SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
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 Vestavia Country Club, 400
Beaumont Drive, Birmingham, Alabama 35216 on Thursday, April 25, 2013, 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, 2013; and an advisory vote on executive
compensation. 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, 2013; and
“FOR” the “Say on Pay” advisory vote approving our executive compensation.
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 2013 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
APRIL 25, 2013 .............................................................................................................................. 1
ABOUT THE ANNUAL MEETING .............................................................................................. 3
PROPOSAL 1: ELECTION OF DIRECTORS ............................................................................... 7
THE ROLE OF THE BOARD OF DIRECTORS ........................................................................... 9
COMMITTEES OF THE BOARD OF DIRECTORS .................................................................. 10
INDEPENDENCE OF THE BOARD OF DIRECTORS .............................................................. 13
COMMUNICATIONS WITH DIRECTORS ............................................................................... 14
CORPORATE GOVERNANCE GUIDELINES .......................................................................... 14
CODE OF BUSINESS CONDUCT .............................................................................................. 15
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ............ 15
DIRECTOR COMPENSATION .................................................................................................. 16
MEETINGS OF THE BOARD OF DIRECTORS ........................................................................ 16
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................................... 16
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE .......................... 17
COMPENSATION DISCUSSION AND ANALYSIS ................................................................. 17
REPORT OF THE COMPENSATION COMMITTEE ................................................................ 25
EXECUTIVE COMPENSATION ................................................................................................ 26
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR
CHANGE IN CONTROL ............................................................................................................. 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT .......................................................................................................................... 32
PROPOSAL 2: RATIFICATION OF KPMG LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER
31, 2013 ......................................................................................................................................... 34
REPORT OF THE AUDIT COMMITTEE ................................................................................... 35
PROPOSAL 3: ADVISORY VOTE ON EXECUTIVE COMPENSATION .............................. 36
STOCKHOLDER PROPOSALS .................................................................................................. 37
GENERAL INFORMATION ....................................................................................................... 38
SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
NOTICE OF 2013 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 25, 2013
To Our Stockholders:
Notice is hereby given that our Annual Meeting of Stockholders will be held at the
Vestavia Country Club, 400 Beaumont Drive, Birmingham, Alabama 35216 on Thursday, April
25, 2013, 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, 2013;
3.
4.
to conduct a “Say on Pay” advisory vote on our executive compensation; and
to transact such other business as may properly come before the Annual Meeting
or any postponement or adjournment thereof.
Our board of directors recommends a vote FOR each of the proposals listed above. Our
board of directors is not aware of any other business to come before the Annual Meeting.
Directions to the Annual Meeting location, the Vestavia Country Club, are posted on our
website at www.servisfirstbancshares.com .
Stockholders of record as of the close of business on March 8, 2013 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
1
PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED RETURN ENVELOPE.
NO POSTAGE
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.
IS REQUIRED
IF MAILED
By Order of the Board of Directors,
Secretary and Chief Financial Officer
Birmingham, Alabama
March 19, 2013
2
2013 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 25, 2013, at 5:00 p.m., Central Daylight Time, at the
Vestavia Country Club, 400 Beaumont Drive, Birmingham, Alabama 35216. The Notice of
Annual Meeting of Stockholders, this Proxy Statement and the accompanying Proxy Card are
being mailed on or about March 19, 2013 to our stockholders of record as of the close of
business on March 8, 2013, 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, 2013; (3) an advisory vote on our
executive compensation; and (4) 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, 2013, 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
3
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.
What is a proxy?
It is your legal designation of another person to vote the stock you own. The person so
designated 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 2013 Annual Meeting of
Stockholders.
What is a Proxy Statement?
It is a document that Securities and Exchange Commision (“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, 6,268,812 shares of our common stock, $0.001 par value per share, held by 1,260
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. A “plurality vote” means that the
winning candidate only needs to get more votes than a competing candidate. If a director runs
unopposed, he or she only needs one vote to be elected. 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.
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How do I vote by proxy?
On or about March 19, 2013, 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, 2012 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 as our independent registered public accounting firm
for 2013, as more fully described in Proposal 2 below; and (3) an advisory vote approving our
executive compensation, as more fully described in Proposal 3 below.
