SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
March 21, 2011
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of ServisFirst Bancshares, Inc.
Our Annual Meeting will be held at The Club, 1 Robert F. Smith Drive, Birmingham, Alabama 35209 on
Wednesday, April 20, 2011, at 5:00 p.m., Central Daylight Time. We will have a cocktail hour after the
meeting.
The enclosed proxy materials describe the formal business to be transacted at the Annual Meeting,
which includes a report on our operations. Many of our directors and officers will be present to answer any
questions that you and other stockholders may have. Included in the materials is our Annual Report on
Form 10-K, which contains detailed information concerning our activities and operating performance.
The business to be conducted at the Annual Meeting consists of the election of six directors; an
advisory vote on executive compensation; and a separate vote on the frequency of future advisory votes on
executive compensation. Our board of directors unanimously recommends a vote “FOR” the election of the
director nominees; “FOR” the “Say on Pay” advisory vote approving our executive compensation; and
“FOR” the advisory vote providing for future “Say on Pay” advisory votes to be held every year.
You may vote your shares by returning your Proxy Card in the enclosed prepaid return envelope or by
voting in person at the Annual Meeting. Instructions regarding the methods of voting are contained in the
Proxy Statement and on the accompanying Proxy Card.
On behalf of our board of directors, we request that you vote your shares now, even if you currently
plan to attend the Annual Meeting. This will not prevent you from voting in person, but will assure that
your vote is counted. Your vote is important.
Sincerely,
Thomas A. Broughton III
Director, President and Chief Executive Officer
TABLE OF CONTENTS
Notice of 2011 Annual Meeting of Stockholders ...........................................................................................................1
About the Annual Meeting .............................................................................................................................................1
Proposal 1: Election of Directors...................................................................................................................................4
The Role of the Board of Directors ................................................................................................................................5
Committees of the Board of Directors............................................................................................................................6
Independence of the Board of Directors .........................................................................................................................8
Communications with Directors .....................................................................................................................................8
Corporate Governance Guidelines..................................................................................................................................8
Code of Business Conduct..............................................................................................................................................9
Compensation Committee Interlocks and Insider Participation......................................................................................9
Director Compensation...................................................................................................................................................9
Meetings of the Board of Directors ................................................................................................................................9
Certain Relationships and Related Transactions...........................................................................................................10
Section 16(a) Beneficial Ownership Reporting Compliance ........................................................................................10
Compensation Discussion and Analysis .......................................................................................................................10
Report of the Compensation Committee ......................................................................................................................14
Executive Compensation ..............................................................................................................................................15
Employment Contracts and Termination of Employment Arrangements and Potential Payments Upon Termination
or Change in Control ....................................................................................................................................................18
Equity Compensation Plan Information .......................................................................................................................20
Security Ownership of Certain Beneficial Owners and Management ..........................................................................21
Independent Registered Public Accounting Firm .........................................................................................................23
Report of the Audit Committee ....................................................................................................................................24
Proposal 2: Advisory Vote on Executive Compensation.............................................................................................24
Proposal 3: Advisory Vote on the Frequency of Future “Say on Pay” Votes..............................................................25
Stockholder Proposals ..................................................................................................................................................25
General Information .....................................................................................................................................................25
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SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
NOTICE OF 2011 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 20, 2011
To Our Stockholders:
Notice is hereby given that our Annual Meeting of Stockholders will be held at The Club, 1 Robert F. Smith
Drive, Birmingham, Alabama 35209 on Wednesday, April 20, 2011, at 5:00 p.m., Central Daylight Time, for the
following purposes:
1.
To elect six nominees to serve on our board of directors until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified, as set forth in the accompanying Proxy
Statement;
2.
3.
4.
To conduct a “Say on Pay” advisory vote on our executive compensation;
To conduct an advisory vote on the frequency of future “Say on Pay” advisory votes; and
To transact such other business as may properly come before the Annual Meeting or any
postponement or adjournment thereof.
Our board of directors is not aware of any other business to come before the Annual Meeting.
Stockholders of record as of the close of business on March 9, 2011 are entitled to notice of and to vote
their shares in person or by proxy at the Annual Meeting.
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT YOU RETURN YOUR PROXY CARD. THEREFORE, WHETHER
OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE SIGN, DATE
AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED
RETURN ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
STOCKHOLDERS WHO EXECUTE A PROXY CARD MAY NEVERTHELESS ATTEND THE ANNUAL
MEETING, REVOKE THEIR PROXY AND VOTE THEIR SHARES IN PERSON.
By Order of the Board of Directors,
William M. Foshee
Secretary and Chief Financial Officer
Birmingham, Alabama
March 21, 2011
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2011 ANNUAL MEETING OF STOCKHOLDERS
OF
SERVISFIRST BANCSHARES, INC.
——————————————
PROXY STATEMENT
——————————————
Our board of directors solicits the accompanying proxy for use at our Annual Meeting of Stockholders to be
held on Wednesday, April 20, 2011, at 5:00 p.m., Central Daylight Time, at The Club, 1 Robert F. Smith Drive,
Birmingham, Alabama 35209. This notice of annual meeting of stockholders, Proxy Statement and Proxy Card are
being mailed on or about March 21, 2011 to our stockholders of record as of March 9, 2011, the record date for the
Annual Meeting.
Our corporate headquarters is located at 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209
and our toll free telephone number is (866) 317-0810.
Throughout this Proxy Statement, unless the context indicates otherwise, when we use the terms “the
Company”, “we,” “our” or “us,” we are referring to ServisFirst Bancshares, Inc. and its wholly owned subsidiary,
ServisFirst Bank (the “Bank”). When we use the term “Annual Meeting”, we intend to include both the Annual
Meeting to be held on the date and at the time and place identified above and any adjournment or postponement of
such Annual Meeting.
ABOUT THE ANNUAL MEETING
What are the purposes of the Annual Meeting?
At the Annual Meeting, stockholders will vote on: (i) the election of six directors, as more fully described in
Proposal 1 below; (ii) an advisory vote on our executive compensation; (iiii) an advisory vote on the frequency of
future advisory votes on our executive compensation; and (iv) such other business as may properly come before the
Annual Meeting. Our board of directors is not aware of any matters that will be brought before the Annual Meeting,
other than procedural matters, that are not listed above. However, if any other matters properly come before the
Annual Meeting, the individuals named on the Proxy Card, or their substitutes, will be authorized to vote on those
matters in their own judgment.
Who is entitled to vote?
Only stockholders of record at the close of business on the record date, March 9, 2011, are entitled to receive
notice of the Annual Meeting and to vote shares of common stock held as of the record date at the Annual Meeting.
Each outstanding share of common stock entitles its holder to cast one vote on each matter to be voted upon. There
are no cumulative voting rights.
If you did not receive an individual copy of this year’s Proxy Statement or our Annual Report, we will send a
copy to you if you send a written request to our Secretary, William M. Foshee, 850 Shades Creek Parkway, Suite
200, Birmingham, Alabama 35209, telephone (205) 949-0307.
1
What is a proxy?
It is your legal designation of another person to vote the stock you own. That other person is called a proxy. If
you designate someone as your proxy in a written document, that document is called a proxy or a Proxy Card. We
have designated Thomas A. Broughton III and William M. Foshee (the “Management Proxies”) as proxies for the
2011 Annual Meeting of Stockholders.
What is a Proxy Statement?
It is a document that SEC regulations require us to give you when we ask you to sign a Proxy Card designating
the Management Proxies as proxies to vote on your behalf.
What constitutes a quorum?
The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the shares entitled to
vote at the Annual Meeting will constitute a quorum. As of the record date, 5,527,482 shares of our common stock,
$.001 par value per share, held by 1,074 stockholders of record, were issued and outstanding. Proxies received but
marked as abstentions will be included in the calculation of the number of shares considered to be present at the
Annual Meeting.
What vote is required to approve each item?
Directors are elected by a plurality of the votes cast. Any other matter that may properly come before the
Annual Meeting must be approved by the affirmative vote of a majority of the shares entitled to vote that are present
or represented by proxy at the Annual Meeting.
Under the General Corporation Law of the State of Delaware (referred to as “Delaware law” in this Proxy
Statement), an abstention from voting on any proposal will have the same legal effect as an “against” vote, except
election of directors, where an abstention has no effect under plurality voting.
How do I vote by proxy?
On or about March 21, 2011, we mailed this Proxy Statement, the accompanying Proxy Card, and our Annual
Report to Stockholders for the year ended December 31, 2010 to all stockholders of record as of the record date.
You may vote by completing and returning your completed and signed Proxy Card by mail or by voting in person at
the Annual Meeting. To vote by mail, sign and date each Proxy Card you receive, mark the boxes indicating how
you wish to vote, and return the Proxy Card, which will be voted as you directed, in the enclosed prepaid return
envelope.
Can I change my vote after I return my Proxy Card?
Yes. You can change or revoke your proxy at any time before the Annual Meeting by (i) notifying our
Secretary, William M. Foshee, in writing or (ii) sending another executed proxy dated later than the first Proxy
Card. Attendance at the Annual Meeting will not revoke any proxy you have previously granted unless you
specifically so request. For shares you own beneficially, but of which you are not the record holder, you may
accomplish this by submitting new voting instructions to your broker or nominee.
Can I vote in person at the Annual Meeting instead of voting by proxy?
Yes. However, we encourage you to vote by proxy to ensure that your shares are represented and voted. If you
attend the Annual Meeting in person, you may then vote in person even though you returned your Proxy Card.
What are the Board’s recommendations?
Our board of directors unanimously recommends that stockholders vote in favor of: (i) the election of the six
nominees for the board of directors, as more fully described in Proposal 1 below; (ii) an advisory vote approving our
2
executive compensation, as more fully described in Proposal 2 below; and (iii) an advisory vote in favor of holding
future “Say on Pay” advisory votes every year, as more fully described in Proposal 3 below.
If your Proxy Card is properly executed and received in time for voting, and not revoked, your shares will be
voted in accordance with your instructions marked on the Proxy Card. In the absence of any instructions or
directions to the contrary, the Management Proxies will vote all shares of common stock for which Proxy Cards
have been received in favor of the approval of the above proposals.
Our board of directors does not know of any other matters other than the above proposals that may be brought
before the Annual Meeting. If any other matters should come before the Annual Meeting, the Management Proxies
will have discretionary authority to vote all proxies not marked to the contrary with respect to such matters in
accordance with their best judgment.
In particular, the Management Proxies will have discretionary authority to vote with respect to the following
matters that may come before the Annual Meeting: (i) approval of the minutes of the prior meeting if such approval
does not amount to ratification of the action or actions taken at that meeting; (ii) any proposal omitted from the
Proxy Statement and form of proxy pursuant to Rules 14a-8 and 14a-9 under the Securities Exchange Act of 1934
(the “Exchange Act”); and (iii) matters incident to the conduct of the Annual Meeting. In connection with such
matters, the Management Proxies will vote in accordance with their best judgment.
Who pays for this proxy solicitation?
We do. We will pay all costs in connection with the meeting, including the cost of preparing, assembling and
mailing the notice of the Annual Meeting, Proxy Statement and Proxy Card, as well as handling and tabulating the
proxies returned. In addition to the use of mail, proxies may be solicited by directors, officers and regular employees
of the Company, without additional compensation, in person or by other electronic means. We will reimburse
brokerage houses and other nominees for their expenses in forwarding proxy material to beneficial owners of our
common stock.
Who can help answer your questions?
If you have questions about the Annual Meeting or would like additional copies of this Proxy Statement, you
should contact our Secretary, William M. Foshee, 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama
35209, telephone (205) 949-0307.
Annual Report on Form 10-K
On written request, we will provide, without charge, a copy of our Annual Report on Form 10-K for the year
ended December 31, 2010 (including a list briefly describing the exhibits thereto), as filed with the Securities and
Exchange Commission (the “SEC”) (including any amendments filed with the SEC), to any record holder or
beneficial owner of our common stock on March 9, 2011, the record date, or to any person who subsequently
becomes such a record holder or beneficial owner. Requests should be directed to the attention of our Secretary at
the address set forth above.
3
PROPOSAL 1
ELECTION OF DIRECTORS
Under our Bylaws, our board of directors consists of six directors unless a different number is fixed from time to time by
resolution passed by a majority of our board of directors, which is the only means of fixing a different number. Six directors will be
elected at the Annual Meeting to hold office until our 2012 Annual Meeting of Stockholders and until their successors are elected and
have qualified.
Our board has nominated the persons named below, all of whom currently serve as directors, for election as directors at the 2011
Annual Meeting. Each of those nominees has consented to serve as a director, if re-elected. Unless otherwise instructed, the
Management Proxies intend to vote the proxies received by them for the election of all six of these nominees. If any nominee
identified below becomes unable to serve as a director before the Annual Meeting, the Management Proxies will vote the proxies
received by them for the election of a substitute nominee selected by our board of directors.
Vote Required and Recommendation of the Board of Directors
The six nominees receiving the most votes cast in the election of directors by holders of shares of common stock present or
represented by proxy and entitled to vote at the Annual Meeting will be elected to serve as directors of the Company for the next year.
As a result, although shares as to which the authority to vote is withheld, will be counted, such “withhold” votes will have no effect on
the outcome of the election of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE
NOMINEES NAMED BELOW.
Information regarding directors and director nominees and their ages as of the record date is as follows:
ServisFirst Bancshares, Inc.
ServisFirst Bank
Name
Director
Age
Since
Position
Director
Since
Position
Thomas A. Broughton III
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
55
60
57
67
53
60
2007
2007
2007
2007
2007
2007
President, Chief Executive
Officer and Director
Chairman of the Board
Director
Director
Director
Director
2005
2005
2005
2005
2005
2005
President, Chief Executive
Officer and Director
Chairman of the Board
Director
Director
Director
Director
The following summarizes the business experience and background of each of our nominees.
Thomas A. Broughton III – Mr. Broughton has served as our President and Chief Executive Officer and a director since 2007 and
as President, Chief Executive Officer and a director of the Bank since its inception in May 2005. Mr. Broughton has spent the entirety
of his 30-year banking career in the Birmingham area. In 1985, Mr. Broughton was named President of the de novo First Commercial
Bank. When First Commercial Bank was bought by Synovus Financial Corp. in 1992, Mr. Broughton continued as President and was
named Chief Executive Officer of First Commercial Bank. In 1998, he became Regional Chief Executive Officer of Synovus
Financial Corp., responsible for the Alabama and Florida markets. In 2001, Mr. Broughton’s Synovus region shifted, and he became
Regional Chief Executive Officer for the markets of Alabama, Tennessee and parts of Georgia. He continued his work in this position
until his retirement from Synovus in August 2004. Mr. Broughton’s experience in banking has afforded him opportunities to work in
many areas of banking and has given him exposure to all bank functions. Mr. Broughton served on the Board of Directors of Cavalier
Homes, Inc. from 1986 until 2009, when the company was sold to a subsidiary of Berkshire Hathaway. We believe that Mr.
Broughton’s extensive experience in banking in Alabama and the Southeast, and in particular his success in building and growing new
banks and developing new markets, makes him highly qualified to serve as a director.
Stanley M. Brock – Mr. Brock has served as our Chairman of the Board since 2007 and has served as Chairman of the Board of
the Bank since its inception in May 2005. He has served as President of Brock Investment Company, Ltd., a private venture capital
firm, since its formation in 1995. Prior to 1995, Mr. Brock practiced corporate law for 20 years with one of the largest law firms
4
based in Birmingham, Alabama. Mr. Brock also served as a director of Compass Bancshares, Inc., a publicly traded bank holding
company, from 1992 to 1995. We believe that Mr. Brock’s experience as a corporate lawyer and a bank holding company director, as
well as his history of community involvement in our largest market, makes him highly qualified to serve as a director.
J. Richard Cashio – Mr. Cashio has served as a director since 2007 and as a director of the Bank since its inception in May 2005.
Mr. Cashio serves as Chief Executive Officer of TASSCO, LLC and served as the Chief Executive Officer of Tricon Metals &
Services, Inc. from 2000 until its sale in October 2008. He served in various other positions with Tricon Metals & Services, Inc. prior
to 2000. We believe that Mr. Cashio’s perspectives as the chief executive officer of successful industrial enterprises allows him to
offer our board both the benefit of his business experience and the perspectives of one of our target customer groups, making him
highly qualified to serve as a director.
James J. Filler – Mr. Filler has served as a director since 2007 and as a director of the Bank since its inception in May 2005. Mr.
Filler has been a private investor since his retirement in 2006. Prior to his retirement, Mr. Filler spent 44 years in the metals recycling
industry with Jefferson Iron & Metal, Inc. and Jefferson Iron & Metal Brokerage Co., Inc. We believe that Mr. Filler’s extensive
business experience and strong ties to the Birmingham business community offer us valuable strategic insights and make him highly
qualified to serve as a director.
Michael D. Fuller – Mr. Fuller has served as a director since 2007 and as a director of the Bank since its inception in May 2005.
For over 20 years, Mr. Fuller has been a private investor in real estate investments. Prior to that time, Mr. Fuller played professional
football for nine years. Mr. Fuller has served as President of Double Oak Water Reclamation, a private collection and wastewater
treatment facility in Shelby County, Alabama since 1998. We believe that Mr. Fuller’s experience in the real estate sector, which is a
major focus of our business, as well as his overall business experience and community presence, makes him highly qualified to serve
as a director.
Hatton C. V. Smith – Mr. Smith has served as a director since 2007 and as a director of the Bank since its inception in May 2005.
Mr. Smith has served as the CEO of Royal Cup Coffee since 1996 and various other positions with Royal Cup Coffee prior to 1996.
He is involved in many different charities and is a director of the United Way and the Baptist Health System. We believe that Mr.
Smith’s business experience, his strong roots in the greater Birmingham business and civic community, and his high profile and
extensive community contacts make him highly qualified to be a director.
General
THE ROLE OF THE BOARD OF DIRECTORS
In accordance with our Bylaws and Delaware law, our board of directors oversees the management of the business and affairs of
the Company. The members of our board also are members of the board of directors of our wholly-owned subsidiary Alabama state-
chartered bank, ServisFirst Bank, which accounts for substantially all of the Company’s consolidated operating results. The members
of our board keep informed about our business through discussions with senior management and other officers and managers of the
Company and its subsidiaries, including the Bank, by reviewing analyses and reports sent to them by management and outside
consultants, and by participating in board and in board committee meetings.
Board Leadership Structure
We believe that our stockholders are best served by a strong, independent board of directors with extensive business experience
and strong ties to our markets. We believe that objective oversight of the performance of our management team is critical to effective
corporate governance, and we believe our board provides such objective oversight.
Since our inception, we have kept separate the offices of chairman of the board and chief executive officer, and an independent
director has held the position of chairman of the board. We believe that this provides us with the benefit of complementary
perspectives and ensures that our board’s oversight function remains fully objective. Although we do not have a fixed policy
requiring the separation of such offices, instead believing that it is appropriate for our board to determine the structure that best meets
our needs from time to time, it is our current intention to retain the present structure for the foreseeable future.
In addition, our three standing committees, which are described below under “Committees of the Board of Directors”, are
composed exclusively of independent directors. We believe that this structure further reinforces the board’s role as an objective
overseer of our business, operations and day-to-day management.
5
The Board’s Role in Risk Oversight
Our board is ultimately responsible for the management of risks inherent in our business. In our day-to-day operations, senior
management is responsible for instituting risk management practices that are consistent with our overall business strategy and risk
tolerance. In addition, because our operations are conducted primarily through our wholly owned subsidiary bank, we maintain an
asset-liability and investment committee at the Bank level, consisting of four executive officers of the Bank. This committee is
charged with monitoring our liquidity and funds position. The committee regularly reviews the rate sensitivity position on a three-
month, six-month and one-year time horizon; loans-to-deposits ratios; and average maturities for certain categories of liabilities. This
committee reports to our board of directors at least quarterly, and otherwise as needed. Outside of formal meetings, our board and its
committees have regular access to senior executives, including our chief executive officer, chief operating officer and chief financial
officer, as well as our senior credit officers. We believe that this structure allows the board to maintain effective oversight over our
risks and ensure that our management personnel are following prudent and appropriate risk management practices.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board maintains three standing committees: Audit, Compensation, and Nominating and Corporate Governance. The
governing charter for each of the three committees is available on our website under the “Committee Charters” heading.
Audit Committee
The Audit Committee assists our board of directors in maintaining the integrity of our financial statements and of our financial
reporting processes and systems of internal audit controls, as well as our compliance with legal and regulatory requirements. The
Audit Committee reviews the scope of independent audits and assesses the results. The Audit Committee meets with management to
consider the adequacy of the internal control over, and the objectivity of, financial reporting. The Audit Committee also meets with
our independent auditors and with appropriate financial personnel concerning these matters. The Audit Committee selects, determines
the compensation of, appoints and oversees our independent auditors. The independent auditors periodically meet with the Audit
Committee and always have unrestricted access to the Audit Committee. The Audit Committee, which currently consists of Michael
D. Fuller, J. Richard Cashio and Stanley M. Brock, met six times in 2010. Our board of directors has determined that each of Messrs.
Fuller, Cashio, and Brock is independent under the standards of independence of the Marketplace Rules of the NASDAQ Stock
Market and Rule 10A-3 under the Exchange Act. We have not designated any of our Audit Committee members as an “audit
committee financial expert,” as such term is defined under Item 407 of Regulation S-K. While we believe that each of our Audit
Committee members have had careers which provide them with the skills to understand financial statements and are competent to
serve as members of the Audit Committee, none of the current members has the financial background or education which we believe
unequivocally allows us to make such a designation, and our board of directors does not believe that designating a member of the
Audit Committee as an “audit committee financial expert” is necessary at this time.
Compensation Committee
The Compensation Committee administers incentive compensation plans, including stock option plans, and advises our board of
directors regarding employee benefit plans. The Compensation Committee establishes the compensation structure for our senior
management, approves the compensation of our senior executives, and makes recommendations to the independent members of our
board of directors with respect to compensation of the Chief Executive Officer and all other executive officers of the Company. The
Compensation Committee, which currently consists of Hatton C.V. Smith, J. Richard Cashio and James J. Filler, met three times in
2010. Our board of directors has determined that each of Messrs. Smith, Cashio and Filler is independent under the standards of
independence of the Marketplace Rules of the NASDAQ Stock Market and Rule 10A-3 under the Exchange Act and an “outside
director” for purposes of Section 162(m) of the Internal Revenue Code of 1986.
In January 2008, the Compensation Committee retained an outside consultant, Clark Consulting, to advise it regarding our
compensation practices. Clark Consulting provided us with a report dated January 2008 (the “Clark Report”) which compared the
compensation paid to our president and chief executive officer in 2007 versus a peer group which included Pinnacle Financial
Partners, Inc. (Nashville, Tennessee), FNB United Corp. (Asheboro, North Carolina), Great Florida Bank (Coral Gables, Florida),
Capital Bank Corporation (Raleigh, North Carolina), Bancorp, Inc. (Wilmington, Delaware), Gateway Financial Holding, Inc.
(Virginia Beach, Virginia), Integrity Bancshares, Inc. (Alpharetta, Georgia), Bank of Florida Corporation (Naples, Florida),
Commonwealth Bankshares, Inc. (Norfolk, Virginia), Omni Financial Services, Inc. (Atlanta, Georgia), Crescent Financial
Corporation (Cary, North Carolina), Patriot National Bancorp, Inc. (Stamford, Connecticut), Tennessee Commerce Bancorp (Franklin,
Tennessee), Southern First Bancshares, Inc. (Greenville, South Carolina) and Sun American Bancorp (Boca Raton, Florida). The
Clark Report concludes that while we were, at the time of the report, in the top 40% in most performance measures and the top 5% for
6
asset growth, the base salary of our president and CEO was in the bottom 12% and his total compensation is in the bottom 30% versus
such peer group.
Since the 2008 engagement of Clark Consulting, we have not retained a compensation consultant to advise the Compensation
Committee, the full board or any members of management with respect to our compensation practices. Instead, the Compensation
Committee independently determines the appropriate levels of compensation for executive officers and directors taking into account,
among other factors, the performance of such individuals, our financial performance, stockholder return and efforts and undertakings
and initiatives to build stockholder value.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee functions include establishing the criteria for selecting candidates for
nomination to our board; actively seeking candidates who meet those criteria; and making recommendations to our board of directors
to fill vacancies on, or as additions to, our board and to monitor the Company’s corporate governance structure. The Nominating and
Corporate Governance Committee, which currently consists of Michael D. Fuller, J. Richard Cashio and Stanley M. Brock, did not
meet in 2010. Our board of directors has determined that each of Messrs. Fuller, Cashio and Brock is independent under the standards
of independence of the Marketplace Rules of the NASDAQ Stock Market and Rule 10A-3 of the Exchange Act and an “outside
director” for purposes of Section 162(m) of the Internal Revenue Code of 1986.
The Nominating and Corporate Governance Committee seeks director candidates based upon a number of criteria, including their
independence, knowledge, judgment, character, leadership skills, education, experience and financial literacy and, for nominees
standing for re-election, their prior performance as a director. The Committee does not assign relative weights to these factors, but
attempts to form an overall judgment as to each individual nominee. The Committee will consider nominees for election to our board
that are timely recommended by stockholders provided that a complete description of the nominees’ qualifications, experience and
background, together with a statement signed by each nominee in which he or she consents to act as such, accompany the
recommendations.
In evaluating nominees for director, the Nominating and Corporate Governance Committee believes that, at this stage of the
Company’s existence, it is of primary importance to ensure that the composition of the board reflects a diversity of business
experience and community leadership, as well as a demonstrated ability to promote the Company’s strategic objectives and expand its
presence, profile and customer base in its local markets. Accordingly, while the Committee may consider other types of diversity in
evaluating nominees, the Committee does not follow any specific formula for considering factors such as race, gender or national
origin in evaluating nominees and potential nominees, nor does it apply any quotas with respect to such factors.
Committee Membership
The following chart provides a summary of our board committee membership for fiscal year ended December 31, 2010.
Names
Thomas A. Broughton III
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C.V. Smith
Advisory Boards
Committee Membership
Nominating and Corporate
Governance
Audit
Compensation
X
X
X
X
X
X
X
X
X
In addition to the boards of directors of the Company and the Bank, which are identical in composition, the Bank also has a non-
voting advisory board of directors in each of the Huntsville, Montgomery and Dothan markets. These advisory directors represent a
wide array of business experience and community involvement in the service areas where they live. As residents of our primary
service areas, they are sensitive and responsive to the needs of our customers and potential customers. In addition, our directors and
advisory directors bring substantial business and banking contacts to us. The Bank has established the following regional advisory
boards:
7
Huntsville Region:
Montgomery Region:
E. Wayne Bonner
Hoyt A. “Tres” Childs, III, MD
Donald J. Davidson
David J. Slyman, Jr.
Irma Tuder
Danny J. Windham
Sidney R. White
William (Bill) B. Watson, Jr.
Thomas J. Young
Ray B. Petty
Todd Strange
G.L. Pete Taylor
W. Ken Upchurch, III
Alan E. Weil, Jr.
Dothan Region:
Charles H. Chapman III
William C. (Bill) Thompson
John Downs
Charles E. Owens
INDEPENDENCE OF THE BOARD OF DIRECTORS
Our common stock is not listed on any exchange, and we have no current plans to list our common stock on any exchange;
therefore, the Exchange Act requires that we select an exchange’s director independence requirements with which to comply. We
have selected the director independence requirements of The NASDAQ Global Market. Our Nominating and Corporate Governance
Committee has conducted and will in the future conduct, as deemed necessary, a review of director independence utilizing the listing
standards of The NASDAQ Global Market. During this review, our board considered transactions and relationships between each
director or any member of his immediate family and us and the Bank. Our board also considered whether there were any transactions
or relationships between directors or with any member of their immediate family (or any entity of which a director or an immediate
family member is an executive officer, general partner or significant equity holder). The purpose of this review was to determine
whether any such relationships or transactions existed that were inconsistent with a determination that a director is independent.
Independent directors must be free of any relationship with us or our management that may impair the director’s ability to make
independent judgments.
Our Nominating and Corporate Governance Committee has determined in its business judgment that five of the Company’s six
Directors are independent as defined in the applicable NASDAQ Global Market listing standards, including that each member is free
of any relationships that would interfere with his individual exercise of independent judgment. Our independent directors are Messrs.
Brock, Cashio, Filler, Fuller and Smith.
Mr. Broughton is considered an inside director because of his employment as our President and Chief Executive Officer.
COMMUNICATIONS WITH DIRECTORS
You may contact any of our independent directors, individually or as a group, by writing to them c/o William M. Foshee, Chief
Financial Officer, ServisFirst Bancshares, Inc., 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209. Mr. Foshee will
review and forward to the appropriate directors copies of all such correspondence that, in the opinion of Mr. Foshee, deals with the
functions of the board of directors or its committees or that he otherwise determines requires their attention. Concerns relating to
accounting, internal controls or auditing matters will be brought promptly to the attention of the Chairman of the Audit Committee and
will be handled in accordance with procedures established by the Audit Committee.
CORPORATE GOVERNANCE GUIDELINES
Our board of directors believes that sound governance practices and policies provide an important framework to assist them in
fulfilling their oversight duty. In December 2007, our board formally adopted the Corporate Governance Guidelines of ServisFirst
Bancshares, Inc. (the “Governance Guidelines”), which include a number of the practices and policies under which our board has
operated for some time, together with concepts suggested by various authorities in corporate governance and the requirements under
the NASDAQ’s listed company rules and the Sarbanes-Oxley Act of 2002. Some of the principal subjects covered by our Governance
Guidelines include:
8
• Director Qualifications, which include a board candidate’s independence, experience, knowledge, skills, expertise, integrity,
ability to make independent analytical inquiries; his or her understanding of our business and the business environment in
which we operate; and the candidate’s ability and willingness to devote adequate time and effort to board responsibilities,
taking into account the candidate’s employment and other board commitments.
• Responsibilities of Directors, including acting in the best interests of all stockholders; maintaining independence; developing
and maintaining a sound understanding of our business and the industry in which we operate; preparing for and attending
board and board committee meetings; and providing active, objective and constructive participation at those meetings.
• Director Access to management and, as necessary and appropriate, independent advisors, including encouraging
presentations to our board from the officers responsible for functional areas of our business and from outside consultants
who are engaged to conduct periodic reviews of various aspects of our operations or the quality of certain of our assets, such
as the loan portfolio.
• Director Orientation and Continuing Education, including programs to familiarize new directors with our business, strategic
plans, significant financial, accounting and risk management issues, compliance programs, conflicts policies, code of
business conduct and corporate governance guidelines. In addition, each director is expected to participate in continuing
education programs relating to developments in our business and in corporate governance.
• Regularly Scheduled Executive Sessions, without management, will be held by our board and by the Audit Committee, which
meets separately with our outside auditors.
CODE OF BUSINESS CONDUCT
Our board of directors has adopted a Code of Ethics that applies to all of our employees, officers and directors. The Code of
Ethics covers compliance with law; fair and honest dealings with us, with competitors and with others; fair and honest disclosure to
the public; and procedures for compliance with the Code of Ethics. A copy of our Code of Ethics is available free of charge on our
website at www.servisfirstbancshares.com.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The primary functions of the Compensation Committee are to evaluate and administer the compensation of our president and
chief executive officer and other executive officers and to review our general compensation programs. As of December 31, 2010, and
currently, the members of this committee are Hatton C. V. Smith, J. Richard Cashio and James J. Filler. No member of this committee
has served as an officer or employee of ServisFirst Bancshares, Inc. or any subsidiary. In addition, none of our executive officers has
served as a director or as a member of the compensation committee of a company which employs any of our directors.
The following table sets forth information regarding the compensation of our non-employee directors for the year ended
December 31, 2010. Thomas A. Broughton III is a named executive officer, and his compensation is reflected in the Summary
Compensation Table.
DIRECTOR COMPENSATION
Name
Stanley M. Brock, Chairman of the Board
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
Fees earned
or paid in cash
($)
21,500
22,000
16,500
19,320
16,500
Stock Awards
($)
--
--
--
--
--
Total
($)
21,500
22,000
16,500
19,320
16,500
MEETINGS OF THE BOARD OF DIRECTORS
Our board of directors held 12meetings in 2010. Each director attended more than 75% of the aggregate of: (i) the number of
meetings of the board of directors held during the period he served on the board; and (ii) the number of meetings of committees of the
board of directors held during the period he served on such committees.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION
OF EACH OF THE NOMINEES NAMED IN PROPOSAL 1.
9
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have not entered into any business transactions with related parties required to be disclosed under Rule 404(a) of Regulation
S-K other than banking transactions in our ordinary course of business with our directors and officers, as well as members of their
families and corporations, partnerships or other organizations in which they have a controlling interest. Management recognizes that
related party transactions can present unique risks and potential conflicts of interest (in appearance and in fact). Therefore, we
maintain written policies around interactions with related parties which require that these transactions are on the following terms:
•
•
In the case of banking transactions, each is on substantially the same terms, including price or interest rate, collateral and
fees, as those prevailing at the time for comparable transactions with unrelated parties, and is expected to involve more than
the normal risk of collectability or present other unfavorable features to the Bank; and
In the case of any related party transactions, including banking transactions, each transaction is approved by a majority of the
directors who do not have an interest in the transaction.
The aggregate amount of indebtedness from directors and executive officers (including their affiliates) to the Bank as of
December 31, 2010, including extensions of credit or overdrafts, endorsements and guarantees outstanding on such date, was
approximately $6,825,000, which equaled 4.09% of our total equity capital as of that date. Less than 1% of these loans were
installment loans to individuals. These loans are secured by real estate and other suitable collateral to the same extent, including loan
to value ratios, as loans to similarly situated unaffiliated borrowers. We anticipate making related party loans in the future to the same
extent as we have in the past.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC, initial reports of ownership and reports of changes in ownership of
common stock and other equity securities. Executive officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon information made available to us, we
believe that each filing required to be made pursuant to Section 16(a) was timely filed by our executive officers and directors and the
beneficial owners of more than 10% of our common stock, except that a stock option grant to William M. Foshee, our Executive Vice
President and Chief Financial Officer, in February 2010 covering 5,000 shares of common stock was not timely reported due to an
inadvertent error. Mr. Foshee timely filed a Form 5 reflecting such award.
Introduction
COMPENSATION DISCUSSION AND ANALYSIS
Our compensation process is designed to address both annual and longer-term corporate objectives. We have been in a period of
accelerated growth and change in recent years, and our compensation processes have been designed to permit us to attract and retain
highly skilled executive and management staff in our competitive market place. This Compensation Discussion and Analysis
describes our compensation program for our “named executive officers”, who are Thomas A. Broughton III, William M. Foshee,
Clarence C. Pouncey III, Ronald A. DeVane and G. Carlton Barker.
Since November 2007, when we completed our reorganization in which we acquired the Bank, we have been a bank holding
company. We conduct most of our operations through the Bank, which is our wholly owned subsidiary. Our board of directors and
the board of directors of the Bank consist of the same individuals. At the holding company level, we have three named executive
officers, each of whom also holds the same position with the Bank. These officers are Thomas A. Broughton III, President and Chief
Executive Officer, Clarence C. Pouncey III, Executive Vice President and Chief Operating Officer, and William M. Foshee, Executive
Vice President and Chief Financial Officer. All of such officers remain employees of the Bank for payroll and tax purposes.
The board of directors of the Bank has a compensation committee. At the time we became a bank holding company, our board of
directors appointed a separate compensation committee (the “Compensation Committee”, as discussed above), consisting of the same
individuals as the compensation committee of the Bank, with the authority to determine the compensation of our Chief Executive
Officer and, either independently or with other independent directors of the board, the compensation of our other executive officers,
and to further administer any stock incentive plans. Because our officers, including Mr. Broughton, Mr. Foshee and Mr. Pouncey,
10
remain employees of the Bank for payroll and tax purposes, their compensation is set by the compensation committee of the Bank, as
a technical matter. However, such compensation is then approved by the board of directors of the Bank and by our board of directors.
Because both compensation committees consist of the same persons, as do both board of directors, references herein to “our” or “the”
Compensation Committee will be deemed to refer to our Compensation Committee and/or the Bank’s compensation committee, as
applicable.
Compensation Philosophy and Objectives
In order to recruit and retain the most qualified and competent individuals as executive officers, we strive to maintain a
compensation program that is competitive in our market. Our Compensation Committee believes that the most effective executive
compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by us and
the Bank, and which aligns executives’ interests with those of our stockholders by rewarding performance, with the ultimate objective
of improving stockholder value. The Compensation Committee evaluates both performance and compensation to ensure that we
maintain our ability to attract and retain superior employees in key positions and that compensation provided to the named executive
officers and other officers remains competitive relative to the compensation paid to similarly situated executives of our peers. Our
Compensation Committee has not yet designated a specific peer group for this purpose, but relies on general information about
similarly sized banks and bank holding companies in similar markets.
The Compensation Committee believes that executive compensation packages should include cash, annual short-term cash
incentives and long-term equity based incentives that reward performance as measured against established goals. These goals may
include any number of criteria, may be unique to the particular executive officer based upon his or her duties, and may include, among
others, criteria based upon our net income, our asset growth, our loan growth, such executive officer’s personal production and our
efficiency and asset quality. Additionally, the Compensation Committee believes that we should offer competitive benefit plans,
including health insurance and a 401(k) plan. We have also entered into change in control agreements in particular circumstances
where we believe it is important to ensure the retention of certain key executives during the critical period immediately preceding a
change in control, if and when applicable.
The fundamental purpose of our executive compensation program is to assist us in achieving our financial and operating
performance objectives. Specifically, our compensation program has three basic objectives:
(cid:2)
(cid:2)
(cid:2)
To attract, retain and motivate our executive officers, including our named executive officers;
To reward executives upon the achievement of measurable corporate, business unit and individual performance goals; and
To align each executive’s interests with the creation of stockholder value.
Elements of our Compensation Program
Base salary: This element is intended to directly reflect an executive’s job responsibilities and his or her value to us. We also use
this element to attract and retain our executives and, to some extent, acknowledge each executive’s individual efforts in furthering our
strategic goals.
Annual short-term cash incentives: This annual cash incentive is one of the performance-based elements of our compensation. It
is intended to motivate our executives and to provide a current or immediate reward for short-term (annual) measurable performance.
Equity-based incentives: The grant of stock options and/or other equity-based incentive compensation is the most important
method we use to align the interests of our named executive officers with the interests of our stockholders, which is another element of
performance-based compensation.
Perquisites and benefits: These benefits and plans are intended to attract and retain qualified executives, by ensuring that our
compensation program is competitive and provides an adequate opportunity for retirement savings. We believe that, to a limited
degree, these programs tend to reward long-term service or loyalty to us.
Change in control agreements: These agreements, or comparable provisions in an employment or similar agreement, provide a
form of severance payable in the event we are the subject of a change in control. They are primarily intended to align the interests of
our executives with our stockholders by providing for a secure financial transition in the event of termination in connection with a
change in control.
11
General Compensation Policies
To reward both short- and long-term performance in the compensation program and in furtherance of our compensation objectives
noted above, our executive officer compensation philosophy includes the following principles:
Compensation should be related to performance. The Compensation Committee believes that a significant portion of an
executive officer’s compensation should be tied not only to individual performance, but also the Company’s performance measured
against both financial and non-financial goals and objectives.
Incentive compensation should represent a portion of an executive officer’s total compensation. The Compensation Committee is
committed to providing competitive compensation that reflects our performance and that of the individual officer or employee.
Compensation levels should be competitive. The Compensation Committee reviews available data to ensure that our
compensation is competitive with that provided by other comparable companies. The Compensation Committee believes that
competitive compensation enhances our ability to attract and retain executive officers.
Incentive compensation should balance short-term and long-term performance. The Compensation Committee seeks to achieve a
balance between encouraging strong short-term annual results and ensuring our long-term viability and success. To reinforce the
importance of balancing these perspectives, executive officers will be provided both short- and long-term incentives. Prior to 2009,
we provided our executive officers, non-employee directors and employees with the means to become stockholders and to share
accretion in value with our external stockholders through our 2005 Amended and Restated Stock Incentive Plan. In 2009, we
continued that process through the adoption and approval by our stockholders of our 2009 Stock Incentive Plan.
The Compensation Committee does not use a specific formula to determine the amount allocated to each element of
compensation. Instead, the Compensation Committee evaluates the total compensation paid to each executive and makes individual
compensation decisions as to the mixture between base salary, annual short-term cash incentives and equity-based incentives. To
date, in determining the amount or mixture of compensation to be paid to any executive, the Compensation Committee has not
considered any severance payment to be paid under an employment agreement or change-in-control agreement or any equity-based
incentives previously awarded. Further, the Compensation Committee has not adopted any specific stock ownership or holding
guidelines that would affect such determinations.
For fiscal year 2010, an average of 31.5% of our named executive officers’ compensation was in annual short-term cash
incentives and an average of 2.0% of our named executive officers’ compensation was in long-term equity-based incentives, or stock
options. The following table illustrates the percentage of each named executive officer’s total compensation, as reported in the
“Summary Compensation Table” below, related to base salary, annual short-term cash incentives and long-term equity-based
incentives:
Percentage of Total Compensation
(Fiscal Year 2010)
Annual Base
Salary
Annual Short-
Term Cash
Incentives
Equity-Based
Incentives
Perquisites
and Benefits
58.0%
56.8%
62.5%
57.1%
57.8%
29.0%
28.4%
31.3%
34.3%
34.7%
--
11.7%
--
--
--
13.0%
3.0%
6.2%
8.6%
7.5%
Named Executive Officer
Thomas A. Broughton III, Principal Executive
Officer (“PEO”)
William M. Foshee, Principal Financial Officer
(“PFO”)
Clarence C. Pouncey III
G. Carlton Barker
Ronald A. DeVane
Chief Executive Officer Compensation
The compensation of Thomas A. Broughton III, our President and Chief Executive Officer, is discussed throughout the following
paragraphs. The Compensation Committee establishes Mr. Broughton’s compensation package each year with the intent of providing
compensation designed to retain Mr. Broughton’s services and motivate him to perform to the best of his abilities. Mr. Broughton’s
2010 base salary and incentive compensation reflects the Committee’s and our board’s determination of the total compensation
package necessary to meet this objective.
12
Annual Base Salary
The Compensation Committee endeavors to establish base salary levels for executives that are consistent and competitive with
those provided for similarly situated executives of other similar financial institutions, taking into account each executive’s areas and
level of responsibility. To date, the Compensation Committee has not designated a specific peer group for its use.
For the year ended December 31, 2010, the Compensation Committee increased the base salaries of our named executive officers
as follows: Thomas A. Broughton III to $275,000 from $250,000, an increase of 10%; William M. Foshee to $180,000 from $165,000,
an increase of 9.1%; Clarence C. Pouncey III to $225,000 from $215,000, an increase of 4.7%; G. Carlton Barker to $205,000 from
$200,000, an increase of 2.5%; and Ronald A. DeVane to $220,000 from $210,000, an increase of 4.8%.
None of the named executive officers have employment agreements other than Mr. Barker. Mr. Barker’s employment agreement
provides that his minimum base salary is $200,000, subject to periodic discretionary raises. See “Employment Agreements” below for
a more detailed discussion.
Annual Short-Term Cash Incentive Compensation
For the year ended December 31, 2010, the Compensation Committee relied on various performance measurements for defining
executive officer incentive compensation for the named executive officers which included, among others, our net income, our asset
growth, our loan growth, the executive’s individual production and our efficiency and asset quality. Each of the performance
measurements was applied and determined at the discretion of the Compensation Committee. The potential award level for Mr.
