UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 _________________________
 
 FORM
10-Q


(Mark one)


x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 FOR
      THE QUARTERLY PERIOD ENDED JUNE 30,
2010


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


Commission
file number 000-53149
 
 SERVISFIRST
BANCSHARES, INC.
 (Exact
Name of Registrant as Specified in Its Charter)





Delaware
              26-0734029(State
      or Other Jurisdiction of
              (I.R.S.
      EmployerIncorporation
      or Organization)
              Identification
      No.)


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


Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No  ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the 
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
 Yes  ̈ No  ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer”, “accelerated filer”, and small
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
 Large
accelerated filer  ̈
Accelerated filer x
Non-accelerated filer  ̈ Smaller reporting
company  ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes  ̈ No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.





Class
                Outstanding as of July 30,
    2010Common
      stock, $.001 par value
                5,513,482












TABLE
OF CONTENTS





PART I. FINANCIAL
    INFORMATIONItem
      1.
                                            
                                            Consolidated
      Financial Statements
                                            
                                            3Item
      2.
                                            
                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                            
                                            20Item
      3.
                                            
                                            Quantitative
      and Qualitative Disclosure about Market Risk
                                            
                                            37Item
      4.
                                            
                                            Controls
      and Procedures
                                            
                                            37PART II. OTHER INFORMATIONItem
      1
                                            
                                            Legal
      Proceedings
                                            
                                            38Item
      1A.
                                            
                                            Risk
      Factors
                                            
                                            38Item
      2.
                                            
                                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                                            
                                            38Item
      3.
                                            
                                            Defaults
      Upon Senior Securities
                                            
                                            38Item
      5.
                                            
                                            Other
      Information
                                            
                                            39Item
      6.
                                            
                                            Exhibits
                                            
                                            39EX-31.01
      SECTION 302, CERTIFICATION OF THE CEOEX-31.02
      SECTION 302, CERTIFICATION OF THE CFOEX-31.01
      SECTION 906, CERTIFICATION OF THE CEOEX-31.01
      SECTION 906, CERTIFICATION OF THE CFO




2


PART
1. FINANCIAL INFORMATION





ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS





SERVISFIRST
BANCSHARES, INC.


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


(In
thousands, except share and per share amounts)





June 30, 2010
                
                
                December 31,
                  2009(Unaudited)
                
                
                (Audited)ASSETSCash
      and due from banks
                
                $
                26,570
                
                
                $
                26,982Interest-bearing
      balances due from depository institutions
                
                
                100,532
                
                
                
                48,544Federal
      funds sold
                
                
                148
                
                
                
                680Cash
      and cash equivalents
                
                
                127,250
                
                
                
                76,206Debt
      securities:Available
      for sale
                
                
                234,808
                
                
                
                255,453Held
      to maturity
                
                
                1,659
                
                
                
                645Restricted
      equity securities
                
                
                3,510
                
                
                
                3,241Mortgage
      loans held for sale
                
                
                4,462
                
                
                
                6,202Loans
                
                
                1,288,410
                
                
                
                1,207,084Less
      allowance for loan losses
                
                
                (15,713
                )
                
                
                (14,737
                )Loans,
      net
                
                
                1,272,697
                
                
                
                1,192,347Premises
      and equipment, net
                
                
                4,701
                
                
                
                5,088Accrued
      interest and dividends receivable
                
                
                6,144
                
                
                
                6,200Deferred
      tax assets
                
                
                4,104
                
                
                
                4,872Other
      real estate owned
                
                
                10,773
                
                
                
                12,525Other
      assets
                
                
                11,776
                
                
                
                10,718Total
      assets
                
                $
                1,681,884
                
                
                $
                1,573,497LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Noninterest-bearing
                
                $
                188,657
                
                
                $
                211,307Interest-bearing
                
                
                1,326,247
                
                
                
                1,221,048Total
      deposits
                
                
                1,514,904
                
                
                
                1,432,355Other
      borrowings
                
                
                24,929
                
                
                
                24,922Trust
      preferred securities
                
                
                30,349
                
                
                
                15,228Accrued
      interest payable
                
                
                887
                
                
                
                1,026Other
      liabilities
                
                
                1,769
                
                
                
                2,344Total
      liabilities
                
                
                1,572,838
                
                
                
                1,475,875Stockholders'
      equity:Common
      stock, par value $.001 per share; 15,000,000 shares authorized; 5,513,482
      shares issued and outstanding
                
                
                6
                
                
                
                6Preferred
      stock, par value $.001 per share; 1,000,000 shares authorized; no shares
      outstanding
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                75,392
                
                
                
                75,078Retained
      earnings
                
                
                28,999
                
                
                
                20,965Accumulated
      other comprehensive income
                
                
                4,649
                
                
                
                1,573Total
      stockholders' equity
                
                
                109,046
                
                
                
                97,622Total
      liabilities and shareholders' equity
                
                $
                1,681,884
                
                
                $
                1,573,497





See
Notes to Consolidated Financial  Statements.


3





SERVISFIRST BANCSHARES,
INC.


CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


(In thousands, except share and per share
amounts)





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Interest
      income:Interest
      and fees on loans
                
                $
                16,750
                
                
                $
                13,583
                
                
                $
                32,954
                
                
                $
                26,092Taxable
      securities
                
                
                1,670
                
                
                
                1,004
                
                
                
                3,422
                
                
                
                2,111Nontaxable
      securities
                
                
                544
                
                
                
                343
                
                
                
                1,068
                
                
                
                620Federal
      funds sold
                
                
                16
                
                
                
                47
                
                
                
                18
                
                
                
                69Other
      interest and dividends
                
                
                16
                
                
                
                2
                
                
                
                36
                
                
                
                43Total
      interest income
                
                
                18,996
                
                
                
                14,979
                
                
                
                37,498
                
                
                
                28,935Interest
      expense:Deposits
                
                
                2,829
                
                
                
                3,967
                
                
                
                5,682
                
                
                
                8,360Borrowed
      funds
                
                
                859
                
                
                
                511
                
                
                
                1,602
                
                
                
                1,029Total
      interest expense
                
                
                3,688
                
                
                
                4,478
                
                
                
                7,284
                
                
                
                9,389Net
      interest income
                
                
                15,308
                
                
                
                10,501
                
                
                
                30,214
                
                
                
                19,546Provision
      for loan losses
                
                
                2,537
                
                
                
                2,608
                
                
                
                5,075
                
                
                
                5,068Net
      interest income after provision for loan losses
                
                
                12,771
                
                
                
                7,893
                
                
                
                25,139
                
                
                
                14,478Noninterest
      income:Service
      charges on deposit accounts
                
                
                588
                
                
                
                376
                
                
                
                1,154
                
                
                
                732Securities
      gains
                
                
                15
                
                
                
                -
                
                
                
                53
                
                
                
                -Other
      operating income
                
                
                401
                
                
                
                906
                
                
                
                929
                
                
                
                1,470Total
      noninterest income
                
                
                1,004
                
                
                
                1,282
                
                
                
                2,136
                
                
                
                2,202Noninterest
      expenses:Salaries
      and employee benefits
                
                
                3,147
                
                
                
                3,590
                
                
                
                6,629
                
                
                
                6,956Equipment
      and occupancy expense
                
                
                774
                
                
                
                622
                
                
                
                1,554
                
                
                
                1,210Professional
      services
                
                
                205
                
                
                
                216
                
                
                
                405
                
                
                
                429Other
      operating expenses
                
                
                3,435
                
                
                
                2,454
                
                
                
                6,405
                
                
                
                4,720Total
      noninterest expenses
                
                
                7,561
                
                
                
                6,882
                
                
                
                14,993
                
                
                
                13,315Income
      before income taxes
                
                
                6,214
                
                
                
                2,293
                
                
                
                12,282
                
                
                
                3,365Provision
      for income taxes
                
                
                2,193
                
                
                
                734
                
                
                
                4,248
                
                
                
                1,086Net
      income
                
                $
                4,021
                
                
                $
                1,559
                
                
                $
                8,034
                
                
                $
                2,279Basic
      earnings per share
                
                $
                0.73
                
                
                $
                0.28
                
                
                $
                1.46
                
                
                $
                0.42Diluted
      earnings per share
                
                $
                0.65
                
                
                $
                0.27
                
                
                $
                1.33
                
                
                $
                0.40





See Notes to Consolidated
Financial  Statements.


4





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)


(In
thousands)





Three Months Ended
                  June 30,
                
                
                Six Months EndedJune
                  30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income
                
                $
                4,021
                
                
                $
                1,559
                
                
                $
                8,034
                
                
                $
                2,279Other
      comprehensive income, net of tax:Unrealized
      holding gains (losses) arising during period from securities available for
      sale, net of tax (benefit) of $1,557 and $1,693 for the three and six
      months ended June 30, 2010, respectively, and $(45) and $26 for the three
      and six months ended June 30, 2009
                
                
                2,821
                
                
                
                (88
                )
                
                
                3,110
                
                
                
                50Reclassification
      adjustment for net gains on sale of securities in net income, net of tax
      of $6 and $19 for the three and six months ended June 30, 2010,
      respectively
                
                
                (9
                )
                
                
                -
                
                
                
                (34
                )
                
                
                -Reclassification
      adjustment for net gains realized on derivatives in net income, net of tax
      of $46 and $93 for the three and six months ended June 30,
      2009
                
                
                -
                
                
                
                (90
                )
                
                
                -
                
                
                
                (180
                )Other
      comprehensive income (loss), net of tax
                
                
                2,812
                
                
                
                (178
                )
                
                
                3,076
                
                
                
                (130
                )Comprehensive
      income
                
                $
                6,833
                
                
                $
                1,381
                
                
                $
                11,110
                
                
                $
                2,149





See
Notes to Consolidated Financial Statements


5





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


SIX
MONTHS ENDED JUNE 30, 2010


(Unaudited)


(In
thousands, except share amounts)





Common
                  Stock
                
                
                Additional
                  Paid-in
                  Capital
                
                
                Retained
                  Earnings
                
                
                Accumulated
                  Other
                  Comprehensive
                  Income
                
                
                Total
                  Stockholders'
                  EquityBalance,
      December 31, 2009
                
                
                6
                
                
                
                75,078
                
                
                
                20,965
                
                
                
                1,573
                
                
                
                97,622Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,076
                
                
                
                3,076Stock-based
      compensation expense
                
                
                -
                
                
                
                314
                
                
                
                -
                
                
                
                -
                
                
                
                314Net
      income
                
                
                -
                
                
                
                -
                
                
                
                8,034
                
                
                
                -
                
                
                
                8,034Balance,
      June 30, 2010
                
                $
                6
                
                
                $
                75,392
                
                
                $
                28,999
                
                
                $
                4,649
                
                
                $
                109,046





See
Notes to Consolidated Financial Statements


6





SERVISFIRST
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


SIX
MONTHS ENDED JUNE 30, 2010 AND 2009


(In
thousands) (Unaudited)





2010
                      
                      
                      2009OPERATING
      ACTIVITIESNet
      income
                      
                      $
                      8,034
                      
                      
                      $
                      2,279Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Deferred
      tax benefit
                      
                      
                      (925
                      )
                      
                      
                      (1,109
                      )Provision
      for loan losses
                      
                      
                      5,075
                      
                      
                      
                      5,068Depreciation
      and amortization
                      
                      
                      537
                      
                      
                      
                      552Net
      amortization (accretion) of investments
                      
                      
                      331
                      
                      
                      
                      (248
                      )Amortized
      gain on derivative
                      
                      
                      -
                      
                      
                      
                      (272
                      )Decrease
      (increase) in accrued interest and dividends receivable
                      
                      
                      56
                      
                      
                      
                      (86
                      )Stock
      compensation expense
                      
                      
                      314
                      
                      
                      
                      395Decrease
      in accrued interest payable
                      
                      
                      (139
                      )
                      
