SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
March 19, 2012
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 Pensacola Country Club, 1500 Bayshore Drive, Pensacola, Florida
32507 on Thursday, April 26, 2012, 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 to
Stockholders, which contains detailed information concerning our activities and operating performance
including our Annual Report on Form 10-K.
The business to be conducted at the Annual Meeting consists of the election of six directors; the
ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the
year ending December 31, 2012; an advisory vote on executive compensation; the approval of an
amendment to our certificate of incorporation to increase the number of shares of authorized common stock
from 15 million to 50 million. Our board of directors unanimously recommends a vote “FOR” the election
of the director nominees; “FOR” the ratification of the appointment of KPMG LLP as our independent
registered public accounting firm for the year ending December 31, 2012; “FOR” the “Say on Pay”
advisory vote approving our executive compensation; and “FOR” the amendment to our certificate of
incorporation to increase the number of shares of authorized common stock.
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
enclosed 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 2012 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..................................................................................................................................9
Code of Business Conduct..............................................................................................................................................9
Compensation Committee Interlocks and Insider Participation......................................................................................9
Director Compensation.................................................................................................................................................10
Meetings of the Board of Directors ..............................................................................................................................10
Certain Relationships and Related Transactions...........................................................................................................10
Section 16(a) Beneficial Ownership Reporting Compliance ........................................................................................10
Compensation Discussion and Analysis .......................................................................................................................11
Report of the Compensation Committee ......................................................................................................................15
Executive Compensation ..............................................................................................................................................16
Employment Contracts and Termination of Employment Arrangements and Potential Payments Upon
Termination or Change in Control.......................................................................................................................19
Equity Compensation Plan Information .......................................................................................................................21
Security Ownership of Certain Beneficial Owners and Management ..........................................................................21
Proposal 2 Ratification of KPMG LLP as Our Independent Registered Public Accounting Firm for the Year Ended
December 31, 2012..............................................................................................................................................23
Independent Registered Public Accounting Firm .........................................................................................................24
Report of the Audit Committee ....................................................................................................................................25
Proposal 3: Advisory Vote on Executive Compensation.............................................................................................25
Proposal 4: Amendment to Certificate of Incorporation to Increase the Number of Shares of Authorized
Common Stock ....................................................................................................................................................26
Stockholder Proposals ..................................................................................................................................................27
General Information .....................................................................................................................................................27
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SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
NOTICE OF 2012 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 26, 2012
To Our Stockholders:
Notice is hereby given that our Annual Meeting of Stockholders will be held at the Pensacola Country Club,
1500 Bayshore Drive, Pensacola, Florida 32507 on Thursday, April 26, 2012, 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.
to ratify the appointment of KPMG LLP as our independent registered public accounting firm for
the year ending December 31, 2012;
3.
4.
to conduct a “Say on Pay” advisory vote on our executive compensation;
to amend our Certificate of Incorporation to increase the number of shares of authorized common
stock from 15 million to 50 million; and
5.
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 8, 2012 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 19, 2012
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2012 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 Thursday, April 26, 2012, at 5:00 p.m., Central Daylight Time, at the Pensacola Country Club, 1500
Bayshore Drive, Pensacola, Florida 32507. The notice of annual meeting of stockholders, this Proxy Statement and
the accompanying Proxy Card are being mailed on or about March 20, 2012 to our stockholders of record as of the
close of business on March 8, 2012, 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: (1) the election of six directors, as more fully described in
Proposal 1 below; (2) the ratification of KPMG LLP as our independent public accounting firm for the year ending
December 31, 2012; (3) an advisory vote on our executive compensation; (4) an amendment to our Certificate of
Incorporation to increase the number of shares of authorized common stock; and (5) 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 March 8, 2012, the record date for the Annual Meeting,
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
2012 Annual Meeting of Stockholders.
What is a Proxy Statement?
It is a document that SEC regulations require us to give to you when we ask you to sign a Proxy Card
designating the Management Proxies as your 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, 5,947,182 shares of our common stock,
$.001 par value per share, held by 1,217 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. The amendment to our Certificate of Incorporation must
be approved by the holders of a majority of the issued and outstanding shares of our common stock. 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 20, 2012, we mailed the Notice of the Annual Meeting, this Proxy Statement, the
accompanying Proxy Card, and our Annual Report to Stockholders for the year ended December 31, 2011 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 Card 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: (1) the election of the six
nominees for the board of directors, as more fully described in Proposal 1 below; (2) the ratification of KPMG LLP
2
as our independent registered public accounting firm for 2012, as more fully described in Proposal 2 below; (3) an
advisory vote approving our executive compensation, as more fully described in Proposal 3 below; and (4) an
amendment to our Certificate of Incorporation to increase the number of shares of authorized common stock from 15
million to 50 million, as more fully described in Proposal 4 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 on any proposal on a Proxy Card, the Management Proxies will vote all shares of common
stock for which such Proxy Cards have been received in favor of the approval of the above proposals for which no
instructions were indicated.
Our board of directors does not know of any 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, Proxy Card and our Annual Report to Stockholders for
the year ended December 31, 2011, 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 materials 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, 2011 (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 as of the close of business on March 8, 2012, 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 2013 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 2012
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
Age
Director
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
56
61
58
68
54
61
2007
2007
2007
2007
2007
2007
President, Chief Executive
Officer and Director
Chairman of the Board
and Director
Director
Director
Director
Director
2005
2005
2005
2005
2005
2005
President, Chief Executive
Officer and Director
Chairman of the Board
and Director
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.
4
Stanley M. Brock – Mr. Brock has served as our Chairman of the Board and a director since 2007 and has served as Chairman of
the Board and a director 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 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 of the Company 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 experience 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 of the Company 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 of the Company 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
wastewater collection and 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, make
him highly qualified to serve as a director.
Hatton C. V. Smith – Mr. Smith has served as a director of the Company 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 meetings of the board and meetings of those board committees on which they serve.
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 always 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.
5
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.
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 to 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 www.servisfirstbancshares.com under the “Corporate
Information - 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 comprises Michael
D. Fuller, J. Richard Cashio and Stanley M. Brock, met six times in 2011. In conjunction with our Board's annual review of its
committees, it has determined that Mr. Brock should be designated as an audit committee financial expert. This determination is
based on the broad spectrum of Mr. Brock's experience. Among the other things described above under Proposal I outlining Mr.
Brock's experience and background, our Board gave careful consideration to Mr. Brock's 16-plus years leading a private venture
capital firm. His experience in this undertaking includes analyzing financial statements and audit results and making investment and
acquisition decisions on the basis of those analyses. 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.
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 six times in
2011. 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),
6
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
asset growth, the base salary of our president and CEO was in the bottom 12% and his total compensation was 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's 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 make 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 during 2011. 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 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 a board member if elected,
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 board's composition 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 our fiscal year ended December 31, 2011.
Names
Thomas A. Broughton III
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C.V. Smith
Committee Membership
Nominating and Corporate
Governance
Audit
Compensation
X
X
X
X
X
X
X
X
X
Advisory Boards
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, Alabama and Pensacola, Florida 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
7
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:
Huntsville Region:
Montgomery Region:
E. Wayne Bonner
Dr. Hoyt A. “Tres” Childs, III
Donald J. Davidson
David J. Slyman, Jr.
Irma Tuder
Sidney R. White
Danny J. Windham
Thomas J. Young
Pensacola Region:
Thomas M. Bizzell
Bo Carter
Leo Cyr
Dr. Mark S. Greskovich
Ray Russenberger
Roger Webb
Ray B. Petty
Todd Strange
G.L. Pete Taylor
W. Ken Upchurch, III
Alan E. Weil, Jr.
Dothan Region:
Charles H. Chapman III
John Downs
Charles E. Owens
William C. (Bill) Thompson
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 its most recent 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.
8
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 comprise:
• 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, which include: 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, which cover: 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, such as: programs to familiarize new directors with our business, strategic
plans, significant financial, accounting and risk management issues; our compliance programs and conflicts policies; our
code of business conduct and ethics and our 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 independent 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, 2011, 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. (For further
information, see the section below entitled "Compensation Discussion and Analysis.")
9
The following table sets forth information regarding the compensation of our non-employee directors for the year ended
December 31, 2011. Thomas A. Broughton III is a named executive officer, and his compensation is reflected in the Summary
Compensation Table.
DIRECTOR COMPENSATION
Name
(a)
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
(b)
($)
22,000
22,250
17,250
17,000
17,500
Stock Awards
(c)
($)
58,800
58,800
58,800
58,800
58,800
Total
(h)
($)
80,800
81,050
76,050
75,800
76,300
MEETINGS OF THE BOARD OF DIRECTORS
Our board of directors held 11 meetings in 2011. 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.
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 the ordinary course of our 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 entered into and maintained
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 that are 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 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, 2011, including extensions of credit or overdrafts, endorsements and guarantees outstanding on such date, was
approximately $8,676,000, which equaled 5.57% 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 Mr. Broughton reported on his Form 5 for the year ended
December 31, 2011, 8,816 shares that were held by his wife and stepchildren that were inadvertently not reported on his Form 3 and
10
1,200 shares purchased by his wife and stepchildren that should have been reported on a Form 4 in February 2011. Mr. Broughton
disclaims beneficial ownership of the shares owned by his wife and stepchildren.
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 and
Clarence C. Pouncey III.
Since November 2007, when we completed our reorganization in which ServisFirst Bancshares, Inc. was formed and became the
parent of 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 Bank's board of directors include 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, 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 equity or other incentive plans. Because our officers, including Mr. Broughton, Mr. Foshee and
Mr. Pouncey, 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 Bank's board of directors and by our board of
directors. Because both compensation committees consist of the same persons, as do both boards 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. No executive officers of the Company make any recommendations to the Compensation Committee or
participate in any way regarding the compensation of other executive officers, other than the President and CEO, Mr. Broughton. The
Compensation Committee consults with Mr. Broughton to gain a better insight into the performance of the executive team as a basis
for the committee's determinations regarding executive compensation. While the Compensation Committee consults with Mr.
Broughton, the Compensation Committee makes its decisions independently.
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:
11
(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.
Role of Say-on-Pay Advisory Vote
At the 2011 Annual Meeting of stockholders, our stockholders approved the advisory say-on-pay proposal by the affirmative vote
of 98% of the shares cast on the proposal. The Compensation Committee considered the results of the advisory say-on-pay advisory
vote and did not implement any significant changes to our executive compensation as a result of the say-on-pay advisory vote. The
Compensation Committee will continue to consider the outcome of the say-on-pay advisory votes when making future compensation
decisions for our named executive officers.
At the 2011 Annual Meeting, the board recommended and the stockholders approved holding annual advisory say-on-pay votes.
The Board has decided to hold the say-on-pay advisory vote every year.
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.
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.
12
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 analyzes 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 2011, an average of 33% of our named executive officers’ compensation was in annual short-term cash incentives
and an average of 19% 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 2011)
Annual Base
Salary
Annual Short-
Term Cash
Incentives
Equity-Based
Incentives
Perquisites
and Benefits
37
56
61
36
34
33
20
6
--
7
4
6
Named Executive Officer
Thomas A. Broughton III, Principal Executive
Officer (“PEO”)
William M. Foshee, Principal Financial Officer
(“PFO”)
Clarence C. Pouncey III
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
2011 base salary and incentive compensation reflect the Compensation Committee’s and our board’s determination of the total
compensation package necessary to meet this objective.
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, 2011, the Compensation Committee increased the base salaries of our named executive officers
as follows: Thomas A. Broughton III to $283,250 from $275,000, an increase of 3%; William M. Foshee to $200,000 from $180,000,
an increase of 11.1% and Clarence C. Pouncey III to $235,000 from $225,000, an increase of 4.4%.
None of the named executive officers have employment agreements. See “Employment Agreements” below for a more detailed
discussion.
Annual Short-Term Cash Incentive Compensation
For the year ended December 31, 2011, the Compensation Committee relied on various performance measurements for defining
executive officer cash 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.
13
Broughton is purely discretionary, but the potential cash 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 cash incentive compensation in excess of 50% of an officer’s base
salary. In 2011, 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 cash incentive compensation of up to 60% of their respective base
salaries. We do not have any contractual obligations to provide the opportunity to earn specified levels of cash incentive
compensation, and thus such determination is entirely within the discretion of the Compensation Committee. 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 cash incentive 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 2011 performance.
Name
Performance Targets
Thomas A. Broughton III
None
William M. Foshee
Net Income
Regulatory Compliance
Clarence C. Pouncey III
Net Income
Non-performing Asset plus
ORE/Loans
Classified Loans plus ORE plus
Non-performing Assets/Capital
2011 Incentive
Range (%)
2011 Incentive as
a Percentage of
Base Salary (%)
2011 Incentive
Paid ($)
None
0%-60%
97%
60%
275,000
120,000
0%-60%
53%
125,000
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 cash incentive bonuses to all of our named executive officers for 2011. Accordingly, for the year
ended December 31, 2011 and based upon its subjective determination of our overall performance and such officers’ individual
performance for 2011, the Compensation Committee awarded the cash 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 60,000 shares to date.
It will vest an additional 10,000 shares on May 19, 2012 (for an aggregate of 70,000 shares) and each May 19 thereafter until the final
5,000 shares vest on May 19, 2013. In addition, Mr. Broughton 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. On November 28, 2011, Mr. Broughton was granted a stock opton to
purchase 10,000 shares of our common stock at $30.00 per share for services as a director. These shares will vest in a lump sum five
years from 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 vest fully 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
14
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, 2011.
Our Stock Incentive Plans allow for the accelerated vesting of equity awards in the event of a change in control. In general, under
these Plans a “change in 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 entered into change in control agreements with Mr. Foshee and Mr. Pouncey. 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, 2011 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 2012 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.
Submitted by the Compensation Committee:
Hatton C.V. Smith, Chairman
J. Richard Cashio
James J. Filler
15
Summary Compensation Table
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by us or the Bank for services for the years ended December 31,
2011, 2010 and 2009 to our named executive officers:
Name and Principal
Position Held
(a)
Thomas A. Broughton III
President & CEO
Clarence C. Pouncey III
EVP and Chief
Operating Officer
William M. Foshee
EVP and Chief Financial
Officer
Year
(b)
2011
2010
2009
2011
2010
2009
2011
2010
2009
Salary
(c)
($)
Bonus
(d)
($)
Stock
Awards
(e)
($)
Option
Awards(1)
(f)
($)
Non-Equity
Incentive
Plan Comp
(g)
($)
283,250
275,000
250,000
275,000
137,500
-
-
-
500,000
152,740
-
-
235,000
225,000
215,000
125,000
112,800
-
200,000
180,000
165,000
120,000
90,000
-
-
-
-
-
-
-
-
-
-
21,350
37,150
-
-
-
-
-
-
-
-
-
-
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings
(h)
($)
-
-
-
-
-
-
-
-
-
All Other
Compensation
(i)
($)
48,679(2)
47,730
47,494
23,839(3)
22,472
21,936
15,101(4)
9,704
17,482
Total
(j)
($)
759,669
460,230
797,494
383,839
360,272
236,936
356,451
316,854
182,482
(1)
The amounts in this column reflect the aggregate grant date fair value under FASB ASC Topic 718 of awards made during the respective year.
(2)
All Other Compensation for 2011 includes car allowance ($9,000), director’s fees ($16,000), country club allowance ($5,830), healthcare premiums
($7,173), matching contributions to 401(k) plan ($9,800) and group life and long-term disability insurance premiums ($876).
(3)
All Other Compensation for 2011 includes car allowance ($9,000), country club allowance ($6,790), group life and long-term disability insurance
premiums ($876) and healthcare premiums ($7,173).
(4)
All Other Compensation for 2011 includes car allowance ($9,000), matching contributions to 401(k) plan ($5,225) and group life and long-term
disability insurance premiums ($876).
16
Grants of Plan-Based Awards in 2011
The table below sets forth information regarding grants of plan-based awards made to our named executive officers during 2011.
Name
(a)
Grant Date
(b)
All Other Option
Awards:
Number of Securities
Underlying Options (#)
(i)
All Other Stock
Awards: Number of
Shares of Stock or
Units (#)
(j)
Exercise or Base
Price of Option
Awards ($/Sh)
(k)
Grant Date Fair
Value ($)
(l)
Thomas A. Broughton III (PEO)
1/19/11
11/28/11
William M. Foshee (PFO)
1/19/11
11,000
10,000
2,500
Clarence C. Pouncey III
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
$25.00
$30.00
$25.00
(cid:2)
93,940
58,800
21,350
(cid:2)
17
Outstanding Equity Awards at Fiscal Year-End
The following table details all outstanding equity awards as of December 31, 2011.
Option Awards
Stock Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
(b)
Number of
securities
underlying
unexercised
options (#)
unexercisable
(c)
Option
exercise
price ($)
(e)
Option
expiration
date
(f)
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(g)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
(h)
Name
(a)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested ($)
(j)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
(i)
Thomas A. Broughton III
(PEO) (1)
William M. Foshee (PFO) (2)
37,500
20,000
5,000
Clarence C. Pouncey III (3)
27,000
____________________
11,000
10,000
10,000
5,000
5,000
2,500
23,000
$25.00
1/19/2016
12,000
$360,000
(cid:2)
(cid:2)
$20.00
$30.00
$10.00
$11.00
$20.00
$25.00
$25.00
$11.00
12/20/2017
11/28/2021
5/19/2015
4/20/2016
2/19/2018
2/16/2020
1/19/2021
4/20/2016
(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 option to purchase 10,000 shares at $30.00 per share granted to Mr. Broughton on November 28, 2011 vests 100% on
November 28, 2016. 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 $30.00 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 on February 16, 2014 and
4,000 shares on February 16, 2015. The option to purchase 2,500 shares at $25.00 per share granted to Mr. Foshee vests in a lump sum on January 19,
2016.
(3) The option to purchase 50,000 shares at $11.00 per share granted to Mr. Pouncey on April 20, 2006 vests 9,000 shares per year beginning on April 20,
2009, with the final 5,000 shares vesting on April 20, 2014.
Plan Option Exercises and Stock Vested in 2011
The following table sets forth information regarding option exercises by and restricted stock vesting for our named executive
officers during 2011:
18
Option Awards
Stock Awards
Number of Shares
Acquired on Exercise (#)
Value
Realized on
Exercise ($)
Number of Shares
Acquired on
Vesting (#)
Value Realized on
Vesting ($)
(b)
12,500
-
-
(c)
250,000
-
-
(d)
4,000
-
-
(e)
120,000
-
-
Name
(a)
Thomas A. Broughton III
William M. Foshee
Clarence C. Pouncey III
Mr. Broughton received a restrictive stock award of 20,000 shares in 2009 and 4,000 shares of such award as referenced in the
table above vested on October 26, 2011. Based upon a value of $30.00 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 $120,000.
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.
During 2011, each of Mr. Broughton and Mr. Cashio exercised his warrant to purchase 10,000 shares of our common stock at a
purchase price of $10.00 per shares. No non-plan options were exercised during fiscal year 2011.
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
Change in Control Agreements
General
At December 31, 2011, we had two change in control severance agreements with named executive officers, William M. Foshee
and Clarence C. Pouncey III. 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.
Mr. Foshee's and Mr. Pouncey's 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.
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.
19
Definitions
The term “change in control” is defined in Mr. Foshee's and Mr. Pouncey's 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) any acquisition by us, by any of our subsidiaries, or by any employee benefit plan (or related trust) of us or our
subsidiaries, or;
(cid:3) 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) our complete liquidation or dissolution, or
(cid:3) 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.
(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.
20
Estimated Payments upon a Termination or Change in Control
Change in Control
Assuming that we had a change in control as of December 31, 2011, as defined in both the change in control agreements above,
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 $400,000 to Mr. Foshee and $235,000 to Mr. Pouncey, each in a lump sum payment within 30 days of their respective
termination.
Furthermore, assuming we had a change in control as of December 31, 2011, as defined in either of our stock incentive plans, and
further assuming that the value of the stock as of that date was $30.00 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 $30.00 per share and their respective exercise prices per share for such shares: (i) Thomas A.
Broughton III – $155,000, (ii) William M. Foshee - $87,500, and (iii) Clarence C. Pouncey, III - $437,000.
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, 2011:
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
1,048,800
55,000
1,103,800
$18.59
$17.27
$18.52
401,200
—
401,200
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 one's
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 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, 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, 2011, we had issued and outstanding options to purchase 1,103,800 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, 2011, 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.
21
Security Ownership of Management
The following table sets forth the beneficial ownership of our common stock as of March 8, 2012 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........................................................................ 184,452 (4)(5)
Stanley M. Brock .................................................................................... 159,250 (3)(4)(6)
Michael D. Fuller.................................................................................... 135,002 (3)(4)(7)
James J. Filler ......................................................................................... 185,252 (3)(4)(8)
J. Richard Cashio .................................................................................... 108,902 (4)(9)
3.07%
2.66%
2.27%
3.10%
1.83%
Hatton C. V. Smith ................................................................................. 53,500 (3)(4)(10)
*
William M. Foshee ................................................................................. 64,992 (11)
1.09%
Clarence C. Pouncey III.......................................................................... 101,667 (12)
All directors and executive officers as a group (8 persons).....................
993,017 (13)
*
Less than 1%.
1.70%
16.11%
(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 5,947,182 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.
Includes the shares underlying a warrant issued to each director on May 13, 2005 pursuant to which each director may purchase
(3)
an additional 10,000 shares of common stock for $10.00 per share which vested 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.
(4) 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 or an option granted to each director on November 28, 2011 to purchase 10,000
shares of common stock for $30.00 per share which vests 100% after five years.
(5)
Includes 37,500 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 an option granted to Mr. Broughton on January 19, 2011 to
purchase 11,000 shares of common stock for $25.00 per share which vests 100% after five years. Does not include 7,816 shares
owned by his spouse and 1,100 shares owned by each of his two stepchildren. Mr. Broughton disclaims beneficial ownership of such
shares.
(6)
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
22
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.
(7) 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.
Includes 24,000 shares obtainable upon conversion of ServisFirst Capital Trust II’s 6.0% Mandatory Convertible Trust
(8)
Preferred Securities.
(9)
Includes 2,946 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.
Includes 16,000 shares obtainable upon conversion of ServisFirst Capital Trust II’s 6.0% Mandatory Convertible Trust
(10)
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.
