Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Interest income:
Interest and fees on loans		$	17,715			$	14,598			$	50,669			$	40,690
Taxable securities			1,575				1,006				4,997				3,117
Nontaxable securities			582				402				1,650				1,022
Federal funds sold			23				77				41				148
Other interest and dividends			64				9				100				30
Total interest income			19,959				16,092				57,457				45,007
Interest expense:
Deposits			3,113				4,031				8,795				12,391
Borrowed funds			859				617				2,461				1,626
Total interest expense			3,972				4,648				11,256				14,017
Net interest income			15,987				11,444				46,201				30,990
Provision for loan losses			2,537				3,209				7,612				8,277
Net interest income after provision for loan losses			13,450				8,235				38,589				22,713
Noninterest income:
Service charges on deposit accounts			564				419				1,718				1,151
Securities gains			-				-				53				-
Other operating income			784				548				1,713				2,018
Total noninterest income			1,348				967				3,484				3,169
Noninterest expenses:
Salaries and employee benefits			3,547				3,398				10,176				10,354
Equipment and occupancy expense			814				767				2,368				1,977
Professional services			220				228				625				657
Other operating expenses			2,886				2,579				9,291				7,299
Total noninterest expenses			7,467				6,972				22,460				20,287
Income before income taxes			7,331				2,230				19,613				5,595
Provision for income taxes			2,532				622				6,780				1,708
Net income		$	4,799			$	1,608			$	12,833			$	3,887
Basic earnings per share		$	0.87			$	0.29			$	2.33			$	0.71
Diluted earnings per share		$	0.77			$	0.28			$	2.11			$	0.67

See Notes to Consolidated Financial  Statements.

 

4

---

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Net income		$	4,799			$	1,608			$	12,833			$	3,887
Other comprehensive income, net of tax:
Unrealized holding gains arising during period from securities available for sale, net of tax of $1,124 and $2,817 for the three and nine months ended September 30, 2010, respectively, and $1,304 and $1,330 for the three and nine months ended September 30, 2009			2,087				2,532				5,197				2,582
Reclassification adjustment for net gains on sale of securities in net income, net of tax of $19 for the nine months ended September 30, 2010			-				-				(34	)			-
Reclassification adjustment for net gains realized on derivatives in net income, net of tax benefit of $93 for the nine months ended September 30, 2009			-				-				-				(180	)
Other comprehensive income, net of tax			2,087				2,532				5,163				2,402
Comprehensive income		$	6,886			$	4,140			$	17,996			$	6,289

See Notes to Consolidated Financial Statements

 

5

---

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2010

(Unaudited)

(In thousands, except share amounts)

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

See Notes to Consolidated Financial Statements

 

6

---

 

SERVISFIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands) (Unaudited)

		2010				2009
OPERATING ACTIVITIES
Net income		$	12,833			$	3,887
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax benefit			(292	)			(909	)
Provision for loan losses			7,612				8,277
Depreciation and amortization			800				802
Net amortization (accretion) of investments			565				(326	)
Amortized gain on derivative			-				(272	)
Market value adjustment of interest rate cap			40				-
Increase in accrued interest and dividends receivable			(634	)			(1,137	)
Stock compensation expense			509				584
Decrease in accrued interest payable			(112	)			(177	)
Proceeds from sale of mortgage loans held for sale			112,068				148,071
Originations of mortgage loans held for sale			(115,361	)			(151,699	)
Gain on sale of securities available for sale			(53	)			(42	)
Net loss on sale of other real estate owned			180				817
Write down of other real estate owned			853				622
Decrease in special prepaid FDIC insurance assessments			1,963				-
Loss on disposal of premises and equipment			-				2
Net change in other assets, liabilities, and other operating activities			(773	)			(1,079	)
Net cash provided by operating activities			20,198				7,421
INVESTMENT ACTIVITIES
Purchase of securities available for sale			(40,817	)			(45,913	)
Proceeds from maturities, calls and paydowns of securities available for sale			23,517				12,825
Purchase of securities held to maturity			(1,986	)			-
Increase in loans			(147,150	)			(197,275	)
Purchase of premises and equipment			(196	)			(2,144	)
Purchase of restricted equity securities			(269	)			(582	)
Purchase of interest rate cap			(160	)			-
Proceeds from sale of securities available for sale			31,014				2,083
Proceeds from disposal of premises and equipment			-				1
Proceeds from sale of other real estate owned and repossessions			7,470				5,249
Additions to other real estate owned			(75	)			-
Net cash used in investing activities			(128,652	)			(225,756	)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits			13,230				53,630
Net increase in interest-bearing deposits			155,972				270,534
Proceeds from issuance of trust preferred securities			15,050				-
Proceeds from other borrowings			-				5,000
Proceeds from sale of stock, net			-				3,479
Proceeds from exercise of stock options			50				-
Net cash provided by financing activities			184,302				332,643
Net increase in cash and cash equivalents			75,848				114,308
Cash and cash equivalents at beginning of year			76,206				72,918
Cash and cash equivalents at end of year		$	152,054			$	187,226
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest		$	11,368			$	14,194
Income taxes			6,958				3,117
NONCASH TRANSACTIONS
Transfers of loans from held for sale to held for investment		$	787			$	1,861
Other real estate acquired in settlement of loans			5,156				9,464
Internally financed sales of other real estate owned			1,083				468

 

See Notes to Consolidated Financial Statements.