                      
                      (209
                      )Proceeds
      from sale of mortgage loans held for sale
                      
                      
                      60,934
                      
                      
                      
                      117,090Originations
      of mortgage loans held for sale
                      
                      
                      (59,981
                      )
                      
                      
                      (123,654
                      )Gain
      on sale of securities available for sale
                      
                      
                      (53
                      )
                      
                      
                      -Net
      loss on sale of other real estate owned
                      
                      
                      175
                      
                      
                      
                      683Decrease
      in special prepaid FDIC insurance assessments
                      
                      
                      1,462
                      
                      
                      
                      -Net
      change in other assets, liabilities, and other operating
      activities
                      
                      
                      (2,703
                      )
                      
                      
                      (730
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      13,117
                      
                      
                      
                      (241
                      )INVESTMENT
      ACTIVITIESPurchase
      of securities available for sale
                      
                      
                      (20,865
                      )
                      
                      
                      (18,351
                      )Proceeds
      from maturities, calls and paydowns of securities available for
      sale
                      
                      
                      16,002
                      
                      
                      
                      9,199Purchase
      of securities held to maturity
                      
                      
                      (1,014
                      )
                      
                      
                      -Increase
      in loans
                      
                      
                      (88,814
                      )
                      
                      
                      (147,290
                      )Purchase
      of premises and equipment
                      
                      
                      (150
                      )
                      
                      
                      (1,021
                      )Purchase
      of restricted equity securities
                      
                      
                      (269
                      )
                      
                      
                      (582
                      )Proceeds
      from sale of securities available for sale
                      
                      
                      29,999
                      
                      
                      
                      -Proceeds
      from sale of other real estate owned and repossessions
                      
                      
                      5,514
                      
                      
                      
                      4,191Additions
      to other real estate owned
                      
                      
                      (75
                      )
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (59,672
                      )
                      
                      
                      (153,854
                      )FINANCING
      ACTIVITIESNet
      (decrease) increase in noninterest-bearing deposits
                      
                      
                      (22,650
                      )
                      
                      
                      17,710Net
      increase in interest-bearing deposits
                      
                      
                      105,199
                      
                      
                      
                      151,456Proceeds
      from issuance of trust preferred securities
                      
                      
                      15,050
                      
                      
                      
                      -Proceeds
      from other borrowings
                      
                      
                      -
                      
                      
                      
                      5,000Proceeds
      from sale of stock, net
                      
                      
                      -
                      
                      
                      
                      3,479Net
      cash provided by financing activities
                      
                      
                      97,599
                      
                      
                      
                      177,645Net
      increase in cash and cash equivalents
                      
                      
                      51,044
                      
                      
                      
                      23,550Cash
      and cash equivalents at beginning of year
                      
                      
                      76,206
                      
                      
                      
                      72,918Cash
      and cash equivalents at end of year
                      
                      $
                      127,250
                      
                      
                      $
                      96,468SUPPLEMENTAL
      DISCLOSURECash
      paid for:Interest
                      
                      $
                      7,423
                      
                      
                      $
                      9,578Income
      taxes
                      
                      
                      5,058
                      
                      
                      
                      2,310NONCASH
      TRANSACTIONSTransfers
      of loans from held for sale to held for investment
                      
                      $
                      787
                      
                      
                      $
                      1,861Other
      real estate acquired in settlement of loans
                      
                      
                      4,671
                      
                      
                      
                      3,811





See
Notes to Consolidated Financial Statements.


7





SERVISFIRST
BANCSHARES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2010


(Unaudited)





NOTE
1 - GENERAL





The
accompanying condensed consolidated financial statements in this report have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission, including Regulation S-X and the instructions for Form
10-Q, and have not been audited. These consolidated financial statements do not
include all of the information and footnotes required by U. S. generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the consolidated
financial position and the consolidated results of operations for the interim
periods have been made. All such adjustments are of a normal nature. The
consolidated results of operations are not necessarily indicative of the
consolidated results of operations which ServisFirst Bancshares, Inc. (the
“Company”) may achieve for future interim periods or the entire year. For
further information, refer to the consolidated financial statements and
footnotes included in the Company’s Form 10-K for the year ended December 31,
2009.





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





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





NOTE
2 - CASH AND CASH FLOWS





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





NOTE
3 - EARNINGS PER COMMON SHARE





Basic
earnings per common share are computed by dividing net income by the weighted
average number of common shares outstanding during the
period.  Diluted earnings per common share include the dilutive effect
of additional potential common shares issuable under stock options and warrants,
as well as the potential common stock issuable upon possible conversion of the
preferred securities described in Note 10 to the Consolidated Financial
Statements.


8





Three Months Ended June
                      30,
                    
                    
                    Six Months Ended June
                      30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(In Thousands, Except Shares and Per Share Data)Earnings
      Per ShareWeighted
      average common shares outstanding
                    
                    
                    5,513,482
                    
                    
                    
                    5,513,482
                    
                    
                    
                    5,513,482
                    
                    
                    
                    5,458,006Net
      income
                    
                    $
                    4,021
                    
                    
                    $
                    1,559
                    
                    
                    $
                    8,034
                    
                    
                    $
                    2,279Basic
      earnings per share
                    
                    $
                    0.73
                    
                    
                    $
                    0.28
                    
                    
                    $
                    1.46
                    
                    
                    $
                    0.42Weighted
      average common shares outstanding
                    
                    
                    5,513,482
                    
                    
                    
                    5,513,482
                    
                    
                    
                    5,513,482
                    
                    
                    
                    5,458,006Dilutive
      effects of assumed conversions and exercise of stock options, warrants,
      and convertible debt
                    
                    
                    886,447
                    
                    
                    
                    296,173
                    
                    
                    
                    646,359
                    
                    
                    
                    292,521Weighted
      average common and dilutive potential common shares
      outstanding
                    
                    
                    6,399,929
                    
                    
                    
                    5,809,655
                    
                    
                    
                    6,159,841
                    
                    
                    
                    5,750,527Net
      income
                    
                    $
                    4,021
                    
                    
                    $
                    1,559
                    
                    
                    $
                    8,034
                    
                    
                    $
                    2,279Effect
      of interest expense on convertible debt, net of tax and discretionary
      expenditures related to conversion
                    
                    
                    148
                    
                    
                    
                    -
                    
                    
                    
                    172
                    
                    
                    
                    -Net
      income, adjusted for effect of debt conversion
                    
                    $
                    4,169
                    
                    
                    $
                    1,559
                    
                    
                    $
                    8,206
                    
                    
                    $
                    2,279Diluted
      earnings per share
                    
                    $
                    0.65
                    
                    
                    $
                    0.27
                    
                    
                    $
                    1.33
                    
                    
                    $
                    0.40





NOTE
4 - SECURITIES





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





Amortized
                          Cost
                        
                        
                        Gross
                          Unrealized
                          Gain
                        
                        
                        Gross
                          Unrealized
                          Loss
                        
                        
                        Market
                          Value(In Thousands)June 30, 2010:Securities
      Available for SaleU.S.
      Treasury and government sponsored agencies
                        
                        $
                        60,157
                        
                        
                        $
                        1,873
                        
                        
                        $
                        -
                        
                        
                        $
                        62,030Mortgage-backed
      securities
                        
                        
                        102,360
                        
                        
                        
                        4,143
                        
                        
                        
                        -
                        
                        
                        
                        106,503State
      and municipal securities
                        
                        
                        63,130
                        
                        
                        
                        1,324
                        
                        
                        
                        (278
                        )
                        
                        
                        64,176Corporate
      debt
                        
                        
                        2,008
                        
                        
                        
                        91
                        
                        
                        
                        -
                        
                        
                        
                        2,099Total
                        
                        $
                        227,655
                        
                        
                        $
                        7,431
                        
                        
                        $
                        (278
                        )
                        
                        $
                        234,808Securities
      Held to MaturityState
      and municipal securities
                        
                        $
                        1,659
                        
                        
                        $
                        18
                        
                        
                        $
                        (4
                        )
                        
                        $
                        1,673Total
                        
                        $
                        1,659
                        
                        
                        $
                        18
                        
                        
                        $
                        (4
                        )
                        
                        $
                        1,673December
      31, 2009:Securities
      Available for SaleU.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 MaturityState
      and municipal securities
                        
                        $
                        645
                        
                        
                        $
                        1
                        
                        
                        $
                        (3
                        )
                        
                        $
                        643Total
                        
                        $
                        645
                        
                        
                        $
                        1
                        
                        
                        $
                        (3
                        )
                        
                        $
                        643




9





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





The
following table identifies, as of June 30, 2010 and December 31, 2009, the
Company’s investment securities that have been in a continuous unrealized loss
position for less than 12 months and those that have been in a continuous
unrealized loss position for 12 or more months.  The Company has the
ability and intent to hold its securities until such time as lost value is
recovered, or the securities mature.  Further, the Company believes
any deterioration in value on its current investment securities is attributable
to changes in market interest rates and not credit quality of the
issuer.





Less Than Twelve Months
                    
                    
                    Twelve Months or MoreGross
                      Unrealized
                      Losses
                    
                    
                    Fair Value
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Fair Value(In Thousands)June
      30, 2010:U.S.
      Treasury and government sponsored agencies
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mortgage-backed
      securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -State
      and municipal securities
                    
                    
                    (282
                    )
                    
                    
                    15,272
                    
                    
                    
                    -
                    
                    
                    
                    -Corporate
      debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    (282
                    )
                    
                    $
                    15,272
                    
                    
                    $
                    -
                    
                    
                    $
                    -December
      31, 2009:U.S.
      Treasury and government sponsored 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
                    )
                    
                    $
                    986





At June
30, 2010, none of the Company’s 348 debt securities had been in an unrealized
loss position for 12 or more months.





NOTE
5 - EMPLOYEE AND DIRECTOR BENEFITS





Stock Options





At June
30, 2010, the Company had stock-based compensation plans, as described below.
The compensation cost that has been charged to earnings for the plans was
approximately $180,000 and $314,000 for the three and six months ended June 30,
2010 and $199,000 and $395,000 for three and six months ended June 30, 2009,
respectively.





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


10





The
Company has granted non-plan options to certain persons representing key
business relationships to purchase up to an aggregate amount of 55,000 shares of
the Company’s common stock at between $15.00 and $20.00 per share for 10 years.
These options are non-qualified and not part of either Plan.





The
Company estimates the fair value of each stock option award using a
Black-Scholes-Merton valuation model that uses the assumptions noted in the
following table.





Expected
volatilities are based on an index of southeastern United States publicly traded
banks. The expected term for options granted is based on the short-cut method
and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of the
option is based on the U. S. Treasury yield curve in effect at the time of
grant.