Includes 20,000 shares obtainable within 60 days pursuant to an option granted to Mr. Foshee on May 19, 2005 to purchase up
(11)
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 shares of common stock for $20.00 per share, which vests 100% on February 19, 2013, an option granted February 16, 2010 to
purchase 5,000 shares at $25.00 per share which vests 1,000 shares on February 16, 2014 and 4,000 shares on February 16, 2015, 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.
(12)
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.
(13) Includes 216,150 shares obtainable within 60 days pursuant to the exercise of outstanding options or warrants or the conversion
of outstanding convertible securities.
PROPOSAL 2
RATIFICATION OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR THE YEAR ENDING DECEMBER 31, 2012
Subject to the ratification by our stockholders, our board of directors intends to engage KPMG LLP as our independent registered
public accounting firm for the fiscal year ending December 31, 2012.
The submission of this matter for ratification by stockholders is not legally required; however, our board of directors believes that
such submission is consistent with best practices in corporate governance and is an opportunity for stockholders to provide direct
feedback to the directors on an important issues of corporate governance. A majority of the total votes cast at the Annual Meeting,
either in person or by proxy, will be required for the ratification of the appointment of the independent registered public accounting
firm. If our stockholders do not ratify the selection of KPMG LLP, the appointment of the independent registered public account firm
will be reconsidered by the Audit Committee and the board of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF KPMG
LLP AS OUR INDEPENDENT REGISTERED PUBLIC AQCCOUNTING FIRM FOR THE YEAR ENDING DECEMBER
31, 2012.
23
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our consolidated balance sheets as of December 31, 2011, and the related consolidated statements of income, comprehensive
income, stockholders’ equity and cash flows for the year ended December 31, 2011 have been audited by KPMG LLP, our
independent registered public accounting firm, as stated in their report appearing in our 2011 Annual Report on Form 10-K. KPMG
LLP was initially engaged as our independent registered public accounting firm on May 20, 2011. Representatives of KPMG LLP 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.
On May 20, 2011, the Audit Committee determined not to reengage Mauldin & Jenkins, LLC ("Mauldin & Jenkins") as the
principal independent registered public accounting firm to audit the Company's financial statements. Mauldin & Jenkins's reports on
the Company's financial statements for the past two years did not contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principles, except that Mauldin & Jenkins's report dated March 8,
2010, that was included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, expressed an opinion that
the Company and its subsidiaries had not maintained effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. During the Company's two most recent fiscal years and the subsequent interim periods preceding Mauldin &
Jenkins' dismissal, there have been no disagreements with Mauldin & Jenkins on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which disagreements, if not resolved to the satisfaction of Mauldin &
Jenkins, would have caused Mauldin & Jenkins to make reference to the subject matter of the disagreements in connection with its
reports on the Company's financial statements. Mauldin & Jenkins's report dated March 8, 2011, that was included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2010, expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting as of December 31, 2010. The Company has provided Mauldin & Jenkins with a
copy of the disclosures made in this paragraph and requested that Mauldin & Jenkins furnish the Company with a letter addressed to
the United States Securities and Exchange Commission stating whether or not Mauldin & Jenkins agreed with such disclosures.
Mauldin & Jenkins has provided such a letter to the Company, and a copy of such letter is included as Exhibit 16 to the Company's
Current Report on Form 8-K filed May 26, 2011.
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 engagement of KPMG
LLP pursuant to which it provided the audit and audit-related services described below for the fiscal year ended December 31, 2011
and pre-approved the engagement of Mauldin & Jenkins, LLC pursuant to which it provided the audit and audit-related services
described below for the fiscal year ended December 31, 2010. One hundred percent of the fees set forth below were pre-approved by
the Audit Committee.
Audit Fees
The aggregate fees billed by KPMG LLP for professional services rendered for the audit of our consolidated financial statements
for the fiscal year ended December 31, 2011, 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 $148,000 . 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,
2010, and for the review of the interim consolidated financial statements included in our Quarterly Reports on Form 10-Q for such
fiscal year were approximately $157,000.
Audit-Related Fees
The aggregate fees billed by KPMG LLP for professional services rendered for assurance and related services for the fiscal year
ended December 31, 2011 were $0. The aggregate fees billed by Mauldin & Jenkins, LLC for professional services rendered for
assurance and related services for the fiscal year ended December 31, 2010 were $10,000. 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.
24
Tax Fees
KPMG LLP did not provide tax compliance, tax advice or tax planning services to us for the fiscal year ended December 31,
2011. Mauldin & Jenkins, LLC did not provide tax compliance, tax advice or tax planning services to us for the fiscal year ended
December 31, 2010.
All Other Fees
The aggregate fees billed by KPMG LLP for other products and services provided for the year ended December 31, 2011 were $0.
The aggregate fees billed by Mauldin & Jenkins, LLC for other products and services for the year ended December 31, 2010 were
$10,000. These fees related to the 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.
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 KPMG
LLP, independent registered public accountants for the Company for the year ended December 31, 2011. Management represented to
the Audit Committee that the Company’s audited consolidated financial statements were prepared in accordance with U.S. generally
accepted accounting principles.
The Audit Committee has discussed with KPMG LLP 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 KPMG LLP required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit
Committees,” and has discussed with KPMG LLP their independence from the Company.
Based on these reviews and discussions with management of the Company and KPMG LLP 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, 2011 be included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2011.
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 3
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
headings “Executive Compensation” and “Compensation Discussion and Analysis” 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:
25
RESOLVED, that the compensation paid to the Company’s named executive officers as disclosed herein
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.
PROPOSAL 4
AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE
THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK
On February 21, 2012, our board of directors approved an amendment to Article IV, Section 4.1 of our Certificate of
Incorporation, as amended, to increase the number of shares of authorized common stock of the Company from 15 million to 50
million. The approval by the board is subject to the approval of such amendment by the holders of a majority of the issued and
outstanding shares of our common stock. A copy of the proposed amendment is attached to this Proxy Statement as Annex A.
Increase in Number of Shares of Authorized Common Stock
The board of directors recommends that the stockholders approve the proposed amendment because it considers such amendment
to be in the best long-term and short-term interests of the Company, its stockholders and its other constituencies. The proposed
increase in the number of shares of authorized common stock will ensure that a sufficient number of shares will be available, if
needed, for issuance in connection with any possible future transactions approved by the board of directors, including, among others,
stock splits, stock dividends, stock incentive plans, acquisitions and other corporate purposes. The board of directors believes that the
availability of the additional shares for such purposes without delay or the necessity for a special stockholders' meeting (except as may
be required by applicable law or regulatory authorities) will be beneficial to the Company by providing it with the flexibility to
consider and respond to future business opportunities and needs as they arise. The availability of such additional shares will also
enable us to act promptly when the board of directors determines that the issuance of additional shares of common stock is advisable.
It is possible that shares of common stock may be issued at a time and under circumstances that may increase or decrease earnings per
share and increase or decrease the book value per share of shares currently outstanding.
We do not have any immediate plans, agreements, arrangements, commitments or understandings with respect to the issuance of
any additional shares of our common stock that would be authorized upon approval of the proposed amendment. However, as
described below, we have a relatively small number of authorized but unissued shares that are not already reserved for issuance, and if
the proposed amendment is not approved, our flexibility to pursue potential future transactions or compensation arrangements
involving our stock will be limited.
Under our Certificate of Incorporation, we currently have authority to issue 15 million shares of common stock, par value $.001
per share, of which 5,947,182 shares were issued and outstanding as of February 28, 2012. In addition, as of such date, approximately
(a) 401,200 shares were reserved for issuance under our incentive compensation plans, under which options to purchase a total of
1,018,800 shares were outstanding, (b) 55,000 shares of common stock subject to other outstanding options, (c) approximately 40,000
shares were reserved for issuance pursuant to outstanding warrants, (d) approximately 75,000 shares were reserved for issuance
pursuant to our convertible trust preferred securities and (e) 15,000 shares of common stock reserved for issuance upon conversion of
an outstanding convertible subordinated note. After giving effect to such reserved shares, approximately 7,417,818 shares were
available for issuance on such date.
There are no preemptive rights with respect to our common stock.
26
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ADOPTION OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER
OF SHARES OF AUTHORIZED COMMON STOCK FROM 15 MILLION TO 50 MILLION.
STOCKHOLDER PROPOSALS
Under Exchange Act Rule 14a-8, any stockholder desiring to submit a proposal for inclusion in our proxy materials for our
2013 Annual Meeting of Stockholders must provide the Company with a written copy of that proposal by no later than November 19,
2012, which is 120 days before the first anniversary of the date on which the Company’s proxy materials for 2012 were first released.
However, if the date of our Annual Meeting in 2013 changes by more than 30 days from the date of our 2012 Annual Meeting, then the
deadline would be a reasonable time before we begin distributing our proxy materials for our 2013 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
By Order of the Board of Directors
SERVISFIRST BANCSHARES, INC.
William M. Foshee
Secretary and Chief Financial Officer
Birmingham, Alabama
March 19, 2012
27
ANNEX A
PROPOSED AMENDMENT TO ARTICLE IV, SECTION 4.1 OF THE CERTIFICATE OF
INCORPORATION OF SERVISFIRST BANCSHARES, INC., AS APPROVED BY THE BOARD OF
DIRECTORS ON FEBRUARY 21, 2012
RESOLVED, that, the first paragraph of Article IV, Section 4.1 of the Certificate of Incorporation
of the Corporation shall be amended to read as follows:
Section 4.1
Authorization of Capital. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue shall be Fifty-One Million (51,000,000) shares,
comprising Fifty Million (50,000,000) shares of Common Stock, with a par value of $.001 per share, and
One Million (1,000,000) shares of Preferred Stock, with a par value of $.001 per share, as the Board of
Directors may decide to issue pursuant to Section 4.3, which constitutes a total authorized capital of all
classes of capital stock of Fifty-One Thousand Dollars ($51,000.00).
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Our Name is Our Mission
2011 Annual Report
ServisFirst Bank
www.servisfirstbank.com
ServisFirst Bancshares
www.servisfirstbancshares.com
Birmingham (cid:2)
Dothan
(cid:2) Huntsville (cid:2) Montgomery (cid:2) Pensacola
(cid:2)
(cid:2)
March 8, 2012
Dear Shareholders,
I am pleased to report that 2011 was a record year for ServisFirst Bancshares. These record earnings were driven by loan growth of 31%
year over year. Our outstanding group of experienced bankers who know their communities drove these record earnings. Our credit
department would also attribute our increased earnings to lower loan losses, lower as compared to our average competitor, as a result of
better underwriting. I attribute the lower losses to dealing with a better quality customer than the average bank’s, due to our bankers’
deep knowledge of the people and businesses within their community. It is not only a distinct advantage but also a privilege for me to
work with these great bankers.
2011 net income totaled $23.2 million, a 34% increase over 2010, and basic earnings per share were $4.03, a 28% increase over 2010.
Our book value has increased from $10 per share in May 2005 to $26.35 per share at year-end 2011.
Our two major initiatives of 2011 were our new Correspondent Division and our new Pensacola Region. Through the Correspondent
Division, we provide settlement and cash management services, buy and sell loan participations, and offer lines of credit to downstream
correspondent banks. At year-end, the Correspondent Division had 53 banks as customers and had reached profitability. Our Pensacola
Region was over $100 million in assets at year-end, after nine months of operation. Last year, we completed a private placement stock
issue in Pensacola at $30 per share, in the same manner in which we have offered in all other regions – we only sell stock to people who
will help us grow the bank. We are proud to be associated with our new shareholders, customers, and employees who joined us in 2011.
Occasionally I am asked when we will begin paying a dividend. Your Board discusses our dividend policy on a regular basis and to this
point has concluded that our shareholders are better served by retaining all earnings to fund our profitable growth. Some shareholders
have chosen to sell some shares, and we keep a list of potential buyers of stock that allows us to facilitate a sale within a reasonable
amount of time.
While we were pleased with 2011, our goal is to improve both our return on assets and return on equity in 2012. Though we added staff
in our two new profit centers of the Correspondent Division and the Pensacola Region, we also added many “back office” personnel to
ensure compliance with new regulatory requirements. Again, I will point out that Congress rather than the banking regulators impose
new regulations. Bankers, directors, and regulators are challenged to understand all the new regulations. However, the flip side of new
regulations is that it is more difficult for a new competitor to start and makes smaller competitors less profitable. In addition, banks that
are more consumer driven than ServisFirst will continue to see their profits eroded by new consumer regulations.
We have enjoyed six consecutive years of profitability, and our job is not to complain about the economy or regulations, but to meet the
challenges and grow your investment in our Company. We have stuck to a simple business plan since May 2005, and do not plan to
make any changes, as we have been successful to date. We have grown deliberately and carefully and will continue to operate the
Company in a safe and sound manner while trying to give the best customer service we can possibly give to our clients.
Our strong balance sheet along with our outstanding bankers and directors continue to attract new core customers to the Bank. However,
our biggest advantage is ServisFirst Bancshares’ 1,217 shareholders who work to help us grow the Bank with your business and your
referrals. We appreciate your support and hope you are proud of your investment in our Company.
Sincerely,
Thomas A. Broughton III
President and Chief Executive Officer
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2(cid:2)
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SELECTED FINANCIAL DATA
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
Bank owned life insurance contracts
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
2010
2009
(Dollars in thousands except for share and per share data)
2008
2011
$
2,460,785
1,830,742
1,808,712
293,809
15,209
43,018
99,350
100,565
17,859
3,501
40,390
4,591
2,143,887
84,219
30,514
5,873
196,292
$
1,935,166
1,394,818
1,376,741
276,959
5,234
27,454
204,278
346
7,875
3,510
-
4,450
1,758,716
24,937
30,420
3,993
117,100
$
91,411
16,080
75,331
8,972
$
78,146
15,260
62,886
10,350
66,359
6,926
37,458
35,827
12,389
23,438
52,536
5,169
30,969
26,736
9,358
17,378
$
4.03
3.53
26.35
$
3.15
2.84
21.19
5,759,524
6,749,163
5,932,182
5,519,151
6,294,604
5,527,482
2007
$
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
$
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
$
55,450
20,474
34,976
6,274
$
51,417
25,872
25,545
3,541
28,702
2,704
20,576
10,830
3,825
7,005
22,004
1,441
14,796
8,649
3,152
5,497
$
1.37
1.31
16.15
$
1.19
1.16
14.13
5,114,194
5,338,883
5,374,022
4,631,047
4,721,864
5,113,482
$ 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
$ 62,197
18,337
43,860
10,685
33,175
4,413
28,930
8,658
2,780
5,878
$ 1.07
1.02
17.71
5,485,972
5,787,643
5,513,482
(cid:2)
3(cid:2)
(cid:2)
(cid:2)
SELECTED FINANCIAL DATA
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 totals 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,
2011
2010
2009
2008
2007
1.08%
14.73%
3.79%
45.54%
0.32%
0.75%
1.06%
1.20%
1.04%
15.86%
3.94%
45.51%
0.55%
1.03%
1.10%
1.30%
0.43%
6.33%
3.31%
59.57%
0.60%
1.01%
1.57%
1.24%
0.71%
9.28%
3.70%
54.61%
0.41%
1.02%
1.74%
1.09%
0.78%
9.40%
3.78%
54.83%
0.23%
0.66%
0.73%
1.15%
159.96%
126.00%
122.34%
108.17%
173.94%
84.37%
76.71%
16.96%
7.97%
12.79%
11.39%
9.17%
78.28%
78.04%
14.24%
6.05%
11.82%
10.22%
7.77%
83.23%
80.06%
14.75%
6.20%
10.48%
8.89%
6.97%
92.32%
87.53%
85.84%
77.19%
11.71%
11.15%
7.47%
11.25%
10.18%
9.01%
8.62%
11.22%
10.12%
8.40%
34.87%
195.64%
-16.10%
27.43%
35.00%
24.30%
27.16%
31.38%
21.90%
67.63%
178.43%
22.99%
15.46%
22.78%
19.95%
-22.50%
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%
(1) Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on
interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.
(2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
(3) 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%.
(4) Total stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets
divided by total risk-weighted. The FDIC-required minimum to be well-capitalized is 6%.
(5) 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%.
(cid:2)
4(cid:2)
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OFFICERS AND DIRECTORS
PRINCIPAL OFFICERS: SERVISFIRST
BANCSHARES, INC.
Thomas A. Broughton III
President and Chief Executive Officer
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
President and Chief Executive Officer
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, Dothan
Chief Executive Officer
Rex D. McKinney
Executive Vice President, Pensacola President
and Chief Executive Officer
Rodney R. Rushing
Executive Vice President, Correspondent Division
Paul M. Schabacker
Executive Vice President, Commercial Sales
BOARD OF DIRECTORS: SERVISFIRST BANCSHARES, INC.
AND SERVISFIRST BANK
Stanley M. Brock, Chairman of the Board
Thomas A. Broughton III
J. Richard Cashio
James J. Filler
Michael D. Fuller
Hatton C.V. Smith
SERVISFIRST BANCSHARES, INC. COMMITTEES
NOMINATING AND CORPORATE GOVERNANCE
Stanley M. Brock
J. Richard Cashio
Michael D. Fuller
AUDIT
Stanley M. Brock
J. Richard Cashio
Michael D. Fuller
COMPENSATION
J. Richard Cashio
James J. Filler
Hatton C.V. Smith
SERVISFIRST BANK REGIONAL DIRECTORS
E. Wayne Bonner
Huntsville, Alabama
Tres Childs
Huntsville, Alabama
Don Davidson
Huntsville, Alabama
Charles H. Chapman
Dothan, Alabama
John Downs
Dothan, Alabama
Charles Owens
Dothan, Alabama
David Slyman
Huntsville, Alabama
William C. Thompson
Dothan, Alabama
Irma Tuder
Huntsville, Alabama
Danny Windham
Huntsville, Alabama
Sidney White
Huntsville, Alabama
Bo Carter
Pensacola, Florida
Leo Cyr
Pensacola, Florida
Mark S. Greskovich
Pensacola, Florida
Tom Young
Huntsville, Alabama
Ray Russenberger
Pensacola, Florida
Ray Petty
Montgomery, Alabama
Roger Webb
Pensacola, Florida
Todd Strange
Montgomery, Alabama
Thomas M. Bizzell
Pensacola, Florida
Pete Taylor
Montgomery, Alabama
In Memoriam
Ken Upchurch
Montgomery, Alabama
Bill Watson
Huntsville, Alabama
Alan E. Weil, Jr.
Montgomery, Alabama
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5(cid:2)
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OFFICES AND LOCATIONS
BIRMINGHAM MAIN OFFICE
850 Shades Creek Parkway
Suite 100
Birmingham, Alabama 35209
205.949.0345
BIRMINGHAM DOWNTOWN
324 Richard Arrington Jr. Boulevard North
Birmingham, Alabama 35203
205.949.2200
BIRMINGHAM GREYSTONE
5403 Highway 280
Suite 401
Birmingham, Alabama 35242
205.949.0870
DOTHAN MAIN OFFICE
4801 West Main Street
Dothan, Alabama 36305
334.340.4300
DOTHAN COTTONWOOD CORNERS
1620 Ross Clark Circle
Suite 307
Dothan, Alabama 36301
334.340.4400
HUNTSVILLE MAIN OFFICE
401 Meridian Street
Suite 100
Huntsville, Alabama 35801
256.722.7800
HUNTSVILLE RESEARCH PARK
1267-A Enterprise Way
Huntsville, Alabama 35806
256.722.7880
MONTGOMERY MAIN OFFICE
One Commerce Street
Suite 100
Montgomery, Alabama 36104
334.223.5800
MONTGOMERY EAST
8117 Vaughn Road
Unit 20
Montgomery, Alabama 36116
334.223.5600
PENSACOLA MAIN OFFICE
316 South Baylen Street
Suite 100
Pensacola, Florida 32502
850.266.9100
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6(cid:2)
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STOCKHOLDER INFORMATION
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 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
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
KPMG LLP
420 20th Street North
Suite 1800
Birmingham, Alabama 35203
205.324.2495
LEGAL COUNSEL
Haskell Slaughter Young & Rediker, LLC
2001 Park Place
Suite 1400
Birmingham, Alabama 35203
205.251.1000
ANNUAL MEETING
The Annual Meeting of Stockholders of
ServisFirst Bancshares, Inc. will be held at the
Pensacola Country Club, 1500 Bayshore Drive,
Pensacola, Florida 32507 on Thursday, April 26,
2012, 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, and is included within
this document. A copy of ServisFirst Bancshares,
Inc.’s 10-K may be obtained, free of charge, if
you address a written request to our Secretary,
William M. Foshee, 850 Shades Creek Parkway,
Suite 200, Birmingham, Alabama 35209.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
website
corporate
AVAILABLE INFORMATION
Our
is
www.servisfirstbancshares.com. We have direct
links on this website to our Code of Ethics and
the charters for our Audit, Compensation and
and Nominating
Corporate Governance
Committees by clicking on
the “Investor
Relations” tab. We also have direct links to our
the Securities and Exchange
filings with
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
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[This page intentionally left blank.]
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, 2011
(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, 2011, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on
a price of $30.00 per share of Common Stock, was $160,408,500.
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, 2012, of the registrant’s only issued and outstanding class
of common stock, its $.001 per share par value common stock, was 5,947,182.
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 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on
Form 10-K.
SERVISFIRST BANCSHARES, INC.
TABLE OF CONTENTS
FORM 10-K
DECEMBER 31, 2011
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ...................................................... 1
PART I .......................................................................................................................................................................... 2
ITEM 1. BUSINESS ...................................................................................................................................... 2
ITEM 1A. RISK FACTORS. ....................................................................................................................... 23
ITEM 1B. UNRESOLVED STAFF COMMENTS. ..................................................................................... 31
ITEM 2. PROPERTIES. .............................................................................................................................. 31
ITEM 3. LEGAL PROCEEDINGS. ........................................................................................................... 32
ITEM 4. MINE SAFETY DISCLOSURES. ................................................................................................ 32
PART II ....................................................................................................................................................................... 32
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES. ................................................................................................................... 32
ITEM 6. SELECTED FINANCIAL DATA. ................................................................................................ 35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................... 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. ................................................................................................................................ 59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ............................................. 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. ................................................... 116
ITEM 9A. CONTROLS AND PROCEDURES ......................................................................................... 116
ITEM 9B. OTHER INFORMATION. ...................................................................................................... 117
PART III .................................................................................................................................................................... 117
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ................... 117
ITEM 11. EXECUTIVE COMPENSATION. ............................................................................................. 118
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ............................ 118
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE. .................................................................................... 118
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. ............................................................ 118
PART IV .................................................................................................................................................................... 119
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. ............................................... 119
SIGNATURES .......................................................................................................................................................... 122
EXHIBIT INDEX ...................................................................................................................................................... 123
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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 37,
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:
•
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the effects of the current economic recession and the possible continued deterioration of the United States
economy, particularly deterioration of the economy in Alabama, Florida 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 lasting high 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 hazardous weather such as the tornados that struck the state of Alabama in April 2011 and
January 2012;
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
the effect of inaccuracies in 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 23.