If your Proxy Card is properly executed and received in time for voting, and not revoked,
your shares will be voted in accordance with your instructions marked on the Proxy Card. In the
absence of any instructions or directions to the contrary 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.
5
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, 2012, 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, 2012 (including a list briefly describing the
exhibits thereto), as filed with 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,
2013, 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.
6
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 2014 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 2013 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
Thomas A. Broughton III
Age
57
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
62
59
69
55
62
Director
Since
2007 President, Chief Executive
Officer and Director
Position
Director
Since
2005
2007 Chairman of the Board and
2005
Position
President, Chief
Executive Officer and
Director
Chairman of the
Board and Director
2005 Director
2005 Director
2005 Director
2005 Director
Director
2007 Director
2007 Director
2007 Director
2007 Director
7
The following summarizes the business experience and background of each of our nominees.
Thomas A. Broughton III — Mr. Broughton has served as our President and Chief
Executive Officer and a director since 2007 and as President, Chief Executive Officer and a
director of the Bank since its inception in May 2005. Mr. Broughton has spent the entirety of his
30-year banking career in the Birmingham area. In 1985, Mr. Broughton was named President of
the de novo First Commercial Bank. When First Commercial Bank was bought by Synovus
Financial Corp. in 1992, Mr. Broughton continued as President and was named Chief Executive
Officer of First Commercial Bank. In 1998, he became Regional Chief Executive Officer of
Synovus Financial Corp., responsible for the Alabama and Florida markets. In 2001, Mr.
Broughton’s Synovus region shifted, and he became Regional Chief Executive Officer for the
markets of Alabama, Tennessee and parts of Georgia. He continued his work in this position
until his retirement from Synovus in August 2004. Mr. Broughton’s experience in banking has
afforded him opportunities to work in many areas of banking and has given him exposure to all
bank functions. Mr. Broughton served on the Board of Directors of Cavalier Homes, Inc. from
1986 until 2009, when the company was sold to a subsidiary of Berkshire Hathaway. We believe
that Mr. Broughton’s extensive experience in banking in Alabama and the Southeast, and, in
particular, his success in building and growing new banks and developing new markets, makes
him highly qualified to serve as a director.
Stanley M. Brock — Mr. Brock has served as our Chairman of the Board 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 has served as Chief
Executive Officer of TASSCO, LLC since 2005 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
8
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 Chief
Executive Officer 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 serve as a director.
THE ROLE OF THE BOARD OF DIRECTORS
General
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 the Bank, our wholly-owned subsidiary Alabama state-
chartered 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
9
fixed policy requiring the separation of such offices, instead believing that it is appropriate for
our board to determine the structure that best meets our needs from time to time, it is our current
intention to retain the present structure for the foreseeable future.
In addition, our three standing committees, which are described below under
“Committees of the Board of Directors”, are composed exclusively of independent directors. We
believe that this structure further reinforces the board’s role as an objective overseer of our
business, operations and day-to-day management.
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 consists of
10
Michael D. Fuller, J. Richard Cashio and Stanley M. Brock, met six times in 2012. 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 1 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 2012. 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 August 2012, the Compensation Committee retained an outside consultant, Meyer-
Chatfield, Corp. (“Meyer-Chatfield”), to advise it regarding our compensation practices.
Meyer-Chatfield provided us with a report dated August 2012 (the “Meyer-Chatfield Report”)
which compared the total compensation paid to our president and chief executive officer,
executive vice president and chief operating officer and executive vice president and chief
financial officer in 2012 versus a peer group of 20 public banks having between $1 billion and
$3.4 billion in assets. The peer group was comprised of BNC Bancorp (North Carolina), S.Y.
Bancorp, Inc. (Kentucky), Hills Bancorporation (Iowa), Bank of Kentucky Financial
Corporation (Kentucky), Wilson Bank Holding Company (Tennessee), QCR Holdings, Inc.