2010
                    
                    
                    2009Expected
      volatility
                    
                    
                    25.00
                    %
                    
                    
                    20.00
                    %Expected
      dividends
                    
                    
                    0.50
                    %
                    
                    
                    0.50
                    %Expected
      term (in years)
                    
                    7
      years
                    
                    
                    7
      yearsRisk-free
      rate
                    
                    
                    2.32
                    %
                    
                    
                    1.65
                    %





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





Shares
                                      
                                      
                                      Weighted
                                        Average
                                        Exercise
                                        Price
                                      
                                      
                                      Weighted
                                        Average
                                        Remaining
                                        Contractual
                                        Term (years)
                                      
                                      
                                      Aggregate
                                        Intrinsic
                                        Value(InThousands)Six
      Months Ended June 30, 2010:Outstanding
      at January 1, 2010
                                      
                                      
                                      833,500
                                      
                                      
                                      $
                                      15.00
                                      
                                      
                                      
                                      6.8
                                      
                                      
                                      $
                                      8,333Granted
                                      
                                      
                                      11,000
                                      
                                      
                                      
                                      25.00
                                      
                                      
                                      
                                      9.6
                                      
                                      
                                      
                                      -Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      (10,000
                                      )
                                      
                                      
                                      15.00
                                      
                                      
                                      
                                      6.7
                                      
                                      
                                      
                                      -Outstanding
      at June 30, 2010
                                      
                                      
                                      834,500
                                      
                                      
                                      
                                      15.13
                                      
                                      
                                      
                                      6.4
                                      
                                      
                                      $
                                      8,238Exercisable
      at June 30, 2010
                                      
                                      
                                      249,696
                                      
                                      
                                      $
                                      11.33
                                      
                                      
                                      
                                      5.5
                                      
                                      
                                      $
                                      3,413Six
      Months Ended June 30, 2009:Outstanding
      at January 1, 2009
                                      
                                      
                                      796,000
                                      
                                      
                                      $
                                      14.50
                                      
                                      
                                      
                                      7.7
                                      
                                      
                                      $
                                      8,363Granted
                                      
                                      
                                      37,500
                                      
                                      
                                      
                                      25.00
                                      
                                      
                                      
                                      9.8
                                      
                                      
                                      
                                      -Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Outstanding
      at June 30, 2009
                                      
                                      
                                      833,500
                                      
                                      
                                      
                                      14.97
                                      
                                      
                                      
                                      7.8
                                      
                                      
                                      $
                                      8,363Exercisable
      at June 30, 2009
                                      
                                      
                                      121,264
                                      
                                      
                                      $
                                      11.73
                                      
                                      
                                      
                                      6.6
                                      
                                      
                                      $
                                      1,609





Restricted
Stock





During
the first quarter of 2010, 10,000 shares of restricted stock were granted
employees.  During the fourth quarter of 2009, 20,000 shares of
restricted stock were granted to a key executive.  The value of
restricted stock awards is determined to be the current value of the Company’s
stock, and this total value will be recognized as compensation expense over the
vesting period, which is five years from the date of grant.  As of
June 30, 2010, there was $674,000 of total unrecognized compensation cost
related to non-vested restricted stock.  The cost is expected to be
recognized evenly over the remaining 4.4 years of the restricted stock’s vesting
period.


11





Stock Warrants





In
recognition of the efforts and financial risks undertaken by the organizers of
ServisFirst Bank (the “Bank”) in 2005, the Bank granted warrants to organizers
to purchase a total 60,000 shares of common stock at a price of $10, which was
the fair market value of the Bank’s common stock at the date of the grant. The
warrants became warrants to purchase a like number of shares of the Company’s
common stock upon the formation of the Company as a holding company for the
Bank.  The warrants vest in equal annual increments over a three-year
period commencing on the first anniversary date of the Bank’s incorporation and
will terminate on the tenth anniversary of the incorporation date. The total
number of warrants outstanding at June 30, 2010 and 2009 was
60,000.





The
Company issued warrants for 75,000 shares of common stock at a price of $25 per
share in the third quarter of 2008. These warrants were issued in connection
with the trust preferred securities that are discussed in detail in Note
9.





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





NOTE
6 - DERIVATIVES





During
2008, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. Upon entering into these
swaps, the Company entered into offsetting positions with a regional
correspondent bank in order to minimize the risk to the Company.  As
of June 30, 2010, the Company was party to two swaps with notional amounts
totaling approximately $12.0 million with customers, and two swaps with notional
amounts totaling approximately $12.0 million with a regional correspondent
bank.  These swaps qualify as derivatives, but are not designated as
hedging instruments.  The Company has recorded the value of these
swaps at $885,000 in offsetting entries in other assets and other
liabilities.





The
Company has entered into agreements with secondary market investors to deliver
loans on a “best efforts delivery” basis. When a rate is committed to a
borrower, it is based on the best price that day and locked with the investor
for the customer for a 30-day period. In the event the loan is not delivered to
the investor, the Company has no risk or exposure with the investor. The
interest rate lock commitments related to loans that are originated for later
sale are classified as derivatives. The fair values of the Company’s agreements
with investors and rate lock commitments to customers as of June 30, 2010 and
December 31, 2009 were not material.





NOTE
7 - ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS





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


12





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




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





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





NOTE
8 - FAIR VALUE MEASUREMENT





Measurement
of fair value under United States generally accepted accounting principles (“US
GAAP”) establishes a hierarchy that prioritizes observable and unobservable
inputs used to measure fair value, as of the measurement date, into three broad
levels, which are described below:





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


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


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





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





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


13





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.





Impaired Loans- Impaired
loans are measured and reported at fair valuewhen full payment under
the loan terms is not expected.  Impaired loans are carried at the
present value of estimated future cash flows using the loan’s existing rate or
the fair value of the collateral if the loan is
collateral-dependent.  Impaired loans are subject to nonrecurring fair
value adjustment.  A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance.  The amount recognized as an impairment charge
related to impaired loans that are measured at fair value on a nonrecurring
basis was $1,244,000 and $3,852,000 during the three and six months ended June
30, 2010, respectively, and $1,456,000 and $3,333,000 for the three and six
months ended June 30, 2009, respectively.  Impaired loans are
classified within Level 3 of the hierarchy.





Other real estate owned –
Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure
are held for sale and are initially recorded at the lower of cost or fair value,
less selling costs.  Any write-downs to fair value at the time of
transfer to OREO are charged to the allowance for loan losses subsequent to
foreclosure.  Values are derived from appraisals of underlying
collateral and discounted cash flow analysis.  The amount charged to
earnings was $558,000 and $659,000 during the three and six months ended June
30, 2010, respectively, and $176,000 and $967,000 during the three and six
months ended June 30, 2009.  These charges were for write-downs in the
value of OREO and losses on the disposal of OREO.  OREO is classified
within Level 3 of the hierarchy.





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


14





Fair Value Measurements at June 30, 2010 UsingQuoted Prices in
                              Active Markets
                              forIdentical
                              Assets(Level 1)
                            
                            
                            Significant Other
                              Observable Inputs
                              (Level 2)
                            
                            
                            Significant
                              Unobservable
                              Inputs(Level 3)
                            
                            
                            Total(In Thousands)Assets Measured on a Recurring Basis:Available-for-sale
      securities
                            
                            $
                            -
                            
                            
                            $
                            234,808
                            
                            
                            $
                            -
                            
                            
                            $
                            234,808Interest
      rate swap agreements
                            
                            
                            -
                            
                            
                            
                            885
                            
                            
                            
                            
                            
                            
                            
                            885Total
      assets at fair value
                            
                            $
                            -
                            
                            
                            $
                            235,693
                            
                            
                            $
                            -
                            
                            
                            $
                            235,693Liabilities
      Measured on a Recurring Basis:Interest
      rate swap agreements
                            
                            $
                            -
                            
                            
                            $
                            885
                            
                            
                            $
                            -
                            
                            
                            $
                            885





Fair Value Measurements at December 31, 2009 UsingQuoted Prices in
                            Active Markets
                            forIdentical
                            Assets(Level 1)
                          
                          
                          Significant Other
                            Observable Inputs
                            (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs(Level 3)
                          
                          
                          Total(In Thousands)Assets Measured on a Recurring Basis:Available-for-sale
      securities
                          
                          $
                          -
                          
                          
                          $
                          255,453
                          
                          
                          $
                          -
                          
                          
                          $
                          255,453Interest
      rate swap agreements
                          
                          
                          -
                          
                          
                          
                          413
                          
                          
                          
                          
                          
                          
                          
                          413Total
      assets at fair value
                          
                          $
                          -
                          
                          
                          $
                          255,866
                          
                          
                          $
                          -
                          
                          
                          $
                          255,866Liabilities
      Measured on a Recurring Basis:Interest
      rate swap agreements
                          
                          $
                          -
                          
                          
                          $
                          413
                          
                          
                          $
                          -
                          
                          
                          $
                          413





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





Fair Value Measurements at June 30, 2010 UsingQuoted Prices in
                              Active Markets
                              forIdentical
                              Assets(Level 1)
                            
                            Significant Other
                              Observable Inputs
                              (Level 2)
                            
                            Significant
                              Unobservable
                              Inputs(Level 3)
                            
                            Total(In Thousands)Assets Measured on a Nonrecurring Basis:Impaired
      loans
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            11,930
                            
                            
                            $
                            11,930Other
      real estate owned
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            10,773
                            
                            
                            
                            10,773Total
      assets at fair value
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            22,703
                            
                            
                            $
                            22,703





Fair Value Measurements at December 31, 2009 UsingQuoted Prices in
                            Active Markets
                            forIdentical
                            Assets(Level 1)
                          
                          Significant Other
                            Observable Inputs
                            (Level 2)
                          
                          Significant
                            Unobservable
                            Inputs(Level 3)
                          
                          Total(In Thousands)Assets Measured on a Nonrecurring Basis:Impaired
      loans
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          8,003
                          
                          
                          $
                          8,003Other
      real estate owned
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          12,525
                          
                          
                          
                          12,525Total
      assets at fair value
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          20,528
                          
                          
                          $
                          20,528




15





The fair
value of a financial instrument is the current amount that would be exchanged in
a sale between willing parties, other than in a forced
liquidation.  Fair value is best determined based upon quoted market
prices.  However, in many instances, there are no quoted market prices
for the Company’s various financial instruments.  In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques.  Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows.  Accordingly, the fair value estimates
may not be realized in an immediate settlement of the instrument. Current U.S.
GAAP excludes certain financial instruments and all nonfinancial instruments
from its fair value disclosure requirements.  Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.





The
carrying amount and estimated fair value of the Company’s financial instruments,
including those that are not measured and reported at fair value on a recurring
basis or non-recurring basis, at June 30, 2010 and December 31, 2009 were as
follows:





June 30, 2010
                  
                  
                  December 31, 2009Carrying
                    Amount
                  
                  
                  Fair Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Fair Value(In Thousands)Financial
      Assets:Cash
      and cash equivalents
                  
                  $
                  127,250
                  
                  
                  $
                  127,250
                  
                  
                  $
                  76,206
                  
                  
                  $
                  76,206Investment
      securities available for sale
                  
                  
                  234,808
                  
                  
                  
                  234,808
                  
                  
                  
                  255,453
                  
                  
                  
                  255,453Investment
      securities held to maturity
                  
                  
                  1,659
                  
                  
                  
                  1,673
                  
                  
                  
                  645
                  
                  
                  
                  643Restricted
      equity securities
                  
                  
                  3,510
                  
                  
                  
                  3,510
                  
                  
                  
                  3,241
                  
                  
                  
                  3,241Mortgage
      loans held for sale
                  
                  
                  4,462
                  
                  
                  
                  4,462
                  
                  
                  
                  6,202
                  
                  
                  
                  6,202Loans,
      net
                  
                  
                  1,272,697
                  
                  
                  
                  1,276,049
                  
                  
                  
                  1,192,347
                  
                  
                  
                  1,193,202Accrued
      interest and dividends receivable
                  
                  
                  6,144
                  
                  
                  
                  6,144
                  
                  
                  
                  6,200
                  
                  
                  
                  6,200Derivative
                  
                  
                  885
                  
                  
                  
                  885
                  
                  
                  
                  413
                  
                  
                  
                  413Financial
      Liabilities:Deposits
                  
                  $
                  1,514,904
                  
                  
                  $
                  1,517,143
                  
                  
                  $
                  1,432,355
                  
                  
                  $
                  1,435,387Borrowings
                  
                  
                  24,929
                  
                  
                  
                  25,768
                  
                  
                  
                  24,922
                  
                  
                  
                  25,981Trust
      preferred securities
                  
                  
                  30,349
                  
                  
                  
                  27,136
                  
                  
                  
                  15,228
                  
                  
                  
                  12,681Accrued
      interest payable
                  
                  
                  887
                  
                  
                  
                  887
                  
                  
                  
                  1,026
                  
                  
                  
                  1,026Derivative
                  
                  
                  885
                  
                  
                  
                  885
                  
                  
                  
                  413
                  
                  
                  
                  413





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





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





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





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





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


16





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





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





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





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





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





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





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





NOTE
9 - SUBORDINATED DEFERRABLE INTEREST DEBENTURES





On
September 2, 2008, ServisFirst Capital Trust I, a subsidiary of the Company (the
“2008 Trust”), sold 15,000 shares of its 8.5% trust preferred securities to
accredited investors for $15,000,000 or $1,000 per share and 463,918 shares of
its common securities to the Company for $463,918 or $1.00 per share. The 2008
Trust invested the $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
will not incur any additional senior debt in excess of 0.5% of the Company’s
average assets for the fiscal year immediately preceding, unless such incurrence
is approved by a majority of the holders of the outstanding trust preferred
securities.





