
      interest-earning assets
                        
                        $
                        855,413
                        
                        
                        $
                        102,513
                        
                        
                        $
                        389,170
                        
                        
                        $
                        165,310
                        
                        
                        $
                        1,512,406Interest
      bearing liabilities:Deposits:Interest
      checking
                        
                        $
                        242,319
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        242,319Money
      market and savings
                        
                        
                        724,795
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        724,795Time
      deposits
                        
                        
                        73,388
                        
                        
                        
                        126,241
                        
                        
                        
                        54,305
                        
                        
                        
                        —
                        
                        
                        
                        253,934Other
      borrowings
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        20,000
                        
                        
                        
                        4,922
                        
                        
                        
                        24,922Trust
      preferred securities
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        15,228
                        
                        
                        
                        —
                        
                        
                        
                        15,228Total
      interest-bearing liabilities
                        
                        $
                        1,040,502
                        
                        
                        $
                        126,241
                        
                        
                        $
                        89,533
                        
                        
                        $
                        4,922
                        
                        
                        $
                        1,261,198Interest
      sensitivity gap
                        
                        $
                        (185,089
                        )
                        
                        $
                        (23,728
                        )
                        
                        $
                        299,637
                        
                        
                        $
                        160,388
                        
                        
                        $
                        251,208Cumulative
      sensitivity gap
                        
                        $
                        (185,089
                        )
                        
                        $
                        (208,817
                        )
                        
                        $
                        90,820
                        
                        
                        $
                        251,208Percent
      of cumulative sensitivity gap to total interest-earning
    assets
                        
                        
                        (21.6
                        )%
                        
                        
                        (21.8
                        )%
                        
                        
                        6.7
                        %
                        
                        
                        16.6
                        %





The interest rate risk model that
defines the gap position also performs a “rate shock” test of the balance
sheet.  The rate shock procedure measures the impact on the economic value
of equity (EVE) which is a measure of long term interest rate risk. EVE is the
difference between the market value of our assets and the liabilities and is our
liquidation value.  In this analysis, the model calculates the
discounted cash flow or market value of each category on the balance
sheet.  The percent change in EVE is a measure of the volatility of
risk.  Regulatory guidelines specify a maximum change of 30% for a 200
basis points rate change.  At December 31, 2009, the percent change at
plus or minus 200 basis points is within that range at (10.6)% and (25.0)%,
respectively.




The chart below identifies the EVE
impact of a shift in rates of 100 and 200 basis points in either
direction.





Economic
      Value of Equity Under Rate Shockat
      December 31, 2009Rate Change
                
                -200bps
                
                
                -100bps
                
                
                0bps
                
                
                +100bps
                
                
                +200bps(Dollars
      in Thousands)Economic
      value of equity
                
                $
                73,217
                
                
                $
                78,195
                
                
                $
                97,622
                
                
                $
                90,203
                
                
                $
                87,274Actual
      dollar change
                
                $
                (24,406
                )
                
                $
                (19,427
                )
                
                
                
                
                
                $
                (7,419
                )
                
                $
                (10,348
                )Percent
      change
                
                
                -25.0
                %
                
                
                -19.9
                %
                
                
                
                
                
                
                -7.6
                %
                
                
                -10.6
                %




The one year gap ratio of (21.8)%
indicates that we would show an increase in net interest income in a falling
rate environment, and the EVE rate shock shows that the EVE would decline in a
falling rate environment. The EVE simulation model is a static model which
provides information only at a certain point in time. For example, in a rising
rate environment, the model does not take into account actions which management
might take to change the impact of rising rates on us. Given that limitation, it
is still useful is assessing the impact of an unanticipated movement in interest
rates.





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


57




ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.




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


PageReport
      of Independent Registered Public Accounting Firm onConsolidated
      Financial Statements
                                  
                                  59Report
      of Management on Internal Control over Financial Reporting
                                  
                                  60Report
      of Independent Registered Public Accounting Firm onInternal
      Control over Financial Reporting
                                  
                                  61Consolidated
      Balance Sheets at December 31, 2009 and 2008
                                  
                                  63Consolidated
      Statements of Income for the Years Ended December 31,2009,
      2008 and 2007
                                  
                                  64Consolidated
      Statements of Comprehensive Income for the Years EndedDecember
      31, 2009, 2008 and 2007
                                  
                                  65Consolidated
      Statements of Stockholders’ Equity for Years EndedDecember
      31, 2009, 2008 and 2007
                                  
                                  66Consolidated
      Statements of Cash Flows for the Years December 31, 2009,2008
      and 2007
                                  
                                  67Notes
      to Consolidated Financial Statements
                                  
                                  68


58





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors


ServisFirst
Bancshares, Inc.


Birmingham,
Alabama





We have audited the accompanying
consolidated balance sheets of ServisFirst Bancshares, Inc., as of December
31, 2009 and 2008, and the related consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2009. These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





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





In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of ServisFirst Bancshares, Inc. as of December 31, 2009
and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended, December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.





We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), ServisFirst Bancshares, Inc.’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 8, 2010, expressed an
opinion that ServisFirst Bancshares, Inc. had not maintained effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.





Birmingham,
      AlabamaMarch
      8, 2010




59




REPORT
OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




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




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




The
Company’s management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2009. In making this assessment, we
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in its Internal Control—Integrated
Framework.




A
material weakness is a deficiency in internal controls over financial reporting
such that there is more than a reasonable possibility that a material
misstatement of the Company’s financial statements will not be detected or
prevented in a timely manner.  A material weakness was identified and
is included in this report on internal control over financial
reporting.  The material weakness relates to management’s failure to
detect a misstatement of the amount of the Federal Deposit Insurance
Corporation’s special three-year prepaid assessment for the year ended December,
31 2009 before the Company released its earnings on January 19,
2010.




Because
of the effect of the material weakness described above, management believes
that, as of December 31, 2009, the Company’s internal controls over financial
reporting were not effective.




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




SERVISFIRST
      BANCSHARES,INC.by
                      /s/    THOMAS
      A. BROUGHTON, IIITHOMAS
      A. BROUGHTON, IIIPresident
      and Chief Executive Officerby
                      /s/    WILLIAM
      M. FOSHEEWILLIAM
      M. FOSHEEChief
      Financial
Officer


60





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors


ServisFirst
Bancshares, Inc.


Birmingham,
Alabama





We have
audited ServisFirst Bancshares, Inc.’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). ServisFirst Bancshares, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company’s internal control over financial reporting
based on our audit.





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





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





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





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is more than a reasonable
possibility that a material misstatement of the company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management’s
assessment: a material weakness in the controls over financial reporting
relating to management’s failure to detect a misstatement of the amount of the
Federal Deposit Insurance Company’s special three-year prepaid assessment as of
December 31, 2009.  This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2009 financial statements, and this report does not affect our report
dated March 8, 2010 on those financial statements.





In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, ServisFirst Bancshares,
Inc., has not maintained effective internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).”





61




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of ServisFirst
Bancshares, Inc. as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2009 and our report
dated March 8, 2010, expressed an unqualified opinion.





Birmingham,
      AlabamaMarch
      8, 2010





62





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
BALANCE SHEETS DECEMBER 31, 2009 AND 2008


(In
thousands, except share and per share amounts)





2009
                      
                      
                      2008ASSETSCash
      and due from banks
                      
                      $
                      26,982
                      
                      
                      $
                      22,844Interest-bearing
      balances due from depository institutions
                      
                      
                      48,544
                      
                      
                      
                      30,774Federal
      funds sold
                      
                      
                      680
                      
                      
                      
                      19,300Cash
      and cash equivalents
                      
                      $
                      76,206
                      
                      
                      
                      72,918Debt
      securities:Available
      for sale
                      
                      
                      255,453
                      
                      
                      
                      102,339Held
      to maturity
                      
                      
                      645
                      
                      
                      
                      -Restricted
      equity securities
                      
                      
                      3,241
                      
                      
                      
                      2,659Mortgage
      loans held for sale
                      
                      
                      6,202
                      
                      
                      
                      3,320Loans
                      
                      
                      1,207,084
                      
                      
                      
                      968,233Less
      allowance for loan losses
                      
                      
                      (14,911
                      )
                      
                      
                      (10,602
                      )Loans,
      net
                      
                      
                      1,192,173
                      
                      
                      
                      957,631Premises
      and equipment, net
                      
                      
                      5,088
                      
                      
                      
                      3,884Accrued
      interest and dividends receivable
                      
                      
                      6,200
                      
                      
                      
                      4,026Deferred
      tax assets
                      
                      
                      4,872
                      
                      
                      
                      3,585Other
      real estate owned
                      
                      
                      12,525
                      
                      
                      
                      10,473Other
      assets
                      
                      
                      10,892
                      
                      
                      
                      1,437Total
      assets
                      
                      $
                      1,573,497
                      
                      
                      $
                      1,162,272LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Noninterest-bearing
                      
                      $
                      211,307
                      
                      
                      $
                      121,459Interest-bearing
                      
                      
                      1,221,048
                      
                      
                      
                      915,860Total
      deposits
                      
                      
                      1,432,355
                      
                      
                      
                      1,037,319Other
      borrowings
                      
                      
                      24,922
                      
                      
                      
                      20,000Trust
      preferred securities
                      
                      
                      15,228
                      
                      
                      
                      15,087Accrued
      interest payable
                      
                      
                      1,026
                      
                      
                      
                      1,280Other
      liabilities
                      
                      
                      2,344
                      
                      
                      
                      1,803Total
      liabilities
                      
                      
                      1,475,875
                      
                      
                      
                      1,075,489Stockholders'
      equity:Common
      stock, par value $.001 per share; 15,000,000 shares
      authorized;5,513,482
      and 5,374,022  shares issued and outstanding
                      
                      
                      6
                      
                      
                      
                      5Preferred
      stock, par value $.001 per share; 1,000,000 shares
    authorized;no
      shares outstanding
                      
                      
                      -
                      
                      
                      
                      -Additional
      paid-in capital
                      
                      
                      75,078
                      
                      
                      
                      70,729Retained
      earnings
                      
                      
                      20,965
                      
                      
                      
                      15,087Accumulated
      other comprehensive income
                      
                      
                      1,573
                      
                      
                      
                      962Total
      stockholders' equity
                      
                      
                      97,622
                      
                      
                      
                      86,783Total
      liabilities and shareholders' equity
                      
                      $
                      1,573,497
                      
                      
                      $
                      1,162,272





See
Notes to Consolidated Financial Statements.


63





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands, except share and per share amounts)





2009
                            
                            
                            2008
                            
                            
                            2007Interest
      income:Interest
      and fees on loans
                            
                            $
                            55,890
                            
                            
                            $
                            49,997
                            
                            
                            $
                            43,839Taxable
      securities
                            
                            
                            4,516
                            
                            
                            
                            3,840
                            
                            
                            
                            2,235Nontaxable
      securities
                            
                            
                            1,500
                            
                            
                            
                            917
                            
                            
                            
                            669Federal
      funds sold
                            
                            
                            257
                            
                            
                            
                            548
                            
                            
                            
                            4,379Other
      interest and dividends
                            
                            
                            34
                            
                            
                            
                            148
                            
                            
                            
                            295Total
      interest income
                            
                            
                            62,197
                            
                            
                            
                            55,450
                            
                            
                            
                            51,417Interest
      expense:Deposits
                            
                            
                            16,087
                            
                            
                            
                            19,375
                            
                            
                            
                            25,871Borrowed
      funds
                            
                            
                            2,250
                            
                            
                            
                            1,099
                            
                            
                            
                            1Total
      interest expense
                            
                            
                            18,337
                            
                            
                            
                            20,474
                            
                            
                            
                            25,872Net
      interest income
                            
                            
                            43,860
                            
                            
                            
                            34,976
                            
                            
                            
                            25,545Provision
      for loan losses
                            
                            
                            10,860
                            
                            
                            
                            6,274
                            
                            
                            
                            3,541Net
      interest income after provision for loan losses
                            
                            
                            33,000
                            
                            
                            
                            28,702
                            
                            
                            
                            22,004Noninterest
      income:Service
      charges on deposit accounts
                            
                            
                            1,631
                            
                            
                            
                            1,270
                            
                            
                            
                            584Securities
      gains
                            
                            
                            193
                            
                            
                            
                            -
                            
                            
                            
                            -Other
      operating income
                            
                            
                            2,589
                            
                            
                            
                            1,434
                            
                            
                            
                            857Total
      noninterest income
                            
                            
                            4,413
                            
                            
                            
                            2,704
                            
                            
                            
                            1,441Noninterest
      expenses:Salaries
      and employee benefits
                            
                            
                            13,581
                            
                            
                            
                            10,552
                            
                            
                            
                            9,308Equipment
      and occupancy expense
                            
                            
                            2,749
                            
                            
                            
                            2,157
                            
                            
                            
                            1,566Professional
      services
                            
                            
                            848
                            
                            
                            
                            986
                            
                            
                            
                            528Other
      operating expenses
                            
                            
                            11,577
                            
                            
                            
                            6,881
                            
                            
                            
                            3,394Total
      noninterest expenses
                            
                            
                            28,755
                            
                            
                            
                            20,576
                            
                            
                            
                            14,796Income
      before income taxes
                            
                            
                            8,658
                            
                            
                            
                            10,830
                            
                            
                            
                            8,649Provision
      for income taxes
                            
                            
                            2,780
                            
                            
                            
                            3,825
                            
                            
                            
                            3,152Net
      income
                            
                            $
                            5,878
                            
                            
                            $
                            7,005
                            
                            
                            $
                            5,497Basic
      earnings per share
                            
                            $
                            1.07
                            
                            
                            $
                            1.37
                            
                            
                            $
                            1.19Diluted
      earnings per share
                            
                            $
                            1.02
                            
                            
                            $
                            1.31
                            
                            
                            $
                            1.16





See
Notes to Consolidated Financial Statements.