1
ITEM 1. BUSINESS
Overview
PART I
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 and are
headquartered in Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate ten full-service
banking offices located in Jefferson, Shelby, Madison, Montgomery and Houston Counties of Alabama and in
Escambia County Florida in the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville,
Montgomery and Dothan, Alabama, and Pensacola-Ferry Pass-Brent, Florida. As of December 31, 2011, we had
total assets of approximately $2.46 billion, total loans of approximately $1.83 billion, total deposits of
approximately $2.14 billion and total stockholders’ equity of approximately $196.3 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), two offices in the Dothan, Alabama MSA (Houston County) and one 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 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.
2
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) and 85 (connecting Montgomery to Atlanta, Georgia). Dothan is located in the southeastern corner 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 connects Mobile, Alabama to Tallahassee and Jacksonville, Florida. Dothan is also
intersected by U.S. Highways 231, 431 and 84, which are common trucking lanes, and has local access to rail
transportation 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.
In April 2011 we opened our first office outside of Alabama in Pensacola, Florida. We hired 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, military presence, 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 (which is being acquired by PNC
Financial Services Group). 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. Jefferson and Shelby Counties are the primary counties for the seven-county Birmingham-
Hoover MSA, which had a 2011 population of 1,134,536. With a 2011 population of 656,717, Jefferson County
includes Alabama’s largest city – Birmingham and is Alabama’s most populated county. Shelby County has a
population of 200,582 and is among the fastest growing counties in the U.S. Between 2000 and 2011, Shelby
County’s population increased 40%.
Jefferson and Shelby Counties have the highest population density in the Birmingham-Hoover MSA and
accounts for 76% of the population in the entire seven-county region. In 2011, the combined population of
Jefferson and Shelby Counties was 857,299 with 335,614 households. Between 2000 and 2011, the counties’
combined population increased 51,959. The projected growth rate for the two counties between 2011 and 2016 is
4% or an additional 33,304 residents, which will bring the total population of the two counties to 890,603.
Serving as the core of the Birmingham-Hoover MSA, Jefferson and Shelby Counties have an employment base
of 469,025 – more than 88% of the Birmingham-Hoover MSA’s total employment. The counties combined 2011
average household income is $72,705 and experienced a 40% increase since 2000. The counties’ 2000 to 2011
average household income growth rate is considerably higher than the U.S. average household income growth rate
of 28%.
The economic composition of the Birmingham-Hoover MSA 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 the region’s core economic sectors; and biological; and medical technology;
entertainment and diverse manufacturing have been identified as the regions emerging economic sectors.
Finance and insurance is a core economic sector and is among the most specialized economic sectors in the
Birmingham-Hoover MSA. 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.
3
Other major corporations headquartered or with a major presence in the Birmingham-Hoover MSA 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.
Healthcare services are also a core economic sector of Metropolitan Birmingham and are highly regarded. 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 provide the basis 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.
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 2010, the
Huntsville, Alabama MSA (which includes Madison and Limestone Counties) was the second largest metropolitan
area in the state with a population of 417,593 people, up 21.5% from the 2000 U.S. Census. Madison County’s
population was 334,811, up 20.5% from the 2000 Census. The Huntsville MSA population grew at over twice the
rate of the rest of Alabama and the U.S. as a whole. According to a 2009 estimate, the average household income
was $73,316 for the Huntsville MSA, $75,911 for Madison County, $71,775 for the City of Huntsville, and
$96,219 for the City of Madison.
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 as well as for 2010, 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 has one of the highest concentrations of Inc. 5000 Companies in the
United States and also has a number of offices of Fortune 500 companies. Major employers in Huntsville include
the U.S. Army/Redstone Arsenal, the Boeing Company, NASA/Marshall Space Flight Center, Intergraph
Corporation, ADTRAN, Inc., Northrop Grumman, Cinram, SAIC, DirecTV, Lockheed Martin, and Toyota Motor
Manufacturing of Alabama. Job growth in the Huntsville metro area has been strong, with 23,300 net new jobs
since 2000 compared to a net loss of jobs during that same period of time for Alabama and the United States.
Professional and business service employment in the Huntsville metro area grew by 45.9% from 2000-2010, adding
a total of 15,300 workers primarily in professional, scientific and technical fields. This accounts for approximately
70% of the total U.S. professional & business service growth this decade.
In total, new and expanding industry in Huntsville/Madison County in 2010 amounted to 61 projects, 2,901
jobs, and almost $153 million in capital investment. Major projects include new government contracts in missile
defense with Lockheed Martin’s Integrated Test Center, Raytheon’s Standard Missile Production facility and new
growth at APT Research and Northrop Grumman. Dynetics broke ground on the company’s new prototype
engineering center in Cummings Research Park, in which it has invested $52 million and created 350 new jobs.
Integration Innovation Inc. also expanded in the park. New government operations included the continued
implementation of BRAC as well as the arrival of the U.S. Army Contracting Command and the Defense
Acquisition University. Additionally, leaders with Redstone Arsenal and the city of Huntsville presented the
4
designs for Redstone Gateway, a 468-acre development that will help with growth on Redstone Arsenal and from
new contractors coming because of BRAC 2005. The office park will be located just outside of gate 9 at Redstone
Arsenal, and will ultimately contain hotels, restaurants and 4.4 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 MSA comprises 367,475 residents, and is the fourth most populous MSA 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 MSA 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 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 continues to have great
potential due to its central hub, its accessibility to large distribution centers, its home to several major corporations,
and its current low level of personalized banking services. 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
5
substantial changes in recent years. These changes continue to provide an opportunity for service oriented banks
such as ServisFirst. 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, an 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 increased banking 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 northwest Florida areas, with two
regional hospitals, Southeast Alabama Medical Center employing over 2,000 medical professionals and support
staff, and Flowers Hospital employing 1,400 medical professionals and support staff. In January 2012, construction
began on the Alabama College of Osteopathic Medicine, a four-year medical college partnering with and located
near; the Southeast Alabama Medical Center. The initial construction budget is $60 million, employment will be
80-100 and the first class will begin in the fall of 2013.
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.
Lastly, the agriculture and agribusiness industries are thriving, and the area is home to many of the successful
farmers and related businesses. In addition, the agricultural communities in northwest Florida and southwest
Georgia are nearby and, in many cases, use Dothan as their hub.
The existence of these industries and the continuing growth in the area allows an opportunity for the Bank to
increase its presence and penetration in this market.
The foregoing and other pertinent data can be found on the Dothan Chamber of Commerce’s and the FDIC’s
websites.
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 world-leading surgical and research center
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, 2011 totaled approximately $5.1
billion (not including credit union deposits) among 24 banks. Currently, only large regional or national banks
dominate Pensacola’s market share. Top market share performers include Regions Bank (22.2%), Wells Fargo
6
Bank (15.2%), Synovus Bank (11.8%), Whitney/Hancock Bank (9.3%), Bank of America (8.4%) and Suntrust
Bank (6.4%). We believe this creates the opportunity for a service-oriented community bank such as ServisFirst to
not only establish itself but to flourish.
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
The markets in which we operate have enjoyed steady expansion in their deposit base until being negatively
affected by the current recession and credit crisis. We believe that each of our markets will continue to grow and
believe that many local affluent professionals and small business customers will do their banking with local,
autonomous institutions that offer a higher level of personalized service. According to FDIC reports, total deposits
in each of our market areas have expanded from 2001 to 2011 (deposit data reflects totals as reported by financial
institutions as of June 30th of each year) as follows:
Compound
Annual
Growth
Rate
2001
(Dollars in Billions)
2011
Jefferson/Shelby County, Alabama
Madison County, Alabama
Montgomery County, Alabama
Houston County, Alabama
Escambia County, Florida
$
26.5
5.9
5.9
2.1
3.8
$
14.5
3.2
2.9
1.3
2.6
6.22%
6.31%
7.36%
4.91%
3.87%
Competition
The Bank is subject to intense competition from various financial institutions and other financial service
providers. 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.
The following table illustrates our market share, by insured deposits, in our primary service areas at June 30,
2011, as reported by the FDIC:
Market
Alabama:
Birmingham-Hoover MSA
Huntsville MSA
Montgomery MSA
Dothan MSA
Florida:
Pensacola-Ferry Pass-Brent MSA
Number of
Branches
Our Market
Deposits
Total
Market
Deposits
(Dollars in Millions)
Ranking
3
2
2
2
1
$
860.0
429.5
284.9
208.6
$
29,285.0
6,638.7
7,214.7
2,791.4
6
7
9
3
24.9
5,076.6
20
Market Share
Percentage
2.94%
6.47%
3.95%
7.47%
0.49%
Together, deposits for all institutions in Jefferson, Shelby, Montgomery, Madison, and Houston Counties
represented approximately 47.94% of all the deposits in the State of Alabama at June 30, 2011.
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. Providing convenient locations, desired
7
financial products and services, convenient office hours, quality customer service, quick local decision making, a
strong community reputation and long-term personal relationships are all important competitive factors that we
emphasize.
In our primary service areas, our five largest competitors are Regions Bank, Wells Fargo Bank, Compass
Bank, BB&T and RBC Bank USA (soon to be acquired by PNC Financial Services Group). These institutions, as
well as other competitors of ours, have greater resources, serve broader geographic markets, have higher lending
limits, offer various services that we do not offer and can better afford, and make broader use of media advertising,
support services, and electronic technology than we can. To offset these competitive disadvantages, we depend on
our reputation for greater personal service, consistency, and flexibility and the ability to make credit and other
business decisions quickly.
Business Strategy
Management Philosophy
Our philosophy is to operate as an urban community bank emphasizing prompt, personalized customer service
to the individuals and businesses located in our primary service areas. We believe this philosophy has attracted and
will continue to attract customers and capture market share historically controlled by other financial institutions
operating in our market. Our management and employees focus on recognizing customers’ needs and delivering
products and services to meet those 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 for us to achieve the level of prompt, responsive service 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 a highly trained and experienced staff. Employees 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 and 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, Dothan and Pensacola markets. These advisory directors represent a broad
spectrum 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
prospects in their respective areas. 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, and in the metropolitan areas of Huntsville, Montgomery, Dothan and Pensacola. 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 officers and directors become familiar with our customers on an
individual basis, they are able to respond to credit requests quickly.
8
(cid:2) Market Segmentation and Advertising. We utilize traditional advertising media, such as local periodicals
and 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 24-
hour voice response and through internet banking.
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 located our offices within 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 are established to support the credit needs of our primary market areas. Consequently, we
aggressively seek high-quality borrowers 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 set 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 fall within our legal lending limits. We make loans to small- and medium-sized
businesses in our primary service areas for the purpose of upgrading plant and equipment, buying inventory and for
general working capital. Typically, targeted business 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 commercial 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
9
with degree of specialization, mobility and general collectability in a default situation. To mitigate this risk, we
underwrite collateral to strict standards, including valuations and general acceptability based on our ability to
monitor its ongoing condition and value.
We underwrite our commercial loans primarily on the basis of the borrower’s cash flow, ability to service debt,
and degree of management expertise. As a general practice, we take as collateral a security interest in any available
real estate, equipment or personal property. Under limited circumstances, we may make commercial loans on an
unsecured basis. This type loan may be subject to many different types of risks, 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. Perceived risks may differ depending on the particular
industry in which a borrower operates in. 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, loans to individual borrowers who may be at risk due to an industry condition may be
more closely analyzed and reviewed by the credit review committee or board of directors. Commercial and
industrial borrowers are required to submit financial statements to us on a regular basis. We analyze these
statements, looking for weaknesses and trends, and will 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 lending presents 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 closely monitor our borrower concentration. These
loans generally have shorter maturities than other loans, giving us an opportunity to reprice, restructure or decline
renewal. 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, the credit review committee
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.
Starting in 2008, there have been numerous construction loan defaults among many commercial bank loan
portfolios, including a number of Alabama-based banks. To mitigate the risk of such defaults in our portfolio, the
board of directors and management tracks and monitors these loans closely. While total construction loans
decreased $20.8 million in 2011, we maintain our allocation of loan loss reserve for construction loans at
approximately $6.5 million, compared to $6.4 million at the end of 2010. Charge-offs for construction loans
decreased from $3.5 million for 2010 to $2.6 million for 2011.
10
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 family residences.
We will originate 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.
Commitments and Contingencies
As of December 31, 2011, we had commitments to extend credit beyond current fundings of approximately
$698.9 million, had issued standby letters of credit in the amount of approximately $42.9 million, and had
commitments for credit card arrangements of approximately $19.7 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
11
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 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 0.32% for the year ended December 31, 2011 from
0.55% for the year ended December 31, 2010, which was down from 0.60% for the year ended December 31, 2009.
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, 2011,
we had $13.8 million of non-accrual loans, of which 89% are secured real estate loans. We have allocated
approximately $6.5 million of our allowance for loan losses to real estate construction, acquisition and
development, and lot loans and $6.6 million to commercial and industrial loans, and have a total loan loss reserve
as of December 31, 2011 allocable to specific loan types of $17.0 million. We also currently maintain a general
reserve, which is not tied to any particular type of loan, in the amount of approximately $5.0 million as of
December 31, 2011, resulting in a total loan loss reserve of $22.0 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 purchase 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. We had no investments in any one
security, restricted or liquid, in excess of 10% of our stockholders’ equity at December 31, 2011.
12
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, we employ an aggressive marketing plan throughout our service areas that features a broad product
line and competitive services. The primary sources of core deposits are residents of, and businesses and their
employees located in, our market areas. We have obtained deposits primarily through personal solicitation by our
officers and directors, through reinvestment in the community, and through our stockholders, who have been a
substantial source of deposits and referrals. We make deposit services accessible to customers by offering direct
deposit, wire transfer, night depository, banking-by-mail and remote capture for non-cash items. The Bank is a
member of the FDIC, and thus our deposits are FDIC-insured. The Dodd-Frank Wall Street Reform and Consumer
Protection Act extended the FDIC’s full guarantee of noninterest-bearing transaction accounts through the end of
2012. This guarantee does not include any interest-bearing accounts.
Other Banking Services
Given client demand for increased convenience and account access, we offer a range of products and services,
including 24-hour telephone banking, direct deposit, Internet banking, traveler’s checks, safe deposit boxes,
attorney trust accounts and automatic account transfers. We also participate in a shared network of automated
teller machines and a debit card system that our customers are able to use throughout Alabama and in other states
and, in certain accounts subject to certain conditions, we rebate to the customer the ATM fees automatically after
each business day. Additionally, we offer Visa® credit cards.
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 210 full-time equivalent employees as of December 31, 2011. We consider our employee relations to
be good, and we have no collective bargaining agreements with any employees.
Supervision and Regulation
Both we and the Bank are subject to extensive state and federal banking regulations that impose restrictions on
and provide for general regulatory oversight of our operations. These regulations require compliance with various
consumer protection provisions applicable to lending, deposits, brokerage and fiduciary activities. These guidelines
also impose capital adequacy requirements and restrict our ability to repurchase stock or receive dividends from the
Bank. These laws generally are intended to protect depositors and not stockholders. The following discussion
describes the material elements of the regulatory framework that applies to us.
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”).
13
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)
(cid:2)
banking or managing or controlling banks; and
any activity that the Federal Reserve determines to be so closely related to banking as to be a proper
incident to the business of banking.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to
the business of banking include:
(cid:2)
factoring accounts receivable;
(cid:2) making, acquiring, brokering or servicing loans and usual related activities;
(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;
14
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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;
(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.
15
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 opened our Pensacola, Florida
branch using this 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, 2011, the Bank qualified for the well-capitalized category.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to
take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of
the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow
exception, the banking regulator must appoint a receiver or conservator for an institution that is critically
undercapitalized.
An
that
institution
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
16
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. In February 2011 the FDIC adopted its final
rule relating to the deposit insurance assessment base, assessment rate adjustments, deposit insurance assessment
rates, and dividends. Many of the changes to the rules were made as a result of provisions contained in the Dodd-
Frank Act and went into effect April 1, 2011. Under the new rules, the base for deposit insurance assessment
purposes is defined as average consolidated assets during the assessment period less average tangible equity capital
during the assessment period. Insured depository institutions are potentially allowed a reduction in their
assessment rates for unsecured debt. The unsecured debt adjustment is capped at the lesser of 5 basis points or
50% of its initial base assessment rate. Currently, annual deposit insurance assessments range from $.03 to $.45
per $100 of assessable base, depending on which risk group an insured depository institution falls into. This
assessment rate is adjusted quarterly, and our rate has been set at $.0163, or $.0652 annually, per $100 of
assessment base for the fourth quarter of 2011.
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 2011, the FICO assessment is equal to $.0017 cents per $100 of assessment
base. 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.
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)
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;
17
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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)
(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
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, 2011, our consolidated ratio of total capital to risk-weighted assets was
12.79%, and our ratio of Tier 1 Capital to risk-weighted assets was 11.39%.
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, 2011, our leverage ratio was 9.17%. 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.
18
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, 2011, 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, 2011.
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2011:
Total Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
$
246,334
243,279
12.79%
12.63%
$
154,094
154,070
8.00%
8.00%
N/A
192,588
$
N/A
10.00%
Tier I Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average Assets:
Consolidated
ServisFirst Bank
219,350
216,295
219,350
216,295
11.39%
11.23%
9.17%
9.06%
77,047
77,035
95,642
95,481
4.00%
4.00%
4.00%
4.00%
N/A
115,553
N/A
119,352
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
19
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, 2011, the Bank’s surplus was equal to 57.0% 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 $61.0 million in dividends as of December 31, 2011. 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
20
appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable
restrictions. Alabama state banking laws also have similar provisions.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting confidential
information. Customers generally may prevent financial institutions from sharing nonpublic personal financial
information with nonaffiliated third parties except under narrow circumstances, such as the processing of
transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service
with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account
numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to
consumers.
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
requirements 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.
21
Effect of Governmental Monetary Policies
The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the
United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary
policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the
issuance of United States government securities, its regulation of the discount rate applicable to member banks and
its influence over reserve requirements to which member banks are subject. We cannot predict, and have no
control over, the nature or impact of future changes in monetary and fiscal policies.
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. As rules and regulations implementing the Dodd-Frank Act are adopted, this new law is
significantly changing the current bank regulatory structure and affecting 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 eliminated 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 requires 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 created a new Bureau of Consumer Financial Protection with broad powers to supervise
and enforce consumer protection laws. The Bureau now has 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 has 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.
As noted above, 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.
22
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
Dodd-Frank Act, 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 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 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 filings. 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. As rules and regulations implementing the Dodd-Frank Act are adopted, this new law is
significantly changing the current bank regulatory structure and affecting 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 eliminated 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 are now 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.
23
The Dodd-Frank Act requires 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 created a new Bureau of Consumer Financial Protection with broad powers to supervise
and enforce consumer protection laws. The Bureau now has 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 has 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.
As noted above, 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
Dodd-Frank Act, 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 four 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 increases in loan losses, deterioration of capital
or limitations on our access to funding or capital, if needed.
24
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 effect 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. 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 over those of non-public
companies. Despite our conducting business in a highly regulated environment, these laws and regulations have
different requirements for compliance than we experienced prior to becoming a public company. 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 and may increase further
as we grow in size.
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
25
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 $151.2 million at December 31, 2011, comprising 8.3% of our total loans. Our commercial and
industrial loans were $799.5 million at December 31, 2011, comprising 43.7% of our total loans. Construction
loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general
economic slowdown like the one we are currently experiencing, these loans sometimes represent higher risk due to
slower sales and reduced cash flow that could negatively affect the borrowers’ ability to repay on a timely basis.
We, as well as our 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. At December 31, 2011, we had an allowance
for loan losses of $22.0 million, of which $6.5 million, or 29.5%, was allocated to real estate construction loans,
and $6.6 million, or 30.0%, 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 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
26
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, 2011 was $22.0 million, or 1.20% 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.
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 three years, including:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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; and
the sale of an aggregate of 340,000 shares of our common stock at $30 per share, or $10,200,000, in a
private placement completed on June 30, 2011.
27
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.
Unpredictable economic conditions or a natural disaster in the State of Alabama or the panhandle of 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.
Substantially all of our borrowers and depositors are individuals and businesses located and doing business in
our primary service areas within the state of Alabama and the panhandle of the state of Florida. Therefore, our
success will depend on the general economic conditions in Alabama and 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 with 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. Our entry into the
Pensacola market increased our exposure to potential 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
28
these products and services to our customers. As these technologies are improved in the future, we may, in order to
remain competitive, be required to make significant capital expenditures, which may increase our overall expenses
and have a material adverse effect on our net income.
Lower lending limits than many of our competitors may limit our ability to attract borrowers.
During our early years of operation, and likely for many years thereafter, our legally mandated lending limits
will be lower than those of many of our competitors because we will have less capital than such competitors. Our
lower lending limits may discourage borrowers with lending needs that exceed those limits from doing business
with us. While we may try to serve these borrowers by selling loan participations to other financial institutions,
this strategy may not succeed.
We may not be able to successfully expand into new markets.
We have opened new offices and operations in two primary markets (Dothan, Alabama and Pensacola, Florida)
in the past four years. We may not be able to successfully manage this growth with sufficient human resources,
training and operational, financial and technological resources. Any such failure could have a material adverse
effect on our operating results and financial condition and our ability to expand into new markets.
Our recent results may not be indicative of our future results, and may not provide guidance to assess the risk of
an investment in our common stock.