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


17





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





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





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





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





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


18





Holders
of the Preferred Securities will be entitled to receive distributions accruing
from March 15, 2010, and payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year, commencing June 15, 2010 unless the
Company defers interest payments on the Subordinated
Debentures.  Distributions accrue at an annual rate equal to 6.0% of
the liquidation amount of $1,000 per Preferred Security.  The rate and
the distribution dates for the Preferred Securities correspond to the interest
rate and payment dates on the Subordinated Debentures, which constitute
substantially all the assets of the 2010 Trust.  As a result, if
principal or interest is not paid on the Subordinated Debentures, no
corresponding amounts will be paid on the Preferred Securities.  The
2010 Trust also pays a distribution on the common securities at an annual rate
of 6.0% of the purchase price of the common securities, but such payments are
financially immaterial since they simply represent a return of funds to the
Company.





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





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





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





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





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


19





NOTE
11 - SUBORDINATED NOTE DUE SEPTEMBER 1, 2016





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





In
addition, the Company issued to the investor a total of 15,000 warrants, each
representing the right to purchase one share of the Company’s common stock for a
purchase price of $25.00. Each warrant is exercisable for a period beginning
upon its date of issuance and ending on June 1, 2016.  The Company
estimated the fair value of each warrant using a Black-Scholes-Merton valuation
model and determined the fair value per warrant to be $5.71. This total value of
$86,000 was recorded as a discount and reduced the net book value of the
debentures to $4,914,000 with an offsetting increase to the Company’s additional
paid-in capital. The discount will be amortized over a five-year
period.





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





The
following discussion and analysis is designed to provide a better understanding
of various factors relating to the results of operations and financial condition
of ServisFirst Bancshares, Inc. (the “Company”) and its wholly owned subsidiary,
ServisFirst Bank (the “Bank”). This discussion is intended to supplement and
highlight information contained in the accompanying unaudited consolidated
financial statements as of June 30, 2010 and for the three and six months ended
June 30, 2010 and 2009.





Forward-Looking
Statements





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


20





Business





We are a
bank holding company under the Bank Holding Company Act of 1956 incorporated in
Delaware and headquartered in Birmingham, Alabama. Through the Bank, we operate
eight full-service banking offices located in Jefferson, Shelby, Madison,
Montgomery and Houston counties in the metropolitan statistical areas (“MSAs”)
of Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama.





We are
headquartered at 850 Shades Creek Parkway, Birmingham, Alabama 35209 (Jefferson
County). In addition to the Jefferson County headquarters, the Bank currently
operates through two offices in the Birmingham-Hoover, 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), which constitute our primary service areas. Our principal business is
to accept deposits from the public and to make loans and other investments. Our
principal sources of funds for loans and investments are demand, time, savings,
and other deposits (including negotiable orders of withdrawal, or NOW accounts).
Our principal sources of income are interest and fees collected on loans,
interest and dividends collected on other investments and service charges. Our
principal expenses are interest paid on savings and other deposits (including
NOW accounts), interest paid on our other borrowings, employee compensation,
office expenses and other overhead expenses.





Overview





As of
June 30, 2010, the Company had total consolidated assets of $1,681,884,000, an
increase of $108,387,000, or 6.89%, over $1,573,497,000 at December 31,
2009.  Total loans were $1,288,410,000 at June 30, 2010, an
$81,326,000, or 6.74%, increase over $1,207,084,000 at December 31, 2009. Total
deposits were $1,514,904,000 at June 30, 2010, an increase of $82,549,000, or
5.76%, over $1,432,355,000 at December 31, 2009.





Net
income for the quarter ended June 30, 2010 was $4,021,000, an increase of
$2,462,000, or 157.92%, from $1,559,000 for the quarter ended June 30,
2009.  Basic and fully diluted earnings per common share were $.73 and
$.65, respectively, for the three months ended June 30, 2010, compared with $.28
and $.27, respectively, for the same period in 2009.  This increase
was primarily attributable to a higher net interest margin and an improved
efficiency ratio, both of which are explained in detail under the captions “Net
Interest Income” and “Noninterest Expense”, respectively, below.





Net
income for the six months ended June 30, 2010 was $8,034,000, an increase of
$5,755,000, or 252.52%, from $2,279,000 for the six months ended June 30,
2009.  Basic and fully diluted earnings per share were $1.46 and
$1.33, respectively, for the six months ended June 30, 2010, compared with $.42
and $.40, respectively for the same period in 2009. Again, this increase was
primarily attributable to a higher net interest margin and an improved
efficiency ratio, as explained below.


21





Critical
Accounting Policies





The
accounting and financial policies of the Company conform to accounting
principles generally accepted in the United States and to general practices
within the banking industry. To prepare consolidated financial statements in
conformity with accounting principles generally accepted in the United States,
management makes estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for loan losses, valuation of foreclosed real estate, deferred taxes,
and fair value of financial instruments are particularly subject to
change.  Information concerning our accounting policies with respect
to these items is available in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009.





Financial
Condition





Investment Securities





Investment
securities available for sale totaled $234,808,000 at June 30, 2010 and
$255,453,000 at December 31, 2009.  Investment securities held to
maturity totaled $1,659,000 at June 30, 2010 and $645,000 at December 31,
2009.  Approximately $32,807,000 in callable agency securities were
sold or called during the first half of 2010, and were partially replaced by the
purchase of $16,386,000 in mortgage backed securities and $5,492,000 in
municipal debt securities.  The purchased securities will increase the
portfolio yield and will also provide monthly principal cash flow.





Each
quarter, management assesses whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss
is other-than-temporarily impaired.  Management considers several
factors, including the amount and duration of the impairment; the intent and
ability of the Company to hold the security for a period sufficient for a
recovery in value; and known recent events specific to the issuer or its
industry.  In analyzing an issuer’s financial condition, management
considers whether the securities are issued by agencies of the federal
government, whether downgrades by bond rating agencies have occurred, and
industry analysts’ reports, among other things. As the Company currently has the
ability to hold its investment securities for the foreseeable future, no
declines are deemed to be other than temporary. The Company will continue to
evaluate its investment securities for possible other-than-temporary impairment,
which could result in a future non-cash charge to earnings.





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


22





Less Than
                      OneYear
                    
                    
                    One Year to
                      Five Years
                    
                    
                    Five Years to
                      Ten Years
                    
                    
                    More Than
                      TenYears
                    
                    
                    Total(In Thousands)U.S.
      Treasury and government sponsored agencies
                    
                    $
                    -
                    
                    
                    $
                    27,697
                    
                    
                    $
                    22,598
                    
                    
                    $
                    9,862
                    
                    
                    $
                    60,157Mortgage-backed
      securities
                    
                    
                    -
                    
                    
                    
                    1,514
                    
                    
                    
                    19,357
                    
                    
                    
                    81,489
                    
                    
                    
                    102,360State
      and municipal securities
                    
                    
                    165
                    
                    
                    
                    6,018
                    
                    
                    
                    42,347
                    
                    
                    
                    16,259
                    
                    
                    
                    64,789Corporate
      debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,008
                    
                    
                    
                    -
                    
                    
                    
                    2,008$
                    165
                    
                    
                    $
                    35,229
                    
                    
                    $
                    86,310
                    
                    
                    $
                    107,610
                    
                    
                    $
                    229,314Taxable-equivalent
      Yield
                    
                    
                    6.96
                    %
                    
                    
                    2.76
                    %
                    
                    
                    4.82
                    %
                    
                    
                    4.42
                    %
                    
                    
                    4.32
                    %





All
securities held are traded in liquid markets. As of June 30, 2010, we owned
certain restricted securities of the Federal Home Loan Bank with an aggregate
book value and market value of $3,260,000 and certain securities of First
National Bankers Bank in which we invested $250,000.  We had no
investments in any one security, restricted or liquid, in excess of 10% of our
stockholders’ equity.





The
Bank’s investment portfolio consists of mortgage-backed pass-through securities,
tax-exempt securities and corporate bonds. The Bank does not invest in
collateralized debt obligations (“CDOs”). All tax-exempt securities currently
held are issued by government issuers within the State of Alabama. All corporate
bonds have a Standard and Poor’s or Moody’s rating of A-1 or better when
purchased.  The June 30, 2010 total investment portfolio has a
combined average credit rating of AA.





The
carrying value of investment securities pledged to secure public funds on
deposit and for other purposes as required by law was $110,468,000 and
$117,377,000 as of June 30, 2010 and December 31, 2009,
respectively.





At June
30, 2010, we had $148,000 in federal funds sold, compared with $680,000 at
December 31, 2009.





Loans





We had
total loans of $1,288,410,000 at June 30, 2010, an increase of $81,326,000, or
6.74%, compared to $1,207,084,000 at December 31, 2009.  At June 30,
2010, 51% of our loans were in our Birmingham offices, 24% in our Huntsville
offices, 13% in our Montgomery offices, and 12% in our Dothan
office.





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


23


June 30, 2010
                      
                      
                      December 31,
                        2009(In
      Thousands)Commercial,
      financial and agricultural
                      
                      $
                      492,114
                      
                      
                      $
                      461,088Real
      estate - construction (1)
                      
                      
                      218,479
                      
                      
                      
                      224,178Real
      estate - mortgage:Owner
      occupied
                      
                      
                      230,937
                      
                      
                      
                      203,9831-4
      Family
                      
                      
                      185,146
                      
                      
                      
                      165,512Other
                      
                      
                      125,230
                      
                      
                      
                      119,749Total
      Real Estate Mortgage
                      
                      
                      541,313
                      
                      
                      
                      489,244Consumer
                      
                      
                      36,504
                      
                      
                      
                      32,574Total
      Loans
                      
                      
                      1,288,410
                      
                      
                      
                      1,207,084Allowance
      for loan losses
                      
                      
                      (15,713
                      )
                      
                      
                      (14,737
                      )Total
      Loans, Net
                      
                      $
                      1,272,697
                      
                      
                      $
                      1,192,347





(1)
            includes
      Owner Occupied real estate construction loans in the amount of $7,965 and
      $10,045 at June 30, 2010 and December 31, 2009,
    respectively





Asset Quality





We
establish and maintain the allowance for loan losses at levels management deems
adequate to absorb anticipated credit losses from identified and otherwise
inherent risks in the loan portfolio as of the balance sheet date. In assessing
the adequacy of the allowance for loan losses, management considers its
evaluation of the loan portfolio, past due loan experience, collateral values,
current economic conditions and other factors considered necessary to maintain
the allowance at an adequate level.  Management believes that the
allowance is adequate at June 30, 2010.