(Illinois), Lakeland Financial Corporation (Indiana), Fidelity Southern Corporation (Georgia),
Southeastern Bank Financial Corporation (Georgia), German American Bancorp, Inc. (Indiana),
Charter Financial Corporation (MHC) (Georgia), BancTrust Financial Group, Inc. (Alabama),
Southside Bancshares, Inc. (Texas), CenterState Banks, Inc. (Florida), State Bank Financial
Corporation (Georgia), Heritage Financial Group, Inc. (Georgia), Ameris Bancorp (Georgia),
Capital City Bank Group, Inc. (Florida), First Financial Corporation (Indiana) and Republic
Bancorp, Inc. (Kentucky). For a more complete discussion of the review conducted by Meyer-
Chatfield, please refer to our Compensation Discussion and Analysis beginning on page 17 of
this Proxy Statement.
11
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 2012. 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 Global 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. No stockholder
nominations for director candidates were received for 2013.
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, 2012.
Names
Thomas A. Broughton III
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Nominating and Corporate Governance
Audit
Compensation
Committee Membership
X
X
X
12
X
X
X
X
X
Hatton C.V. Smith
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 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
13
relationships between each director or any member of his immediate family and us and the
Bank. Our board also considered whether there were any transactions or relationships between
directors or with any member of their immediate family (or any entity of which a director or an
immediate family member is an executive officer, general partner or significant equity holder).
The purpose of this review was to determine whether any such relationships or transactions
existed that were inconsistent with a determination that a director is independent. Independent
directors must be free of any relationship with us or our management that may impair the
director’s ability to make independent judgments.
Our Nominating and Corporate Governance Committee has determined in its business
judgment that five of the Company’s six Directors are independent as defined in the applicable
NASDAQ Global Market listing standards, including that each member is free of any
relationships that would interfere with his individual exercise of independent judgment. Our
independent directors are Messrs. Brock, Cashio, Filler, Fuller and Smith.
Mr. Broughton is considered an inside director because of his employment as our
President and Chief Executive Officer.
COMMUNICATIONS WITH DIRECTORS
You may contact any of our independent directors, individually or as a group, by writing
to them c/o William M. Foshee, Chief Financial Officer, ServisFirst Bancshares, Inc., 850
Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209. Mr. Foshee will review and
forward to the appropriate directors copies of all such correspondence that, in the opinion of Mr.
Foshee, deals with the functions of the board of directors or its committees or that he otherwise
determines requires their attention. Concerns relating to accounting, internal controls or auditing
matters will be brought promptly to the attention of the Chairman of the Audit Committee and
will be handled in accordance with procedures established by the Audit Committee.
CORPORATE GOVERNANCE GUIDELINES
Our board of directors believes that sound governance practices and policies provide an
important framework to assist them in fulfilling their oversight duty. In December 2007, our
board formally adopted the Corporate Governance Guidelines of ServisFirst Bancshares, Inc.
(the “Governance Guidelines”), which include a number of the practices and policies under
which our board has operated for some time, together with concepts suggested by various
authorities in corporate governance and the requirements under The NASDAQ Global Market’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
14
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
independence; developing and maintaining a sound
stockholders; maintaining
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, 2012, 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 the Company, the Bank 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.”)
15
DIRECTOR COMPENSATION
The following table sets forth information regarding the compensation of our non-
employee directors for the year ended December 31, 2012. Thomas A. Broughton III is a named
executive officer, and his compensation is reflected in the Summary Compensation Table.
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)
($)
28,450
28,450
22,700
23,950
22,700
Stock Awards
(c)
($)
0
0
0
0
0
Total
(h)
($)
28,450
28,450
22,700
23,950
22,700
MEETINGS OF THE BOARD OF DIRECTORS
Our board of directors held 11 meetings in 2012. 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. Messrs. Broughton, Brock and Fuller
attended the 2012 annual meeting.
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
16
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, 2012, including extensions of credit or
overdrafts, endorsements and guarantees outstanding on such date, was approximately
$12,400,000, which equaled 6.42% 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.
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
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 the Company
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,
and William M. Foshee, executive vice president and chief financial officer. All of such officers
remain employees of the Bank for payroll and tax purposes.