64





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007


(In
thousands)





2009
                  
                  
                  2008
                  
                  
                  2007Net
      income
                  
                  $
                  5,878
                  
                  
                  $
                  7,005
                  
                  
                  $
                  5,497Other
      comprehensive income (loss), net of tax:Unrealized
      holding gains arising during period from securities available for sale,
      net of tax of $472, $131, and $273 for 2009, 2008 and 2007,
      respectively
                  
                  
                  918
                  
                  
                  
                  254
                  
                  
                  
                  531Reclassification
      adjustment for net gains on sale of securities in net income, net of tax
      of $65
                  
                  
                  (128
                  )
                  
                  
                  -
                  
                  
                  
                  -Unrealized
      holding gains arising during period from derivative, net of tax of $23,
      and $125 for 2008 and 2007, respectively
                  
                  
                  -
                  
                  
                  
                  67
                  
                  
                  
                  445Reclassification
      adjustment for net gains realized on derivatives in net income, net of tax
      of $93 and $184 for 2009 and 2008, respectively
                  
                  
                  (179
                  )
                  
                  
                  (360
                  )
                  
                  
                  -Other
      comprehensive income (loss)
                  
                  
                  611
                  
                  
                  
                  (39
                  )
                  
                  
                  976Comprehensive
      income
                  
                  $
                  6,489
                  
                  
                  $
                  6,966
                  
                  
                  $
                  6,473





See
Notes to Consolidated Financial Statements


65





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007


(In
thousands, except share amounts)





Common
                  Stock
                
                
                Additional
                  Paid-in
                  Capital
                
                
                Retained
                  Earnings
                
                
                AccumulatedOther
                  Comprehensive
                  Income
                
                
                Total
                  Stockholders'
                  EquityBalance,
      December 31, 2006
                
                $
                22,318
                
                
                $
                27,360
                
                
                $
                2,585
                
                
                $
                25
                
                
                $
                52,288Change
      in par value
                
                
                (22,314
                )
                
                
                22,314
                
                
                
                -
                
                
                
                -
                
                
                
                -Sale
      of 649,875 shares
                
                
                1
                
                
                
                12,945
                
                
                
                -
                
                
                
                -
                
                
                
                12,946Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                976
                
                
                
                976Stock
      based compensation expense
                
                
                -
                
                
                
                540
                
                
                
                -
                
                
                
                -
                
                
                
                540Net
      income
                
                
                -
                
                
                
                -
                
                
                
                5,497
                
                
                
                -
                
                
                
                5,497Balance,
      December 31, 2007
                
                
                5
                
                
                
                63,159
                
                
                
                8,082
                
                
                
                1,001
                
                
                
                72,247Sale
      of 260,540 shares
                
                
                -
                
                
                
                6,474
                
                
                
                -
                
                
                
                -
                
                
                
                6,474Other
      comprehensive loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (39
                )
                
                
                (39
                )Stock
      based compensation expense
                
                
                -
                
                
                
                671
                
                
                
                -
                
                
                
                -
                
                
                
                671Issuance
      of warrants related to subordinated notes payable
                
                
                -
                
                
                
                425
                
                
                
                -
                
                
                
                -
                
                
                
                425Net
      income
                
                
                -
                
                
                
                -
                
                
                
                7,005
                
                
                
                -
                
                
                
                7,005Balance,
      December 31, 2008
                
                
                5
                
                
                
                70,729
                
                
                
                15,087
                
                
                
                962
                
                
                
                86,783Sale
      of 139,460 shares
                
                
                1
                
                
                
                3,478
                
                
                
                -
                
                
                
                -
                
                
                
                3,479Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                611
                
                
                
                611Stock
      based compensation expense
                
                
                -
                
                
                
                785
                
                
                
                -
                
                
                
                -
                
                
                
                785Issuance
      of warrants related to subordinated notes payable
                
                
                -
                
                
                
                86
                
                
                
                -
                
                
                
                -
                
                
                
                86Net
      income
                
                
                -
                
                
                
                -
                
                
                
                5,878
                
                
                
                -
                
                
                
                5,878Balance,
      December 31, 2009
                
                $
                6
                
                
                $
                75,078
                
                
                $
                20,965
                
                
                $
                1,573
                
                
                $
                97,622





See
Notes to Consolidated Financial Statements


66





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007


(In
thousands)





2009
                              
                              
                              2008
                              
                              
                              2007OPERATING
      ACTIVITIESNet
      income
                              
                              $
                              5,878
                              
                              
                              $
                              7,005
                              
                              
                              $
                              5,497Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Deferred
      tax benefit
                              
                              
                              (1,601
                              )
                              
                              
                              (1,237
                              )
                              
                              
                              (1,036
                              )Provision
      for loan losses
                              
                              
                              10,860
                              
                              
                              
                              6,274
                              
                              
                              
                              3,541Depreciation
      and amortization
                              
                              
                              1,087
                              
                              
                              
                              926
                              
                              
                              
                              615Write-down
      of other real estate owned
                              
                              
                              1,802
                              
                              
                              
                              1,289
                              
                              
                              
                              -Net
      accretion of investments
                              
                              
                              (318
                              )
                              
                              
                              (320
                              )
                              
                              
                              (447
                              )Amortized
      gain on derivative
                              
                              
                              (272
                              )
                              
                              
                              (544
                              )
                              
                              
                              -Increase
      in accrued interest and dividends receivable
                              
                              
                              (2,174
                              )
                              
                              
                              (77
                              )
                              
                              
                              (1,047
                              )Stock
      compensation expense
                              
                              
                              785
                              
                              
                              
                              671
                              
                              
                              
                              540(Decrease)
      increase in accrued interest payable
                              
                              
                              (254
                              )
                              
                              
                              498
                              
                              
                              
                              226Proceeds
      from sale of mortgage loans held for sale
                              
                              
                              196,400
                              
                              
                              
                              79,751
                              
                              
                              
                              50,232Originations
      of mortgage loans held for sale
                              
                              
                              (201,143
                              )
                              
                              
                              (81,025
                              )
                              
                              
                              (49,793
                              )Gain
      on sale of securities available for sale
                              
                              
                              (193
                              )
                              
                              
                              -
                              
                              
                              
                              -Loss
      on sale of other real estate owned
                              
                              
                              441
                              
                              
                              
                              180
                              
                              
                              
                              -Increase
      in special prepaid FDIC insurance assessments
                              
                              
                              (7,850
                              )
                              
                              
                              -
                              
                              
                              
                              -Net
      change in other assets, liabilities, and otheroperating
      activities
                              
                              
                              (985
                              )
                              
                              
                              (1,193
                              )
                              
                              
                              1,879Net
      cash provided by operating activities
                              
                              
                              2,463
                              
                              
                              
                              12,198
                              
                              
                              
                              10,207INVESTMENT
      ACTIVITIESPurchase
      of securities available for sale
                              
                              
                              (200,558
                              )
                              
                              
                              (23,825
                              )
                              
                              
                              (94,679
                              )Proceeds
      from maturities, calls and paydowns of securitiesavailable
      for sale
                              
                              
                              16,585
                              
                              
                              
                              9,434
                              
                              
                              
                              36,816Purchase
      of securities held to maturity
                              
                              
                              (645
                              )
                              
                              
                              -
                              
                              
                              
                              -Increase
      in loans
                              
                              
                              (253,172
                              )
                              
                              
                              (308,944
                              )
                              
                              
                              (239,160
                              )Purchase
      of premises and equipment
                              
                              
                              (2,294
                              )
                              
                              
                              (817
                              )
                              
                              
                              (2,186
                              )Purchase
      of restricted equity securities
                              
                              
                              (582
                              )
                              
                              
                              (1,457
                              )
                              
                              
                              (397
                              )Proceeds
      from sale of interest rate floor
                              
                              
                              -
                              
                              
                              
                              1,000
                              
                              
                              
                              -Proceeds
      from sale of securities available for sale
                              
                              
                              32,567
                              
                              
                              
                              -
                              
                              
                              
                              -Proceeds
      from tenant reimbursement
                              
                              
                              -
                              
                              
                              
                              183
                              
                              
                              
                              -Proceeds
      from sale of other real estate owned and repossessions
                              
                              
                              6,314
                              
                              
                              
                              4,111
                              
                              
                              
                              261Additions
      to other real estate owned
                              
                              
                              (905
                              )
                              
                              
                              (1,424
                              )
                              
                              
                              (129
                              )Net
      cash used in investing activities
                              
                              
                              (402,690
                              )
                              
                              
                              (321,739
                              )
                              
                              
                              (299,474
                              )FINANCING
      ACTIVITIESNet
      increase in noninterest-bearing deposits
                              
                              
                              89,848
                              
                              
                              
                              36,441
                              
                              
                              
                              13,794Net
      increase in interest-bearing deposits
                              
                              
                              305,188
                              
                              
                              
                              238,195
                              
                              
                              
                              275,541Repayment
      of other borrowings
                              
                              
                              -
                              
                              
                              
                              (390
                              )
                              
                              
                              -Proceeds
      from other borrowings
                              
                              
                              5,000
                              
                              
                              
                              20,317
                              
                              
                              
                              73Proceeds
      from issuance of trust preferred securities
                              
                              
                              -
                              
                              
                              
                              15,000
                              
                              
                              
                              -Net
      cash provided by financing activities
                              
                              
                              403,515
                              
                              
                              
                              316,037
                              
                              
                              
                              302,354Net
      increase in cash and cash equivalents
                              
                              
                              3,288
                              
                              
                              
                              6,496
                              
                              
                              
                              13,087Cash
      and cash equivalents at beginning of year
                              
                              
                              72,918
                              
                              
                              
                              66,422
                              
                              
                              
                              53,335Cash
      and cash equivalents at end of year
                              
                              $
                              76,206
                              
                              
                              $
                              72,918
                              
                              
                              $
                              66,422SUPPLEMENTAL
      DISCLOSURECash
      paid for:Interest
                              
                              $
                              18,591
                              
                              
                              $
                              19,976
                              
                              
                              $
                              25,646Income
      taxes
                              
                              
                              4,317
                              
                              
                              
                              4,169
                              
                              
                              
                              4,371NONCASH
      TRANSACTIONSTransfers
      of loans from held for sale to held for investment
                              
                              $
                              1,861
                              
                              
                              $
                              -
                              
                              
                              $
                              -Other
      real estate acquired in settlement of loans
                              
                              
                              10,198
                              
                              
                              
                              13,650
                              
                              
                              
                              3,141




See
Notes to Consolidated Financial Statements.


67





SERVISFIRST
BANCSHARES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Operations





ServisFirst
Bancshares, Inc. (the “Company”) was formed on August 16, 2007 and is a bank
holding company whose business is conducted by its wholly-owned subsidiary
ServisFirst Bank (the “Bank”).  The Bank is headquartered in
Birmingham, Alabama, and provides a full range of banking services to individual
and corporate customers throughout the Birmingham market since opening for
business in May 2005.  In addition, the Bank entered the Huntsville,
Alabama market in 2006, the Montgomery, Alabama market in 2007 and the Dothan,
Alabama market in 2008.





Basis
of Presentation and Accounting Estimates





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





The
Company has evaluated all subsequent events for potential recognition and
disclosure through March 8, 2010, the date of the filing of this Form
10-K.





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





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




The Bank
is required to maintain reserve balances in cash or on deposit with the Federal
Reserve Bank based on a percentage of deposits.  The total of those
reserve balances was approximately $8,009,000 at December 31, 2009 and
$1,360,000 at December 31, 2008.





Investment
Securities





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


68


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)




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




Investments
in Restricted Equity Securities Carried at Cost





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





Loans





Loans are
stated at unpaid principal balances, less the allowance for loan
losses.  Interest on all loans is recognized as income based upon the
applicable rate applied to the daily outstanding principal balance of the loans.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote.  Interest payments received
on such loans are generally applied as a reduction of the loan principal
balance.  Interest income on nonaccrual loans is recognized on a cash
basis or cost recovery basis until the loan is returned to accrual
status.  Loan fees, net of direct costs, are reflected as an
adjustment to the yield of the related loan over the term of the
loan.  The Company does not have a concentration of loans to any one
industry.