A loan is
considered impaired when it is probable, based on current information and
events, that the Company will be unable to collect all principal and interest
payments due in accordance with the contractual terms of the loan agreement.
Impaired loans are measured by the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s obtainable market
price, or the fair value of the collateral if the loan is collateral-dependent.
The amount of impairment, if any, and subsequent changes in impairments are
included in the allowance for loan losses. Interest on accruing impaired loans
is recognized as long as such loans do not meet the criteria for non-accrual
status.  At June 30, 2010, we had $51,192,000 in impaired loans,
including all non-accrual loans. $3,389,000 of the Company’s allowance for loan
losses was specifically allocated to $15,319,000 of these loans.  The
increase in impaired loans at June 30, 2010 relates to management’s
determination to increase the number of loans evaluated on a loan-by-loan basis
to encompass all loans classified as substandard or below (see “Provision for
Loan Losses” below), coupled with prevailing economic conditions.





The
following table presents a summary of changes in the allowances for loan losses
for the three and six months ended June 30, 2010 and 2009,
respectively.  The largest balance of our charge-offs during the three
and six months ended June 30, 2010, $1,586,000 and $1,924,000, respectively,
were in real estate construction loans.  $1,515,000 of the charge-offs
in real estate construction loans during the three months ended June 30, 2010
were of residential lot development loans.  Real estate construction
loans represent 16.96% of our loan portfolio at June 30, 2010.


24





Three
      Months EndedJune
                                30,
                              
                              
                              Six
      Months EndedJune
                                30,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009(In
      Thousands)Allowance
      for Loan LossesBalance,
      beginning of period
                              
                              $
                              15,323
                              
                              
                              $
                              12,412
                              
                              
                              $
                              14,737
                              
                              
                              $
                              10,602Charge-offs:Commercial,
      financial and agricultural
                              
                              
                              (166
                              )
                              
                              
                              (808
                              )
                              
                              
                              (1,013
                              )
                              
                              
                              (808
                              )Real
      estate - construction
                              
                              
                              (1,586
                              )
                              
                              
                              (574
                              )
                              
                              
                              (1,924
                              )
                              
                              
                              (1,208
                              )Real
      estate - mortgage:Owner
      Occupied
                              
                              
                              (370
                              )
                              
                              
                              -
                              
                              
                              
                              (548
                              )
                              
                              
                              -1-4
      family mortgage
                              
                              
                              (61
                              )
                              
                              
                              -
                              
                              
                              
                              (694
                              )
                              
                              
                              (40
                              )Other
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      real estate mortgage
                              
                              
                              (431
                              )
                              
                              
                              -
                              
                              
                              
                              (1,242
                              )
                              
                              
                              (40
                              )Consumer
                              
                              
                              (58
                              )
                              
                              
                              (71
                              )
                              
                              
                              (74
                              )
                              
                              
                              (86
                              )Total
      charge-offs
                              
                              
                              (2,241
                              )
                              
                              
                              (1,453
                              )
                              
                              
                              (4,253
                              )
                              
                              
                              (2,142
                              )Recoveries:Commercial,
      financial and agricultural
                              
                              
                              38
                              
                              
                              
                              -
                              
                              
                              
                              94
                              
                              
                              
                              -Real
      estate - construction
                              
                              
                              44
                              
                              
                              
                              -
                              
                              
                              
                              44
                              
                              
                              
                              39Real
      estate - mortgage:Owner
      Occupied
                              
                              
                              12
                              
                              
                              
                              -
                              
                              
                              
                              12
                              
                              
                              
                              -1-4
      family mortgage
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3
                              
                              
                              
                              -Other
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      real estate mortgage
                              
                              
                              12
                              
                              
                              
                              -
                              
                              
                              
                              15
                              
                              
                              
                              -Consumer
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1
                              
                              
                              
                              -Total
      recoveries
                              
                              
                              94
                              
                              
                              
                              -
                              
                              
                              
                              154
                              
                              
                              
                              39Net
      charge-offs
                              
                              
                              (2,147
                              )
                              
                              
                              (1,453
                              )
                              
                              
                              (4,099
                              )
                              
                              
                              (2,103
                              )Provision
      for loan losses charged to expense
                              
                              
                              2,537
                              
                              
                              
                              2,608
                              
                              
                              
                              5,075
                              
                              
                              
                              5,068Balance,
      end of period
                              
                              $
                              15,713
                              
                              
                              $
                              13,567
                              
                              
                              $
                              15,713
                              
                              
                              $
                              13,567As
      a percent of year to date average loans:Annualized
      net charge-offs
                              
                              
                              0.69
                              %
                              
                              
                              0.55
                              %
                              
                              
                              0.67
                              %
                              
                              
                              0.41
                              %Annualized
      provision for loan losses
                              
                              
                              0.81
                              %
                              
                              
                              0.98
                              %
                              
                              
                              0.83
                              %
                              
                              
                              0.99
                              %





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





June
      30, 2010
                  
                  
                  December
      31, 2009
                  
                  
                  June
      30, 2009Amount
                  
                  
                  Percentage of
                    Loans
      in
                    Each
                    Category
      of
                    Total
      Loans
                  
                  
                  Amount
                  
                  
                  Percentage of
                    Loans
      in
                    Each
                    Category
      of
                    Total
      Loans
                  
                  
                  Amount
                  
                  
                  Percentage of
                    Loans
      in
                    Each
                    Category
      of
                    Total
      Loans(In Thousands)
                  
                  
                  
                  
                  
                  (In Thousands)
                  
                  
                  
                  
                  
                  (In Thousands)Commercial,
      financial and agricultural
                  
                  $
                  4,593
                  
                  
                  
                  38.20
                  %
                  
                  $
                  3,058
                  
                  
                  
                  38.20
                  %
                  
                  $
                  3,537
                  
                  
                  
                  37.57
                  %Real
      estate - construction
                  
                  
                  5,875
                  
                  
                  
                  16.96
                  %
                  
                  
                  6,295
                  
                  
                  
                  18.57
                  %
                  
                  
                  5,708
                  
                  
                  
                  22.83
                  %Real
      estate - mortgage
                  
                  
                  848
                  
                  
                  
                  42.01
                  %
                  
                  
                  1,242
                  
                  
                  
                  40.53
                  %
                  
                  
                  514
                  
                  
                  
                  36.96
                  %Consumer
                  
                  
                  87
                  
                  
                  
                  2.83
                  %
                  
                  
                  1
                  
                  
                  
                  2.70
                  %
                  
                  
                  35
                  
                  
                  
                  2.64
                  %Other
                  
                  
                  4,310
                  
                  
                  
                  -
                  
                  
                  
                  4,141
                  
                  
                  
                  -
                  
                  
                  
                  3,773
                  
                  
                  
                  -Total
                  
                  $
                  15,713
                  
                  
                  
                  100.00
                  %
                  
                  $
                  14,737
                  
                  
                  
                  100.00
                  %
                  
                  $
                  13,567
                  
                  
                  
                  100.00
                  %


25


Nonperforming Assets





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





Nonperforming
assets, comprising non-accrual loans, loans 90 days or more past due and still
accruing, other real estate owned (“OREO”), and troubled debt restructurings in
which the loan was not current when the terms were restructured totaled
$18,811,000 at June 30, 2010, compared to $24,713,000 at December 31, 2009 and
$24,482,000 at June 30, 2009. Non-accrual loans were $7,866,000 at June 30,
2010, a decrease of $4,055,000 from non-accrual loans of $11,921,000 at December
31, 2009 and a decrease of $6,748,000 from non-accrual loans of $14,614,000 at
June 30, 2009.  Loans 90 days past due and still accruing totaled
$172,000 at June 30, 2010, compared to $267,000 at December 31, 2009 and
$111,000 at June 30, 2009.  There was one troubled debt restructured
loan for $518,000 at June 30, 2009.





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





June 30, 2010
                    
                    
                    December
                      31,2009
                    
                    
                    June 30, 2009(In
      Thousands)Nonaccrual
      loans
                    
                    $
                    7,866
                    
                    
                    $
                    11,921
                    (1)
                    
                    $
                    14,614
                    (1)Past
      due 90 days and still accruing
                    
                    
                    172
                    
                    
                    
                    267
                    
                    
                    
                    111All
      other real estate owned
                    
                    
                    10,773
                    
                    
                    
                    12,525
                    
                    
                    
                    9,239Troubled
      debt restructures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    518Total
      non-performing assets
                    
                    $
                    18,811
                    
                    
                    $
                    24,713
                    
                    
                    $
                    24,482





(1)
$1,785 of this amount represents a loan that is guaranteed by the U.S.
Department of Agriculture




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





The
decrease in non-accrual loans from December 31, 2009 to June 30, 2010 was the
result of a combination of loans being foreclosed and transferred to OREO, loans
being paid off, and one loan, based on being brought current, being put back on
accruing status.  The decrease in OREO from December 31, 2009 to June
30, 2010 was the result of sales exceeding amounts transferred, and, to a lesser
extent, write-downs in the value of OREO.





At June
30, 2010, total nonperforming assets included finished and unfinished homes of
$3,576,000, residential lots of $7,622,000, raw land of $5,548,000 and
commercial buildings of $1,386,000. Our OREO procedures currently determine
disposition value, the value used to place the property into OREO, based on the
most recent fair value appraisal of the property that we have at the time, less
estimated costs to sell the property.


26


Deposits





Total
deposits increased $82,549,000, or 5.76%, to $1,514,904,000 at June 30, 2010
compared to $1,432,355,000 at December 31, 2009.  This increase in
deposits is a result of organic growth within our Montgomery and Dothan, Alabama
markets.  We anticipate long-term sustainable growth in deposits
through continued development of market share in our less mature markets and
through organic growth in all of our markets.





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





Other Borrowings





On March
19, 2008, we borrowed $20.0 million from the Federal Home Loan Bank of Atlanta,
of which $10.0 million bears interest at 2.995% per annum and is payable on
March 19, 2012, and $10.0 million bears interest at 3.275% per annum and is
payable on March 19, 2013.  As discussed in Note 9 to the Consolidated
Financial Statements, we borrowed $15.5 million through the issuance of trust
preferred securities and the related debenture on September 2,
2008.  Both financial instruments bear an identical annual rate of
interest of 8.50% and pay interest on March 1, June 1, September 1 and December
1 of each year.  The current book value of this borrowing is $15.3
million as a result of amortization of the discount associated with 75,000
warrants issued to the holders of the Preferred Securities.  As
discussed in Note 10 to the Consolidated Financial Statements, we borrowed $15.0
million through the issuance of trust preferred securities and the related
debenture on March 15, 2010.  Both financial instruments bear an
identical rate of interest of 6.00% and pay interest on March 15, June 15,
September 15 and December 15 of each year.  As discussed in Note 11 to
the Consolidated Financial Statements, on June 23, 2009, the Bank issued a $5.0
million subordinated note due June 1, 2016 in a private
placement.  The note bears interest at an annual rate of 8.25% payable
on March 1, June 1, September 1 and December 1 of each year.





Liquidity





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





The
retention of existing deposits and attraction of new deposit sources through new
and existing customers is critical to our liquidity position. If our liquidity
were to decline due to a run-off in deposits, we have procedures that provide
for certain actions under varying liquidity conditions. These actions include
borrowing from existing correspondent banks, selling or participating loans, and
curtailing loan commitments and funding.  At June 30, 2010, liquid
assets, which are represented by cash and due from banks, federal funds sold and
unpledged available-for-sale securities, totaled $290
million.  Additionally, the Bank had additional borrowing availability
of approximately $269 million in unused federal funds lines of credit with
regional banks, subject to certain restrictions and collateral requirements, and
had additional borrowing availability of $3 million at the Federal Home Loan
Bank of Atlanta to meet short-term funding needs. We believe these sources of
funding are adequate to meet immediate anticipated funding needs, but we will
need additional capital to maintain our current growth. Our management meets on
a quarterly basis to review sources and uses of funding to determine the
appropriate strategy to ensure an appropriate level of liquidity. At the current
time, our long-term liquidity needs primarily relate to funds required to
support loan originations and commitments and deposit withdrawals. Our regular
sources of funding are from the growth of our deposit base, repayment of
principal and interest on loans, the sale of loans and the renewal of time
deposits.  In addition, we have issued debt as described above under
“Other Borrowings”.