Broughton is purely discretionary, but the potential award level for each of our other named executive officers is generally limited to
50% of their respective base salaries. The Compensation Committee also has discretionary authority to establish “stretch”
performance goals for individual officers, potentially allowing for incentive compensation in excess of 50% of an officer’s base salary.
In 2010, the Committee established such “stretch” goals for each of our named executive officers other than Mr. Broughton, meaning
that each of such officers had the opportunity to earn incentive compensation of up to 60% of their respective base salaries. With the
exception of Mr. Barker, we do not have any contractual obligations to provide the opportunity to earn specified levels of incentive
compensation, and thus such determination is entirely within the discretion of the Compensation Committee. Mr. Barker’s
employment agreement specifically provides that has the opportunity to receive discretionary annual short-term incentive
compensation of up to 50% of his base salary and is eligible for such additional performance-based compensation as we may
determine from time to time. The Compensation Committee makes a determination of awards based on the information available to it
at the time the award is made. The Compensation Committee has no policy to adjust or recover awards or payments if the relevant
Company performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size
of an award or payment.
The table below details, for each named executive officer, the various elements comprising the performance targets for each
named executive officer, the range of incentive cash compensation each was eligible to earn (expressed as a percentage of base
salary), cash incentive compensation paid as a percentage of base salary and cash incentive compensation paid for 2010 performance.
Name
Performance Targets
Thomas A. Broughton III
None
William M. Foshee
Clarence C. Pouncey III
G. Carlton Barker
Ronald A. DeVane
Net Income
Regulatory Compliance
Net Income
Nonperforming Asset Levels
Montgomery Office Deposits and
Loans
Montgomery Office Net Income
Non-Performing Asset Levels
Dothan Office Net Income
Non-Performing Asset Levels
2010 Incentive Range
(%)
2010 Incentive as
a Percentage of
Base Salary (%)
2010 Incentive
Paid ($)
None
0%-60%
0%-60%
50%
50%
50%
$137,500
$90,000
$112,800
0%-60% (1)
60% (1)
$123,000
0%-60% (1)
60% (1)
$132,000
(1) Messrs. Barker and DeVane also had additional “stretch” incentive goals based upon their respective office’s net income and return on average assets, allowing for
incentive compensation of up to 10% of their base salaries in addition to the basic incentive range. Both Mr. Barker and Mr. DeVane achieved those goals.
13
The Compensation Committee did not set specific objective numerical targets for any of the above-stated criteria for each named
executive officer. Instead, the Compensation Committee made a subjective determination for each named executive officer’s
performance using, other than in the case of Mr. Broughton, the above criteria as guidelines. The Compensation Committee believed
that, based upon our overall performance and the specific individual performance levels of our named executive officers, it was
appropriate to provide significant incentive bonuses to all of our named executive officers for 2010. Accordingly, for the year ended
December 31, 2010 and based upon its subjective determination of our overall performance and such officers’ individual performance
for 2010, the Compensation Committee awarded the incentive compensation set forth in the table above.
Equity-Based Incentive Compensation
On May 19, 2005, Mr. Broughton received a stock option to purchase up to 75,000 shares of our common stock at $10.00 per
share, and a warrant (now vested in full) in his capacity as a founding director to purchase up to 10,000 shares of our common stock
for $10.00 per share. Such 75,000-share option vests 10,000 shares per year each May 19 and thus has vested 50,000 shares to date.
It will vest an additional 10,000 shares on May 19, 2011 (for an aggregate of 60,000 shares) and each May 19 thereafter until the final
5,000 shares vest on May 19, 2013. In addition, Mr. Brought was granted (i) a stock option to purchase up to 10,000 shares of
common stock at $20.00 per share in December 2007, which vests 100% after five years, for his services as a director, and (ii) a stock
option to purchase up to 11,000 shares of common stock in January 2011, which vests in a lump sum five years from the grant date.
On October 26, 2009, Mr. Broughton was awarded 20,000 shares of restricted common stock. These shares vest in five equal
installments beginning on the first anniversary of the grant date.
In general, we have granted incentive stock options to our other named executive officers only in connection with their initial
hiring, but with vesting schedules designed to enhance their retention and align their interests with those of our stockholders. These
incentive stock options generally fully vest over six to eight years from their date of grant, with most of such grants not beginning to
vest until three to five years following their date of grant, the first of which vested in February 2009. In addition, (i) in February 2010
we granted a stock option to purchase up to 5,000 shares to Mr. Foshee, which vests 1,000 shares on the fourth anniversary of the
grant date and the remaining shares on the fifth anniversary of the grant date, and (ii) in January 2011 we granted a stock option to
purchase up to 2,500 shares of common stock to Mr. Foshee, which vests in a lump sum five years from the grant date, See “Executive
Compensation – Outstanding Equity Awards at Fiscal Year-End” below for a detailed description of the vesting schedules of each of
the options granted to the named executive officers that were outstanding at December 31, 2010.
Our Stock Incentive Plans allow for the accelerated vesting of equity awards in the event of a change of control. In general, under
these Plans a “change of control” means a reorganization, merger or consolidation of the Company with or into another entity where
our stockholders before the transaction own less than 50% of our combined voting power after the transaction, a sale of all or
substantially all of our assets or a purchase of more than 50% of the combined voting power of our outstanding capital stock in a
single transaction or a series of related transactions by one “person” (as that term is used in Section 13(d) of the Exchange Act) or
more than one person acting in concert.
Severance and Change in Control.
We do not have an employment or other agreement with Mr. Broughton that would require us to pay him severance payments
upon termination of his employment. We have, however, entered into agreements to pay severance payments under certain
circumstances to Mr. Barker under his employment agreement, and we have entered into change in control agreements with Mr.
Foshee and Mr. Pouncey. Mr. Barker’s employment agreement also contains a change in control provision. See “Executive
Compensation – Employment Agreements”, “ – Change in Control Agreements” and “ – Estimated Payments upon a Termination or
Change in Control” below.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the board of directors of ServisFirst Bancshares, Inc. has reviewed and discussed the
Compensation Discussion and Analysis for the Company for the year ended December 31, 2010 with management. In reliance on the
reviews and discussions with management, the Compensation Committee recommended to the board of directors, and the board of
directors has approved, that the Compensation Discussion and Analysis be included in the required company filings with the SEC,
including the Proxy Statement for the 2010 Annual Meeting of Stockholders.
The Compensation Committee Report shall not be deemed incorporated by reference in any document previously or subsequently
filed with the SEC that incorporates by reference all or any portion of this Proxy Statement.
14
Submitted by the Compensation Committee:
Hatton C.V. Smith, Chairman
J. Richard Cashio
James J. Filler
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate compensation paid by us or the Bank for services for the years ended December 31,
2010, 2009 and 2008 to our named executive officers:
Name and Principal
Position Held
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards(1)
($)
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings
($)
Non-Equity
Incentive
Plan Comp
($)
Thomas A. Broughton III
President & CEO
Clarence C. Pouncey III
EVP and Chief
Operating Officer
William M. Foshee
EVP and Chief Financial
Officer
G. Carlton Barker (2)
Regional CEO -
Montgomery
Ronald A. DeVane (2)
Regional CEO – Dothan
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
275,000
250,000
250,000
137,500
-
100,000
-
500,000
-
225,000
215,000
210,000
112,800
-
55,000
180,000
165,000
160,000
90,000
-
30,000
205,000
200,000
200,000
123,000
-
-
220,000
210,000
132,000
105,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
37,150
-
27,050
-
-
-
-
-
352,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2008
205,530
25,000
All Other
Compensation
($)
Total
($)
47,730 (3)
47,494
50,149
22,472 (4)
21,936
22,236
9,704 (5)
17,482
18,961
31,011 (6)
29,560
31,045
460,230
797,494
400,149
360,272
236,936
287,236
316,854
182,482
236,011
359,011
229,560
231,045
28,449 (7)
19,256
380,449
334,256
6,847
589,877
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The amounts in this column reflect the aggregate grant date fair value under FASB ASC Topic 718 of awards made during the respective year.
Although Mr. Barker and Mr. DeVane are employees of the Bank only, we have included them as named executive officers due to their salary
level and since they are president and chief executive officer of the Montgomery and Dothan offices, respectively. Mr. DeVane was first
employed by the Bank in 2008.
All Other Compensation for 2010 includes car allowance ($9,000), director’s fees ($16,000), country club allowance ($5,680), healthcare
premiums ($6,374), matching contributions to 401(k) plan ($9,800) and group life and long-term disability insurance premiums ($876).
All Other Compensation for 2010 includes car allowance ($9,000), country club allowance ($6,340), group life and long-term disability insurance
premiums ($758) and healthcare premiums ($6,374).
All Other Compensation for 2010 includes car allowance ($9,000) and group life and long-term disability insurance premiums ($704).
All Other Compensation for 2010 includes car allowance ($9,000), matching contributions to 401(k) plan ($8,787), country club allowance
($6,092) and group life and long-term disability insurance premiums ($758) and healthcare premiums ($6,374).
All Other Compensation for 2010 includes car allowance ($9,000), matching contributions to 401(k) plan ($9,019), country club allowance
($3,180) and group life and long-term disability insurance premiums ($876) and healthcare premiums ($6,374).
15
Grants of Plan-Based Awards in 2010
The table below sets forth information regarding grants of plan-based awards made to our named executive officers during 2010.
All Other
Option Awards:
Number of
Securities
Underlying
Options (#)
All Other Stock Awards:
Number of Shares of
Stock or Units
(#)
Name
Grant Date
Thomas A. Broughton III (PEO)
(cid:2)
(cid:2)
William M. Foshee (PFO)
2/16/2010
5,000 (1)
Clarence C. Pouncey III
G. Carlton Barker
Ronald A. DeVane
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Exercise or Base
Price of Option
Awards ($/Sh)
Grant Date Fair
Value ($)
(cid:2)
(cid:2)
$25.00
$37,150
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(1) Option vests 1,000 shares on the fourth anniversary of the grant date and the remaining shares on the fifth anniversary of the grant date
Outstanding Equity Awards at Fiscal Year-End
The following table details all outstanding equity awards as of December 31, 2010
16
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested($)
Option
expiration
date
5/19/2015
16,000
$400,000
(cid:2)
(cid:2)
12/20/2017
5/19/2015
4/20/2016
2/19/2018
2/16/2020
Option
exercise
price ($)
$10.00
$20.00
$10.00
$11.00
$20.00
$25.00
$11.00
4/20/2016
$15.00
2/1/2017
Number of
securities
underlying
unexercised
options (#)
exercisable
Option Awards
Number of
securities
underlying
unexercised
options (#)
unexercisable
Name
Thomas A. Broughton III,
(PEO) (1)
William M. Foshee (PFO)
(2)
50,000
(cid:2)
10,000
(cid:2)
(cid:2)
(cid:2)
Clarence C. Pouncey III (3)
18,000
G. Carlton Barker (4)
19,998
25,000
10,000
10,000
5,000
5,000
5,000
32,000
55,002
Ronald A. DeVane (5)
8,000
42,000
$25.00
9/11/2018
____________________
(1) The option to purchase 75,000 shares at $10.00 per share granted to Mr. Broughton on May 19, 2005 vests 10,000 shares per year with the final 5,000
vesting on May 19, 2013. The option to purchase 10,000 shares at $20.00 per share granted to Mr. Broughton on December 20, 2007 vests 100% on
December 20, 2012. The award of 20,000 shares of restricted stock made to Mr. Broughton on October 26, 2009 vests in five equal annual installments,
beginning on October 26, 2010. The market value of this restricted stock award is based on $25.00 per share, the last sale price of the Company’s
common stock known to the Company.
(2) The option to purchase 20,000 shares at $10.00 per share granted to Mr. Foshee on May 19, 2005 vests 10,000 shares on May 19, 2010 and 10,000
shares on May 19, 2011. The option to purchase 5,000 shares at $11.00 per share granted to Mr. Foshee on April 20, 2006 vests in a lump sum on April
20, 2011. The option to purchase 5,000 shares at $20.00 per share granted to Mr. Foshee on February 19, 2008 vests in a lump sum on February 19,
2013. The option to purchase 5,000 shares at $25.00 per share granted to Mr. Foshee on February 16, 2010 vests 1,000 shares of February 16, 2014 and
4,000 shares of February 16, 2015.
(3) The option to purchase 50,000 shares at $11.00 per share granted to Mr. Pouncey on April 20, 2006 vests 9,000 shares per year beginning on April 20,
2009, with the final 5,000 shares vesting on April 20, 2014.
(4) The option to purchase 75,000 shares at $15.00 per share granted to Mr. Barker on February 1, 2007 vests 6,666 shares per year beginning on February
1, 2008, with the final 41,670 shares vesting at one time on February 1, 2013.
(5) The option to purchase 50,000 shares at $25.00 per share granted to Mr. DeVane on September 11, 2008 vests 4,000 shares per year beginning on
September 11, 2009, with the final 34,000 shares vesting on September 11, 2013.
Plan Option Exercises and Stock Vested in 2010
There were no options exercised by any of our named executive officers during 2010. 4,000 shares of the 20,000-share restricted
stock award to Mr. Broughton in 2009 and referenced in the table above vested on October 26, 2010. Based upon a value of $25.00
per share, the last sale price of the Company’s common stock known to the Company at the time of vesting, the value realized by Mr.
Broughton on the vesting of such shares was $100,000.
17
Non-Plan Warrants and Stock Options
Upon the formation of the Bank in May 2005, we issued to each of our directors warrants to purchase up to 10,000 shares of our
common stock, or 60,000 shares in the aggregate, for a purchase price of $10.00 per share, expiring in ten years. These warrants
became fully vested in May 2008.
We granted non-plan stock options to persons representing certain key business relationships to purchase up to an aggregate of
55,000 shares of our common stock at between $15.00 and $20.00 per share for 10 years. These stock options are “non-qualified
stock options” under the Internal Revenue Code and are not issued under our stock incentive plans. They vest 100% in a lump sum
five years after their date of grant.
No warrants or non-plan options were exercised during fiscal year 2010.
Effect of Compensation Policies and Practices on Risk Management and Risk-Taking Incentives
There is inherent risk in the business of banking. However, we do not believe that any of our compensation policies and practices
provide incentives to our employees to take risks that are reasonably likely to have a material adverse effect on us. We believe that
our compensation policies and practices are consistent with those of similar bank holding companies and their banking subsidiaries
and are intended to encourage and reward performance that is consistent with sound practice in the industry.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Employment Agreements
G. Carlton Barker. G. Carlton Barker entered into an employment agreement with the Bank on February 1, 2007, pursuant to
which he serves as executive vice president of the Bank and president and chief executive officer of the Montgomery market. Mr.
Barker’s agreement provides that he will receive a base salary of $200,000 per year, an option to purchase up to 75,000 shares of our
common stock as set forth in the above table, automobile allowance and reimbursement, life, health, dental, and disability insurance,
and other benefits afforded to employees of the Bank. Mr. Barker is eligible to receive incentive-based compensation up to 50% of
base salary, the terms of which shall be established by the Bank annually. In addition, the Bank may increase Mr. Barker’s base salary
upon a periodic review. The agreement’s initial term ends January 31, 2012, but upon expiration of the initial term the agreement
automatically renews for subsequent one-year terms, unless earlier terminated.
The Bank may terminate Mr. Barker’s employment upon his death, disability or for “cause.” The Bank may further terminate Mr.
Barker’s employment at any time without cause by providing proper notice and the payment to Mr. Barker in a lump sum an amount
equal to what Mr. Barker would have been paid during the remainder of the term or twelve months, whichever is greater, plus any
other cash payments due including incentive pay. Comparatively, Mr. Barker can terminate his employment voluntarily by providing
proper notice. Under his agreement, Mr. Barker agrees to maintain the confidentiality of the Bank’s confidential information during
the term of the agreement and at all times thereafter. Furthermore, Mr. Barker agrees to not solicit, directly or indirectly, any
individual who is employed by the Bank, for himself or as an employee or agent of any person, firm, or corporation, for a period of 12
to 24 months following his employment with the Bank.
For purposes of Mr. Barker’s agreement, “cause” means any of the following: (i) conviction of a felony, (ii) conviction of any
crime, whether a felony or a misdemeanor, involving the purchase or sale of any security, mail or wire fraud, theft, embezzlement,
moral turpitude or misappropriation of the Bank’s property; (iii) willful or gross neglect of his duties or obligations; (iv) willful
misconduct in connection with the performance of his duties; (v) a material breach of the Bank’s Code of Ethics; or (vi) suspension or
removal by any bank or securities regulator or regulatory agency.
Furthermore, Mr. Barker’s agreement provides that, in the event of a change of control, Mr. Barker may elect to terminate his
employment and receive a lump sum payment equal to three times his base salary, and any unvested stock options granted to him shall
immediately vest. In the event that the payments due in a change in control results in adverse tax consequences to Mr. Barker, then
we will reduce such payment to such amount as Mr. Barker determines will not result in such adverse tax consequences. For purposes
of this agreement, the term “change in control” means (i) the occurrence of any transaction with respect to which either notice or
application must be filed with the Federal Reserve Board pursuant to certain provisions of the Code of Federal Regulations, and as a
result of which more than 50% of our outstanding shares becomes owned by any person, or group of persons acting in concert, who
prior to the transaction owned less than 50% of our outstanding shares, (ii) individuals who were our directors immediately prior to a
“control transaction” shall cease within one year of such control transaction to constitute a majority of our board of directors, or (iii)
18
we are merged or consolidated with another corporation and are not the surviving corporation or we sell or otherwise dispose of
substantially all of our assets. A “control transaction” is (i) any tender offer for or acquisition of our shares, (ii) any merger,
consolidation, or sale of substantially all of our assets, (iii) any contested election of directors or (iv) any combination of the foregoing
which results in a change in voting power sufficient to elect a majority of the board of directors.
Change in Control Agreements
General
At December 31, 2010, we had two change in control severance agreements with named executive officers, William M. Foshee
and Clarence C. Pouncey III; there is a similar provision in Mr. Barker’s employment agreement. Each of these change in control
agreements was originally entered into with the Bank, but now also applies to a change in control of the Company.
These agreements generally provide for a lump sum payment (equal to two times annual base salary for Mr. Foshee and one times
annual base salary for Mr. Pouncey) in the event of the termination of their respective employment within 24 months after a “change
in control” (as defined in their agreements) either: (i) by us, other than for “cause” (as defined in the respective agreements), death,
disability or the attainment of normal retirement date, or (ii) by the employee for the specific reasons set forth in the contract. These
agreements are not employment agreements and do not guarantee employment for any term or period; they only apply if a change in
control occurs. In the case of Mr. Barker, in the event of a change of control as defined in his employment agreement described
above, Mr. Barker may elect to terminate his employment at any time within one year following the change of control, in which case
we must pay him a lump sum payment equal to three times his base salary.
The size of each benefit was set through arm’s-length negotiations with each of such individuals upon their employment and
consistent with general industry standards. Each of these agreements was approved by the Board of Directors of the Bank.
Definitions
The term “change in control” is defined in the change in control agreements to include:
(cid:2)
(cid:2)
a merger, consolidation or other corporate reorganization (other than a holding company reorganization) the Company in
which we do not survive, or if we survive, our stockholders before such transaction do not own more than 50% of,
respectively, (i) the common stock of the surviving entity, and (ii) the combined voting power of any other outstanding
securities entitled to vote on the election of directors of the surviving entity.
the acquisition, other than from us, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) of beneficial ownership of 50% or more of either the then outstanding shares of our common stock or the
combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors;
provided, however, that neither of the following shall constitute a change in control:
(cid:3)
(cid:3)
any acquisition by us, by any of our subsidiaries, or by any employee benefit plan (or related trust) of us or our
subsidiaries, or;
any acquisition by any corporation, entity, or group, if, following such acquisition, more than 50% of the then-
outstanding voting rights of such corporation, entity or group are owned, directly or indirectly, by all or substantially all
of the persons who were the owners of our common stock immediately prior to such acquisition; or
(cid:2)
approval by our stockholders of:
(cid:3)
(cid:3)
our complete liquidation or dissolution, or
the sale or other disposition of all or substantially all our assets, other than to an entity with respect to which immediately
following such sale or other disposition, more than 50% of, respectively, the then-outstanding shares of common stock of
such corporation, and the combined voting power of the then-outstanding voting securities of such corporation entitled to
vote generally in the election of directors, is then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of our outstanding common stock, and our
outstanding voting securities immediately prior to such sale or other disposition, in substantially the same proportions as
their ownership, immediately prior to such sale or disposition, of our outstanding common stock and our outstanding
securities, as the case may be.
19
(cid:2) Notwithstanding the foregoing, if Section 409A of the Internal Revenue Code would apply to any payment or right arising
under the change in control agreements as a result of a change in control as described above, then with respect to such right
or payment the only events that would constitute a change in control will be deemed to be those events that would constitute
a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of
the Company in accordance with Section 409A.
Mr. Pouncey’s agreement further defines a “change in control” to include any circumstance in which individuals who, as of the
effective date of his agreement, constituted our board of directors (the “Incumbent Board”) cease for any reason to constitute at least a
majority of our board of directors, except as otherwise provided in the agreement.
Mr. Foshee and Mr. Pouncey can each terminate their employment and still trigger the change in control payment if they
terminate because, after the change in control, (i) they are assigned to duties or responsibilities that are materially inconsistent with
their position, duties, responsibilities or status immediately preceding such change in control, or a change in their reporting
responsibilities or titles in effect at such time resulting in a reduction of their responsibilities or position, (ii) the reduction of their base
salary or, to the extent such has been established by the board of directors or its Compensation Committee, target bonus (including any
deferred portions thereof) or substantial reduction in their level of benefits or supplemental compensation from those in effect
immediately preceding such change in control; or (iii) their transfer to a location requiring a change in residence or a material increase
in the amount of travel normally required of them in connection with their employment.
In addition to the cash payments set forth in the change in control agreements, any incentive stock options granted to the affected
employee will immediately vest upon a change in control.
Estimated Payments upon a Termination or Change in Control
Termination
In the event that we had terminated Mr. Barker’s employment without cause as of December 31, 2010, then we would have been
required to pay a lump sum cash payment to Mr. Barker equal to $615,000 upon the date of termination.
Change in Control
Assuming that we had a change in control as of December 31, 2010, as defined in both the change in control agreements above
and Mr. Barker’s employment agreement, and assuming further that each of the requisite triggering events had occurred as of such
date, then we would have had to pay cash payments of $360,000 to Mr. Foshee and $225,000 to Mr. Pouncey, each in a lump sum
payment within 30 days of their respective termination, and $615,000 to Mr. Barker no less than 30 days and no more than 90 days
following his notice of his intent to exercise his change of control rights.
Furthermore, assuming we had a change in control as of December 31, 2010, as defined in either of our stock incentive plans, and
further assuming that the value of the stock as of that date was $25 per share (the most recent sale price), then each of the named
executive officers would become immediately vested in their unvested incentive stock options as of such date equal to the following
value based upon the difference between $25 per share and their respective exercise prices per share for such shares: (i) Thomas A.
Broughton III – $425,000, (ii) William M. Foshee - $236,675, (iii) Clarence C. Pouncey, III - $448,000 and (iv) G. Carlton Barker -
$550,020.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about our common stock that may be issued upon the exercise of options and rights under
all of our existing equity compensation plans and arrangements as of December 31, 2010:
20
Plan Category
Equity compensation awards plans
approved by security holders
Equity compensation awards plans not
approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans
856,000
55,000
911,000
$15.87
$17.27
$15.93
594,000
—
594,000
We grant stock options as an incentive to employees, officers, directors, and consultants, as a means to attract or retain these
individuals, to maintain and enhance our long-term performance and profitability, and to allow these individuals to acquire an
ownership interest in the Company. Our Compensation Committee administers this program, making all decisions regarding grants
and amendments to these awards. All shares to be issued upon the exercise of these options must be authorized and unissued shares.
In the event an option holder leaves us we may provide for varying time periods for exercise of options after the termination of ones
employment; provided, that, an incentive stock option plan may not be exercised later than 90 days after an option holder terminates
his or her employment with us unless such termination is a consequence of such options holder’s death or disability in which case the
option period may be extended for up to one year after termination of employment. All of our issued options will vest immediately
upon a transaction in which we merge or consolidate with or into any other corporation, or sell or otherwise transfer our property,
assets, or business substantially in its entirety to a successor corporation. At that time, upon the exercise of the option, the option
holder will receive the number of shares of stock or other securities or property, including cash, to which the holder of a like number
of shares of common stock would have been entitled upon the merger, consolidation, sale or transfer if such option had been exercised
in full immediately prior thereto. All of our issued options have a term of 10 years. This means the options must be exercised within
10 years from the date of the grant. At December 31, 2010, we had issued and outstanding options to purchase 911,000 shares of our
common stock (including options granted outside of our stock incentive plans).
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
As of December 31, 2010, there was no person (including any group) who is known to us to be the beneficial owner of more than
5% of our common stock.
Security Ownership of Management
The following table sets forth the beneficial ownership of our common stock as of March 9, 2011 by: (i) each of our directors; (ii)
our named executive officers; and (iii) all of our directors and our executive officers as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to all shares shown to be beneficially owned by him except to
the extent that such power is shared by a spouse under applicable law. The information provided in the table is based on our records,
information filed with the SEC and information provided to the Company.
Name and Address of Beneficial Owner(1)
Amount and Nature of
Beneficial Ownership
Percentage of Outstanding
Common Stock (%)(2)
Thomas A. Broughton III........................................................................ 152,252 (3)(4)
Stanley M. Brock .................................................................................... 159,250 (3)(5)
Michael D. Fuller.................................................................................... 135,002 (3)(6)
James J. Filler ......................................................................................... 185,252 (3)(7)
J. Richard Cashio .................................................................................... 93,902 (3)(8)
2.72%
2.86%
2.44%
3.33%
1.69%
Hatton C. V. Smith ................................................................................. 53,500 (3)(9)
*
William M. Foshee ................................................................................. 64,992(10)
1.16%
Clarence C. Pouncey III.......................................................................... 101,667 (11)
1.83%
21
Name and Address of Beneficial Owner(1)
Amount and Nature of
Beneficial Ownership
Percentage of Outstanding
Common Stock (%)(2)
G. Carlton Barker.................................................................................... 33,998(12)
*
Ronald A. DeVane.................................................................................. 12,000(13)
*
All directors and executive officers as a group (11 persons)...................
1,025,815(14)
17.71%
*
Less than 1%.
(1) The addresses for all above listed individuals is 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209.
(2) Except as otherwise noted herein, the percentage is determined on the basis of 5,527,482 shares of our common stock outstanding
plus securities deemed outstanding pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Under Rule 13d-3, a person is deemed to be a beneficial owner of any security owned by certain family members
and any security of which that person has the right to acquire beneficial ownership within 60 days, including, without limitation,
shares of our common stock subject to currently exercisable options.
(3) Includes the shares underlying a warrant issued to each director on May 13, 2005 pursuant to which each director may purchase
an additional 10,000 shares of common stock for $10.00 per share which vests in three equal annual installments beginning on May
13, 2006, and thus each director has the right to acquire within 60 days up to the entire 10,000 shares. Does not include an option
granted to each director on December 20, 2007 to purchase 10,000 shares of common stock for $20.00 per share which vests 100%
after five years.
(4) Includes 50,000 shares obtainable within 60 days pursuant to an option granted on May 19, 2005 to Mr. Broughton to purchase up
to 75,000 shares of common stock for $10.00 per share, which vests 10,000 shares per year beginning May 19, 2006 and each year
thereafter, with the final 5,000 vesting on May 19, 2013. Does not include 6,750 shares owned by his spouse and 700 shares owned
by each of his two stepchildren. Mr. Broughton disclaims beneficial ownership of such shares.
(5) Includes 22,000 shares owned by immediate family members and 24,000 shares obtainable upon conversion of ServisFirst Capital
Trust II’s 6.0% Mandatory Convertible Trust Preferred Securities, including 8,000 shares obtainable upon conversion of such
securities owned by one of Mr. Brock’s children, as to which Mr. Brock may still be deemed to be the beneficial owner. Mr. Brock
was issued a warrant to purchase up to 6,500 shares of common stock for the purchase price of $25 per share until the later of
September 1, 2013 or such date as is the 60th day following the date upon which our common stock is listed on a “national securities
exchange” as defined under the Exchange Act. Mr. Brock transferred ownership of such warrant to his children in 2010 but may still
be deemed to be the beneficial owner of warrants owned by one of his children covering 3,250 of such shares. Mr. Brock disclaims
beneficial ownership of all shares not directly owned by him.
(6) Does not include 4,000 shares obtainable upon conversion of ServisFirst Capital Trust II’s 6.0% Mandatory Convertible Trust
Preferred Securities held by Mr. Fuller’s spouse. Mr. Fuller disclaims beneficial ownership of such shares.
(7) Includes 24,000 shares obtainable upon conversion of ServisFirst Capital Trust II’s 6.0% Mandatory Convertible Trust Preferred
Securities.
(8) Includes 2,500 shares owned by immediate family members and 6,400 shares obtainable by Mr. Cashio or immediate family
members upon conversion of ServisFirst Capital Trust II’s 6.0% Mandatory Convertible Trust Preferred Securities. Mr. Cashio was
issued a warrant to purchase up to 2,500 shares of common stock for the purchase price of $25 per share until the later of September 1,
2013 or such date as is the 60th day following the date upon which our common stock is listed on a “national securities exchange” as
defined under the Exchange Act.
(9) Includes 2,500 shares owned by immediate family members and 16,000 shares obtainable upon conversion of ServisFirst Capital
Trust II’s 6.0% Mandatory Convertible Trust Preferred Securities. Mr. Smith was issued a warrant to purchase up to 2,500 shares of
common stock for the purchase price of $25 per share until the later of September 1, 2013 or such date as is the 60th day following the
date upon which our common stock is listed on a “national securities exchange” as defined under the Exchange Act.
(10) Includes 20,000 shares obtainable within 60 days pursuant to an option granted to Mr. Foshee on May 19, 2005 to purchase up to
20,000 shares of common stock for $10.00 per share, which vests 50% on May 19, 2010 and 50% on May 19, 2011, and 5,000 shares
obtainable within 60 days pursuant to an option granted on April 20, 2006 to purchase up to 5,000 shares of common stock for $11.00
per share which vests 100% on April 20, 2011. Does not include an option granted on February 19, 2008 to purchase up to 5,000
22
shares of common stock for $20.00 per share, which vests 100% on February 19, 2013, or an option granted on January 19, 2011 to
purchase up to 2,500 shares of common stock for $25.00 per share which vests 100% on January 19, 2016.
(11) Includes 27,000 shares of common stock obtainable within 60 days pursuant to an option granted to Mr. Pouncey on April 20,
2006 to purchase up to 50,000 shares of common stock for $11.00 per share, which vests at 9,000 shares per year beginning on April
20, 2009 and 5,000 shares on April 20, 2014. Includes 3,000 shares beneficially owned by Mr. Pouncey’s wife through a limited
liability company.
(12)
Includes 19,998 shares of common stock obtainable within 60 days pursuant to an option granted to Mr. Barker on February
1, 2007 to purchase up to 75,000 shares of common stock for $15.00 per share, which vests 6,666 shares per year beginning on
February 1, 2008, with the final 41,670 shares vesting on February 1, 2013.
(13)
Includes 4,000 shares obtainable within 60 days pursuant to an option granted to Mr. DeVane on September 11, 2008 to
purchase up to 50,000 shares of common stock for $25.00 per share, which vests 4,000 shares per year beginning September 11, 2010
and each year thereafter with the final 34,000 vesting on September 11, 2014.
(14)
conversion of outstanding convertible securities.
Includes 265,398 shares obtainable within 60 days pursuant to the exercise of outstanding options or warrants or the
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our consolidated balance sheets as of December 31, 2010, 2009 and 2008 and the related consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2010, 2009 and 2008 have been audited
by Mauldin & Jenkins, LLC, our independent registered public accounting firm, as stated in their report appearing in our 2010 Annual
Report on Form 10-K. Mauldin & Jenkins, LLC was initially engaged as our independent registered public accounting firm on July
11, 2006. Representatives of Mauldin & Jenkins, LLC are expected to be in attendance at our Annual Meeting, will have the
opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.
We have not changed independent registered public accounting firms during the past two fiscal years, and there have been no
disagreements with our independent registered public accounting firm during such time.
Audit and Non-Audit Services Pre-Approval Policy
The Audit Committee’s Charter provides that the Audit Committee must pre-approve services to be performed by our
independent registered public accounting firm. In accordance with that requirement, the Audit Committee pre-approved the
engagements of Mauldin & Jenkins, LLC pursuant to which it provided the audit and audit-related services described below for the
fiscal years ended December 31, 2010, 2009 and 2008.
Audit Fees
The aggregate fees billed by Mauldin & Jenkins, LLC for professional services rendered for the audit of our consolidated
financial statements for the fiscal year ended December 31, 2010, and for the reviews of the interim consolidated financial statements
included in our Quarterly Reports on Form 10-Q for such fiscal year were approximately $157,000. The aggregate fees billed by
Mauldin & Jenkins, LLC for professional services rendered for the audit of our consolidated financial statements for the fiscal year
ended December 31, 2009 were approximately $152,000.
Audit-Related Fees
The aggregate fees billed by Mauldin & Jenkins, LLC for professional services rendered for assurance and related services for the
fiscal years ended December 31, 2010 and 2009 were $10,000 and $0, respectively. These fees related to services performed by
Mauldin & Jenkins, LLC in connection with providing its consent to include, or incorporate by reference, our consolidated financial
statements in filings with the SEC, including registration statements and proxy statements, its services provided on private placements
of securities and its services in connection with an audit of the Bank’s mortgage operations by the U.S. Department of Housing and
Urban Development.
Tax Fees
Mauldin & Jenkins, LLC did not provide tax compliance, tax advice or tax planning services to us for the fiscal years ended
December 31, 2010, 2009 and 2008.
23
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the board of directors of ServisFirst Bancshares, Inc. has reviewed and discussed the audited
consolidated financial statements of the Company and its subsidiary, ServisFirst Bank, with management of the Company and
Mauldin & Jenkins, LLC, independent registered public accountants for the Company for the year ended December 31, 2010.
Management represented to the Audit Committee that the Company’s audited consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United States.
The Audit Committee has discussed with Mauldin & Jenkins, LLC the matters required to be discussed by Statement on Auditing
Standards No. 61, “Communication with Audit Committees,” as amended. The Audit Committee has received the written disclosures
and confirming letter from Mauldin & Jenkins, LLC required by Independence Standards Board Standard No. 1, “Independence
Discussions with Audit Committees,” and has discussed with Mauldin & Jenkins, LLC their independence from the Company.
Based on these reviews and discussions with management of the Company and Mauldin & Jenkins, LLC referred to above, the
Audit Committee has recommended to our board of directors that the audited consolidated financial statements of the Company and its
subsidiaries for the fiscal year ended December 31, 2010 be included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2010.
This Audit Committee Report shall not be deemed incorporated by reference in any document previously or subsequently filed
with the SEC that incorporates by reference all or any portion of this Proxy Statement.
Submitted by the Audit Committee:
Michael D. Fuller, Chairman
J. Richard Cashio
Stanley M. Brock
PROPOSAL 2
ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) included a provision that
requires publicly traded companies to hold an advisory, or non-binding, stockholder vote to approve or disapprove the compensation
of executive officers. Consistent with that requirement, we are conducting an advisory vote on the compensation of the executive
officers named in this proxy statement. The compensation of our executive officers is disclosed in this proxy statement under the
heading “Executive Compensation” above in accordance with rules and regulations of the SEC.
We believe that the most effective executive compensation program is one that is designed to reward the achievement of specific
annual, long-term and strategic goals by us and the Bank, and which aligns executives’ interests with those of our stockholders by
rewarding performance, with the ultimate objective of improving stockholder value. As a stockholder, you have the opportunity to
endorse or not endorse our executive compensation program and policies through an advisory vote, commonly known as a “Say on
Pay” vote, on the following resolution:
RESOLVED, that the compensation paid to the Company’s named executive officers pursuant to item 402
of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative
discussion, is hereby approved.
This vote is intended to address the overall compensation of our named executive officers and the policies and practices described
in this Proxy Statement. This vote is advisory and therefore not binding on the Company, the Compensation Committee, or the
Board. The Board and the Compensation Committee value the opinions of shareholders and will take into account the outcome of the
vote when considering future executive compensation arrangements.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RESOLUTION APPROVING
THE COMPENSATION PAID TO OUR NAMED EXECUTIVE OFFICERS.
24
ADVISORY VOTE ON THE FREQUENCY OF FUTURE “SAY ON PAY” VOTES
PROPOSAL 3
The Dodd-Frank Act also included a provision providing stockholders the opportunity to vote, on an advisory, or non-binding,
basis, on how frequently they would like companies to hold an advisory vote on the compensation of executive officers in the manner
done in Proposal 3 above. When voting, stockholders may indicate whether they would prefer an advisory vote on named executive
officer compensation once every one, two, or three years, or they may abstain from the vote. In accordance with this requirement of
the Dodd-Frank Act, we are holding an advisory vote on the frequency of future stockholder advisory votes on our executive
compensation program.
After consideration of the frequency alternatives, the Board believes that conducting an advisory vote on executive compensation
“every year” is appropriate for the Company and its stockholders at this time. If the Board determines in the future that a less frequent
vote would better serve stockholder interests, the Board may make such a recommendation in connection with future advisory votes.
Stockholders are not being asked to approve or disapprove the Board's recommendation. Instead, our Board is providing a
recommendation, but you are being asked to choose one of four options regarding this proposal, as reflected in the Proxy Card. You
may vote for us to hold advisory votes on our compensation every one, two or three years, or you may abstain from voting on the
matter.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR”
THE PROPOSAL TO HOLD A “SAY ON PAY” VOTE EVERY YEAR.
STOCKHOLDER PROPOSALS
Under Exchange Act Rule 14a-8, any stockholder desiring to submit a proposal for inclusion in our proxy materials for our 2012
Annual Meeting of Stockholders must provide the Company with a written copy of that proposal by no later than November 21, 2011,
which is 120 days before the first anniversary of the date on which the Company’s proxy materials for 2011 were first released.
However, if the date of our Annual Meeting in 2012 changes by more than 30 days from the date of our 2011 Annual Meeting, then
the deadline would be a reasonable time before we begin distributing our proxy materials for our 2012 Annual Meeting. Matters
pertaining to such proposals, including the number and length thereof, eligibility of persons entitled to have such proposals included
and other aspects are governed by the Exchange Act and the rules of the SEC thereunder and other laws and regulations, to which
interested stockholders should refer.
As of the date of this Proxy Statement, the board of directors does not know of any other business to be presented for
consideration or action at the Annual Meeting, other than that stated in the notice of the Annual Meeting. If other matters properly
come before the Annual Meeting, the persons named in the accompanying form of proxy will vote thereon in their best judgment.
GENERAL INFORMATION
Birmingham, Alabama
March 21, 2011
By Order of the Board of Directors
SERVISFIRST BANCSHARES, INC.
William M. Foshee
Secretary and Chief Financial Officer
25
[This page intentionally left blank.]
Our N
Name
is Our
r Miss
ion
2010 A
2
ANNU
UAL R
REPO
ORT
Dear S
Shareholders,
I am p
are ou
pleased to repo
utlined below:
ort that 2010 w
was a great year
r for our Comp
pany. Some of
f what I conside
er the highligh
hts
(cid:2)
(cid:2)
eported net inc
he Company r
Th
.
hare was $3.15
sh
come of $17.4
million, a 196
6% increase ov
ver 2009. Basic
c net income p
er
Se
ervisFirst Bank
k was the most
t profitable ban
nk in Alabama
in 2010, with n
net income of
$18.9 million.
(cid:2) A
All regions were
e profitable in
2010. Total de
eposits in the ba
ank grew 23%
% in 2010.
(cid:2) O
Our asset quality
y continues to
be much better
r than our peer
r group.
(cid:2)
our outstandin
Fo
o talented bank
to
g private bank
kers in many m
kers joined us i
arkets and I am
n Birmingham
m optimistic we
m from BBVA
e can continue
Compass. We
e to grow the C
Company.
continue to ta
alk
(cid:2) W
rocess of assem
We are in the p
roval to open
pplied for app
ap
being the best b
ecognized as b
re
n.
ensacola region
Pe
mbling an outs
our main offi
bankers in tha
standing group
ice in Spring 2
t region, and I
p of bankers in
2011. We beli
I am very opti
n Pensacola, Fl
ieve that this
imistic about o
ve
lorida, and hav
group is wide
ly
he
our future in th
The bi
Frank
busine
the U.
iggest concern
Act. Complia
ess. Some in ou
S. Congress.
n I have today i
ance costs wil
ur industry com
is the cost and
ll continue to
mplain about re
d impact of new
grow, especi
egulators, but t
w banking regu
ally on the co
they are simply
ulations pursua
onsumer bank
y enforcing the
ant to the Dodd
d-
king side of th
he
by
e laws passed b
I am
busine
strong
contin
pleased, but n
ess plan, altho
g shareholder b
nue to follow ou
never satisfied
ugh we are m
base that has
ur simple busin
d, with our pe
more humble th
enabled us to
ness model tha
rformance. Th
han we were b
prosper durin
at has proven su
he recession h
before the rec
ng difficult tim
uccessful for th
has not materi
cession. I am t
mes in our ind
he past six yea
ially altered ou
ur
thankful for ou
ur
ill
dustry. We wi
ars.