17
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 Chief Executive Officer, 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. Our Compensation Committee engaged a compensation consultant in August 2012 to
assist in the Committee’s review of total compensation and although the compensation
consultant utilized a peer group for this review, the Compensation Committee does not consider
such peer companies to be a formal peer group. See “Compensation Discussion and Analysis –
Compensation Consultant” beginning on page 21 of this Proxy Statement.
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
18
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 also have entered into change in control
agreements that apply to 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:
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 2012 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.
19
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
to providing competitive
compensation. The Compensation Committee
compensation that reflects our performance and that of the individual officer or employee.
is committed
Compensation levels should be competitive. The Compensation Committee reviews
available data to ensure that our compensation is competitive with that provided by other
comparable companies. The Compensation Committee believes that competitive compensation
enhances our ability to attract and retain executive officers.
Incentive compensation should balance short-term and long-term performance. The
Compensation Committee seeks to achieve a balance between encouraging strong short-term
annual results and ensuring our long-term viability and success. To reinforce the importance of
balancing these perspectives, executive officers will be provided both short- and long-term
incentives. Prior to 2009, we provided our executive officers, non-employee directors and
employees with the means to become stockholders and to share accretion in value with our
external stockholders through our 2005 Amended and Restated Stock Incentive Plan. In 2009,
we continued that process through the adoption and approval by our stockholders of our 2009
Stock Incentive Plan. The Compensation Committee does not make automatic equity grants each
20
fiscal year, preferring instead to utilize such grants on an as needed basis to provide additional
long-term incentives. Such equity long-term incentives have historically not vested immediately,
but rather require the officers and directors that receive such grants to earn them over a period of
years with the Company.
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 2012, an average of 39% of our named executive officers’ compensation
was in annual short-term cash incentives and none 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:
Named Executive Officer
Percentage of Total Compensation
(Fiscal Year 2012)
Annual
Short
Term Cash
Incentives
Equity-
Based
Incentives
Annual
Base
Salary
Perquisites
and
Benefits
Thomas A. Broughton III, Principal Executive Officer (“PEO”)
William M. Foshee, Principal Financial Officer (“PFO”)
Clarence C. Pouncey III
45
58
59
47
36
35
--
--
--
8
6
6
Compensation Consultant
In August 2012, the Compensation Committee retained an outside consultant, Meyer-
Chatfield, to advise it regarding our compensation practices. Meyer-Chatfield provided us with
the Meyer-Chatfield Report, which compared the total compensation paid to our president and
chief executive officer, executive vice president and chief operating officer and executive vice
president and chief financial officer in 2012 versus a peer group of 20 public banks having
between $1 billion and $3.4 billion in assets. The peer group was comprised of BNC Bancorp
(North Carolina), S.Y. Bancorp, Inc. (Kentucky), Hills Bancorporation (Iowa), Bank of
Kentucky Financial Corporation (Kentucky), Wilson Bank Holding Company (Tennessee), QCR
Holdings, Inc. (Illinois), Lakeland Financial Corporation (Indiana), Fidelity Southern
21
Corporation (Georgia), Southeastern Bank Financial Corporation (Georgia), German American
Bancorp, Inc. (Indiana), Charter Financial Corporation (MHC) (Georgia), BancTrust Financial
Group, Inc. (Alabama), Southside Bancshares, Inc. (Texas), CenterState Banks, Inc. (Florida),
State Bank Financial Corporation (Georgia), Heritage Financial Group, Inc. (Georgia), Ameris
Bancorp (Georgia), Capital City Bank Group, Inc. (Florida), First Financial Corporation
(Indiana) and Republic Bancorp, Inc. (Kentucky).
The Meyer-Chatfield Report was designed to assist the Compensation Committee with
its compensation decisions with respect to base salary, annual incentives, long-term incentives,
benefits and total compensation. Meyer-Chatfield compared the compensation categories of
each of our named executive officers against the compensation practices of the peer group set
forth above, at the median and 75th percentile of the peer group market. Meyer-Chatfield did not
make specific recommendations on individual pay levels, but instead provided data for review
and use by the Compensation Committee and the Company. As discussed previously, our
president and chief executive officer consults with the Compensation Committee regarding
executive compensation, but the Compensation Committee makes all final compensation
decisions independently.