27


We are
subject to general FDIC guidelines that require a minimum level of liquidity.
Management believes our liquidity ratios meet or exceed these guidelines. Our
management is not currently aware of any trends or demands that are reasonably
likely to result in liquidity materially increasing or decreasing.





The
following table reflects the contractual maturities of our term liabilities as
of June 30, 2010. The amounts shown do not reflect any early withdrawal or
prepayment assumptions.





Payments due by PeriodTotal
                  
                  
                  1
      year or less
                  
                  
                  Over
      1 - 3
                    years
                  
                  
                  Over
      3 - 5
                    years
                  
                  
                  Over
      5 years(In
      Thousands)Contractual
      Obligations (1)Deposits
      without a stated maturity
                  
                  $
                  1,269,318
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Certificates
      of deposit (2)
                  
                  
                  245,586
                  
                  
                  
                  193,403
                  
                  
                  
                  40,645
                  
                  
                  
                  11,538
                  
                  
                  
                  -FHLB
      borrowings
                  
                  
                  20,000
                  
                  
                  
                  -
                  
                  
                  
                  20,000
                  
                  
                  
                  -
                  
                  
                  
                  -Subordinated
      debentures
                  
                  
                  30,349
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,349Subordinated
      note payable
                  
                  
                  4,929
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,929Operating
      lease commitments
                  
                  
                  17,542
                  
                  
                  
                  1,784
                  
                  
                  
                  3,642
                  
                  
                  
                  3,765
                  
                  
                  
                  8,351Total
                  
                  $
                  1,587,724
                  
                  
                  $
                  195,187
                  
                  
                  $
                  64,287
                  
                  
                  $
                  15,303
                  
                  
                  $
                  43,629





(1)  Excludes
interest


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





Capital Adequacy





In the
first quarter of 2010, we formed ServisFirst Capital Trust II, which issued
15,000 shares of its 6.0% Mandatory Convertible Trust Preferred Securities (the
“Preferred Securities”) for $15,000,000 on March 15, 2010.  The Trust
invested all of the proceeds from the sale of the Trust Securities in the
Company’s 6.0% Junior Subordinated Mandatory Convertible Deferrable Interest
Debentures due March 15, 2040 in the principal amount of $15,050,000 (the
“Subordinated Debentures”).  The Preferred Securities were offered and
sold to accredited investors in a private placement.  The Federal
Reserve Board has deemed these securities to qualify as Tier 1 capital of the
Company up to 25% of Tier 1 capital elements.  See Note 10 to the
consolidated financial statements for further discussion of the issuance and
sale of the Preferred Securities.





As of
June 30, 2010, our most recent notification from the FDIC categorized us as
well-capitalized under the regulatory framework for prompt corrective action. To
remain categorized as well-capitalized, we must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the
table below. Our management believes that we are well-capitalized under the
prompt corrective action provisions as of June 30, 2010.





The
following table sets forth (i) the capital ratios required by the FDIC and the
Alabama Banking Department’s leverage ratio requirement and (ii) our actual
ratios of capital to total regulatory or risk-weighted assets, as of June 30,
2010, December 31, 2009, and June 30, 2009:


28





Actual
                    
                    
                    For
      Capital Adequacy
                      Purposes
                    
                    
                    To
      Be Well Capitalized
                      Under
      Prompt Corrective
                      Action
      ProvisionsAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio(In Thousands)
                    
                    
                    
                    
                    
                    (In Thousands)
                    
                    
                    
                    
                    
                    (In Thousands)As
      of June 30, 2010:Total
      Capital to Risk-Weighted Assets:Consolidated
                    
                    $
                    155,039
                    
                    
                    
                    11.80
                    %
                    
                    $
                    105,221
                    
                    
                    
                    8.00
                    %
                    
                    $
                    131,527
                    
                    
                    
                    10.00
                    %ServisFirst
      Bank
                    
                    
                    154,786
                    
                    
                    
                    11.78
                    %
                    
                    
                    105,165
                    
                    
                    
                    8.00
                    %
                    
                    
                    131,457
                    
                    
                    
                    10.00
                    %Tier
      1 Capital to Risk-Weighted Assets:Consolidated
                    
                    
                    134,397
                    
                    
                    
                    10.23
                    %
                    
                    
                    52,611
                    
                    
                    
                    4.00
                    %
                    
                    
                    78,916
                    
                    
                    
                    6.00
                    %ServisFirst
      Bank
                    
                    
                    134,144
                    
                    
                    
                    10.21
                    %
                    
                    
                    52,583
                    
                    
                    
                    4.00
                    %
                    
                    
                    78,874
                    
                    
                    
                    6.00
                    %Tier
      1 Capital to Average Assets:Consolidated
                    
                    
                    134,397
                    
                    
                    
                    8.48
                    %
                    
                    
                    63,423
                    
                    
                    
                    4.00
                    %
                    
                    
                    79,279
                    
                    
                    
                    5.00
                    %ServisFirst
      Bank
                    
                    
                    134,144
                    
                    
                    
                    8.46
                    %
                    
                    
                    63,409
                    
                    
                    
                    4.00
                    %
                    
                    
                    79,262
                    
                    
                    
                    5.00
                    %As
      of December 31, 2009:Total
      Capital to Risk-Weighted Assets:Consolidated
                    
                    $
                    130,708
                    
                    
                    
                    10.47
                    %
                    
                    $
                    99,903
                    
                    
                    
                    8.00
                    %
                    
                    $
                    124,879
                    
                    
                    
                    10.00
                    %ServisFirst
      Bank
                    
                    
                    130,252
                    
                    
                    
                    10.44
                    %
                    
                    
                    99,851
                    
                    
                    
                    8.00
                    %
                    
                    
                    124,814
                    
                    
                    
                    10.00
                    %Tier
      1 Capital to Risk-Weighted Assets:Consolidated
                    
                    
                    111,049
                    
                    
                    
                    8.89
                    %
                    
                    
                    49,952
                    
                    
                    
                    4.00
                    %
                    
                    
                    74,927
                    
                    
                    
                    6.00
                    %ServisFirst
      Bank
                    
                    
                    110,593
                    
                    
                    
                    8.86
                    %
                    
                    
                    49,926
                    
                    
                    
                    4.00
                    %
                    
                    
                    74,888
                    
                    
                    
                    6.00
                    %Tier
      1 Capital to Average Assets:Consolidated
                    
                    
                    111,049
                    
                    
                    
                    6.97
                    %
                    
                    
                    63,767
                    
                    
                    
                    4.00
                    %
                    
                    
                    79,709
                    
                    
                    
                    5.00
                    %ServisFirst
      Bank
                    
                    
                    110,593
                    
                    
                    
                    6.94
                    %
                    
                    
                    63,737
                    
                    
                    
                    4.00
                    %
                    
                    
                    79,672
                    
                    
                    
                    5.00
                    %As
      of June 30, 2009:Total
      Capital to Risk-Weighted Assets:Consolidated
                    
                    $
                    120,627
                    
                    
                    
                    10.74
                    %
                    
                    $
                    89,836
                    
                    
                    
                    8.00
                    %
                    
                    $
                    112,295
                    
                    
                    
                    10.00
                    %ServisFirst
      Bank
                    
                    
                    124,566
                    
                    
                    
                    11.10
                    %
                    
                    
                    89,781
                    
                    
                    
                    8.00
                    %
                    
                    
                    112,226
                    
                    
                    
                    10.00
                    %Tier
      1 Capital to Risk-Weighted Assets:Consolidated
                    
                    
                    107,060
                    
                    
                    
                    9.53
                    %
                    
                    
                    44,918
                    
                    
                    
                    4.00
                    %
                    
                    
                    67,377
                    
                    
                    
                    6.00
                    %ServisFirst
      Bank
                    
                    
                    106,084
                    
                    
                    
                    9.45
                    %
                    
                    
                    44,890
                    
                    
                    
                    4.00
                    %
                    
                    
                    67,335
                    
                    
                    
                    6.00
                    %Tier
      1 Capital to Average Assets:Consolidated
                    
                    
                    107,060
                    
                    
                    
                    8.29
                    %
                    
                    
                    51,635
                    
                    
                    
                    4.00
                    %
                    
                    
                    64,544
                    
                    
                    
                    5.00
                    %ServisFirst
      Bank
                    
                    
                    106,084
                    
                    
                    
                    8.22
                    %
                    
                    
                    51,605
                    
                    
                    
                    4.00
                    %
                    
                    
                    64,506
                    
                    
                    
                    5.00
                    %





Off-Balance Sheet
Arrangements





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





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


29


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





(In Thousands)Commitments
      to extend credit
                    
                    $
                    515,559Credit
      card arrangements
                    
                    
                    22,538Standby
      letters of credit
                    
                    
                    40,495$
                    578,592





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





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





Results
of Operations





Summary of Net Income





Net
income for the three months ended June 30, 2010 was $4,021,000, compared to net
income of $1,559,000 for the three months ended June 30, 2009.  Net
income for the six months ended June 30, 2010 was $8,034,000, compared to net
income of $2,279,000 for the six months ended June 30, 2009.  The
increase in net income was primarily attributable to a higher net interest
margin and an improved efficiency ratio.  Net interest income for the
three months ended June 30, 2010 increased to $15,308,000, or 45.78%, compared
to $10,501,000 for the same period in 2009.  Net interest income for
the six months ended June 30, 2010 increased to $30,214,000, or 54.58%, compared
to $19,546,000 for the same period in 2009.  Operating expenses for
the three months ended June 30, 2010 increased to $7,561,000, or 9.87%, compared
to $6,882,000 in 2009, and for the six months ended June 30, 2010 increased to
$14,993,000, or 12.60%, compared to $13,315,000 in 2009.  The
provision for loan losses decreased $71,000 to $2,537,000 for the three months
ended June 30, 2010 compared to the same period in 2009, and increased $7,000 to
$5,075,000 for the six months ended June 30, 2010 compared to the same period in
2009.  Noninterest income decreased $278,000 to $1,004,000 for the
three months ended June 30, 2010 compared to the same period in 2009, and
decreased $66,000 to $2,136,000 for the six months ended June 30, 2010 compared
to the same period in 2009.  Basic and diluted net income per common
share were $.73 and $.65, respectively, for the three months ended June 30,
2010, compared to $.28 and $.27, respectively, for the same period in
2009.  Basic and diluted net income per common share were $1.46 and
$1.33, respectively, for the six months ended June 30, 2010, compared to $.42
and $.40, respectively, for the same period in 2009.  Return on
average assets for the three and six months ended June 30, 2010 was 1.02% and
1.04%, respectively, compared to 0.48% and 0.37% in 2009, and return on average
stockholders’ equity for the three and six months ended June 30, 2010 was 15.34%
and 15.77%, respectively, compared to 6.77% and 5.10% in 2009.


30


Net Interest Income





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





Taxable-equivalent
net interest income increased $4,888,000, or 45.89%, to $15,539,000 for the
three months ended June 30, 2010 compared to $10,651,000 in 2009, and increased
$10,888,000, or 54.94%, to $30,705,000 for the six months ended June 30, 2010
compared to $19,817,000 in 2009.  These increases were primarily
attributable to growth in interest-earning assets and lower rates on
interest-bearing deposits.  The taxable-equivalent yield on
interest-earning assets increased to 5.04% for the three months ended June 30,
2010 from 4.81% for the same period in 2009, and increased to 5.09% for the six
months ended June 30, 2010 from 4.87% for the same period in
2009.  The yield on loans for the three months ended June 30, 2010 was
5.33% compared to 5.08% for the same period in 2009, and was 5.36% compared to
5.08% for the six months ended June 30, 2010 and 2009,
respectively.  Loan fees included in the yield calculation increased
to $211,000 for the three months ended June 30, 2010 from $172,000 for the same
period in 2009, and increased to $398,000 for the six months ended June 30, 2010
from $308,000 for the same period in 2009.  The cost of total
interest-bearing liabilities decreased to 1.16% for the three months ended June
30, 2010 from 1.68% for the same period in 2009, and to 1.16% for the six months
ended June 30, 2010 from 1.84% for the same period in 2009.  The
higher interest rate on the trust preferred securities sold in September 2008,
8.50%, limited the decrease in the average rate paid on interest-bearing
liabilities.