We may not be able to sustain our historical rate of growth and may not even be able to expand our business at
all. In addition, our recent growth may distort some of our historical financial ratios and statistics. In the future,
we may not have the benefit of several factors that were favorable until late 2008, such as a rising interest rate
environment, a strong residential housing market or the ability to find suitable expansion opportunities. Various
factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede
or prohibit our ability to expand our market presence. As a small commercial bank, we have different lending risks
than larger banks. We provide services to our local communities; thus, our ability to diversify our economic risks
is limited by our own local markets and economies. We lend primarily to small to medium-sized businesses, which
may expose us to greater lending risks than those faced by banks lending to larger, better-capitalized businesses
with longer operating histories. We manage our credit exposure through careful monitoring of loan applicants and
loan concentrations in particular industries, and through our loan approval and review procedures. Our use of
historical and objective information in determining and managing credit exposure may not be accurate in assessing
our risk.
We are dependent on the services of our management team and board of directors, and the unexpected loss of
key officers or directors may adversely affect our operations.
If any of our or the Bank’s executive officers, other key personnel, or directors leaves us or the Bank, our
operations may be adversely affected. In particular, we believe that Thomas A. Broughton III is extremely
important to our success and the Bank. Mr. Broughton has extensive executive-level banking experience and is the
President and Chief Executive Officer of us and the Bank. If he leaves his position for any reason, our financial
condition and results of operations may suffer. The Bank is the beneficiary of a key man life insurance policy on
the life of Mr. Broughton in the amount of $5 million. Also, we have hired key officers to run our banking offices
in each of the Huntsville, Montgomery and Dothan, Alabama markets 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.
29
Our directors and executive officers own a significant portion of our common stock and can exert influence over
our business and corporate affairs.
Our directors and executive officers, as a group, beneficially owned approximately 16.21% of our outstanding
common stock as of December 31, 2011. As a result of their ownership, the directors and executive officers will
have the ability, by voting their shares in concert, to influence the outcome of all matters submitted to our
stockholders for approval, including the election of directors.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business,
we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or
toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable
for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to
incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell
the affected property. The remediation costs and any other financial liabilities associated with an environmental
hazard could have a material adverse effect on our financial condition and results of operations. In addition, future
laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our
exposure to environmental liability. Although management has policies and procedures to perform an
environmental review before the loan is recorded and before initiating any foreclosure action on real property, these
reviews may not be sufficient to detect environmental hazards.
Risks Related to Our Common Stock
We have no current plans to pay dividends on our common stock.
We have never declared or paid cash dividends on our common stock. We have no current intentions to pay
dividends. In addition, our ability to pay dividends is subject to regulatory limitations.
Under Alabama law, a state bank may not pay a dividend in excess of 90% of its net earnings until the bank’s
surplus is equal to at least 20% of its capital. As of December 31, 2011, the Bank’s surplus was equal to 57.0% 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.
30
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. In 2011, we issued 40,000 shares of Senior Non-
cumulative Perpetual Preferred Stock with certain rights and preferences set forth in the Certificate of Designation
for such preferred stock. 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 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 ten 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
City
Zip
Code
Birmingham
Birmingham
Birmingham
35209
35203
35242
3 Offices
Owned
or
Leased
Leased
Leased
Leased
Huntsville
Huntsville
35801
35806
2 Offices
Leased
Leased
Montgomery
Montgomery
36104
36116
2 Offices
Leased
Leased
Date
Opened
03/02/2005
12/19/2005
08/15/2006
11/21/2006
08/21/2006
06/04/2007
09/26/2007
Dothan
Dothan
36305
36301
Leased
Leased
10/17/2008
2/1/2011
31
Total:
Total Offices in Alabama:
Florida:
Pensacola-Ferry Pass-Brent MSA:
316 South Balen Street
Total:
2 Offices
9 Offices
Pensacola
32502
1 Office
Leased
04/01/2011
(1) Office relocated to this address in 2009. Original office opened on date indicated.
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.
ITEM 4. MINE SAFETY DISCLOSURE
None.
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 $30 per share on February 7, 2012. As of December 31, 2011, we
had approximately 1,217 stockholders of record holding 5,932,182 outstanding shares of our common stock, and
we had 792,300 shares of our common stock currently subject to outstanding options to purchase such shares under
the 2005 Amended and Restated Stock Incentive Plan, 226,500 shares of our common stock currently subject to
outstanding options to purchase such shares under the 2009 Stock Incentive Plan, 22,000 shares issued with
restrictions under our 2009 Stock Incentive Plan, 55,000 shares of common stock subject to other outstanding
options, 40,000 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 on our common stock, and we do not expect to pay dividends to
common 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 to common stockholders 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. We do pay quarterly dividends on our 40,000 shares of outstanding Non-
cumulative Perpetual Preferred Stock pursuant to it Certificate of Designation.
Recent Sales of Unregistered Securities
We had no sales of unregistered securities in 2011 other than those previously reported in our reports filed with
the Securities and Exchange Commission.
32
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, 2011.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2011 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
1,048,800
55,000
1,103,800
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
18.59
17.27
18.52
401,200
-
401,200
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. 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, 2011, we had issued and outstanding
options to purchase 1,048,800 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.
On June 23, 2009, we granted warrants to purchase up to 15,000 shares of our common stock for a purchase
price of $25.00 per share in relation to the issuance of our Subordinated Note due June 1, 2016 as more fully
described in Note 11 to the Consolidated Financial Statements.
On September 21, 2006, we granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 30,000 shares of our common stock for a purchase price of $15.00
per share. On November 2, 2007, we granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 25,000 shares of our common stock for a purchase price of $20.00
per share. These stock options are non-qualified and are not part of either of our stock incentive plans. They vest
100% in a lump sum five years after their date of grant and expire 10 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.
33
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.
On November 28, 2011, we granted 10,000 non-qualified stock options to each Company director, or a total of
60,000 options, to purchase shares at a price of $30.00. The options vest 100% at the end of five years.
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 December 31, 2006
through December 31, 2011. This comparison assumes $100 invested on December 31, 2006 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
250
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Index:
ServisFirst Bancshares, Inc.
NASDAQ Composite
NASDAQ Bank
12/31/2006
100.00
100.00
100.00
12/31/2007
133.00
109.81
77.93
12/31/2008
167.00
65.29
59.29
12/31/2009
167.00
93.95
48.32
12/31/2010
167.00
109.84
54.06
12/31/2011
200.00
107.86
47.34
Date
34
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, 2011, 2010, 2009, 2008, and 2007 and for the years ended December 31, 2011, 2010, 2009, 2008,
and 2007 are derived from our audited consolidated financial statements and related notes.
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
Bank owned life insurance contracts
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,
2011
2010
2009
2008
2007
(Dollars in thousands except for share and per share data)
$
2,460,785
1,830,742
1,808,712
293,809
15,209
43,018
99,350
100,565
17,859
3,501
40,390
4,591
2,143,887
84,219
30,514
5,873
196,292
$
1,935,166
1,394,818
1,376,741
276,959
5,234
27,454
204,278
346
7,875
3,510
-
4,450
1,758,716
24,937
30,420
3,993
117,100
$
91,411
16,080
75,331
8,972
$
78,146
15,260
62,886
10,350
66,359
6,926
37,458
35,827
12,389
23,438
52,536
5,169
30,969
26,736
9,358
17,378
$ 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
$ 62,197
18,337
43,860
10,685
33,175
4,413
28,930
8,658
2,780
5,878
$
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
$
55,450
20,474
34,976
6,274
$
51,417
25,872
25,545
3,541
28,702
2,704
20,576
10,830
3,825
7,005
22,004
1,441
14,796
8,649
3,152
5,497
$
4.03
3.53
26.35
$
3.15
2.84
21.19
$ 1.07
1.02
17.71
$
1.37
1.31
16.15
$
1.19
1.16
14.13
5,759,524
6,749,163
5,932,182
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
35
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 totals 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,
2011
2010
2009
2008
2007
1.08%
14.73%
3.79%
45.54%
0.32%
0.75%
1.06%
1.20%
1.04%
15.86%
3.94%
45.51%
0.55%
1.03%
1.10%
1.30%
0.43%
6.33%
3.31%
59.57%
0.60%
1.01%
1.57%
1.24%
0.71%
9.28%
3.70%
54.61%
0.41%
1.02%
1.74%
1.09%
0.78%
9.40%
3.78%
54.83%
0.23%
0.66%
0.73%
1.15%
159.96%
126.00%
122.34%
108.17%
173.94%
84.37%
78.28%
83.23%
92.32%
87.53%
76.71%
78.04%
80.06%
85.84%
77.19%
16.96%
14.24%
14.75%
11.71%
11.15%
7.97%
12.79%
11.39%
9.17%
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%
34.87%
195.64%
-16.10%
27.43%
35.00%
24.30%
27.16%
31.38%
21.90%
67.63%
178.43%
22.99%
15.46%
22.78%
19.95%
-22.50%
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%
(1) Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on
interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.
(2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
(3) 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%.
(4)Total stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets
divided by total risk-weighted. The FDIC-required minimum to be well-capitalized is 6%.
(5) 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 8%.
36
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 in the context 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 ten full service banking offices
located in Jefferson, Shelby, Madison, Montgomery and Houston Counties in Alabama, and in Escambia County in
Florida. These offices operate in the Birmingham-Hoover, Huntsville, Montgomery, and Dothan, Alabama MSAs,
and in the Pensacola-Ferry Pass-Brent, Florida 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.
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
37
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.
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).
Other Real Estate Owned
Other real estate owned, consisting of assets that have been acquired through foreclosure, is recorded at the
lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent
appraisals and other relevant factors. Other real estate owned is revalued on an annual basis or more often if
market conditions necessitate. Valuation adjustments required at foreclosure are charged to the allowance for loan
losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to net income as
OREO expense. Significant judgments and complex estimates are required in estimating the fair value of other real
estate, and the period of time within which such estimates can be considered current is significantly shortened
during periods of market volatility, as experienced in recent years. As a result, the net proceeds realized from sales
transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the
fair value of other real estate.
Results of Operations
Net Income
Net income for the year ended December 31, 2011 was $23.4 million, compared to net income of $17.4 million
for the year ended December 31, 2010. This increase in net income is primarily attributable to a significant
increase in net interest income, which increased $12.4 million, or 19.8%, to $75.3 million in 2011 from $62.9
million in 2010. Noninterest income increased $1.8 million, or 34.0%, to $6.9 million in 2011 from $5.2 million in
2010. Noninterest expense increased by $6.5 million, or 21.0%, to $37.5 million in 2011 from $31.0 million in
2010. Basic and diluted net income per common share were $4.03 and $3.53, respectively, for the year ended
December 31, 2011, compared to $3.15 and $2.84, respectively, for the year ended December 31, 2010. Return on
average assets was 1.08% in 2011, compared to 1.04% in 2010, and return on average stockholders’ equity was
14.73% in 2011, compared to 15.86% in 2010.
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 $2.0 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.
38
Year Ended December 31,
2011
2010
(Dollars in Thousands)
$
91,411
$
78,146
16,080
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
200
15,260
62,886
10,350
52,536
5,169
30,969
26,736
9,358
17,378
-
Change from
the Prior
Year
16.97%
5.37%
19.79%
-13.31%
26.31%
33.99%
20.95%
34.00%
32.39%
34.87%
NM
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
Taxes
Net income
Dividends on preferred stock
Net income available to
common stockholders
$
23,238
$
17,378
33.72%
Year Ended December 31,
2010
2009
(Dollars in Thousands)
$
78,146
$
62,197
15,260
62,886
10,350
52,536
5,169
30,969
26,736
9,358
17,378
-
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%
NM
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
Taxes
Net income
Dividends on preferred stock
Net income available to
common stockholders
$
17,378
$
5,878
195.64%
Net Interest Income
Net interest income is the difference between the income earned on interest-earning assets and interest paid on
interest-bearing liabilities used to support such assets. The major factors which affect net interest income are
changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our
management’s ability to respond to changes in interest rates by effective asset-liability management techniques is
critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.
39
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 lowering interest 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 interest
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 $12.4 million, or 19.8%, to $75.3 million for the year ended December 31, 2011
from $62.9 million for the year ended December 31, 2010. This was due to an increase in total interest income of
$13.3 million, or 17.0%, and an increase in total interest expense of $820,000, or 5.4%. The increase in total
interest income was primarily attributable to a 22.6% increase in average loans outstanding from 2010 to 2011,
which was the result of growth in all of our markets, including in Pensacola, Florida, our newest market.
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 Alabama markets, but primarily market share expansion in our
younger markets of Montgomery and Dothan.
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, 2011 was $309.0 million, compared to $282.2 million at December
31, 2010. The interest earned on investments decreased slightly, from $8.8 million in 2010 to $8.7 million in 2011.
The lower income was a result of lower yields on new securities purchased during 2011. The average taxable-
equivalent yield on the investment portfolio decreased from 4.08% in 2010 to 3.70% in 2011, or 38 basis points.
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.
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, 2011, 2010 and 2009, 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.
40
Average Balance Sheets and Net Interest Analysis
On a Fully Taxable-Equivalent Basis
For the Year Ended December 31,
(Dollats in Thousands)
Average
Balance
2011
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
2010
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
2009
Interest
Earned /
Paid
Average
Yield /
Rate
$
1,573,500
7,556
$
82,083
211
5.22 %
2.79
$
1,283,204
6,275
$
68,889
226
5.37 %
3.60
$
1,088,437
6,195
$
55,625
265
5.11 %
4.28
188,315
82,239
270,554
85,825
4,259
83,152
2,024,846
28,304
4,813
29,094
2,087,057
5,721
4,275
10,006
176
74
203
92,743
3.04
5.20
3.70
0.21
1.50
180,045
59,812
239,857
47,581
3,448
0.24
4.58 %
42,675
1,623,040
6,482
3,314
9,796
104
56
115
79,186
3.60
5.72
4.08
0.22
1.62
92,903
38,834
131,737
88,651
3,101
0.27
4.88 %
24,987
1,343,108
4,517
2,151
6,668
257
10
24
62,849
4.86
5.54
5.06
0.29
0.32
0.10
4.68 %
24,837
4,914
23,087
1,675,878
18,337
4,503
10,534
1,376,482
$
303,165
10,088
902,290
330,221
$
1,134
47
6,675
5,192
19,335
41,866
49
2,983
0.37 %
0.47
0.74
1.57
0.25
7.13
$
264,591
2,978
775,544
255,326
4,901
52,186
$
1,253
15
5,994
4,679
31
3,288
0.47 %
0.50
0.77
1.83
$
178,232
972
704,112
218,087
0.63
6.30
-
37,705
$
1,599
5
8,859
5,624
-
2,250
0.90 %
0.51
1.26
2.58
-
5.97
1,606,965
16,080
1.00 %
1,355,526
15,260
1.13 %
1,139,108
18,337
1.61 %
315,781
6,580
157,731
2,087,057
207,399
3,412
109,541
1,675,878
140,660
3,785
92,929
1,376,482
3.58 %
3.79 %
3.75 %
3.94 %
3.07 %
3.31 %
Assets:
Interest-earning assets:
Loans, net of unearned
income (1)
Mortgage loans held for sale
Securities:
Taxable
Tax-exempt (2)
Total 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 premises and equipment
Allowance for loan losses,
accrued interest and
other assets
Total assets
Interest-bearing liabilities:
Interest-bearing deposits:
Checking
Savings
Money market
Time deposits
Federal funds
purchased
Other borrowings
Total interest-bearing
liabilities
Non-interest-bearing liabilities:
Non-interest-bearing
checking
Other liabilites
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest spread
Net interest margin
(1)
(2)
(3)
Non(cid:2)accrual(cid:3)loans(cid:3)are(cid:3)included(cid:3)in(cid:3)average(cid:3)loan(cid:3)balances(cid:3)in(cid:3)all(cid:3)periods.(cid:3)(cid:3)Loan(cid:3)fees(cid:3)of(cid:3)$538,000(cid:3),(cid:3)$750,000(cid:3)and
$730,000(cid:3)are(cid:3)included(cid:3)in(cid:3)interest(cid:3)income(cid:3)in(cid:3)2011,(cid:3)2010(cid:3)and(cid:3)2009,(cid:3)respectively.
Interest(cid:3)income(cid:3)and(cid:3)yields(cid:3)are(cid:3)presented(cid:3)on(cid:3)a(cid:3)fully(cid:3)taxable(cid:3)equivalent(cid:3)basis(cid:3)using(cid:3)a(cid:3)tax(cid:3)rate(cid:3)of(cid:3)35%(cid:3)in(cid:3)2011,
35%(cid:3)in(cid:3)2010,(cid:3)and(cid:3)34%(cid:3)in(cid:3)2009.
Unrealized(cid:3)gains(cid:3)of(cid:3)$7,624,000,(cid:3)$6,717,000(cid:3)and(cid:3)$1,197,000(cid:3)are(cid:3)excluded(cid:3)from(cid:3)the(cid:3)yield(cid:3)calculation(cid:3)in(cid:3)2011,(cid:3)2010
and(cid:3)2009,(cid:3)respectively.
41
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.
For the Year Ended December 31,
2011 Compared to 2010 Increase (Decrease)
in Interest Income and Expense Due to
Changes in:
Rate
Volume
Total
2010 Compared to 2009 Increase
(Decrease) in Interest Income and Expense
Due to Changes in:
Rate
Volume
Total
Interest-earning assets:
Loans, net of unearned income
Mortgages held for sale
Securities:
Taxable
Tax-exempt
Federal funds sold
Restricted equity securities
Interest-bearing balances
with banks
Total interest-earning assets
Interest-bearing liabilities:
Checking
Savings
Money market
Time deposits
Federal funds purchased
Other borrowed funds
Total interest-bearing
liabilities
Increase in net interest income
15,193
41
287
1,177
78
14
100
16,890
166
33
947
1,242
47
(701)
(1,999)
(56)
(1,048)
(216)
(6)
4
(12)
(3,333)
(285)
(1)
(266)
(729)
(29)
396
13,194
(15)
10,346
4
(761)
961
72
18
3,374
1,162
(100)
1
88
13,557
26
14,813
(119)
32
681
513
18
(305)
590
10
827
857
31
906
1,734
15,156
(914)
(2,419)
820
12,737
3,221
11,592
2,918
(43)
(1,409)
1
(53)
45
65
1,524
(936)
-
(3,692)
(1,802)
-
132
(6,298)
7,822
13,264
(39)
1,965
1,163
(153)
46
91
16,337
(346)
10
(2,865)
(945)
31
1,038
(3,077)
19,414
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 our cost of funds. Also, we have not competed for new loans on interest rate alone, but rather
we have relied significantly on effective marketing to business customers.
Our net interest spread and net interest margin were 3.58% and 3.79%, respectively, for the year ended
December 31, 2011, compared to 3.75% and 3.94%, respectively, for the year ended December 31, 2010. Our
average interest-earning assets for the year ended December 31, 2011 increased $401.8 million, or 24.8%, to
$2.025 billion from $1.623 billion for the year ended December 31, 2010. This increase in our average interest-
earning assets was due to continued core growth in all of our markets, increased loan production and increases in
investment securities, federal funds sold and interest-bearing balances with other banks. Our average interest-
bearing liabilities increased $251.4 million, or 18.5%, to $1.607 billion for the year ended December 31, 2011 from
$1.356 billion for the year ended December 31, 2010. This increase in our average interest-bearing liabilities was
primarily due to an increase in interest-bearing deposits in all our markets. We paid off two advances from the
Federal Home Loan Bank totaling $20.0 million during the first half of 2011. The average rate paid on these
advances was 3.13%. The ratio of our average interest-earning assets to average interest-bearing liabilities was
126.0% and 119.7% for the years ended December 31, 2011 and 2010, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.58% for the year ended December
31, 2011, compared to 4.88% for the year ended December 31, 2010. The average rate paid on interest-bearing
liabilities was 1.00% for the year ended December 31, 2011, compared to 1.13% for the year ended December 31,
2010.
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
42
$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 $217.0 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. 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.
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. Based on 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, 2011, total loans rated
Special Mention, Substandard, and Doubtful were $88.9 million, or 5.2% of total loans, compared to $98.3 million,
or 7.1% of total loans, at December 31, 2010. 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 nonaccruals, 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 $9.0 million for the year ended December 31, 2011, a decrease of
$1.4 million from $10.4 million in 2010. Also, nonperforming loans decreased to $13.8 million, or 0.75%, of total
loans at December 31, 2011 from $14.3 million, or 1.03%, of total loans at December 31, 2010. During 2011, we
had net charged-off loans totaling $5.0 million, compared to net charged-off loans of $7.0 million for 2010. The
ratio of net charged-off loans to average loans was 0.32% for 2011 compared to 0.55% for 2010. The allowance
for loan losses totaled $22.0 million, or 1.20% of loans, net of unearned income, at December 31, 2011, compared
to $18.1 million, or 1.30% of loans, net of unearned income, at December 31, 2010.
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 1.03% 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 $7.0 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.
Noninterest Income
Noninterest income increased $1.8 million, or 34.0%, to $6.9 million in 2011 from $5.2 million in 2010.
Noninterest income increased $.8 million, or 17.1%, to $5.2 million in 2010 from $4.4 million in 2009. Increases
in the cash surrender value of bank-owned life insurance contracts purchased during the third quarter 2011
contributed to the increase in noninterest income by $390,000 during 2011. Gains on the sale of securities
43
increased from $108,000 in 2010 to $666,000 in 2011. Also, the Bank partnered with a different credit card
servicing company in June 2011, and interchange income on credit card transactions has increased significantly,
with total noninterest income from credit cards increasing from $30,000 in 2010 to $481,000 in 2011. Gains of
$76,000 on the sale of OREO during 2011 compared favorably to losses of $203,000 during 2010 and losses of
$441,000 during 2009.