 

7

---

 

SERVISFIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

NOTE 1 - GENERAL

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

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

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

NOTE 2 - CASH AND CASH FLOWS

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

NOTE 3 - EARNINGS PER COMMON SHARE

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

 

8

---

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(In Thousands, Except Shares and Per Share Data)
Earnings Per Share
Weighted average common shares outstanding			5,515,384				5,513,482				5,513,482				5,476,701
Net income		$	4,799			$	1,608			$	12,833			$	3,887
Basic earnings per share		$	0.87			$	0.29			$	2.33			$	0.71
Weighted average common shares outstanding			5,515,384				5,513,482				5,513,482				5,476,701
Dilutive effects of assumed conversions and exercise of stock options, warrants, and convertible debt			902,563				307,849				735,377				297,740
Weighted average common and dilutive potential common shares outstanding			6,417,947				5,821,331				6,248,859				5,774,441
Net income		$	4,799			$	1,608			$	12,833			$	3,887
Effect of interest expense on convertible debt, net of tax and discretionary expenditures related to conversion			150				-				323				-
Net income, adjusted for effect of debt conversion		$	4,949			$	1,608			$	13,156			$	3,887
Diluted earnings per share		$	0.77			$	0.28			$	2.11			$	0.67

NOTE 4 - SECURITIES

 

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

 

		Amortized Cost				Gross Unrealized Gain				Gross Unrealized Loss				Fair Value
		(In Thousands)
September 30, 2010:
Securities Available for Sale
U.S. Treasury and government sponsored agencies		$	60,648			$	3,465			$	-			$	64,113
Mortgage-backed securities			110,381				4,079				(81	)			114,379
State and municipal securities			65,804				2,907				(216	)			68,495
Corporate debt			2,011				209				-				2,220
Total		$	238,844			$	10,660			$	(297	)		$	249,207
Securities Held to Maturity
State and municipal securities		$	2,631			$	76			$	(3	)		$	2,704
Total		$	2,631			$	76			$	(3	)		$	2,704
December 31, 2009:
Securities Available for Sale
U.S. Treasury and government sponsored agencies		$	92,368			$	412			$	(453	)		$	92,327
Mortgage-backed securities			99,608				2,717				(625	)			101,700
State and municipal securities			58,090				876				(567	)			58,399
Corporate debt			3,004				36				(13	)			3,027
Total		$	253,070			$	4,041			$	(1,658	)		$	255,453
Securities Held to Maturity
State and municipal securities		$	645			$	1			$	(3	)		$	643
Total		$	645			$	1			$	(3	)		$	643

 

 

9

---

 

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

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

		Less Than Twelve Months								Twelve Months or More
		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
		(In Thousands)
September 30, 2010:
Mortgage-backed securities		$	(81	)		$	13,292			$	-			$	-
State and municipal securities			(131	)			4,269				(88	)			3,028
		$	(212	)		$	17,561			$	(88	)		$	3,028
December 31, 2009:
U.S. Treasury and government sponsored agencies		$	(453	)		$	44,910			$	-			$	-
Mortgage-backed securities			(625	)			44,993				-				-
State and municipal securities			(570	)			20,479				-				-
Corporate debt			-				-				(13	)			986
		$	(1,648	)		$	110,382			$	(13	)		$	986

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

NOTE 5 - EMPLOYEE AND DIRECTOR BENEFITS

Stock Options

At September 30, 2010, the Company had stock-based compensation plans, as described below. The compensation cost that has been charged to earnings for the plans was approximately $195,000 and $509,000 for the three and nine months ended September 30, 2010 and $189,000 and $584,000 for three and nine months ended September 30, 2009, respectively.