As alw
owner
ways, we would
r of ServisFirst
d appreciate an
t Bancshares.
ny referrals of
new customers
s, and hope we
e can make you
u proud to be a
an
Sincer
rely,
Thoma
Direct
Chief
as A. Broughto
tor, President a
Executive Offi
on III
and
ficer
1
Selected Balance Sheet Data:
Total assets
Total loans
Loans, net
Securities available for sale
Securities held to maturity
Cash and due from banks
Interest-bearing balances with banks
Fed funds sold
Mortgage loans held for sale
Restricted equity securities
Premises and equipment, net
Deposits
Other borrowings
Trust preferred securities
Other liabilities
Stockholders’ equity
Selected Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes expenses
Net income
Per Common Share Data:
Net income, basic
Net income, diluted
Book value
Weighted average shares outstanding:
Basic
Diluted
Actual shares outstanding
As of and for the years ended December 31,
2009
2008
(Dollars in thousands except for share data)
2007
2006
$ 1,573,497
1,207,084
1,192,173
255,453
645
26,982
48,544
680
6,202
3,241
5,088
1,432,355
24,922
15,228
3,370
97,622
$1,162,272
968,233
957,631
102,339
—
22,844
30,774
19,300
3,320
2,659
3,884
1,037,319
20,000
15,087
3,082
86,784
$
838,250
675,281
667,549
87,233
—
15,756
34,068
16,598
2,463
1,202
4,176
762,683
73
—
2,465
72,247
$ 528,545
440,489
435,071
28,119
—
15,706
22
37,607
2,902
805
2,605
473,348
—
—
2,353
52,288
2010
$ 1,935,166
1,394,818
1,376,741
276,959
5,234
27,454
204,278
246
7,875
3,510
4,450
1,758,716
24,937
30,420
3,993
117,100
$ 78,146
15,260
62,886
10,350
$ 62,197
18,337
43,860
10,685
$ 55,450
20,474
34,976
6,274
$
52,536
5,169
30,969
26,736
9,358
17,378
33,175
4,413
28,930
8,658
2,780
5,878
28,702
2,704
20,576
10,830
3,825
7,005
$ 3.15
2.84
21.19
$ 1.07
1.02
17.71
$ 1.37
1.31
16.15
$
51,417
25,872
25,545
3,541
22,004
1,441
14,796
8,649
3,152
5,497
1.19
1.16
14.13
$
$
30,610
13,335
17,275
3,252
14,023
911
8,674
6,260
2,189
4,071
1.06
1.06
11.71
5,519,151
6,294,604
5,527,482
5,485,972
5,787,643
5,513,482
5,114,194
5,338,883
5,374,022
4,631,047
4,721,864
5,113,482
3,831,881
3,846,111
4,463,607
2
As of and for the years ended December 31,
2010
2009
2008
2007
2006
1.04%
0.43%
0.71%
0.78%
1.02%
15.86%
3.94%
45.51%
6.33%
3.31%
59.57%
9.28%
3.70%
54.61%
9.40%
3.78%
54.83%
9.96%
4.60%
50.67%
0.55%
0.60%
0.41%
0.23%
0.28%
1.03%
1.10%
1.01%
1.02%
0.66%
0.00%
1.57%
1.74%
0.73%
0.11%
1.30%
1.24%
1.09%
1.15%
1.23%
126.00%
122.34%
108.17%
173.94%
5,418.00%
78.28%
83.23%
92.32%
87.53%
91.91%
78.04%
80.06%
85.84%
77.19%
89.34%
14.24%
14.75%
11.71%
11.15%
15.05%
6.05%
11.82%
10.22%
7.77%
6.20%
10.48%
8.89%
6.97%
7.47%
11.25%
10.18%
9.01%
8.62%
11.22%
10.12%
8.40%
9.89%
11.58%
10.49%
10.32%
195.64%
-16.1%
27.43%
35.00%
373.93%
178.43%
22.99%
15.46%
22.78%
19.95%
-22.5%
35.38%
24.49%
38.08%
12.49%
12.93%
38.65%
45.45%
36.00%
20.12%
13.21%
58.59%
53.43%
61.13%
38.18%
352.38%
90.15%
76.76%
93.96%
56.23%
Selected Performance Ratios:
Return on average assets
Return on average stockholders’
equity
Net interest margin(1)
Efficiency ratio(2)
Asset Quality Ratios:
Net charge-offs to average
loans outstanding
Non-performing loans to total
loans
Non-performing assets to total
assets
Allowance for loan losses to total
gross loans
Allowance for loan losses to total
non-performing loans
Liquidity Ratios:
Net loans to total deposits
Net average loans to average
earning assets
Noninterest-bearing deposits
to total deposits
Capital Adequacy Ratios:
Stockholders’ equity to total assets
Total risked-based capital(3)
Tier I capital(4)
Leverage ratio(5)
Growth Ratios:
Percentage change in net income
Percentage change in diluted
net income per share
Percentage change in assets
Percentage change in net loans
Percentage change in deposits
Percentage change in equity
___________________
(1)
(2)
(3)
(4)
(5)
Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on
interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.
Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
Total stockholders’ equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible
assets plus allowance for loan losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. The
FDIC required minimum to be well-capitalized is 10%.
Total stockholders’ equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible
assets divided by total risk-weighted assets. The FDIC required minimum to be well-capitalized is 6%.
Total stockholders’ equity excluding unrealized losses on securities available for sale, net of taxes, and intangible assets
divided by average assets less intangible assets. The FDIC required minimum to be well-capitalized is 5%; however, the
Alabama Banking Department has required that the Bank maintain a Tier 1 capital leverage ratio of 7%.
3
OFFICERS AND DIRECTORS
PRINCIPAL OFFICERS: SERVISFIRST
BANCSHARES, INC.
Thomas A. Broughton III
Chief Executive Officer and President
William M. Foshee
Executive Vice President, Chief Financial Officer
Treasurer and Secretary
Clarence C. Pouncey III
Executive Vice President and Chief Operating Officer
PRINCIPAL OFFICERS: SERVISFIRST BANK
Thomas A. Broughton III
Chief Executive Officer and President
William M. Foshee
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Clarence C. Pouncey III
Executive Vice President and Chief Operating Officer
G. Carlton Barker
Executive Vice President, Montgomery President
and Chief Executive Officer
Andrew N. Kattos
Executive Vice President, Huntsville President
and Chief Executive Officer
Ronald A. DeVane
Executive Vice President and Dothan
Chief Executive Officer
Rex D. McKinney
Executive Vice President, Pensacola President
and Chief Executive Officer
BOARD OF DIRECTORS: SERVISFIRST BANCSHARES, INC.
Stanley M. Brock, Chairman of the Board
Birmingham, Alabama
Thomas A. Broughton III
Birmingham, Alabama
Michael D. Fuller
Birmingham, Alabama
James J. Filler
Birmingham, Alabama
J. Richard Cashio
Birmingham, Alabama
Hatton C. V. Smith
Birmingham, Alabama
SERVISFIRST BANK
REGIONAL DIRECTORS
E. Wayne Bonner
Huntsville, Alabama
Tres Childs
Huntsville, Alabama
Don Davidson
Huntsville, Alabama
David Slyman
Huntsville, Alabama
Irma Tuder
Huntsville, Alabama
Danny Windham
Huntsville, Alabama
Sidney White
Huntsville, Alabama
William B. Watson, Jr.
Huntsville, Alabama
Tom Young
Huntsville, Alabama
Ray Petty
Montgomery, Alabama
Todd Strange
Montgomery, Alabama
Pete Taylor
Montgomery, Alabama
Ken Upchurch
Montgomery, Alabama
Alan E. Weil, Jr.
Montgomery, Alabama
Charles H. Chapman
Dothan, Alabama
John Downs
Dothan, Alabama
Charles Owens
Dothan, Alabama
William C. Thompson
Dothan, Alabama
SERVISFIRST BANCSHARES, INC. COMMITTEES
NOMINATING AND CORPORATE GOVERNANCE
Stanley M. Brock
Michael D. Fuller
J. Richard Cashio
AUDIT
Stanley M. Brock
Michael D. Fuller
J. Richard Cashio
COMPENSATION
James J. Filler
Joseph R. Cashio
Hatton C.V. Smith
4
OFFICES AND LOCATIONS
MAIN OFFICE BANKING CENTER
850 SHADES CREEK PARKWAY
SUITE 100
BIRMINGHAM, ALABAMA 35209
205.949.0302
HUNTSVILLE DOWNTOWN BANKING CENTER
401 MERIDIAN STREET
SUITE 100
HUNTSVILLE, ALABAMA 35801
256.722.7800
DOWNTOWN BANKING CENTER
324 RICHARD ARRINGTON JR. BOULEVARD N.
BIRMINGHAM, ALABAMA 35203
205.949.2200
RESEARCH PARK BANKING CENTER
1267-A ENTERPRISE WAY
HUNTSVILLE, ALABAMA 35806
256.722.7880
GREYSTONE BANKING CENTER
5403 HIGHWAY 280
SUITE 401
BIRMINGHAM, ALABAMA 35242
205.949.0870
DOTHAN BANKING CENTER
4801 WEST MAIN STREET
DOTHAN, ALABAMA 36305
334.340.4300
DOTHAN COTTONWOOD CORNERS
BANKING CENTER
1620 ROSS CLARK CIRCLE
SUITE 307
DOTHAN, ALABAMA 36301
334.340.4400
MONTGOMERY DOWNTOWN BANKING CENTER
ONE COMMERCE STREET
SUITE 100
MONTGOMERY, ALABAMA 36104
334.223.5800
MONTGOMERY EAST BANKING CENTER
8117 VAUGHN ROAD
UNIT 20
MONTGOMERY, ALABAMA 36116
334.223.5600
5
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders of
ServisFirst Bancshares, Inc. will be held at The
Club, 1 Robert S. Smith Drive, AL 35209 on
Wednesday, April 20th at 5:00 p.m., Central
Daylight Time.
FORM 10-K
Form 10-K is ServisFirst Bancshares, Inc.’s
Annual Report filed with the Securities and
Exchange Commission (SEC). A copy of
ServisFirst Bancshares, Inc.’s 10-K is included
as part of this Annual Report, and additional
copies may be obtained free of charge by writing
to 850 Shades Creek Parkway, Suite 200,
Birmingham, Alabama 35209, Attn.: Investor
Relations.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
AVAILABLE INFORMATION
website
corporate
Our
is
www.servisfirstbank.com. We have direct links
on this website to our Code of Ethics and the
charters for our Audit, Compensation and
and Corporate Governance
Nominating
Committees by clicking on
the “Investor
Relations” tab. We also have direct links to our
filings with
the Securities and Exchange
Commission (SEC), including, but not limited to,
our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form
8-K, proxy statements and any amendments to
these reports. You may also obtain a copy of any
such report free of charge by requesting such
copy in writing to 850 Shades Creek Parkway,
Suite 200, Birmingham, Alabama 35209 Attn.:
Investor Relations.
This Annual Report,
accompanying exhibits and all other reports and
filings that we file with the SEC will be available
for the public to view and copy (at prescribed
rates) at the SEC’s Public Reference Room at
100 F Street, Washington, D.C. 20549. You
may also obtain copies of such information at the
prescribed
the SEC’s Public
Reference Room by calling the SEC at 1-800-
SEC-0330. The SEC also maintains a website
that contains such reports, proxy and information
statements, and other information as we file
electronically with the SEC by clicking on
http://www.sec.gov.
from
rates
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Mauldin & Jenkins, LLC
2000 Southbridge Parkway
Birmingham, Alabama 35209
205.445.2880
LEGAL COUNSEL
Haskell Slaughter Young & Rediker, LLC
2001 Park Place
Suite 1400
Birmingham, Alabama 35203
205. 251.1000
6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
(cid:3)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
or
Commission File Number 0-53149
SERVISFIRST BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama
(Address of Principal Executive Offices)
26-0734029
(I.R.S. Employer
Identification No.)
35209
(Zip Code)
(205) 949-0302
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Titles of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:3) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:3) No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (cid:3) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “larger accelerated filer,” “accelerated filer,” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a smaller reporting company)
Accelerated filer (cid:2)
Smaller reporting company (cid:3)
Indicate by check mark whether the registrant is a shell company Yes (cid:3) No (cid:2)
As of June 30, 2010, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on
a price of $25.00 per share of Common Stock, was $122,542,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest
practicable date: the number of shares outstanding as of February 28, 2011, of the registrant’s only issued and outstanding class
of common stock, its $.001 per share par value common stock, was 5,527,482.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in
connection with its 2010 Annual Meeting of Stockholders are incorporated by reference in Part III of this annual report on Form
10-K.
SERVISFIRST BANCSHARES, INC.
TABLE OF CONTENTS
FORM 10-K
DECEMBER 31, 2010
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS......................................................1
PART I ..........................................................................................................................................................................2
ITEM 1. BUSINESS ......................................................................................................................................2
ITEM 1A. RISK FACTORS. .......................................................................................................................26
ITEM 1B. UNRESOLVED STAFF COMMENTS......................................................................................35
ITEM 2. PROPERTIES...............................................................................................................................35
ITEM 3. LEGAL PROCEEDINGS............................................................................................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. .................................36
PART II .......................................................................................................................................................................36
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES....................................................................................................................36
ITEM 6. SELECTED FINANCIAL DATA.................................................................................................39
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................................41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. ................................................................................................................................63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. .............................................65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. ...................................................113
ITEM 9A. CONTROLS AND PROCEDURES.........................................................................................113
ITEM 9B. OTHER INFORMATION. ......................................................................................................114
PART III....................................................................................................................................................................114
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE....................114
ITEM 11. EXECUTIVE COMPENSATION..............................................................................................115
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ............................115
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE. ....................................................................................115
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............................................................115
PART IV....................................................................................................................................................................116
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. .....................................................................116
SIGNATURES ..........................................................................................................................................................119
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of our statements contained in this Form 10-K, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 41,
are “forward-looking statements” that are based upon our current expectations and projections about future events.
Forward-looking statements relate to future events or our future financial performance and include statements about
the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other
markets, our other business strategies and other statements that are not historical facts. Forward-looking statements
are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,”
“believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and
similar expressions, you should consider them as identifying forward-looking statements, although we may use other
phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and
assumptions, and on the information available to us at the time that these disclosures were prepared and may not be
realized due to a variety of factors, including, but not limited to, the following:
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the effects of the current economic recession and the possible continued deterioration of the United States
economy, particularly deterioration of the economy in Alabama and the communities in which we operate;
the effects of continued deleveraging of United States citizens and businesses;
the current financial and banking crisis resulting in the massive devaluation of the assets and shareholders’
equity of many of the United States’ financial and banking institutions;
the effects of continued compression of the residential housing industry, the continued recession and recovery
and rising unemployment;
credit risks, including credit risks resulting from the devaluation of collateralized debt obligations (CDOs)
and/or structured investment vehicles to which we currently have no direct exposure;
the effects of the Emergency Economic Stabilization Act of 2008, including its Troubled Asset Relief Program
(TARP), the American Recovery and Reinvestment Act of 2009, and other governmental monetary and fiscal
policies and legislative and regulatory changes;
the effect of changes in interest rates on the level and composition of deposits, loan demand and the values of
loan collateral, securities and interest sensitive assets and liabilities;
the effects of terrorism and efforts to combat it;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance
companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual
funds and other financial institutions operating in our market area and elsewhere, including institutions
operating regionally, nationally and internationally, together with competitors offering banking products and
services by mail, telephone and the Internet;
the effect of any merger, acquisition or other transaction to which we or our subsidiary may from time to time
be a party, including our ability to successfully integrate any business that we acquire; and
failure of our assumptions underlying the establishment of our loan loss reserves.
All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this
Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking
statements. For certain other factors, risks and uncertainties that could cause our actual results to differ materially
from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” in Item
1A beginning on page 26.
1
PART I
ITEM 1. BUSINESS
Overview
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956
headquartered in Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate nine
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, and are in the process of establishing a new banking office in the Pensacola-Ferry
Pass-Brent, Florida MSA (Escambia and Santa Rosa Counties). As of December 31, 2010, we had total
assets of approximately $1.94 billion, total loans of approximately $1.39 billion, total deposits of
approximately $1.76 billion and total stockholders’ equity of approximately $117.1 million.
We were originally incorporated as a Delaware corporation in August 2007 for the purpose of
acquiring all of the common stock of ServisFirst Bank, an Alabama banking corporation (separately
referred to herein as the “Bank”), which was formed on April 28, 2005 and commenced operations on
May 2, 2005. On November 29, 2007, we became the sole shareholder of the Bank by virtue of a plan of
reorganization and agreement of merger pursuant to which (i) a wholly-owned subsidiary formed for the
purpose of the reorganization was merged with and into the Bank, with the Bank surviving, and (ii) each
shareholder of the Bank exchanged their shares of the Bank’s common stock for an equal number of
shares of our common stock.
We were organized to facilitate the Bank’s ability to serve its customers’ requirements for financial
services. The holding company structure provides flexibility for expansion of our banking business
through the possible acquisition of other financial institutions, the provision of additional banking-related
services which the traditional commercial bank may not provide under current law, and additional
financing alternatives such as the issuance of trust preferred securities. We have no current plans to
acquire any operating subsidiaries in addition to the Bank, but we may make acquisitions in the future if
we deem them to be in the best interest of our stockholders. Any such acquisitions would be subject to
applicable regulatory approvals and requirements.
Our principal business is to accept deposits from the public and to make loans and other investments.
Our principal sources of funds for loans and investments are demand, time, savings and other deposits
(including negotiable orders of withdrawal, or NOW accounts) and the amortization and prepayment of
loans and borrowings. Our principal sources of income are interest and fees collected on loans, interest
and dividends collected on other investments, and service charges. Our principal expenses are interest
paid on savings and other deposits (including NOW accounts), interest paid on our other borrowings,
employee compensation, office expenses and other overhead expenses.
We are headquartered at 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209
(Jefferson County). In addition to the Jefferson County headquarters, the Bank currently operates
through three offices in the Birmingham-Hoover, Alabama MSA (two offices 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 two offices in the Dothan,
Alabama MSA (Houston County) and are in the process of establishing an office in the Pensacola-Ferry
Pass-Brent, Florida MSA (Escambia County). These MSAs constitute our primary service areas, and we
also serve certain areas adjacent to our primary service areas.
Markets
Service Areas
Birmingham is located in central Alabama approximately 90 miles northwest of Montgomery,
Alabama, 146 miles west of Atlanta, Georgia, and 148 miles southwest of Chattanooga, Tennessee.
Birmingham is intersected by U.S. Interstates 20, 59 and 65. Jefferson County includes the major
business area of downtown Birmingham. North Shelby County also encompasses a growing business
community and affluent residential areas. With two offices in Jefferson County and one in north Shelby
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County, we believe we are well positioned to access the most affluent areas of the Birmingham-Hoover
MSA.
We also operate in the Huntsville, Alabama MSA, the Montgomery, Alabama MSA and the Dothan,
Alabama MSA. We believe the Huntsville market offers substantial growth as one of the strongest
technology economies in the nation, with over 300 companies performing sophisticated government,
commercial and university research. Huntsville has one of the highest concentrations of engineers in the
United States, as well as one of the highest concentrations of Ph.D.s. Huntsville is located in North
Alabama off U.S. Interstate 65 between Birmingham and Nashville, Tennessee. Montgomery is the
capital and one of the largest cities in Alabama and home to the Hyundai Motor Manufacturing plant,
which began production in May 2005. Montgomery is located in central Alabama between Birmingham
and Mobile, Alabama and is intersected by U.S. Interstates 65 (connecting Birmingham and Mobile,
Alabama) and 85 (connecting Montgomery to Atlanta, Georgia). Dothan is located in the southeastern
corner of the State of Alabama near the Georgia and Florida state lines and is 35 miles from U.S.
Interstate 10 which runs through the panhandle of Florida and connections Mobile, Alabama to
Tallahassee, Florida. Dothan is also intersected by U.S. Highways 231, 431 and 84, which are common
trucking lanes, and has access to railroad and the Chattahoochee River. With two offices in each of
Madison, Montgomery and Houston Counties, we believe that we have a base of banking resources to
serve such counties.
We are in the process of opening our first office outside the State of Alabama in Pensacola, Florida.
We have recruited an experienced team of veteran Pensacola bankers to help us establish this office.
Pensacola is located in the Florida panhandle approximately 50 miles east of Mobile, Alabama, and 40
miles west of Fort Walton, Florida, with easy access to U.S. Interstate 10 just minutes away. Pensacola
is a regional hub for healthcare and retail, with an important manufacturing sector, a strong tourism
presence and a broadly diversified economy.
We conduct a general consumer and commercial banking business, emphasizing personal banking
services to commercial firms, professionals and affluent consumers located in our service areas. We
believe the current market for financial services, as well as the prospects for the future, present
opportunity for a locally owned and operated financial institution. Specifically, we believe that our
primary service areas will be in need of local institutions to respond to customer and deposit attrition
resulting from the acquisitions during the last few years of Alabama-headquartered banks, including the
acquisitions of SouthTrust Corporation by Wachovia Corporation (which has now been acquired by
Wells Fargo & Company), AmSouth Bancorporation by Regions Financial Corporation, Compass
Bancshares, Inc. by Banco Bilbao Vizcaya Argentaria and Alabama National Bancorporation (operating
as First American Bank) by RBC Centura Banks. We believe that a community-based bank such as the
Bank can better identify and serve local relationship banking needs than can an office or subsidiary of
such larger banking institutions.
Local Economy of Service Areas
Birmingham. We believe that Jefferson and Shelby Counties offer us a growing and diverse
economic base in which to operate. Jefferson and Shelby Counties are the primary counties for the
seven-county Birmingham Metropolitan Area. With a 2010 population of 671,861, Jefferson County
includes Birmingham, Alabama’s largest city, and is Alabama’s most populated county. Shelby County
has a population of 193,570 and is among the fastest growing counties in the U.S. Between 2000 and
2010, Shelby County’s population increased more than 35%.
Jefferson and Shelby Counties have the highest population density in Metropolitan Birmingham and
account for more than 75% of the population in the entire seven-county region. In 2010, the combined
population of Jefferson and Shelby Counties was 865,431 with 340,561 households. Between 2000 and
2010, the counties grew by more than 60,000 residents or 7.5%. The projected growth rate for the two
counties between 2010 and 2015 is 4% or an additional 33,620 residents, which will bring the total
population of the two counties to almost 900,000.
Serving as the core of Metropolitan Birmingham, Jefferson and Shelby Counties have an
employment base of 459,938 – more than 88% of Metropolitan Birmingham’s total employment. The
counties combined 2010 average household income is $72,517, an almost 40% increase since 2000. The
3
counties’ 2000 to 2010 average household income growth rate is considerably higher than the U.S.
average household income growth rate of 28%.
The economic composition of Metropolitan Birmingham is a diverse mixture of traditional and
emerging employment sectors. Metals manufacturing is an important historical sector; finance and
insurance, healthcare services and distribution are currently the region’s core economic sectors and
biological and medical technology; entertainment and diverse manufacturing have been identified as the
region’s emerging economic sectors.
Finance and insurance is among the most specialized economic sectors in Metropolitan Birmingham.
Several banks and insurance companies have corporate or regional headquarters in the region, including:
Regions Financial Corporation, BBVA Compass, Protective Life, Infinity Insurance and State Farm.
Healthcare services is also a core economic sector of Metropolitan Birmingham. The University of
Alabama at Birmingham (UAB) is Alabama’s largest employer, with more than 19,000 employees, and is
among the elite healthcare centers in the U.S. UAB’s annual economic impact is estimated at more than
$4.6 billion; in 2009, UAB received $489 million in outside research funding. Additionally, Birmingham
is home to the largest nonprofit independent research laboratory in the Southeast – Southern Research
Institute. These two institutions form the foundation of the region’s growing biotechnology sector.
Diverse manufacturing is an emerging economic sector and is spearheaded by the presence of two
major automotive manufacturing facilities, Mercedes Benz U.S. International and Honda Manufacturing
of Alabama. These automotive manufacturing facilities together employ more than 7,000 and serve as
the basis for the region’s growth in transportation equipment manufacturing.
Other major corporations headquartered or with a major presence in Metropolitan Birmingham
include: HealthSouth Corporation, Vulcan Materials and AT&T. Moreover, Birmingham serves as the
headquarters to six of the country’s top-performing private companies on the elite Forbes 500 list,
including O’Neal Steel and Drummond Company.
Unless otherwise stated, the foregoing and other pertinent data can be found on the websites of the
Birmingham Regional Chamber of Commerce and the Federal Deposit Insurance Corporation (the
“FDIC”).
Huntsville. Huntsville, Madison County, is the life-center for North Alabama and has seen steady
growth since the 1960's. Today there are nearly one million people within a 50-mile radius of Huntsville.
The metropolitan population is diverse and rich in culture, with many residents moving into the area as a
technology destination from all 50 states and numerous countries, including Japan, Switzerland, Korea,
Germany and the U.K. In 2009, the Huntsville, Alabama MSA (which includes Madison and Limestone
Counties) had a population of 397,000 people, up 16.0% from the 2000 U.S. Census, and Madison
County's population was 321,000, up 16.1% from the 2000 Census. The Huntsville metro population
grew at over twice the rate of the rest of Alabama and nearly twice the rate of the U.S. as a whole.
According to a 2008 estimate, the average household income was $71,267 for the Huntsville, Alabama
MSA, $73,430 for Madison County and $65,159 for the City of Huntsville. The City of Madison
reported an average household income of $72,432 according to the 2000 U.S. Census.
We believe that Huntsville offers substantial growth as one of the strongest technology economies in
the nation with one of the highest concentrations of engineers and Ph.D.s in the United States. Huntsville
has a number of major government programs, including NASA programs such as the Space Station and
Space Shuttle Propulsion and U.S. Army programs such as the National Space and Missile Defense
Command, Army Aviation and Foreign Military Sales. Cummings Research Park in Huntsville is now
the second largest research park in the United States and the fourth largest research park in the world.
Huntsville was ranked number one in the state for announced new and expanding jobs from 2004 to
2008, according to the Alabama Development Office. Huntsville was named as Forbes magazine’s
“Best Place to Live to Weather the Economy” in November 2008. Further, Forbes named Huntsville one
of its “Leading Cities for Business” six years in a row, including 2008, as well as one of the “10 Smartest
Cities in the World” in 2009. Fortune Small Business Magazine named Huntsville as the country’s “Top
Mid-sized City to Launch and Grow a Business” and Kiplinger Magazine named Huntsville as the
nation’s “Best City” in 2009. Huntsville is home to the highest concentration of Inc. 500 Companies in
the United States and also a number of offices of Fortune 500 companies. Major employers in Huntsville
4
include the U.S. Army/Redstone Arsenal, the Boeing Company, NASA/Marshall Space Flight Center,
Intergraph Corporation, Benchmark Electronics, ADTRAN, Inc., Northrop Grumman, Cinram, SAIC,
DirecTV, LG Electronics, Inc., Lockheed Martin, and Toyota Motor Manufacturing of Alabama. Job
growth in the Huntsville metro area has been strong, with over 29,000 new workers added since 2000,
accounting for 46% of the state’s net job growth during that same period of time. The Huntsville metro
area’s employment growth rate of 15.8% is almost four times the U.S. average. Professional and business
service employment in the Huntsville metro area grew by 41.7% from 2000-2008, adding a total of
13,900 workers primarily in professional, scientific and technical fields.
In September 2005, the Base Realignment and Closure Commission, or BRAC, approved the
relocation of the majority of the United States Missile Defense Agency's development and management
work, along with the headquarters of the U.S. Army Space & Missile Defense Command, the U.S. Army
Materiel Command and the U.S. Army Security Assistance Command, to Huntsville. The relocation of
jobs to Huntsville began in 2007 and will bring up to 5,000 jobs. All moves are scheduled to be
completed by 2011. In addition to these jobs, the move is expected to bring another 5,000 support jobs.
The Hudson-Alpha Institute for Biotechnology opened its 260,000-square foot facility in November
2007, housing 17 biotechnology companies representing the for-profit side of development focused on
using the code generated by the Human Genome Project to produce drugs and treatment. The institute
has provided the Huntsville community with over 900 new jobs, and the new 22,000-square foot Jackson
Conference Center was constructed there in 2008. Verizon Wireless has built a 152,000-square foot
Alabama headquarters and customer service center in Thornton Research Park, in which it has invested
$44 million and created nearly 1,300 new jobs. Expanding the plant at Toyota Manufacturing led to the
creation of 240 jobs as well as total capital investment of $147 million. Other notable expansions include
Raytheon, DHS Systems, Aegis Technologies, System Studies and Simulation and Lockheed Martin. In
total, new and expanding industry in Huntsville/Madison County in 2009 amounted to 32 projects, 2,027
jobs, and over $219 million in capital investment. Additionally, plans are underway to construct a $1
billion office park just outside of the gates at Redstone Arsenal, which will ultimately contain hotels,
restaurants and 4 million square feet of office space.
The foregoing and other pertinent data are available on the Huntsville/Madison County Chamber of
Commerce's and the FDIC's websites.
Montgomery. Montgomery is Alabama’s second largest city and is the capital of Alabama. We have
identified Montgomery as a high-growth market for us, second in the state of Alabama only to Huntsville
in the growth of new jobs from 2000-2007. A recent competitive assessment conducted by Market Street
Services on behalf of the Montgomery Area Chamber of Commerce shows Montgomery outpacing the
State of Alabama as a whole, as well as the benchmark cities of Richmond, Virginia, Little Rock,
Arkansas, and Shreveport, Louisiana, with an 11.1% increase in net new jobs during the same period. It
is also noteworthy that, according to Market Street, Montgomery had more jobs in March 2010 than it
did in March 2000, unlike Richmond, the State of Alabama, and the United States.
The Montgomery metro area comprises 366,401 residents, and is the fourth most populous county in
Alabama. Over the past 15 years 16,500 jobs have been created in the metro area, an increase of 11%.
The area’s wealth has more than doubled since 1990, with a total personal income of $13.2 billion for the
Montgomery metro area in 2008. The average median family income grew 25% from 1990 to 2008, from
$45,182 to $56,400. The area’s per capita income grew from $18,500 in 1990 to $35,973 in 2009, an
increase of 94%.
Recent developments in Montgomery include the more than $1 billion that has been spent on the
revitalization of downtown Montgomery and the Riverfront District, including over $200 million on a
downtown four-star hotel, performing arts theatre, and convention center complex. Downtown
Montgomery also opened a new minor league baseball stadium in 2004, and the Montgomery Regional
Airport completed a $40 million renovation and expansion project in 2006.
As its capital city, the State of Alabama employs approximately 9,500 persons in Montgomery, as
well as numerous service providers. Montgomery is also home to Maxwell Gunter Air Force Base,
which employs more than 12,000 persons, including Air University, the worldwide center for U.S. Air
Force leadership and education, in addition to global information technology support systems. In 2010 a
new Network Operations Squadron for Air Force Cyber Command and worldwide Air Force Enterprise
5
Call Center created 370 new high-paying civilian and military jobs while strengthening the overall
mission of Maxwell/Gunter.
In May of 2005, Hyundai Motor Manufacturing Alabama (HMMA) opened its Montgomery
manufacturing plant, which was built with a capital investment of over $1.4 billion. That plant, which
now employs over 3,500 people and produces two Hyundai models, has been further expanded with the
addition of a new engine plant. That engine plant will also serve the new Kia manufacturing facility in
West Point, Georgia. The area has also benefited from the nearly 30 top-tier Hyundai suppliers who have
invested over $550 million in new plant facilities, producing almost 8,000 additional jobs. In 2010,
HMMA announced an additional $50 million capital investment in order to prepare for the addition of
the 2011 Elantra production line.
In 2010, Montgomery led the state in announced new and expanding industries. Hyundai Power
Transformers USA will create 1,000 new jobs and invest more than $125 million in Montgomery, the
largest project in the State of Alabama for 2010 and the company’s first American manufacturing
facility. In addition, approximately 400 new jobs and more than $150 million in capital investment were
announced in 2010 as a result of existing industry expansions. Two additional corporate headquarters
announced their locations in Montgomery in 2010, Hausted Patient Handling Services and Community
Newspaper Holdings Inc.
The foregoing and other pertinent data can be found on the Montgomery Area Chamber of
Commerce’s and the FDIC’s websites and recent publications of the Montgomery Area Chamber of
Commerce, particularly the Montgomery Business Journal (complete archived editions available at
montgomerychamber.com).
Dothan. Dothan, in Houston County, is located in the southeastern corner of Alabama and is
conveniently placed near the Florida panhandle and Georgia state line. We believe that this market has
great potential due to its central hub, its accessibility to large distribution centers, its home to several
major corporations, and its lack of personalized banking services currently being provided. According to
the FDIC, Dothan’s deposit base has grown 28% during the past five years. Furthermore, Dothan’s two
largest deposit holders are Regions Bank and Wells Fargo Bank (formerly SouthTrust Bank and more
recently Wachovia Bank), each of which has undergone substantial changes in recent years, which we
believe provides an opportunity for a new bank such as us. We believe the citizens of Dothan demand
the personal service provided by the Bank, making it a more viable option for the current residents than
local branches of larger regional competitors. The Bank’s two offices are strategically located in the
southeastern and western areas of Dothan, which are growing areas of business activity and development.
In 2009, the Dothan, Alabama MSA had a population of 142,000 people, a 9.8% increase from 2000.
Houston County had a population of 99,000, a 11.5% increase from 2000, while the city of Dothan has
experienced a 16.8% increase in population since 2000.
We believe Dothan to be a growing market with greater needs considering the wide array of
industries being serviced. The Dothan area, while being known as the peanut capital, is also home to
facilities of several major corporations, including Michelin, Pemco World Aviation, International Paper,
Globe Motors, AAA Cooper-Headquarters, and many more. Also, the strong presence of trucking and its
strategic positioning in the Southeast market attracts distribution-related projects to the Dothan MSA.
For example, the development of the Houston County Distribution Park has allowed companies to take
advantage of the 352-acre tract to serve consumers in the Southeast region of the United States. Being
only minutes from the Florida state line, the large lots can serve distribution-related projects up to 1.2
million square feet in size.
Dothan is a hub of healthcare for southeast Alabama, southwest Georgia and north Florida areas,
with two regional hospitals, Southeast Alabama Regional Medical Center employing over 2,000 medical
professionals and support staff, and Flowers Hospital employing 1,400 medical professionals and support
staff. The area also has a strong history in the expansion of aviation jobs in Alabama through Enterprise-
Ozark Community College (avionics and aviation mechanic training) and Fort Rucker, the Army
Aviation Center of the United States. The highly specialized Dothan Airport Industrial Park offers the
land and infrastructure to house aviation related projects with runway access to facilities. The existence
of these industries and the constant growth allows an opportunity for the Bank to increase its presence
and penetration in this market.
6
The foregoing and other pertinent data can be found on the Dothan Chamber of Commerce’s and the
FDIC’s websites.
Pensacola. The Pensacola-Ferry Pass-Brent MSA (Escambia and Santa Rosa Counties) has a
population of more than 450,000, up from 412,000 in 2000. Population in the Pensacola city limits totals
53,752, down from 56,255 in 2000. Pensacola is served by the Pensacola Gulf Coast Regional Airport,
which transports over 1.5 million passengers per year, representing more traffic than the airports in
Mobile and Fort Walton combined.
The Pensacola and Northwest Florida economies are driven by tourism, military, health services, and
medical technologies industries. Five major military bases are located in northwest Florida: Eglin Air
Force Base, Hurlburt Field, Pensacola Whiting Field, Pensacola Naval Air Station and Corry Station.
Pensacola, the cradle of naval aviation, is home to the U.S. Navy’s precision flight team, the Blue
Angels, and has trained naval aviators for decades. Defense spending by these bases totals nearly $5
billion annually. Other major employers in the area include Sacred Heart Health System, Baptist
Healthcare, West Florida Regional Hospital, Gulf Power Company (Southern Company), the University
of West Florida, International Paper, Ascend Performance Materials (Solutia), GE Wind Energy,
Armstrong World Industries, and Wayne Dalton Corporation. The Pensacola Bay area is also home to
the Andrews Institute for Orthopaedics and Sports Medicine, a leading surgical and research center in the
world for human performance enhancement. A vibrant small business sector operates in all areas of the
economy.
According to the FDIC, Pensacola MSA market deposits as of June 30, 2010 totaled approximately
$5.4 billion (not including credit union deposits) among 22 banks. Top market share performers include
Regions (19.5%), Synovus (17.74%), Wells Fargo (15.9%), Bank of America (7.18%) and Suntrust
(5.27%). Currently, only large regional or national banks dominate Pensacola’s market share. We
believe this creates the opportunity for a service-oriented community bank such as ServisFirst to not only
establish itself but to flourish.
Market deposit growth has been relatively flat over the last ten years, but we believe the opportunity
presented by expansion into Pensacola is not necessarily from a growth market. The three largest
community banks are under public consent orders, and the national/regional banks are distracted by
continued credit issues, recent mergers, and employee layoffs, and we believe that they are no longer able
to give customers the personalized and responsive attention they deserve and demand. The top regional
banks have nonperforming asset ratios approaching 10%. Recent mergers in the market include
AmSouth/Regions, Wachovia/Wells Fargo, and, most recently, Whitney/Hancock. Synovus recently
announced a $100 million expense reduction plan which we believe will inevitably affect the local
division, Coastal Bank and Trust. These factors have caused the “big” banks to lose focus on their
customers and have essentially terminated any significant business development efforts. As a result, we
believe that a need has been created for a financially sound, community-focused bank such as ServisFirst,
with motivated, experienced, and energized team members empowered to make timely, local decisions.
In addition to the higher level of service offered than mass-market retail banks offer, we also believe that
ServisFirst offers more sophisticated products than community banks currently operating in the market.
The foregoing and other pertinent data can be found on the Pensacola Chamber of Commerce’s and
the FDIC’s websites.
Deposit Growth in Our Markets
According to FDIC reports, total deposits in Jefferson and Shelby Counties grew from
approximately $14.5 billion in June 2001 to approximately $25.1 billion in June 2010, representing a
compound average annual growth rate of approximately 5.97% over the period. Deposits in Madison
County grew from approximately $3.2 billion in June 2001 to approximately $6.5 billion in June 2010,
representing a compound average annual growth rate of approximately 8.19% over the period. Deposits
in Montgomery County grew from approximately $2.9 billion in June 2001 to approximately $4.6 billion
in June 2010, representing a compound average annual growth rate of approximately 5.26% over the
period. Deposits in Houston County grew from approximately $1.3 billion in June 2001 to
approximately $2.1 billion in June 2010, representing a compound average annual growth rate of
approximately 6.18% over the period. While our markets have been negatively affected by the current
7
recession and credit crisis, we believe that each of our markets will continue to grow and believe that
many local affluent professionals and small business customers will do their banking with local,
autonomous institutions that offer a higher level of personalized service.
Competition
We are subject to intense competition from various financial institutions and other companies that
offer financial services. The Bank competes for deposits with other commercial banks, savings and loan
associations, credit unions and issuers of commercial paper and other securities, such as money-market
and mutual funds. In making loans, the Bank competes with other commercial banks, savings and loan
associations, consumer finance companies, credit unions, leasing companies and other lenders.
We currently conduct business principally through our nine banking offices (including our second
office in the Dothan MSA, which opened in February 2011). Based upon the latest data available on the
FDIC’s website as of June 30, 2010, and our records, our total deposits in the Birmingham-Hoover MSA
ranked 9th among 49 financial institutions and represented approximately 2.47% of the total deposits in
the Birmingham-Hoover MSA. Our total deposits in the Huntsville MSA ranked us 8th among 25
financial institutions and represented approximately 4.59% of the total deposits in the Huntsville MSA.
Our total deposits in the Montgomery MSA ranked us 7th among 22 financial institutions and
represented approximately 5.14% of the total deposits in the Montgomery MSA. Our total deposits in the
Dothan MSA, our newest service area other than Pensacola, ranked us 4th among 21 financial institutions
and represented approximately 6.89% of the total deposits in the Dothan MSA. Together, deposits for all
institutions
in Jefferson, Shelby, Montgomery, Madison, and Houston Counties represented
approximately 46.60% of all the deposits in the State of Alabama at June 30, 2010.
The following table illustrates our market share, by insured deposits, in our primary service areas at
June 30, 2010, as reported by the FDIC:
Market
Alabama:
Birmingham-Hoover MSA
Montgomery MSA
Huntsville MSA
Dothan MSA
Number
of
Branche
s
Our Market
Total
Market
Deposits
Deposits
(Dollar amounts in millions)
Ranking
3
2
2
1
$ 686.3
301.8
330.1
195.9
$ 27,841.4
5,869.6
7,207.8
2,845.0
9
7
8
4
Market
Share
Percentage
2.47 %
5.14 %
4.59 %
6.89 %
Our retail and commercial divisions operate in highly competitive markets. We compete directly in
retail and commercial banking markets with other commercial banks, savings and loan associations,
credit unions, mortgage brokers and mortgage companies, mutual funds, securities brokers, consumer
finance companies, other lenders and insurance companies, locally, regionally and nationally. Many of
our competitors compete by using offerings by mail, telephone, computer and/or the Internet. Interest
rates, both on loans and deposits, and prices of services are significant competitive factors among
financial institutions generally. Office locations, types and quality of services and products, office hours,
customer service, a local presence, community reputation and continuity of personnel are also important
competitive factors that we emphasize.
Many other commercial or savings institutions currently have offices in our primary service areas.
These institutions include many of the largest banks operating in Alabama, including some of the largest
banks in the country. Many of our competitors serve the same counties we serve. Virtually every type of
competitor for business of the type we serve has offices in each of our primary markets. In our service
areas, our five largest competitors are generally Regions Bank, Wells Fargo Bank, Compass Bank (now a
subsidiary of Banco Bilbao Vizcaya Argentaria), BB&T and RBC Bank USA. These institutions, as well
as other competitors of ours, have greater resources, serve broader geographic markets, have higher
lending limits, offer various services that we do not offer and can better afford and make broader use of
media advertising, support services, and electronic technology than we can. To offset these competitive
disadvantages, we depend on our reputation for greater personal service, consistency, and flexibility and
the ability to make credit and other business decisions quickly.
8
Business Strategy
Management Philosophy
Our philosophy is to operate as an urban community bank emphasizing prompt, personalized
customer service to the individuals and businesses located in our primary service areas. We believe this
philosophy has attracted and will continue to attract customers and capture market share historically
controlled by other financial institutions operating in our market. Our management and employees focus
on recognizing customers’ needs and delivering products and services to meet those targeted needs. We
aggressively market to businesses, professionals and affluent consumers that may be underserved by the
large regional banks that operate in their service areas. We believe that local ownership and control
allows us to serve customers more efficiently and effectively and will aid in our growth and success.
Operating Strategy
In order to achieve the level of prompt, responsive service that we believe is necessary to attract
customers and to develop our image as an urban bank with a community focus, we have employed the
following operating strategies:
(cid:2) Quality Employees. We strive to hire highly trained and seasoned staff. Staff are trained to
answer questions about all of our products and services, so that the first employee the customer
encounters can usually resolve most questions the customer may have.
(cid:2)
(cid:2)
(cid:2)
Experienced Senior Management. Our senior management has extensive experience in the
banking industry, as well as substantial business and banking contacts in our markets.
Relationship Banking. We focus on cross-selling financial products and services to our
customers. Our customer-contact employees are highly trained to recognize customer needs and
to meet those needs with a sophisticated array of products and services. We view cross-selling
as a means to leverage relationships and help provide useful financial services to retain
customers, attract new customers and remain competitive.
Community-Oriented Directors. The boards of directors for the holding company and the Bank
currently consist of residents of Birmingham, but we also have a non-voting advisory board of
directors in each of the Huntsville, Montgomery and Dothan markets. These advisory directors
represent a wide array of business experience and community involvement in the service areas
where they live. As residents of our primary service areas, they are sensitive and responsive to
the needs of our customers and potential customers. In addition, our directors and advisory
directors bring substantial business and banking contacts to us.
(cid:2) Highly Visible Offices. Our local headquarters buildings are highly visible in Birmingham’s
south Jefferson County, downtown Huntsville, downtown Montgomery and downtown Dothan.
We believe that a highly visible headquarters building gives us a powerful presence in each
local market.
(cid:2)
Individual Customer Focus. We focus on providing individual service and attention to our
target customers, which include privately held businesses with $2 million to $250 million in
sales, professionals, and affluent consumers. As our employees, officers and directors become
familiar with our customers on an individual basis, they are able to respond to credit requests
quickly.
(cid:2) Market Segmentation and Advertising. We utilize traditional advertising media, such as local
periodicals and local event sponsorships, to increase our public visibility. The majority of our
marketing and advertising efforts, however, are focused on leveraging our management’s,
directors’, advisory directors’ and stockholders’ existing relationship networks.
(cid:2)
Telephone and Internet Banking Services. We offer various banking services by telephone
through a 24-hour voice response unit and through Internet banking arrangements.
9
Growth Strategy
Because we believe that growth and expansion of our operations are significant factors in our
success, we have implemented the following growth strategies:
(cid:2)
(cid:2)
Capitalize on Community Orientation. We seek to capitalize on the extensive relationships that
our management, directors, advisory directors and stockholders have with businesses and
professionals in our markets. We believe that these market sectors are not adequately served by
the existing banks in such areas.