Income from mortgage banking operations continued to be bolstered by refinancing activity in 2011 as the
result of low interest rates. For the year ended December 31, 2011, mortgage banking income increased $0.2
million, or 9.1%, to $2.4 million from $2.2 million for the year ended December 31, 2010. 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. Income from service charges on deposit accounts for the year ended December 31, 2011
remained relatively flat at $2.3 million when compared to the year ended December 31, 2010. Despite the fact that
average balances in transaction accounts increased by approximately $280.8 million, or 22.5%, there was minimal
growth in the balances in accounts that are tied to analysis fees. Income from service charges on deposit accounts
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. 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 $6.5 million, or 21.0%, to $37.5 million for the year ended December 31, 2011
from $31.0 million for the year ended December 31, 2010. 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 210 full-time
equivalent employees at December 31, 2011 compared to 170 at December 31, 2010. Equipment and occupancy
expense also increased, from $3.2 million in 2010 to $3.7 million in 2011, as a result of our expansion into
Pensacola, Florida and the expansion of existing offices to accommodate new staff. FDIC insurance assessments
decreased from $2.9 million in 2010 to $1.8 million in 2011 due to the changes in the assessment base and rates
under the Dodd-Frank Act. OREO expenses decreased from $2.0 million in 2010 to $820,000 in 2011 due to the
completion of construction projects in 2010, and the sale of several pieces of OREO during 2010 and 2011. Other
noninterest expenses increased $3.1 million, or 43.0%, to $10.4 million for the year ended December 31, 2011 from
$7.3 million during the year ended December 31, 2010. A large part of this increase was the $738,000 in
prepayment penalties incurred when we paid off our advances to the FHLB in 2011. Recording fees and bank-paid
loan expenses increased during 2011 as a result of loan growth and a greater proportion of loans for which the
Bank agreed to pay various expenses related to closing. More details of changes in other noninterest expenses can
be seen in Note 18 to the Consolidated Financial Statements.
Noninterest expense increased $2.0 million, or 7.1%, to $31.0 million for the year ended December 31, 2010
from $28.9 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. Also, loan expenses
increased $490,000.
Income Tax Expense
Income tax expense was $12.4 million for the year ended December 31, 2011 compared to $9.4 million in
2010 and $2.8 million in 2009. Our effective tax rates for 2011, 2010 and 2009 were 34.59%, 35.00% and 32.11%,
respectively. Our primary permanent differences are related to incentive stock option expenses and tax-free
income.
Financial Condition
Assets
Total assets at December 31, 2011, were $2.461 billion, an increase of $525.6 million, or 27.2% over total
assets of $1.935 billion at December 31, 2010. Average assets for the year ended December 31, 2011 were $2.087
billion, an increase of $411.2 million, or 24.5%, over average assets of $1.676 billion for the year ended December
31, 2010. Loan growth was the primary reason for the increase. Year-end 2011 net loans were $1.809 billion, up
$432.0 million, or 31.4%, over the year-end 2010 total net loans of $1.377 billion.
44
Total assets at December 31, 2010, were $1.935 billion, an increase of $361.7 million, or 23.0%, over total
assets of $1.573 billion at December 31, 2009. Average assets for the year ended December 31, 2010 were $1.676
billion, an increase of $299.4 million, or 21.74%, over average assets of $1.376 billion for the year ended
December 31, 2009. Loan growth was the primary reason for the increase. Year-end 2010 net loans were $1.377
billion, up $184.4 million, or 15.5%, over the year-end 2009 total net loans of $1.192 billion.
Earning assets include loans, securities, short-term investments and bank-owned life insurance contracts. We
maintain a higher level of earning assets in our business model than do our peers because we allocate fewer of our
resources to facilities, ATMs, cash and due-from-bank accounts used for transaction processing. Earning assets at
December 31, 2011 were $2.401 billion, or 97.6% of total assets of $2.461 billion. Earning assets at December 31,
2010 were $1.893 billion, or 97.8% of total assets of $1.935 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, 2011, mortgage-backed securities represented 31% of the investment portfolio, state and municipal
securities represented 34% of the investment portfolio, U.S. Treasury and government agencies represented 35% of
the investment portfolio, and corporate debt represented less than 1% of the investment portfolio. Our investment
portfolio at December 31, 2011, 2010 and 2009 consisted of the following:
45
December 31, 2011:
Securities Available for Sale
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
Mortgage-backed securities
State and municipal securities
Total
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
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
Market
Value
$
$
$
$
1,512
4,462
5,230
52
11,256
(59)
-
(35)
-
(94)
99,622
92,580
100,526
1,081
293,809
$
$
$
$
$
$
$
$
410
380
790
-
$
-
-
$
$
$
10,086
5,913
15,999
1,887
2,783
1,076
162
5,908
412
2,717
876
36
4,041
$
$
$
$
(224)
(268)
(1,051)
-
(1,543)
92,294
104,224
78,266
2,175
276,959
$
$
$
$
$
$
5,234
5,234
$
-
$
-
$
$
(271)
(271)
4,963
4,963
$
$
$
$
$
(453)
(625)
(567)
(13)
(1,658)
92,327
101,700
58,399
3,027
255,453
$
$
$
$
$
$
645
645
$
1
$
1
$
$
(3)
(3)
$
$
643
643
98,169
88,118
95,331
1,029
282,647
9,676
5,533
15,209
90,631
101,709
78,241
2,013
272,594
92,368
99,608
58,090
3,004
253,070
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, 2011, any structured investment vehicles or any private-label
mortgage-backed securities. The amortized cost of securities in our portfolio totaled $297.9 million at
December 31, 2011, compared to $277.8 million at December 31, 2010. The following table provides the
amortized cost of our securities as of December 31, 2011 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.
46
Maturity of Investment Securities - Amortized Cost
Less Than
One Year
One Year
through Five
Years
Six Years
through Ten
Years
(Dollars in Thousands)
More Than
Ten Years
Total
$
$
$
$
$
10,014
735
650
-
11,399
83,251
868
29,236
-
113,355
4,257
30,111
60,222
1,029
95,619
647
56,404
5,223
-
62,274
98,169
88,118
95,331
1,029
282,647
$
$
$
$
$
1.52
4.96
5.16
-
1.95
%
%
1.57
5.26
3.83
-
2.18
%
%
3.77
3.39
5.45
7.08
4.74
%
%
5.09
3.99
6.20
-
4.19
%
%
1.68
3.81
4.99
7.08
3.48
%
%
$
-
-
$
-
$
-
-
$
-
$
-
-
$
-
$
9,676
5,533
15,209
$
$
9,676
5,533
15,209
$
-
-
-
%
%
-
-
-
%
%
-
-
-
%
%
3.51 %
6.39
4.56 %
3.51 %
6.39
4.56 %
Securities Available for Sale:
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Tax-equivalent Yield
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Weighted average yield
Securities Held to Maturity:
Mortgage-backed securities
State and municipal securities
Total
Tax-equivalent Yield
Mortgage-backed securities
State and municipal securities
Weighted average yield
At December 31, 2011, we had $100.6 million in federal funds sold, compared with $346,000 at December 31,
2010.
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 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 $1.831 billion at December 31, 2011. The following table shows the
percentage of our total loan portfolio by MSA. With our loan portfolio concentrated in a limited number of
markets, there is a risk that our borrowers’ ability to repay their loans from us could be affected by changes in local
and regional economic conditions.
Percentage
of Total
Loans in
MSA
51%
19%
12%
14%
96%
4%
Birmingham-Hoover, AL MSA
Huntsville, AL MSA
Montgomery, AL MSA
Dothan, AL MSA
Total Alabama MSAs
Pensacola, FL MSA
47
The following table details our loans at December 31, 2011, 2010 and 2009:
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
2011
2010
(Dollars in Thousands)
2009
$
799,464
151,218
$
536,620
172,055
$
461,088
224,178
398,601
205,182
235,251
839,034
41,026
1,830,742
(22,030)
1,808,712
$
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
$
The following table details the percentage composition of our loan portfolio by type at December 31, 2011,
2010 and 2009:
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
2011
43.67%
8.26%
21.77%
11.21%
12.85%
45.83%
2.24%
100.00%
2010
38.47%
12.34%
19.41%
14.28%
12.82%
46.51%
2.68%
100.00%
2009
38.20%
18.57%
16.90%
13.71%
9.92%
40.53%
2.70%
100.00%
48
The following table details maturities and sensitivity to interest rate changes for our loan portfolio at
December 31, 2011:
Type of Loan(1)
Due in 1
year or less
Due in 1 to 5
years
Due after 5
years
Total
(Dollars in Thousands)
Commercial, financial and agricultural
$
477,605
$
297,816
$
24,043
$
799,464
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
Interest rate sensitivity:
Fixed interest rates
97,117
53,951
150
151,218
58,928
33,340
87,560
179,828
26,662
275,821
120,124
125,618
521,563
14,306
63,852
51,718
22,073
137,643
58
398,601
205,182
235,251
839,034
41,026
$
781,212
$
887,636
$
161,894
$
1,830,742
(22,030)
$
1,808,712
$
158,198
$
536,447
$
56,868
$
751,513
Floating or adjustable rates
623,014
351,189
105,026
1,079,229
Total
(1) includes nonaccrual loans
$
781,212
$
887,636
$
161,894
$
1,830,742
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 2011 was lower than 2010 at 0.32%, compared to
0.55%. The largest balance of our charge-offs is on real estate construction loans. Real estate construction loans
represent 8.26% of our loan portfolio.
49
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 mortgage
Total real estate mortgage
Consumer
Total charge-offs
Recoveries:
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 recoveries
For the Years Ended December 31,
2009
2010
2011
(Dollars in Thousands)
$
18,077
$
14,737
$
10,602
(1,096)
(2,594)
-
(1,096)
-
(1,096)
(867)
(5,653)
361
180
12
-
-
12
81
634
(1,667)
(3,488)
(548)
(1,227)
-
(1,775)
(278)
(7,208)
97
53
12
20
-
32
16
198
(2,616)
(3,322)
-
(522)
(9)
(531)
(207)
(6,676)
-
108
-
3
-
3
15
126
Net charge-offs
(5,019)
(7,010)
(6,550)
Provision for loan losses charged to expense
8,972
10,350
10,685
Allowance for loan losses at end of period
$
22,030
$
18,077
$
14,737
As a percent of year to date average loans:
Net charge-offs
Provision for loan losses
Allowance for loan losses as a percentage of:
Year-end loans
Nonperforming assets
0.32%
0.57%
1.20%
84.48%
0.55%
0.81%
1.30%
84.82%
0.60%
1.00%
1.24%
60.34%
The allowance for loan losses is established and maintained at levels needed to absorb anticipated credit losses
from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date. Our management’s
assessment of the allowance for loan losses includes an evaluation of the loan portfolio, past due loan experience,
collateral values, current economic conditions and other factors necessary to provide assurance that the allowance
is adequate in amount. Our management feels that the allowance was adequate at December 31, 2011.
50
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.
2011
For the Years Ended December 31,
2010
2009
Percentage
of loans in
each
category to
total loans
43.67%
8.26%
45.83%
2.24%
0.00%
100.00%
Percentage
of loans in
each
category to
total loans
Amount
(Dollars in Thousands)
Amount
5,348
6,373
2,443
749
3,164
18,077
38.47%
12.34%
46.51%
2.68%
0.00%
100.00%
3,135
6,295
2,102
115
3,090
14,737
Percentage
of loans in
each
category to
total loans
38.20%
18.57%
40.53%
2.70%
0.00%
100.00%
Amount
6,627
6,542
3,295
531
5,035
22,030
$
$
$
$
$
$
Commercial, financial and
agricultural
Real estate - construction
Real estate - mortgage
Consumer
Unallocated
Total
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, 2011, we had impaired loans of $37.3 million inclusive of nonaccrual loans, a decrease of
$14.2 million from $51.5 million as of December 31, 2010. We allocated $4.2 million of our allowance for loan
losses at December 31, 2011 to these impaired loans. We had previous write-downs against impaired loans of $1.2
million at December 31, 2011, compared to $3.2 million at December 31, 2010. The average balance for 2011 of
loans impaired as of December 31, 2011 was $35.5 million. Interest income foregone on these impaired loans was
$608,000 for the year ended December 31, 2011, and we recognized $1.6 million of interest income on these
impaired loans for the year ended December 31, 2011. 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-dependent. The amount of any initial impairment and subsequent changes in impairment 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 administration group performs verification and testing to ensure
appropriate identification of impaired loans and that proper reserves are allocated to these loans.
Of the $37.3 million of impaired loans reported as of December 31, 2011, $16.3 million were real estate
construction loans, $5.7 million were residential real estate loans, $5.6 million were commercial and industrial
loans, $6.0 million were commercial real estate loans, and $3.2 million were other mortgage loans. Of the $16.3
million of impaired real estate construction loans, $5.3 million (a total of 18 loans with eight builders) were
residential construction loans, and $4.4 million consisted of various residential lot loans to six 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 watch list.
(cid:2) We perform extensive monthly credit review for all watch list/classified loans, including formulation of
aggressive workout or action plans. When a workout is not achievable, we move to collection/foreclosure
51
proceedings to obtain control of the underlying collateral as rapidly as possible to minimize the
deterioration of collateral and/or the loss of its value.
(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 $13.8 million, $14.3 million and $11.9 million as of December 31, 2011, 2010 and
2009, respectively. The table below summarizes our nonperforming assets at December 31, 2011, 2010 and 2009:
52
Nonaccrual 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
Total nonaccrual loans:
90+ days past due and accruing:
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 90+ days past due and accruing:
Total nonperforming loans:
Plus: Other real estate owned and repossessions
Total nonperforming assets
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
Total restructured accruing loans:
Total nonperforming assets and
restructured accruing loans
Gross interest income foregone on nonaccrual
loans throughout year
Interest income recognized on nonaccrual loans
throughout year
Ratios:
Nonperforming loans to total loans
Nonperforming assets to total loans plus
other real estate owned and repossessions
Nonperforming loans plus restructured accruing
loans to total loans plus other real estate
owned and repossessions
For the Years Ended December 31,
2011
2010
2009
(Dollars in Thousands)
Balance
$
1,179
10,063
792
670
693
2,155
375
13,772
$
$
-
-
-
-
-
-
-
$
-
$
13,772
12,305
26,077
$
$
1,369
-
2,785
-
331
3,116
-
4,485
$
Number
of Loans
7
21
2
4
1
7
1
36
-
-
-
-
-
-
-
-
36
39
75
2
-
3
-
1
4
-
6
Balance
$
2,164
10,722
635
202
-
837
624
14,347
$
$
-
-
-
-
-
-
-
$
-
$
14,347
6,966
21,313
$
$
2,398
-
-
-
-
-
-
2,398
$
Number
of Loans
8
24
1
1
-
2
1
35
-
-
-
-
-
-
-
-
35
39
74
9
-
-
-
-
-
-
9
Balance
$
2,032
8,100
909
265
615
1,789
-
11,921
$
$
14
-
-
253
-
253
-
$
267
$
12,188
12,525
24,713
$
$
-
-
845
-
-
845
-
$
845
Number of
Loans
2
13
2
2
1
5
-
20
1
-
-
1
-
1
-
2
22
51
73
-
-
1
-
-
1
-
1
$
30,562
81
$
23,711
83
$
25,558
74
$
1,371
$
263
0.75%
1.41%
0.99%
$
510
$
418
1.03%
1.52%
1.19%
$
647
$
310
1.01%
2.02%
1.06%
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
53
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 and
average rate paid on each of the following deposit categories at the Bank level for years ended 2011, 2010 and
2009:
Average Deposits
Average for Years Ended December 31,
2011
2010
2009
Types of Deposits:
Non-interest-bearing checking
Interest-bearing checking
Money market
Savings
Time deposits
Time deposits, $100,000 and over
Total deposits
Average
Balance
Average
Rate
Paid
$
315,781
303,165
902,290
10,088
65,484
264,737
1,861,545
$
-
0.37
0.74
0.47
1.44
1.60
%
%
%
%
%
%
Average
Balance
Average
Rate
Paid
(Dollars in Thousands)
$
207,399
264,591
775,544
2,978
47,026
208,300
1,505,838
$
-
0.47
0.77
0.50
1.76
1.85
The scheduled maturities of time deposits at December 31, 2011 are as follows:
Average
Balance
Average
Rate
Paid
%
%
%
%
%
%
$
140,660
178,232
704,112
972
35,804
182,283
1,242,063
$
-
0.90
1.26
0.51
2.63
2.57
%
%
%
%
%
%
Total
Maturity
Three months or less
Over three through six months
Over six months through one year
Over one year
$100,000 or more
Less than $100,000
(In Thousands)
$
$
$
42,952
49,965
89,340
130,363
312,620
14,508
12,821
20,552
23,487
71,368
57,460
62,786
109,892
153,850
383,988
Total
$
$
$
Total average deposits for the year ended December 31, 2011 were $1.862 billion, an increase of $355.7
million, or 23.6%, over total average deposits of $1.506 billion for the year ended December 31, 2010. Average
noninterest-bearing deposits increased by $108.4 million, or 52.2%, from $207.4 million for the year ended
December 31, 2010 to $315.8 million for the year ended December 31, 2011.
Total average deposits for the year ended December 31, 2010 were $1.506 billion, an increase of $263.8
million, or 21.2%, over total average deposits of $1.242 billion for the year ended December 31, 2009. Average
noninterest-bearing deposits increased by $66.7 million, or 47.4%, from $140.7 million for the year ended
December 31, 2009 to $207.4 million for the year ended December 31, 2010.
We had no brokered deposits in 2011, 2010 or 2009.
Borrowed Funds
We had available approximately $140 million in unused federal funds lines of credit with regional banks as of
December 31, 2011, subject to certain restrictions and collateral requirements.
54
Stockholders’ Equity
Stockholders’ equity increased $79.2 million during 2011, to $196.3 million at December 31, 2011 from
$117.1 million at December 31, 2010. The increase in stockholders’ equity resulted primarily from the sale of
340,000 shares of our common stock in a private placement related to our entry into the Pensacola, Florida market,
the sale of $40.0 million in preferred shares to the United States Treasury Department as part of their Small
Business Lending Fund, and net income of $23.2 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.
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.
On September 21, 2006, we granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 30,000 shares of our common stock for a purchase price of $15.00
per share. On November 2, 2007, we granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 25,000 shares of our common stock for a purchase price of $20.00
per share. These stock options are non-qualified and are not part of either of our stock incentive plans. They vest
100% in a lump sum five years after their date of grant and expire 10 years after their date of grant.
On December 20, 2007, we granted 10,000 stock options to purchase shares of our common stock to each of
our directors, or 60,000 in the aggregate, for a purchase price of $20.00 per share, expiring in ten years. These are
non-qualified stock options that fully vest on December 19, 2012.
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.
On November 28, 2011, we granted 10,000 non-qualified stock options to each Company director, or a total of
60,000 options, to purchase shares at a price of $30. The options vest 100% at the end of five years.
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.
55
The following table sets forth our credit arrangements and financial instruments whose contract amounts
represent credit risk as of December 31, 2011, 2010 and 2009:
Commitments to extend credit
Credit card arrangements
Standby letters of credit and
financial guarantees
Total
2011
2010
(In Thousands)
2009
$
697,939
19,686
$
538,719
17,601
42,937
760,562
$
47,103
603,423
$
$
$
409,760
19,059
39,205
468,024
Commitments to extend credit beyond current fundings are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Such commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by us upon extension of credit is based on our management’s credit evaluation.
Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. All letters of credit are due within one year
or less of the original commitment date. The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
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, 2011 and 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 Bank 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 the
income statement. For the year ended December 31, 2010, the Company recognized $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, 2011 and 2010 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
56
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 is charged with monitoring our liquidity and funds position. The
committee regularly reviews the rate sensitivity position on a three-month, six-month and one-year time horizon;
loans-to-deposits ratios; and average maturities for certain categories of liabilities. The asset liability committee
uses a computer model to analyze the maturities of rate-sensitive assets and liabilities. The model measures the
“gap” which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a
period and the volume of rate-sensitive liabilities repricing during the same period. Gap is also expressed as the
ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than “one,” then the dollar
value of assets exceeds the dollar value of liabilities and the balance sheet is “asset sensitive.” Conversely, if the
value of liabilities exceeds the dollar value of assets, then the ratio is less than one and the balance sheet is
“liability sensitive.” Our internal policy requires our management to maintain the gap such that net interest
margins will not change more than 10% if interest rates change by 100 basis points or more than 15% if interest
rates change by 200 basis points. As of December 31, 2011, 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, 2011, our liquid assets, represented by cash and due from banks,
federal funds sold and available-for-sale securities, totaled $536.7 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. 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 June 2011, we completed a private placement of
340,000 shares of our common stock at an offering price of $30 per share. Also in 2011, we completed a private
placement of 40,000 shares of our Non-cumulative Perpetual Senior Preferred Stock for an aggregate purchase
price of $39,958,000. 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.
57
The following table reflects the contractual maturities of our term liabilities as of December 31, 2011. The
amounts shown do not reflect any early withdrawal or prepayment assumptions.
Total
1 year or less
Payments due by Period
Over 1 - 3
years
Over 3 - 5
years
Over 5 years
Contractual Obligations (1):
(In Thousands)
Deposits without a stated maturity
$
1,759,899
$
-
$
-
$
-
$
Certificates of deposit (2)
Subordinated debentures
Subordinated note payable
Operating lease commitments
383,988
230,138
121,065
32,785
30,514
4,914
17,078
-
-
-
-
2,068
3,900
-
4,914
3,909
-
-
30,514
-
7,201
Total
$
2,196,393
$
232,206
$
124,965
$
41,608
$
37,715
(1) Excludes interest
(2) Certificates of deposit give customers the right to early withdrawal. Early withdrawals may be subject to penalties.
The penalty amount depends on the remaining time to maturity at the time of early withdrawal.
Capital Adequacy
As of December 31, 2011, 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, 2011. In addition, the Alabama Banking Department has required that the Bank maintain a leverage
ratio of 8.00%.
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, 2011.
Total risk-based capital
Tier 1 capital
Leverage ratio
Well-Capitalized
10.00%
6.00%
5.00%
Actual at December
31, 2011
12.79%
11.39%
9.17%
For a description of capital ratios see Note 16 of “Notes to Consolidated Financial Statements” for the period
ending December 31, 2011.
Impact of Inflation
Our consolidated financial statements and related data presented herein have been prepared in accordance with
generally accepted accounting principles which require the measure of financial position and operating results in
terms of historic dollars, without considering changes in the relative purchasing power of money over time due to
inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets
bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more
significant effect on the performance of a financial institution than the effects of general levels of inflation. In
addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease
the market value of investments and loans held and may adversely affect liquidity, earnings and stockholders’
equity. Mortgage originations and refinancing 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.
58
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, 2011, 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, 2011. Management
uses the one year gap as the appropriate time period for setting strategy.