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

 

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 assumptions of expected volatility, dividends paid on the Company’s stock, term, and the risk-free rate. Expected volatilities are based on an index of southeastern United States publicly traded banks. The expected term for options granted is based on the short-cut method and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of grant.  Assumptions for each component input into the model for options granted are as follows:

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

 

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

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
														(In Thousands)
Nine Months Ended September 30, 2010:
Outstanding at January 1, 2010			863,500			$	15.17				6.8			$	8,488
Granted			37,500				25.00				9.8				-
Exercised			(5,000	)			10.00				-				-
Forfeited			(10,000	)			15.00				6.6				-
Outstanding at September 30, 2010			886,000				15.62				6.3			$	8,313
Exercisable at September 30, 2010			272,627			$	11.96				5.3			$	3,555
Nine Months Ended September 30, 2009:
Outstanding at January 1, 2009			826,000			$	14.70				7.7			$	8,513
Granted			40,000				25.00				9.4				-
Exercised			-				-				-				-
Forfeited			(2,500	)			15.00				7.2				-
Outstanding at September 30, 2009			863,500				15.17				7.1			$	8,488
Exercisable at September 30, 2009			146,862			$	12.40				6.5			$	1,851

 

11

---

 

Restricted Stock

During the first quarter of 2010, 10,000 shares of restricted stock were awarded to employees.  During the fourth quarter of 2009, 20,000 shares of restricted stock were awarded to a key executive.  The value of restricted stock awards is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation expense over the vesting period, which is five years from the date of grant.  As of September 30, 2010, there was $623,000 of total unrecognized compensation cost related to non-vested restricted stock.  The cost is expected to be recognized evenly over the remaining 4.2 years of the restricted stock’s vesting period.

Stock Warrants

In recognition of the efforts and financial risks undertaken by the organizers of ServisFirst Bank (the “Bank”) in 2005, the Bank granted warrants to organizers to purchase a total 60,000 shares of common stock at a price of $10.00 per share, which was the fair market value of the Bank’s common stock at the date of the grant. The warrants became warrants to purchase a like number of shares of the Company’s common stock upon the formation of the Company as a holding company for the Bank.  The warrants vest in equal annual increments over a three-year period commencing on the first anniversary date of the Bank’s incorporation and will terminate on the tenth anniversary of the incorporation date. The total number of warrants outstanding at September 30, 2010 and 2009 was 60,000.

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

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

NOTE 6 - DERIVATIVES

During 2008, the Company entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company entered into offsetting positions with a regional correspondent bank in order to minimize the risk to the Company.  As of September 30, 2010, the Company was party to two swaps with notional amounts totaling approximately $12.0 million with customers, and two swaps with notional amounts totaling approximately $12.0 million with a regional correspondent bank.  These swaps qualify as derivatives, but are not designated as hedging instruments.  The Company has recorded the value of these swaps at $1,032,000 in offsetting entries in other assets and other liabilities.

On August 24, 2010, the Company entered into an interest rate cap with a notional value of $100,000,000.  The cap has a strike rate of 2.00% and is indexed to the three month London Interbank Offered Rate (“LIBOR”).  The cap does not qualify for hedge accounting treatment, and is marked to market, with changes in market value reflected in interest expense.  The cap was marked down by $40,000 during the quarter ended September 30, 2010, and is currently valued at $120,000.

 

12

---

 

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

NOTE 7 - ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

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

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

 

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

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

 

13

---

 

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

NOTE 8 - FAIR VALUE MEASUREMENT

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

Level 1:

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

Level 2:

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

Level 3:

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

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

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

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

Impaired Loans- Impaired loans are measured and reported at fair value when full payment under the loan terms is not expected.  Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of the collateral if the loan is collateral-dependent.  Impaired loans are subject to nonrecurring fair value adjustment.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.  The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $1,248,000 and $5,100,000 during the three and nine months ended September 30, 2010, respectively, and $1,586,000 and $4,919,000 for the three and nine months ended September 30, 2009, respectively.  Impaired loans are classified within Level 3 of the hierarchy.

 

14

---

 

Other real estate owned – Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs.  Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure.  Values are derived from appraisals of underlying collateral and discounted cash flow analysis.  The amount charged to earnings was $372,000 and $1,031,000 during the three and nine months ended September 30, 2010, respectively, and $359,000 and $1,326,000 during the three and nine months ended September 30, 2009.  These charges were for write-downs in the value of OREO and losses on the disposal of OREO.  OREO is classified within Level 3 of the hierarchy.