Emphasize Local Decision-Making. We emphasize local decision-making by experienced
bankers. We believe this helps us attract local businesses and service-minded customers.
(cid:2) Offer Fee-Generating Products and Services. Our range of services, pricing strategies, interest
rates paid and charged, and hours of operation are structured to attract our target customers and
increase our market share. We strive to offer the businessperson, professional, entrepreneur and
consumer the best loan services available while pricing these services competitively.
(cid:2) Office Location Strategy. We have opened our offices in each of our local markets in areas that
we believe provide visibility, convenience and access to our target customers.
Lending Services
Lending Policy
Our lending policies have been established to support the banking needs of our primary market
areas. Consequently, we aggressively seek high-quality loans within a limited geographic area and in
competition with other well-established financial institutions in our primary service areas that have
greater resources and lending limits than we have.
Loan Approval and Review
Our loan approval policies provide for various levels of officer lending authority. When the total
amount of loans to a single borrower exceeds an individual officer’s lending authority, further approval
must be obtained from the Regional CEO and/or our Chief Executive Officer, Chief Risk Officer or
Chief Credit Officer, based on our loan policies.
Commercial Loans
Our commercial lending activity is directed principally toward businesses and professional service
firms whose demand for funds falls within our legal lending limits. We also make loans to small- to
medium-sized businesses in our primary service areas for purposes such as new or upgraded plant and
equipment, inventory acquisition and various working capital purposes. Typically, targeted borrowers
have annual sales between $2 million and $250 million. This category of loans includes loans made to
individual, partnership or corporate borrowers, and such loans are obtained for a variety of business
purposes. We offer a variety of commercial lending products to meet the needs of business and
professional service firms in our service areas. These commercial lending products include seasonal
loans, bridge loans and term loans for working capital, expansion of the business, or acquisition of
property, plant and equipment. We also offer business lines of credit. The repayment terms of our
commercial loans will vary according to the needs of each customer.
Our commercial loans will usually be collateralized. Generally, collateral consists of business
assets, including any or all of general intangibles, accounts receivables, inventory, equipment, or real
estate. Collateral is subject to the risk that we may have difficulty converting it to a liquid asset if
necessary, as well as risks associated with degree of specialization, mobility and general collectibility in
a default situation. To mitigate this risk, we underwrite collateral to strict standards, including valuations
and general acceptability based on our ability to monitor its ongoing health and value.
We underwrite our commercial loans primarily on the basis of the borrower’s cash flow, expected
ability to service its debt from income and degree of management expertise. As a general practice, we
10
take as collateral a security interest in any available real estate, equipment or other personal property,
although in limited circumstances we may make some commercial loans on an unsecured basis. This
type loan may be subject to many different types of risk, which will differ depending on the particular
industry a borrower is engaged in, including fraud, bankruptcy, economic downturn, deteriorated or non-
existent collateral, and changes in interest rates such as have occurred in the recent economic recession
and credit market crisis. General risks to an industry, such as the recent economic recession and credit
market crisis, or to a particular segment of an industry are monitored by senior management on an
ongoing basis. When warranted, individual borrowers who may be at risk due to an industry condition
may be more closely analyzed and reviewed at the credit review committee or board of directors level.
On a regular basis, commercial and industrial borrowers are required to submit statements of financial
condition relative to their business to us for review. We analyze these statements for trends and assign
the loan a risk grade accordingly. Based on this risk grade, the loan may receive an increased degree of
scrutiny by management, up to and including additional loss reserves being required.
Real Estate Loans
We make commercial real estate loans, construction and development loans and residential real
estate loans.
Commercial Real Estate. Commercial real estate loans are generally limited to terms of five years or
less, although payments are usually structured on the basis of a longer amortization. Interest rates may
be fixed or adjustable, although rates generally will not be fixed for a period exceeding five years. In
addition, we generally will require personal guarantees from the principal owners of the property
supported by a review by our management of the principal owners’ personal financial statements.
Commercial real estate offers some risks not found in traditional residential real estate lending.
Repayment is dependent upon successful management and marketing of properties and on the level of
expense necessary to maintain the property. Repayment of these loans may be adversely affected by
conditions in the real estate market or the general economy. Also, commercial real estate loans typically
involve relatively large loan balances to a single borrower. To mitigate these risks, we monitor our loan
concentration. This type loan generally has a shorter maturity than other loan types, giving us an
opportunity to reprice, restructure or decline to renew the credit. As with other loans, all commercial real
estate loans are graded depending upon strength of credit and performance. A higher risk grade will
bring increased scrutiny by our management and the board of directors.
Construction and Development Loans. We make construction and development loans both on a pre-
sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to
beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not
entered into an agreement to sell the property prior to beginning construction, then the loan is considered
to be on a speculative basis. Construction and development loans are generally made with a term of 12
to 24 months, and interest is paid monthly. The ratio of the loan principal to the value of the collateral as
established by independent appraisal typically will not exceed 80% of residential construction loans.
Speculative construction loans will be based on the borrower’s financial strength and cash flow position.
Development loans are generally limited to 75% of appraised value. Loan proceeds will be disbursed
based on the percentage of completion and only after the project has been inspected by an experienced
construction lender or third-party inspector. During times of economic stress, this type loan has typically
had a greater degree of risk than other loan types, as has been evident in the current credit crisis.
During the period 2008 – 2010, there were numerous construction loan defaults among many
commercial bank loan portfolios, including a number of Alabama-based banks such as Regions Financial
Corporation and Colonial Bancgroup, Inc. To mitigate that risk, our board of directors and management
review the entire portfolio on a periodic basis and we internally track and monitor these loans closely.
On a quarterly basis, the portfolio is segmented by market area to allow analysis of exposure and a
comparison to current inventory levels in these areas. While total construction loans decreased $52.1
million in 2010, we increased our allocation slightly within our loan loss reserve for construction loans,
from $6.3 million at the end of 2009 to $6.4 million at the end of 2010. Charge-offs for construction
loans increased from $3.3 million for 2009 to $3.5 million for 2010.
Residential Real Estate Loans. Our residential real estate loans consist primarily of residential
second mortgage loans, residential construction loans and traditional mortgage lending for one-to-four
11
family residences. We will originate and maintain fixed rate mortgages with long-term maturity and
balloon payments generally not exceeding five years. The majority of our fixed-rate loans are sold in the
secondary mortgage market. All loans are made in accordance with our appraisal policy, with the ratio of
the loan principal to the value of collateral as established by independent appraisal generally not
exceeding 80%. Risks associated with these loans are generally less significant than those of other loans
and involve fluctuations in the value of real estate, bankruptcies, economic downturn and customer
financial problems. Real estate has recently experienced a period of declining prices which negatively
affects real estate collateralized loans, but this negative effect has to date been more prevalent in regions
of the United States other than our primary service areas; however, homes in our primary service areas
may experience significant price declines in the future. We have not made and do not expect to make
any Alt-A or subprime loans.
Consumer Loans
We offer a variety of loans to retail customers in the communities we serve. Consumer loans in
general carry a moderate degree of risk compared to other loans. They are generally more risky than
traditional residential real estate loans but less risky than commercial loans. Risk of default is usually
determined by the well-being of the local economies. During times of economic stress, there is usually
some level of job loss both nationally and locally, which directly affects the ability of the consumer to
repay debt. Risk on consumer-type loans is generally managed though policy limitations on debt levels
consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral
type.
Our consumer loans include home equity loans (open- and closed-end); vehicle financing; loans
secured by deposits; and secured and unsecured personal loans. These various types of consumer loans
all carry varying degrees of risk:
(cid:2)
Loans secured by deposits carry little or no risk.
(cid:2) Home equity lines carry additional risk because of the increased difficulty of converting real
estate to cash in the event of a default and have become particularly risky as housing prices
decline, thereby reducing and in some cases eliminating a home owner’s equity relative to their
primary mortgage. To date, homes in our primary service areas have not experienced the severe
price declines of homes in other regions of the United States; however, homes in our service
areas have experienced some price declines in the past two years. Our current underwriting
policy allows home equity lines in amounts less than 90% of current market value. Although
this appears high, our historical losses for home equity lines have been less than losses on the
loan portfolio as a whole (21 basis points for the year ended December 31, 2010). We also
require the customer to carry adequate insurance coverage to pay all mortgage debt in full if the
collateral is destroyed.
(cid:2) Vehicle financing carries additional risks over loans secured by real estate in that the collateral
is declining in value over the life of the loan and is mobile. We manage the risks inherent in
vehicle financing by matching the loan term with the age and remaining useful life of the
collateral to try to ensure the customer always has an equity position and is never “upside
down.” To protect the collateral, we require the customer to carry insurance showing us as loss
payee. We also have a blanket policy that covers us in the event of a lapse in the borrower’s
coverage and also provides assistance in locating collateral when necessary.
(cid:2)
Secured personal loans carry additional risks over the other types identified above in that they
are generally smaller and made to borrowers with somewhat limited financial resources and
credit histories. These loans are secured by a variety of collateral with varying degrees of
marketability in the event of default. Risk on these types of loans is managed primarily at the
underwriting level with strict adherence to debt to income ratio limitations and conservative
collateral valuations. Unsecured personal loans carry the greatest degree of risk in the consumer
portfolio. Without collateral, we are completely dependent on the commitment of the borrower
to repay and the stability of the borrower’s income stream. Again, primary risk management
occurs at the underwriting stage, with strict adherence to debt-to-income ratios, time in present
job and in industry and policy guidelines relative to loan size as a percentage of net worth and
liquid assets.
12
Commitments and Contingencies
As of December 31, 2010, we had commitments to extend credit beyond current fundings of
approximately $538.7 million, had issued standby letters of credit in the amount of approximately $47.1
million, and had commitments for credit card arrangements of approximately $17.6 million.
Policy for Determining the Loan Loss Allowance
The allowance for loan losses represents our management’s assessment of the risk associated with
extending credit and its evaluation of the quality of the loan portfolio. In calculating the adequacy of the
loan loss allowance, our management evaluates the following factors:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
the asset quality of individual loans;
changes in the national and local economy and business conditions/development, including
underwriting standards, collections, and charge-off and recovery practices;
changes in the nature and volume of the loan portfolio;
changes in the experience, ability and depth of our lending staff and management;
changes in the trend of the volume and severity of past-due loans and classified loans, and
trends in the volume of non-accrual loans, troubled debt restructurings and other modifications,
as has occurred in the residential mortgage markets and particularly for residential construction
and development loans;
possible deterioration in collateral segments or other portfolio concentrations;
historical loss experience (when available) used for pools of loans (i.e. collateral types,
borrowers, purposes, etc.);
changes in the quality of our loan review system and the degree of oversight by our board of
directors; and
the effect of external factors such as competition and the legal and regulatory requirement on the
level of estimated credit losses in our current loan portfolio
These factors are evaluated monthly, and changes in the asset quality of individual loans are
evaluated as needed.
We assign all of our loans individual risk grades when they are underwritten. We have established
minimum general reserves based on the asset quality grade of the loan. We also apply general reserve
factors based on historical losses, management’s experience and common industry and regulatory
guidelines.
After a loan is underwritten and booked, it is monitored or reviewed by the account officer,
management, internal loan review, and external loan review personnel during the life of the loan.
Payment performance is monitored monthly for the entire loan portfolio; account officers contact
customers during the regular course of business and may be able to ascertain if weaknesses are
developing with the borrower; independent loan consultants perform a review annually; and federal and
state banking regulators perform annual reviews of the loan portfolio. If we detect weaknesses that have
developed in an individual loan relationship, we downgrade the loan and assign higher reserves based
upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt.
We have established a policy to discontinue accrual of interest (non-accrual status) after the loan has
become 90 days delinquent as to payment of principal or interest unless the loan is considered to be well
collateralized and is in actively process of collection. In addition, a loan will be placed on non-accrual
status before it becomes 90 days delinquent if management believes that the borrower’s financial
condition is such that the collection of interest or principal is doubtful. Interest previously accrued but
uncollected on such loans is reversed and charged against current income when the receivable is
13
determined to be uncollectible. Interest income on non-accrual loans is recognized only as received. If a
loan will not be collected in full, we increase the allowance for loan losses to reflect our management’s
estimate of any potential exposure or loss.
Our net loan losses to average total loans decreased to 0.55% for the year ended December 31, 2010
from 0.60% for the year ended December 31, 2009, up from 0.41% for the year ended December 31,
2008. Historical performance, however, is not an indicator of future performance, and our future results
could differ materially, particularly in the current real estate environment and economic recession. As of
December 31, 2010, we had $14.3 million of non-accrual loans, of which 81% are secured real estate
loans. We have allocated approximately $6.4 million of our allowance for loan losses to real estate
construction, acquisition and development, and lot loans and $5.2 million to commercial and industrial
loans, and have a total loan loss reserve as of December 31, 2010 allocable to specific loan types of $13.2
million. We also currently maintain a general reserve, which is not tied to any particular type of loan, in
the amount of approximately $4.9 million as of December 31, 2010, resulting in a total loan loss reserve
of $18.1 million. Our management believes, based upon historical performance, known factors, overall
judgment, and regulatory methodologies, that the current methodology used to determine the adequacy of
the allowance for loan losses is reasonable, including after considering the effect of the current
residential housing market defaults and business failures (particularly of real estate developers) plaguing
financial institutions in general.
Our allowance for loan losses is also subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology used to calculate the allowance
for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks
identified by the regulators. During their routine examinations of banks, regulatory agencies may require
a bank to make additional provisions to its allowance for loan losses when, in the opinion of the
regulators, credit evaluations and allowance for loan loss methodology differ materially from those of
management.
While it is our policy to charge off in the current period loans for which a loss is considered
probable, there are additional risks of future losses that cannot be quantified precisely or attributed to
particular loans or classes of loans. Because these risks include the state of the economy, our
management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.
Investments
In addition to loans, we make investments in securities, primarily in mortgage-backed securities and
state and municipal securities. No investment in any of those instruments will exceed any applicable
limitation imposed by law or regulation. Our board of directors reviews the investment portfolio on an
ongoing basis in order to ensure that the investments conform to the policy as set by the board of
directors. Our investment policy provides that no more than 50% of our total investment portfolio may
be composed of municipal securities.
All securities held are traded in liquid markets, and we have no auction-rate securities. As of
December 31, 2010, we owned certain restricted securities of the Federal Home Loan Bank with an
aggregate book value of $3.3 million and certain restricted securities of First National Bankers Bank in
which we invested $250,000. Neither of these securities had contractual maturities or quoted fair values,
and no ready market exists for either of these securities. We had no investments in any one security,
restricted or liquid, in excess of 10% of our stockholders’ equity at December 31, 2010.
Deposit Services
We seek to establish solid core deposits, including checking accounts, money market accounts,
savings accounts and a variety of certificates of deposit and IRA accounts. We currently have no
brokered deposits. To attract deposits, the Company employs an aggressive marketing plan throughout
its service areas that features a broad product line and competitive services. The primary sources of core
deposits are residents of, and businesses and their employees located in, our market areas. We have
obtained deposits primarily through personal solicitation by our officers and directors, through
reinvestment in the community, and through our stockholders, who have been a substantial source of
deposits and referrals. We make deposit services accessible to customers by offering direct deposit, wire
transfer, night depository, banking by mail and remote capture for non-cash items. The Bank is a
14
member of the FDIC, and thus our deposits are FDIC-insured. With regard to noninterest-bearing
transaction accounts, the Bank opted into the Temporary Liquidity Guarantee Program by which the
FDIC guaranteed noninterest-bearing deposit transaction accounts and NOW accounts with interest rates
less than or equal to 0.50% through June 30, 2010 (which was later extended to December 31, 2010),
with the exception of NOW accounts, which were only covered if interest rates paid were less than or
equal to 0.25%. Under Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the FDIC is required to provide full deposit insurance coverage for noninterest-bearing transaction
accounts for a two-year period beginning December 31, 2010. This section applies to all insured
depository institutions and, unlike under the Temporary Liquidity Guarantee Program, no opt-outs are
permitted and low-interest NOW accounts are not covered.
The scheduled maturities of time deposits at December 31, 2010 are as follows:
Maturity
Three months or less
Over three through six months
Over six months through one year
Over one year
Total
Other Banking Services
$100,000 or
more
$
$
46,891
38,519
55,112
82,384
222,906
Less than
$100,000
Total
(Dollars in Thousands)
$
$
15,939
7,869
14,654
17,121
55,583
$
$
62,830
46,388
69,766
99,505
278,489
Given client demand for increased convenience and account access, we offer a range of products and
services, including 24-hour telephone banking, direct deposit, Internet banking, traveler’s checks, safe
deposit boxes, attorney trust accounts and automatic account transfers. We also participate in a shared
network of automated teller machines and a debit card system that our customers are able to use
throughout Alabama and in other states and, in certain accounts subject to certain conditions, we rebate
to the customer the ATM fees automatically after each business day. Additionally, we offer Visa® credit
card services through a correspondent bank as our agent.
Asset, Liability and Risk Management
We manage our assets and liabilities with the aim of providing an optimum and stable net interest
margin, a profitable after-tax return on assets and return on equity, and adequate liquidity. These
management functions are conducted within the framework of written loan and investment policies. To
monitor and manage the interest rate margin and related interest rate risk, we have established policies
and procedures to monitor and report on interest rate risk, devise strategies to manage interest rate risk,
monitor loan originations and deposit activity and approve all pricing strategies. We attempt to maintain
a balanced position between rate-sensitive assets and rate-sensitive liabilities. Specifically, we chart
assets and liabilities on a matrix by maturity, effective duration, and interest adjustment period, and
endeavor to manage any gaps in maturity ranges.
Seasonality and Cycles
We do not consider our commercial banking business to be seasonal.
Employees
We had 170 full-time equivalent employees as of December 31, 2010. We consider our employee
relations to be good, and we have no collective bargaining agreements with any employees.
Supervision and Regulation
Both we and the Bank are subject to extensive state and federal banking regulations that impose
restrictions on and provide for general regulatory oversight of our operations. These regulations require
compliance with various consumer protection provisions applicable to lending, deposits, brokerage and
fiduciary activities. These guidelines also impose capital adequacy requirements and restrict our ability to
repurchase stock or receive dividends from the Bank. These laws generally are intended to protect
15
depositors and not stockholders. The following discussion describes the material elements of the
regulatory framework that applies to us.
Bank Holding Company Regulation
Since we own all of the capital stock of the Bank, we are a bank holding company under the federal
Bank Holding Company Act of 1956 (the “BHC Act”). As a result, we are primarily subject to the
supervision, examination and reporting requirements of the BHC Act and the regulations of the Board of
Governors of the Federal Reserve System (the “Federal Reserve”).
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval
before:
(cid:2)
(cid:2)
acquiring direct or indirect ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will, directly or indirectly, own or control more than 5%
of the bank’s voting shares;
acquiring all or substantially all of the assets of any bank; or
(cid:2) merging or consolidating with any other bank holding company.
Additionally, the BHC Act provides that the Federal Reserve may not approve any of these
transactions if such transaction would result in or tend to create a monopoly or substantially lessen
competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the
proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and banks concerned and the
convenience and needs of the community to be served. The Federal Reserve’s consideration of financial
resources generally focuses on capital adequacy, which is discussed below.
Under the BHC Act, if adequately capitalized and adequately managed, we or any other bank
holding company located in Alabama may purchase a bank located outside of Alabama. Conversely, an
adequately capitalized and adequately managed bank holding company located outside of Alabama may
purchase a bank located inside Alabama. In each case, however, restrictions may be placed on the
acquisition of a bank that has only been in existence for a limited amount of time or will result in
specified concentrations of deposits.
Change in Bank Control.
Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with
related regulations, require Federal Reserve approval prior to any person’s or company’s acquiring
“control” of a bank holding company. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Exchange Act would, under the circumstances set
forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any
person or group of persons must obtain the approval of the Federal Reserve under the BHC Act before
acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the
outstanding common stock of a bank holding company, or otherwise obtaining control or a “controlling
influence” over the bank holding company.
Permitted Activities
Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or
indirect control of more than 5% of the voting shares of any company engaged in the following activities:
(cid:2)
banking or managing or controlling banks; and
16
(cid:2)
any activity that the Federal Reserve determines to be so closely related to banking as to be a
proper incident to the business of banking.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper
incident to the business of banking include:
(cid:2)
factoring accounts receivable;
(cid:2) making, acquiring, brokering or servicing loans and usual related activities;
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
leasing personal or real property;
operating a non-bank depository institution, such as a savings association;
trust company functions;
financial and investment advisory activities;
discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
acting as an agent or broker in selling credit life insurance and other types of insurance in
connection with credit transactions; and
performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of any subsidiary when it has
reasonable cause to believe that the bank holding company’s continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank
subsidiaries.
In addition to the permissible bank holding company activities listed above, a bank holding company
may qualify and elect to become a financial holding company, permitting the bank holding company to
engage in activities that are financial in nature or incidental or complementary to financial activity. The
BHC Act expressly lists the following activities as financial in nature:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
lending, trust and other banking activities;
insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities,
and acting as principal, agent, or broker for these purposes, in any state;
providing financial, investment, or advisory services;
issuing or selling instruments representing interests in pools of assets permissible for a bank to
hold directly;
underwriting, dealing in or making a market in securities;
other activities that the Federal Reserve may determine to be so closely related to banking or
managing or controlling banks as to be a proper incident to managing or controlling banks;
foreign activities permitted outside of the United States if the Federal Reserve has determined
them to be usual in connection with banking operations abroad;
17
(cid:2) merchant banking through securities or insurance affiliates; and
(cid:2)
insurance company portfolio investments.
For us to qualify to become a financial holding company, the Bank and any other depository
institution subsidiary of ours must be well-capitalized and well-managed and must have a Community
Reinvestment Act rating of at least “satisfactory”. Additionally, we must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal Reserve with 30 days’
written notice prior to engaging in a permitted financial activity. We have not elected to become a
financial holding company at this time.
Support of Subsidiary Institutions
Under Federal Reserve policy, we are expected to act as a source of financial strength for the Bank
and to commit resources to support the Bank. This support may be required at times when we might not
be inclined to provide it in the absence of this policy. In addition, any capital loans made by us to the
Bank will be repaid in full. In the unlikely event of our bankruptcy, any commitment by us to a federal
bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Bank Regulation and Supervision
The Bank is subject to extensive state and federal banking regulations that impose restrictions on and
provide for general regulatory oversight of our operations. These laws are generally intended to protect
depositors and not stockholders. The following discussion describes the material elements of the
regulatory framework that applies to the Bank.
Since the Bank is a commercial bank chartered under the laws of the State of Alabama, it is
primarily subject to the supervision, examination and reporting requirements of the FDIC and the
Alabama Department of Banking (the “Alabama Banking Department”). The FDIC and the Alabama
Banking Department regularly examine the Bank’s operations and have the authority to approve or
disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory
agencies have the power to prevent the development or continuance of unsafe or unsound banking
practices or other violations of law. Additionally, the Bank’s deposits are insured by the FDIC to the
maximum extent provided by law. The Bank is also subject to numerous state and federal statutes and
regulations that affect its business, activities and operations.
Branching
Under current Alabama law, the Bank may open branch offices throughout Alabama with the
prior approval of the Alabama Banking Department. In addition, with prior regulatory approval, the
Bank may acquire branches of existing banks located in Alabama. While prior law imposed various
limits on the ability of banks to establish new branches in states other than their home state, the Dodd-
Frank Wall Street Reform and Consumer Protection Act allows a bank to branch into a new state by
acquiring a branch of an existing institution or by setting up a new branch, without merging with an
existing institution in the target state, if, under the laws of the state in which the branch is to be located, a
state bank chartered by that state would be permitted to establish the branch. This makes it much simpler
for banks to open de novo branches in other states. We are in the process of seeking to obtain necessary
regulatory approvals to open our planned Pensacola branch using this new mechanism.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of
“prompt corrective action” to resolve the problems of undercapitalized financial institutions. Under this
system, the federal banking regulators have established five capital categories (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized)
into which all institutions are placed. The federal banking agencies have also specified by regulation the
relevant capital levels for each of the other categories. At December 31, 2010, the Bank qualified for the
well-capitalized category.
18
Federal banking regulators are required to take various mandatory supervisory actions and are
authorized to take other discretionary actions with respect to institutions in the three undercapitalized
categories. The severity of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or
conservator for an institution that is critically undercapitalized.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically
undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal
banking agency. A bank holding company must guarantee that a subsidiary depository institution meets
its capital restoration plan, subject to various limitations. The controlling holding company’s obligation
to fund a capital restoration plan is limited to the lesser of (i) 5% of an undercapitalized subsidiary’s
assets at the time it became undercapitalized and (ii) the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from increasing its average
total assets, making acquisitions, establishing any branches or engaging in any new line of business,
except under an accepted capital restoration plan or with FDIC approval. The regulations also establish
procedures for downgrading an institution to a lower capital category based on supervisory factors other
than capital.
FDIC Insurance Assessments
The FDIC has adopted a risk-based assessment system for insured depository institutions that takes
into account the risks attributable to different categories and concentrations of assets and liabilities. The
system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately
capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt
corrective action categories described above, with the “undercapitalized” category including institutions
that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt
corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups
based on a supervisory evaluation that the institution’s primary federal regulator provides to the FDIC
and information that the FDIC determines to be relevant to the institution’s financial condition and the
risk posed to the deposit insurance funds. Currently, annual deposit insurance assessments range from
$.07 to $.77 per $100 of assessable deposits, depending on the institution’s capital group and supervisory
subgroup. This assessment rate is adjusted quarterly, and our rate has been set at $.0347, or $.1388
annually, per $100 of deposits for the fourth quarter of 2010.
As part of the Deposit Insurance Fund Restoration Plan adopted by the FDIC in October 2008, the
FDIC adopted the final rule modifying risk-based assessment system in February 2009. The final rule set
initial base assessment rates between 12 and 45 basis points beginning April 1, 2009. The FDIC imposed
an emergency special assessment on June 30, 2009, which was collected on September 30, 2009. In
addition, in September 2009, the FDIC adopted a final rule requiring prepayment of 13 quarters of FDIC
premiums on December 30, 2009. Our required prepayment aggregated $8.1 million in December 2009.
The FDIC also imposes Financing Corporation (“FICO”) assessments to help pay the $780 million
in annual interest payments on the $8 billion of bonds issued in the late 1980s as part of the government
rescue of the thrift industry. For the fourth quarter of 2010, the FICO assessment is equal to $.0102 cents
per $100 in assessable deposits. These assessments will continue until the bonds mature in 2019.
The FDIC may terminate its insurance of deposits of a bank if it finds that the bank has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC. Under the Federal Deposit
Insurance Act, an FDIC-insured depository institution can be held liable for any loss incurred by, or
reasonably expected, to be incurred by, the FDIC in connection with (1) the default of a commonly
controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined
generally as the appointment of a conservator or receiver, and “in danger of default” is defined generally
as the existence of certain conditions indicating that a default is likely to occur in the absence of
regulatory assistance. The FDIC’s claim for damage is superior to claims of stockholders of the insured
depository institution but is subordinate to claims of depositors, secured creditors, and holders of
subordinated debt (other than affiliates) of the commonly controlled insured depository institution.
19
In October 2008, the FDIC inaugurated the Temporary Liquidity Guarantee Program (“TLG
Program”). The TLG Program consists of two basic components: (1) a guarantee of newly issued senior
unsecured debt of banks, thrifts, and certain holding companies; and (2) a full guarantee of non-interest
bearing deposit transaction accounts. We opted into the transaction account guarantee portion of the
TLG Program, which will insure all balances in non-interest bearing transaction accounts and NOW
accounts with interest rates less than or equal to 0.50% through June 30, 2010 (which was later extended
to December 31, 2010), with the exception of NOW accounts, which were only covered if interest rates
paid were less than or equal to 0.25%. The FDIC premiums paid by the Bank increased by the amount of
assessment charged on the balances in such accounts that are in excess of the maximum insured balances
under normal FDIC coverage. We opted out of the senior unsecured debt guarantee portion of the TLG
Program.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC will evaluate
the record of each financial institution in meeting the credit needs of its local community, including low
and moderate-income neighborhoods. These factors are also considered in evaluating mergers,
acquisitions, and applications to open an office or facility. Failure to adequately meet these criteria could
impose additional requirements and limitations on the Bank. Additionally, we must publicly disclose the
terms of various CRA-related agreements.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and
federal laws concerning interest rates.
Federal Laws Applicable to Credit Transactions
The Bank’s loan operations are subject to federal laws applicable to credit transactions, including:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
the Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial institution
is fulfilling its obligation to help meet the housing needs of the community it serves;
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978, governing the use and provisions of information to credit
reporting agencies;
the Fair Debt Collection Act, governing the manner in which consumer debts may be collected
by collection agencies;
the Service Members’ Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief
Act of 1940, governing the repayment terms of, and property rights underlying, secured
obligations of persons in military service; and
Rules and regulations of the various federal agencies charged with the responsibility of
implementing these federal laws.
Federal Laws Applicable to Deposit Transactions
The deposit operations of the Bank are subject to:
(cid:2)
the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
20
(cid:2)
the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement
that act, which govern automatic deposits to and withdrawals from deposit accounts and
customers’ rights and liabilities arising from the use of automated teller machines and other
electronic banking services.
Capital Adequacy
We and the Bank are required to comply with the capital adequacy standards established by the
Federal Reserve (in the case of the holding company) and the FDIC (in the case of the Bank). The
Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank
holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by
the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding
companies.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive
to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet
exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with
appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-
weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital
consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of
common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less
goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted
assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount
of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At
December 31, 2010, our consolidated ratio of total capital to risk-weighted assets was 11.82%, and our
ratio of Tier 1 Capital to risk-weighted assets was 10.22%.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding
companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less
goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-
based capital measure for market risk. All other bank holding companies generally are required to
maintain a leverage ratio of at least 4%. At December 31, 2010, our leverage ratio was 7.77%. The
guidelines also provide that bank holding companies experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the minimum supervisory levels
without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other
indicators of capital strength in evaluating proposals for expansion or new activities.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of
enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by
the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As
described above, significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements.
As of December 31, 2010, the Bank’s most recent notification from the FDIC categorized the Bank
as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized
as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the table below. Our management believes that the Bank is well-
capitalized under the prompt corrective action provisions as of December 31, 2010.
21
As of December 31, 2010:
Total Capital to Risk-Weighted Assets:
Consolidated
ServisFirst Bank
Tier 1 Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier 1 Capital to Average Assets:
Consolidated
ServisFirst Bank
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Ratio
Amount
(Dollars in Thousands)
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
$ 166,850
166,721
11.82%
11.81%
144,263
144,117
144,263
144,117
10.22%
10.20%
7.77%
7.77%
$ 112,927
112,978
56,464
56,489
74,266
74,236
8.00 %
8.00 %
4.00 %
4.00 %
4.00 %
4.00 %
N/A
$ 141,222
N/A
84,733
N/A
92,795
N/A
10.00 %
N/A
6.00 %
N/A
5.00 %
Potential Changes in Capital Adequacy Requirements
On December 15, 2010, the Basel Committee on Banking Supervision, a group representing the
central banking authorities of 27 nations that formulates recommendations on banking supervisory
policy, released its final framework for strengthening international capital and liquidity regulation,
known as “Basel III”. Although the Basel III framework is not directly binding on the U.S. bank
regulatory agencies, it has been predicted that the regulatory agencies will likely implement changes to
the capital adequacy standards applicable to the insured depository institutions and their holding
companies in light of Basel III. When fully phased in on January 1, 2019, Basel III will require banks to
maintain the following new standards and introduces a new capital measure “Common Equity Tier 1”, or
“CET1”. Basel III increases the CET1 to risk-weighted assets to 4.5%, and introduces a capital
conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target
CET1 to risk-weighted assets ratio to 7%. It requires banks to maintain a minimum ratio of Tier 1 capital
to risk weighted assets of at least 6.0%, plus the capital conservation buffer effectively resulting in Tier 1
capital ratio of 8.5%. Basel III increases the minimum total capital ratio to 8.0% plus the capital
conservation buffer, increasing the minimum total capital ratio to 10.5%. Basel III also introduces a non-
risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and
new liquidity standards. The Basel III capital and liquidity standards will be phased in over a multi-year
period, but the implementation of the new framework will commence January 1, 2013. On that date, to
the extent the Basel III standards are adopted by the applicable regulatory agencies, banks will be
required to meet the following minimum capital ratios: 3.5% CET1 to risk-weighted assets, 4.5% Tier 1
capital to risk-weighted assets and 8.0% total capital to risk-weighted assets.
Payment of Dividends
We are a legal entity separate and distinct from the Bank. Our principal source of cash flow,
including cash flow to pay dividends to our stockholders, is dividends the Bank pays to us as the Bank’s
sole stockholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us as
well as to our payment of dividends to our stockholders. The policy of the Federal Reserve that a bank
holding company should serve as a source of strength to its subsidiary banks also results in the position
of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its
stockholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only
through additional borrowings or other arrangements that may undermine the bank holding company’s
ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions
of Delaware corporate law.
The Alabama Banking Department also regulates the Bank’s dividend payments and must approve
any dividends that would exceed 50% of the Bank’s net income for the prior year. Under Alabama law, a
state-chartered bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus
is equal to at least 20% of its capital. As of December 31, 2010, the Bank’s surplus was equal to 54.0%
of the Bank’s capital. The Bank is also required by Alabama law to obtain the prior approval of the
Superintendent of Banks (the “Superintendent”) for its payment of dividends if the total of all dividends
declared by the Bank in any calendar year will exceed the total of (1) the Bank’s net earnings (as defined
by statute) for that year, plus (2) its retained net earnings for the preceding two years, less any required
transfers to surplus. Based on this, the Bank would be limited to paying $39.1 million in dividends as of
22
December 31, 2010. In addition, no dividends, withdrawals or transfers may be made from the Bank’s
surplus without the prior written approval of the Superintendent.
The Bank’s payment of dividends may also be affected or limited by other factors, such as the
requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies
have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the FDIC Improvement Act of 1991, a
depository institution may not pay any dividends if payment would cause it to become undercapitalized
or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should generally only pay dividends out of
current operating earnings. If, in the opinion of the federal banking regulators, the Bank were engaged in
or about to engage in an unsafe or unsound practice, the federal banking regulators could require, after
notice and a hearing, that the Bank stop or refrain from engaging in the questioned practice.
We have never paid any dividends and we do not plan to pay dividends in the near future. We
anticipate that our earnings, if any, will be held for purposes of enhancing our capital.
Restrictions on Transactions with Affiliates
We are subject to Section 23A of the Federal Reserve Act, which places limits on the amount of:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
a bank’s loans or extensions of credit to affiliates;
a bank’s investment in affiliates;
assets a bank may purchase from affiliates, except for real and personal property exempted by
the Federal Reserve;
loans or extensions of credit made by a bank to third parties collateralized by the securities or
obligations of affiliates; and
a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a
bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In
addition to the limitation on the amount of these transactions, each of the above transactions must also
meet specified collateral requirements. The Bank must also comply with other provisions designed to
avoid the taking of low-quality assets.
We are also subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits
an institution from engaging in the above transactions with affiliates unless the transactions are on terms
substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at
the time for comparable transactions with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its executive officers, directors,
principal shareholders and their related interests. These extensions of credit (1) must be made on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and (2) must not involve more than the normal risk of
repayment or present other unfavorable features. There is also an aggregate limitation on all loans to
insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital
and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable restrictions. Alabama state
banking laws also have similar provisions.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting confidential
information. Customers generally may prevent financial institutions from sharing nonpublic personal
financial information with nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer or when the financial institution is jointly
23
sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions
generally may not disclose consumer account numbers to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing to consumers.
Consumer Credit Reporting
On December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act, which
amended the federal Fair Credit Reporting Act (the “FCRA”). These amendments to the FCRA (the
“FCRA Amendments”) became effective in 2004.
The FCRA Amendments include, among other things:
(cid:2)
(cid:2)
(cid:2)
requirements for financial institutions to develop policies and procedures to identify potential
identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit
file stating that the consumer may be the victim of identity theft or other fraud;
for entities that furnish information to consumer reporting agencies (which would include the
Bank), requirements to implement procedures and policies regarding the accuracy and integrity
of the furnished information and regarding the correction of previously furnished information
that is later determined to be inaccurate; and
a requirement for mortgage lenders to disclose credit scores to consumers.
The FCRA Amendments also prohibit a business that receives consumer information from an
affiliate from using that information for marketing purposes unless the consumer is first provided a notice
and an opportunity to direct the business not to use the information for such marketing purposes (the
“opt-out”), subject to certain exceptions. We do not share consumer information between us and the
Bank for marketing purposes, except as allowed under exceptions to the notice and opt-out requirements.
Because we do not share consumer information between us and the Bank, the limitations on sharing of
information for marketing purposes do not have a significant impact on us.
Anti-Terrorism and Money Laundering Legislation
The Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act (the “USA PATRIOT Act”), the Bank Secrecy Act,
and rules and regulations of the Office of Foreign Assets Control (the “OFAC”). These statutes and
related rules and regulations impose requirements and limitations on specified financial transactions and
account relationships, intended to guard against money laundering and terrorism financing. The Bank
has established a customer identification program pursuant to Section 326 of the USA PATRIOT Act and
the Bank Secrecy Act, and otherwise has implemented policies and procedures to comply with the
foregoing rules.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering
the structures, regulations and competitive relationships of financial institutions operating or doing
business in the United States. We cannot predict whether or in what form any proposed regulation or
statute will be adopted or the extent to which our business may be affected by any new regulation or
statute.
Effect of Governmental Monetary Policies
The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies. The Federal Reserve’s monetary policies have
had, and are likely to continue to have, an important impact on the operating results of commercial banks
through its power to implement national monetary policy in order, among other things, to curb inflation
or combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans,
investments and deposits through its control over the issuance of United States government securities, its
regulation of the discount rate applicable to member banks and its influence over reserve requirements to
24
which member banks are subject. We cannot predict, and have no control over, the nature or impact of
future changes in monetary and fiscal policies.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 represents a comprehensive revision of laws affecting corporate
governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity securities registered, or that file reports, under the Securities Exchange Act of
1934. In particular, the act established (i) requirements for audit committees, including independence,
expertise and responsibilities; (ii) responsibilities regarding financial statements for the chief executive
officer and chief financial officer of the reporting company and new requirements for them to certify the
accuracy of periodic reports; (iii) standards for auditors and regulation of audits; (iv) disclosure and
reporting obligations for the reporting company and its directors and executive officers; and (v) civil and
criminal penalties for violations of the federal securities laws. The legislation also established a new
accounting oversight board to enforce auditing standards and restrict the scope of services that
accounting firms may provide to their public company audit clients.
Recent Federal Legislation relating to Financial Institutions
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”) was signed into law. This new law will significantly change the current bank regulatory
structure and affect the lending, deposit, investment, trading and operating activities of financial
institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt
a broad range of new implementing rules and regulations and to prepare numerous studies and reports for
Congress. The federal agencies are given significant discretion in drafting the implementing rules and
regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may
not be known for many months or years.
The Dodd-Frank Act will eliminate the federal prohibitions on paying interest on demand deposits
effective one year after the date of its enactment, thus allowing businesses to have interest-bearing
checking accounts. Depending on competitive responses, this significant change to existing law could
have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now
be based on the average consolidated total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings
institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts and
certain attorney’s trust accounts have unlimited deposit insurance through December 31, 2012.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote
on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizes
the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate
their own candidates using a company’s proxy materials and directs the federal banking regulators to
issue rules prohibiting incentive compensation that encourages inappropriate risks.
The Dodd-Frank Act creates a new Bureau of Consumer Financial Protection with broad powers to
supervise and enforce consumer protection laws. The Bureau will have broad rule-making authority for a
wide range of consumer protection laws that apply to all banks, including the authority to prohibit
“unfair, deceptive or abusive” acts and practices. The Bureau will have examination and enforcement
authority over all banks with more than $10 billion in assets. Savings institutions with less than
$10 billion in assets will continue to be examined for compliance with consumer laws by their primary
bank regulator.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on us. However, compliance with this
new law and its implementing regulations clearly will result in additional operating and compliance costs
that could have a material adverse effect on our business, financial condition and results of operations.
Recent government efforts to strengthen the U.S. financial system, including the implementation of
the American Recovery and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act
(“EESA”), the Temporary Liquidity Guarantee Program (“TLGP”) and special assessments imposed by
the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance
requirements, restrictions on executive compensation, restrictions on declaring or paying dividends,
25
restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions
against golden parachute payments. These fees, requirements and restrictions, as well as any others that
may be imposed in the future, may have a material and adverse effect on our business, financial
condition, and results of operations.
Available Information
Our corporate website is www.servisfirstbank.com. We have direct links on this website to our
Code of Ethics and the charters for our Audit, Compensation and Corporate Governance and
Nominations Committees by clicking on the “Investor Relations” tab. We also have direct links to our
filings with the Securities and Exchange Commission (SEC), including, but not limited to, our first
annual report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements and any amendments to these reports. You may also obtain a copy of any such report free of
charge from us by requesting such copy in writing to 850 Shades Creek Parkway, Suite 200,
Birmingham, Alabama 35209, Attention: Chief Financial Officer. This annual report and accompanying
exhibits and all other reports and filings that we file with the SEC will be available for the public to view
and copy (at prescribed rates) at the SEC’s Public Reference Room at 100 F Street, Washington, D.C.
20549. You may also obtain copies of such information at the prescribed rates from the SEC’s Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains
such reports, proxy and information statements, and other information as we file electronically with the
SEC by clicking on http://www.sec.gov.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves risks. Before deciding to invest in our common stock,
you should carefully consider the risks described below, together with our consolidated financial
statements and the related notes and the other information included in this annual report. The
discussion below presents material risks associated with an investment in our common stock. Our
business, financial condition and results of operation could be harmed by any of the following risks or by
other risks identified in this annual report, as well as by other risks we may not have anticipated or
viewed as material. In such a case, the value of our common stock could decline, and you may lose all or
part of your investment. The risks discussed below also include forward-looking statements, and our
actual results may differ substantially from those discussed in these forward-looking statements. See
also “Cautionary Note Regarding Forward-Looking Statements” on page 1.
Risks Related to Our Industry
Recently enacted financial reform legislation will, among other things, tighten capital standards,
create a new Consumer Financial Protection Bureau and result in new regulations that are likely to
increase our costs of operations.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”) was signed into law. This new law will significantly change the current bank regulatory
structure and affect the lending, deposit, investment, trading and operating activities of financial
institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt
a broad range of new implementing rules and regulations and to prepare numerous studies and reports for
Congress. The federal agencies are given significant discretion in drafting the implementing rules and
regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may
not be known for many months or years.
The Dodd-Frank Act will eliminate the federal prohibitions on paying interest on demand deposits
effective one year after the date of its enactment, thus allowing businesses to have interest-bearing
checking accounts. Depending on competitive responses, this significant change to existing law could
have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now
be based on the average consolidated total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings
institutions and credit unions to $250,000 per depositor. Noninterest-bearing transaction accounts and
certain attorney’s trust accounts have unlimited deposit insurance through December 31, 2012.
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The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote
on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act authorizes
the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate
their own candidates using a company’s proxy materials and directs the federal banking regulators to
issue rules prohibiting incentive compensation that encourages inappropriate risks.