59
Interest-earning assets:
Loans, including mortgages
held for sale
Securities
Federal funds sold
Interest bearing balances
with banks
Total interest-earning assets
Interest-bearing liabilities:
Deposits:
Interest-bearing checking
Money market and savings
Time deposits
Federal funds purchased
Other borrowings
Trust preferred securities
Total interest-bearing liabilities
Interest sensitivity gap
Cumulative sensitivity gap
Percent of cumulative sensitivity Gap
to total interest-earning assets
Rate Sensitivity Gap Analysis
2-5
Years
4-12
Months
1-3 Months
Over 5
Years
Total
(Dollars in Thousands)
$
1,176,579
21,845
100,565
$
174,359
82,791
-
$
432,587
127,916
-
$
65,076
79,967
-
$
1,848,601
312,519
100,565
97,145
1,396,134
$
-
257,150
$
2,205
562,708
$
-
145,043
$
99,350
2,361,035
$
$
354,112
986,975
57,339
79,265
-
-
1,477,691
(81,557)
(81,557)
$
$
$
$
-
-
172,801
-
-
172,801
84,349
2,792
$
$
$
$
-
-
153,850
4,954
15,050
173,854
388,854
391,646
$
$
$
$
-
-
-
-
15,464
15,464
129,579
521,225
$
$
$
$
$
$
354,112
986,975
383,990
79,265
4,954
30,514
1,839,810
521,225
(5.8) %
0.2 %
17.7 %
22.1 %
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
historically low levels during 2009 and have remained at those low levels. 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,
2011, the 4.28% change for a 200 basis points rate change is well within the regulatory guidance range.
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, 2011
Economic value of equity
$
196,292
0 bps
+100 bps
(Dollars in Thousands)
$
200,022
$
+200 bps
204,693
Actual dollar change
Percent change
$
3,730
$
8,401
1.90%
4.28%
The one year gap ratio of 0.2% indicates that we would show a very slight increase in net interest income in a
rising rate environment, and the EVE rate shock shows that the EVE would increase 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
60
magnitude and duration of changes in interest rates may have a significant impact on net interest income. Interest
rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest
rates on other types may lag behind changes in general market rates. Our asset liability committee develops its
view of future rate trends by monitoring economic indicators, examining the views of economists and other
experts, and understanding the current status of our balance sheet and conducts a quarterly analysis of the rate
sensitivity position. The results of the analysis are reported to our board of directors.
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 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, 2011 and 2010
Consolidated Statements of Income for the Years Ended December 31,
2011, 2010 and 2009
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for Years Ended
December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Page
62
63
64
65
66
67
68
69
70
72
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
ServisFirst Bancshares, Inc.:
We have audited the accompanying consolidated balance sheet of ServisFirst Bancshares, Inc. and subsidiaries as
of December 31, 2011, and the related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for the year then ended. 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 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 audit 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. and subsidiaries as of December 31, 2011, and the results of their
operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), ServisFirst Banchsares, Inc.’s internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 7, 2012 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Birmingham, Alabama
March 7, 2012
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
ServisFirst Bancshares, Inc.
Birmingham, Alabama
We have audited the accompanying consolidated balance sheet of ServisFirst Bancshares, Inc., as of
December 31, 2010, and the related consolidated statements of income, comprehensive income, stockholders’
equity and cash flows for each of the two years in the period then 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 the results of their
operations and their cash flows for each of the two years in the period then ended December 31, 2010, in
conformity with accounting principles generally accepted in the United States of America.
Birmingham, Alabama
March 8, 2011
63
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, 2011. 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, 2011, 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
by
/s/ THOMAS A. BROUGHTON, III
THOMAS A. BROUGHTON, III
President and Chief Executive Officer
/s/ WILLIAM M. FOSHEE
WILLIAM M. FOSHEE
Chief Financial Officer
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
ServisFirst Bancshares, Inc.:
We have audited ServisFirst Bancshares, Inc. internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). 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, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included 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, 2011, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheet of ServisFirst Bancshares, Inc. as of December 31, 2011, and the
related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the
year then ended, and our report dated March 7, 2012 expressed an unqualified opinion on these consolidated
financial statements.
/s/ KPMG LLP
Birmingham, Alabama
March 7, 2012
65
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2011 AND 2010
(In thousands, except share and per share amounts)
Cash and due from banks
Interest-bearing balances due from depository institutions
Federal funds sold
Cash and cash equivalents
Available for sale debt securities, at fair value
Held to maturity debt securities (fair value of $15,999 and $4,963 at
December 31, 2011 and 2010, respectively)
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
Bank owned life insurance contracts
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased
Other borrowings
Subordinated debentures
Accrued interest payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001
(liquidation preference $1,000), net of discount; 40,000 shares authorized,
40,000 shares issued and outstanding at December 31, 2011 and no shares
authorized, issued and outstanding at December 31, 2010
Preferred stock, undesignated, par value $.001 per share; 1,000,000
shares authorized; no shares outstanding
Common stock, par value $.001 per share; 15,000,000 shares authorized;
5,932,182 shares issued and outstanding at December 31, 2011 and
5,527,482 shares issued and outstanding at December 31, 2010
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
66
2011
$
43,018
99,350
100,565
242,933
293,809
15,209
3,501
17,859
1,830,742
(22,030)
1,808,712
4,591
8,192
4,914
12,275
40,390
8,400
2,460,785
$
$
418,810
1,725,077
2,143,887
79,265
4,954
30,514
945
4,928
2,264,493
$
$
$
2010
27,454
204,178
346
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
39,958
-
-
-
6
87,805
61,581
6,942
196,292
2,460,785
$
6
75,914
38,343
2,837
117,100
1,935,166
$
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
2010
2011
2009
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
Mortgage banking
Securities gains
Other operating income
Total noninterest income
Noninterest expenses:
Salaries and employee benefits
Equipment and occupancy expense
Professional services
FDIC and other regulatory assessments
Other real estate owned expense
Other operating expenses
Total noninterest expenses
Income before income taxes
Provision for income taxes
Net income
Dividends on preferred stock
Net income available to common stockholders
$
82,294
5,721
2,943
176
277
91,411
$
69,115
6,482
2,274
104
171
78,146
13,047
3,033
16,080
75,331
8,972
66,359
2,290
2,373
666
1,597
6,926
19,518
3,697
1,213
1,796
820
10,414
37,458
35,827
12,389
23,438
200
23,238
$
11,941
3,319
15,260
62,886
10,350
52,536
2,316
2,174
108
571
5,169
14,669
3,184
925
2,944
1,964
7,283
30,969
26,736
9,358
17,378
-
17,378
$
Basic earnings per common share
Diluted earnings per common share
$
4.03
$
3.15
$
3.53
$
2.84
See Notes to Consolidated Financial Statements.
$
$
$
$
55,890
4,516
1,500
257
34
62,197
16,087
2,250
18,337
43,860
10,685
33,175
1,631
2,222
193
367
4,413
13,581
2,749
848
2,815
2,745
6,192
28,930
8,658
2,780
5,878
-
5,878
1.07
1.02
67
918
(128)
(179)
611
6,489
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands)
Net income
Other comprehensive income (loss), net of tax (benefit):
Unrealized holding gains arising during period from securities available for sale,
net of tax of $2,944, $755 and $472 for 2011, 2010 and 2009, respectively
Reclassification adjustment for net gains on sale of securities in net income, net
2011
23,438
$
2010
17,378
$
2009
$
5,878
4,519
1,334
of tax (benefit) of $(252), $(39) and $(65) for 2011, 2010 and 2009, respectively
(414)
(70)
Reclassification adjustment for net gains realized on derivatives in net income,
net of tax benefit of $93 for 2009
Other comprehensive income, net of tax
Comprehensive income
See Notes to Consolidated Financial Statements
-
4,105
27,543
$
-
1,264
18,642
$
$
68
SERVISFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands, except share amounts)
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
Sale of 340,000 shares of common
stock, net
Sale of 40,000 shares of preferred
stock, net
Preferred dividends paid
Exercise 64,700 stock options, including tax
benefit
Other comprehensive income
Stock-based compensation expense
Net income
Balance, December 31, 2011
See Notes to Consolidated Financial Statements
Common
Stock
5
1
-
-
-
-
6
-
-
-
Additional
Paid-in
Capital
70,729
3,478
-
785
86
-
75,078
-
123
713
Retained
Earnings
15,087
-
-
-
-
5,878
20,965
-
-
-
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
962
-
611
-
-
-
1,573
1,264
-
-
86,783
3,479
611
785
86
5,878
97,622
1,264
123
713
-
6
-
75,914
17,378
38,343
-
2,837
17,378
117,100
Preferred
Stock
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,159
-
-
10,159
39,958
-
-
-
-
39,958
-
-
-
(200)
-
(200)
-
-
757
-
-
757
-
-
-
-
4,105
4,105
-
-
975
-
-
975
-
$
39,958
-
$
6
-
$
87,805
23,438
$
61,581
-
$
6,942
23,438
$
196,292
69
SERVISFIRST BANC SHARES, INC .
C O NSO LIDATED STATEMENTS O F C ASH FLO W S
YEARS ENDED DEC EMBER 31, 2011, 2010 AND 2009
(In thousands)
O PERATING AC TIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
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-based compensation expense
Increase (decrease) in accrued interest payable
2011
2010
2009
$
23,438
$
17,378
$
5,878
(1,240)
8,972
1,173
958
-
106
(1,202)
975
47
(2,212)
10,350
1,066
823
-
45
(790)
713
(128)
(1,601)
10,685
1,087
(318)
(272)
-
(2,174)
785
(254)
Proceeds from sale of mortgage loans held for sale
169,172
174,760
198,622
Originations of mortgage loans held for sale
(177,200)
(175,046)
(201,143)
Gain on sale of securities available for sale
Gain on sale of mortgage loans held for sale
Net (gain) loss on sale of other real estate owned
Write down of other real estate owned
Decrease in special prepaid FDIC insurance assessments
Loss on prepayment of other borrowings
Increase in cash surrender value of life insurance contracts
Excess tax benefits from the exercise of warrants
Net change in other assets, liabilities, and other
operating activities
Net cash provided by operating activities
(666)
(2,373)
(76)
326
1,492
738
(390)
(127)
(108)
(2,174)
203
1,051
2,538
-
-
-
(193)
(2,222)
441
1,802
(7,850)
-
-
-
200
24,323
1,106
29,575
(810)
2,463
INVESTMENT AC TIVITIES
Purchase of securities available for sale
(102,190)
(84,425)
(200,558)
Proceeds from maturities, calls and paydowns of securities
available for sale
Purchase of securities held to maturity
Proceeds from maturities, calls and paydowns of securities
held to maturity
Increase in loans
Purchase of premises and equipment
Purchase of restricted equity securities
Purchase of interest rate cap
Purchase of bank-owned life insurance contracts
Proceeds from sale of securities available for sale
Proceeds from sale of restricted equity securities
Proceeds from sale of other real estate owned and repossessions
Additions to other real estate owned
Net cash used in investing activities
28,575
(15,441)
31,889
(4,589)
16,585
(645)
5,466
-
-
(449,449)
(197,572)
(253,172)
(1,314)
(543)
-
(40,000)
63,270
552
3,334
-
(428)
(269)
(160)
-
(2,294)
(582)
-
-
32,297
32,567
-
7,995
(75)
-
6,314
(905)
(507,740)
(215,337)
(402,690)
70
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net increase in federal funds purchased
Proceeds from issuance of trust preferred securities
Proceeds from other borrowings
Proceeds from sale of common stock, net
Proceeds from sale of preferred stock, net
Proceeds from exercise of stock options
Excess tax benefits from the exercise of warrants
Repayment of other borrowings
Dividends on preferred stock
Net cash provided by financing activities
168,320
216,851
79,265
-
-
10,159
39,958
630
127
(20,738)
(200)
494,372
39,183
287,178
-
15,050
-
-
-
123
-
-
-
89,848
305,188
-
-
5,000
3,479
-
-
-
-
-
341,534
403,515
Net increase in cash and cash equivalents
10,955
155,772
3,288
Cash and cash equivalents at beginning of year
231,978
76,206
72,918
Cash and cash equivalents at end of year
$
242,933
$
231,978
$
76,206
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest
Income taxes
NONCASH TRANSACTIONS
$
16,033
$
15,388
$
15,837
6,958
Transfers of loans from held for sale to held for investment
$
417
$
787
$
Other real estate acquired in settlement of loans
Internally financed sales of other real estate owned
See Notes to Consolidated Financial Statements.
9,029
136
5,372
1,757
18,591
4,317
1,861
10,198
566
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Bank
has since expanded into the Huntsville, Montgomery and Dothan, Alabama markets, and
most recently into the Pensacola, Florida market.
Basis of Presentation and Accounting Estimates
To prepare consolidated financial statements in conformity with U.S. generally accepted
accounting principles, 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 $7,472,000 at December 31, 2011 and $5,456,000 at December 31, 2010.
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.
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
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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.
In the course of originating mortgage loans and selling those loans in the secondary
market, the Company makes various representations and warranties to the purchaser of
the mortgage loans. Every loan closed by the Bank’s mortgage center is run through a
government agency automated underwriting system. Any exceptions noted during this
process are remedied prior to sale. These representations and warranties also apply to
underwriting the real estate appraisal opinion of value for the collateral securing these
loans. Under the representations and warranties, failure by the Company to comply with
the underwriting and/or appraisal standards could result in the Company being required
to repurchase the mortgage loan or to reimburse the investor for losses incurred (make
whole requests) if such failure cannot be cured by the Company within the specified
period following discovery. The Company continues to experience a manageable level of
investor repurchase demands. There were no expenses incurred as part of these buyback
obligations for the year ended December 31, 2011 and $104,000 for the year ended
December 31, 2010.
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.
The accrual of interest on loans is discontinued when there is a significant deterioration
in the financial condition of the borrower and full repayment of principal and interest is
not expected or the principal or interest is more than 90 days past due, unless the loan is
both well-collateralized and in the process of collection. Generally, all interest accrued
but not collected for loans that are placed on nonaccrual status are reversed against
current interest income. Interest collections on nonaccrual loans are generally applied as
principal reductions. The Company determines past due or delinquency status of a loan
based on contractual payment terms.
A loan is considered impaired when it is probable the Company will be unable to collect
all principal and interest payments due according to the contractual terms of the loan
agreement. Individually identified impaired loans are measured based on the present
value of expected payments using the loan’s original effective rate as the discount rate,
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
the loan’s observable market price, or the fair value of the collateral if the loan is
collateral dependent. If the recorded investment in the impaired loan exceeds the
measure of fair value, a valuation allowance may be established as part of the allowance
for loan losses. Changes to the valuation allowance are recorded as a component of the
provision for loan losses.
Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course
of business management grants concessions to borrowers, which would not otherwise be
considered, where the borrowers are experiencing financial difficulty. The concessions
granted most frequently for TDRs involve reductions or delays in required payments of
principal and interest for a specified time, the rescheduling of payments in accordance
with a bankruptcy plan or the charge-off of a portion of the loan. In some cases, the
conditions of the credit also warrant nonaccrual status, even after the restructure occurs.
As part of the credit approval process, the restructured loans are evaluated for adequate
collateral protection in determining the appropriate accrual status at the time of
restructure. TDR loans may be returned to accrual status if there has been at least a six
month sustained period of repayment performance by the borrower.
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.
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).
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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. Financial
Accounting Standards Board (“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 a
fair-value hedge, 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 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.
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.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The Company uses derivatives to hedge interest rate exposures associated with mortgage
loans held for sale and mortgage loans in process. The Company regularly enters into
derivative financial instruments in the form of forward contracts, as part of its normal
asset/liability management strategies. The Company’s obligations under forward
contracts consist of “best effort” commitments to deliver mortgage loans originated in the
secondary market at a future date. Interest rate lock commitments related to loans that
are originated for later sale are classified as derivatives. In the normal course of business,
the Company regularly extends these rate lock commitments to customers during the loan
origination process. The fair values of the Company’s forward contract and rate lock
commitments to customers as of December 31, 2011 and 2010 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, 2011, the Company was
party to two swaps with notional amounts totaling approximately $11.5 million with
customers, and two swaps with notional amounts totaling approximately $11.5 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.
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, 2011, 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
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years ended
December 31, 2011, 2010 and 2009 was $406,000, $313,000 and $276,000, respectively.
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860):
Reconsideration of Effective Control for Repurchase Agreements, which removes from
the assessment of effective control the criterion relating to the transferor’s ability to
repurchase or redeem financial assets on substantially the agreed-upon terms, even in the
event of default by the transferee. The amendments in this update also eliminate the
requirement to demonstrate that the transferor possesses adequate collateral to fund
substantially all the cost of purchasing replacement assets. The amendments in this
update are effective for interim and annual periods beginning after December 31, 2011,
with prospective application to transactions or modifications of existing transactions that
occur on or after the effective date. Early adoption is not permitted. The Company will
adopt these amendments when required, and does not anticipate that the update will have
a material effect on its financial position or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRS, which outlines the collaborative effort of the FASB and the
International Accounting Standards Board (“IASB”) to consistently define fair value and
to come up with a set of consistent disclosures for fair value. The amendments in this
update explain how to measure fair value. They do not require additional fair value
measurements and are not intended to establish valuation standards or affect valuation
practices outside of financial reporting. The amendments in this update are to be applied
prospectively. For public entities, the amendments are effective for interim and annual
periods beginning after December 31, 2011. Early application is not permitted. The
Company will adopt these amendments when required, and does not believe the
application will have a material effect on its financial position or results of operations.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements (Continued)
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income, which amends existing standards to allow an
entity the option to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements.
Under both options, an entity is required to present each component of net income along
with total net income, each component of other comprehensive income along with a total
for other comprehensive income, and a total amount for comprehensive income. Any
changes pursuant to the options allowed in the amendments should be applied
retrospectively. For public entities, the amendments are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted. The Company has evaluated the impact of this update on its financial
statements and determined that there will be no change.
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic
220): Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No.
2011-05, which defers the effective date pertaining to reclassification adjustments out of
other accumulated comprehensive income in ASU 2011-05, until the FASB is able to
reconsider those requirements. All other requirements of ASU 2011-05 are not affected
by this update, including the requirement to report comprehensive income either in a
single continuous financial statement or in two separate but consecutive financial
statements. Public entities should apply these requirements for fiscal years, and interim
periods within those years, beginning after December 15, 2011, which coincide with the
effective dates of the requirements in ASU 2011-05 amended by this Update. The
Company has evaluated the impact of this Update on its financial statements and
determined that there will be no change.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities, which amends disclosures by
requiring improved information about financial instruments and derivative instruments
that are either offset on the balance sheet or subject to an enforceable master netting
arrangement or similar agreement, irrespective of whether they are offset on the balance
sheet. Reporting entities are required to provide both net and gross information for these
assets and liabilities in order to enhance comparability between those entities that prepare
their financial statements on the basis of U.S. GAAP and those entities that prepare their
financial statements on the basis of international financial reporting standards (“IFRS”).
Companies are required to apply the amendments for fiscal years beginning on or after
January 1, 2013, and interim periods within those years. Retrospective disclosures are
required. The Company does not believe this update will have a material impact on its
financial position or results of operations.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.
INVESTMENT SECURITIES
The amortized cost and fair value of securities are summarized as follows:
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
Fair Value
98,169
88,118
95,331
1,029
282,647
9,676
5,533
15,209
90,631
101,709
78,241
2,013
272,594
$
$
$
$
1,512
4,462
5,230
52
11,256
(59)
-
(35)
-
(94)
99,622
92,580
100,526
1,081
293,809
$
$
$
$
$
$
$
$
410
380
790
-
$
-
$
-
$
$
10,086
5,913
15,999
$
$
$
$
1,887
2,783
1,076
162
5,908
(224)
(268)
(1,051)
-
(1,543)
92,294
104,224
78,266
2,175
276,959
$
$
$
$
$
$
5,234
5,234
$
-
$
-
$
$
(271)
(271)
$
$
4,963
4,963
December 31, 2011:
Securities Available for Sale
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
Mortgage-backed securities
State and municipal securities
Total
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
79
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 2011 and 2010, there were no holdings of securities of any issuer, other
than the U.S. Government and its agencies, in an amount greater than 10% of
stockholders’ equity.
The amortized cost and fair value of securities as of December 31, 2011 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
Mortgage-backed securities
$
$
10,664
112,488
65,509
5,868
88,118
282,647
5,533
9,676
15,209
$
$
$
$
$
$
10,762
114,227
69,864
6,376
92,580
293,809
5,913
10,086
15,999
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, 2011 and 2010. In estimating other-than-
temporary impairment losses, management considers, among other things, the length of
time and the extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer and the intent and ability of the
Company to hold the security for a period of time sufficient to allow for any
anticipated recovery in fair value. The unrealized losses shown in the following table
are primarily due to increases in market rates over the yields available at the time of
purchase of the underlying securities and not credit quality. Because the Company
does not intend to sell these securities and it is more likely than not that the Company
will not be required to sell the securities before recovery of their amortized cost basis,
which may be maturity, the Company does not consider these securities to be other-
than-temporarily impaired at December 31, 2011. There were no other-than-temporary
impairments for the years ended December 31, 2011, 2010 and 2009.
80
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, 2011:
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
December 31, 2010:
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
$
$
(59)
-
(35)
-
(94)
(224)
(268)
(1,034)
-
(1,526)
$
$
$
$
$
$
15,074
-
4,559
-
19,633
24,217
16,417
33,282
-
73,916
-
$
-
-
-
$
-
-
$
-
-
-
$
-
-
$
-
(288)
-
(288)
$
-
$
-
3,674
-
3,674
$
At December 31, 2011, none of the Company’s 518 debt securities were in an
unrealized loss position for more than 12 months.
During 2011, 16 government agency bonds with an amortized cost of $63,156,000 and
20 government agency sponsored mortgage-backed securities with an amortized cost of
$29,852,000 were bought. Nine US Treasury notes, six government agency bonds and
five government agency sponsored mortgage-backed securities were sold with an
amortized cost of $56,075,000 and a net gain on sale in the amount of $992,000.
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 $326,000 in losses on sales of securities during 2011, and no losses on the sale of
securities during 2010 or 2009.