Mortgage
Loans Held for Sale





The
Company classifies certain residential mortgage loans as held for
sale.  Typically mortgage loans held for sale are sold to a third
party investor within a very short time period and are sold without
recourse.  Net fees earned from this banking service are recorded in
noninterest income.





Allowance
for Loan Losses





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


69




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)





Foreclosed
Real Estate





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





Premises
and Equipment





Premises
and equipment are stated at cost less accumulated
depreciation.  Expenditures for additions and major improvements that
significantly extend the useful lives of the assets are
capitalized.  Expenditures for repairs and maintenance are charged to
expense as incurred.  Assets which are disposed of are removed from
the accounts and the resulting gains or losses are recorded in
operations.  Depreciation is calculated on a straight-line basis over
the estimated useful lives of the related assets (3 to 10
years).  Leasehold improvements are amortized on a straight-line basis
over the lesser of the lease terms or the estimated useful lives of the
improvements.





Derivatives
and Hedging Activities





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





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


70





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)





Derivatives
      and Hedging Activities (Continued)





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





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





The
      Company uses derivatives to hedge interest rate exposures associated with
      mortgage loans held for sale and mortgage loans in process.  The
      Company regularly enters into derivative financial instruments in the form
      of forward contracts, as part of its normal asset/liability management
      strategies.  The Company’s obligations under forward contracts
      consist of “best effort” commitments to deliver mortgage loans originated
      in the secondary market at a future date.  Interest rate lock
      commitments related to loans that are originated for later sale are
      classified as derivatives.  In the normal course of business,
      the Company regularly extends these rate lock commitments to customers
      during the loan origination process.  The fair values of the
      Company’s forward contract and rate lock commitments to customers as of
      December 31, 2009 and 2008 were not material and have not been
      recorded.





During
2008 the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs.  Upon entering
into these swaps, the Company entered into offsetting positions with a regional
correspondent bank in order to minimize the risk to the Company.  As
of December 31, 2009, the Company was party to two swaps with notional amounts
totaling approximately $12.1 million with customers, and two swaps with notional
amounts totaling approximately $12.1 million with a regional correspondent
bank.  These swaps qualify as derivatives, but are not designated as
hedging instruments.


71


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)





Income
      Taxes





Income
      tax expense is the total of the current year income tax due or refundable
      and the change in deferred tax assets and liabilities.  Deferred
      tax assets and liabilities are the expected future tax amounts for the
      temporary differences between carrying amounts and tax bases of assets and
      liabilities, computed using enacted tax rates.  A valuation
      allowance, if needed, reduces deferred tax assets to the amount expected
      to be realized.




Stock-Based
      Compensation





At
      December 31, 2009, the Company had two stock-based employee compensation
      plans for grants of options to key employees.  These plans have
      been accounted for under the provisions of FASB ASC 718-10,
      Compensation-Stock Compensation.  The stock-based employee
      compensation plans are more fully described in Note
  13.





Earnings
      per Common Share





Basic
      earnings per common share are computed by dividing net income by the
      weighted average number of common shares outstanding during the
      period.  Diluted earnings per common share include the dilutive
      effect of additional potential common shares issuable under stock options
      and warrants.





Loan
      Commitments and Related Financial
Instruments





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





Fair
      Value of Financial Instruments





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





Comprehensive
      Income





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




72


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)





Advertising





Advertising
      costs are expensed as incurred.  Advertising expense for the
      years ended December 31, 2009, 2008 and 2007 was $276,000, $318,000 and
      $272,000, respectively.





Adoption of Recent Accounting
Pronouncements





In March
2008, the Financial Accounting Standards Board (“FASB”) issued an accounting
pronouncement that changed the disclosure requirements for derivative
instruments and hedging activities. Entities are now required to provide
enhanced disclosure about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedging items are accounted for, and
(c) how derivative instruments and related hedging items affect an entity’s
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  The Company adopted this
pronouncement effective January 1, 2009.  See Note 12 for the
Company’s disclosures about its derivative instruments and hedging
activities.





In
September 2008, the FASB issued an accounting pronouncement that
defined whether instruments granted in share-based payment transactions are
participating securities for purposes of computing earnings per
share.  Under the pronouncement, unvested share-based payment awards
that contain rights to receive non-forfeitable dividends (whether paid or
unpaid) are participating securities and should be included in the two-class
method of computing earnings per share. The pronouncement is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those years.  The Company’s adoption of the provisions of this
pronouncement effective January 1, 2009 did not have an impact on the
consolidated financial statements.





In April
2009, the FASB issued three related accounting pronouncements to provide further
application guidance and enhanced disclosures of fair value measurements and
impairments of securities.  These pronouncements provide guidance for
making fair value measurements more consistent with existing accounting
principles when the volume and level of activity for the asset or liability have
significantly decreased.  The pronouncements also enhance consistency
in reporting by increasing the frequency of fair value disclosures and modifies
existing general accounting standards for and disclosure of other-than-temporary
(“OTTI”) losses for impaired debt securities.





The fair
value measurement guidance of these pronouncements reaffirms the need for
entities to use judgment in determining if a formerly active market has become
inactive and in determining fair values when markets have become
inactive.  Prior to these pronouncements, fair value disclosures for
instruments covered by the pronouncements were required for annual statements
only.  These disclosures are now required in interim financial
statements.  The general standards of accounting for OTTI losses were
changed to require the recognition of an OTTI loss in earnings only when an
entity (1) intends to sell the debt security; (2) more likely than not will be
required to sell the security before recovery of its amortized cost basis; or
(3) does not expect to recover the entire amortized cost basis of the
security.  When an entity intends to sell or more likely than not will
be required to sell a security, the entire OTTI loss must be recognized in
earnings.  In all other situations, only the portion of the OTTI
losses representing the credit loss must be recognized in earnings, with the
remaining portion being recognized in other comprehensive income, net of
deferred taxes.


73


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)





All three
pronouncements were effective for interim and annual reports ending after June
15, 2009.  Early adoption was permitted for interim and annual periods
ending after March 15, 2009, but concurrent adoption of all three was
required.  The Company adopted the provisions of these pronouncements
for the quarter ending June 30, 2009.  The adoption of these
provisions did not have an impact on the consolidated financial
statements.





In May
2009, the FASB issued an accounting pronouncement establishing general standards
of accounting for and disclosure of subsequent events.  The
pronouncement defines “recognized subsequent events” as those that give evidence
of conditions that existed at the balance-sheet date and “non-recognized
subsequent events” as those that provide evidence about conditions that arose
after the balance-sheet date but prior to the issuance of the financial
statements.  Entities must recognize in the financial statements the
effect of recognized subsequent events, but cannot recognize the effects in the
financial statements of non-recognized subsequent events.  This
pronouncement also requires entities to disclose the date through which
subsequent events have been evaluated.  This pronouncement was
effective for interim and annual periods ending after June 30,
2009.  The Company adopted this pronouncement for the quarter ended
June 30, 2009, and adoption did not have an impact on the consolidated financial
statements.





In June
2009, the FASB issued an accounting pronouncement establishing the FASB
“Accounting Standards CodificationTM” as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities.  This pronouncement was effective
for financial statements issued for interim and annual periods ending after
September 30, 2009.  On the effective date, this pronouncement
superseded all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative.  The
Company adopted this new accounting pronouncement effective September 30,
2009.  There was no impact on the consolidated financial statements
from the adoption of this pronouncement.





Effect
of Newly Issued but Not Yet Effective Accounting Pronouncements





In June
2009, the 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.  These pronouncements must be applied as of the beginning of
each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Earlier
application is prohibited.  The Company does not anticipate a material
impact to the consolidated financial statements from the adoption of this
standard.


74





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      2.
            INVESTMENT
      SECURITIES





The
amortized cost and fair value of securities are summarized as
follows:





Amortized
                        Cost
                      
                      
                      Gross
                        Unrealized
                        Gain
                      
                      
                      Gross
                        Unrealized
                        Loss
                      
                      
                      MarketValue(In
      Thousands)December
      31, 2009:Securities
      Available for SaleU.S.
      Treasury and government agencies
                      
                      $
                      92,368
                      
                      
                      $
                      412
                      
                      
                      $
                      (453
                      )
                      
                      $
                      92,327Mortgage-backed
      securities
                      
                      
                      99,608
                      
                      
                      
                      2,717
                      
                      
                      
                      (625
                      )
                      
                      
                      101,700State
      and municipal securities
                      
                      
                      58,090
                      
                      
                      
                      876
                      
                      
                      
                      (567
                      )
                      
                      
                      58,399Corporate
      debt
                      
                      
                      3,004
                      
                      
                      
                      36
                      
                      
                      
                      (13
                      )
                      
                      
                      3,027Total
                      
                      $
                      253,070
                      
                      
                      $
                      4,041
                      
                      
                      $
                      (1,658
                      )
                      
                      $
                      255,453Securities
      Held to MaturityState
      and municipal securities
                      
                      $
                      645
                      
                      
                      $
                      1
                      
                      
                      $
                      (3
                      )
                      
                      $
                      643Total
                      
                      $
                      645
                      
                      
                      $
                      1
                      
                      
                      $
                      (3
                      )
                      
                      $
                      643December
      31, 2008:Securities
      Available for SaleU.S.
      Treasury and government agencies
                      
                      $
                      5,093
                      
                      
                      $
                      42
                      
                      
                      $
                      (18
                      )
                      
                      $
                      5,117Mortgage-backed
      securities
                      
                      
                      60,211
                      
                      
                      
                      2,338
                      
                      
                      
                      (5
                      )
                      
                      
                      62,544State
      and municipal securities
                      
                      
                      29,879
                      
                      
                      
                      457
                      
                      
                      
                      (857
                      )
                      
                      
                      29,479Corporate
      debt
                      
                      
                      5,971
                      
                      
                      
                      -
                      
                      
                      
                      (772
                      )
                      
                      
                      5,199Total
                      
                      $
                      101,154
                      
                      
                      $
                      2,837
                      
                      
                      $
                      (1,652
                      )
                      
                      $
                      102,339





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





At
year-end 2009 and 2008, there were no holdings of securities of any issuer,
other than the U.S. Government and its agencies, in an amount greater that 10%
of stockholders’ equity.





The
amortized cost and fair value of securities as of December 31, 2009 by
contractual maturity are shown below.  Actual maturities may differ
from contractual maturities because the issuers may have the right to call or
prepay obligations with or without call or prepayment
penalties.


75


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      2.
            INVESTMENT
      SECURITIES (Continued)





Amortized
                          Cost
                        
                        
                        Market
                          Value(In
      Thousands)Securities
      available for saleDue
      within one year
                        
                        $
                        -
                        
                        
                        $
                        -Due
      from one to five years
                        
                        
                        59,370
                        
                        
                        
                        59,633Due
      from five to ten years
                        
                        
                        65,763
                        
                        
                        
                        65,887Due
      after ten years
                        
                        
                        28,329
                        
                        
                        
                        28,233Mortgage-backed
      securities
                        
                        
                        99,608
                        
                        
                        
                        101,700$
                        253,070
                        
                        
                        $
                        255,453Securities
      held to maturityDue
      after ten years
                        
                        
                        645
                        
                        
                        
                        643$
                        645
                        
                        
                        $
                        643





The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2009 and
2008.  The Company has the ability and intent to hold these securities
until such time as the value recovers or the securities
mature.  Further, the Company believes the deterioration in value on
these securities is attributable to changes in market interest rates and not
credit quality of the issuer.





Less
      Than Twelve Months
                    
                    
                    Twelve
      Months or MoreGross
                      Unrealized
                      Losses
                    
                    
                    Fair
      Value
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Fair
      Value(In
      Thousands)December
      31, 2009:U.S.
      Treasury and government agencies
                    
                    $
                    (437
                    )
                    
                    $
                    42,836
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mortgage-backed
      securities
                    
                    
                    (625
                    )
                    
                    
                    44,993
                    
                    
                    
                    -
                    
                    
                    
                    -State
      and municipal securities
                    
                    
                    (569
                    )
                    
                    
                    20,479
                    
                    
                    
                    -
                    
                    
                    
                    -Corporate
      debt
                    
                    
                    (17
                    )
                    
                    
                    2,074
                    
                    
                    
                    (13
                    )
                    
                    
                    986$
                    (1,648
                    )
                    
                    $
                    110,382
                    
                    
                    $
                    (13
                    )
                    
                    $
                    986December
      31, 2008.:U.S.
      Treasury and government agencies
                    
                    $
                    (18
                    )
                    
                    $
                    3,089
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mortgage-backed
      securities
                    
                    
                    (5
                    )
                    
                    
                    1,868
                    
                    
                    
                    -
                    
                    
                    
                    -State
      and municipal securities
                    
                    
                    (857
                    )
                    
                    
                    14,814
                    
                    
                    
                    -
                    
                    
                    
                    -Corporate
      debt
                    
                    
                    (772
                    )
                    
                    
                    5,199
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    (1,652
                    )
                    
                    $
                    24,970
                    
                    
                    $
                    -
                    
                    
                    $
                    -





At
December 31, 2009, one of the Company’s 319 debt securities was in an unrealized
loss position for more than 12 months.  The Company does not believe
this unrealized loss is “other than temporary” since it has the ability and
intent to hold the investment 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.  We have not
identified any issues related to the ultimate repayment of principal as a result
of credit concerns on these securities.