The Dodd-Frank Act creates a new Bureau of Consumer Financial Protection with broad powers to
supervise and enforce consumer protection laws. The Bureau will have broad rule-making authority for a
wide range of consumer protection laws that apply to all banks, including the authority to prohibit
“unfair, deceptive or abusive” acts and practices. The Bureau will have examination and enforcement
authority over all banks with more than $10 billion in assets. Savings institutions with less than
$10 billion in assets will continue to be examined for compliance with consumer laws by their primary
bank regulator.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on us. However, compliance with this
new law and its implementing regulations clearly will result in additional operating and compliance costs
that could have a material adverse effect on our business, financial condition and results of operations.
Additional regulatory requirements especially those imposed under ARRA, EESA or other legislation
intended to strengthen the U.S. financial system, could adversely affect us.
Recent government efforts to strengthen the U.S. financial system, including the implementation of
the American Recovery and Reinvestment Act (“ARRA”), the Emergency Economic Stabilization Act
(“EESA”), the Temporary Liquidity Guarantee Program (“TLGP”) and special assessments imposed by
the FDIC, subject us, to the extent applicable, to additional regulatory fees, corporate governance
requirements, restrictions on executive compensation, restrictions on declaring or paying dividends,
restrictions on stock repurchases, limits on tax deductions for executive compensation and prohibitions
against golden parachute payments. These fees, requirements and restrictions, as well as any others that
may be imposed in the future, may have a material and adverse effect on our business, financial
condition, and results of operations.
Current market conditions have adversely affected, and may continue to adversely affect, us, our
customers and our industry.
Because our business is focused exclusively in the Southeastern United States, we are particularly
exposed to downturns in the U.S. economy in general and in the Southeastern economy in particular.
Dramatic declines in the housing market over the past three years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of mortgage loans and resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as major commercial and investment banks.
These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and
other derivative and cash securities, in turn, have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern
about the stability of the financial markets generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding to borrowers, including to other
financial institutions. This market turmoil and tightening of credit has led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and
widespread reduction of business activity generally. The resulting economic pressure on consumers and
businesses and lack of confidence in the financial markets may adversely affect our customers and thus
our business, financial condition, and results of operations. A worsening of these conditions would likely
exacerbate any adverse effects of these difficult market conditions on us and others in the financial
institutions industry.
Current market volatility and industry developments may adversely affect our business and financial
results.
The volatility in the capital and credit markets, along with the housing declines over the past three
years, has resulted in significant pressure on the financial services industry. We have experienced a
higher level of foreclosures and higher losses upon foreclosure than we have historically. If current
volatility and market conditions continue or worsen, there can be no assurance that our industry, results
of operations or our business will not be significantly adversely impacted. We may have further
27
increases in loan losses, deterioration of capital or limitations on our access to funding or capital, if
needed.
Further, if other, particularly larger, financial institutions continue to fail to be adequately capitalized
or funded, it may negatively impact our business and financial results. We routinely interact with
numerous financial institutions in the ordinary course of business and are therefore exposed to
operational and credit risk to those institutions. Failures of such institutions may significantly adversely
impact our operations.
Our profitability is vulnerable to interest rate fluctuations.
As a financial institution, our earnings can be significantly affected by changes in interest rates,
particularly our net interest income, the rate of loan prepayments, the volume and type of loans
originated or produced, the sales of loans on the secondary market and the value of our mortgage
servicing rights. Our profitability is dependent to a large extent on our net interest income, which is the
difference between our income on interest-earning assets and our expense on interest-bearing liabilities.
We are affected by changes in general interest rate levels and by other economic factors beyond our
control.
Changes in interest rates also affect the average life of loans and mortgage-backed securities. The
relatively lower interest rates in recent periods have resulted in increased prepayments of loans and
mortgage-backed securities as borrowers have refinanced their mortgages to reduce their borrowing
costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to
reinvest such prepayments at rates which are comparable to the rates on the prepaid loans or securities.
We are subject to extensive regulation that could limit or restrict our activities and impose financial
requirements or limitations on the conduct of our business, which limitations or restrictions could
have a material adverse effect on our profitability.
We operate in a highly regulated industry and are subject to examination, supervision and
comprehensive regulation by various federal and state agencies including the Federal Reserve, the FDIC
and the Alabama Banking Department. Regulatory compliance is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates
charged, and interest rates paid on deposits. We are also subject to capitalization guidelines established
by our regulators, which require us to maintain adequate capital to support our growth. Violations of
various laws, even if unintentional, may result in significant fines or other penalties, including
restrictions on branching or bank acquisitions. Recently, banks generally have faced increased regulatory
sanctions and scrutiny particularly with respect to the USA Patriot Act and other statutes relating to anti-
money laundering compliance and customer privacy. The current recession has had major adverse
effects on the banking and financial industry, many of which have lost well over 50% of their market
capitalization during the past three years due to material and substantial losses in their loan portfolios and
substantial write downs of their asset values. As described above, recent legislation has substantially
changed, and increased, federal regulation of financial institutions, and there may be significant future
legislation (and regulations under existing legislation) that could have a further material affect on banks
and bank holding companies like us.
The laws and regulations applicable to the banking industry could change at any time, and we cannot
predict the effects of these changes on our business and profitability. Because government regulation
greatly affects the business and financial results of all commercial banks and bank holding companies,
our cost of compliance could adversely affect our ability to operate profitably. As a relatively new public
company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and the related rules and regulations promulgated
by the Securities and Exchange Commission. These laws and regulations increase the scope, complexity
and cost of corporate governance, reporting and disclosure practices. Despite our conducting business in
a highly regulated environment, these laws and regulations have different requirements for compliance
than we have previously experienced. Our expenses related to services rendered by our accountants,
legal counsel and consultants will increase in order to ensure compliance with these laws and regulations
that we will be subject to as a public company. In addition, it is possible that the sudden application of
these requirements to our business will result in some cultural adjustments and strain our management
resources.
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Changes in monetary policies may have a material adverse effect on our business.
Like all regulated financial institutions, we are affected by monetary policies implemented by the
Federal Reserve and other federal instrumentalities. A primary instrument of monetary policy employed
by the Federal Reserve is the restriction or expansion of the money supply through open market
operations. This instrument of monetary policy frequently causes volatile fluctuations in interest rates,
and it can have a direct, material adverse effect on the operating results of financial institutions including
our business. Borrowings by the United States government to finance government debt may also cause
fluctuations in interest rates and have similar effects on the operating results of such institutions.
Risks Related To Our Business
Our construction and land development loan portfolio and commercial and industrial loan portfolio
are both subject to unique risks that could have a material adverse effect on our financial condition
and results of operations.
The severity of the decline in the U.S. economy has adversely affected the performance and market
value of many of our loans. Several years of decline and stagnation in the residential housing market
have directly affected our construction and land development loans, while unemployment and general
economic weakness have adversely affected parts of our commercial and industrial loan portfolio. Our
construction and land development loan portfolio was $172.1 million at December 31, 2010, comprising
12.3% of our total loans. Our commercial and industrial loans were $536.6 million, or 38.5% of total
loans at December 31, 2010. Construction loans are often riskier than home equity loans or residential
mortgage loans to individuals. In the event of a general economic slowdown like the one we are
currently experiencing, these loans sometimes represent higher risk due to slower sales and reduced cash
flow that could negatively affect the borrowers’ ability to repay on a timely basis. We, as well as our
competitors, have experienced a significant increase in impaired and non-accrual construction and land
development loans and commercial and industrial loans. We believe we have established adequate
reserves with respect to such loans, although there can be no assurance that our actual loan losses will not
be greater or less than we have anticipated in establishing such reserves. Primarily as a result of the
continued weakness in residential construction and overall poor economic conditions in our market areas,
our total impaired loans increased to $51.5 million at December 31, 2010 compared to $21.5 million at
December, 2009. Of this $51.5 million of impaired loans, $28.7 million were real estate construction and
$11.5 million were commercial and industrial loans. We had an allowance for loan losses of $18.1
million, of which $6.4 million, or 35.4%, was allocated to real estate construction loans, and $5.2
million, or 28.8%, was allocated to commercial and industrial loans.
In addition, although regulations and regulatory policies affecting banks and financial services
companies undergo continuous change and we cannot predict when changes will occur or the ultimate
effect of any changes, there has been recent regulatory focus on construction, development and other
commercial real estate lending. Recent changes in the federal policies applicable to construction,
development or other commercial real estate loans subject us to substantial limitations with respect to
making such loans, increase the costs of making such loans, and require us to have a greater amount of
capital to support this kind of lending, all of which could have a material adverse effect on our financial
condition and results of operations.
If we fail to maintain effective internal controls over financial reporting or remediate any future
material weakness in our internal control over financial reporting, we may be unable to accurately
report our financial results or prevent fraud, which could have a material adverse effect on our
financial condition and results of operations.
Our internal controls over financial reporting are designed to provide reasonable assurance regarding
the reliability of the financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. Effective internal controls over financial
reporting are necessary for us to provide reliable reports and prevent fraud.
We believe that a control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
29
all control issues and instances of fraud, if any, within a company have been detected. We cannot
guarantee that we will identify significant deficiencies and/or material weaknesses in our internal
controls in the future, and our failure to maintain effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our
financial condition and results of operations.
Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be
inadequate, which could have a material adverse effect on our business, financial condition, results of
operations and future prospects.
Our earnings are affected by our ability to make loans, and thus we could sustain significant loan
losses and consequently significant net losses if we incorrectly assess either the creditworthiness of our
borrowers resulting in loans to borrowers who fail to repay their loans in accordance with the loan terms
or the value of the collateral securing the repayment of their loans, or we fail to detect or respond to a
deterioration in our loan quality in a timely manner. Management makes various assumptions and
judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers
and the value of the real estate and other assets serving as collateral for the repayment of many of our
loans. We maintain an allowance for loan losses that we consider adequate to absorb losses inherent in
the loan portfolio based on our assessment of the information available. In determining the size of our
allowance for loan losses, we rely on an analysis of our loan portfolio based on historical loss experience,
volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals,
national and local economic conditions and other pertinent information. We target small and medium-
sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand
competitive or economic pressures than larger borrowers in periods of economic weakness. Also, as we
expand into new markets, our determination of the size of the allowance could be understated due to our
lack of familiarity with market-specific factors. Despite the effects of the ongoing economic decline, we
believe our allowance for loan losses is adequate. Our allowance for loan losses as of December 31,
2010 was $18.1 million, or 1.30% of total gross loans as of year-end.
If our assumptions are inaccurate, we may incur loan losses in excess of our current allowance for
loan losses and be required to make material additions to our allowance for loan losses which could
consequently materially and adversely affect our business, financial condition, results of operations and
future prospects.
However, even if our assumptions are accurate, federal and state regulators periodically review our
allowance for loan losses and could require us to materially increase our allowance for loan losses or
recognize further loan charge-offs based on judgments different than those of our management. Any
material increase in our allowance for loan losses or loan charge-offs as required by these regulatory
agencies could consequently materially and adversely affect our business, financial condition, results of
operations and future prospects.
Our business strategy includes the continuation of our growth plans, and our financial condition and
results of operations could be negatively affected if we fail to grow or fail to manage our growth
effectively.
We intend to continue pursuing our growth strategy for our business through organic growth of our
loan portfolio. Our prospects must be considered in light of the risks, expenses and difficulties that can
be encountered by financial service companies in rapid growth stages, which include the risks associated
with the following:
(cid:2) maintaining loan quality;
(cid:2) maintaining adequate management personnel and information systems to oversee such
growth;
(cid:2) maintaining adequate control and compliance functions; and
(cid:2)
securing capital and liquidity needed to support anticipated growth.
30
We may not be able to expand our presence in our existing markets or successfully enter new
markets, and any expansion could adversely affect our results of operations. Failure to manage our
growth effectively could have a material adverse effect on our business, future prospects, financial
condition or results of operations, and could adversely affect our ability to successfully implement our
business strategy. Our ability to grow successfully will depend on a variety of factors, including the
continued availability of desirable business opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our growth.
Our continued pace of growth will require us to raise additional capital in the future to fund such
growth, and the unavailability of additional capital or on terms acceptable to us could adversely affect
our growth and/or our financial condition and results of operations.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to
support our operations. To support our recent and ongoing growth, we have completed a series of capital
transactions during the past two years, including:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
the sale of $15,000,000 in 8.50% Trust Preferred Securities by our initial statutory trust,
ServisFirst Capital Trust I, on September 2, 2008;
the sale of an aggregate of 400,000 shares of our common stock at $25 per share, or
$10,000,000, in a private placement completed in part on December 31, 2008 and in part on
March 13, 2009;
the sale of $5,000,000 aggregate principal amount of the Bank’s 8.25% Subordinated Notes due
June 1, 2016 in a private placement to an institutional investor in June 2009; and
the sale of $15,000,000 in 6.0% Mandatory Convertible Trust Preferred Securities by our
second statutory trust, ServisFirst Capital Trust II, on March 15, 2010.
After giving effect to these transactions, we believe that we will have sufficient capital to meet our
capital needs for our immediate growth plans. However, we will continue to need capital to support our
longer-term growth plans. If capital is not available on favorable terms when we need it, we will have to
either issue common stock or other securities on less than desirable terms or reduce our rate of growth
until market conditions become more favorable. In either of such events, our financial condition and
results of operations may be adversely affected.
Competition from financial institutions and other financial service providers may adversely affect our
profitability.
The banking business is highly competitive, and we experience competition in our markets from
many other financial institutions. We compete with commercial banks, credit unions, savings and loan
associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance
companies, money market funds, and other mutual funds, as well as other community banks and super-
regional and national financial institutions that operate offices in our service areas.
Additionally, we face competition in our service areas from de novo community banks, including
those with senior management who were previously affiliated with other local or regional banks or those
controlled by investor groups with strong local business and community ties. These new, smaller
competitors are likely to cater to the same small and medium-size business clientele and with similar
relationship-based approaches as we do. Moreover, with their initial capital base to deploy, they could
seek to rapidly gain market share by under-pricing the current market rates for loans and paying higher
rates for deposits. These de novo community banks may offer higher deposit rates or lower cost loans in
an effort to attract our customers, and may attempt to hire our management and employees.
We compete with these other financial institutions both in attracting deposits and in making loans.
In addition, we must attract our customer base from other existing financial institutions and from new
residents. We expect competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial services industry. Our
profitability depends upon our continued ability to successfully compete with an array of financial
institutions in our service areas.
31
Unpredictable economic conditions or a natural disaster in the State of Alabama or the State of
Florida, particularly the Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama MSAs
or the Pensacola-Ferry Pass-Brent, Florida MSA, may have a material adverse effect on our financial
performance.
The majority of our current borrowers and depositors are individuals and businesses located and
doing business in Jefferson and Shelby Counties of the Birmingham-Hoover, Alabama MSA. We also
have added borrowers and depositors in Madison County in the Huntsville, Alabama MSA since opening
offices in Huntsville in 2006; in Montgomery County in the Montgomery, Alabama MSA since opening
offices in Montgomery in 2007, and in Houston County in the Dothan, Alabama MSA since opening our
office in Dothan in 2008. We are now in the process of opening an office in Escambia County in the
Pensacola-Ferry Pass-Brent, Florida MSA (which also includes Santa Rosa County). Therefore, our
success will depend on the general economic conditions in the State of Alabama and the State of Florida,
and more particularly in Jefferson, Shelby, Madison, Houston and Montgomery Counties in Alabama and
Escambia and Santa Rosa Counties in Florida, which we cannot predict with certainty. Unlike many of
our larger competitors, the majority of our borrowers are commercial firms, professionals and affluent
consumers located and doing business in such local markets. As a result, our operations and profitability
may be more adversely affected by a local economic downturn or natural disaster in Alabama or Florida,
particularly in such markets, than those of larger, more geographically diverse competitors. For example,
a downturn in the economy of any of our MSAs could make it more difficult for our borrowers in those
markets to repay their loans and may lead to loan losses that we cannot offset through operations in other
markets until we can expand our markets further. Similarly, our entry into the Pensacola market
increases our potential exposure to losses associated with hurricanes and similar natural disasters that are
more common on the Gulf Coast than in our historical markets.
We encounter technological change continually and have fewer resources than many of our
competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent
introductions of new technology-driven products and services. In addition to serving customers better,
the effective use of technology increases efficiency and enables financial institutions to reduce costs.
Our success will depend in part on our ability to address our customers’ needs by using technology to
provide products and services that will satisfy customer demands for convenience, as well as to create
additional efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements than we have. We may not be able to implement new technology-
driven products and services effectively or be successful in marketing these products and services to our
customers. As these technologies are improved in the future, we may, in order to remain competitive, be
required to make significant capital expenditures, which may increase our overall expenses and have a
material adverse effect on our net income.
Lower lending limits than many of our competitors may limit our ability to attract borrowers.
During our early years of operation, and likely for many years thereafter, our legally mandated
lending limits will be lower than those of many of our competitors because we will have less capital than
such competitors. Our lower lending limits may discourage borrowers with lending needs that exceed
those limits from doing business with us. While we may try to serve these borrowers by selling loan
participations to other financial institutions, this strategy may not succeed.
We may not be able to successfully expand into new markets, including our planned expansion into
the Pensacola, Florida market.
We have opened new offices and operations in three primary markets (Huntsville, Montgomery and
Dothan, Alabama) in the past four years and now plan to open an office in the Pensacola, Florida market,
our first market outside of Alabama, upon receipt of appropriate regulatory approvals. We may not be
able to successfully manage this growth with sufficient human resources, training and operational,
financial and technological resources. Any such failure could have a material adverse effect on our
operating results and financial condition and our ability to expand into new markets.
32
Our recent results may not be indicative of our future results, and may not provide guidance to assess
the risk of an investment in our common stock.
We may not be able to sustain our historical rate of growth and may not even be able to expand our
business at all. In addition, our recent growth may distort some of our historical financial ratios and
statistics. In the future, we may not have the benefit of several factors that were favorable until late
2008, such as a rising interest rate environment, a strong residential housing market or the ability to find
suitable expansion opportunities. Various factors, such as economic conditions, regulatory and
legislative considerations and competition, may also impede or prohibit our ability to expand our market
presence. As a small commercial bank, we have different lending risks than larger banks. We provide
services to our local communities; thus, our ability to diversify our economic risks is limited by our own
local markets and economies. We lend primarily to small to medium-sized businesses, which may
expose us to greater lending risks than those faced by banks lending to larger, better-capitalized
businesses with longer operating histories. We manage our credit exposure through careful monitoring
of loan applicants and loan concentrations in particular industries, and through our loan approval and
review procedures. Our use of historical and objective information in determining and managing credit
exposure may not be accurate in assessing our risk.
We are dependent on the services of our management team and board of directors, and the unexpected
loss of key officers or directors may adversely affect our operations.
If any of our or the Bank’s executive officers, other key personnel, or directors leaves us or the
Bank, our operations may be adversely affected. In particular, we believe that Thomas A. Broughton III
is extremely important to our success and the Bank. Mr. Broughton has extensive executive-level
banking experience and is the President and Chief Executive Officer of us and the Bank. If he leaves his
position for any reason, our financial condition and results of operations may suffer. The Bank is the
beneficiary of a key man life insurance policy on the life of Mr. Broughton in the amount of $5 million.
Also, we have hired key officers to run our banking offices in each of the Huntsville, Montgomery and
Dothan, Alabama markets and the Pensacola, Florida market, who are extremely important to our success
in such markets. If any of them leaves for any reason, our results of operations could suffer in such
markets. With the exception of the key officers in charge of our Huntsville, Montgomery and Dothan
banking offices, we do not have employment agreements or non-competition agreements with any of our
executive officers, including Mr. Broughton. In the absence of these types of agreements, our executive
officers are free to resign their employment at any time and accept an offer of employment from another
company, including a competitor. Additionally, our directors’ and advisory board members’ community
involvement and diverse and extensive local business relationships are important to our success. If the
composition of our board of directors changes materially, our business may also suffer. Similarly, if the
composition of the respective advisory boards of the Bank change materially, our business may suffer in
such markets.
Our directors and executive officers own a significant portion of our common stock and can exert
influence over our business and corporate affairs.
Our directors and executive officers, as a group, beneficially owned approximately 14.76% of our
outstanding common stock as of December 31, 2010. As a result of their ownership, the directors and
executive officers will have the ability, by voting their shares in concert, to influence the outcome of all
matters submitted to our stockholders for approval, including the election of directors.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of
business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a
risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as for personal injury and property
damage. Environmental laws may require us to incur substantial expenses and may materially reduce the
affected property’s value or limit our ability to use or sell the affected property. The remediation costs
and any other financial liabilities associated with an environmental hazard could have a material adverse
effect on our financial condition and results of operations. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing laws may increase our exposure to
environmental liability. Although management has policies and procedures to perform an environmental
33
review before the loan is recorded and before initiating any foreclosure action on real property, these
reviews may not be sufficient to detect environmental hazards.
Risks Related to Our Common Stock
We have no current plans to pay dividends on our common stock.
We have never declared or paid cash dividends on our common stock. We have no current intentions
to pay dividends. In addition, our ability to pay dividends is subject to regulatory limitations.
Under Alabama law, a state bank may not pay a dividend in excess of 90% of its net earnings until
the bank’s surplus is equal to at least 20% of its capital. As of December 31, 2010, the Bank’s surplus
was equal to 54.0% of the Bank’s capital. The Bank is also required by Alabama law to obtain the prior
approval of the Alabama Superintendent of Banks (the “Superintendent”) for its payment of dividends if
the total of all dividends declared by the Bank in any calendar year will exceed the total of (1) the Bank’s
net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the preceding two
years, less any required transfers to surplus. In addition, no dividends, withdrawals or transfers may be
made from the Bank’s surplus without the prior written approval of the Superintendent.
There are limitations on your ability to transfer your common stock.
There is no public trading market for the shares of our common stock, and we have no current plans
to list our common stock on any exchange. However, a brokerage firm may create a market for our
common stock on the OTC/Bulletin Board or Pink Sheets without our participation or approval upon the
filing and approval by the FINRA OTC Compliance Unit of a Form 211. As a result, unless a Form 211
is filed and approved, stockholders who may wish or need to dispose of all or part of their investment in
our common stock may not be able to do so effectively except by private direct negotiations with third
parties, assuming that third parties are willing to purchase our common stock.
Alabama and Delaware law limit the ability of others to acquire the Bank, which may restrict your
ability to fully realize the value of your common stock.
In many cases, stockholders receive a premium for their shares when one company purchases
another. Alabama and Delaware law makes it difficult for anyone to purchase the Bank or us without
approval of our board of directors. Thus, your ability to realize the potential benefits of any sale by us
may be limited, even if such sale would represent a greater value for stockholders than our continued
independent operation.
Our Certificate of Incorporation authorizes the issuance of preferred stock which could adversely
affect holders of our common stock and discourage a takeover of us by a third party.
Our Certificate of Incorporation authorizes the board of directors to issue up to 1,000,000 shares of
preferred stock without any further action on the part of our shareholders. Our board of directors also has
the power, without shareholder approval, to set the terms of any series of preferred stock that may be
issued, including voting rights, dividend rights, and preferences over our common stock with respect to
dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we
issue preferred stock in the future that has preference over our common stock with respect to payment of
dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting
rights that dilute the voting power of our common stock, the rights of the holders of our common stock or
the market price of our common stock could be adversely affected. In addition, the ability of our board
of directors to issue shares of preferred stock without any action on the part of the shareholders may
impede a takeover of us and prevent a transaction favorable to our shareholders.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any
deposit insurance fund or by any other public or private entity. Investment in our common stock is
inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this
Memorandum (including the documents incorporated herein by reference) and is subject to the same
34
market forces that affect the price of common stock in any company. As a result, an investor may lose
some or all of such investor’s investment in our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We operate through the following banking offices. Our Shades Creek Parkway office also includes
our corporate headquarters. We believe that our banking offices are in good condition, are suitable to our
needs and, for the most part, are relatively new. The following table summarizes pertinent details of our
banking offices, all of which are leased.
State
MSA
Office Address
Alabama:
Birmingham-Hoover MSA:
850 Shades Creek Parkway, Suite 200 (1)
324 Richard Arrington Jr. Boulevard North
5403 Highway 280, Suite 401
Total:
Huntsville MSA:
401 Meridian Street, Suite 100
1267 Enterprise Way, Suite A (1)
Total:
Montgomery MSA:
1 Commerce Street, Suite 200
8117 Vaughn Road, Unit 20
Total:
Dothan MSA:
4801 West Main Street (1)
1640 Ross Clark Circle
Total:
Total Offices in Alabama:
City
Zip
Code
Owned
or
Leased
Date
Opened
Birmingham
Birmingham
Birmingham
Huntsville
Huntsville
35209
35203
35242
3 Offices
35801
35806
2 Offices
Leased
Leased
Leased
03/02/2005
12/19/2005
08/15/2006
Leased
Leased
11/21/2006
08/21/2006
Montgomery
Montgomery
36104
36116
2 Offices
Leased
Leased
06/04/2007
09/26/2007
Leased
Leased
10/17/2008
2/1/2011
Dothan
Dothan
36305
36301
2 Offices
9 Offices
(1) Office relocated to this address in 2009. Original office opened on date indicated.
Since mid-2009, our corporate headquarters has been located in 28,900 square feet of leased space in
a 50,000-square foot building near the intersection of Cahaba Road and Shades Creek Parkway. This
building was newly constructed by a joint venture between Protective Life Corp., whose home offices are
adjacent to the land, and Birmingham-based construction company B.L. Harbert International and opened
in 2009.
ITEM 3. LEGAL PROCEEDINGS.
Neither we nor the Bank is currently subject to any material legal proceedings. In the ordinary
course of business, the Bank is involved in routine litigation, such as claims to enforce liens, claims
involving the making and servicing of real property loans, and other issues incident to the Bank’s
business. Management does not believe that there are any threatened proceedings against us or the Bank
which, if determined adversely, would have a material effect on our or the Bank’s business, financial
position or results of operations.
35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of 2010 through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
There is no public market for our common stock, and we have no current plans to list our
common stock on any public market. Consequently, there have only been a very few secondary trades in
our common stock. The most recent sale of our common stock was at $25 per share on January 25, 2011.
We are in the process of offering shares of our common stock for sale in a private placement at an
offering price of $30 per share. As of December 31, 2010, we had approximately 1,072 stockholders of
record holding 5,527,482 outstanding shares of our common stock, and we had 826,000 shares of our
common stock currently subject to outstanding options to purchase such shares under the 2005 Amended
and Restated Stock Incentive Plan, 26,000 shares issued with restrictions under our 2009 Stock Incentive
Plan, 55,000 shares of common stock subject to other outstanding options, 60,000 shares of common
stock currently subject to outstanding warrants to purchase such shares, 75,000 shares of common stock
reserved for issuance upon conversion of outstanding mandatory convertible trust preferred securities and
15,000 shares of common stock currently reserved for issuance upon conversion of an outstanding
convertible subordinated note.
Dividends
We have never declared or paid dividends and we do not expect to pay dividends to stockholders in
the near future. We anticipate that our earnings, if any, will be held for purposes of enhancing our capital.
Our payment of cash dividends is subject to the discretion of our Board of Directors and the Bank’s
ability to pay dividends. The principal source of our cash flow, including cash flow to pay dividends,
comes from dividends that the Bank pays to us as its sole shareholder. Statutory and regulatory
limitations apply to the Bank’s payment of dividends to us, as well as our payment of dividends to our
stockholders. For a more complete discussion on the restrictions on dividends, see “Supervision and
Regulation - Payment of Dividends” in Item 1.
Recent Sales of Unregistered Securities
We had no sales of unregistered securities in 2010 other than those previously reported in our reports
filed with the Securities and Exchange Commission.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
We made no repurchases of our equity securities, and no “affiliated purchasers” (as defined in
Rule 10b-18(a) (3) under the Securities Exchange Act of 1934) purchased any shares of our equity
securities during the fourth quarter of the fiscal year ended December 31, 2010.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2010 relating to stock options
granted under our 2005 Amended and Restated Stock Incentive Plan and our 2009 Stock Incentive Plan
and other options or warrants issued outside of such plans.
Plan Category
Equity compensation awards plans
approved by security holders
Equity compensation awards plans not
approved by security holders
Total
Number of securities
issued/to be issued
upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans
856,000
55,000
911,000
36
$ 15.87
17.27
$ 15.95
594,000
—
594,000
We grant stock options as incentive to employees, officers, directors, and consultants to attract
or retain these individuals, to maintain and enhance our long-term performance and profitability, and to
allow these individuals to acquire an ownership interest in our company. Our compensation committee
administers this program, making all decisions regarding grants and amendments to these awards. All
shares to be issued upon the exercise of these options must be authorized and unissued shares. If an
option holder terminates employment, we may provide for varying time periods for exercise of options
after such termination provided, that an incentive stock option may not be exercised later than 90 days
after an option holder terminates his or her employment with us unless such termination is a consequence
of such option holder’s death or disability, in which case the option period may be extended for up to one
year after termination of employment. All of our issued options will vest immediately upon a transaction
in which we merge or consolidate with or into any other corporation (unless we are the surviving
corporation), or sell or otherwise transfer our property, assets or business substantially in its entirety to a
successor corporation. At that time, upon the exercise of an option, the option holder will receive the
number of shares of stock or other securities or property, including cash, to which the holder of a like
number of shares of common stock would have been entitled upon the merger, consolidation, sale or
transfer if such option had been exercised in full immediately prior thereto. All of our issued options
have a term of 10 years. This means the options must be exercised within 10 years from the date of the
grant. At December 31, 2010, we had issued and outstanding options to purchase 881,000 shares of our
common stock.
Upon the formation of the Bank in May 2005, we issued to each of our directors warrants to
purchase up to 10,000 shares of our common stock, or 60,000 in the aggregate, for a purchase price of
$10.00 per share, expiring in ten years. These warrants became fully vested in May 2008.
On September 2, 2008, we granted warrants to purchase up to 75,000 shares of our common stock
for a purchase price of $25.00 per share in relation to the issuance of our Subordinated Deferrable
Interest Debentures as more fully described in Note 10 to the Consolidated Financial Statements.
On June 23, 2009, we granted warrants to purchase up to 15,000 shares of our common stock for a
purchase price of $25.00 per share in relation to the issuance of our Subordinated Note due June 1, 2016
as more fully described in Note 12 to the Consolidated Financial Statements.
We granted non-plan stock options to persons representing certain key business relationships to
purchase up to an aggregate of 55,000 shares of our common stock at between $15.00 and $20.00 per
share for 10 years. These stock options are non-qualified and are not part of our stock incentive plan.
They vest 100% in a lump sum five years after their date of grant.
On October 26, 2009, we made a restricted stock award under the 2009 Stock Incentive Plan of
20,000 shares of common stock to Thomas A. Broughton III, President and Chief Executive Officer.
These shares vest in five equal installments commencing on the first anniversary of the grant date,
subject to earlier vesting in the event of a merger, consolidation, sale or transfer as described in the first
paragraph under the table above.
On February 9, 2010, we made restricted stock awards under the 2009 Stock Incentive Plan of 2,000
shares of common stock to each of five employees, for a total of 10,000 shares. These shares vest five
years from the date of grant, subject to earlier vesting in the event of a merger, consolidation, sale or
transfer as described in the first paragraph under the table above.
Performance Graph
The information included under the caption “Performance Graph” in this Item 5 of this Form 10-K is
not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C
under the Securities Exchange Act of 1934 or the liabilities of Section 18 of the Securities Exchange Act
of 1934, and will not be deemed to be incorporated by reference into any filings we make under the
Securities Act of 1933 or the Securities Act of 1934, except to the extent we specifically incorporate it by
reference into such a filing.
The following graph compares the change in cumulative total stockholder return on our common
stock with the cumulative total return of the NASDAQ Banks Index and the S&P Stock Index from
37
December 31, 2005 through December 31, 2010. This comparison assumes $100 invested on December
31, 2005 in (a) our common stock, (b) the NASDAQ Banks Index, and (c) the NASDAQ Composite
Stock Index. Our common stock is not traded on any exchange or national market system, and prices for
our stock are determined based on actual prices at which our stock has been sold in arm’s-length private
placements completed prior to each point in time represented in the graph. Such prices are not
necessarily indicative of the prices that would result from transactions conducted on an exchange.
Total Return Performance
ServisFirst Bancshares,
Inc.
NASDAQ Composite
NASDAQ Bank
e
u
l
a
V
x
e
d
n
I
300
250
200
150
100
50
0
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Index:
12/31/2005
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
ServisFirst Bancshares, Inc.
NASDAQ Composite
NASDAQ Bank
100.00
100.00
100.00
150.00
109.52
111.01
200.00
120.27
86.51
250.00
71.51
65.81
250.00
102.89
53.63
250.00
120.29
60.01
Date
38
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial data from our consolidated
financial statements and should be read in conjunction with our consolidated financial statements
including the related notes and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” which are included below. Except for the data under “Selected Performance
Ratios”, “Asset Quality Ratios”, “Liquidity Ratios”, “Capital Adequacy Ratios” and “Growth Ratios”,
the selected historical consolidated financial data as of December 31, 2010, 2009, 2008, 2007, and 2006
and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 are derived from our audited
consolidated financial statements and related notes.
As of and for the years ended December 31,
Selected Balance Sheet Data:
Total assets
Total loans
Loans, net
Securities available for sale
Securities held to maturity
Cash and due from banks
Interest-bearing balances with banks
Fed funds sold
Mortgage loans held for sale
Restricted equity securities
Premises and equipment, net
Deposits
Other borrowings
Trust preferred securities
Other liabilities
Stockholders’ equity
Selected Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes expenses
Net income
Per Common Share Data:
Net income, basic
Net income, diluted
Book value
2010
$ 1,935,166
1,394,818
1,376,741
276,959
5,234
27,454
204,278
246
7,875
3,510
4,450
1,758,716
24,937
30,420
3,993
117,100
2009
2008
(Dollars in thousands except for share data)
2007
$ 1,573,497
1,207,084
1,192,173
255,453
645
26,982
48,544
680
6,202
3,241
5,088
1,432,355
24,922
15,228
3,370
97,622
$1,162,272
968,233
957,631
102,339
—
22,844
30,774
19,300
3,320
2,659
3,884
1,037,319
20,000
15,087
3,082
86,784
$
838,250
675,281
667,549
87,233
—
15,756
34,068
16,598
2,463
1,202
4,176
762,683
73
—
2,465
72,247
$ 78,146
15,260
62,886
10,350
$ 62,197
18,337
43,860
10,685
$ 55,450
20,474
34,976
6,274
$
52,536
5,169
30,969
26,736
9,358
17,378
33,175
4,413
28,930
8,658
2,780
5,878
28,702
2,704
20,576
10,830
3,825
7,005
$ 3.15
2.84
21.19
$ 1.07
1.02
17.71
$ 1.37
1.31
16.15
$
51,417
25,872
25,545
3,541
22,004
1,441
14,796
8,649
3,152
5,497
1.19
1.16
14.13
2006
$ 528,545
440,489
435,071
28,119
—
15,706
22
37,607
2,902
805
2,605
473,348
—
—
2,353
52,288
$
$
30,610
13,335
17,275
3,252
14,023
911
8,674
6,260
2,189
4,071
1.06
1.06
11.71
Weighted average shares outstanding:
Basic
Diluted
Actual shares outstanding
5,519,151
6,294,604
5,527,482
5,485,972
5,787,643
5,513,482
5,114,194
5,338,883
5,374,022
4,631,047
4,721,864
5,113,482
3,831,881
3,846,111
4,463,607
39
Selected Performance Ratios:
Return on average assets
Return on average stockholders’
equity
Net interest margin(1)
Efficiency ratio(2)
Asset Quality Ratios:
Net charge-offs to average
loans outstanding
Non-performing loans to total
loans
Non-performing assets to total
assets
Allowance for loan losses to total
gross loans
Allowance for loan losses to total
non-performing loans
Liquidity Ratios:
Net loans to total deposits
Net average loans to average
earning assets
Noninterest-bearing deposits
to total deposits
Capital Adequacy Ratios:
Stockholders’ equity to total assets
Total risked-based capital(3)
Tier I capital(4)
Leverage ratio(5)
Growth Ratios:
Percentage change in net income
Percentage change in diluted
net income per share
Percentage change in assets
Percentage change in net loans
Percentage change in deposits
Percentage change in equity
As of and for the years ended December 31,
2010
2009
2008
2007
2006
1.04%
0.43%
0.71%
0.78%
1.02%
15.86%
3.94%
45.51%
6.33%
3.31%
59.57%
9.28%
3.70%
54.61%
9.40%
3.78%
54.83%
9.96%
4.60%
50.67%
0.55%
0.60%
0.41%
0.23%
0.28%
1.03%
1.01%
1.02%
0.66%
0.00%
1.10%
1.57%
1.74%
0.73%
0.11%
1.30%
1.24%
1.09%
1.15%
1.23%
126.00%
122.34%
108.17%
173.94%
5,418.00%
78.28%
83.23%
92.32%
87.53%
91.91%
78.04%
80.06%
85.84%
77.19%
89.34%
14.24%
14.75%
11.71%
11.15%
15.05%
6.05%
11.82%
10.22%
7.77%
6.20%
10.48%
8.89%
6.97%
7.47%
11.25%
10.18%
9.01%
8.62%
11.22%
10.12%
8.40%
9.89%
11.58%
10.49%
10.32%
195.64%
-16.1%
27.43%
35.00%
373.93%
178.43%
22.99%
15.46%
22.78%
19.95%
-22.5%
35.38%
24.49%
38.08%
12.49%
12.93%
38.65%
45.45%
36.00%
20.12%
13.21%
58.59%
53.43%
61.13%
38.18%
352.38%
90.15%
76.76%
93.96%
56.23%
___________________
(1)
(2)
(3)
(4)
(5)
Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on
interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.
Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
Total stockholders’ equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible
assets plus allowance for loan losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. The
FDIC required minimum to be well-capitalized is 10%.
Total stockholders’ equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible
assets divided by total risk-weighted assets. The FDIC required minimum to be well-capitalized is 6%.
Total stockholders’ equity excluding unrealized losses on securities available for sale, net of taxes, and intangible assets
divided by average assets less intangible assets. The FDIC required minimum to be well-capitalized is 5%; however, the
Alabama Banking Department has required that the Bank maintain a Tier 1 capital leverage ratio of 7%.
40
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following is a narrative discussion and analysis of significant changes in our results of
operations and financial condition. The purpose of this discussion is to focus on information about our
financial condition and results of operations that is not otherwise apparent from the audited financial
statements. Analysis of the results presented should be made with an understanding of our relatively
short history. This discussion should be read in conjunction with the financial statements and selected
financial data included elsewhere in this document.
Forward-Looking Statements
We may from time to time make written or oral forward-looking statements, including statements
contained in our filings with the Securities and Exchange Commission and reports to stockholders.
Statements made in this annual report, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such forward-looking
statements are made based upon our management’s belief as well as assumptions made by, and
information currently available to, our management. Our actual results may differ materially from the
results anticipated in forward-looking statements due to a variety of factors, including governmental
monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio
values, interest rate risk management, the effects of competition in the banking business from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market funds and other financial institutions
operating in our market area and elsewhere, including institutions operating through the Internet, changes
in governmental regulation relating to the banking industry, including regulations relating to branching
and acquisitions, failure of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, and other factors. We caution that such
factors are not exclusive. We do not undertake to update any forward-looking statement that may be
made from time to time by, or on behalf of, us. See also “Cautionary Note Regarding Forward Looking
Statements” on page 1.
Overview
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956
headquartered in Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate nine
full service banking offices located in Jefferson, Shelby, Madison, Montgomery and Houston Counties in
the Birmingham-Hoover, Huntsville, Montgomery and Dothan, Alabama MSAs, respectively, and are in
the process of opening a tenth office in Escambia County, Florida, in the Pensacola-Ferry Pass-Brent
MSA. Our principal business is to accept deposits from the public and to make loans and other
investments. Our principal source of funds for loans and investments are demand, time, savings, and
other deposits and the amortization and prepayment of loans and borrowings. Our principal sources of
income are interest and fees collected on loans, interest and dividends collected on other investments and
service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on
our other borrowings, employee compensation, office expenses and other overhead expenses.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of certain accounting
policies, the most significant of which are described in the Notes to the Consolidated Financial
Statements. Certain of these policies require numerous estimates and strategic or economic assumptions
that may prove inaccurate or subject to variation and may significantly affect our reported results and
financial position for the period or in future periods. The use of estimates, assumptions, and judgments
are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect,
fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values
and information used to record valuation adjustments for certain assets and liabilities are based on either
quoted market prices or are provided by other independent third-party sources, when available. When
such information is not available, management estimates valuation adjustments. Changes in underlying
factors, assumptions or estimates in any of these areas could have a material impact on our future
financial condition and results of operations.
41
Allowance for Loan Losses
The allowance for loan losses, sometimes referred to as the “ALLL”, is established through periodic
charges to income. Loan losses are charged against the ALLL when management believes that the future
collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL
is considered inadequate to absorb future loan losses on existing loans for any reason, including but not
limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk
characteristics of the loan portfolio, then the provision for loan losses is increased.
Impairment of Assets
Loans are considered impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the original terms of the loan agreement. The
collection of all amounts due according to contractual terms means that both the contractual interest and
principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at the loan’s effective
interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the
underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if
a loan is collateral-dependent.
Investment Securities Impairment
Periodically, we may need to assess whether there have been any events or economic circumstances
to indicate that a security on which there is an unrealized loss is impaired on other-than-temporary basis.
In any such instance, we would consider many factors, including the severity and duration of the
impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in
value, recent events specific to the issuer or industry, and for debt securities, external credit ratings and
recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-
temporary are written down to fair value, with the write-down recorded as a realized loss in securities
gains (losses).
Results of Operations
Net Income
Net income for the year ended December 31, 2010 was $17.4 million, compared to net income of
$5.9 million for the year ended December 31, 2009. This increase in net income is primarily attributable
to a significant increase in net interest income, which increased $19.0 million, or 43.4%, to $62.9 million
in 2010 from $43.9 million in 2009. Noninterest income increased $756,000, or 17.1%, to $5.2 million
in 2010 from $4.4 million in 2009. Noninterest expense increased by $2.1 million, or 7.1%, to $31.0
million in 2010 from $28.9 million in 2009. Basic and diluted net income per common share were $3.15
and $2.84, respectively, for the year ended December 31, 2010, compared to $1.07 and $1.02,
respectively, for the year ended December 31, 2009. Return on average assets was 1.04% in 2010,
compared to 0.43% in 2009, and return on average stockholders’ equity was 15.86% in 2010, compared
to 6.33% in 2009.
Net income for the year ended December 31, 2009 was $5.9 million, compared to net income of $7.0
million for the year ended December 31, 2008. This decrease in net income is primarily attributable to a
significant increase in deposit insurance assessments by the FDIC, and an increase in provision for loan
losses. The expense of FDIC insurance assessments increased $2.2 million, or 266.7%, to $2.7 million in
2009 from $568,000 in 2008. This increase was attributable to increases in both the assessment rates
determined by the FDIC and our assessable deposits, as a result of the Company’s growth in deposits.