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, 2011 and 2010 was
$197,897,000 and $111,347,000, respectively. This increase in the amount of
securities pledged was primarily the result of the termination of the FDIC’s Temporary
Account Guarantee Program for fully insuring interest-bearing accounts at the end of
2010.
Restricted equity securities include (1) a restricted investment in Federal Home Loan
Bank of Atlanta 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 of Atlanta stock was $3,251,000 and
$3,260,000 at December 31, 2011 and 2010, respectively. The amount of investment
in the First National Bankers Bank stock was $250,000 at December 31, 2011 and
2010.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS
The composition of loans is summarized as follows:
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
December 31,
2011
2010
(In Thousands)
$
799,464
151,218
$
536,620
172,055
398,601
205,182
235,251
839,034
41,026
1,830,742
(22,030)
1,808,712
$
270,767
199,236
178,793
648,796
37,347
1,394,818
(18,077)
1,376,741
$
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Changes in the allowance for loan losses during the years ended December 31, 2011,
2010 and 2009, respectively are as follows:
Years Ended December 31,
2010
2009
2011
(In Thousands)
Balance, beginning of year
Loans charged off
Recoveries
Provision for loan losses
$
$
$
18,077
(5,653)
634
8,972
22,030
14,737
(7,208)
198
10,350
18,077
10,602
(6,676)
126
10,685
14,737
Balance, end of year
$
$
$
The Company assesses the adequacy of its allowance for loan losses prior to the end of
each calendar quarter. The level of the allowance is based on management’s
evaluation of the loan portfolios, past loan loss experience, current asset quality trends,
known and inherent risks in the portfolio, adverse situations that may affect the
borrower’s ability to repay (including the timing of future payment), the estimated
value of any underlying collateral, composition of the loan portfolio, economic
conditions, industry and peer bank loan quality indications and other pertinent factors,
including regulatory recommendations. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant
change. Loan losses are charged off when management believes that the full
collectability of the loan is unlikely. A loan may be partially charged-off after a
“confirming event” has occurred which serves to validate that full repayment pursuant
to the terms of the loan is unlikely. Allocation of the allowance is made for specific
loans, but the entire allowance is available for any loan that in management’s judgment
deteriorates and is uncollectible. The unallocated portion of the reserve is
management’s evaluation of potential future losses that would arise in the loan
portfolio should management’s assumption about qualitative and environmental
conditions materialize. The unallocated portion of the allowance for loan losses is
based on management’s judgment regarding various external and internal factors
including macroeconomic trends, management’s assessment of the Bank’s loan growth
prospects, and evaluations of internal risk controls.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Changes in the allowance for loan losses, segregated by loan type, during the years
ended December 31, 2011 and 2010, respectively, are as follows:
Commercial,
financial and
agricultural
Real estate -
construction
Real estate -
mortgage
Consumer
Unallocated
Total
Year Ended December 31, 2011
$
5,348
(1,096)
361
2,014
6,627
$
6,373
(2,594)
180
2,583
6,542
$
2,443
(1,096)
12
1,936
3,295
$
749
(867)
81
568
531
$
3,164
-
-
1,871
5,035
$
18,077
(5,653)
634
8,972
22,030
Allowance for loan losses:
Balance at December 31, 2010
Chargeoffs
Recoveries
Provision
Balance at December 31, 2011
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
$
1,382
5,245
$
1,533
5,009
$
941
2,354
$
325
206
-
$
5,035
$
4,181
17,849
December 31, 2011
Loans:
Ending Balance
Individually Tested for Impairment
Collectively Evaluated for Impairment
Allowance for loan losses:
Balance at December 31, 2009
Chargeoffs
Recoveries
Provision
Balance at December 31, 2010
$
799,464
5,578
793,886
$
151,218
16,262
134,956
$
839,034
14,866
824,168
$
41,026
547
40,479
-
$
-
-
$
1,830,742
37,253
1,793,489
Year Ended December 31, 2010
$
3,135
(1,667)
97
3,783
5,348
$
6,295
(3,488)
53
3,513
6,373
$
2,102
(1,775)
32
2,084
2,443
$
115
(278)
16
896
749
$
3,090
-
-
74
3,164
$
14,737
(7,208)
198
10,350
18,077
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
$
1,602
3,746
$
1,855
4,518
$
415
2,028
$
554
195
-
$
3,164
$
4,426
13,651
December 31, 2010
Loans:
Ending Balance
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
$
536,620
11,535
525,085
$
172,055
28,710
143,345
$
648,796
10,310
638,486
$
37,347
993
36,354
$
1,394,818
51,548
1,343,270
-
-
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Loans by credit quality indicator as of December 31, 2011 and 2010 are as follows:
December 31, 2011
Pass
Special Mention
Substandard
Doubtful
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
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
$
780,270
117,244
$
11,775
14,472
$
7,419
19,502
$
-
$
385,084
194,447
224,807
804,338
40,353
1,742,205
$
-
7,333
4,835
7,034
19,202
96
45,545
$
6,184
5,900
3,410
15,494
577
42,992
$
$
-
$
508,376
126,200
$
14,209
17,145
$
14,035
28,710
$
-
256,638
193,365
175,815
625,818
36,090
1,296,484
$
-
6,251
1,072
562
7,885
-
39,239
$
7,878
4,799
2,416
15,093
1,257
59,095
$
$
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
$
799,464
151,218
398,601
205,182
235,251
839,034
41,026
1,830,742
Total
536,620
172,055
270,767
199,236
178,793
648,796
37,347
1,394,818
December 31, 2010
Pass
Special Mention
Substandard
Doubtful
The credit quality of the loan portfolio is summarized no less frequently than quarterly
using categories similar to the standard asset classification system used by the federal
banking agencies. The following table presents credit quality indicators for the loan
loss portfolio segments and classes. These categories are utilized to develop the
associated allowance for loan losses using historical losses adjusted for current
economic conditions defined as follows:
Pass – loans which are well protected by the current net worth and paying capacity of
the obligor (or obligors, if any) or by the fair value, less cost to acquire and sell, of any
underlying collateral.
Special Mention – loans with potential weakness that may, if not reversed or corrected,
weaken the credit or inadequately protect the Company’s position at some future date.
These loans are not adversely classified and do not expose an institution to sufficient
risk to warrant an adverse classification.
Substandard – loans that exhibit well-defined weakness or weaknesses that presently
jeopardize debt repayment. These loans are characterized by the distinct possibility
that the institution will sustain some loss if the deficiencies are not corrected.
(cid:2)
(cid:2)
(cid:2)
(cid:2) Doubtful – loans that have all the weaknesses inherent in loans classified substandard,
plus the added characteristic that the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions, and values highly questionable and
improbable.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Loans by performance status as of December 31, 2011 and 2010 are as follows:
December 31, 2011
Performing
Nonperforming
Total
$
798,285
141,155
$
1,179
10,063
$
799,464
151,218
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
$
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
$
December 31, 2010
Performing
Nonperforming
398,601
205,182
235,251
839,034
41,026
1,830,742
Total
536,620
172,055
270,766
199,237
178,793
648,796
37,347
1,394,818
$
$
$
397,809
204,512
234,558
836,879
40,651
1,816,970
792
670
693
2,155
375
13,772
$
$
534,456
161,333
$
2,164
10,722
270,131
199,035
178,793
647,959
36,723
1,380,471
635
202
-
837
624
14,347
$
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
Loans by past-due status as of December 31, 2011 and 2010 are as follows:
December 31, 2011
Past Due Status (Accruing Loans)
30-59 Days 60-89 Days
90+ Days
Total Past
Due
Non-
Accrual
Current
Total 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
Total
$
-
2,234
$
-
-
$
-
-
$
-
2,234
$
1,179
10,063
$
797,300
138,262
$
799,464
151,218
-
2,107
-
2,107
-
4,341
$
-
-
-
-
84
84
$
-
-
-
-
-
$
-
$
-
2,107
-
2,107
84
4,425
792
670
693
397,966
202,873
235,251
398,601
205,182
235,251
2,155
375
13,772
$
836,090
40,318
1,811,970
$
839,034
41,026
1,830,742
$
December 31, 2010
Past Due Status (Accruing Loans)
30-59 Days 60-89 Days
90+ Days
Total Past
Due
Non-
Accrual
Current
Total 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
Total
$
205
-
$
575
-
$
-
-
$
780
-
$
2,164
10,722
$
533,676
161,333
$
536,620
172,055
134
125
-
-
-
-
-
-
-
134
125
-
635
202
-
269,998
198,909
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
$
$
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
The following table presents details of the Company’s loans evaluated for impairment,
and those determined to be impaired, as of December 31, 2011 and December 31,
2010, and for the year ended December 31, 2011. Loans which have been fully
charged off do not appear in the tables.
December 31, 2011
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized in
Period
Related
Allowance
(In Thousands)
$
1,264
11,583
$
1,264
12,573
-
$
-
$
1,501
10,406
$
74
226
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
2,493
1,293
2,837
6,623
173
2,493
1,293
2,837
6,623
173
Total with no allowance recorded
19,643
20,633
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 Impaired Loans:
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
4,314
4,679
3,515
4,397
331
8,243
374
17,610
5,578
16,262
4,314
4,679
3,515
4,397
331
8,243
624
17,860
5,578
17,252
-
-
-
-
-
-
1,382
1,482
88
904
-
992
325
4,181
1,382
1,482
2,523
1,241
2,746
6,510
173
18,590
4,156
3,987
3,504
4,484
337
8,325
425
16,893
5,657
14,393
153
44
162
359
6
665
226
94
365
198
22
585
-
905
300
320
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total impaired loans
6,008
5,690
3,168
14,866
547
37,253
$
6,008
5,690
3,168
14,866
797
38,493
$
88
904
-
992
325
4,181
$
6,027
5,725
3,083
14,835
598
35,483
$
518
242
184
944
6
1,570
$
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
December 31, 2010
Recorded
Investment
Unpaid
Principal
Balance
(In Thousands)
Related
Allowance
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
$
2,345
$
2,930
$
10,532
12,705
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 Impaired 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
9,190
18,178
3,373
2,995
-
6,368
704
34,440
11,535
28,710
4,988
3,506
1,817
10,311
993
9,190
18,428
3,373
2,995
-
6,368
704
34,690
12,120
31,133
5,174
3,506
1,817
10,497
993
-
-
-
-
-
-
-
-
1,602
1,855
55
360
-
415
554
4,426
1,602
1,855
55
360
-
415
554
Total impaired loans
$
51,549
$
54,743
$
4,426
The average amount of impaired loans was $52.1 million during 2010 and $21.8
million during 2009. Interest income recognized on impaired loans was $2.2 million
and $584,000 for 2010 and 2009, respectively.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.
LOANS (Continued)
During the third quarter of 2011, the Company adopted the provisions of the FASB
ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a
Restructuring Is a Troubled Debt Restructuring (“TDR”). Management applied the
guidance on determining whether any restructurings that occurred from January 1,
2011 or later met the definition of a TDR. TDRs at December 31, 2011 and 2010
totaled $4.5 million and $3.1 million, respectively. At December 31, 2011, the
Company had a related allowance for loan losses of $439,000 allocated to these TDRs,
compared to $487,000 at December 31, 2010. All loans classified as TDRs as of
December 31, 2011 are performing as agreed under the terms of their restructured
plans. For the years ended December 31, 2011 and 2010, there were no loans modified
as a TDR for which there was a payment default during the year. The following table
presents an analysis of TDRs as of December 31, 2011 and December 31, 2010.
December 31, 2011
December 31, 2010
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
2
-
3
-
1
4
-
6
$
1,369
-
$
1,369
-
2,785
-
331
3,116
-
4,485
2,785
-
331
3,116
-
4,485
$
$
9
-
1
-
-
1
-
10
$
2,398
-
$
2,398
-
660
-
-
660
-
3,058
$
$
660
-
-
660
-
3,058
Troubled Debt Restructurings
Commercial, financial and
agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate mortgage
Consumer
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, 2011 and 2010 are as follows:
Years Ended December 31,
2011
2010
$
(In Thousands)
6,825
7,926
(4,204)
(1,500)
9,047
8,469
9,471
(11,115)
-
6,825
$
$
$
Balance, beginning of year
Advances
Repayments
Participation sold
Balance, end of year
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4.
FORECLOSED PROPERTIES
Other real estate and certain other assets acquired in foreclosure are carried at the lower
of the recorded investment in the loan or fair value less estimated costs to sell the
property.
An analysis of foreclosed properties for the years ended December 31, 2011, 2010 and
2009 follows:
2011
2010
2009
Balance at beginning of year
Transfers from loans and capitalized expenses
Foreclosed properties sold
Writedowns and partial liquidations
$
$
6,966
9,029
(3,334)
(386)
12,275
12,525
5,447
(7,995)
(3,011)
6,966
$
$
$
10,473
11,103
(6,314)
(2,737)
12,525
Balance at end of year
$
NOTE 5.
PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Furniture and equipment
Leasehold improvements
Accumulated depreciation
December 31,
2011
2010
$
(In Thousands)
5,224
4,436
9,660
(5,069)
4,591
$
4,441
3,920
8,361
(3,911)
4,450
$
$
The provisions for depreciation charged to occupancy and equipment expense for the
years ended December 31, 2011, 2010 and 2009 were $1,173,000, $1,066,000 and
$1,087,000, respectively.
The Company leases land and building space under non-cancellable operating leases.
Future minimum
leases are
summarized as follows:
lease payments under non-cancellable operating
2012
2013
2014
2015
2016
Thereafter
(In Thousands)
$
$
2,068
1,955
1,945
1,974
1,934
7,201
17,077
For the years ended December 31, 2011, 2010 and 2009, annual rental expense on
operating leases was $2,060,000, $1,734,000 and $1,447,000, respectively.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2011
was $504,000, and is included in other assets.
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,
2011 was $3,403,000, of which $2,270,000 is included in loans of the Company. The
remaining amount is included in other assets.
NOTE 7.
DEPOSITS
Deposits at December 31, 2011 and 2010 were as follows:
December 31,
2011
2010
(In Thousands)
Noninterest-bearing demand
Interest-bearing checking
Savings
Time
Time, $100,000 and over
$
418,810
1,325,451
15,638
71,368
312,620
2,143,887
$
$
$
250,490
1,224,244
5,493
55,583
222,906
1,758,716
The scheduled maturities of time deposits at December 31, 2011 were as follows:
(In Thousands)
2012
2013
2014
2015
2016
$
$
230,138
66,036
55,029
6,515
26,270
383,988
At December 31, 2011 and 2010, overdraft deposits reclassified to loans were
$876,000 and $1,111,000, respectively.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.
FEDERAL FUNDS PURCHASED
At December 31, 2011, The Company had $79.3 million in federal funds purchased
from its respondent banks that are clients of its correspondent banking unit. The
Company was paying an interest rate of 0.25% on these balances at December 31,
2011.
At December 31, 2011, the Company had available lines of credit totaling
approximately $140 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
The Company prepaid both of its advances from Federal Home Loan Bank (“FHLB”)
during 2011, one in March and the other in June. Prepayment penalties of $738,000
were paid to the FHLB as part of these prepayments, and is included in other operating
expenses.
At December 31, 2011 and 2010, the composition of other borrowings is as follows:
FHLB Advances:
Fixed rate, due 2012 and 2013
Subordinated notes payable
Total other borrowings
Amount
$
-
4,954
4,954
$
2011
Weighted
Average
Rate
2010
Weighted
Average
Rate
Amount
0.00 %
8.25
8.25 %
$
$
20,000
4,937
24,937
3.13 %
8.25
4.14 %
NOTE 10.
JUNIOR SUBORDINATED MANDATORY CONVERTIBLE
DEFERRABLE INTEREST DEBENTURES DUE MARCH 15,
2040
On February 9, 2010 the Company established a Delaware statutory trust subsidiary,
ServisFirst Capital Trust II (the “2010 Trust”), which issued 15,000 shares of its 6.0%
Mandatory Convertible Trust Preferred Securities (the “Preferred Securities”) for
$15,000,000, or $1,000 per Preferred Security, on March 15, 2010. The 2010 Trust
simultaneously issued 50,000 shares of its common securities to the Company for a
purchase price of $50,000, or $1.00 per share, which together with the Preferred
Securities constitute all of the issued and outstanding securities of the 2010 Trust
(collectively, the “Trust Securities”). The 2010 Trust invested all of the proceeds from
the sale of the Trust Securities in the Company’s 6.0% Junior Subordinated Mandatory
Convertible Deferrable Interest Debentures due March 15, 2040 in the principal
amount of $15,050,000 (the “Subordinated Debentures”). The Preferred Securities
were offered and sold to accredited investors in a private placement.
Holders of the Preferred Securities 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
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10.
JUNIOR SUBORDINATED MANDATORY CONVERTIBLE
DEFERRABLE INTEREST DEBENTURES DUE MARCH 15,
2040 (Continued)
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.
The Subordinated Debentures are subordinate and junior in right of payment to all of
the Company’s senior debt, as defined in the Indenture governing the Subordinated
Debentures; provided, however, that, while any of the Preferred Securities remain
outstanding, the Company shall not incur any additional senior debt in excess of 0.5%
of the Company’s average assets for the fiscal year immediately preceding, unless
approved by the holders of a majority of the outstanding Preferred Securities. The
Company has the right to defer payments of interest on the Subordinated Debentures
from time to time, for up to 20 consecutive quarterly periods for each deferral
period. During any deferral period, the Company may not (i) pay dividends on or
redeem any of its capital stock, (ii) pay principal of or interest on any debt securities
ranking pari passu with or subordinate to the Subordinated Debentures or (iii) make
any guaranty payments with respect to any guaranty of the debt securities of any of the
Company’s subsidiaries if such guaranty ranks pari passu with or junior in right of
payment to the Subordinated Debentures.
If not previously redeemed or converted into common stock of the Company, the
Preferred Securities will automatically and mandatorily convert into common stock of
the Company on March 15, 2013 at a conversion price of $25 per share of common
stock. In addition to such mandatory conversion, the Preferred Securities may be
converted into common stock of the Company at the option of the holder at any time
prior to the earliest to occur of maturity, redemption or mandatory conversion at the
same conversion price.
The Preferred Securities are subject to mandatory redemption upon repayment of the
Subordinated Debentures at their stated maturity (as defined in the Indenture), or upon
earlier redemption of the Subordinated Debentures. The Subordinated Debentures are
redeemable by the Company at any time in whole, but not in part, upon the occurrence
of a special event, as defined in the Indenture.
The Company has the right at any time to terminate the 2010 Trust and cause the
Subordinated Debentures to be distributed to the holders of the Preferred Securities in
liquidation of the 2010 Trust. This right is optional and wholly within the Company’s
discretion.
The Company is required by the Federal Reserve Board to maintain certain levels of
capital for bank regulatory purposes. The Federal Reserve Board has determined that
certain cumulative preferred securities having the characteristics of trust preferred
securities qualify as minority interests, which is included in Tier 1 capital for bank and
financial holding companies. In calculating the amount of Tier 1 qualifying capital, the
trust preferred securities can only be included up to the amount constituting 25% of
total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital
treatment provides the Company with a more cost-effective means of obtaining capital
for bank regulatory purposes than if the Company were to issue preferred stock.
NOTE 11.
SUBORDINATED NOTE DUE JUNE 1, 2016
On June 23, 2009, the Company issued its 8.25% Subordinated Note due June 1, 2016
in the aggregate principal amount of $5,000,000 to an accredited investor at 100% of
par. The note is subordinate and junior in right of payment upon any liquidation of the
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11.
SUBORDINATED NOTE DUE JUNE 1, 2016 (Continued)
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 to be $5.41 using a Black-Scholes-Merton valuation model. This total
value of $86,000 was recorded as a discount and reduced the net book value of the note
to $4,914,000 with an offsetting increase to the Company’s additional paid-in capital.
The discount will be amortized over a five-year period.
NOTE 12.
PARTICIPATION IN THE SMALL BUSINESS LENDING FUND
OF THE U.S. TREASURY DEPARTMENT
On June 21, 2011, the Company entered into a Securities Purchase Agreement with the
Secretary of the Treasury, pursuant to which the Company issued and sold to the
Treasury 40,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series
A, having a liquidation preference of $1,000 per share (the “Series A Preferred
Stock”), for aggregate proceeds of $40,000,000. The issuance was pursuant to the
Treasury’s Small Business Lending Fund program, a $30 billion fund established under
the Small Business Jobs Act of 2010, which encourages lending to small businesses by
providing capital to qualified community banks with assets of less than $10 billion.
The Series A Preferred Stock is entitled to receive non-cumulative dividends payable
quarterly on each January 1, April 1, July 1 and October 1, commencing October 1,
2011. The dividend rate, which is calculated on the aggregate Liquidation Amount,
has been initially set at 1% per annum based upon the current level of “Qualified Small
Business Lending” (“QSBL”) by the Bank. The dividend rate for future dividend
periods will be set based upon the percentage change in qualified lending between each
dividend period and the baseline QSBL level established at the time the Agreement
was entered into. Such dividend rate may vary from 1% per annum to 5% per annum
for the second through tenth dividend periods, and from 1% per annum to 7% per
annum for the eleventh through the first half of the nineteenth dividend periods. If the
Series A Preferred Stock remains outstanding for more than four-and-one-half years,
the dividend rate will be fixed at 9%. Prior to that time, in general, the dividend rate
decreases as the level of the Bank’s QSBL increases. Such dividends are not
cumulative, but the Company may only declare and pay dividends on its common stock
(or any other equity securities junior to the Series A Preferred Stock) if it has declared
and paid dividends for the current dividend period on the Series A Preferred Stock, and
will be subject to other restrictions on its ability to repurchase or redeem other
securities. In addition, if (i) the Company has not timely declared and paid dividends
on the Series A Preferred Stock for six dividend periods or more, whether or not
consecutive, and (ii) shares of Series A Preferred Stock with an aggregate liquidation
preference of at least $25,000,000 are still outstanding, the Treasury (or any successor
holder of Series A Preferred Stock) may designate two additional directors to be
elected to the Company’s Board of Directors.
As is more completely described in the Certificate of Designation, holders of the Series
A Preferred Stock have the right to vote as a separate class on certain matters relating
to the rights of holders of Series A Preferred Stock and on certain corporate
transactions. Except with respect to such matters and, if applicable, the election of the
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12.