76





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      2.
            INVESTMENT
      SECURITIES (Continued)





Two
corporate bonds with an amortized cost of $2,040,000 were sold in August 2009,
and three government agency bonds with an amortized cost of $30,334,000 were
sold in December 2009.  Gains on sale of $193,000 were recognized on these
sales during 2009.  There were no losses on the sale of securities during
2009.  There were no sales of securities during 2008 and 2007.





The
carrying value of investment securities pledged to secure public funds on
deposits and for other purposes as required by law as of December 31, 2009 and
2008 was $117,377,000 and $91,959,000, respectively.





Restricted
equity securities include (1) a restricted investment in Federal Home Loan Bank
stock for membership requirement and to secure available lines of credit, and
(2) an investment in First National Bankers Bank stock.  The amount of
investment in the Federal Home Loan Bank stock was $2,991,000 and $2,409,000 at
December 31, 2009 and 2008, respectively.  The amount of investment in the
First National Bankers Bank stock was $250,000 at December 31, 2009 and
2008.





NOTE
      3.
            LOANS





The
composition of loans is summarized as follows:





December31,2009
                    
                    
                    2008(In Thousands)Commercial,
      financial and agricultural
                    
                    $
                    461,140
                    
                    
                    $
                    326,175Real
      estate - construction
                    
                    
                    224,178
                    
                    
                    
                    235,162Real
      estate - mortgage
                    
                    
                    489,244
                    
                    
                    
                    377,628Consumer
                    
                    
                    32,574
                    
                    
                    
                    29,4751,207,136
                    
                    
                    
                    968,440Allowance
      for loan losses
                    
                    
                    (14,911
                    )
                    
                    
                    (10,602
                    )Net
      unamortized loan origination fees
                    
                    
                    (52
                    )
                    
                    
                    (207
                    )Loans,
      net
                    
                    $
                    1,192,173
                    
                    
                    $
                    957,631





Changes
in the allowance for loan losses are as follows:





YearsEndedDecember31,2009
                      
                      
                      2008
                      
                      
                      2007(In Thousands)Balance,
      beginning of year
                      
                      $
                      10,602
                      
                      
                      $
                      7,732
                      
                      
                      $
                      5,418Loans
      charged off
                      
                      
                      (6,676
                      )
                      
                      
                      (3,866
                      )
                      
                      
                      (1,240
                      )Recoveries
                      
                      
                      125
                      
                      
                      
                      462
                      
                      
                      
                      13Provision
      for loan losses
                      
                      
                      10,860
                      
                      
                      
                      6,274
                      
                      
                      
                      3,541Balance,
      end of year
                      
                      $
                      14,911
                      
                      
                      $
                      10,602
                      
                      
                      $
                      7,732


77





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3.
            LOANS
      (Continued)





Impaired
loans were as follows:





December31,2009
                  
                  
                  2008
                  
                  
                  2007(In Thousands)Total
      impaired loans
                  
                  $
                  21,524
                  
                  
                  $
                  15,880
                  
                  
                  $
                  11,612Impaired
      loans with allowance allocated
                  
                  
                  11,085
                  
                  
                  
                  6,254
                  
                  
                  
                  6,185Impaired
      loans without valuation allowance
                  
                  
                  10,439
                  
                  
                  
                  9,626
                  
                  
                  
                  5,427Amount
      of allowance allocated
                  
                  
                  3,082
                  
                  
                  
                  1,125
                  
                  
                  
                  1,370Average
      balance during the year
                  
                  
                  22,330
                  
                  
                  
                  13,450
                  
                  
                  
                  7,070Interest
      income not recognized during impairment
                  
                  
                  610
                  
                  
                  
                  450
                  
                  
                  
                  177Interest
      income recognized on impaired loans
                  
                  
                  599
                  
                  
                  
                  644
                  
                  
                  
                  -





Nonperforming
loans were as follows:





December31,2009
                  
                  
                  2008(In Thousands)Nonaccrual
      loans
                  
                  $
                  11,921
                  
                  
                  $
                  7,713Past
      due 90 days and still accruing
                  
                  
                  267
                  
                  
                  
                  1,939





In the
ordinary course of business, the Company has granted loans to certain related
parties, including directors, executive officers, and their affiliates. 
The interest rates on these loans were substantially the same as rates
prevailing at the time of the transaction and repayment terms are customary for
the type of loan.  Changes in related party loans for the year ended
December 31, 2009 and 2008 are as follows:





December31,2009
                    
                    
                    2008(In Thousands)Balance,
      beginning of year
                    
                    $
                    15,934
                    
                    
                    $
                    12,078Advances
                    
                    
                    5,174
                    
                    
                    
                    22,579Repayments
                    
                    
                    (12,639
                    )
                    
                    
                    (18,723
                    )Balance,
      end of year
                    
                    $
                    8,469
                    
                    
                    $
                    15,934


78





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      4.
            FORECLOSED
      PROPERTIES





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





An
analysis of foreclosed properties for the years ended December 31, 2009, 2008
and 2007 follows:





2009
                  
                  
                  2008
                  
                  
                  2007Balance
      at beginning of year
                  
                  $
                  10,473
                  
                  
                  $
                  1,623
                  
                  
                  $
                  585Transfers
      from loans and capitalized expenses
                  
                  
                  11,103
                  
                  
                  
                  15,074
                  
                  
                  
                  3,270Foreclosed
      properties sold
                  
                  
                  (6,314
                  )
                  
                  
                  (4,111
                  )
                  
                  
                  (261
                  )Writedowns
      and partial liquidations
                  
                  
                  (2,737
                  )
                  
                  
                  (2,113
                  )
                  
                  
                  (1,971
                  )Balance
      at end of year
                  
                  $
                  12,525
                  
                  
                  $
                  10,473
                  
                  
                  $
                  1,623





NOTE
      5.
            PREMISES
      AND EQUIPMENT





Premises
and equipment are summarized as follows:





December31,2009
                  
                  
                  2008(In Thousands)Furniture
      and equipment
                  
                  $
                  4,079
                  
                  
                  $
                  3,511Leasehold
      improvements
                  
                  
                  3,882
                  
                  
                  
                  2,4227,961
                  
                  
                  
                  5,933Accumulated
      depreciation
                  
                  
                  (2,873
                  )
                  
                  
                  (2,049
                  )$
                  5,088
                  
                  
                  $
                  3,884


79





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      5.
            PREMISES
      AND EQUIPMENT (Continued)





The
provisions for depreciation charged to occupancy and equipment expense for the
years ended December 31, 2009, 2008 and 2007 were $1,087,000, $926,000 and
$615,000, respectively.





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





(In Thousands)2010
                  
                  $
                  1,6402011
                  
                  
                  1,6502012
                  
                  
                  1,6792013
                  
                  
                  1,7052014
                  
                  
                  1,736Thereafter
                  
                  
                  8,846$
                  17,256





For the
years ended December 31, 2009, 2008 and 2007, annual rental expense on operating
leases was approximately $1,447,000, $1,009,000 and $802,000,
respectively.





NOTE
      6.
            VARIABLE
      INTEREST ENTITIES (VIEs)





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





The
Company has invested in two limited partnerships for which it determined is not
the primary beneficiary, and which thus are not subject to consolidation by the
company.  The Company reports its investment in these partnerships at their
net realizable value, estimated to be the discounted value of the remaining
amount of tax credits to be received.  The amount recorded as investments
in these partnerships at December 31, 2009 was $988,000.





On
December 31, 2009, the Company entered into a limited partnership as funding
investor.  The partnership is a single purpose entity that is lending money
to a real estate investor for the purpose of acquiring and operating a
multi-tenant office building.  The investment qualifies for New Market Tax
Credits under Internal Revenue Code Section 45D, as amended.  The Company
has determined that it is the primary beneficiary of the economic risks and
rewards of the VIE, and thus has consolidated the partnership’s assets and
liabilities into its consolidated financial statements.  The amount
recorded as an investment in this partnership at December 31, 2009 was
$3,899,000, of which $3,325,000 is included in loans of the
Company.


80





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      7.
            DEPOSITS





Deposits
at December 31, 2009 and 2008 were as follows:





December31,2009
                  
                  
                  2008(In Thousands)Noninterest-bearing
      demand
                  
                  $
                  211,307
                  
                  
                  $
                  121,459Interest-bearing
      checking
                  
                  
                  965,661
                  
                  
                  
                  749,856Savings
                  
                  
                  1,453
                  
                  
                  
                  777Time
                  
                  
                  43,513
                  
                  
                  
                  25,920Time,
      $100,000 and over
                  
                  
                  210,421
                  
                  
                  
                  139,307$
                  1,432,355
                  
                  
                  $
                  1,037,319





The
scheduled maturities of time deposits at December 31, 2009 were as
follows:





(In Thousands)2010
                  
                  $
                  199,6292011
                  
                  
                  32,4072012
                  
                  
                  10,9312013
                  
                  
                  6,0162014
                  
                  
                  4,951$
                  253,934





At
December 31, 2009 and 2008, overdraft deposits reclassified to loans totaled
approximately $471,000 and $518,000, respectively.





NOTE
      8.
            FEDERAL
      FUNDS PURCHASED





At
December 31, 2009, the Company had available lines of credit totaling
approximately $78 million with various financial institutions for borrowing on a
short-term basis, with no amount outstanding.  These lines are subject to
annual renewals with varying interest rates.


81





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      9.
            OTHER
      BORROWINGS





At
      December 31, 2009 and 2008, the composition of other borrowings is
      presented below.





2009
                    
                    
                    2008Amount
                    
                    
                    Weighted
                      Average
                      Rate
                    
                    
                    Amount
                    
                    
                    Weighted
                      Average
                      RateFHLB Advances:Fixed
      rate, due 2012 and 2013
                    
                    $
                    20,000
                    
                    
                    
                    3.13
                    %
                    
                    $
                    20,000
                    
                    
                    
                    3.13
                    %Subordinated
      notes payable
                    
                    
                    4,922
                    
                    
                    
                    8.25
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      other borrowings
                    
                    $
                    24,922
                    
                    
                    
                    4.14
                    %
                    
                    $
                    20,000
                    
                    
                    
                    3.13
                    %





The
Company had a line of credit with a regional bank allowing for the borrowing of
up to $5,000,000.  The line was paid in full and terminated in September
2008.





Other
borrowings as of December 31, 2009 consist of two Federal Home Loan Bank
advances in the amount of $10 million each.  One has a maturity of March
19, 2012, and the other has a maturity of March 19, 2013.





The
Company has pledged certain qualifying mortgage loans with an aggregate carrying
value of $25.5 million as collateral under the borrowing agreement with the
FHLB.  The Company has borrowing capacity with the FHLB of Atlanta totaling
$5.5 million at December 31, 2009.





NOTE
      10.
            SUBORDINATED
      DEFERRABLE INTEREST DEBENTURES





On
September 2, 2008, ServisFirst Capital Trust I, a subsidiary of the Company (the
“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 Trust
invested the $15,463,918 of the proceeds from such sale in the Company’s 8.5%
junior subordinated deferrable interest debenture due September 1, 2038 in the
principal amount of $15,463,918 (the “Debenture”). 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 may
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.


82





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10.
            SUBORDINATED
      DEFERRABLE INTEREST DEBENTURES
(Continued)





In
addition, the Company issued a total of 75,000 warrants, each with the right to
purchase one share of the Company’s common stock for a purchase price of $25.00.
The warrants were issued in increments of 500 for each $100,000 of trust
preferred securities purchased. Each warrant is exercisable for a period
beginning upon its date of issuance and ending upon the later to occur of either
(i) September 1, 2013 or (ii) 60 days following the date upon which the
Company’s common stock becomes listed for trading upon a “national securities
exchange” as defined under the Securities Exchange Act of 1934. The Company
estimated the fair value of each warrant using a Black-Scholes-Merton valuation
model and determined the fair value per warrant to be $5.65. This total value of
$423,000 was recorded as a discount and reduced the net book value of the
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 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 not considered the primary beneficiary of the Trust under accounting
standards for variable interest entities; therefore the Trust is not
consolidated in the Company’s financial statements, but rather the subordinated
debentures are shown as a liability.  The Company’s investment in the
common stock of the Trust in included in other assets in the Consolidated
Balance Sheets.