Also, during the fourth quarter of 2009, the Company expensed the first installment of the 13-quarter
prepaid assessment adopted by the FDIC in November 2009. The provision for loan losses increased
$4.6 million, or 73.1%, from $6.3 million in 2008 to $10.9 million in 2009. The increase in provision for
loan losses was the result of funding the loan loss reserve to match growth in the loan portfolio and loan
charge-offs. These negative effects were partially offset by higher net interest income, which was due to
significant growth of our deposits and loan portfolio resulting from continued core growth in
Birmingham, Huntsville and Montgomery and our expansion into Dothan in late 2008. Also positively
impacting net income in 2009 was an increase of $1.7 million in noninterest income, up 63.2%, from
42
$2.7 million in 2008 to $4.4 million in 2009. Basic and diluted net income per common share were $1.07
and $1.02, respectively, for the year ended December 31, 2009, compared to $1.37 and $1.31,
respectively, for the year ended December 31, 2008. Return on average assets was 0.43% in 2009,
compared to 0.71% in 2008, and return on average stockholders’ equity was 6.33% in 2009, compared to
9.28% in 2008.
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Provisions for income taxes
Net income
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Provisions for income taxes
Net income
Net Interest Income
Year Ended
December 31,
2010
2009
(Dollars in Thousands)
78,146
15,260
62,886
10,350
52,536
5,169
30,969
26,736
9,358
17,378
$
$
62,197
18,337
43,860
10,685
33,175
4,413
28,930
8,658
2,780
5,878
Change from the
Prior Year
25.64 %
(16.78) %
43.38 %
(3.14) %
58.36 %
17.13 %
7.05 %
208.80 %
236.62 %
195.64 %
Year Ended
December 31,
2009
2008
(Dollars in Thousands)
62,197
18,337
43,860
10,685
33,175
4,413
28,930
8.658
2,780
5,878
$
$
55,450
20,474
34,976
6,274
28,702
2,704
20,576
10,830
3,825
7,005
Change from the
Prior Year
12.17 %
(10.44) %
25.40 %
70.31 %
15.58 %
63.20 %
40.60 %
(20.06) %
(27.32) %
(16.09) %
$
$
$
$
Net interest income is the difference between the income earned on interest-earning assets and
interest paid on interest-bearing liabilities used to support such assets. The major factors which affect net
interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-
bearing liabilities. Our management’s ability to respond to changes in interest rates by effective asset-
liability management techniques is critical to maintaining the stability of the net interest margin and the
momentum of our primary source of earnings.
Beginning in mid-2004, the Federal Reserve Open Market Committee, or FOMC, increased interest
rates 400 basis points through mid-2006, where interest rates remained constant until September 2007.
In September 2007, the FOMC started dropping market rates in an effort to stabilize a declining real
estate market and to ease recessionary pressures. Over the next five quarters, the FOMC would drop
rates a total of 500 basis points. Rates have remained extremely low since bottoming out in December
2008. During this time of falling market rates, our management maintained a moderately liability-
sensitive balance sheet position, meaning that more liabilities are scheduled to reprice within the next
year than assets, thereby taking advantage of the decreasing rates.
Net interest income increased $19.0 million, or 43.4%, to $62.9 million for the year ended December
31, 2010 from $43.9 million for the year ended December 31, 2009. This was due to an increase in total
interest income of $15.9 million, or 25.6%, and a decrease in total interest expense of $3.1 million, or
16.8%. The increase in total interest income was primarily attributable to a 17.9% increase in average
loans outstanding from 2009 to 2010, which was the result of growth in all four of our markets, but
primarily market share expansion in our younger markets of Montgomery and Dothan.
Net interest income increased $8.9 million, or 25.4%, to $43.9 million for the year ended December
31, 2009 from $35.0 million for the year ended December 31, 2008. This was due to an increase in total
interest income of $6.7 million, or 12.2%, and a decrease in total interest expense of $2.1 million, or
43
10.4%. The increase in total interest income was primarily attributable to loan growth as a result of
significant continued core growth in Birmingham, Huntsville and Montgomery and the relocation of our
Dothan office following our expansion into that market in 2008.
Investments
We view the investment portfolio as a source of income and liquidity. Our investment strategy is to
accept a lower immediate yield in the investment portfolio by targeting shorter term investments. Our
investment policy provides that no more than 40% of our total investment portfolio should be composed
of municipal securities.
The investment portfolio at December 31, 2010 was $282.2 million, compared to $256.1 million at
December 31, 2009. The interest earned on investments rose to $8.8 million in 2010 from $6.0 million in
2009. That was a result of higher average portfolio balances due to our growth. The average taxable-
equivalent yield on the investment portfolio decreased from 5.06% in 2009 to 4.08% in 2010, or 98 basis
points.
The investment portfolio at December 31, 2009 was $256.1 million, compared to $102.3 million at
December 31, 2008. The interest earned on investments rose to $6.0 million in 2009 from $4.8 million in
2008. That was a result of higher average portfolio balances due to our growth. The average taxable-
equivalent yield on the investment portfolio decreased from 5.60% in 2008 to 5.06% in 2009, or 54 basis
points.
Net Interest Margin Analysis
The net interest margin is impacted by the average volumes of interest-sensitive assets and interest-
sensitive liabilities and by the difference between the yield on interest-sensitive assets and the cost of
interest-sensitive liabilities (spread). Loan fees collected at origination represent an additional
adjustment to the yield on loans. Our spread can be affected by economic conditions, the competitive
environment, loan demand, and deposit flows. The net yield on earning assets is an indicator of
effectiveness of our ability to manage the net interest margin by managing the overall yield on assets and
cost of funding those assets.
The following table shows, for the twelve months ended December 31, 2010, 2009 and 2008, the
average balances of each principal category of our assets, liabilities and stockholders’ equity, and an
analysis of net interest revenue, and the change in interest income and interest expense segregated into
amounts attributable to changes in volume and changes in rates. This table is presented on a taxable
equivalent basis, if applicable.
44
Assets
Interest-earning assets:
Loans, net of
unearned
income(1)
Mortgage loans
held
for sale
Investment
securities:
Taxable
Tax-exempt(2)
Total investment
securities(3)
Federal funds
sold
Restricted equity
securities
Interest -bearing
balances with
banks
Total interest-
earning assets
Non-interest
earning assets:
Cash and due from
banks
Net fixed assets and
equipment
Allowance for loan
losses, accrued
interest and other
assets
Savings deposits
Money market
accounts
Time deposits
Fed funds
purchased
Other borrowings
Total interest-bearing
Average Consolidated Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Years Ended December 31
(Dollars in Thousands)
2010
Interest
Earned/
Paid
Average
Yield/
Rate
2009
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Balance
Average
Balance
2008
Interest
Earned
/Paid
Average
Yield/
Rate
Average
Balance
$1,283,204
$68,889
5.37% $1,088,437
$55,625
5.11%
$826,957
$49,852
6.03%
6,275
226
3.60%
6,195
265
4.28%
2,469
145
5.87%
180,045
59,812
6,482
3,314
3.60%
5.72%
92,903
38,834
4,517
2,151
4.86%
5.54%
68,683
23,384
3,840
1,318
5.59%
5.64%
239,857
9,796
4.08%
131,737
6,668
5.06%
92,067
5,158
5.60%
47,581
104
0.22%
88,651
257
0.29%
29,474
548
1.86%
3,448
56
1.62%
3,101
10
0.32%
2,454
90
3.67%
42,675
115
0.27%
24,987
24
0.10%
3,141
58
1.85%
$1,623,040
$79,186
4.88% $1,343,108
$ 62,849
4.68% $ 956,562
$ 55,851
5.84%
24,837
4,914
23,087
18,337
4,503
10,534
$1,376,482
18,247
3,998
4,514
$ 983,321
Total assets
$1,675,878
Liabilities
and stockholders’ equity
Interest-bearing
liabilities:
Interest -bearing
demand deposits
$264,591
$1,253
2,978
15
0.47%
0.50%
$178,232
972
$1,599
5
775,544
255,326
5,994
4,679
0.77%
1.83%
704,112
218,087
8,859
5,624
0.90%
0.51%
1.26%
2.58%
$92,717
455
558,313
135,128
$1,522
3
12,411
5,439
4,901
52,186
31
3,288
0.63%
6.30%
—
37,705
— —
5.96%
2,250
4,729
20,838
119
980
1.64%
0.66%
2.22%
4.03%
2.52%
4.70%
liabilities
$1,355,526
$15,260
1.13% $1,139,108
$ 18,337
1.61%
$812,180
$ 20,474
2.52 %
45
Average Consolidated Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Years Ended December 31
(Dollars in Thousands)
2010
Interest
Earned/
Paid
Average
Yield/
Rate
2009
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Balance
Average
Balance
2008
Interest
Earned
/Paid
Average
Yield/
Rate
Average
Balance
Noninterest-bearing
liabilities:
Noninterest-
bearing
demand deposits
Other liabilities
Stockholders’
equity
Unrealized
gains(loss) on
securities and
derivative
Total liabilities and
stockholders’
equity
Net interest spread
Net interest margin
207,399
3,412
105,156
140,660
3,785
91,188
92,451
3,203
75,034
4,385
1,741
453
$1,675,878
$1,376,482
$983,321
3.75%
3.94%
3.07%
3.31%
3.32%
3.70%
(1) Non-accrual loans are included in average loan balances in all periods. Net loan fees of $750,000, $730,000 and $920,000 are
(2)
included in interest income in 2010, 2009 and 2008, respectively.
Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35% in 2010, and 34% in 2009 and
2008.
(3) Unrealized gains of $6,717,000, $1,197,000 and $376,000 are excluded from the yield calculation in 2010, 2009 and 2008,
respectively.
46
The following table reflects changes in our net interest margin as a result of changes in the volume
and rate of our interest-bearing assets and liabilities. Changes as a result of mix or the number of days in
the period have been allocated to the volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
Change in Interest Income and Expenses on a
Taxable-Equivalent Basis
2010 Compared to 2009
Increase (Decrease) in
Interest Income and Expense
Due to Changes in:
Rate
Volume
2009 Compared to 2008
Increase (Decrease) in
Interest Income and Expense
Due to Changes in:
Rate
Total
Total
Volume
(Dollar amounts in Thousands)
$ 10,346
4
$ 2,918
(43)
$ 13,264
(39)
$ 15,763
219
$
(9,990)
(99)
$ 5,773
120
3,374
1,162
(1,409)
1
1,965
1,163
1,354
870
(677)
(37)
(100)
(53)
(153)
1,100
(1,391)
1
26
14,813
45
65
1,524
46
24
(104)
91
16,337
403
19,733
(437)
(12,735 )
(34)
6,998
677
833
(291)
(80)
590
10
827
857
31
906
(936)
—
(3,692)
(1,802)
—
132
(346)
10
(2,865)
(945)
31
1,038
1,404
3
3,241
3,339
(119)
794
(1,327)
(1)
(6,793)
(3,154)
—
476
77
2
(3,552)
185
(119))
1,270
3,221
(6,298)
(3,077)
8,662
(10,799)
(2,137)
Interest-earning assets:
Loans, net of unearned income
Mortgages held for sale
Investment securities:
Taxable
Tax-exempt
Federal funds
Restricted equity securities
Interest bearing balances with
banks
Total earning assets
Interest-bearing liabilities:
Interest-bearing demand
deposits
Savings deposits
Money market accounts
Time deposits
Federal funds purchased
Other borrowings
Total interest-bearing
liabilities
Increase in net interest income
$11,593
$ 7,822
$19,414
$ 11,071
$ (1,936)
$ 9,135
The two primary factors that make up the spread are the interest rates received on loans and the
interest rates paid on deposits. We have been disciplined in raising interest rates on deposits only as the
market demanded and thereby managing cost of funds. Also, we have not competed for new loans on
interest rate alone, but rather we have relied on effective marketing to business customers.
Our net interest spread and net interest margin were 3.75% and 3.94%, respectively, for the year
ended December 31, 2010, compared to 3.07% and 3.31%, respectively, for the year ended December 31,
2009. Our average interest-earning assets for the year ended December 31, 2010 increased $279.9
million, or 20.8%, to $1.623 billion from $1.343 billion for the year ended December 31, 2009. This
increase in our average interest-earning assets was due to continued core growth in all of our markets,
increased loan production and increased investment securities. Our average interest-bearing liabilities
increased $216.4 million, or 19.0%, to $1.356 billion for the year ended December 31, 2010 from $1.139
billion for the year ended December 31, 2009. This increase in our average interest-bearing liabilities
was primarily due to an increase in interest-bearing deposits in all our markets, but also reflects the
issuance of $15 million in trust preferred securities in March 2010 and a $5 million subordinated note in
June 2009. The ratio of our average interest-earning assets to average interest-bearing liabilities was
119.7% and 117.9% for the years ended December 31, 2010 and 2009, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.88% for the year ended
December 31, 2010, compared to 4.68% for the year ended December 31, 2009. The average rate paid
on interest-bearing liabilities was 1.13% for the year ended December 31, 2010, compared to 1.61% for
the year ended December 31, 2009.
Our net interest spread and net interest margin were 3.07% and 3.31%, respectively, for the year
ended December 31, 2009, compared to 3.32% and 3.70%, respectively, for the year ended December 31,
2008. Our average interest-earning assets for the year ended December 31, 2009 increased $386.5
million, or 40.4%, to $1.3 billion from $956.6 million for the year ended December 31, 2008. This
47
increase in our average interest-earning assets was due to continued core growth in all of our markets,
increased loan production and increased investment securities. Our average interest-bearing liabilities
increased $326.9 million, or 40.3%, to $1.1 billion for the year ended December 31, 2009 from $812.2
million for the year ended December 31, 2008. This increase in our average interest-bearing liabilities
was primarily due to an increase in interest-bearing deposits in all our markets, but also reflects the
issuance of $15 million in trust preferred securities in September 2008 and a $5 million subordinated
note in June 2009. The ratio of our average interest-earning assets to average interest-bearing liabilities
was 117.9% and 117.8% for the years ended December 31, 2009 and 2008, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.68% for the year ended
December 31, 2009, compared to 5.84% for the year ended December 31, 2008. The average rate paid
on interest-bearing liabilities was 1.61% for the year ended December 31, 2009, compared to 2.52% for
the year ended December 31, 2008.
Provision for Loan Losses
The provision for loan losses represents the amount determined by management to be necessary to
maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan
portfolio. Our management reviews the adequacy of the allowance for loan losses on a quarterly basis.
The allowance for loan losses calculation is segregated into various segments that include classified
loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized
by a very low to average risk of default and in which management perceives there is a minimal risk of
loss. Loans are rated using a nine-point risk grade scale with loan officers having the primary
responsibility for assigning risk grades and for the timely reporting of changes in the risk grades. These
processes, and the assigned risk grades, the criticized and classified loans in the portfolio are segregated
into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss, with some
general allocation of reserve based on these grades. At December 31, 2010, total loans rated Special
Mention or worse were $98.3 million, or 7.05% of total loans, compared to $79.1 million, or 6.6% of
total loans, at December 31, 2009. Impaired loans are reviewed specifically and separately under FASB
ASC 310-30-35, Subsequent Measurement of Impaired Loans, to determine the appropriate reserve
allocation. Our management compares the investment in an impaired loan with the present value of
expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market
price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific
reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-
off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to
absorb losses inherent in our loan portfolio, our management considers historical loss experience based
on volume and types of loans, trends in classifications, volume and trends in delinquencies and non-
accruals, economic conditions and other pertinent information. Based on future evaluations, additional
provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate
level.
The provision expense for loan losses was $10.4 million for the year ended December 31, 2010, a
decrease of $300,000 from $10.7 million in 2009. Also, nonperforming loans increased to $14.3 million,
or 1.02%, of total loans at December 31, 2010 from $12.2 million, or 1.01%, of total loans at December
31, 2009. During 2010, we had net charged-off loans totaling $6.9 million, compared to net charged-off
loans of $6.6 million for 2009. The ratio of net charged-off loans to average loans was 0.55% for 2010,
compared to 0.60% for 2009. The allowance for loan losses totaled $18.1 million, or 1.30% of loans, net
of unearned income, at December 31, 2010, compared to $14.9 million, or 1.24% of loans, net of
unearned income, at December 31, 2009.
The provision expense for loan losses was $10.7 million for the year ended December 31, 2009, an
increase of $4.4 million, in comparison to $6.3 million in 2008. Also, nonperforming loans increased to
$12.2 million, or 1.01%, of total loans at December 31, 2009 from $9.7 million, or 1.02%, of total loans
at December 31, 2008. During 2009, we had net charged-off loans totaling $6.6 million, compared to net
charged-off loans of $3.4 million for 2008. The ratio of net charged-off loans to average loans was
0.60% for 2009, compared to 0.41% for 2008. The allowance for loan losses totaled $14.9 million, or
1.24% of loans, net of unearned income, at December 31, 2009, compared to $10.6 million, or 1.10% of
loans, net of unearned income, at December 31, 2008.
48
Noninterest Income
Noninterest income increased $756,000, or 17.1%, to $5.2 million in 2010 from $4.4 million in
2009. Noninterest income increased $1.7 million, or 63.2%, to $4.4 million in 2009 from $2.7 million in
2008. Growth in deposits, with corresponding increases in deposit service charges and debit card
transaction fees contributed to the increases in noninterest income in both the 2010-2009 and 2009-2008
comparative periods. Lending fees also contributed to the increase in 2009 compared to 2008.
Income from mortgage banking operations for the year ended December 31, 2010 was unchanged at
$2.2 million from the year ended December 31, 2009 as we continue to experience strong demand for
refinancing. Income from mortgage banking operations for the year ended December 31, 2009 increased
$1.2 million, or 123.3%, to $2.2 million from $1.0 for the year ended December 31, 2008. This increase
was the result of higher originations and refinancings, and the addition of a loan production officer in the
Montgomery, Alabama market in May 2008. Income from customer service charges and fees for the
year ended December 31, 2010 increased $685,000, or 42.0%, to $2.3 million from $1.6 million for the
year ended December 31, 2009. Income from customer service charges and fees for the year ended
December 31, 2009 increased $361,000, or 28.43%, to $1.6 million from $1.3 million for the year ended
December 31, 2008. These increases are primarily due to a gain of transaction accounts over the past
five years. Our management is currently pursuing new accounts and customers through direct marketing
and other promotional efforts to increase this source of revenue.
Noninterest Expense
Noninterest expense increased $2.2 million, or 7.7%, to $31.0 million for the year ended December
31, 2010 from $28.8 million for the year ended December 31, 2009. This increase is largely attributable
to increased salary and employee benefits expense, which is a result of staff additions related to our
expansion. We had 170 full-time equivalent employees at December 31, 2010 compared to 156 at
December 31, 2009. Noninterest expense increased $8.2 million, or 39.7%, to $28.8 million for the year
ended December 31, 2009 from $20.6 million for the year ended December 31, 2008. This increase is
primarily attributable to a significant increase in FDIC deposit insurance assessments and an increase in
the provision for loan losses during 2009. FDIC insurance assessments increased $2.2 million, or
266.7%, to $2.7 million in 2009 from $568,000 in 2008. This increase was attributable to increases in
both the assessment rates determined by the FDIC and the assessable deposits, as a result of the
Company’s growth in deposits. Also, during the fourth quarter of 2009, the Company expensed the first
installment of the 13-quarter prepaid assessment adopted by the FDIC in November 2009. The provision
for loan losses increased $4.4 million, or 69.8%, from $6.3 million in 2008 to $10.7 million in 2009. The
increase in provision for loan losses was the result of funding the loan loss reserve to match growth in the
loan portfolio and loan charge-offs.
Income Tax Expense
Income tax expense was $9.4 million in 2010, compared to $2.8 million in 2009 and $3.8 million in
2008. Our effective tax rates for 2010, 2009 and 2008 were 35.00%, 32.11% and 35.32%, respectively.
Our primary permanent differences are related to incentive stock option expenses and tax-free income.
Barring legislative tax changes, we anticipate our effective tax rate to remain consistent with preceding
years.
Financial Condition
Assets
Total assets at December 31, 2010, were $1.94 billion, an increase of $361.7 million, or 23.0%, over
total assets of $1.57 billion at December 31, 2009. Average assets for 2010 were $1.68 billion, an
increase of $299.4 million, or 21.74%, over average assets of $1.38 billion in 2009. Loan growth was the
primary reason for the increase. Year-end 2010 net loans were $1.38 billion, up $184.4 million, or
15.5%, over the year-end 2009 total net loans of $1.19 billion.
Total assets at December 31, 2009, were $1.57 billion, an increase of $411.0 million, or 35.3%, over
total assets of $1.16 billion at December 31, 2008. Average assets for 2009 were $1.38 billion, an
increase of $393.2 million, or 40.0%, over average assets of $983.3 million in 2008. Loan growth was
49
the primary reason for the increase. Year-end 2009 net loans were $1.19 billion, up $234.5 million, or
24.5%, over the year-end 2008 total net loans of $957.6 million.
We believe that our business model results in a higher level of earning assets than peer banks.
Earning assets are defined as assets which earn interest income. Earning assets include short-term
investments, the investment portfolio and net loans. We maintain a higher level of earning assets
because in our business model, fewer assets are allocated to facilities, ATMs, cash and due-from-bank
accounts used for transaction processing than is the case with many of our peers. Earning assets at
December 31, 2010 were $1.89 billion, or 97.4% of total assets of $1.94 billion. Earning assets at
December 31, 2009 were $1.52 billion, or 96.8% of total assets of $1.57 billion. We believe this ratio is
expected to generally continue at these levels, although it may be affected by economic factors beyond
our control.
Investment Portfolio
We view the investment portfolio as a source of income and liquidity. Our investment strategy is to
accept a lower immediate yield in the investment portfolio by targeting shorter-term investments. Our
investment policy provides that no more than 40% of our total investment portfolio should be composed
of municipal securities. At December 31, 2010, mortgage-backed securities represented 37% of the
investment portfolio, state and municipal securities represented 29% of the investment portfolio, U.S.
Treasury and government agencies represented 33% of the investment portfolio, and corporate debt
represented 1% of the investment portfolio. Our investment portfolio at December 31, 2010, 2009 and
2008 consisted of the following:
50
Gross
Amortized
Unrealized
Cost
Gain
Gross
Unrealized
Loss
Market
Value
(Dollars in Thousands)
$
$
$
$
$
$
$
$
90,631
101,709
78,241
2,013
272,594
5,234
5,234
92,368
99,608
58,090
3,004
253,070
645
645
$
$
$
$
$
$
$
$
1,887
2,783
1,076
162
5,908
$
(224)
(268)
(1,051)
—
$ (1,543)
—
—
$
$
(271)
(271)
412
2,717
876
36
4,041
$
(453)
(625)
(567)
(13)
$ (1,658)
1
1
$
$
(3)
(3)
$
$
$
$
$
$
$
$
92,294
104,224
78,266
2,175
276,959
4,963
4,963
92,327
101,700
58,399
3,027
255,453
643
643
As of December 31, 2010
Securities available for sale:
U.S. Treasury and government sponsored
agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities held to maturity::
State and municipal securities
Total
As of December 31, 2009
Securities available for sale:
U.S. Treasury and government sponsored
agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities held to maturity:
State and municipal securities
Total
As of December 31, 2008
Securities available for sale:
U.S. Treasury and government sponsored
agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
$
$
5,093 $
60,211
29,879
5,971
101,154
$
42
2,338
457
—
2,837
$
$
(18)
(5)
(857)
(772)
$ (1,652)
$
5,117
62,544
29,479
5,199
102,339
All of our investments in mortgage-backed securities are pass-through mortgage-backed securities.
We do not currently, and did not have at December 31, 2010, any structured investment vehicles or any
private-label mortgage-backed securities. The amortized cost of securities in our portfolio totaled
$277.8 million at December 31, 2010, compared to $253.7 million at December 31, 2009. The following
table provides the amortized cost of our securities as of December 31, 2010 by their stated maturities
(this maturity schedule excludes security prepayment and call features), as well as the taxable equivalent
yields for each maturity range. All such securities held are traded in liquid markets.
51
Maturity of Investment Securities — Amortized Cost
Less than
one year
More than
One year to
five years
More than
five years to
ten years
More than
ten years
Total
(Dollars in Thousands)
Securities Available for Sale:
U.S. Treasury and
government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
$
Total
$
Taxable-equivalent yield
U.S. Treasury and
government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Weighted-average yield
Securities Held to Maturity:
State and municipal securities
Total
Taxable-equivalent yield
State and municipal securities
Weighted-average yield
$
$
$
$
$
$
—
—
165
—
165
—
—
6.96 %
—
6.96 %
—
—
—
—
$
$
$
$
58,729
1,169
9,031
—
68,929
2.04 %
5.00 %
4.78 %
—
2.45 %
—
—
—
—
$
$
$
$
25,519
20,257
57,044
2,013
104,833
3.94%
4.38%
5.24 %
6.44%
4.78%
—
—
—
—
$
6,382
80,283
12,001
—
98,666
$
90,630
101,709
78,241
2,013
272,593
4.40%
4.00%
5.95%
—
4.26%
5,234
5,234
$
$
6.12 %
6.12%
2.74%
4.09%
5.30%
6.44%
4.01%
5,234
4.01%
6.12%
6.12%
At December 31, 2010, we had $246,000 in federal funds sold, compared with $680,000 at
December 31, 2009.
The objective of our investment policy is to invest funds not otherwise needed to meet our loan
demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan
demand and deposit structure. In doing so, we balance the market and credit risks against the potential
investment return, make investments compatible with the pledge requirements of any deposits of public
funds, maintain compliance with regulatory investment requirements, and assist certain public entities
with their financial needs. The asset liability and investment committee has full authority over the
investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio,
along with all investment transactions occurring since the previous board of directors meeting, is
reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to
include short-term securities purchased to provide us with needed liquidity and longer term securities
purchased to generate level income for us over periods of interest rate fluctuations.
Loan Portfolio
We had total loans of approximately $1.39 billion at December 31, 2010. Approximately 51% of
our loan portfolio is concentrated in the Birmingham-Hoover, Alabama, MSA, while approximately 23%
is concentrated in the Huntsville, Alabama MSA. The Montgomery, Alabama MSA and the Dothan,
Alabama MSA each represent approximately 13% of our loans. With our loan portfolio concentrated in
only a few markets, there is a risk that our borrowers’ ability to repay their loans from us could be
affected by changes in local economic conditions.
The following table details our loans at December 31, 2010, 2009 and 2008:
52
Commercial, financial and
agricultural $
Real estate — construction
Real estate — mortgage:
Owner occupied commercial
1-4 family mortgage
Other mortgage
Total real estate — mortgage
Consumer
Total loans
Less: allowance for loan losses
Net loans
$
2010
2009
2008
(Dollars in Thousands)
536,620
172,055
$
461,088
224,178
$
325,968
235,162
270,767
199,236
178,793
648,796
37,347
1,394,818
(18,077)
1,376,741
203,983
165,512
119,749
489,244
32,574
1,207,084
(14,737)
1,192,347
147,197
137,019
93,412
377,628
29,475
968,233
(10,602)
957,631
$
$
The following table details the percentage composition of our loan portfolio by type at December 31,
2010, 2009 and 2008:
Commercial, financial and agricultural
Real estate - construction
Real estate – mortgage:
Owner occupied commercial
1-4 family mortgage
Other mortgage
Total real estate — mortgage
Consumer
Total loans
2010
38.47%
12.34%
19.41%
14.28%
12.82%
46.51%
2.68%
100.00%
December 31,
2009
2008
38.20%
18.57%
33.67%
24.29%
16.90%
13.71%
9.92%
40.53%
2.70%
15.20%
14.15%
9.65%
39.00%
3.04%
100.00% 100.00%
The following table details maturities and sensitivity to interest rate changes for our commercial
loans at December 31, 2010:
Due in 1
year or less
$
319,394
146,600
$
32,736
28,782
54,365
115,883
25,698
607,575
101,095
506,480
607,575
$
$
$
$
$
$
Due in 1
to 5 years
Due after
5 Years
(Dollars in Thousands)
18,561
—
198,665
25,455
$
180,423
88,181
112,866
381,470
11,549
617,139
57,608
82,273
11,562
151,443
100
$ 170,104
Total
$ 536,620
172,055
270,767
199,236
178,793
648,796
37,347
1,394,818
$
(18,077)
$
1,376,741
69,414
$
395,194
221,945 100,690
617,139 $ 170,104
565,703
$
829,115
1,394,818
$
Type of Loan(1)
Commercial, financial and agricultural
Real estate – construction
Real estate – mortgage
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Subtotal: Real estate-mortgage
Consumer
Total Loans
Less: allowance for loan losses
Net loans
Interest rate sensitivity:
Fixed interest rates
Floating or adjustable rates
Total
(1)
Includes non-accrual loans.
53
Asset Quality
The following table presents a summary of changes in the allowances for loan losses over the past
three fiscal years. Our net charge-offs as a percentage of average loans for 2010 was lower than 2009 at
0.55%, compared to 0.60%. The largest balance of our charge-offs is on real estate construction loans.
Real estate construction loans represent 12.34% of our loan portfolio.
For the Years Ended December 31,
2009
(Dollars in Thousands)
2010
2008
Allowance for loan losses:
Beginning of year
Charge-offs:
Commercial, financial and agricultural
Real estate – construction
Real estate – mortgage:
Owner occupied commercial
1-4 family mortgage
Other mortgages
Total real estate – mortgages
Consumer
Other
Total charge-offs
Recoveries:
Commercial, financial and agricultural
Real estate – construction
Real estate – mortgage:
Owner Occupied
1-4 family mortgage
Other
Total real estate – mortgages
Consumer
Total recoveries
$
14,737 $ 10,602 $
7,732
(1,667)
(3,488)
(2,616)
(3,322)
(545)
(2,264)
(548)
(1,227)
—
(1,775)
(12)
(266)
(7,208)
—
(522)
(9)
(531)
(43)
(164)
(6,676)
—
(480)
(459)
(939)
(44)
(74)
(3,866)
97
53
12
20
—
32
16
198
—
108
—
3
—
3
15
126
264
—
—
—
—
—
198
462
Net charge-offs
(7,010)
(6,550)
(3,404)
Provision for loan losses charged to expense
10,350
10,685
6,274
Allowance for loan losses at end of period
$
18,077 $
14,737
$
10,602
As a percentage of year-to-date average total loans:
Net charge-offs
Provisions for loan losses
Allowance for loan losses as a percentage of:
Year-end loans
Nonperforming assets
2010
2009
2008
0.55%
0.81%
0.60%
1.00%
0.41%
0.76%
1.30%
84.82%
1.24%
60.34%
1.09%
52.68%
The allowance for loan losses is established and maintained at levels management deems adequate to
absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the
balance sheet date. In assessing the adequacy of the allowance for loan losses management considers its
evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions
and other factors considered necessary to maintain the allowance at an adequate level. Our management
feels that the allowance was adequate at December 31, 2010.
The following table presents the allocation of the allowance for loan losses for each respective loan
category with the corresponding percent of loans in each category to total loans. The comprehensive
allowance analysis developed by our credit administration group is in compliance with all current
regulatory guidelines.
54
Allocation of Allowance for Loan Losses
For the Years Ended December 31,
2010
2009
2008
Percentage
of loans in
each
category to
total loans Amount
Percentage
of loans in
each
category to
total loans
(Dollars in Thousands)
Amount
Percentage
of loans in
each
category to
total loans
Amount
Commercial, financial and
agricultural
Real estate - construction
Real estate – mortgage
Consumer
Other
Total
$
5,214
6,373
1,067
554
4,869
18,077
$
38.47% $
12.34%
46.51%
2.68%
0.00%
$
3,058
6,295
1,241
1
4,142
38.20%
18.57%
40.53%
2.70%
0.00%
100.00% $ 14,737
100.00% $
1,489
5,473
40
5
3,595
10,602
33.67%
24.29%
39.00%
3.04%
0.00%
100.00%
We target small and medium-sized businesses as loan customers. Because of their size, these
borrowers may be less able to withstand competitive or economic pressures than larger borrowers in
periods of economic weakness. If loan losses occur to a level where the loan loss reserve is not sufficient
to cover actual loan losses, our earnings will decrease. Additionally, we use an independent consulting
firm to review our loans annually for quality in addition to the reviews that may be conducted by bank
regulatory agencies as part of their usual examination process.
As of December 31, 2010, we had impaired loans of $51.5 million inclusive of nonaccrual loans, an
increase of $30.0 million from $21.5 million as of December 31, 2009. We allocated $4.4 million of our
allowance for loan losses at December 31, 2010 to these impaired loans. We had previous write-downs
against impaired loans of $3.2 million at December 31, 2010, compared to $1.2 million at December 31,
2009. The average balance of all impaired loans in 2010 was $48.8 million. Interest income foregone
for impaired loans was $510,000 for the year ended December 31, 2010, and we recognized $2.2 million
of income on impaired loans for the year ended December 31, 2010. A loan is considered impaired,
based on current information and events, if it is probable that we will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of the original loan
agreement. Impairment does not always indicate credit loss, but provides an indication of collateral
exposure based on prevailing market conditions and third-party valuations. Impaired loans are measured
by either the present value of expected future cash flows discounted at the loan’s effective interest rate,
the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependant.
The amount of impairment, if any, and subsequent changes are included in the allowance for loan losses.
Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for
nonaccrual status. Our credit risk management performs verification and testing to ensure appropriate
identification of impaired loans and that proper reserves are held on these loans.
Of the $51.5 million of impaired loans reported as of December 31, 2010, $28.7 million were real
estate – construction loans, $3.5 million were residential real estate loans, $11.5 million were commercial
and industrial loans and $5.0 million were commercial real estate loans. Of the $28.7 million of impaired
real estate – construction loans, $13.9 million (a total of 21 loans with 11 builders) were residential
construction loans, and $7.0 million consisted of various residential lot loans to 10 builders.
The Bank has procedures and processes in place intended to ensure that losses do not exceed the
potential amounts documented in the Bank’s impairment analyses and reduce potential losses in the
remaining performing loans within our real estate construction portfolio. These include the following:
(cid:2) We closely monitor the past due and overdraft reports on a weekly basis to identify
deterioration as early as possible and the placement of identified loans on the watchlist.
(cid:2) We perform extensive monthly credit review for all watchlist/classified loans, including
formulation of aggressive workout or action plans. When a workout is not achievable, we move
to collection/foreclosure mode to obtain control of the underlying collateral as rapidly as
possible to minimize the deterioration of collateral and/or the loss of its value.
55
(cid:2) We require updated financial information, global inventory aging and interest carry analysis for
existing builders to help identify potential future loan payment problems.
(cid:2) We generally limit loans for new construction to established builders and developers that have
an established record of turning their inventories, and we restrict our funding of undeveloped
lots and land.
Nonperforming Assets
Nonaccrual loans totaled $14.3 million, $11.9 million and $7.7 million as of December 31, 2010,
2009 and 2008, respectively. The table below summarizes our nonperforming assets at December 31,
2010, 2009 and 2008:
Nonperforming Assets
For the Years Ended December 31,
2010
2009
2008
Balance
Number
of Loans
Balance
Number of
Loans
Balance
Number
of Loans
Non-accrual loans:
Commercial, financial and agricultural
Real estate - construction
$ 2,164
10,722
8
24
$ 2,032
8,100
2
13
-
$ 5,035
-
22
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
635
202
-
837
624
1
1
-
2
1
909
265
615
1,789
-
2
2
1
5
-
237
558
1,883
2,678
-
2
1
1
5
-
Total non-accrual loans
14,347
35
11,921
20
7,713
26
90+ days past due and accruing:
Commercial, financial and agricultural
-
-
14
1
1,939
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
253
-
253
-
-
1
-
1
-
-
-
-
-
-
1
-
-
-
-
-
-
Total 90+ days past due and accruing
-
-
267
2
1,939
1
Total nonperforming loans
14,347
35
12,188
22
9,652
27
Plus: Other real estate owned
6,966
39
12,525
51
10,473
25
Total nonperforming assets
21,313
74
24,713
73
20,125
52
56
Restructured accruing loans:
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
For the Years Ended December 31,
2010
2009
2008
Balance
Number of
Loans
Balance
Number
of Loans
Balance
Number
of Loans
2,398
-
9
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
845
-
-
845
-
1
-
-
1
-
-
-
-
-
-
-
-
-
-
-
-
-
Total restructured accruing loans
2,398
9
845
1
-
-
Total nonperforming assets and
restructured accruing loans
Gross interest income foregone on nonaccrual
loans throughout year
Interest income recognized on nonaccrual loans
throughout year
$ 23,711
83
$ 25,558
74
$ 20,125
52
$ 510
$ 647
$ 735
$ 418
$ 310
$ 287
Ratios:
Nonperforming loans to total loans
Nonperforming assets to total loans plus
other real estate owned
Nonperforming loans plus restructured accruing loans
to total loans plus other real estate owned
1.03%
1.52%
1.19%
1.01%
2.02%
1.06%
1.02%
2.07%
1.00%
The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have
established a policy to discontinue accruing interest on a loan (i.e., place the loan on non-accrual status)
after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered
to be well collateralized and is actively in the process of collection. In addition, a loan will be placed on
non-accrual status before it becomes 90 days delinquent if management believes that the borrower’s
financial condition is such that the collection of interest or principal is doubtful. Interest previously
accrued but uncollected on such loans is reversed and charged against current income when the
receivable is determined to be uncollectible. Interest income on non-accrual loans is recognized only as
received. If we believe that a loan will not be collected in full, we will increase the allowance for loan
losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received
on non-accrual loans are applied directly to principal.
Deposits
We rely on increasing our deposit base to fund loan and other asset growth. Each of our markets is
highly competitive. We compete for local deposits by offering attractive products with premium rates.
We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack
of an extensive branch network. Our management’s strategy is to offset the higher cost of funding with a
lower level of operating expense and firm pricing discipline for loan products. We have promoted
electronic banking services by providing them without charge and by offering in-bank customer training.
The following table presents the average balance of and average rate paid on each of the following
deposit categories at the Bank level for years ended 2010, 2009 and 2008:
57
Average Deposits for Years Ended December 31,
2009
2008
2010
Types of Deposits:
Average
Balance
Average
Rate
Paid
Average
Rate
Paid
Average
Balance
(Dollars in Thousands)
Average
Average
Balance
Rate
Paid
Noninterest-bearing demand
deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Time deposits, $100,000 and over
Total deposits
$207,399
264,591
775,544
2,978
47,026
208,300
$ 1,505,838
—
$ 140,660 —
$
0.47%
0.77%
0.50%
1.76%
1.85%
178,232
704,112
972
35,804
182,283
0.90%
1.26%
0.51%
2.63%
2.57%
$ 1,242,063
92,451
92,717
558,313
455
19,144
115,984
$ 879,064
—
1.64 %
2.22 %
0.64 %
3.99 %
4.04 %
The scheduled maturities of time deposits at December 31, 2010 are as follows:
Maturity
Three months or less
Over three through six months
Over six months through one year
Over one year
Total
$100,000 or
more
Less than
$100,000
(Dollars in Thousands)
$
$
46,891
38,519
55,112
82,384
222,906
$
$
15,939
7,869
14,654
17,121
55,583
Total
$
$
62,830
46,388
69,766
99,505
278,489
Total average deposits in 2010 were $1.51 billion, an increase of $264 million, or 21.2%, over the
total average deposits of $1.24 billion in 2009. Average noninterest-bearing deposits increased by $66.7
million, or 47.4%, from $140.7 million in 2009 to $207.4 million in 2010. Average interest-bearing
deposits increased by $197.0 million, from $1.10 billion in 2009 to $1.3 billion in 2010.
Total average deposits in 2009 were $1.24 billion, an increase of $363.0 million, or 41.3%, over the
total average deposits of $879.1 million in 2008. Average noninterest-bearing deposits increased by
$48.2 million, or 52.1%, from $92.5 million in 2008 to $140.7 million in 2009. Average interest-bearing
deposits increased by $314.8 million, from $786.6 million in 2008 to $1.10 billion in 2009.
We had no brokered deposits in 2010, 2009 or 2008.
Stockholders’ Equity
Stockholders’ equity increased $19.5 million during 2010, to $117.1 million at December 31, 2010
from $97.6 million at December 31, 2009. The increase in stockholders’ equity resulted primarily from
net income of $17.4 million.
We issued to each of our directors upon the formation of the Bank in May 2005 warrants to
purchase up to 10,000 shares of our common stock, or 60,000 in the aggregate, for a purchased price of
$10.00 per share, expiring in ten years. These warrants became fully vested in May 2008.
We issued warrants to purchase 75,000 shares of our common stock at a price of $25.00 per share in
the third quarter of 2008. These warrants were issued in connection with the trust preferred securities
that are discussed in detail in Note 10 to the Consolidated Financial Statements.
58
We issued warrants to purchase 15,000 shares of our common stock at a price of $25.00 per share in
the second quarter of 2009. These warrants were issued in connection with the sale of a $5,000,000
subordinated note of the Bank, as discussed in detail in Note 12 to the Consolidated Financial
Statements.
We granted non-plan stock options to persons representing certain key business relationships to
purchase up to an aggregate of 55,000 shares of our common stock at between $15.00 and $20.00 per
share for 10 years. These stock options are non-qualified and are not part of our stock incentive plans.
They vest 100% in a lump sum five years after their date of grant.
On October 26, 2009, we made a restricted stock award under the 2009 Stock Incentive Plan of
20,000 shares of common stock to Thomas A. Broughton III, President and Chief Executive Officer.
These shares vest in five equal installments commencing on the first anniversary of the grant date,
subject to earlier vesting in the event of a merger, consolidation, sale or transfer of the Company or
substantially all of its assets and business.
On February 9, 2010, we made restricted stock awards under the 2009 Stock Incentive Plan of 2,000
shares of common stock to each of five employees, for a total of 10,000 shares. These shares vest five
years from the date of grant, subject to earlier vesting in the event of a merger, consolidation, sale or
transfer as described in the first paragraph under the table above.
Borrowed Funds
We had available approximately $140.0 million in unused federal funds lines of credit with regional
banks as of December 31, 2010, subject to certain restrictions and collateral requirements.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial credit arrangements with off-balance
sheet risk to meet the financing needs of our customers. These financial credit arrangements include
commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit
and financial guarantees. Those credit arrangements involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement we have in those particular financial credit arrangements.
All such credit arrangements bear interest at variable rates and we have no such credit arrangements
which bear interest at fixed rates.
Our exposure to credit loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit, credit card arrangements and standby letters of credit is
represented by the contractual or notional amount of those instruments. We use the same credit policies
in making commitments and conditional obligations as we do for on-balance sheet instruments.
The following table sets forth our credit arrangements and financial instruments whose contract
amounts represent credit risk as of December 31, 2010, 2009 and 2008:
Commitments to extend credit
Credit card arrangements
Standby letters of credit and
financial guarantees
Total
2010
$538,719
17,601
47,103
$603,423
2009
(Dollars in Thousands)
$409,760
19,059
39,205
$468,024
2008
$294,502
11,323
32,655
$338,480
Commitments to extend credit beyond current fundings are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Such commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-
by-case basis. The amount of collateral obtained if deemed necessary by us upon extension of credit is
based on our management’s credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial properties.
59
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar transactions. All letters of credit
are due within one year or less of the original commitment date. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to customers.
Derivatives
Prior to 2008, we entered into an interest rate floor with a notional amount of $50 million in order to
fix the minimum interest rate on a corresponding amount of our floating-rate loans. The interest rate floor
was sold in January 2008 and the related gain of $817,000 was deferred and amortized to income over
the remaining term of the original agreement, which terminated on June 22, 2009. A gain of $272,000
was recognized in interest income for the year ended December 31, 2009.