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

 

						Fair Value Measurements at September 30, 2010 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
		(In Thousands)
Assets Measured on a Recurring Basis:
Available-for-sale securities		$	-			$	249,207			$	-			$	249,207
Interest rate swap agreements			-				1,032								1,032
Interest rate cap							120								120
Total assets at fair value		$	-			$	250,359			$	-			$	250,359
Liabilities Measured on a Recurring Basis:
Interest rate swap agreements		$	-			$	1,032			$	-			$	1,032

 

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

 

15

---

 

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

 

						Fair Value Measurements at September 30, 2010 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
		(In Thousands)
Assets Measured on a Nonrecurring Basis:
Impaired loans		$	-			$	-			$	13,790			$	13,790
Other real estate owned			-				-				8,170				8,170
Total assets at fair value		$	-			$	-			$	21,960			$	21,960

 

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

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

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

 

16

---

 

 

		September 30, 2010								December 31, 2009
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(In Thousands)
Financial Assets:
Cash and cash equivalents		$	152,054			$	152,054			$	76,206			$	76,206
Investment securities available for sale			249,207				249,207				255,453				255,453
Investment securities held to maturity			2,631				2,704				645				643
Restricted equity securities			3,510				3,510				3,241				3,241
Mortgage loans held for sale			8,708				8,708				6,202				6,202
Loans, net			1,328,599				1,328,336				1,192,173				1,193,202
Accrued interest and dividends receivable			6,834				6,834				6,200				6,200
Interest rate swaps			1,032				1,032				413				413
Interest rate cap			120				120				-				-
Financial Liabilities:
Deposits		$	1,601,557			$	1,603,162			$	1,432,355			$	1,435,387
Borrowings			24,933				26,343				24,922				25,981
Trust preferred securities			30,384				27,087				15,228				12,681
Accrued interest payable			914				914				1,026				1,026
Interest rate swaps			1,032				1,032				413				413

 

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

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

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

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

Loans:  For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is based on carrying amounts.  The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and industrial loans) is estimated using discounted cash flow analysis based on option-adjusted spread rates tied to the LIBOR swap curve, with term structures matching each loan being valued.  Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.  Fair value for impaired loans is estimated using underlying collateral values, where applicable, or discounted cash flow analysis.

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

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

Deposits:  The fair values of demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts).  The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis based on option-adjusted spread rates tied to the LIBOR swap curve, with term structures matching each certificate of deposit being valued.

 

17

---

 

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

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

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

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

NOTE 9 - SUBORDINATED DEFERRABLE INTEREST DEBENTURES

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

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

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

 

18

---

 

The trust preferred securities are subject to mandatory redemption upon repayment of the Debenture at its maturity, September 1, 2038, or its earlier redemption. The Debenture is redeemable by the Company (i) prior to September 1, 2011, in whole upon the occurrence of a Special Event, as defined in the Indenture, or (ii) in whole or in part on or after September 1, 2011 for any reason. In the event of the redemption of the trust preferred securities prior to September 1, 2011, the holders of the trust preferred securities will be entitled to $1,050 per share, plus accumulated and unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment. In the event of the redemption of the trust preferred securities on or after September 1, 2011, the holders of the trust preferred securities will be entitled to receive $1,000 per share plus accumulated and unpaid distributions thereon (including accrued interest thereon), if any, to the date of payment.

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

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

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

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

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

 

19

---

 

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

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

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

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

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

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.

 

20

---

 

NOTE 11 - SUBORDINATED NOTE DUE SEPTEMBER 1, 2016

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

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

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

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

Forward-Looking Statements

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

 

21

---

 

Business

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

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

Overview

As of September 30, 2010, the Company had total consolidated assets of $1,776,524,000, an increase of $203,027,000, or 12.90%, over $1,573,497,000 at December 31, 2009.  Total loans were $1,345,502,000 at September 30, 2010, an increase of $138,418,000, or 11.47%, over $1,207,084,000 at December 31, 2009. Total deposits were $1,601,557,000 at September 30, 2010, an increase of $169,202,000, or 11.81%, over $1,432,355,000 at December 31, 2009.

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

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

 

22

---

 

 

Critical Accounting Policies

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

Financial Condition

Investment Securities

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

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

 

23

---

 

 

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

		Less Than One Year				One Year to Five Years				Five Years to Ten Years				More Than Ten Years				Total
		(In Thousands)
U.S. Treasury and government sponsored agencies		$	-			$	28,551			$	21,367			$	10,730			$	60,648
Mortgage-backed securities			-				1,265				18,771				90,345				110,381
State and municipal securities			165				6,539				45,907				15,824				68,435
Corporate debt			-				-				2,011				-				2,011
		$	165			$	36,355			$	88,056			$	116,899			$	241,475
Taxable-equivalent Yield			6.96	%			2.80	%			4.85	%			4.16	%			4.21	%

 

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.

 

38

---

 

Evaluation of Disclosure Controls and Procedures.

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

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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

 

39

---

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibit:

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

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

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

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

SIGNATURES

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

	SERVISFIRST BANCSHARES, INC.
Date: November 1, 2010		By	/s/ Thomas A. Broughton, III
		Thomas A. Broughton, III
		President and Chief Executive Officer
Date: November 1, 2010		By	/s/ William M. Foshee
		William M. Foshee
		Chief Financial Officer

 

40

---