83





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10.
            SUBORDINATED
      DEFERRABLE INTEREST DEBENTURES
(Continued)





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





NOTE
      11.
            SUBORDINATED
      NOTE DUE JUNE 1, 2016





On June
23, 2009, the Company issued its 8.25% Subordinated Note due June 1, 2016 in the
aggregate principal amount of $5,000,000 to an accredited investor at 100% of
par.  The note is subordinate and junior in right of payment upon any
liquidation of the Company as to principal, interest and premium to obligations
to the Company’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 $5.41. This total value of
$86,000 was recorded as a discount and reduced the net book value of the note to
$4,914,000 with an offsetting increase to the Company’s additional paid-in
capital. The discount will be amortized over a five-year period.





NOTE
      12.
            DERIVATIVES





Prior to
2008 the Company entered into an interest rate floor with a notional amount of
$50 million in order to fix the minimum interest rate on a corresponding amount
of its floating-rate loans.  The interest rate floor was sold in January
2008 and the related gain of $817,000 was deferred and amortized to income over
the remaining term of the original agreement which would have terminated on June
22, 2009.  Gains of $272,000 and $544,000 were recognized for the years
ended December 31, 2009 and 2008, respectively.


84





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      12.
            DERIVATIVES
      (Continued)





The
Company uses derivatives to hedge interest rate exposures associated with
mortgage loans held for sale and mortgage loans in process.  The Company
regularly enters into derivative financial instruments in the form of forward
contracts, as part of its normal asset/liability management strategies. 
The Company’s obligations under forward contracts consist of “best effort”
commitments to deliver mortgage loans originated in the secondary market at a
future date.  Interest rate lock commitments related to loans that are
originated for later sale are classified as derivatives.  In the normal
course of business, the Company regularly extends these rate lock commitments to
customers during the loan origination process.  The fair values of the
Company’s forward contract and rate lock commitments to customers as of December
31, 2009 and 2008 were not material and have not been recorded.





NOTE
      13.
            EMPLOYEE
      AND DIRECTOR BENEFITS





At
December 31, 2009, the Company has two share-based compensation plans, which are
described below.  The compensation cost that has been charged against
income for the plans was approximately $785,000, $671,000 and $540,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.





Stock
Incentive Plans





The
Company’s 2005 Stock Incentive Plan (the “2005 Plan”), originally permitted the
grant of stock options to its officers, employees, directors and organizers of
the Company for up to 525,000 shares of common stock.  However, upon
shareholder approval during 2006, the 2005 Plan was amended in order to allow
the Company to grant stock options for up to 1,025,000 shares of common
stock.  Both incentive stock options and non-qualified stock options may be
granted under the 2005 Plan.  Option awards are generally granted with an
exercise price equal to the estimated fair market value of the Company’s stock
at the date of grant; those option awards vest in varying amounts from 2007
through 2014 and are based on continuous service during that vesting period and
have a ten-year contractual term.  Dividends are not paid on unexercised
options and dividends are not subject to vesting.  The Plan provides for
accelerated vesting if there is a change in control (as defined in the
Plan).





On March
23, 2009 the Company’s board of directors adopted the 2009 Stock Incentive Plan
(the “2009 Plan”), which was effective upon approval by the stockholders at the
2009 Annual Meeting of Stockholders.  The 2009 Plan authorizes the grant of
Stock Appreciation Rights, Restricted Stock, Options, Non-stock Share
Equivalents, Performance Shares or Performance Units and other equity-based
awards.  Both incentive stock options and non-qualified stock options may
be granted under the 2009 Plan.  Option awards are generally granted with
an exercise price equal to the estimated fair market value of the Company’s
stock at the date of grant.  Up to 425,000 shares of common stock of the
Company are available for awards under the 2009 Plan.





As of
December 31, 2009, there are a total of 651,500 shares available to be granted
under both of these plans.


85





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      13.
            EMPLOYEE
      AND DIRECTOR BENEFITS (Continued)





The
Company granted non-plan options to certain persons representing key
relationships to purchase up to an aggregate amount of 55,000 shares of our
common stock at between $15.00 and $20.00 per share for 10 years.  These
options are non-qualified and not part of either the 2005 Amended and Restated
Stock Incentive Plan or 2009 Stock Incentive Plan.





The fair
value of each stock option award is estimated on the date of grant using a
Black-Scholes-Merton valuation model that uses the assumptions noted in the
following table.  Expected volatilities are based on an index of
approximately 117 publicly traded banks in the southeast United States. 
The expected term of options granted is based on the short-cut method and
represents the period of time that options granted are expected to be
outstanding.  The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve in effect at the time of
grant.





2009
                    
                    
                    2008
                    
                    
                    2007Expected
      volatility
                    
                    
                    20.00
                    %
                    
                    
                    21.16
                    %
                    
                    
                    20.00
                    %Expected
      dividends
                    
                    
                    0.50
                    %
                    
                    
                    0.50
                    %
                    
                    
                    0.50
                    %Expected
      term (in years)
                    
                    7
      years
                    
                    
                    7
      years
                    
                    
                    7
      yearsRisk-free
      rate
                    
                    
                    1.70
                    %
                    
                    
                    2.93
                    %
                    
                    
                    4.15
                    %





The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2009, 2008 and 2007 was $5.87, $6.58 and $4.92,
respectively.


86





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      13.
            EMPLOYEE
      AND DIRECTOR BENEFITS (Continued)





The
following tables summarize the status of stock options granted.





Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Weighted
                          Average
                          Remaining
                          Contractual
                          Term(years)
                        
                        
                        Aggregate
                          Intrinsic
                          Value(In Thousands)Year
      Ended December 31, 2009:Outstanding
      at beginning of year
                        
                        
                        796,000
                        
                        
                        $
                        14.50
                        
                        
                        
                        7.7
                        
                        
                        $
                        8,363Granted
                        
                        
                        40,000
                        
                        
                        
                        25.00
                        
                        
                        
                        9.2
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (2,500
                        )
                        
                        
                        15.00
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at end of year
                        
                        
                        833,500
                        
                        
                        
                        15.00
                        
                        
                        
                        6.8
                        
                        
                        $
                        8,333Exercisable
      at December 31, 2009
                        
                        
                        143,530
                        
                        
                        $
                        11.99
                        
                        
                        
                        6.1
                        
                        
                        $
                        1,867Year
      Ended December 31, 2008:Outstanding
      at beginning of year
                        
                        
                        712,500
                        
                        
                        $
                        13.12
                        
                        
                        
                        8.4
                        
                        
                        $
                        4,905Granted
                        
                        
                        98,500
                        
                        
                        
                        24.31
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (15,000
                        )
                        
                        
                        13.50
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at end of year
                        
                        
                        796,000
                        
                        
                        
                        14.50
                        
                        
                        
                        7.7
                        
                        
                        $
                        8,363Exercisable
      at December 31, 2008
                        
                        
                        68,598
                        
                        
                        $
                        12.08
                        
                        
                        
                        7.0
                        
                        
                        $
                        886Year
      Ended December 31, 2007:Outstanding
      at beginning of year
                        
                        
                        517,000
                        
                        
                        $
                        11.35
                        
                        
                        
                        9.0
                        
                        
                        $
                        1,894Granted
                        
                        
                        201,500
                        
                        
                        
                        17.56
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (6,000
                        )
                        
                        
                        10.00
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at end of year
                        
                        
                        712,500
                        
                        
                        
                        13.12
                        
                        
                        
                        8.4
                        
                        
                        $
                        4,905Exercisable
      at December 31, 2007
                        
                        
                        20,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        7.3
                        
                        
                        $
                        200


87





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      13.
            EMPLOYEE
      AND DIRECTOR BENEFITS (Continued)





Exercisable
options at December 31, 2009 were as follows:





RangeofExercisePrice
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Term
                      (years)
                    
                    
                    Aggregate
                      IntrinsicValue(In Thousands)$
                    10.00
                    
                    
                    60,000
                    
                    
                    $
                    10.00
                    
                    
                    
                    5.4
                    
                    
                    $
                    90011.00
                    
                    
                    33,000
                    
                    
                    
                    11.00
                    
                    
                    
                    6.3
                    
                    
                    
                    46215.00
                    
                    
                    50,530
                    
                    
                    
                    15.00
                    
                    
                    
                    6.9
                    
                    
                    
                    505143,530
                    
                    
                    $
                    11.99
                    
                    
                    
                    6.1
                    
                    
                    $
                    1,867





As of
December 31, 2009, there was $1,512,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Plans.  The cost is expected to be recognized over a weighted-average
period of 2.1 years.  The total fair value of shares vested during the year
ended December 31, 2009 was $298,000.





The
Company granted 20,000 restricted stock awards to a key executive in October
2009.  The value of these 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 December 31, 2009, there was $482,000 of total unrecognized
compensation cost related to non-vested restricted stock.  The cost is
expected to be recognized evenly over the remaining 4.8 years of the restricted
stock’s vesting period.





Stock
Warrants





In
recognition of the efforts and financial risks undertaken by the Bank’s
organizers, it granted organizers an opportunity to purchase a total 60,000
shares of common stock at a price of $10, which was the fair market value of the
Bank’s common stock at the time.  The warrants fully vested on May 2, 2008,
the third anniversary of the Bank’s incorporation, and will terminate on the
tenth anniversary of the incorporation date.  The total number of warrants
outstanding at December 31, 2009 and 2008 was 60,000





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





The
Company issued warrants for 15,000 shares of common stock at a price of $25 per
share in the second quarter of 2009.  These warrants were issued in
connection with the sale of the Company’s 8.25% Subordinated Note that is
discussed in detail in Note 11.


88





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      13.
            EMPLOYEE
      AND DIRECTOR BENEFITS (Continued)





Stock
Warrants (Continued)





As of
December 31, 2009, all warrants were fully vested and related compensation
expense recognized.





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




Shares
                        
                        
                        Weighted
                          Average
                          ExercisePrice
                        
                        
                        Weighted
                          Average
                          Remaining
                          Contractual
                          Term(years)
                        
                        
                        Aggregate
                          Intrinsic
                          Value(In Thousands)Year
      Ended December 31, 2009:Outstanding
      at beginning of year
                        
                        
                        60,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        6.3
                        
                        
                        $
                        900Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at end of year
                        
                        
                        60,000
                        
                        
                        
                        10.00
                        
                        
                        
                        5.3
                        
                        
                        $
                        900Exercisable
      at December 31, 2009
                        
                        
                        60,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        5.3
                        
                        
                        $
                        900Year
      Ended December 31, 2008:Outstanding
      at beginning of year
                        
                        
                        60,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        7.3
                        
                        
                        $
                        600Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at end of year
                        
                        
                        60,000
                        
                        
                        
                        10.00
                        
                        
                        
                        6.3
                        
                        
                        $
                        900Exercisable
      at December 31, 2008
                        
                        
                        60,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        6.3
                        
                        
                        $
                        900Year
      Ended December 31, 2007:Outstanding
      at beginning of year
                        
                        
                        60,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        8.3
                        
                        
                        $
                        -Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at end of year
                        
                        
                        60,000
                        
                        
                        
                        10.00
                        
                        
                        
                        7.3
                        
                        
                        $
                        600Exercisable
      at December 31, 2007
                        
                        
                        60,000
                        
                        
                        $
                        10.00
                        
                        
                        
                        7.3
                        
                        
                        $
                        600





The
Company has a retirement savings 401(k) and profit sharing plan in which all
employees age 21 and older may participate after completion of one year of
service.  For employees in service with the Bank at June 15, 2005, the
length of service and age requirements were waived.  The Company matches
employees’ contributions based on a percentage of salary contributed by
participants and may make additional discretionary profit sharing
contributions.  The Company’s expense for the plan was $341,000, $303,000
and $202,000 for 2009, 2008 and 2007, respectively.


89





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      14.
            COMMON
      STOCK





During
2007, the Company completed private placements of 649,875 shares of common
stock.  The shares were issued and sold at $20 per share to accredited
investors of which approximately 184,875 shares were purchased by directors,
officers and their families.  This sale of stock resulted in net proceeds
of $12,946,000.  This includes stock offering expenses of
$51,000.





On August
16, 2007 ServisFirst Bancshares, Inc. was formed with 100,000,000 authorized
shares of common stock, par value $.001, and issued 5,113,482 shares, and
5,000,000 shares of preferred stock, par value $.001, with no shares
issued.  On November 29, 2007, each share of ServisFirst Bank’s $5 par
value common stock was exchanged for one share of ServisFirst Bancshares, Inc.
$0.001 common stock.  (See Note 24 of Notes to Consolidated Financial
Statements).





During
2008, the Company completed private placements of 260,540 shares of common
stock.  The shares were issued and sold at $25 per share to accredited
investors of which approximately 75,800 shares were purchased by directors,
officers and their families.  This sale of stock resulted in net proceeds
of $6,474,000.  This includes stock offering expenses of
$39,000.