The
following tables show, for the three months ended June 30, 2010 and 2009, the
average balances of each principal category of our assets, liabilities and
stockholders’ equity, and an analysis of net interest revenue.  The
accompanying tables reflect
changes in our net interest margin as a result of changes in the volume and rate
of our interest-earning assets and interest-bearing liabilities for the same
periods.  Changes as a result of mix or the number of days in the
periods have been allocated to the volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in
each.The tables are presented on a taxable-equivalent basis
if applicable:


31





Average
Balance Sheets and Net Interest Analysis


On
a Fully Taxable-Equivalent Basis


For
the Three Months Ended June 30,


(dollars
in thousands)





2010
                      
                      
                      2009Average
                        Balance
                      
                      
                      Interest
                        Earned
                        /
      Paid
                      
                      
                      Average
                        Yield
      /
                        Rate
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                        Earned
      /
                        Paid
                      
                      
                      Average
                        Yield
      /
                        RateAssets:Interest-earning
      assets:Loans,
      net of unearned income (1)
                      
                      $
                      1,256,458
                      
                      
                      $
                      16,708
                      
                      
                      
                      5.33
                      %
                      
                      $
                      1,064,554
                      
                      
                      $
                      13,485
                      
                      
                      
                      5.08
                      %Mortgage
      loans held for sale
                      
                      
                      4,294
                      
                      
                      
                      42
                      
                      
                      
                      3.92
                      
                      
                      
                      8,839
                      
                      
                      
                      98
                      
                      
                      
                      4.45Investment
      securities:Taxable
                      
                      
                      175,088
                      
                      
                      
                      1,669
                      
                      
                      
                      3.82
                      
                      
                      
                      71,081
                      
                      
                      
                      1,004
                      
                      
                      
                      5.67Tax-exempt
      (2)
                      
                      
                      55,120
                      
                      
                      
                      776
                      
                      
                      
                      5.65
                      
                      
                      
                      35,596
                      
                      
                      
                      493
                      
                      
                      
                      5.56Total
      investment securities (3)
                      
                      
                      230,208
                      
                      
                      
                      2,445
                      
                      
                      
                      4.26
                      
                      
                      
                      106,677
                      
                      
                      
                      1,497
                      
                      
                      
                      5.63Federal
      funds sold
                      
                      
                      28,171
                      
                      
                      
                      16
                      
                      
                      
                      0.23
                      
                      
                      
                      75,649
                      
                      
                      
                      46
                      
                      
                      
                      0.24Restricted
      equity securities
                      
                      
                      4,024
                      
                      
                      
                      13
                      
                      
                      
                      1.30
                      
                      
                      
                      3,241
                      
                      
                      
                      10
                      
                      
                      
                      1.24Interest-bearing
      balances with banks
                      
                      
                      7,621
                      
                      
                      
                      3
                      
                      
                      
                      0.16
                      
                      
                      
                      2,607
                      
                      
                      
                      3
                      
                      
                      
                      0.46Total
      interest-earning assets
                      
                      $
                      1,530,776
                      
                      
                      $
                      19,227
                      
                      
                      
                      5.04
                      %
                      
                      $
                      1,261,567
                      
                      
                      $
                      15,139
                      
                      
                      
                      4.81
                      %Noninterest-earning
      assets:Cash
      and due from banks
                      
                      
                      25,371
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      17,044Net
      fixed assets and equipment
                      
                      
                      5,019
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,098Allowance
      for loan losses, accrued interest and other assets
                      
                      
                      23,675
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,165Total
      assets
                      
                      $
                      1,584,841
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,290,874Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                      
                      $
                      241,929
                      
                      
                      $
                      314
                      
                      
                      
                      0.52
                      %
                      
                      $
                      151,414
                      
                      
                      $
                      380
                      
                      
                      
                      1.01
                      %Savings
      deposits
                      
                      
                      2,379
                      
                      
                      
                      3
                      
                      
                      
                      0.51
                      
                      
                      
                      882
                      
                      
                      
                      1
                      
                      
                      
                      0.45Money
      market accounts
                      
                      
                      737,956
                      
                      
                      
                      1,383
                      
                      
                      
                      0.75
                      
                      
                      
                      674,303
                      
                      
                      
                      2,198
                      
                      
                      
                      1.31Time
      deposits
                      
                      
                      240,317
                      
                      
                      
                      1,129
                      
                      
                      
                      1.88
                      
                      
                      
                      209,215
                      
                      
                      
                      1,388
                      
                      
                      
                      2.66Fed
      funds purchased
                      
                      
                      1,142
                      
                      
                      
                      3
                      
                      
                      
                      1.05
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      0.00Other
      borrowings
                      
                      
                      55,260
                      
                      
                      
                      856
                      
                      
                      
                      6.21
                      
                      
                      
                      35,463
                      
                      
                      
                      521
                      
                      
                      
                      5.89Total
      interest-bearing liabilities
                      
                      $
                      1,278,983
                      
                      
                      $
                      3,688
                      
                      
                      
                      1.16
                      
                      
                      $
                      1,071,277
                      
                      
                      $
                      4,488
                      
                      
                      
                      1.68Noninterest-bearing
      liabilities:Noninterest-bearing
      demand deposits
                      
                      
                      195,753
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      124,343Other
      liabilities
                      
                      
                      4,937
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,905Stockholders'
      equity
                      
                      
                      102,294
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      91,138Unrealized
      gains on securities and derivatives
                      
                      
                      2,874
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,211Total
      liabilities and stockholders' equity
                      
                      $
                      1,584,841
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,290,874Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.88
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.13
                      %Net
      interest margin
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.07
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.39
                      %





(1)
            Non-accrual
      loans are included in average loan balances in all
      periods.  Loan fees of $211,000 and $172,000 are included in
      interest income in 2010 and 2009,
respectively.


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


(3)
            Unrealized
      gains of $4,356,000 and $1,756,000 are excluded from the yield calculation
      in 2010 and 2009, respectively.


32





Three
      Months Ended June 30,2010
      Compared to 2009 Increase (Decrease)
                            in
      Interest Income and Expense Due to
                            Changes
      in:Volume
                          
                          
                          Rate
                          
                          
                          Total(In
      Thousands)Interest-earning
      assets:Loans,
      net of unearned income
                          
                          
                          2,526
                          
                          
                          
                          697
                          
                          
                          
                          3,223Mortgages
      held for sale
                          
                          
                          (45
                          )
                          
                          
                          (11
                          )
                          
                          
                          (56
                          )Investment
      securities:Securities
      - taxable
                          
                          
                          1,078
                          
                          
                          
                          (413
                          )
                          
                          
                          665Securities
      - tax-exempt
                          
                          
                          275
                          
                          
                          
                          8
                          
                          
                          
                          283Federal
      funds sold
                          
                          
                          (27
                          )
                          
                          
                          (3
                          )
                          
                          
                          (30
                          )Restricted
      equity securities
                          
                          
                          3
                          
                          
                          
                          -
                          
                          
                          
                          3Interest-bearing
      balances with banks
                          
                          
                          3
                          
                          
                          
                          (3
                          )
                          
                          
                          -Total
      interest-earning assets
                          
                          
                          3,813
                          
                          
                          
                          275
                          
                          
                          
                          4,088Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                          
                          
                          166
                          
                          
                          
                          (232
                          )
                          
                          
                          (66
                          )Savings
                          
                          
                          2
                          
                          
                          
                          -
                          
                          
                          
                          2Money
      market accounts
                          
                          
                          191
                          
                          
                          
                          (1,006
                          )
                          
                          
                          (815
                          )Time
      deposits
                          
                          
                          186
                          
                          
                          
                          (445
                          )
                          
                          
                          (259
                          )Fed
      funds purchased
                          
                          
                          2
                          
                          
                          
                          1
                          
                          
                          
                          3Other
      borrowed funds
                          
                          
                          306
                          
                          
                          
                          29
                          
                          
                          
                          335Total
      interest-bearing liabilities
                          
                          
                          853
                          
                          
                          
                          (1,653
                          )
                          
                          
                          (800
                          )Increase
      in net interest income
                          
                          
                          2,960
                          
                          
                          
                          1,928
                          
                          
                          
                          4,888


33


Average
Balance Sheets and Net Interest Analysis


On
a Fully Taxable-Equivalent Basis


For
the Six Months Ended June 30,


(dollars
in thousands)





2010
                      
                      
                      2009Average
                        Balance
                      
                      
                      Interest
                        Earned
      /
                        Paid
                      
                      
                      Average
                        Yield
      /
                        Rate
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                        Earned
      /
                        Paid
                      
                      
                      Average
                        Yield
      /
                        RateAssets:Interest-earning
      assets:Loans,
      net of unearned income (1)
                      
                      $
                      1,237,864
                      
                      
                      $
                      32,877
                      
                      
                      
                      5.36
                      %
                      
                      $
                      1,028,711
                      
                      
                      $
                      25,916
                      
                      
                      
                      5.08
                      %Mortgage
      loans held for sale
                      
                      
                      3,810
                      
                      
                      
                      77
                      
                      
                      
                      4.08
                      
                      
                      
                      8,050
                      
                      
                      
                      176
                      
                      
                      
                      4.41Investment
      securities:Taxable
                      
                      
                      181,681
                      
                      
                      
                      3,422
                      
                      
                      
                      3.80
                      
                      
                      
                      72,426
                      
                      
                      
                      2,111
                      
                      
                      
                      5.88Tax-exempt
      (2)
                      
                      
                      55,168
                      
                      
                      
                      1,559
                      
                      
                      
                      5.70
                      
                      
                      
                      31,988
                      
                      
                      
                      891
                      
                      
                      
                      5.62Total
      investment securities (3)
                      
                      
                      236,849
                      
                      
                      
                      4,981
                      
                      
                      
                      4.24
                      
                      
                      
                      104,414
                      
                      
                      
                      3,002
                      
                      
                      
                      5.80Federal
      funds sold
                      
                      
                      15,902
                      
                      
                      
                      18
                      
                      
                      
                      0.23
                      
                      
                      
                      55,166
                      
                      
                      
                      69
                      
                      
                      
                      0.25Restricted
      equity securities
                      
                      
                      3,886
                      
                      
                      
                      25
                      
                      
                      
                      1.30
                      
                      
                      
                      2,958
                      
                      
                      
                      17
                      
                      
                      
                      1.16Interest-bearing
      balances with banks
                      
                      
                      7,835
                      
                      
                      
                      11
                      
                      
                      
                      0.28
                      
                      
                      
                      10,996
                      
                      
                      
                      26
                      
                      
                      
                      0.48Total
      interest-earning assets
                      
                      $
                      1,506,146
                      
                      
                      $
                      37,989
                      
                      
                      
                      5.09
                      %
                      
                      $
                      1,210,295
                      
                      
                      $
                      29,206
                      
                      
                      
                      4.87
                      %Noninterest-earning
      assets:Cash
      and due from banks
                      
                      
                      23,790
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      17,852Net
      fixed assets and equipment
                      
                      
                      5,130
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,982Allowance
      for loan losses, accrued interest and other assets
                      
                      
                      21,968
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,362Total
      assets
                      
                      $
                      1,557,034
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,240,491Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                      
                      $
                      232,905
                      