During 2008 the Bank entered into interest rate swaps (“swaps”) to facilitate customer transactions
and meet their financing needs. Upon entering into these swaps, the Bank entered into offsetting
positions with a regional correspondent bank in order to minimize the risk to the Bank. As of December
31, 2010, the Bank was party to two swaps with notional amounts totaling approximately $11.8 million
with customers, and two swaps with notional amounts totaling approximately $11.8 million with a
regional correspondent bank. These swaps qualify as derivatives, but are not designated as hedging
instruments.
During 2010 the Company entered into an interest rate cap with a notional value of $100 million.
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. For the year ended December 31, 2010, the
Company reconginzed $45,000 in expense related to marking the cap to market.
The Bank has entered into agreements with secondary market investors to deliver loans on a “best
efforts delivery” basis. When a rate is committed to a borrower, it is based on the best price that day and
locked with our investor for our customer for a 30-day period. In the event the loan is not delivered to the
investor, the Bank has no risk or exposure with the investor. The interest rate lock commitments related
to loans that are originated for later sale are classified as derivatives. The fair values of our agreements
with investors and rate lock commitments to customers as of December 31, 2010 and 2009 were not
material.
Asset and Liability Management
The matching of assets and liabilities may be analyzed by examining the extent to which such assets
and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity
“gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference
between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-
sensitive liabilities repricing during the same period. A gap is considered positive when the amount of
interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered
negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-
sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to result in an increase in net interest income. During a
period of falling interest rates, a negative gap would tend to result in an increase in net interest income
while a positive gap would tend to adversely affect net interest income.
Our asset liability and investment committee of the Bank, which consists of four executive officers
of the Bank, is charged with monitoring our liquidity and funds position. The committee regularly
reviews the rate sensitivity position on a three-month, six-month and one-year time horizon; loans-to-
deposits ratios; and average maturities for certain categories of liabilities. The asset liability committee
uses a computer model to analyze the maturities of rate-sensitive assets and liabilities. The model
measures the “gap” which is defined as the difference between the dollar amount of rate-sensitive assets
repricing during a period and the volume of rate-sensitive liabilities repricing during the same period.
Gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio
60
is greater than “one,” then the dollar value of assets exceeds the dollar value of liabilities and the balance
sheet is “asset sensitive.” Conversely, if the value of liabilities exceeds the dollar value of assets, then
the ratio is less than one and the balance sheet is “liability sensitive.” Our internal policy requires our
management to maintain the gap such that net interest margins will not change more than 10% if interest
rates change by 100 basis points or more than 15% if interest rates change by 200 basis points. As of
December 31, 2010, our gap was within such ranges. See “—Quantitative and Qualitative Analysis of
Market Risk” below in Item 7A for additional information.
Liquidity and Capital Adequacy
Liquidity
Liquidity is defined as our ability to generate sufficient cash to fund current loan demand, deposit
withdrawals, or other cash demands and disbursement needs, and otherwise to operate on an ongoing
basis.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the
liquidity of the Bank. The management of liquidity at both levels is critical, because the Company and
the Bank have different funding needs and sources, and each are subject to regulatory guidelines and
requirements. We are subject to general FDIC guidelines which require a minimum level of liquidity.
Management believes our liquidity ratios meet or exceed these guidelines. Our management is not
currently aware of any trends or demands that are reasonably likely to result in liquidity increasing or
decreasing in any material manner.
The retention of existing deposits and attraction of new deposit sources through new and existing
customers is critical to our liquidity position. In the event of compression in liquidity due to a run-off in
deposits, we have a liquidity policy and procedure that provides for certain actions under varying
liquidity conditions. These actions include borrowing from existing correspondent banks, selling or
participating loans, and the curtailment of loan commitments and funding. At December 31, 2010, our
liquid assets, represented by cash and due from banks, federal funds sold and available-for-sale
securities, totaled $508.9 million. Additionally, at such date we had available to us approximately
$140.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions
and collateral requirements, to meet short term funding needs. On March 19, 2008, we borrowed $20.0
million from the Federal Home Loan Bank against “qualified” loans of the Bank (as defined by the
FHLB). We also have approximately $5.5 million in borrowing capacity from the FHLB under a blanket
pledge of our qualifying residential mortgages, consumer home equity lines of credit and second
mortgage loans, and our commercial real estate loans. We believe these sources of funding are adequate
to meet immediate anticipated funding needs, but we will need additional capital to maintain our current
growth. Our management meets on a weekly basis to review sources and uses of funding to determine
the appropriate strategy to ensure an appropriate level of liquidity, and we have increased our focus on
the generation of core deposit funding to supplement our liquidity position. At the current time, our
long-term liquidity needs primarily relate to funds required to support loan originations and commitments
and deposit withdrawals.
To finance our continued growth and planned expansion activities, the Bank issued its 8.25%
Subordinated Note due June 1, 2016 in the principal amount of $5.0 million in a private placement on
June 23, 2009. Also, in connection with a private placement and pursuant to subscription agreements
effective December 31, 2008, we issued and sold 139,460 shares of our common stock for $25.00 per
share in January 2009 for an aggregate purchase price of $3,479,000. In addition, on March 15 2010, we
completed a private placement of $15.0 million in 6.0% Mandatory Convertible Trust Preferred
Securities. In February 2011, we commenced a private placement of up to 340,000 shares of our
common stock at an offering price of $30 per share, which private placement is expected to be completed
later in the spring of 2011. 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.
61
The following table reflects the contractual maturities of our term liabilities as of December 31, 2010.
The amounts shown do not reflect any early withdrawal or prepayment assumptions.
Contractual Obligations (1):
Total
Deposits without a stated maturity
Certificates of deposit(2)
FHLB borrowings
Subordinated debentures
Subordinated note payable
Operating lease commitments
Total
$ 1,480,227
278,489
20,000
30,420
4,937
17,588
$ 1,831,661
Payments Due by Period
Less Than
1 Year
1-3
Years
(Dollars in Thousands)
$ -—
76,732
20,000
—
—
3,962
$100,694
$ —
178,983
—
—
—
1,992
$180,975
More than
3 to 5
Years
More than
5 Years
$ —
22,774
—
—
—
3,919
$26,693
$ —-
—
—
30,420
4,937
7,715
$43,072
(1) Excludes interest.
(2) Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be
subject to penalties. The penalty amount depends on the remaining time to maturity at the time
of early withdrawal.
Capital Adequacy
As of December 31, 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 December 31, 2010. In addition, the Alabama Banking Department has
required that the Bank maintain a leverage ratio of 7.00%.
The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking
Department’s leverage ratio requirement to be maintained by the Bank in order to maintain “well-
capitalized” status and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of
December 31, 2010.
Total risk-based capital
Tier 1 capital
Leverage ratio
Well-Capitalized
Actual at
December 31, 2010
10.00 %
6.00 %
5.00 %
11.81%
10.20%
7.77%
For a description of capital ratios see Note 16 of “Notes to Consolidated Financial Statements” for
the period ending December 31, 2010.
Impact of Inflation
Our consolidated financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the measure of financial position
and operating results in terms of historic dollars, without considering changes in the relative purchasing
power of money over time due to inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent loans and
other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates
generally have a more significant effect on the performance of a financial institution than the effects of
general levels of inflation. In addition, inflation affects financial institutions’ cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related
62
increases in interest rates generally decrease the market value of investments and loans held and may
adversely affect liquidity, earnings and stockholders’ equity. Mortgage originations and refinancings tend
to slow as interest rates increase, and likely will reduce our volume of such activities and the income
from the sale of residential mortgage loans in the secondary market.
Adoption of Recent Accounting Pronouncements
New accounting standards are discussed in Note 1 the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Like all financial institutions, we are subject to market risk from changes in interest rates.
Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-
sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities
exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted.
Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-
sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is
further complicated by the fact that all rates do not change at the same pace, in other words, short term
rates may be rising while longer term rates remain stable. In addition, different types of rate-sensitive
assets and rate-sensitive liabilities react differently to changes in rates.
To manage interest rate risk, we must take a position on the expected future trend of interest rates.
Rates may rise, fall, or remain the same. Our asset liability committee develops its view of future rate
trends and strives to manage rate risk within a targeted range by monitoring economic indicators,
examining the views of economists and other experts, and understanding the current status of our balance
sheet. Our annual budget reflects the anticipated rate environment for the next twelve months. The asset
liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to
our board of directors.
The asset liability committee employs multiple modeling scenarios to analyze the maturities of
rate-sensitive assets and liabilities. The model measures the “gap” which is defined as the difference
between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-
sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-
sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than “one”, the dollar value of
assets exceeds the dollar value of liabilities; the balance sheet is “asset sensitive”. Conversely, if the
value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability
sensitive”. Our internal policy requires management to maintain the gap such that net interest margins
will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates
change 200 basis points. As of December 31, 2010, our gap was within such ranges.
The model measures scheduled maturities in periods of three months, four to twelve months, one to
five years and over five years. The chart below illustrates our rate-sensitive position at December 31,
2010. Management uses the one year gap as the appropriate time period for setting strategy.
63
Rate Sensitivity Gap Analysis
0-3
Months
4-12
Months
1-5
Years
(Dollars in Thousands)
Over
5 years
Total
Interest-earning assets:
Loans
Securities
Federal funds sold
Interest-bearing balances with banks
$ 895,434
$
175,963
$
287,936
$
43,360
$ 1,402,693
11,027
246
204,278
12,221
116,356
146,099
—
—
—
—
—
—
285,703
246
204,278
Total interest-earning assets
$ 1,110,985
$
188,184
$
404,292
$
189,459
$ 1,892,920
Interest-bearing liabilities:
Deposits:
Interest checking
Money market and savings
Time deposits
Other borrowings
Trust preferred securities
$ 381,169
848,568
62,830
—
—
Total interest-bearing liabilities
$ 1,292,567
Interest sensitivity gap
Cumulative sensitivity gap
$ (181,582)
$ (181,582)
$
$
$
$
— $
—
116,154
— $
—
99,505
$
—
—
—
—
—
116,154
72,030
(109,552)
$
$
$
20,000
15,050
134,555
269,737
160,185
$
$
4,937
15,370
20,307
$ 1,563,583
169,152
$
329,337
329,337
381,169
848,568
278,489
24,937
30,420
Percent of cumulative sensitivity gap
to total interest-earning assets
(16.3)%
(8.4)%
9.4%
17.4%
The interest rate risk model that defines the gap position also performs a “rate shock” test of the
balance sheet. The rate shock procedure measures the impact on the economic value of equity (EVE)
which is a measure of long term interest rate risk. EVE is the difference between the market value of our
assets and the liabilities and is our liquidation value. In this analysis, the model calculates the discounted
cash flow or market value of each category on the balance sheet. The percent change in EVE is a
measure of the volatility of risk. Regulatory guidelines specify a maximum change of 30% for a 200
basis points rate change. Short term rates dropped to historical low levels during 2009 and remained at
those low levels through 2010. We could not assume further drops in interest rates in our model, and as a
result feel the down rate shock scenarios are not meaningful. At December 31, 2010, the percent change
at plus 200 basis points is within the regulatory guideline range at (7.4)%.
The chart below identifies the EVE impact of an upward shift in rates of 100 and 200 basis points.
Economic Value of Equity Under Rate Shock
at December 31, 2010
Rate Change
0bps
+100bps
+200bps
Economic value of equity
$ 117,100
$ 112,533
$ 108,435
Actual dollar change
$(4,567)
$ (8,665)
Percent change
-3.90%
-7.40%
The one year gap ratio of (8.4)% indicates that we would show an increase in net interest income in a
falling rate environment, and the EVE rate shock shows that the EVE would decline in a rising rate
environment. The EVE simulation model is a static model which provides information only at a certain
point in time. For example, in a rising rate environment, the model does not take into account actions
which management might take to change the impact of rising rates on us. Given that limitation, it is still
useful in assessing the impact of an unanticipated movement in interest rates.
The above analysis may not on its own be an entirely accurate indicator of how net interest income
or EVE will be affected by changes in interest rates. Income associated with interest earning assets and
costs associated with interest bearing liabilities may not be affected uniformly by changes in interest
rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact
64
on net interest income. Interest rates on certain types of assets and liabilities fluctuate in advance of
changes in general market rates, while interest rates on other types may lag behind changes in general
market rates. Our asset liability committee develops its view of future rate trends by monitoring
economic indicators, examining the views of economists and other experts, and understanding the current
status of our balance sheet and conducts a quarterly analysis of the rate sensitivity position. The results
of the analysis are reported to our board of directors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulations S-X and by Item 302 of
Regulation S-K are set forth in the pages listed below.
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements
Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Income for the Years Ended December 31,
2010, 2009 and 2008
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for Years Ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years December 31, 2010,
2009 and 2008
Notes to Consolidated Financial Statements
Page
66
67
68
69
70
71
72
73
75
65
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors
ServisFirst Bancshares, Inc.
Birmingham, Alabama
We have audited the accompanying consolidated balance sheets of ServisFirst Bancshares, Inc.,
as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive
income, stockholders’ equity and cash flows for each of the three years in the period ended December 31,
2010. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ServisFirst Bancshares, Inc. as of December 31, 2010 and
2009, and the results of their operations and their cash flows for each of the three years in the period
ended, December 31, 2010, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), ServisFirst Bancshares, Inc.’s internal control over financial reporting
as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March
8, 2011, expressed an unqualified opinion thereon.
Birmingham, Alabama
March 8, 2011
66
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We, as members of the Management of ServisFirst Bancshares, Inc. (the “Company”), are responsible for
establishing and maintaining effective internal control over financial reporting. The Company’s internal
control system was designed to provide reasonable assurance to the Company’s management and Board
of Directors regarding the preparation and fair presentation of the Company’s financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. Internal control over
financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as
they are identified.
All internal controls systems, no matter how well designed, have inherent limitations and may not
prevent or detect misstatements in the Company’s financial statements, including the possibility of
circumvention or overriding of controls. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
The Company’s management assessed the effectiveness of its internal control over financial reporting as
of December 31, 2010. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control—Integrated
Framework. Based on this assessment, management determined that the Company maintained effective
internal control over financial reporting as of December 31, 2010, based on these criteria.
The Company’s independent registered public accounting firm has issued an audit report on the
effectiveness of the Company’s internal control over financial reporting. This report appears on the
following page.
SERVISFIRST BANCSHARES,
INC.
by
/s/ THOMAS A. BROUGHTON, III
THOMAS A. BROUGHTON, III
President and Chief Executive Officer
by
/s/ WILLIAM M. FOSHEE
WILLIAM M. FOSHEE
Chief Financial Officer
67
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors
ServisFirst Bancshares, Inc.
Birmingham, Alabama
We have audited ServisFirst Bancshares, Inc.’s internal control over financial reporting as of December
31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ServisFirst
Bancshares, Inc.’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Report of Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, ServisFirst Bancshares, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of ServisFirst Bancshares, Inc. as of December 31,
2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2010 of ServisFirst Bancshares,
Inc. and our report dated March 8, 2011, expressed an unqualified opinion.
Birmingham, Alabama
March 8, 2011
68
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2010 AND 2009
(In thousands, except share and per share amounts)
ASSETS
Cash and due from banks
Interest-bearing balances due from depository institutions
Federal funds sold
Cash and cash equivalents
Debt securities:
Available for sale
Held to maturity
Restricted equity securities
Mortgage loans held for sale
Loans
Less allowance for loan losses
Loans, net
Premises and equipment, net
Accrued interest and dividends receivable
Deferred tax assets
Other real estate owned
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Other borrowings
Trust preferred securities
Accrued interest payable
Other liabilities
Total liabilities
Stockholders' equity:
Common stock, par value $.001 per share; 15,000,000 shares authorized;
5,527,482 shares issued and outstanding at December 31, 2010 and
5,513,482 shares issued and outstanding at December 31, 2009
Preferred stock, par value $.001 per share; 1,000,000 shares authorized;
no shares outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
69
2010
2009
$
27,454
204,278
246
231,978
276,959
5,234
3,510
7,875
1,394,818
(18,077)
1,376,741
4,450
6,990
6,366
6,966
8,097
1,935,166
$
$
250,490
1,508,226
1,758,716
24,937
30,420
898
3,095
1,818,066
$
$
$
26,982
48,544
680
76,206
255,453
645
3,241
6,202
1,207,084
(14,737)
1,192,347
5,088
6,200
4,872
12,525
10,718
1,573,497
211,307
1,221,048
1,432,355
24,922
15,228
1,026
2,344
1,475,875
6
6
-
75,914
38,343
2,837
117,100
1,935,166
$
-
75,078
20,965
1,573
97,622
1,573,497
$
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
2010
2009
2008
$
69,115
6,482
2,274
104
171
78,146
$
55,890
4,516
1,500
257
34
62,197
$
49,997
3,840
917
548
148
55,450
11,941
3,319
15,260
62,886
10,350
52,536
2,316
108
2,745
5,169
16,087
2,250
18,337
43,860
10,685
33,175
1,631
193
2,589
4,413
19,375
1,099
20,474
34,976
6,274
28,702
1,270
-
1,434
2,704
14,669
3,184
925
12,191
30,969
26,736
9,358
17,378
$
13,581
2,749
848
11,752
28,930
8,658
2,780
5,878
$
10,552
2,157
986
6,881
20,576
10,830
3,825
7,005
$
$
3.15
$
1.07
$
1.37
$
2.84
$
1.02
$
1.31
Interest income:
Interest and fees on loans
Taxable securities
Nontaxable securities
Federal funds sold
Other interest and dividends
Total interest income
Interest expense:
Deposits
Borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Securities gains
Other operating income
Total noninterest income
Noninterest expenses:
Salaries and employee benefits
Equipment and occupancy expense
Professional services
Other operating expenses
Total noninterest expenses
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
See Notes to Consolidated Financial Statements.
70
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
Net income
2010
17,378
$
2009
2008
$
5,878
$
7,005
Other comprehensive income (loss), net of tax (benefit):
Unrealized holding gains arising during period from securities available for sale,
net of tax of $755, $472 and $131 for 2010, 2009 and 2008, respectively
Reclassification adjustment for net gains on sale of securities in net income, net
of tax of $39 and $65 for 2010 and 2009, respectively
Unrealized holding gains arising during period from derivative, net of tax of $23
Reclassification adjustment for net gains realized on derivatives in net income,
net of tax benefit of $93 and $184 for 2009 and 2008, respectively
Other comprehensive income (loss), net of tax (benefit)
Comprehensive income
See Notes to Consolidated Financial Statements
1,334
(70)
-
918
(128)
-
254
-
67
-
1,264
18,642
$
(179)
611
6,489
$
(360)
(39)
6,966
$
71
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands, except share amounts)
Balance, December 31, 2007
Sale of 260,540 shares
Other comprehensive loss
Stock based compensation expense
Issuance of warrants related to
subordinated notes payable
Net income
Balance, December 31, 2008
Sale of 139,460 shares
Other comprehensive income
Stock based compensation expense
Issuance of warrants related to
subordinated notes payable
Net income
Balance, December 31, 2009
Other comprehensive income
Exercise of stock options, including tax benefit
Stock-based compensation expense
Net income
Balance, December 31, 2010
See Notes to Consolidated Financial Statements
Common
Stock
$ 5
-
-
-
-
-
5
1
-
-
-
-
6
-
-
-
-
$
6
Additional
Paid-in
Capital
$ 63,159
6,474
-
671
425
-
70,729
3,478
-
785
86
-
75,078
-
123
713
-
75,914
$
Retained
Earnings
$ 8,082
-
-
-
-
7,005
15,087
-
-
-
-
5,878
20,965
-
-
-
17,378
38,343
$
Accumulated Other
Comprehensive
Income
$ 1,001
-
(39)
-
-
-
962
-
611
-
-
-
1,573
1,264
-
-
-
2,837
$
Total
Stockholders'
Equity
$ 72,247
6,474
(39)
671
425
7,005
86,783
3,479
611
785
86
5,878
97,622
1,264
123
713
17,378
117,100
$
72
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
2010
2009
2008
$
17,378
$
5,878
$
7,005
(2,212)
10,350
1,066
823
-
45
(790)
713
(128)
172,586
(175,046)
(108)
203
1,051
(1,601)
10,685
1,087
(318)
(272)
-
(2,174)
785
(254)
196,400
(201,143)
(193)
441
1,802
(1,237)
6,274
926
(320)
(544)
-
(77)
671
498
79,751
(81,025)
-
180
1,289
2,538
(7,850)
-
1,106
29,575
(810)
2,463
(1,193)
12,198
(84,425)
(200,558)
(23,825)
31,889
(4,589)
(197,572)
(428)
(269)
(160)
32,297
-
-
7,995
(75)
(215,337)
16,585
(645)
(253,172)
(2,294)
(582)
-
32,567
-
-
6,314
(905)
(402,690)
9,434
-
(308,944)
(817)
(1,457)
-
-
1,000
183
4,111
(1,424)
(321,739)
operating activities:
Deferred tax benefit
Provision for loan losses
Depreciation and amortization
Net amortization (accretion) of investments
Amortized gain on derivative
Market value adjustment of interest rate cap
Increase in accrued interest and dividends receivable
Stock compensation expense
(Decrease) increase in accrued interest payable
Proceeds from sale of mortgage loans held for sale
Originations of mortgage loans held for sale
Gain on sale of securities available for sale
Net loss on sale of other real estate owned
Write down of other real estate owned
Decrease (increase) in special prepaid
FDIC insurance assessments
Net change in other assets, liabilities, and other
operating activities
Net cash provided by operating activities
INVESTMENT ACTIVITIES
Purchase of securities available for sale
Proceeds from maturities, calls and paydowns of securities
available for sale
Purchase of securities held to maturity
Increase in loans
Purchase of premises and equipment
Purchase of restricted equity securities
Purchase of interest rate cap
Proceeds from sale of securities available for sale
Proceeds from sale of interest rate floor
Proceeds from tenant reimbursement
Proceeds from sale of other real estate owned and repossessions
Additions to other real estate owned
Net cash used in investing activities
73
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits
Net increase in interest-bearing deposits
Proceeds from issuance of trust preferred securities
Proceeds from other borrowings
Repayment of other borrowings
Proceeds from sale of stock, net
Proceeds from exercise of stock options
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest
Income taxes
NONCASH TRANSACTIONS
Transfers of loans from held for sale to held for investment
Other real estate acquired in settlement of loans
Internally financed sales of other real estate owned
See Notes to Consolidated Financial Statements.
39,183
287,178
15,050
-
-
-
123
341,534
155,772
76,206
89,848
305,188
-
5,000
-
3,479
-
403,515
3,288
72,918
$
231,978
$
76,206
$
15,388
6,958
$
18,591
4,317
$
787
5,372
1,757
$
1,861
10,198
566
$
$
$
36,441
238,195
15,000
20,317
(390)
6,474
-
316,037
6,496
66,422
72,918
19,976
4,169
-
13,650
-
74
SERVISFIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ServisFirst Bancshares, Inc. (the “Company”) was formed on August 16, 2007 and is a
bank holding company whose business is conducted by its wholly-owned subsidiary
ServisFirst Bank (the “Bank”). The Bank is headquartered in Birmingham, Alabama, and
provides a full range of banking services to individual and corporate customers
throughout the Birmingham market since opening for business in May 2005. In addition,
the Bank entered the Huntsville, Alabama market in 2006, the Montgomery, Alabama
market in 2007 and the Dothan, Alabama market in 2008.
Basis of Presentation and Accounting Estimates
To prepare consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates and
assumptions based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, valuation of foreclosed real estate,
deferred taxes, and fair values of financial instruments are particularly subject to change.
All numbers are in thousands except share and per share data.
Cash, Due from Banks, Interest-Bearing Balances due from Financial
Institutions
Cash and due from banks includes cash on hand, cash items in process of collection,
amounts due from banks and interest bearing balances due from financial institutions.
For purposes of cash flows, cash and cash equivalents include cash and due from banks
and federal funds sold. Generally, federal funds are purchased and sold for one-day
periods. Cash flows from loans, mortgage loans held for sale, federal funds sold, and
deposits are reported net.
The Bank is required to maintain reserve balances in cash or on deposit with the Federal
Reserve Bank based on a percentage of deposits. The total of those reserve balances was
approximately $5,456,000 at December 31, 2010 and $8,009,000 at December 31, 2009.
Investment Securities
Securities are classified as available-for-sale when they might be sold before maturity.
Unrealized holding gains and losses, net of tax, on securities available for sale are
reported as a net amount in a separate component of stockholders’ equity until realized.
Gains and losses on the sale of securities available for sale are determined using the
specific-identification method. The amortization of premiums and the accretion of
discounts are recognized in interest income using methods approximating the interest
method over the period to maturity.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Declines in the fair value of available-for-sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses. Securities are
classified as held-to-maturity when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are reported at amortized cost.
In determining the existence of other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
Investments in Restricted Equity Securities Carried at Cost
Investments in restricted equity securities without a readily determinable market value
are carried at cost.
Loans
Loans are reported at unpaid principal balances, less unearned fees and the allowance for
loan losses. Interest on all loans is recognized as income based upon the applicable rate
applied to the daily outstanding principal balance of the loans. Interest income on
nonaccrual loans is recognized on a cash basis or cost recovery basis until the loan is
returned to accrual status. Loan fees, net of direct costs, are reflected as an adjustment to
the yield of the related loan over the term of the loan. The Company does not have a
concentration of loans to any one industry or geographic market.
Mortgage Loans Held for Sale
The Company classifies certain residential mortgage loans as held for sale. Typically
mortgage loans held for sale are sold to a third party investor within a very short time
period and are sold without recourse. Net fees earned from this banking service are
recorded in noninterest income.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management’s judgment,
is adequate to absorb credit losses inherent in the loan portfolio. The amount of the
allowance is based on management’s evaluation of the collectability of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, economic conditions, and other risks inherent in the
portfolio. Allowances for impaired loans are generally determined based on collateral
values or the present value of the estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans. Such
agencies may require the Company to recognize adjustments to the allowance based on
their judgments about information available to them at the time of their examination.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and in-substance
foreclosed property. At the time of foreclosure, foreclosed real estate is recorded at fair
value less cost to sell, which becomes the property’s new basis. Any write downs based
on the asset’s fair value at date of acquisition are charged to the allowance for loan
losses. After foreclosure, these assets are carried at the lower of their new cost basis or
fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and
subsequent adjustments to the carrying amount of the property are included in other
operating expenses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Expenditures
for additions and major improvements that significantly extend the useful lives of the
assets are capitalized. Expenditures for repairs and maintenance are charged to expense
as incurred. Assets which are disposed of are removed from the accounts and the
resulting gains or losses are recorded in operations. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the related assets (3 to 10 years).
Leasehold improvements are amortized on a straight-line basis over the lesser of the lease
terms or the estimated useful lives of the improvements.
Derivatives and Hedging Activities
As part of its overall interest rate risk management, the Company uses derivative
instruments, which can include interest rate swaps, caps, and floors. FASB ASC 815-10,
Derivatives and Hedging, requires all derivative instruments to be carried at fair value on
the balance sheet. This accounting standard provides special accounting provisions for
derivative instruments that qualify for hedge accounting. To be eligible, the Company
must specifically identify a derivative as a hedging instrument and identify the risk being
hedged. The derivative instrument must be shown to meet specific requirements under
this accounting standard.
The Company designates the derivative on the date the derivative contract is entered into
as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment (a “fair-value” hedge) or (2) a hedge of a forecasted transaction of the
variability of cash flows to be received or paid related to a recognized asset or liability (a
“cash-flow” hedge). Changes in the fair value of a derivative that is highly effective as
and that is designated and qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability that is attributable to the hedged risk (including losses or
gains on firm commitments), are recorded in current-period earnings. The effective
portion of the changes in the fair value of a derivative that is highly effective as and that
is designated and qualifies as a cash-flow hedge is recorded in other comprehensive
income, until earnings are affected by the variability of cash flows (e.g., when periodic
settlements on a variable-rate asset or liability are recorded in earnings). The remaining
gain or loss on the derivative, if any, in excess of the cumulative change in the present
value of future cash flows of the hedged item is recognized in earnings.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Derivatives and Hedging Activities (Continued)
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for undertaking various
hedge transactions. This process includes linking all derivatives that are designated as fair-
value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assessed, both at
the hedge’s inception and on an ongoing basis (if the hedges do not qualify for short-cut
accounting), whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company discontinues hedge accounting prospectively, as
discussed below. The Company discontinues hedge accounting prospectively when: (1) it is
determined that the derivative is no longer effective in offsetting changes in the fair value or
cash flows of a hedged item (including firm commitments or forecasted transactions); (2)
the derivative expires or is sold, terminated, or exercised; (3) the derivative is re-designated
as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) a
hedged firm commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument is no
longer appropriate.
When hedge accounting is discontinued because it is determined that the derivative no
longer qualifies as an effective fair-value hedge, hedge accounting is discontinued
prospectively and the derivative will continue to be carried on the balance sheet at its fair
value with all changes in fair value being recorded in earnings but with no offsetting being
recorded on the hedged item or in other comprehensive income for cash flow hedges.
The Company uses derivatives to hedge interest rate exposures associated with mortgage
loans held for sale and mortgage loans in process. The Company regularly enters into
derivative financial instruments in the form of forward contracts, as part of its normal
asset/liability management strategies. The Company’s obligations under forward
contracts consist of “best effort” commitments to deliver mortgage loans originated in the
secondary market at a future date. Interest rate lock commitments related to loans that
are originated for later sale are classified as derivatives. In the normal course of business,
the Company regularly extends these rate lock commitments to customers during the loan
origination process. The fair values of the Company’s forward contract and rate lock
commitments to customers as of December 31, 2010 and 2009 were not material and
have not been recorded.
During 2008 the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. Upon entering into these swaps,
the Company entered into offsetting positions with a regional correspondent bank in
order to minimize the risk to the Company. As of December 31, 2010, the Company was
party to two swaps with notional amounts totaling approximately $11.8 million with
customers, and two swaps with notional amounts totaling approximately $11.8 million
with a regional correspondent bank. These swaps qualify as derivatives, but are not
designated as hedging instruments.
During 2010 the Company entered into an interest rate cap with a notional value of $100
million. 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.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Stock-Based Compensation
At December 31, 2010, the Company had two stock-based employee compensation plans
for grants of options to key employees. These plans have been accounted for under the
provisions of FASB ASC 718-10, Compensation – Stock Compensation. The stock-
based employee compensation plans are more fully described in Note 14.
Earnings per Common Share
Basic earnings per common share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings per
common share include the dilutive effect of additional potential common shares issuable
under stock options and warrants.
Loan Commitments and Related Financial Instruments
Financial instruments, which include credit card arrangements, commitments to make
loans, and standby letters of credit, are issued to meet customer financing needs. The
face amount for these items represents the exposure to loss before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are
funded. Instruments such as stand-by letters of credit are considered financial guarantees
in accordance with FASB ASC 460-10. The fair value of these financial guarantees is
not material.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in Note 23. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly affect the
estimates.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss).
Accumulated comprehensive income (loss), which is recognized as a separate component
of equity, includes unrealized gains and losses on securities available for sale as well as
the interest rate floor contract that qualified for cash flow hedge accounting.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years ended
December 31, 2010, 2009 and 2008 was $313,000, $276,000 and $318,000, respectively.
Adoption of Recent Accounting Pronouncements
During December 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2009-16 – “Loans and Debt Securities Acquired
with Deteriorated Credit Quality”.
The ASU amends Accounting Standards
Codification (ASC) Subtopic 310 to clarify that modifications of loans that are accounted
for within a pool, as defined by Subtopic 310-30, do not result in the removal of these
loans from the pool even if the modification would otherwise be considered a troubled
debt restructuring. The amendments do not include loans not accounted for within pools.
Loans accounted for on an individual basis continue to be subject to the troubled debt
restructuring accounting provisions with ASC 310-40 Troubled Debt Restructurings by
Creditors. The Company adopted the provisions of this ASU during the third quarter
2010. This amendment did not have a material impact on the Company’s consolidated
financial statements.
During January 2010, the FASB issued 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.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Adoption of Recent Accounting Pronouncements (Continued)
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 2.
INVESTMENT SECURITIES
The amortized cost and fair value of securities are summarized as follows:
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
$
$
$
$
$
$
$
$
5,234
5,234
$
-
$
-
$
$
(271)
(271)
$
$
$
90,631
101,709
78,241
2,013
272,594
92,368
99,608
58,090
3,004
253,070
1,887
2,783
1,076
162
5,908
412
2,717
876
36
4,041
Fair Value
$
$
$
$
$
92,294
104,224
78,266
2,175
276,959
4,963
4,963
92,327
101,700
58,399
3,027
255,453
(224)
(268)
(1,051)
-
(1,543)
(453)
(625)
(567)
(13)
(1,658)
$
$
$
$
$
645
645
$
1
$
1
$
$
(3)
(3)
$
$
643
643
December 31, 2010:
Securities Available for Sale
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
State and municipal securities
Total
December 31, 2009:
Securities Available for Sale
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
State and municipal securities
Total
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.
INVESTMENT SECURITIES (Continued)
All mortgage-backed securities are with government sponsored enterprises (GSEs)
such as Federal National Mortgage Association, Government National Mortgage
Association, Federal Home Loan Bank, and Federal Home Loan Mortgage
Corporation.
At year-end 2010 and 2009, there were no holdings of securities of any issuer, other
than the U.S. Government and its agencies, in an amount greater that 10% of
stockholders’ equity.
The amortized cost and fair value of securities as of December 31, 2010 by contractual
maturity are shown below. Actual maturities may differ from contractual maturities
because the issuers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized
Cost
Fair Value
(In Thousands)
Securities available for sale
Due within one year
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage-backed securities
Securities held to maturity
Due after ten years
$
$
165
67,760
84,577
18,383
101,709
272,594
$
167
68,471
85,712
18,385
104,224
276,959
$
$
5,234
5,234
4,963
4,963
$
$
$
The following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a continuous
unrealized loss position at December 31, 2010 and 2009. The Company has the ability
and intent to hold these securities until such time as the value recovers or the securities
mature. Further, the Company believes the deterioration in value on these securities is
attributable to changes in market interest rates and not credit quality of the issuer.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.
INVESTMENT SECURITIES (Continued)
Less Than Twelve Months
Gross
Unrealized
Losses
Fair Value
Twelve Months or More
Gross
Unrealized
Losses
Fair Value
(In Thousands)
December 31, 2010:
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
December 31, 2009:
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
$
$
$
$
$
$
(224)
(268)
(1,034)
-
(1,526)
(437)
(625)
(569)
(17)
(1,648)
24,217
16,417
33,282
-
73,916
42,836
44,993
20,479
2,074
110,382
-
$
-
(288)
-
(288)
$
-
$
-
3,674
-
3,674
$
$
-
-
-
(13)
(13)
$
$
-
-
-
986
986
$
$
$
At December 31, 2010, 18 of the Company’s 430 debt securities were in an unrealized
loss position for more than 12 months. The Company does not believe this unrealized
loss is “other than temporary” since it has the ability and intent to hold the investment
for a period of time sufficient to allow for a recovery in market value, and it is not
probable that the Company will be unable to collect all of the amounts contractually
due. The Company has not identified any issues related to the ultimate repayment of
principal as a result of credit concerns on these securities.
During 2010, nine government agency bonds with an amortized cost of $31,189,000
and one corporate bond with an amortized cost of $1,000,000 were sold with total
recognized gain on sale of $108,000. During 2009, two corporate bonds with an
amortized cost of $2,040,000 and three government agency bonds with an amortized
cost of $30,334,000 were sold with total recognized gain on sale of $193,000. There
were no losses on the sale of securities during 2010, 2009 or 2008. There were no
sales of securities during 2008.
The carrying value of investment securities pledged to secure public funds on deposits
and for other purposes as required by law as of December 31, 2010 and 2009 was
$111,347,000 and $117,377,000, respectively.
Restricted equity securities include (1) a restricted investment in Federal Home Loan
Bank stock for membership requirement and to secure available lines of credit, and (2)
an investment in First National Bankers Bank stock. The amount of investment in the
Federal Home Loan Bank stock was $3,260,000 and $2,991,000 at December 31, 2010
and 2009, respectively. The amount of investment in the First National Bankers Bank
stock was $250,000 at December 31, 2010 and 2009.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS
The composition of loans is summarized as follows:
December 31,
2010
2009
(In Thousands)
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage
Consumer
Allowance for loan losses
Net unamortized loan origination fees
Loans, net
$
$
536,152
172,055
648,796
37,347
1,394,350
(18,077)
468
1,376,741
$
$
461,140
224,178
489,244
32,574
1,207,136
(14,737)
(52)
1,192,347
Changes in the allowance for loan losses are as follows:
2010
Years Ended December 31,
2009
(In Thousands)
2008
Balance, beginning of year
Loans charged off
Recoveries
Provision for loan losses
Balance, end of year
$
$
$
14,737
(7,208)
198
10,350
18,077
10,602
(6,676)
126
10,685
14,737
7,732
(3,866)
462
6,274
10,602
$
$
$
Loans by credit quality indicator as of December 31, 2010 are as follows:
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner occupied
commercial
1-4 family mortgage
other mortgage
Total real estate
mortgage
Consumer
Total
Pass
Special Mention
Substandard
Doubtful
Total
$
508,376
126,200
$
14,209
17,145
$
14,035
28,710
$
-
-
$
536,620
172,055
256,638
193,365
175,815
6,251
1,072
562
7,878
4,799
2,416
-
-
-
270,767
199,236
178,793
625,818
36,090
1,296,484
$
7,885
-
39,239
$
15,093
1,257
59,095
$
-
-
$
-
648,796
37,347
1,394,818
$
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Loans by performance status as of December 31, 2010 are as follows:
Performing
Nonperforming
Total
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner occupied
commercial
1-4 family mortgage
other mortgage
Total real estate
mortgage
Consumer
Total
$
534,456
161,333
$
2,164
10,722
$
536,620
172,055
270,131
199,035
178,793
636
201
-
270,767
199,236
178,793
647,959
36,723
1,380,471
$
837
624
14,347
$
648,796
37,347
1,394,818
$
Loans by past due status as of December 31, 2010 are as follows:
Past Due Status (Accruing Loans)
30-59
Days
60-89
Days
90+ Days
Total Past
Due
Non-
Accrual
Current
Total Loans
$
205
-
$
575
-
-
$
-
780
$
-
$
2,164
10,722
$
533,676
161,333
$
536,620
172,055
134
125
-
-
-
-
-
-
-
134
125
-
636
201
-
269,997
198,910
178,793
270,767
199,236
178,793
259
13
477
$
-
-
575
-
-
$
-
$
259
13
1,052
$
837
624
14,347
$
647,700
36,710
1,379,419
$
648,796
37,347
1,394,818
$
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate -
mortgage
Consumer
Total
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Impaired loans as of December 31, 2010 are as follows:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized in
Year
$
2,345
10,532
$
2,930
12,705
-
$
-
$
2,909
11,799
$
With no allowance recorded:
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
1,614
511
1,817
3,942
289
1,801
511
1,817
4,129
289
Total with no allowance recorded
17,108
20,053
With an allowance recorded:
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total with allowance recorded
Total I impaired loans
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
9,190
18,178
3,373
2,995
-
6,368
704
34,440
9,190
18,428
3,373
2,995
-
6,368
704
34,690
11,535
28,710
12,120
31,133
-
-
-
-
-
-
1,602
1,855
55
360
-
415
554
4,426
1,602
1,855
1,668
462
1,021
3,151
223
18,082
8,881
18,136
3,393
3,025
-
6,418
625
34,060
11,790
29,935
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total impaired loans
4,987
3,506
1,817
10,311
993
51,549
$
5,174
3,506
1,817
10,497
993
54,743
$
55
360
-
415
554
4,426
$
5,061
3,487
1,021
9,569
848
52,142
$
$
The recorded investment in impaired loans was $21.4 million at December 31, 2009.
The allowance allocated to impaired loans totaled $3.1 million at December 31, 2009.
The average amount of impaired loans was $21.8 million during 2009 and $11.2
million during 2008. Interest income recognized on impaired loans was $584,000 and
$404,000 for 2009 and 2008, respectively.
86
129
351
123
16
66
205
12
697
449
643
208
154
-
362
37
1,491
578
994
332
170
66
567
49
2,188
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
In the ordinary course of business, the Company has granted loans to certain related
parties, including directors, executive officers, and their affiliates. The interest rates on
these loans were substantially the same as rates prevailing at the time of the transaction
and repayment terms are customary for the type of loan. Changes in related party loans
for the year ended December 31, 2010 and 2009 are as follows:
Years Ended December 31,
2010
2009
Balance, beginning of year
Advances
Repayments
Balance, end of year
NOTE 4.
FORECLOSED PROPERTIES
$
(In Thousands)
$
8,469
9,471
(11,115)
6,825
15,934
5,174
(12,639)
8,469
$
$
Other real estate and certain other assets acquired in foreclosure are carried at the lower
of the recorded investment in the loan or fair value less estimated costs to sell the
property.
An analysis of foreclosed properties for the years ended December 31, 2010, 2009 and
2008 follows:
Balance at beginning of year
Transfers from loans and capitalized expenses
Foreclosed properties sold
Writedowns and partial liquidations
Balance at end of year
$
$
2010
12,525
5,447
(7,995)
(3,011)
6,966
2009
10,473
11,103
(6,314)
(2,737)
12,525
2008
1,623
15,074
(4,111)
(2,113)
10,473
$
$
$
$
NOTE 5.
PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
2010
2009
Furniture and equipment
Leasehold improvements
Accumulated depreciation
$
(In Thousands)
4,441
3,920
8,361
(3,911)
4,450
$
4,079
3,882
7,961
(2,873)
5,088
$
$
The provisions for depreciation charged to occupancy and equipment expense for the
years ended December 31, 2010, 2009 and 2008 were $1,066,000, $1,087,000 and
$926,000, respectively.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5.
PREMISES AND EQUIPMENT (Continued)
The Company leases land and building space under non-cancellable operating leases.
leases are
Future minimum
summarized as follows:
lease payments under non-cancellable operating
2011
2012
2013
2014
2015
Thereafter
(In Thousands)
$
$
1,992
2,050
1,912
1,945
1,974
7,715
17,588
For the years ended December 31, 2010, 2009 and 2008, annual rental expense on
operating leases was $1,734,000, $1,447,000 and $1,009,000, respectively.
NOTE 6.
VARIABLE INTEREST ENTITIES (VIEs)
The Company utilizes special purpose entities (SPEs) that constitute investments in
limited partnerships that undertake certain development projects to achieve federal and
state tax credits. These SPEs are typically structured as VIEs and are thus subject to
consolidation by the reporting enterprise that absorbs the majority of the economic
risks and rewards of the VIE. To determine whether it must consolidate a VIE, the
Company analyzes the design of the VIE to identify the sources of variability within
the VIE, including an assessment of the nature of risks created by the assets and other
contractual obligations of the VIE, and determines whether it will absorb a majority of
that variability.
The Company has invested in a limited partnership for which it determined is not the
primary beneficiary, and which thus are not subject to consolidation by the company.
The Company reports its investment in this partnership at its net realizable value,
estimated to be the discounted value of the remaining amount of tax credits to be
received. The amount recorded as investment in this partnership at December 31, 2010
was $699,000.
On December 31, 2009, the Company entered into a limited partnership as funding
investor. The partnership is a single purpose entity that is lending money to a real
estate investor for the purpose of acquiring and operating a multi-tenant office
building. The investment qualifies for New Market Tax Credits under Internal
Revenue Code Section 45D, as amended. The Company has determined that it is the
primary beneficiary of the economic risks and rewards of the VIE, and thus has
consolidated the partnership’s assets and liabilities into its consolidated financial
statements. The amount recorded as an investment in this partnership at December 31,
2010 was $3,578,000, of which $2,270,000 is included in loans of the Company.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7.