During
2009, the Company completed private placements of 139,460 shares of common
stock.  The shares were issued and sold at $25 per share to accredited
investors of which approximately 78,500 shares were purchased by directors,
officers and their families.  This sale of stock resulted in net proceeds
of $3,479,000.  This includes stock offering expenses of
$8,000.





NOTE
      15.
            REGULATORY
      MATTERS





The Bank
is subject to dividend restrictions set forth by the Alabama State Banking
Department.  Under such restrictions, the Bank may not, without the prior
approval of the Alabama State Banking Department, declare dividends in excess of
the sum of the current year’s earnings plus the retained earnings from the prior
two years.  Based on this, the Bank would be limited to paying $21.4
million in dividends as of December 31, 2009.





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





Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations), and Tier 1 capital to adjusted total assets (as defined). 
Management believes, as of December 31, 2009, that the Bank meets all capital
adequacy requirements to which it is subject.


90





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      16.
            REGULATORY
      MATTERS (Continued)





As of
December 31, 2009, the most recent notification from the Federal Deposit
Insurance Corporation categorized ServisFirst Bank as well capitalized under the
regulatory framework for prompt corrective.  To remain categorized as well
capitalized; the Bank will have to maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as disclosed in the table below. 
Management believes that it is well capitalized under the prompt corrective
action provisions as of December 31, 2009.





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





Actual
                  
                  
                  ForCapitalAdequacy
                    Purposes
                  
                  
                  ToBeWellCapitalizedUnder
                    PromptCorrectiveAction
                    ProvisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioAs
      of December 31, 2009:Total
      Capital to Risk Weighted Assets:Consolidated
                  
                  $
                  130,882
                  
                  
                  
                  10.48
                  %
                  
                  $
                  99,903
                  
                  
                  
                  8.00
                  %
                  
                  $
                  124,879
                  
                  
                  
                  10.00
                  %ServisFirst
      Bank
                  
                  
                  130,426
                  
                  
                  
                  10.45
                  %
                  
                  
                  99,851
                  
                  
                  
                  8.00
                  %
                  
                  
                  124,814
                  
                  
                  
                  10.00
                  %Tier
      I 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
      I Capital to Average Assets:Consolidated
                  
                  
                  111,049
                  
                  
                  
                  6.97
                  %
                  
                  
                  63,737
                  
                  
                  
                  4.00
                  %
                  
                  
                  79,672
                  
                  
                  
                  5.00
                  %ServisFirst
      Bank
                  
                  
                  110,593
                  
                  
                  
                  6.94
                  %
                  
                  
                  63,737
                  
                  
                  
                  4.00
                  %
                  
                  
                  79,672
                  
                  
                  
                  5.00
                  %As
      of December 31, 2008:Total
      Capital to Risk Weighted Assets:Consolidated
                  
                  $
                  111,424
                  
                  
                  
                  11.25
                  %
                  
                  $
                  79,247
                  
                  
                  
                  8.00
                  %
                  
                  $
                  99,058
                  
                  
                  
                  10.00
                  %ServisFirst
      Bank
                  
                  
                  110,242
                  
                  
                  
                  11.14
                  %
                  
                  
                  79,182
                  
                  
                  
                  8.00
                  %
                  
                  
                  98,977
                  
                  
                  
                  10.00
                  %Tier
      I Capital to Risk Weighted Assets:Consolidated
                  
                  
                  100,822
                  
                  
                  
                  10.18
                  %
                  
                  
                  39,623
                  
                  
                  
                  4.00
                  %
                  
                  
                  59,435
                  
                  
                  
                  6.00
                  %ServisFirst
      Bank
                  
                  
                  99,640
                  
                  
                  
                  10.07
                  %
                  
                  
                  39,591
                  
                  
                  
                  4.00
                  %
                  
                  
                  59,386
                  
                  
                  
                  6.00
                  %Tier
      I Capital to Average Assets:Consolidated
                  
                  
                  100,822
                  
                  
                  
                  9.01
                  %
                  
                  
                  44,746
                  
                  
                  
                  4.00
                  %
                  
                  
                  55,933
                  
                  
                  
                  5.00
                  %ServisFirst
      Bank
                  
                  
                  99,640
                  
                  
                  
                  8.91
                  %
                  
                  
                  44,746
                  
                  
                  
                  4.00
                  %
                  
                  
                  55,933
                  
                  
                  
                  5.00
                  %


91





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      17.
            OTHER
      OPERATING INCOME AND EXPENSES





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





YearsEndedDecember31,2009
                  
                  
                  2008
                  
                  
                  2007(In Thousands)Other
      Operating IncomeMortgage
      fee income
                  
                  $
                  2,222
                  
                  
                  $
                  995
                  
                  
                  $
                  654Merchant
      services income
                  
                  
                  636
                  
                  
                  
                  477
                  
                  
                  
                  195Loss
      on sale of other real estate owned
                  
                  
                  (441
                  )
                  
                  
                  (180
                  )
                  
                  
                  -Other
                  
                  
                  365
                  
                  
                  
                  142
                  
                  
                  
                  8$
                  2,782
                  
                  
                  $
                  1,434
                  
                  
                  $
                  857Other
      Operating ExpensesPostage
                  
                  $
                  142
                  
                  
                  $
                  105
                  
                  
                  $
                  129Telephone
                  
                  
                  318
                  
                  
                  
                  206
                  
                  
                  
                  130Data
      processing
                  
                  
                  1,844
                  
                  
                  
                  1,341
                  
                  
                  
                  718FDIC
      insurance
                  
                  
                  2,735
                  
                  
                  
                  568
                  
                  
                  
                  202Expenses
      to carry other real estate owned
                  
                  
                  2,745
                  
                  
                  
                  1,619
                  
                  
                  
                  14Recording
      fees
                  
                  
                  309
                  
                  
                  
                  288
                  
                  
                  
                  202Supplies
                  
                  
                  319
                  
                  
                  
                  274
                  
                  
                  
                  205Customer
      and public relations
                  
                  
                  462
                  
                  
                  
                  409
                  
                  
                  
                  335Marketing
                  
                  
                  276
                  
                  
                  
                  318
                  
                  
                  
                  272Sales
      and use tax
                  
                  
                  211
                  
                  
                  
                  243
                  
                  
                  
                  190Donations
      and contributions
                  
                  
                  214
                  
                  
                  
                  205
                  
                  
                  
                  147Directors
      fees
                  
                  
                  180
                  
                  
                  
                  198
                  
                  
                  
                  96Other
                  
                  
                  1,822
                  
                  
                  
                  1,107
                  
                  
                  
                  754$
                  11,577
                  
                  
                  $
                  6,881
                  
                  
                  $
                  3,394





NOTE
      18.
            INCOME
      TAXES





The
components of income tax expense are as follows:





YearsEndedDecember31,2009
                    
                    
                    2008
                    
                    
                    2007(In Thousands)Current
                    
                    $
                    4,381
                    
                    
                    $
                    5,062
                    
                    
                    $
                    4,188Deferred
                    
                    
                    (1,601
                    )
                    
                    
                    (1,237
                    )
                    
                    
                    (1,036
                    )Income
      tax expense
                    
                    $
                    2,780
                    
                    
                    $
                    3,825
                    
                    
                    $
                    3,152





The
Company’s total income tax expense differs from the amounts computed by applying
the Federal income tax statutory rates to income before income taxes.  A
reconciliation of the differences is as follows:


92





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      18.
            INCOME
      TAXES (Continued)





YearEndedDecember31,2009Amount
                    
                    
                    %ofPre-tax
                      Earnings(In Thousands)Income
      tax at statutory federal rate
                    
                    $
                    2,944
                    
                    
                    
                    34.00
                    %Effect
      on rate of:State
      income tax, net of federal tax effect
                    
                    
                    214
                    
                    
                    
                    2.47
                    %Tax-exempt
      income, net of expenses
                    
                    
                    (477
                    )
                    
                    
                    -5.51
                    %Incentive
      stock option expense
                    
                    
                    224
                    
                    
                    
                    2.59
                    %Other
                    
                    
                    (125
                    )
                    
                    
                    -1.44
                    %Effective
      income tax and rate
                    
                    $
                    2,780
                    
                    
                    
                    32.11
                    %





YearEndedDecember31,2008Amount
                    
                    
                    %ofPre-tax
                      Earnings(In Thousands)Income
      tax at statutory federal rate
                    
                    $
                    3,683
                    
                    
                    
                    34.00
                    %Effect
      on rate of:State
      income tax, net of federal tax effect
                    
                    
                    191
                    
                    
                    
                    1.76
                    %Tax-exempt
      income, net of expenses
                    
                    
                    (278
                    )
                    
                    
                    -2.57
                    %Incentive
      stock option expense
                    
                    
                    177
                    
                    
                    
                    1.64
                    %Other
                    
                    
                    52
                    
                    
                    
                    0.48
                    %Effective
      income tax and rate
                    
                    $
                    3,825
                    
                    
                    
                    35.31
                    %





YearEndedDecember31,2007Amount
                    
                    
                    %ofPre-tax
                      Earnings(In Thousands)Income
      tax at statutory federal rate
                    
                    $
                    2,941
                    
                    
                    
                    34.00
                    %Effect
      on rate of:State
      income tax, net of federal tax effect
                    
                    
                    165
                    
                    
                    
                    1.91
                    %Tax-exempt
      income, net of expenses
                    
                    
                    (102
                    )
                    
                    
                    -1.18
                    %Incentive
      stock option expense
                    
                    
                    163
                    
                    
                    
                    1.88
                    %Other
                    
                    
                    (15
                    )
                    
                    
                    -0.18
                    %Effective
      income tax and rate
                    
                    $
                    3,152
                    
                    
                    
                    36.43
                    %


93





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      18.
            INCOME
      TAXES (Continued)





The
components of net deferred tax asset are as follows:





December31,2009
                    
                    
                    2008
                    
                    
                    2007(In Thousands)Other
      real estate
                    
                    $
                    411
                    
                    
                    $
                    309
                    
                    
                    $
                    -Start-up
      costs
                    
                    
                    141
                    
                    
                    
                    154
                    
                    
                    
                    168Net
      unrealized gains on securities available for sale and cash flow
      hedge
                    
                    
                    (810
                    )
                    
                    
                    (496
                    )
                    
                    
                    (412
                    )Depreciation
                    
                    
                    (304
                    )
                    
                    
                    (195
                    )
                    
                    
                    (107
                    )Deferred
      loan fees
                    
                    
                    106
                    
                    
                    
                    131
                    
                    
                    
                    299Allowance
      for loan losses
                    
                    
                    5,419
                    
                    
                    
                    3,649
                    
                    
                    
                    2,422Nonqualified
      equity awards
                    
                    
                    27
                    
                    
                    
                    116
                    
                    
                    
                    41Other
                    
                    
                    (118
                    )
                    
                    
                    (83
                    )
                    
                    
                    21Net
      deferred income tax assets
                    
                    $
                    4,872
                    
                    
                    $
                    3,585
                    
                    
                    $
                    2,432





Management
of the Company believes its net deferred tax asset is recoverable as of December
31, 2009 based on the expectation of future taxable income and other relevant
considerations.





NOTE
      19.
            COMMITMENTS
      AND CONTINGENCIES





Loan
Commitments





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





2009
                  
                  
                  2008
                  
                  
                  2007(In Thousands)Commitments
      to extend credit
                  
                  $
                  409,760
                  
                  
                  $
                  294,502
                  
                  
                  $
                  291,937Credit
      card arrangements
                  
                  
                  19,059
                  
                  
                  
                  11,323
                  
                  
                  
                  5,849Standby
      letters of credit
                  
                  
                  39,205
                  
                  
                  
                  32,655
                  
                  
                  
                  21,010$
                  468,024
                  
                  
                  $
                  338,480
                  
                  
                  $
                  318,796





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


94





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      20.
            CONCENTRATIONS
      OF CREDIT





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





The
Company’s loan portfolio is primarily concentrated in loans secured by real
estate, of which 59% is secured by real estate in the Company’s primary market
area.  In addition, a substantial portion of the other real estate owned is
located in that same market.  Accordingly, the ultimate collectability of
the loan portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in the Company’s primary
market area.





NOTE
      21.
            EARNINGS
      PER SHARE





A
reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations are presented
below.