PARTICIPATION IN THE SMALL BUSINESS LENDING FUND
OF THE U.S. TREASURY DEPARTMENT (Continued)
additional directors described above, the Series A Preferred Stock does not have voting
rights.
The Company may redeem the shares of Series A Preferred Stock, in whole or in part,
at any time at a redemption price equal to the sum of the Liquidation Amount per share
and the per-share amount of any unpaid dividends for the then-current period, subject
to any required prior approval by the Company’s primary federal banking regulator.
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 the income statement.
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, 2011 and 2010 were not material and have not been recorded.
the Company regularly extends
these rate
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS
At December 31, 2011, 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 $975,000, $713,000 and $785,000 for the years ended
December 31, 2011, 2010 and 2009, 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
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
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, 2011, there are a total of 401,200 shares available to be granted
under both of these plans.
On September 21, 2006, we granted non-plan stock options to persons representing
certain key business relationships to purchase up to an aggregate of 30,000 shares of
our common stock for a purchase price of $15.00 per share. On November 2, 2007, we
granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 25,000 shares of our common stock for
a purchase price of $20.00 per share. These stock options are non-qualified and are not
part of either of our stock incentive plans. They vest 100% in a lump sum five years
after their date of grant and expire 10 years after their date of grant.
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 84
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
2011
2010
2009
26.50%
0.37%
6.5
2.21%
26.00%
0.00%
7
2.10%
20.00%
0.50%
7
1.70%
The weighted-average grant-date fair value of options granted during the years ended
December 31, 2011, 2010 and 2009 was $7.82, $7.91 and $5.87, respectively.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
The following tables summarize the status of stock options granted.
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(In Thousands)
6.9
9.3
3.8
-
6.0
4.4
6.8
9.4
-
-
6.9
5.1
7.7
9.4
-
-
6.8
6.1
$
$
$
$
$
$
$
$
$
8,238
-
792
-
12,508
7,447
8,483
-
150
-
8,238
3,555
8,513
-
-
-
8,483
1,867
Year Ended December 31, 2011:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Shares
881,000
233,500
(40,700)
-
1,073,800
$
$
15.65
27.16
10.53
15.00
18.33
Exercisable at December 31, 2011
442,940
$
13.19
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
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
Exercisable options at December 31, 2011 were as follows:
Range of Exercise Price
Shares
$
10.00
11.00
15.00
20.00
25.00
146,500
118,300
125,394
24,996
27,750
442,940
Weighted
Average
Remaining
Contractual
Term
(years)
Weighted
Average
Exercise
Price
$
$
10.00
11.00
15.00
20.00
25.00
13.19
3.4
4.3
4.9
5.7
6.7
4.4
Aggregate
Intrinsic Value
(In Thousands)
2,930
$
2,247
1,881
250
139
7,447
$
As of December 31, 2011, there was $2,269,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under the
Plans. The cost is expected to be recognized over a weighted-average period of 2.3
years. The total fair value of shares vested during the year ended December 31, 2011
was $588,000.
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 when the awards are made, and this total value is
recognized as compensation expense over the vesting period, which is five years from
the date of grant. 8,000 shares of restricted stock awarded to the key executive have
vested as of December 31, 2011. As of December 31, 2011, there was $437,000 of
total unrecognized compensation cost related to non-vested restricted stock. The cost
is expected to be recognized over a weighted-average period of 2.9 years.
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, 2011 and 2010 was 40,000
and 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, 2011, all warrants were fully vested.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS (Continued)
The following tables summarize the status of stock warrants granted under the
Company’s stock-based compensation plans.
Year Ended December 31, 2011:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted
Average
Exercise Price
Shares
60,000
-
(20,000)
-
40,000
$
10.00
-
10.00
-
10.00
Exercisable at December 31, 2011
40,000
$
10.00
Year Ended December 31, 2010:
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, 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
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(In Thousands)
4.3
-
3.4
-
3.4
3.4
5.3
-
-
-
4.3
4.3
6.3
-
-
-
5.3
5.3
$
$
$
$
$
$
$
$
$
900
-
400
-
800
800
900
-
-
-
900
900
900
-
-
-
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
$946,000, $377,000 and $341,000 for 2011, 2010 and 2009, respectively. The
Company’s board of directors approved an additional 3% match based on the profits of
the Company during 2011. The expense for this additional match was $432,000, and is
included in the 2011 expense above.
NOTE 15. COMMON STOCK
During 2011, the Company completed private placements of 340,000 shares of
common stock. The shares were issued and sold at $30 per share to 105 accredited
investors, of which approximately 33,900 shares were purchased by directors, officers
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMON STOCK (Continued)
and their families, and 20 non-accredited investors. This sale of stock resulted in net
proceeds of $10,159,000. This includes stock offering expenses of $33,000.
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 $61.0 million in dividends as of December
31, 2011.
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, 2011, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2011, 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, 2011.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. REGULATORY MATTERS (Continued)
The Company’s and Bank’s actual capital amounts and ratios are presented in the
following table:
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2011:
Total Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
$
246,334
243,279
12.79%
12.63%
$
154,094
154,070
Tier I Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average Assets:
Consolidated
ServisFirst Bank
As of December 31, 2010:
Total Capital to Risk Weighted Assets:
219,350
216,295
11.39%
11.23%
219,350
216,295
9.17%
9.06%
77,047
77,035
95,642
95,481
Consolidated
ServisFirst Bank
$
166,850
166,721
11.82%
11.81%
$
112,927
112,978
Tier I Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average Assets:
Consolidated
ServisFirst Bank
144,263
144,117
10.22%
10.20%
144,263
144,117
7.77%
7.77%
56,464
56,489
74,266
74,236
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
192,588
$
N/A
10.00%
N/A
115,553
N/A
119,352
N/A
6.00%
N/A
5.00%
N/A
141,222
$
N/A
10.00%
N/A
84,733
N/A
92,795
N/A
6.00%
N/A
5.00%
102
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:
2011
Years Ended December 31,
2010
(In Thousands)
2009
Other Operating Income
Gain (loss) on sale of other real estate owned
Credit card income
Increase in cash surrender value of life insurance contracts
Other
76
481
390
650
1,597
$
(203)
30
-
744
571
$
(441)
22
-
786
367
$
Other Operating Expenses
Postage
Telephone
Data processing
Recording fees and other loan expenses
Supplies
Customer and public relations
Marketing
Sales and use tax
Donations and contributions
Directors fees
Prepayment penalties FHLB advances
Other
$
$
$
194
409
2,023
2,406
356
689
406
208
437
235
738
2,313
10,414
173
358
1,983
1,027
263
477
313
141
261
216
-
2,071
7,283
$
$
$
142
318
1,844
537
319
462
276
211
214
180
-
1,689
6,192
NOTE 18.
INCOME TAXES
The components of income tax expense are as follows:
2011
Years Ended December 31,
2010
(In Thousands)
2009
Current
Deferred
Income tax expense
$
$
13,629
(1,240)
12,389
$
11,570
(2,212)
9,358
$
$
$
4,381
(1,601)
2,780
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:
103
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
Bank owned life insurance contracts
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, 2011
% of Pre-tax
Earnings
Amount
(In Thousands)
$
12,540
967
(875)
(137)
128
(234)
12,389
$
35.00%
2.70%
-2.44%
-0.38%
0.36%
-0.65%
34.59%
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%
104
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) losses 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
2011
$
452
115
(4,220)
(489)
(176)
8,509
436
287
4,914
$
December 31,
2010
(In Thousands)
$
646
127
(1,528)
(206)
(72)
6,974
194
231
6,366
$
2009
411
141
(810)
(304)
106
5,419
27
(118)
4,872
$
$
The Company believes its net deferred tax asset is recoverable as of December 31,
2011 based on the expectation of future taxable income and other relevant
considerations.
ASC 740 defines the threshold for recognizing the benefits of tax return positions in
the financial statements as “more-likely-than-not” to be sustained by the taxing
authority. This section also provides guidance on derecognition, measurement and
classification of income tax uncertainties in interim periods. As of December 31, 2011,
the Company had no unrecognized tax benefits related to federal or state income tax
matters. The Company does not anticipate any material increase or decrease in
unrecognized tax benefits during 2012 related to any tax positions taken prior to
December 31, 2011. As of December 31, 2011, the Company has accrued no interest
or penalties related to uncertain tax positions. It is the Company’s policy to recognize
interest and penalties, if any, related to income tax matters in income tax expense.
The Company and its subsidiaries file consolidated U.S. federal, State of Alabama and
State of Florida income tax returns. The Company is currently open to audit under the
statute of limitations by the Internal Revenue Service for the years ended December 31,
2009 through 2011. The Company is also currently open to audit by the State of
Alabama for the years ended December 31, 2009 through 2011, and open to audit by
the state of Florida for the year ended 31, 2011, as we opened our first office in the
State of Florida in 2011.
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:
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. COMMITMENTS AND CONTINGENCIES (Continued)
Commitments to extend credit
Credit card arrangements
Standby letters of credit and
financial guarantees
Total
2011
$
697,939
19,686
2010
(In Thousands)
538,719
$
17,601
2009
$
409,760
19,059
42,937
760,562
$
47,103
603,423
$
39,205
468,024
$
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.
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 54% is secured by real estate in the Company’s primary market areas. 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.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
2011
Years Ended December 31,
2010
(Dollar Amounts In Thousands Except Per
Share Amounts)
2009
Earnings Per Share
Weighted average common shares outstanding
Net income available to common stockholders
Basic earnings per common 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 available to common stockholders
Effect of interest expense on convertible debt, net of tax
and discretionary expenditures related to conversion
Net income availabe to common stockholders, adjusted
5,759,524
$
23,238
$
4.03
5,519,151
$
17,378
$
3.15
5,485,972
$
5,878
$
1.07
5,759,524
5,519,151
5,485,972
989,639
775,453
301,671
6,749,163
$
23,238
6,294,604
$
17,378
5,787,643
$
5,878
$
568
$
473
$
-
for effect of debt conversion
Diluted earnings per common share
$
$
23,806
3.53
$
$
17,851
2.84
$
$
5,878
1.02
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, 2011 and 2010 in the amount of $9,047,000 and
$6,825,000, respectively.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT
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 pricing services provided by independent
vendors. Such independent pricing services are to advise the Company on the carrying
value of the securities available for sale portfolio. As part of the Company’s
procedures, the price provided from the service is evaluated for reasonableness given
market changes. When a questionable price exists, the Company investigates further to
determine if the price is valid. If needed, other market participants may be utilized to
determine the correct fair value. The Company has also reviewed and confirmed its
determinations in discussions with the pricing source regarding their methods of price
discovery. 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.
108
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 $5,419,000 and $7,878,000 during the years ended December
31, 2011 and 2010, 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 $266,000 and $1,252,000 for 2011 and 2010,
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.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
The following table presents the Company’s financial assets and financial liabilities
carried at fair value on a recurring basis as of December 31, 2011 and 2010:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Fair Value Measurements at December 31, 2011 Using
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
(In Thousands)
Assets Measured on a Recurring Basis:
Available-for-sale securities:
U.S Treasury and government agencies
$
-
$
99,622
$
-
$
99,622
Mortgage-backed securities
State and municipal securities
Corporate debt
Interest rate swap agreements
Interest rate cap
Total assets at fair value
-
-
-
-
-
$
-
92,580
100,526
1,081
617
9
294,435
$
-
-
-
-
-
$
-
Liabilities Measured on a Recurring Basis:
Interest rate swap agreements
$
-
$
617
$
-
92,580
100,526
1,081
617
9
294,435
617
$
$
Fair Value Measurements at December 31, 2010 Using
Total
$
$
$
92,294
104,224
78,266
2,175
803
115
277,877
803
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
$
-
-
-
-
-
-
$
-
Assets Measured on a Recurring Basis:
Available-for-sale securities:
U.S Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Interest rate swap agreements
Interest rate cap
Total assets at fair value
Liabilities Measured on a Recurring Basis:
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
$
92,294
104,224
78,266
2,175
803
115
277,877
$
-
-
-
-
-
-
$
-
$
Interest rate swap agreements
$
-
$
803
$
-
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
The following table presents the Company’s financial assets and financial liabilities
carried at fair value on a nonrecurring basis as of December 31, 2011 and 2010:
Fair Value Measurements at December 31, 2011 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)
-
$
-
$
33,072
12,275
Total assets at fair value
$
-
$
-
$
45,347
Total
$
$
33,072
12,275
45,347
Fair Value Measurements at December 31, 2010 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)
-
$
-
$
-
$
$
35,183
6,966
42,149
Total
$
$
35,183
6,966
42,149
The fair value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there are
no quoted market prices for the Company’s various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. Current U.S. GAAP excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily represent
the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts reported in the statements of
financial condition for cash and cash equivalents approximate those assets’ fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If a quoted market price is not available, fair value is
based on quoted market prices of comparable instruments.
Restricted equity securities: Fair values for other investments are considered to be their
cost as they are redeemed at par value.
Loans: For variable-rate loans that re-price frequently and with no significant change
in credit risk, fair value is based on carrying amounts. The fair value of other loans
(for example, fixed-rate commercial real estate loans, mortgage loans, and industrial
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
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. The method of estimating fair value does not
incorporate the exit-price concept of fair value as prescribed by FASB Accounting
Standards Codification (ASC) 820 and generally produces a higher value than an exit-
price approach. 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: The carrying amount of accrued interest payable
approximates its fair value.
Loan commitments: The fair values of the Company’s off-balance sheet financial
instruments are based on fees currently charged to enter into similar agreements. Since
the majority of the Company’s other off-balance-sheet instruments consist of non-fee-
producing, variable-rate commitments, the Company has determined they do not have
a distinguishable fair value.
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23.
FAIR VALUE MEASUREMENT (Continued)
The carrying amount and estimated fair value of the Company’s financial instruments
were as follows:
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
Bank owned life insurance contracts
Derivative
Financial Liabilities:
Deposits
Borrowings
Trust preferred securities
Accrued interest payable
Derivative
December 31,
2011
Carrying
Amount
Fair Value
2010
Carrying
Amount
Fair Value
(In Thousands)
$
242,933
293,809
15,209
3,501
17,859
1,808,712
8,192
40,390
626
$
242,933
293,809
15,999
3,501
17,859
1,811,612
8,192
40,390
626
$
231,978
276,959
5,234
3,510
7,875
1,376,741
6,990
-
918
$
231,978
276,959
4,963
3,510
7,875
1,388,154
6,990
-
918
$
2,143,887
4,954
30,514
945
617
$
2,150,308
5,377
27,402
945
617
$
1,758,716
24,937
30,420
898
803
$
1,761,906
25,717
27,989
898
803
NOTE 24.
PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheet of ServisFirst
Bancshares, Inc. as of December 31, 2011 and 2010 and the condensed statements of
income and cash flows for the years ended December 31, 2011, 2010 and 2009.
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24.
PARENT COMPANY FINANCIAL INFORMATION (Continued)
BALANCE SHEETS DECEMBER 31, 2011 AND 2010
(In Thousands)
ASSETS
Cash & due from banks
Investment in subsidiary
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, Series A Senior Non-Cumulative Perpetual, par value $.001
(liquidation preference $1,000), net of discount; 40,000 shares authorized,
40,000 shares issued and outstanding at December 31, 2011 and no shares
authorized, issued and outstanding at December 31, 2010
Common stock, par value $.001 per share; 15,000,000 shares authorized;
5,932,182 shares issued and outstanding at December 31, 2011 and
5,527,482 shares issued and outstanding at December 31, 2010
Paid in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilites and stockholders' equity
2011
2010
$
2,908
223,753
$
51
146,954
293
226,954
$
660
147,665
$
$
30,514
148
30,662
$
30,420
145
30,565
39,958
-
6
87,805
61,581
6,942
196,292
226,954
$
6
75,914
38,343
2,837
117,100
147,665
$
STATEMENTS OF INCOME
(In Thousands)
Income:
Dividends received from subsidiary
Other income
Total income
Expense:
Interest on borrowings
Other operating expenses
Total expenses
Loss before income tax benefit & equity in
undistributed earnings of subsidiary
Income tax benefit
Loss before equity in undistributed earnings
earnings of subsidiary
Equity in undistributed earnings of subsidiary
Net income
Dividends on preferred stock
Net income available to common stockholders
2011
2010
2009
$
800
43
843
$
1,230
42
1,272
$
325
40
365
2,345
291
2,636
(1,793)
(976)
2,236
295
2,531
(1,259)
(924)
1,401
304
1,705
(1,340)
(614)
(817)
24,255
23,438
200
23,238
$
(335)
17,713
17,378
-
17,378
$
(726)
6,604
5,878
-
5,878
$
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24.
PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In Thousands)
2011
2010
2009
$
23,438
$
17,378
$
5,878
(50)
(24,255)
(867)
(46,200)
(46,200)
-
-
-
39,958
10,166
(200)
49,924
2,857
51
2,908
$
241
(17,713)
(94)
(15,000)
(15,000)
-
-
15,050
-
-
-
15,050
(44)
95
51
$
260
(6,604)
(466)
(3,479)
(3,479)
-
-
-
-
3,479
-
3,479
(466)
561
95
$
$
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Other
Equity in undistributed earnings of subsidiary
Net used in operating activities
INVESTMENT ACTIVITIES
Investment in subsidiary
Net cash used in investment activities
FINANCING ACTIVITIES
Proceeds from other borrowings
Repayment of borrowings
Proceeds from issuance of trust preferred securities
Proceeds from issuance of preferred stock
Proceeds from issuance of common stock
Dividends on preferred stock
Net cash provided by financing activities
Increase (decrease) in cash & cash equivalents
Cash & cash equivalents at beginning of year
Cash & cash equivalents at end of year
115
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.
2011 Quarter Ended
(Dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net income available to common stockholders
Net income per common share, basic
Net income per common share, diluted
March 31
$
20,961
3,985
16,976
2,231
4,871
0.88
0.77
$
$
June 30
$
22,080
4,032
18,048
1,494
5,845
1.02
0.89
$
$
$
September 30 December 31
25,058
$
3,970
21,088
2,507
6,487
1.10
0.97
23,312
4,093
19,219
2,740
6,035
1.03
0.90
$
$
$
$
2010 Quarter Ended
(Dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net income available to common stockholders
Net income per common share, basic
Net income per common share, diluted
March 31
18,502
$
3,596
14,906
2,538
4,013
0.73
0.69
$
$
June 30
$
18,996
3,688
15,308
2,537
4,021
0.73
0.65
$
$
$
September 30 December 31
20,689
$
4,004
16,685
2,738
4,545
0.82
0.73
19,959
3,972
15,987
2,537
4,799
0.87
0.77
$
$
$
$
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, 2011.
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, 2011.
Changes in Internal Control over Financial Reporting
The Chief Executive Officer and Chief Financial Officer have 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, 2011, 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
116
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
As of December 31, 2011, 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, 2011, based
on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31,
2011, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report herein — “Report of Independent Registered Public Accounting Firm.”
ITEM 9B. OTHER INFORMATION.
At the 2011 Annual Meeting of Stockholders, the board of directors recommended, and 98% of the
shares represented at the meeting voted in favor of, advisory say-on-pay votes at each annual meeting of
stockholders. The board of directors has determined that it will hold the say-on-pay advisory vote at
each annual meeting of stockholders.
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 2012 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.
117
G. Carlton Barker – Mr. Barker has served as Executive Vice President and Montgomery President
and Chief Executive Officer of the Bank since February 1, 2007. Prior to joining the Company, Mr.
Barker was employed by Regions Bank for 19 years in various capacities, most recently as the Regional
President for the Southeast Alabama Region. Mr. Barker serves on the Huntingdon College Board of
Trustee.
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.
Rex D. McKinney – Mr. McKinney has served as Executive Vice President and Pensacola President
and Chief Executive Officer of the Bank since January 2011. Prior to joining the Company, Mr.
McKinney held several leadership positions at First American Bank/Coastal Bank and Trust (owned by
Synovus Financial Corporation) starting in 1997. Mr. McKinney is on the Membership Committee and a
Past Board Member of the Rotary Club of Pensacola. He is Past President of the Pensacola Sports
Association, Board Member and Finance Committee Member for the United Way of Escambia County,
Finance Committee Member for Christ Episcopal Church, Finance Committee Member for the Pensacola
Country Club, Member of the Irish Politicians Club, and Board Member of the Order of Tristan.
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 2012 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 2012 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 2012 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 2012 Annual Meeting of Stockholders.
118
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(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 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, 2011 and 2010
Consolidated Statements of Income for the Years Ended December 31,
2011, 2010 and 2009
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for Years Ended
December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Page
62
63
64
65
66
67
68
69
70
72
(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
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)
119
4.8
4.9
4.10
4.11
4.12
4.13
4.14
10.1
10.2
10.3
10.4
10.5
10.6
11
14
21
23.1
23.2
24
31.1
31.2
32.1
32.2
ServisFirst Bank 8.5% Subordinated Note due June 1, 2016 (6)
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)
Small Business Fund – Securities Purchase Agreement dated June 21, 2011 between the
Secretary of the Treasury and ServisFirst Bancshares, Inc. (8)
Certificate of Designation of Senior Non-cumulative Perpetual Preferred Stock, Series A of
ServisFirst Bancshares, Inc. (8)
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
Consent of KPMG LLP
Consent of Mauldin & Jenkins
Power of Attorney
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
120
(1) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Registration Statement on Form 10, as
filed with the Securities and Exchange Commission on March 28, 2008, and incorporated herein by
reference.
(2) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated
September 15, 2008, and incorporated herein by reference.
(3) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Current Report on Form 8-K dated
September 2, 2008, and incorporated herein by reference.
(4) Previously filed as Appendix A to ServisFirst Bancshares, Inc.’s definitive Proxy Statement on
Schedule 14A relating to the 2009 Annual Meeting of Stockholders and incorporated herein by reference.
(5) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, and incorporated herein by reference.
(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.
(8) Previously filed as an exhibit to ServisFirst Bancshares, Inc.’s current report on Form 8-K dated June
21, 2011, and incorporated herein by reference.
* Management contract or compensatory plan arrangements.
121
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 7, 2012
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 7, 2012
March 7, 2012
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 7, 2012
Director
Director
Director
Director
March 7, 2012
March 7, 2012
March 7, 2012
March 7, 2012
_________________
*The undersigned, acting pursuant to a Power of Attorney, has 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
122
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www
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