                      
                      $
                      621
                      
                      
                      
                      0.54
                      %
                      
                      $
                      147,600
                      
                      
                      $
                      880
                      
                      
                      
                      1.20
                      %Savings
      deposits
                      
                      
                      2,140
                      
                      
                      
                      5
                      
                      
                      
                      0.47
                      
                      
                      
                      867
                      
                      
                      
                      2
                      
                      
                      
                      0.47Money
      market accounts
                      
                      
                      722,272
                      
                      
                      
                      2,680
                      
                      
                      
                      0.75
                      
                      
                      
                      652,002
                      
                      
                      
                      4,741
                      
                      
                      
                      1.47Time
      deposits
                      
                      
                      245,927
                      
                      
                      
                      2,376
                      
                      
                      
                      1.95
                      
                      
                      
                      193,795
                      
                      
                      
                      2,737
                      
                      
                      
                      2.85Fed
      funds purchased
                      
                      
                      9,883
                      
                      
                      
                      31
                      
                      
                      
                      0.63
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      0.00Other
      borrowings
                      
                      
                      49,003
                      
                      
                      
                      1,571
                      
                      
                      
                      6.46
                      
                      
                      
                      35,285
                      
                      
                      
                      1,029
                      
                      
                      
                      5.88Total
      interest-bearing liabilities
                      
                      $
                      1,262,130
                      
                      
                      $
                      7,284
                      
                      
                      
                      1.16
                      
                      
                      $
                      1,029,549
                      
                      
                      $
                      9,389
                      
                      
                      
                      1.84Noninterest-bearing
      liabilities:Noninterest-bearing
      demand deposits
                      
                      
                      188,305
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      118,109Other
      liabilites
                      
                      
                      3,884
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,635Stockholders'
      equity
                      
                      
                      100,220
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      88,940Unrealized
      gains on securities and derivatives
                      
                      
                      2,495
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,258Total
      liabilities and stockholders' equity
                      
                      $
                      1,557,034
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,240,491Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.92
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.03
                      %Net
      interest margin
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.11
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.30
                      %





(1)
            Non-accrual
      loans are included in average loan balances in all
      periods.  Loan fees of $398,000 and $308,000 are included in
      interest income in 2010 and 2009,
respectively.


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


(3)
            Unrealized
      gains of $3,781,000 and $1,758,000 are excluded from the yield calculation
      in 2010 and 2009, respectively.




34




Six
      Months Ended June 30,2010
      Compared to 2009 Increase (Decrease)
                          in
      Interest Income and Expense Due to
                          Changes
      in:Volume
                        
                        
                        Rate
                        
                        
                        Total(In
      Thousands)Interest-earning
      assets:Loans,
      net of unearned income
                        
                        
                        5,495
                        
                        
                        
                        1,466
                        
                        
                        
                        6,961Mortgages
      held for sale
                        
                        
                        (87
                        )
                        
                        
                        (12
                        )
                        
                        
                        (99
                        )Investment
      securities:Securities
      - taxable
                        
                        
                        2,272
                        
                        
                        
                        (961
                        )
                        
                        
                        1,311Securities
      - tax-exempt
                        
                        
                        655
                        
                        
                        
                        13
                        
                        
                        
                        668Federal
      funds sold
                        
                        
                        (45
                        )
                        
                        
                        (6
                        )
                        
                        
                        (51
                        )Restricted
      equity securities
                        
                        
                        6
                        
                        
                        
                        2
                        
                        
                        
                        8Interest-bearing
      balances with banks
                        
                        
                        (6
                        )
                        
                        
                        (9
                        )
                        
                        
                        (15
                        )Total
      interest-earning assets
                        
                        
                        8,290
                        
                        
                        
                        493
                        
                        
                        
                        8,783Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                        
                        
                        364
                        
                        
                        
                        (623
                        )
                        
                        
                        (259
                        )Savings
                        
                        
                        3
                        
                        
                        
                        -
                        
                        
                        
                        3Money
      market accounts
                        
                        
                        466
                        
                        
                        
                        (2,527
                        )
                        
                        
                        (2,061
                        )Time
      deposits
                        
                        
                        630
                        
                        
                        
                        (991
                        )
                        
                        
                        (361
                        )Fed
      funds purchased
                        
                        
                        15
                        
                        
                        
                        16
                        
                        
                        
                        31Other
      borrowed funds
                        
                        
                        432
                        
                        
                        
                        110
                        
                        
                        
                        542Total
      interest-bearing liabilities
                        
                        
                        1,910
                        
                        
                        
                        (4,015
                        )
                        
                        
                        (2,105
                        )Increase
      in net interest income
                        
                        
                        6,380
                        
                        
                        
                        4,508
                        
                        
                        
                        10,888





Provision for Loan Losses





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


35


The
provision for loan losses was $2,537,000 for the three months ended June 30,
2010, a decrease of $71,000 from $2,608,000 for the three months ended June 30,
2009. The provision for loan losses was $5,075,000 for the six months ended
June 30, 2010, a $7,000 increase over $5,068,000 for the six months ended June
30, 2009.  Our management continues to maintain a proactive approach
to credit risk management. Nonperforming loans decreased significantly to
$8,038,000, or 0.62% of total loans, at June 30, 2010 from $12,188,000, or 1.01%
of total loans, at December 31, 2009, and decreased from $15,243,000, or 1.37%
of total loans, at June 30, 2009.  Impaired loans increased to
$51,192,000, or 3.97% of total loans at June 30, 2010.  The increase
in impaired loans at June 30, 2010 relates to management’s determination to
increase the number of loans evaluated on a loan-by-loan basis to encompass all
loans classified as substandard or below, coupled with prevailing economic
conditions.  The allowance for loan losses totaled $15,713,000, or
1.22% of loans, net of unearned income, at June 30, 2010, compared to
$14,911,000, or 1.24% of loans, net of unearned income, at December 31, 2009 and
$13,567,000, or 1.22% of loans, net of unearned income, at June 30,
2009.





Noninterest Income





Noninterest
income totaled $1,004,000 for the three months ended June 30, 2010, a decrease
of $278,000, or 21.68%, compared to the same period in 2009, and totaled
$2,136,000 for the six months ended June 30, 2010, a decrease of $66,000, or
3.00%, compared to the same period in 2009.  Income from mortgage
banking operations for the three months ended June 30, 2010 was $333,000, down
$431,000, or 56.41%, from $764,000 for the same period in 2009, and for the six
months ended June 30, 2009 was $747,000, down $536,000, or 41.78%, from
$1,283,000 for the same period in 2009.  These decreases in mortgage
income are reflective of the high refinancing volume in 2009 due to historically
low interest rates.  Income from customer service charges and fees for
the three months ended June 30, 2010 increased $212,000, or 56.38%, to $588,000
from $376,000 for the same period in 2009, and for the six months ended June 30,
2009 increased $422,000, or 57.65%, to $1,154,000 from $732,000 for the same
period in 2009.  The increase is primarily due to an increase in
transaction accounts from 2009 to 2010.  Merchant service fees were
$99,000 for the three months ended June 30, 2010, a decrease of $77,000, or
43.75%, compared to $176,000 for the same period in 2009, and were $200,000 for
the six months ended June 30, 2010, a decrease of $125,000, or 38.46%, compared
to $325,000 for the same period in 2009.





Noninterest
Expense





Noninterest
expense totaled $7,561,000 for the three months ended June 30, 2010, an increase
of $679,000, or 9.87%, compared to $6,882,000 in 2009, and totaled $14,993,000
for the six months ended June 30, 2010, an increase of $1,678,000, or 12.60%,
compared to $13,315,000 in 2009.  The increases for the three and six
month periods in 2010 over the same periods in 2009 were primarily due to higher
FDIC insurance assessments on our deposits, higher rent and insurance expense
related to our move into our new headquarters building in Birmingham in July
2009, and higher data processing charges due to increases in the number of
accounts and transaction volume. These increases were partially offset by lower
salaries and employee benefits expenses and lower merchant processing
expenses.  Salaries and employee benefits expenses are down for the
three and six months ended June 30, 2010, compared to 2009, due to lower
commissions on mortgage lending and higher deferred loan origination
expenses.





Income Tax Expense





Income
tax expense was $2,193,000 for the three months ended June 30, 2010 versus
$734,000 for the same period in 2009, and was $4,248,000 for the six months
ended June 30, 2010 versus $1,086,000 for the same period in 2009. Our effective
tax rates for the three and six months ended June 30, 2010 were 35.29% and
34.59%, respectively, compared to 32.01% and 32.27% for the same periods in
2009.  Our primary permanent differences are related to SFAS 123(R)
option expenses and tax-free income.  We increased our marginal
accrual rate from 34% to 35% based on anticipated net income for the full year
2010.


36


ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK





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




To manage
interest rate risk, we must take a position on the expected future trend of
interest rates. Rates may rise, fall or remain the same. Our asset-liability
committee develops its view of future rate trends and strives to manage rate
risk within a targeted range by monitoring economic indicators, examining the
views of economists and other experts, and understanding the current status of
our balance sheet. Our annual budget reflects the anticipated rate environment
for the next 12 months. The asset-liability committee conducts a quarterly
analysis of the rate sensitivity position and reports its results to our board
of directors.




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





ITEM
4. CONTROLS AND PROCEDURES





CEO and CFO
Certification.





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





Evaluation of Disclosure Controls and
Procedures.





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


37


We
conducted an evaluation (the “Evaluation”) of the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of our management, including our CEO and CFO, as of
June 30, 2010. Based upon the Evaluation, our CEO and CFO have concluded that,
as of June 30, 2010, our disclosure controls and procedures are effective to
ensure that material information relating to ServisFirst Bancshares, Inc. and
its subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being
prepared.





There
have not been any changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting,
except as previously disclosed in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009.  As disclosed in that report, during the
first quarter of 2010, we discovered a material weakness in our internal control
over financial reporting relating to the treatment in our financial statements
of the Federal Deposit Insurance Corporation’s special three-year prepaid
premium assessment for the year ended December 31, 2009.  We corrected
this material weakness prior to the filing of our Annual Report on Form 10-K,
and we have changes to our internal control over financial reporting that we
believe appropriate to ensure that similar changes in FDIC assessments and
prepayments are accurately reported.





PART
II. OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





From time
to time we may be a party to various legal proceedings arising in the ordinary
course of business. We are not currently a party to any material legal
proceedings except as disclosed in Item 3, “Legal Proceedings”, in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, and there has
been no material change in any matter described therein.





ITEM
1A. RISK FACTORS





Our
business is influenced by many factors that are difficult to predict, involve
uncertainties that may materially affect actual results and are often beyond our
control. We have identified a number of these risk factors in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, which should be taken
into consideration when reviewing the information contained in this report.
There have been no material changes with regard to the risk factors previously
disclosed in the Form 10-K. For other factors that may cause actual results to
differ materially from those indicated in any forward-looking statement or
projection contained in this report, see “Forward-Looking Statements” under Part
1, Item 2 above.





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





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





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.


38


ITEM
5. OTHER INFORMATION





None.


ITEM
6. EXHIBITS





(a)
Exhibit:


31.01
Certification of principal executive officer pursuant to Rule
13a-14(a).


31.02
Certification of principal financial officer pursuant to Rule
13a-14(a).


32.01
Certification of principal executive officer pursuant to 18 U.S.C. Section
1350.


32.02
Certification of principal financial officer pursuant to 18 U.S.C. Section
1350.





SIGNATURES





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





SERVISFIRST
      BANCSHARES, INC.Date:
      August 3, 2010
              
              By
              /s/
      Thomas A. Broughton,
    IIIThomas A. Broughton, IIIPresident and Chief Executive OfficerDate:
      August 3, 2010
              
              By
              /s/
      William M. FosheeWilliam M. FosheeChief Financial Officer


39