Years Ended December 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007(Dollar Amounts In Thousands Except Per
                                        Share Amounts)Earnings
      Per ShareWeighted
      average common shares outstanding
                                      
                                      
                                      5,485,972
                                      
                                      
                                      
                                      5,114,194
                                      
                                      
                                      
                                      4,617,422Net
      income
                                      
                                      $
                                      5,878
                                      
                                      
                                      $
                                      7,005
                                      
                                      
                                      $
                                      5,497Basic
      earnings per share
                                      
                                      $
                                      1.07
                                      
                                      
                                      $
                                      1.37
                                      
                                      
                                      $
                                      1.19Weighted
      average common shares outstanding
                                      
                                      
                                      5,485,972
                                      
                                      
                                      
                                      5,114,194
                                      
                                      
                                      
                                      4,617,422Dilutive
      effects of assumed conversions and exercise of stock options and
      warrants
                                      
                                      
                                      301,671
                                      
                                      
                                      
                                      224,689
                                      
                                      
                                      
                                      104,442Weighted
      average common and dilutive potential common shares
      outstanding
                                      
                                      
                                      5,787,643
                                      
                                      
                                      
                                      5,338,883
                                      
                                      
                                      
                                      4,721,864Net
      income
                                      
                                      $
                                      5,878
                                      
                                      
                                      $
                                      7,005
                                      
                                      
                                      $
                                      5,497Diluted
      earnings per share
                                      
                                      $
                                      1.02
                                      
                                      
                                      $
                                      1.31
                                      
                                      
                                      $
                                      1.16





NOTE
      22.
            RELATED
      PARTY TRANSACTIONS





Loans





As more
fully described in Note 3, the Company had outstanding loan balances to related
parties as of December 31, 2009 and 2008 in the amount of $8,469,000 and
$15,934,000, respectively.


95





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      23.
            FAIR
      VALUE MEASUREMENT





Effective
January 1, 2008, the Company adopted the methods of fair value as described in
FASB ASC 820, Fair Value Measurements and Disclosures topic, to value its
financial assets and financial liabilities measured at fair value. Fair value is
based on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair
value measurements, the standard establishes a fair value hierarchy that
prioritizes observable and unobservable inputs used to measure fair value into
three broad levels, which are described below:





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





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





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





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





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.





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


96





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
23.          
   FAIR VALUE MEASUREMENT (Continued)





Impaired Loans-Loans are
considered impaired under FASB ASC 310-10-35, Subsequent Measurement of Impaired
Loans,when full
payment under the loan terms is not expected.  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 $6,076,000 and $3,701,000 during the years ended December 31, 2009 and
2008, respectively.  Impaired loans measured at fair value on a
nonrecurring basis are classified within Level 3 of the hierarchy.





Other real estate owned –
Other real estate 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 $2,149,000 and $1,469,000 for 2009 and 2008,
respectively.  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 fair value hierarchy of financial assets and
financial liabilities measured at fair value as of December 31,
2009:





(In Thousands)QuotedPricesin
                        ActiveMarkets
                        forIdentical
                        Assets(Level1)
                      
                      
                      SignificantOther
                        ObservableInputs
                        (Level2)
                      
                      
                      Significant
                        Unobservable
                        Inputs(Level3)
                      
                      
                      TotalAssets
      Measured on a Recurring Basis:Available
      for sale securities
                      
                      $
                      -
                      
                      
                      $
                      255,453
                      
                      
                      $
                      -
                      
                      
                      $
                      255,453Interest
      rate swap agreements
                      
                      
                      -
                      
                      
                      
                      413
                      
                      
                      
                      
                      
                      
                      
                      413Total
      assets at fair value
                      
                      $
                      -
                      
                      
                      $
                      255,866
                      
                      
                      $
                      -
                      
                      
                      $
                      255,866Liabilities
      Measured on a Recurring Basis:Interest
      rate swap agreements
                      
                      $
                      -
                      
                      
                      $
                      413
                      
                      
                      $
                      -
                      
                      
                      $
                      413Assets
      Measured on a Nonrecurring Basis:Impaired
      loans
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      8,003
                      
                      
                      $
                      8,003Other
      real estate owned
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,525
                      
                      
                      
                      12,525Total
      assets at fair value
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      20,528
                      
                      
                      $
                      20,528




97





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
23.            FAIR VALUE
MEASUREMENT (Continued)





The fair
value of a financial instrument is the current amount that would be exchanged
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 disclosure
requirements.  Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the
Company.





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





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





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 as they are redeemed at par
value.





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, mortgage loans,
and industrial loans) is estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to borrowers
of  similar credit quality.  Loan fair value estimates
include judgments regarding future expected loss experience and risk
characteristics.  Fair value for impaired loans is estimated using
discounted cash flow analysis, or underlying collateral values, where
applicable.





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





Other
borrowings:The fair value 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.


98





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
23.            FAIR
VALUE MEASUREMENT (Continued)





Trust preferred
securities:The fair value 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.





The
carrying amount and estimated fair value of the Company’s financial instruments
were as follows:




December31,2009
            
            
            2008Carrying
              Amount
            
            
            FairValue
            
            
            Carrying
              Amount
            
            
            FairValue(In
      Thousands)Financial
      Assets:Cash
      and cash equivalents
            
            $
            76,206
            
            
            $
            76,206
            
            
            $
            72,918
            
            
            $
            72,918Investment
      securities available for sale
            
            
            255,453
            
            
            
            255,453
            
            
            
            102,339
            
            
            
            102,339Investment
      securities held to maturity
            
            
            645
            
            
            
            643
            
            
            
            -
            
            
            
            -Restricted
      equity securities
            
            
            3,241
            
            
            
            3,241
            
            
            
            2,659
            
            
            
            2,659Mortgage
      loans held for sale
            
            
            6,202
            
            
            
            6,202
            
            
            
            3,320
            
            
            
            3,320Loans,
      net
            
            
            1,192,173
            
            
            
            1,193,376
            
            
            
            957,631
            
            
            
            979,656Accrued
      interest and dividends receivable
            
            
            6,200
            
            
            
            6,200
            
            
            
            4,026
            
            
            
            4,026Derivative
            
            
            413
            
            
            
            413
            
            
            
            823
            
            
            
            823Financial
      Liabilities:Deposits
            
            $
            1,432,355
            
            
            $
            1,435,387
            
            
            $
            1,037,319
            
            
            $
            1,038,502Borrowings
            
            
            24,922
            
            
            
            25,981
            
            
            
            20,000
            
            
            
            20,270Trust
      preferred securities
            
            
            15,228
            
            
            
            12,681
            
            
            
            15,087
            
            
            
            12,544Accrued
      interest payable
            
            
            1,026
            
            
            
            1,026
            
            
            
            1,280
            
            
            
            1,280Derivative
            
            
            413
            
            
            
            413
            
            
            
            823
            
            
            
            823




NOTE
24.            BUSINESS
COMBINATIONS





During
the second quarter of 2007, the stockholders approved the formation of a holding
company for the Bank.  On November 29, 2007, each share of the Bank’s
$5 par value common stock was exchanged for one share of the Company’s $0.001
common stock.  The combination was accounted for by transferring the
net assets of the Bank to the Company at the carrying amount.  The net
income of the Bank prior to the combination was $4,963,000 and has been included
in the consolidated statements of income for the year ended December 31,
2007.


99





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
25. PARENT
COMPANY FINANCIAL INFORMATION





The
following information presents the condensed balance sheet of ServisFirst
Bancshares, Inc. as of December 31, 2009 and 2008 and the condensed statements
of income and cash flows for the years ended December 31, 2009, 2008 and
2007.





BALANCE SHEET


(In Thousands)





December312009
                  
                  
                  2008AssetsCash
      & due from banks
                  
                  $
                  95
                  
                  
                  $
                  561Investment
      in subsidiary
                  
                  
                  112,166
                  
                  
                  
                  100,602Other
      assets
                  
                  
                  649
                  
                  
                  
                  812Total
      assets
                  
                  
                  112,910
                  
                  
                  
                  101,975LiabilitiesOther
      borrowings
                  
                  
                  15,228
                  
                  
                  
                  15,087Other
      liabilities
                  
                  
                  60
                  
                  
                  
                  10515,288
                  
                  
                  
                  15,192Stockholders'
      equityCommon
      stock
                  
                  
                  6
                  
                  
                  
                  5Paid
      in capital
                  
                  
                  75,078
                  
                  
                  
                  70,729Retained
      earnings
                  
                  
                  20,965
                  
                  
                  
                  15,087Accumulated
      other comprehensive income
                  
                  
                  1,573
                  
                  
                  
                  962Total
      stockholders' equity
                  
                  
                  97,622
                  
                  
                  
                  86,783Total
      liabilites and stockholders' equity
                  
                  $
                  112,910
                  
                  
                  $
                  101,975





STATEMENT
OF INCOME


(In
Thousands)





2009
                    
                    
                    2008
                    
                    
                    2007IncomeDividends
      received from subsidiary
                    
                    $
                    325
                    
                    
                    $
                    850
                    
                    
                    $
                    -Other
      income
                    
                    
                    40
                    
                    
                    
                    30
                    
                    
                    
                    -Total
      income
                    
                    
                    365
                    
                    
                    
                    880
                    
                    
                    
                    -ExpenseInterest
      on borrowings
                    
                    
                    1,401
                    
                    
                    
                    488
                    
                    
                    
                    1Other
      operating expenses
                    
                    
                    304
                    
                    
                    
                    391
                    
                    
                    
                    88Total
      expense
                    
                    
                    1,705
                    
                    
                    
                    879
                    
                    
                    
                    89(Loss)
      income before income taxes & equity in undistributed earnings of
      subsidiary
                    
                    
                    (1,340
                    )
                    
                    
                    1
                    
                    
                    
                    (89
                    )Income
      tax benefit
                    
                    
                    (614
                    )
                    
                    
                    (313
                    )
                    
                    
                    (33
                    )(Loss)
      income before equity in undistributed earnings earnings of
      subsidiary
                    
                    
                    (726
                    )
                    
                    
                    314
                    
                    
                    
                    (56
                    )Equity
      in undistributed earnings of subsidiary
                    
                    
                    6,604
                    
                    
                    
                    6,691
                    
                    
                    
                    590Net
      income
                    
                    $
                    5,878
                    
                    
                    $
                    7,005
                    
                    
                    $
                    534




100





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
25.            PARENT
COMPANY FINANCIAL INFORMATION (Continued)





STATEMENT
OF CASH FLOWS


(In
Thousands)





2009
                    
                    
                    2008
                    
                    
                    2007Operating
      activitiesNet
      income
                    
                    $
                    5,878
                    
                    
                    $
                    7,005
                    
                    
                    $
                    534Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Other
                    
                    
                    260
                    
                    
                    
                    (180
                    )
                    
                    
                    (16
                    )Equity
      in undistributed earnings of subsidiary
                    
                    
                    (6,604
                    )
                    
                    
                    (6,691
                    )
                    
                    
                    (590
                    )Net
      cash (used in) provided by operating activities
                    
                    
                    (466
                    )
                    
                    
                    134
                    
                    
                    
                    (72
                    )Investing
      activitiesInvestment
      in subsidiary
                    
                    
                    (3,479
                    )
                    
                    
                    (20,975
                    )
                    
                    
                    -Net
      cash used in investing activities
                    
                    
                    (3,479
                    )
                    
                    
                    (20,975
                    )
                    
                    
                    -Financing
      activitiesProceeds
      from other borrowings
                    
                    
                    -
                    
                    
                    
                    317
                    
                    
                    
                    73Repayment
      of borrowings
                    
                    
                    -
                    
                    
                    
                    (390
                    )
                    
                    
                    -Proceeds
      from issuance of trust preferred securities
                    
                    
                    -
                    
                    
                    
                    15,000
                    
                    
                    
                    -Proceeds
      from issuance of common stock
                    
                    
                    3,479
                    
                    
                    
                    6,474
                    
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    3,479
                    
                    
                    
                    21,401
                    
                    
                    
                    73(Decrease)
      increase in cash & cash equivalents
                    
                    $
                    (466
                    )
                    
                    $
                    560
                    
                    
                    $
                    1Cash
      & cash equivalents at beginning of year
                    
                    
                    561
                    
                    
                    
                    1
                    
                    
                    
                    -Cash
      & cash equivalents at end of year
                    
                    $
                    95
                    
                    
                    $
                    561
                    
                    
                    $
                    1




101





QUARTERLY
FINANCIAL DATA (UNAUDITED)





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





2009QuarterEnded(Dollars in Thousands, except per share data)March31
                        
                        
                        June30
                        
                        
                        September30
                        
                        
                        December31Interest
      Income
                        
                        $
                        13,937
                        
                        
                        $
                        14,979
                        
                        
                        $
                        16,092
                        
                        
                        $
                        17,189Interest
      Expense
                        
                        
                        4,891
                        
                        
                        
                        4,478
                        
                        
                        
                        4,648
                        
                        
                        
                        4,320Net
      Interest Income
                        
                        
                        9,046
                        
                        
                        
                        10,501
                        
                        
                        
                        11,444
                        
                        
                        
                        12,869Provision
      for Loan Loss
                        
                        
                        2,460
                        
                        
                        
                        2,608
                        
                        
                        
                        3,209
                        
                        
                        
                        2,583Net
      Income
                        
                        
                        721
                        
                        
                        
                        1,559
                        
                        
                        
                        1,608
                        
                        
                        
                        1,990Income
      Per Share, basic
                        
                        
                        0.13
                        
                        
                        
                        0.28
                        
                        
                        
                        0.29
                        
                        
                        
                        0.37Income
      Per Share, diluted
                        
                        
                        0.13
                        
                        
                        
                        0.27
                        
                        
                        
                        0.28
                        
                        
                        
                        0.34





2008 Quarter Ended(Dollars
      in Thousands, except per share data)March 31
                        
                        
                        June 30
                        
                        
                        September 30
                        
                        
                        December 31Interest
      Income
                        
                        $
                        13,835
                        
                        
                        $
                        13,341
                        
                        
                        $
                        13,881
                        
                        
                        $
                        14,393Interest
      Expense
                        
                        
                        5,748
                        
                        
                        
                        4,647
                        
                        
                        
                        5,004
                        
                        
                        
                        5,075Net
      Interest Income
                        
                        
                        8,087
                        
                        
                        
                        8,694
                        
                        
                        
                        8,877
                        
                        
                        
                        9,318Provision
      for Loan Loss
                        
                        
                        1,383
                        
                        
                        
                        2,137
                        
                        
                        
                        1,381
                        
                        
                        
                        1,373Net
      Income
                        
                        
                        1,570
                        
                        
                        
                        1,750
                        
                        
                        
                        1,724
                        
                        
                        
                        1,961Income
      Per Share, basic
                        
                        
                        0.31
                        
                        
                        
                        0.34
                        
                        
                        
                        0.34
                        
                        
                        
                        0.38Income
      Per Share, diluted
                        
                        
                        0.30
                        
                        
                        
                        0.33
                        
                        
                        
                        0.32
                        
                        
                        
                        0.36





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




There
were no changes in or disagreements with accountants regarding accounting and
financial disclosure matters during the year ended December 31, 2009.