DEPOSITS
Deposits at December 31, 2010 and 2009 were as follows:
December 31,
2010
2009
(In Thousands)
Noninterest-bearing demand
Interest-bearing checking
Savings
Time
Time, $100,000 and over
$
250,490
1,224,244
5,493
55,583
222,906
1,758,716
$
$
$
211,307
965,661
1,453
43,513
210,421
1,432,355
The scheduled maturities of time deposits at December 31, 2010 were as follows:
(In Thousands)
2011
2012
2013
2014
2015
$
$
178,984
40,565
36,167
15,521
7,252
278,489
At December 31, 2010 and 2009, overdraft deposits reclassified to loans were
$1,111,000 and $471,000, respectively.
NOTE 8.
FEDERAL FUNDS PURCHASED
At December 31, 2010, the Company had available lines of credit totaling
approximately $130 million with various financial institutions for borrowing on a
short-term basis, with no amount outstanding. These lines are subject to annual
renewals with varying interest rates.
NOTE 9.
OTHER BORROWINGS
At December 31, 2010 and 2009, the composition of other borrowings is as follows:
2010
Weighted
Average
Rate
Amount
2009
Weighted
Average
Rate
Amount
$
$
20,000
4,937
24,937
3.13 %
8.25
4.14 %
$
$
20,000
4,922
24,922
3.13 %
8.25
4.14 %
FHLB Advances:
Fixed rate, due 2012 and 2013
Subordinated notes payable
Total other borrowings
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9.
OTHER BORROWINGS (Continued)
Other borrowings as of December 31, 2010 consist of two Federal Home Loan Bank
advances in the amount of $10 million each. One has a maturity of March 19, 2012,
and the other has a maturity of March 19, 2013.
The Company has pledged certain qualifying mortgage loans with an aggregate
carrying value of $24.8 million as collateral under the borrowing agreement with the
FHLB. The Company has borrowing capacity with the FHLB of Atlanta totaling $4.8
million at December 31, 2010.
NOTE 10.
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
On September 2, 2008, ServisFirst Capital Trust I, a subsidiary of the Company (the
“Trust”), sold 15,000 shares of its 8.5% trust preferred securities to accredited
investors for $15,000,000 or $1,000 per share and 463,918 shares of its common
securities to the Company for $463,918 or $1.00 per share. The Trust invested the
$15,463,918 of the proceeds from such sale in the Company’s 8.5% junior
subordinated deferrable interest debenture due September 1, 2038 in the principal
amount of $15,463,918 (the “Debenture”). The Debenture bears a fixed rate of interest
at 8.5% per annum and is subordinate and junior in right of payment to all of the
Company’s senior debt; provided, however, the Company may not incur any additional
senior debt in excess of 0.5% of the Company’s average assets for the fiscal year
immediately preceding, unless such incurrence is approved by a majority of the holders
of the outstanding trust preferred securities.
Holders of the trust preferred securities are entitled to receive distributions accruing
from the original date of issuance. The distributions are payable quarterly in arrears on
December 1, March 1, June 1 and September 1 of each year, commencing December 1,
2008. The distributions accrue at an annual fixed rate of 8.5%. Payments of
distributions on the trust preferred securities will be deferred in the event interest
payments on the Debenture is deferred, which may occur at any time and from time to
time, for up to 20 consecutive quarterly periods. During any deferral period, the
Company may not pay dividends or make certain other distributions or payments as
provided for in the Indenture. If payments are deferred, holders accumulate additional
distributions thereon at 8.5%, compounded quarterly, to the extent permitted by law.
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
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10.
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
(Continued)
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
unpaiddistributions thereon (including accrued interest thereon), if any, to the date of
payment. In the event of the redemption of the trust preferred securities on or after
September 1, 2011, the holders of the trust preferred securities will be entitled to
receive $1,000 per share plus accumulated and unpaid distributions thereon (including
accrued interest thereon), if any, to the date of payment.
The Company has the right at any time to terminate the Trust and cause the Debenture
to be distributed to the holders of the trust preferred securities in liquidation of the
Trust. This right is optional and wholly within the Company’s discretion as set forth in
the Indenture.
Payment of periodic cash distributions and payment upon liquidation or redemption
with respect to the trust preferred securities are guaranteed by the Company to the
extent of funds held by the Trust (the “Preferred Securities Guarantee”). The Preferred
Securities Guarantee, when taken together with the Company’s other obligations under
the debentures, constitutes a full and unconditional guarantee, on a subordinated basis,
by the Company of payments due on the trust preferred securities.
The Company is not considered the primary beneficiary of the Trust under accounting
standards for variable interest entities; therefore the Trust is not consolidated in the
Company’s financial statements, but rather the subordinated debentures are shown as a
liability. The Company’s investment in the common stock of the Trust in included in
other assets in the Consolidated Balance Sheets.
The Company is required by the Federal Reserve Board to maintain certain levels of
capital for bank regulatory purposes. The Federal Reserve Board has determined that
certain cumulative preferred securities having the characteristics of trust preferred
securities qualify as minority interests, which is included in Tier 1 capital for bank and
financial holding companies. In calculating the amount of Tier 1 qualifying capital, the
trust preferred securities can only be included up to the amount constituting 25% of
total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital
treatment provides the Company with a more cost-effective means of obtaining capital
for bank regulatory purposes than if the Company were to issue preferred stock.
NOTE 11.
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.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11.
JUNIOR SUBORDINATED MANDATORY CONVERTIBLE
DEFERRABLE INTEREST DEBENTURES DUE MARCH 15,
2040 (Continued)
Holders of the Preferred Securities are 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.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11.
JUNIOR SUBORDINATED MANDATORY CONVERTIBLE
DEFERRABLE INTEREST DEBENTURES DUE MARCH 15,
2040 (Continued)
The Company is required by the Federal Reserve Board to maintain certain levels of
capital for bank regulatory purposes. The Federal Reserve Board has determined that
certain cumulative preferred securities having the characteristics of trust preferred
securities qualify as minority interests, which is included in Tier 1 capital for bank and
financial holding companies. In calculating the amount of Tier 1 qualifying capital, the
trust preferred securities can only be included up to the amount constituting 25% of
total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital
treatment provides the Company with a more cost-effective means of obtaining capital
for bank regulatory purposes than if the Company were to issue preferred stock.
NOTE 12.
SUBORDINATED NOTE DUE JUNE 1, 2016
On June 23, 2009, the Company issued its 8.25% Subordinated Note due June 1, 2016
in the aggregate principal amount of $5,000,000 to an accredited investor at 100% of
par. The note is subordinate and junior in right of payment upon any liquidation of the
Company as to principal, interest and premium to obligations to the Company’s
depositors and other obligations to its general and secured creditors. Interest payments
are due and payable on each September 1, December 1, March 1 and June 1,
commencing on September 1, 2009. Interest accrues at an annual rate of 8.25%. The
proceeds from the note payable are included in Tier 2 capital of the Bank and the
Company.
In addition, the Company issued to the investor a total of 15,000 warrants, each
representing the right to purchase one share of the Company’s common stock for a
purchase price of $25.00. Each warrant is exercisable for a period beginning upon its
date of issuance and ending on June 1, 2016. The Company estimated the fair value of
each warrant using a Black-Scholes-Merton valuation model and determined the fair
value per warrant to be $5.41. This total value of $86,000 was recorded as a discount
and reduced the net book value of the note to $4,914,000 with an offsetting increase to
the Company’s additional paid-in capital. The discount will be amortized over a five-
year period.
NOTE 13. DERIVATIVES
Prior to 2008 the Company entered into an interest rate floor with a notional amount of
$50 million in order to fix the minimum interest rate on a corresponding amount of its
floating-rate loans. The interest rate floor was sold in January 2008 and the related
gain of $817,000 was deferred and amortized to income over the remaining term of the
original agreement which would have terminated on June 22, 2009. Gains of $272,000
and $544,000 were recognized for the years ended December 31, 2009 and 2008,
respectively.
During 2010 the Company entered into an interest rate cap with a notional value of
$100 million. 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.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. DERIVATIVES (Continued)
The Company uses derivatives to hedge interest rate exposures associated with
mortgage loans held for sale and mortgage loans in process. The Company regularly
enters into derivative financial instruments in the form of forward contracts, as part of
its normal asset/liability management strategies. The Company’s obligations under
forward contracts consist of “best effort” commitments to deliver mortgage loans
originated in the secondary market at a future date. Interest rate lock commitments
related to loans that are originated for later sale are classified as derivatives. In the
normal course of business,
lock
commitments to customers during the loan origination process. The fair values of the
Company’s forward contract and rate lock commitments to customers as of December
31, 2009 and 2008 were not material and have not been recorded.
the Company regularly extends
these rate
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS
At December 31, 2010, the Company has two share-based compensation plans, which
are described below. The compensation cost that has been charged against income for
the plans was approximately $713,000, $785,000 and $671,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.
Stock Incentive Plans
The Company’s 2005 Stock Incentive Plan (the “2005 Plan”), originally permitted the
grant of stock options to its officers, employees, directors and organizers of the
Company for up to 525,000 shares of common stock. However, upon shareholder
approval during 2006, the 2005 Plan was amended in order to allow the Company to
grant stock options for up to 1,025,000 shares of common stock. Both incentive stock
options and non-qualified stock options may be granted under the 2005 Plan. Option
awards are generally granted with an exercise price equal to the estimated fair market
value of the Company’s stock at the date of grant; those option awards vest in varying
amounts from 2007 through 2015 and are based on continuous service during that
vesting period and have a ten-year contractual term. Dividends are not paid on
unexercised options and dividends are not subject to vesting. The Plan provides for
accelerated vesting if there is a change in control (as defined in the Plan).
On March 23, 2009 the Company’s board of directors adopted the 2009 Stock
Incentive Plan (the “2009 Plan”), which was effective upon approval by the
stockholders at the 2009 Annual Meeting of Stockholders. The 2009 Plan authorizes
the grant of Stock Appreciation Rights, Restricted Stock, Options, Non-stock Share
Equivalents, Performance Shares or Performance Units and other equity-based awards.
Both incentive stock options and non-qualified stock options may be granted under the
2009 Plan. Option awards are generally granted with an exercise price equal to the
estimated fair market value of the Company’s stock at the date of grant. Up to 425,000
shares of common stock of the Company are available for awards under the 2009 Plan.
As of December 31, 2010, there are a total of 594,000 shares available to be granted
under both of these plans.
The Company granted non-plan options to certain persons representing key
relationships to purchase up to an aggregate amount of 55,000 shares of our common
stock at between $15.00 and $20.00 per share for 10 years. These options are non-
qualified and not part of either the 2005 Amended and Restated Stock Incentive Plan or
2009 Stock Incentive Plan.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
The fair value of each stock option award is estimated on the date of grant using a
Black-Scholes-Merton valuation model that uses the assumptions noted in the
following table. Expected volatilities are based on an index of approximately 117
publicly traded banks in the southeast United States. The expected term of options
granted is based on the short-cut method and represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant.
Expected volatility
Expected dividends
Expected term (in years)
Risk-free rate
2010
2009
2008
26.00%
0.00%
7
2.10%
20.00%
0.50%
7
1.70%
21.16%
0.50%
7
2.93%
The weighted-average grant-date fair value of options granted during the years ended
December 31, 2010, 2009 and 2008 was $7.91, $5.87 and $6.58, respectively.
The following tables summarize the status of stock options granted.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Shares
Aggregate
Intrinsic
Value
(In Thousands)
Year Ended December 31, 2010:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
863,500
37,500
(10,000)
(10,000)
881,000
$
15.17
25.00
10.00
15.00
15.65
Exercisable at December 31, 2010
272,627
$
11.96
Year Ended December 31, 2009:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
826,000
40,000
-
(2,500)
863,500
$
14.70
25.00
-
15.00
15.17
Exercisable at December 31, 2009
143,530
$
11.99
Year Ended December 31, 2008:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
742,500
98,500
-
(15,000)
826,000
$
13.40
24.31
-
13.50
14.70
Exercisable at December 31, 2008
68,598
$
12.08
Exercisable options at December 31, 2010 were as follows:
Weighted
Average
Remaining
Contractual
Term
(years)
Weighted
Average
Exercise
Price
$
$
10.00
11.00
15.00
20.00
11.96
4.4
5.3
5.9
6.6
5.1
Range of Exercise Price
Shares
$
10.00
11.00
15.00
20.00
125,500
69,000
63,130
14,997
272,627
96
6.8
9.4
-
-
6.9
5.1
7.7
9.4
-
-
6.8
6.1
8.4
-
-
-
7.7
7.0
$
$
$
$
$
$
$
$
$
8,483
-
150
-
8,238
3,555
8,513
-
-
-
8,483
1,867
4,905
-
-
-
8,513
886
Aggregate
Intrinsic Value
(In Thousands)
1,883
$
966
631
75
3,555
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
As of December 31, 2010, there was $1,337,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under the
Plans. The cost is expected to be recognized over a weighted-average period of 1.9
years. The total fair value of shares vested during the year ended December 31, 2010
was $474,000.
The Company granted 20,000 restricted stock awards to a key executive in October
2009, and granted 2,000 restricted stock awards to each of five employees in February
2010, for a total of 30,000 shares. The value of these awards is determined to be the
current value of the Company’s stock, and this total value will be recognized as
compensation expense over the vesting period, which is five years from the date of
grant. 4,000 shares of restricted stock vested during 2010. As of December 31, 2010,
there was $583,000 of total unrecognized compensation cost related to non-vested
restricted stock. The cost is expected to be recognized evenly over the remaining 3.9
years of the restricted stock’s vesting period.
Stock Warrants
In recognition of the efforts and financial risks undertaken by the Bank’s organizers, it
granted organizers an opportunity to purchase a total 60,000 shares of common stock at
a price of $10, which was the fair market value of the Bank’s common stock at the
time. The warrants fully vested on May 2, 2008, the third anniversary of the Bank’s
incorporation, and will terminate on the tenth anniversary of the incorporation date.
The total number of warrants outstanding at December 31, 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 10.
The Company issued warrants for 15,000 shares of common stock at a price of $25 per
share in the second quarter of 2009. These warrants were issued in connection with the
sale of the Company’s 8.25% Subordinated Note that is discussed in detail in Note 11.
As of December 31, 2010, all warrants were fully vested.
The following tables summarize the status of stock warrants granted under the
Company’s stock-based compensation plans.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
Year Ended December 31, 2010:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted
Average
Exercise Price
Shares
60,000
-
-
-
60,000
$
10.00
-
-
-
10.00
Exercisable at December 31, 2010
60,000
$
10.00
Year Ended December 31, 2009:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
60,000
-
-
-
60,000
$
10.00
-
-
-
10.00
Exercisable at December 31, 2009
60,000
$
10.00
Year Ended December 31, 2008:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
60,000
-
-
-
60,000
$
10.00
-
-
-
10.00
Exercisable at December 31, 2008
60,000
$
10.00
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(In Thousands)
5.3
-
-
-
4.3
4.3
6.3
-
-
-
5.3
5.3
7.3
-
-
-
6.3
6.3
$
$
$
$
$
$
$
$
$
900
-
-
-
900
900
900
-
-
-
900
900
600
-
-
-
900
900
The Company has a retirement savings 401(k) and profit-sharing plan in which all
employees age 21 and older may participate after completion of one year of service.
For employees in service with the Bank at June 15, 2005, the length of service and age
requirements were waived. The Company matches employees’ contributions based on
a percentage of salary contributed by participants and may make additional
discretionary profit sharing contributions. The Company’s expense for the plan was
$377,000, $341,000 and $303,000 for 2010, 2009 and 2008, respectively.
NOTE 15. COMMON STOCK
During 2008, the Company completed private placements of 260,540 shares of
common stock. The shares were issued and sold at $25 per share to accredited
investors of which approximately 75,800 shares were purchased by directors, officers
and their families. This sale of stock resulted in net proceeds of $6,474,000. This
includes stock offering expenses of $39,000.
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMON STOCK (Continued)
During 2009, the Company completed private placements of 139,460 shares of
common stock. The shares were issued and sold at $25 per share to accredited
investors of which approximately 78,500 shares were purchased by directors, officers
and their families. This sale of stock resulted in net proceeds of $3,479,000. This
includes stock offering expenses of $8,000.
NOTE 16. REGULATORY MATTERS
The Bank is subject to dividend restrictions set forth by the Alabama State Banking
Department. Under such restrictions, the Bank may not, without the prior approval of
the Alabama State Banking Department, declare dividends in excess of the sum of the
current year’s earnings plus the retained earnings from the prior two years. Based on
this, the Bank would be limited to paying $39.1 million in dividends as of December
31, 2010.
The Bank is subject to various regulatory capital requirements administered by the
state and federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions by regulators
that if undertaken, could have a direct material effect on the Bank and the financial
statements. Under regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines
involving quantitative measures of the Bank’s assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The Bank’s
capital amounts and classification under the prompt corrective guidelines are also
subject to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the
Bank to maintain minimum amounts and ratios (set forth in the table below) of total
risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations), and Tier 1 capital to adjusted total assets (as defined). Management
believes, as of December 31, 2010, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2010, the most recent notification from the Federal Deposit
Insurance Corporation categorized ServisFirst Bank as well capitalized under the
regulatory framework for prompt corrective. To remain categorized as well
capitalized; the Bank will have to maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as disclosed in the table below. Management believes
that it is well capitalized under the prompt corrective action provisions as of December
31, 2010.
The Company’s and Bank’s actual capital amounts and ratios are presented in the
following table:
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. REGULATORY MATTERS (Continued)
As of December 31, 2010:
Total Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average Assets:
Consolidated
ServisFirst Bank
As of December 31, 2009:
Total Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average Assets:
Consolidated
ServisFirst Bank
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
166,850
166,721
11.82%
11.81%
$
112,927
112,978
144,263
144,117
144,263
144,117
10.22%
10.20%
7.77%
7.77%
56,464
56,489
74,266
74,236
$
130,882
130,426
10.48%
10.45%
$
99,903
99,851
111,049
110,593
111,049
110,593
8.89%
8.86%
6.97%
6.94%
49,952
49,926
63,737
63,737
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
N/A
$141,222
N/A
10.00%
N/A
84,733
N/A
92,795
N/A
6.00%
N/A
5.00%
N/A
$124,814
N/A
10.00%
N/A
74,888
N/A
79,672
N/A
6.00%
N/A
5.00%
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. OTHER OPERATING INCOME AND EXPENSES
The major components of other operating income and expense included in noninterest
income and noninterest expense are as follows:
2010
Years Ended December 31,
2009
(In Thousands)
2008
Other operating income
Mortgage fee income
Loss on sale of other real estate owned
Other
Other operating expenses
Postage
Telephone
Data processing
FDIC insurance
Expenses to carry other real estate owned
Recording fees
Supplies
Customer and public relations
Marketing
Sales and use tax
Donations and contributions
Directors fees
Other
$
$
$
$
$
$
$
$
$
2,174
(203)
774
2,745
173
358
1,983
2,879
1,964
308
263
477
313
141
261
216
2,855
12,191
2,222
(441)
808
2,589
142
318
1,844
2,735
2,745
309
319
462
276
211
214
180
1,822
11,577
995
(180)
619
1,434
105
206
1,341
568
1,619
288
274
409
318
243
205
198
1,107
6,881
$
$
$
NOTE 18.
INCOME TAXES
The components of income tax expense are as follows:
2010
Years Ended December 31,
2009
(In Thousands)
2008
Current
Deferred
Income tax expense
$
$
11,570
(2,212)
9,358
$
$
4,381
(1,601)
2,780
$
$
5,062
(1,237)
3,825
The Company’s total income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18.
INCOME TAXES (Continued)
Income tax at statutory federal rate
Effect on rate of:
State income tax, net of federal tax effect
Tax-exempt income, net of expenses
Incentive stock option expense
Other
Effective income tax and rate
Income tax at statutory federal rate
Effect on rate of:
State income tax, net of federal tax effect
Tax-exempt income, net of expenses
Incentive stock option expense
Other
Effective income tax and rate
Income tax at statutory federal rate
Effect on rate of:
State income tax, net of federal tax effect
Tax-exempt income, net of expenses
Incentive stock option expense
Other
Effective income tax and rate
Year Ended December 31, 2010
% of Pre-tax
Earnings
Amount
(In Thousands)
9,355
$
715
(773)
144
(83)
9,358
$
35.00%
2.68%
-2.89%
0.54%
-0.32%
35.01%
Year Ended December 31, 2009
% of Pre-tax
Earnings
Amount
(In Thousands)
2,944
$
214
(477)
224
(125)
2,780
$
34.00%
2.47%
-5.51%
2.59%
-1.44%
32.11%
Year Ended December 31, 2008
% of Pre-tax
Earnings
Amount
(In Thousands)
3,683
$
191
(278)
177
52
3,825
$
34.00%
1.76%
-2.57%
1.64%
0.48%
35.31%
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18.
INCOME TAXES (Continued)
The components of net deferred tax asset are as follows:
Other real estate
Start-up costs
Net unrealized gains on securities available for sale
and cash flow hedge
Depreciation
Deferred loan fees
Allowance for loan losses
Nonqualified equity awards
Other
Net deferred income tax assets
2010
December 31,
2009
(In Thousands)
2008
$
646
127
$
411
141
$
309
154
(1,528)
(206)
(72)
6,974
194
231
6,366
$
(810)
(304)
106
5,419
27
(118)
4,872
$
(496)
(195)
131
3,649
116
(83)
3,585
$
The Company believes its net deferred tax asset is recoverable as of December 31,
2010 based on the expectation of future taxable income and other relevant
considerations.
NOTE 19. COMMITMENTS AND CONTINGENCIES
Loan Commitments
The Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, credit card arrangements,
and standby letters of credit. Such commitments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the balance sheets.
A summary of the Company’s commitments and contingent liabilities is approximately
as follows:
2010
2009
(In Thousands)
Commitments to extend credit
Credit card arrangements
Standby letters of credit
$
$
538,719
17,601
47,103
603,423
$
$
409,760
19,059
39,205
468,024
2008
$
$
294,502
11,323
32,655
338,480
Commitments to extend credit, credit card arrangements, commercial letters of credit
and standby letters of credit all include exposure to some credit loss in the event of
nonperformance of the customer. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
financial instruments. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally present
any significant liquidity risk to the Company.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer loans to
customers in the Company’s market area. The ability of the majority of the
Company’s customers to honor their contractual loan obligations is dependent on the
economy in this area.
The Company’s loan portfolio is primarily concentrated in loans secured by real estate,
of which 59% is secured by real estate in the Company’s primary market area. In
addition, a substantial portion of the other real estate owned is located in that same
market. Accordingly, the ultimate collectability of the loan portfolio and the recovery
of the carrying amount of other real estate owned are susceptible to changes in market
conditions in the Company’s primary market area.
NOTE 21.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common share
and earnings per common share assuming dilution computations are presented below.
2010
Years Ended December 31,
2009
(Dollar Amounts In Thousands Except Per
Share Amounts)
2008
Earnings Per Share
Weighted average common shares outstanding
Net income
Basic earnings per share
Weighted average common shares outstanding
Dilutive effects of assumed conversions and
exercise of stock options and warrants
Weighted average common and dilutive potential
common shares outstanding
Net income
Diluted earnings per share
5,519,151
$
17,378
$
3.15
5,485,972
$
5,878
$
1.07
5,114,194
$
7,005
$
1.37
5,519,151
5,485,972
5,114,194
775,453
301,671
224,689
6,294,604
17,378
2.84
$
$
5,787,643
5,878
1.02
$
$
5,338,883
7,005
1.31
$
$
NOTE 22. RELATED PARTY TRANSACTIONS
Loans
As more fully described in Note 3, the Company had outstanding loan balances to
related parties as of December 31, 2010 and 2009 in the amount of $6,825,000 and
$8,469,000, respectively.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT
Effective January 1, 2008, the Company adopted the methods of fair value as
described in FASB ASC 820, Fair Value Measurements and Disclosures topic, to
value its financial assets and financial liabilities measured at fair value. Fair value is
based on the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. In
order to increase consistency and comparability in fair value measurements, the
standard establishes a fair value hierarchy
that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which are
described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives
the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets,
but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible, as well as considers counterparty credit risk in its assessment of fair
value.
Securities – where quoted prices are available in an active market, securities are
classified within level 1 of the hierarchy. Level 1 securities include highly liquid
government securities such as U.S. Treasuries and exchange-traded equity securities.
For securities traded in secondary markets for which quoted market prices are not
available, the Company generally relies on prices obtained from independent
vendors. Securities measured with these techniques are classified within Level 2 of
the hierarchy and often involve using quoted market prices for similar securities,
pricing models or discounted cash flow calculations using inputs observable in the
market where available. Examples include U.S. government agency securities,
mortgage-backed securities, obligations of states and political subdivisions, and
certain corporate, asset-backed and other securities. In certain cases where Level 1
or Level 2 inputs are not available, securities are classified in Level 3 of the
hierarchy.
Interest Rate Swap Agreements – The fair value is estimated by a third party using
inputs that are observable or that can be corroborated by observable market data and,
therefore, are classified within Level 2 of the hierarchy. These fair value estimations
include primarily market observable inputs such as yield curves and option
volatilities, and include the value associated with counterparty credit risk.
Interest Rate Cap – 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.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
Impaired Loans- Loans are considered impaired under FASB ASC 310-10-35,
Subsequent Measurement of Impaired Loans, when full payment under the loan
terms is not expected. Impaired loans are carried at the present value of estimated
future cash flows using the loan’s existing rate or the fair value of the collateral if the
loan is collateral-dependent. Impaired loans are subject to nonrecurring fair value
adjustment. A portion of the allowance for loan losses is allocated to impaired loans
if the value of such loans is deemed to be less than the unpaid balance. The amount
recognized as an impairment charge related to impaired loans that are measured at
fair value on a nonrecurring basis was $7,878,000 and $6,076,000 during the years
ended December 31, 2010 and 2009, respectively. Impaired loans measured at fair
value on a nonrecurring basis are classified within Level 3 of the hierarchy.
Other real estate owned – Other real estate assets (“OREO”) acquired through, or in
lieu of foreclosure are held for sale and are initially recorded at the lower of cost or
fair value, less selling costs. Any write-downs to fair value at the time of transfer to
OREO are charged to the allowance for loan losses subsequent to foreclosure.
Values are derived from appraisals of underlying collateral and discounted cash flow
analysis. The amount charged to earnings was $1,252,000 and $2,149,000 for 2010
and 2009, respectively. These charges were for write-downs in the value of OREO
and losses on the disposal of OREO. OREO is classified within Level 3 of the
hierarchy.
The following table presents the Company’s financial assets and financial liabilities
carried at fair value on a recurring basis as of December 31, 2010 and 2009:
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
Fair Value Measurements at December 31, 2010 Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
-
$
-
Assets Measured on a Recurring Basis:
Available-for-sale securities
Interest rate swap agreements
Interest rate cap
Total assets at fair value
$
-
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
$
276,959
803
115
277,877
$
$
-
$
-
Total
$
$
276,959
803
115
277,877
Liabilities Measured on a Recurring Basis:
Interest rate swap agreements
$
-
$
803
$
-
$
803
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
-
$
-
$
-
Assets Measured on a Recurring Basis:
Available-for-sale securities
Interest rate swap agreements
Total assets at fair value
Liabilities Measured on a Recurring Basis:
Fair Value Measurements at December 31, 2009 Using
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Total
$
$
255,453
413
255,866
$
-
$
-
$
$
255,453
413
255,866
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 December 31, 2010 and 2009:
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
Fair Value Measurements at December 31, 2010 Using
Assets Measured on a Nonrecurring Basis:
Impaired loans
Other real estate owned
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
-
$
-
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
-
$
-
$
35,183
6,966
Total assets at fair value
$
-
$
-
$
42,149
Total
$
$
35,183
6,966
42,149
Fair Value Measurements at December 31, 2009 Using
Assets Measured on a Nonrecurring Basis:
Impaired loans
Other real estate owned
Total assets at fair value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
-
$
-
$
-
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
-
$
-
$
-
$
$
8,003
12,525
20,528
Total
$
$
8,003
12,525
20,528
The fair value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there are
no quoted market prices for the Company’s various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. Current U.S. GAAP excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily represent
the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts reported in the statements of
financial condition for cash and cash equivalents approximate those assets’ fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If a quoted market price is not available, fair value is
based on quoted market prices of comparable instruments.
Restricted equity securities: Fair values for other investments are considered to be their
cost as they are redeemed at par value.
Loans: For variable-rate loans that re-price frequently and with no significant change
in credit risk, fair value is based on carrying amounts. The fair value of other loans
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
(for example, fixed rate commercial real estate, mortgage loans, and industrial loans) is
estimated using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. Loan fair
value estimates include judgments regarding future expected loss experience and risk
characteristics. Fair value for impaired loans is estimated using discounted cash flow
analysis, or underlying collateral values, where applicable.
Derivatives: The fair value of the derivative agreements are based on quoted prices
from an outside third party.
Accrued interest and dividends receivable: The carrying amount of accrued interest
and dividends receivable approximates its fair value.
Deposits: The fair value disclosed for demand deposits is, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying amounts). The
carrying amounts of variable-rate, fixed-term money market accounts and certificates
of deposit approximate their fair values. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies interest rates
currently offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Other borrowings: The fair value of other borrowings are estimated using
discounted cash flow analysis, based on interest rates currently being offered by the
Federal Home Loan Bank for borrowings of similar terms as those being valued.
Trust preferred securities: The fair value of trust preferred securities are estimated
using a discounted cash flow analysis, based on interest rates currently being offered
on the best alternative debt available at the measurement date.
Accrued interest payable:
approximates its fair value.
The carrying amount of accrued interest payable
Loan commitments: The fair values of the Company’s off-balance sheet financial
instruments are based on fees currently charged to enter into similar agreements. Since the
majority of the Company’s other off-balance-sheet instruments consist of non-fee-
producing, variable-rate commitments, the Company has determined they do not have a
distinguishable fair value.
The carrying amount and estimated fair value of the Company’s financial instruments
were as follows:
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
Financial Assets:
Cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity
Restricted equity securities
Mortgage loans held for sale
Loans, net
Accrued interest and dividends receivable
Derivative
Financial Liabilities:
Deposits
Borrowings
Trust preferred securities
Accrued interest payable
Derivative
December 31,
2010
Carrying
Amount
Fair Value
2009
Carrying
Amount
Fair Value
(In Thousands)
$
231,978
276,959
5,234
3,510
7,875
1,376,741
6,990
918
$
1,758,716
24,937
30,420
898
803
$
231,978
276,959
4,963
3,510
7,875
1,388,154
6,990
918
$
1,761,906
25,717
27,989
898
803
$
76,206
255,453
645
3,241
6,202
1,192,347
6,200
413
$
1,432,355
24,922
15,228
1,026
413
$
76,206
255,453
643
3,241
6,202
1,193,550
6,200
413
$
1,435,387
25,981
12,681
1,026
413
NOTE 24.
PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheet of ServisFirst
Bancshares, Inc. as of December 31, 2010 and 2009 and the condensed statements of
income and cash flows for the years ended December 31, 2010, 2009 and 2008.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24.
PARENT COMPANY FINANCIAL INFORMATION (Continued)
BALANCE SHEET
(In Thousands)
Assets
Cash & due from banks
Investment in subsidiary
Other assets
Total assets
Liabilities
Other borrowings
Other liabilities
Stockholders' equity
Common stock
Paid in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilites and stockholders' equity
December 31
2010
2009
$
51
146,954
660
147,665
$
95
112,166
649
112,910
30,420
145
30,565
15,228
60
15,288
6
75,914
38,343
2,837
117,100
147,665
$
6
75,078
20,965
1,573
97,622
112,910
$
STATEMENT OF INCOME
(In Thousands)
Income
Dividends received from subsidiary
Other income
Total income
Expense
Interest on borrowings
Other operating expenses
Total expense
(Loss) income before income taxes & equity in
undistributed earnings of subsidiary
Income tax benefit
(Loss) income before equity in undistributed earnings
earnings of subsidiary
Equity in undistributed earnings of subsidiary
Net income
2010
2009
2008
$
1,230
42
1,272
$
325
40
365
$
850
30
880
2,236
295
2,531
(1,259)
(924)
1,401
304
1,705
(1,340)
(614)
488
391
879
1
(313)
(335)
17,713
17,378
$
(726)
6,604
5,878
$
314
6,691
7,005
$
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24.
PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENT OF CASH FLOWS
(In Thousands)
2010
2009
2008
$
17,378
$
5,878
$
7,005
241
(17,713)
(94)
(15,000)
(15,000)
260
(6,604)
(466)
(3,479)
(3,479)
(180)
(6,691)
134
(20,975)
(20,975)
-
-
-
3,479
3,479
(466)
561
95
317
(390)
15,000
6,474
21,401
560
1
561
$
$
$
$
$
$
-
-
15,050
-
15,050
(44)
95
51
Operating activities
Net income
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Other
Equity in undistributed earnings of subsidiary
Net cash (used in) provided by operating activities
Investing activities
Investment in subsidiary
Net cash used in investing activities
Financing activities
Proceeds from other borrowings
Repayment of borrowings
Proceeds from issuance of trust preferred securities
Proceeds from issuance of common stock
Net cash provided by financing activities
(Decrease) increase in cash & cash equivalents
Cash & cash equivalents at beginning of year
Cash & cash equivalents at end of year
112
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data derived from our
consolidated financial statements. Such data is only a summary and should be read in conjunction with
our historical consolidated financial statements and related notes continued in this annual report on Form
10-K.
Interest income
Interest expense
Net interest income
Provision for loan loss
Net income
Income per share, basic
Income per share, diluted
Interest income
Interest expense
Net interest income
Provision for loan loss
Net income
Income per share, basic
Income per share, diluted
$
$
2010 Quarter Ended
(Dollars in thousands, except per share data)
March 31
June 30
September 30
$
18,502
3,596
14,906
2,538
4,013
0.73
0.69
$
18,996
3,688
15,308
2,537
4,021
0.73
0.65
19,959
3,972
15,987
2,537
4,799
0.87
0.77
2009 Quarter Ended
(Dollars in thousands, except per share data)
March 31
June 30
13,937
4,891
9,046
2,460
721
0.13
0.13
$
14,979
4,478
10,501
2,608
1,559
0.28
0.27
September 30
$
16,092
4,648
11,444
3,209
1,608
0.29
0.28
December 31
$
20,689
4,004
16,685
2,738
4,545
0.82
0.73
December 31
$
17,189
4,320
12,869
2,583
1,990
0.37
0.34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants regarding accounting and financial
disclosure matters during the year ended December 31, 2010.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under supervision and with the participation of the Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as
defined under Exchange Act Rule 13a-15(e). Based upon that evaluation of these disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of December 31, 2010.
Changes in Internal Control over Financial Reporting
The Chief Executive Officer and Chief Financial Officer has concluded that there were no changes
in our internal control over financial reporting identified in the evaluation of the effectiveness of our
disclosure controls and procedures that occurred during the fiscal quarter ended December 31, 2010, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined under Exchange Act Rules 13a-15(f) and 14d-14(f). Our internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
113
As of December 31, 2010, management assessed the effectiveness of our internal control over
financial reporting based on criteria for effective internal control over financial reporting established in
“Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission. Based on the assessment, management determined that the
Company maintained effective internal control over financial reporting as of December 31, 2010, based
on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31,
2010, has been audited by Mauldin & Jenkins, LLC an independent registered public accounting firm, as
stated in their report herein — “Report of Independent Registered Public Accounting Firm.”
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
We respond to this Item by incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange Commission in connection with
our 2011 Annual Meeting of Shareholders.
Code of Ethics
Our Board of Directors has adopted a Code of Ethics that applies to all of our employees, officers
and directors. The Code of Ethics covers compliance with law; fair and honest dealings with us, with
competitors and with others; fair and honest disclosure to the public; and procedures for compliance with
the Code of Ethics. A copy of the Code of Ethics is included as Exhibit 14 to this Form 10-K.
Executive Officers of the Registrant
The business experience of our executive officers who are not also directors is set forth below.
William Foshee – Mr. Foshee has served as our Executive Vice President, Chief Financial Officer,
Treasurer and Secretary since 2007 and as Executive Vice President, Chief Financial Officer, Treasurer
and Secretary of the Bank since 2005. Mr. Foshee served as the Chief Financial Officer of Heritage
Financial Holding Corporation from 2002 until it was acquired in 2005. Mr. Foshee is a Certified Public
Accountant.
Clarence C. Pouncey, III – Mr. Pouncey has served as our Executive Vice President and Chief
Operating Officer since 2007 and Executive Vice President and Chief Operating Officer of the Bank
since November 2006 and also served as Chief Risk Officer of the Bank from March 2006 until
November 2006. Prior to joining the Company, Mr. Pouncey was employed by SouthTrust Bank (now
Wells Fargo Bank) in various capacities from 1978 to 2006, most recently as the Senior Vice President
and Regional Manager of Real Estate Financial Services.
Andrew N. Kattos – Mr. Kattos has served as Executive Vice President and Huntsville President
and Chief Executive Officer of the Bank since April 2006. Prior to joining the Company, Mr. Kattos was
employed by First Commercial Bank for 14 years, most recently as an Executive Vice President and
Senior Lender in the Commercial Lending Department. Mr. Kattos also serves on the advisory council
of the University of Alabama in Huntsville School of Business.
G. Carlton Barker – Mr. Barker has served as Executive Vice President and Montgomery President
and Chief Executive Officer of the Bank since February 1, 2007. Prior to joining the Company, Mr.
Barker was employed by Regions Bank for 19 years in various capacities, most recently as the Regional
114
President for the Southeast Alabama Region. Mr. Barker serves on the Huntingdon College Board of
Trustees and on the Alabama State Banking Board.
Ronald A. DeVane – Mr. DeVane has served as Executive Vice President and Dothan President and
Chief Executive Officer of the Bank since August 2008. Prior to joining the Company, Mr. DeVane held
various positions with Wachovia Bank and SouthTrust Bank until his retirement in 2006, including CEO
for the Wachovia Midsouth Region, which encompassed Alabama, Tennessee, Mississippi and the
Florida panhandle, from September 2004 until 2006, CEO of the Community Bank Division of
SouthTrust from January 2004 until September 2004, and CEO for SouthTrust Bank of Atlanta and
North Georgia from July 2002 until December 2003. Mr. DeVane is a Trustee at Samford University, a
member of the Troy University Foundation Board, a Trustee of the Southeast Alabama Medical Center
Foundation Board, and a Board Member of the National Peanut Festival Association.
ITEM 11. EXECUTIVE COMPENSATION.
We respond to this Item by incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange Commission in connection with
our 2011 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
We respond to this Item by incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange Commission in connection with
our 2011 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
We respond to this Item by incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange Commission in connection with
our 2011 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
We respond to this Item by incorporating by reference the material responsive to this Item in our
definitive proxy statement to be filed with the Securities and Exchange Commission in connection with
our 2011 Annual Meeting of Stockholders.
115
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
PART IV
(a)
The following financial statements are filed as a part of this registration statement:
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements
Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Income for the Years Ended December 31,
2010, 2009 and 2008
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for Years Ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years December 31, 2010,
2009 and 2008
Notes to Consolidated Financial Statements
Page
66
67
68
69
70
71
72
73
75
(b)
The following exhibits are furnished with this registration statement.
EXHIBIT NO.
NAME OF EXHIBIT
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Plan of Reorganization and Agreement of Merger dated August 29, 2007 (1)
Certificate of Incorporation (1)
Certificate of Amendment to Certificate of Incorporation (1)
Bylaws (1)
Form of Common Stock Certificate (1)
Certain provisions from the Certificate of Incorporation (1)
Revised Form of Common Stock Certificate (2)
Amended and Restated Trust Agreement of ServisFirst Capital Trust I dated September 2, 2008
(3)
Indenture dated September 2, 2008 (3)
Guarantee Agreement dated September 2, 2008 (3)
Form of Common Stock Purchase Warrant dated September 2, 2008 (3)
ServisFirst Bank 8.5% Subordinated Note due June 1, 2016 (6)
116
4.9
4.10
4.11
4.12
10.1
10.2
10.3
10.4
10.5
10.6
11
14
21
24
31.1
31.2
32.1
32.2
Warrant to Purchase Shares of Common Stock dated June 23, 2009 (6)
Amended and Restated Trust Agreement of ServisFirst Capital Trust II, dated March 15, 2010 (7)
Indenture, dated March 15, 2010, by and between ServisFirst Bancshares, Inc. and Wilmington
Trust Company (7)
Preferred Securities Guaranty Agreement, dated March 15, 2010, by and between ServisFirst
Bancshares, Inc. and Wilmington Trust Company (7)
2005 Amended and Restated Stock Incentive Plan (1)*
Change in Control Agreement with William M. Foshee dated May 20, 2005 (1)*
Change in Control Agreement with Clarence C. Pouncey III dated June 6, 2006 (1)*
Employment Agreement of Andrew N. Kattos dated April 27, 2006 (1)*
Employment Agreement of G. Carlton Barker dated February 1, 2007 (1)*
2009 Stock Incentive Plan (4)*
Statement Regarding Computation of Earnings Per Share is included herein at Note 21 to the
Financial Statements in Item 8.
Code of Ethics for Principal Financial Officers (5)
List of Subsidiaries
Power of Attorney
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
(1) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Registration Statement on Form 10, as
filed with the Securities and Exchange Commission on March 28, 2008, and incorporated herein by
reference.
(2) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated
September 15, 2008, and incorporated herein by reference.
(3) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated
September 2, 2008, and incorporated herein by reference.
(4) Previously filed as Appendix A to ServisFirst Bancshares, Inc.’s definitive Proxy Statement on
Schedule 14A relating to the 2009 Annual Meeting of Stockholders and incorporated herein by reference.
117
(5) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, and incorporated herein by reference.
(6) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, and incorporated herein by reference.
(7) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated
March 15, 2010, and incorporated herein by reference.
* Management contract or compensatory plan arrangements.
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SERVISFIRST BANCSHARES, INC.
By: /s/Thomas A. Broughton, III
Thomas A. Broughton, III
President and Chief Executive
Officer
Dated: March 8, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
Signature
Title
/s/Thomas A. Broughton, III
Thomas A. Broughton, III
/s/ William M. Foshee
William M. Foshee
*
Stanley M. Brock
*
Michael D. Fuller
James J. Filler
*
Joseph R. Cashio
*
Hatton C. V. Smith
Date
March 8, 2011
March 8, 2011
President, Chief Executive
Officer and Director (Principal
Executive Officer)
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Chairman of the Board
March 8, 2011
Director
Director
Director
Director
March 8, 2011
March 8, 2011
March 8, 2011
March 8, 2011
_________________
*The undersigned, acting pursuant to a Power of Attorney, have signed this Annual Report on Form 10-K for and on behalf of
the persons indicated above as such persons’ true and lawful attorney-in-fact and in their names, places and stated, in the
capacities indicated above ad on the date indicated below.
/s/ William M. Foshee
William M. Foshee
Attorney-in-Fact
119
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cshares, Inc
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Servi
850 S
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Shades Cree
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mingham, AL
Free: 866.3
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L 35209
17.0810
bank.com
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