ITEM 9A.  CONTROLS
AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




Our management, under supervision and
with the participation of the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures,
as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, as
described in “Management’s Report on Internal Control over Financial Reporting”
below, our management identified a material weakness in our internal control
over financial reporting relating to the recording of the prepaid FDIC
assessments in the fourth quarter of 2009.  Solely because of this
material weakness, the Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2009, the disclosure controls and
procedures were not effective to ensure that information required to be
disclosed in our Exchange Act reports are recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.




Management’s
Report on Internal Control over Financial Reporting




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




Our management identified a material
weakness in its internal control over financial reporting, as more fully
explained in the Report of Management on Internal Control over Financial
Reporting included in Item 8, Financial Statements and Supplementary
Data.  As a result of this material weakness, our initial report of
our results of operations for the quarter and year ended December 31, 2009 was
incorrect.  We corrected this error promptly upon discovery and issued
a corrected earnings announcement.  Management has taken steps as it
believes appropriate to ensure that similar changes in FDIC assessments and
prepayments are accurately reported.


102




The effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009, has been
audited by Mauldin & Jenkins, LLC an independent registered public
accounting firm, as stated in their report herein — “Report of Independent
Registered Public Accounting Firm.”




Changes
in Internal Control over Financial Reporting




Except as described above with respect
to the material weakness relating to our recording of the FDIC prepayment
expense in the fourth quarter of 2009, there have been no changes in our
internal controls over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.





ITEM
9B.   OTHER INFORMATION.




None.





PART III




ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.






We respond to this Item by
incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2010 Annual Meeting of
Shareholders.




Code
of Ethics




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




Executive
Officers of the Registrant




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




William Foshee – Mr. Foshee
has served as our Executive Vice President, Chief Financial Officer, Treasurer
and Secretary since 2007 and as Executive Vice President, Chief Financial
Officer, Treasurer and Secretary of the Bank since 2005.  Mr. Foshee
served as the Chief Financial Officer of Heritage Financial Holding Corporation
from 2002 until it was acquired in 2005.  Mr. Foshee received a
Bachelor of Science in Accounting from Auburn University and is a
C.P.A.




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




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


103




G. Carlton Barker – Mr. Barker
has served as Executive Vice President and Montgomery President and Chief
Executive Officer of the Bank since February 1, 2007.  Prior to
joining the Company, Mr. Barker was employed by Regions Bank for 19 years in
various capacities, most recently as the Regional President for the Southeast
Alabama Region.  Mr. Barker received a Bachelor of Science in Business
Administration from Huntingdon College and a graduate degree in banking at the
Stonier Graduate School of Banking at Rutgers University.  Mr. Barker
also serves on the Huntingdon College Board of Trustees and on the Board of
Directors of the Alabama State Banking Board.




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





ITEM 11. EXECUTIVE
COMPENSATION.




We respond to this Item by
incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2010 Annual Meeting of
Stockholders.





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




We respond to this Item by
incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2010 Annual Meeting of
Stockholders.





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




We respond to this Item by
incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2010 Annual Meeting of
Stockholders.





ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.




We respond to this Item by
incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2010 Annual Meeting of
Stockholders.





PART
IV




ITEM
15.  FINANCIAL STATEMENTS AND EXHIBITS.




(a)           The
following financial statements are filed as a part of this registration
statement:





PageReport
      of Independent Registered Public Accounting Firm on Consolidated Financial
      Statements
                59Report
      of Management on Internal Control over Financial Reporting
                60Report
      of Independent Registered Public Accounting Firm on Internal Control over
      Financial Reporting
                61Consolidated
      Balance Sheets at December 31, 2009 and 2008
                63Consolidated
      Statements of Income for the Years Ended December 31, 2009, 2008 and
      2007
                64Consolidated
      Statements of Comprehensive Income for the Years Ended December 31, 2009,
      2008 and 2007
                65Consolidated
      Statements of Stockholders’ Equity for Years Ended December 31, 2009, 2008
      and 2007
                66Consolidated
      Statements of Cash Flows for the Years December 31, 2009, 2008 and
      2007
                67Notes
      to Consolidated Financial Statements
                68




104





(b) The
following exhibits are furnished with this registration
statement.





EXHIBIT NO.
                                              
                                              NAME OF EXHIBIT2.1
                                              
                                              Plan
      of Reorganization and Agreement of Merger dated August 29, 2007
      (1)3.1
                                              
                                              Certificate
      of Incorporation (1)3.2
                                              
                                              Certificate
      of Amendment to Certificate of Incorporation (1)3.3
                                              
                                              Bylaws
      (1)4.1
                                              
                                              Form
      of Common Stock Certificate (1)4.2
                                              
                                              Certain
      provisions from the Certificate of Incorporation (1)4.3
                                              
                                              Revised
      Form of Common Stock Certificate (2)4.4
                                              
                                              Amended
      and Restated Trust Agreement of ServisFirst Capital Trust I dated
      September 2, 2008 (3)4.5
                                              
                                              Indenture
      dated September 2, 2008 (3)4.6
                                              
                                              Guarantee
      Agreement dated September 2, 2008 (3)4.7
                                              
                                              Form
      of Common Stock Purchase Warrant dated September 2, 2008
    (3)4.8
                                              
                                              ServisFirst
      Bank 8.5% Subordinated Note due June 1, 20164.9
                                              
                                              Warrant
      to Purchase Shares of Common Stock dated June 23, 200910.1
                                              
                                              2005
      Amended and Restated Stock Incentive
  Plan  (1)*10.2
                                              
                                              Change
      in Control Agreement with William M. Foshee dated May 20, 2005
      (1)*10.3
                                              
                                              Change
      in Control Agreement with Clarence C. Pouncey III dated June 6, 2006
      (1)*10.4
                                              
                                              Employment
      Agreement of Andrew N. Kattos dated April 27, 2006 (1)*10.5
                                              
                                              Employment
      Agreement of G. Carlton Barker dated February 1, 2007
  (1)*10.6
                                              
                                              2009
      Stock Incentive Plan
(4)*




105




11
            
            Statement
      Regarding Computation of Earnings Per Share is included herein at Note 16
      to the Financial Statements in Item 8.14
            
            Code
      of Ethics for Principal Financial Officers (5)21
            
            List
      of Subsidiaries24
            
            Power
      of Attorney31.1
            
            Section
      302 Certification of Chief Executive Officer31.2
            
            Section
      302 Certification of Chief Financial Officer32.1
            
            Section
      906 Certification of Chief Executive Officer32.2
            
            Section
      906 Certification of Chief Financial
Officer




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





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





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





(4)
Previously filed as Appendix A to ServisFirst Bancshares, Inc.’s definitive
Proxy Statement on Schedule 14A relating to the 2009 Annual Meeting of
Stockholders and incorporated herein by reference.





(5)
Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2008, and incorporated
herein by reference.





*
Management contract or compensatory plan arrangements.


106


SIGNATURES




Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





SERVISFIRST
      BANCSHARES, INC.By:
              /s/Thomas A. Broughton,
  IIIThomas
      A. Broughton, IIIPresident
      and Chief Executive Officer





Dated:
March 8, 2010





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





Signature
                                    
                                    Title
                                    
                                    Date/s/Thomas A. Broughton, III
                                    
                                    President,
      Chief Executive
                                    
                                    March
      8, 2010Thomas
      A. Broughton, III
                                    
                                    Officer
      and Director (PrincipalExecutive
      Officer)/s/ William M. Foshee
                                    
                                    Executive
      Vice President
                                    
                                    March
      8, 2010William
      M. Foshee
                                    
                                    and
      Chief Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting Officer)*
                                    
                                    Chairman
      of the Board
                                    
                                    March
      8, 2010Stanley
      M. Brock*
                                    
                                    Director
                                    
                                    March
      8, 2010Michael
      D. Fuller*
                                    
                                    Director
                                    
                                    March
      8, 2010James
      J. Filler*
                                    
                                    Director
                                    
                                    March
      8, 2010Joseph
      R. Cashio*
                                    
                                    Director
                                    
                                    March
      8, 2010Hatton
      C. V. Smith





_________________


*The
undersigned, acting pursuant to a Power of Attorney, have signed this Annual
Report on Form 10-K for and on behalf of  the persons indicated above
as such persons’ true and lawful attorney-in-fact and in their names, places and
stated, in the capacities indicated above ad on the date indicated
below.





/s/ William M.
      FosheeWilliam M. FosheeAttorney-in-Fact


107





EXHIBITINDEX




EXHIBIT NO.
                      
                      NAME OF EXHIBIT2.1
                      
                      Plan
      of Reorganization and Agreement of Merger dated August 29,
      2007(1)3.1
                      
                      Certificate
      of Incorporation(1)3.2
                      
                      Certificate
      of Amendment to Certificate of Incorporation(1)3.3
                      
                      Bylaws(1)4.1
                      
                      Common
      stock certificate(1)4.2
                      
                      Certain
      provisions from the Certificate of Incorporation(1)4.3
                      
                      Revised
      Common Stock Certificate(2)4.4
                      
                      Amended
      and Restated Trust Agreement of ServisFirst Capital Trust I dated
      September 2, 2008(3)4.5
                      
                      Indenture
      dated September 2, 2008(3)4.6
                      
                      Guarantee
      Agreement dated September 2, 2008(3)4.7
                      
                      Form
      of Common Stock Purchase Warrant dated September 2,
  2008(3)4.8
                      
                      ServisFirst
      Bank 8.5% Subordinated Note due June 1, 20164.9
                      
                      Warrant
      to Purchase Shares of Common Stock dated June 23, 200910.1
                      
                      2005
      Amended and Restated Stock Incentive Plan(1)*10.2
                      
                      Change
      in Control Agreement with William M. Foshee dated May 20,
      2005(1)*10.3
                      
                      Change
      in Control Agreement with Clarence C. Pouncey III dated June 6,
      2006(1)*10.4
                      
                      Employment
      Agreement of Andrew N. Kattos dated April 27, 2006(1)*10.5
                      
                      Employment
      Agreement of G. Carlton Barker February 1, 2007(1)*11
                      
                      Statement
      Regarding Computation of Earnings Per Share is included herein at Note 16
      to the Financial Statements in Item 8.14
                      
                      Code
      of Ethics for Principal Financial Officers21
                      
                      List
      of Subsidiaries24
                      
                      Power
      of Attorney31.1
                      
                      Section
      302 Certification of Chief Executive Officer31.2
                      
                      Section
      302 Certification of Chief Financial Officer32.1
                      
                      Section
      906 Certification of Chief Executive Officer32.2
                      
                      Section
      906 Certification of Chief Financial
Officer




i


(1)
Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s
Registration Statement on Form 10, as filed with the Securities and
Exchange Commission on March 28, 2008, and incorporated herein by
reference.
 
 (2)
Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current
Report on Form 8-K dated September 15, 2008, and incorporated herein by
reference.
 
 (3)
Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current
Report on Form 8-K dated September 2, 2008, and incorporated herein by
reference.
 
 (4)
Previously filed as Appendix A to ServisFirst Bancshares, Inc.’s definitive
Proxy Statement on Schedule 14A relating to the 2009 Annual Meeting of
Stockholders and incorporated herein by reference.
 
 (5)
Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2008, and incorporated
herein by reference.
 
 *
Management contract or compensatory plan arrangements.


ii