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 2012 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, 2012, the Compensation Committee increased the base
salaries of our named executive officers as follows: Thomas A. Broughton III to $297,500 from
$283,250, an increase of 4.8%; William M. Foshee to $210,000 from $200,000, an increase of
4.8% and Clarence C. Pouncey III to $244,000 from $235,000, an increase of 3.5%.
None of the named executive officers have employment agreements. See “Employment
Agreements” below for a more detailed discussion.
22
Annual Short-Term Cash Incentive Compensation
For the year ended December 31, 2012, 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. 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 2012, 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 2012 performance.
Name
Performance Targets
Thomas A. Broughton III None
William M. Foshee
Net Income
Regulatory Compliance
2012 Incentive
Range (%)
None
0%-60%
2012 Incentive as
a Percentage of
Base Salary (%)
106%
62%
2012 Incentive
Paid ($)
315,000
130,000
Clarence C. Pouncey III Net Income
0%-60%
59%
145,000
Non-performing Asset plus
ORE/Loans
Classified Loans plus ORE plus
Non-performing Assets/Capital
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
23
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 2012. Accordingly,
for the year ended December 31, 2012 and based upon its subjective determination of our
overall performance and such officers’ individual performance for 2012, 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 70,000 shares to date. 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 for $25 per
share 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 option 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 2012 we granted a stock option to purchase up to
2,500 shares for $30 per share to Mr. Foshee, which vests in a lump sum five years after the
grant date, (ii) in February 2011 we granted a stock option to purchase up to 5,000 shares for
$25 per share 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 (iii) in January 2011 we
granted a stock option to purchase up to 2,500 shares of common stock for $25 per share 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, 2012.
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
24
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, 2012 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 2013 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
25
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate compensation paid by us or the Bank for
services for the years ended December 31, 2012, 2011 and 2010 to our named executive
officers:
Name and Principal
Position Held
(a)
Year
(b)
Salary
(c)
($)
Bonus
(d)
($)
Stock
Awards
(e)
($)
Option
Awards(1)
(f)
($)
Change in Pension
Value and Non-
Qualified Deferred
Compensation
Earnings
(h)
($)
Non-Equity
Incentive
Plan Comp
(g)
($)
Thomas A. Broughton III
President and Chief
Executive Officer
Clarence C. Pouncey III
EVP and Chief
Operating Officer
William M. Foshee
EVP and Chief
Financial Officer
2012
297,500 315,000
2011
283,250 275,000
2010
275,000 137,500
2012
2011
2010
2012
2011
2010
244,000 145,000
235,000 125,000
225,000 112,800
210,000 130,000
200,000 120,000
180,000 90,000
-
-
-
-
-
-
-
-
-
-
-
-
152,740
-
-
-
-
-
-
-
21,350
37,150
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
All Other
Compensation
(i)
($)
Total
(j)
($)
56,667(2)
669,167
48,679
759,669
47,730
460,230
24,268(3)
23,839
22,472
19,876(4)
15,101
9,704
413,268
383,839
360,272
359,876
356,451
316,854
(1)
(2)
(3)
(4)
The amounts in this column reflect the aggregate grant date fair value under FASB ASC
Topic 718 of awards made during the respective year.
All Other Compensation for 2012 includes car allowance ($9,000), director’s fees
($22,200), country club allowance ($7,418), healthcare premiums ($7,173), matching
contributions to 401(k) plan ($10,000) and group life and long-term disability insurance
premiums ($876).
All Other Compensation for 2012 includes car allowance ($9,000), country club
allowance ($7,219), group life and long-term disability insurance premiums ($876) and
healthcare premiums ($7,173).
includes car allowance ($9,000), matching
All Other Compensation for 2012
contributions to 401(k) plan ($10,000) and group life and long-term disability insurance
premiums ($876).
Grants of Plan-Based Awards in 2012
The Company did not make any grants of plan-based awards to our named executive
officers during 2012.
26
Outstanding Equity Awards at Fiscal Year-End
The following table details all outstanding equity awards as of December 31, 2012.
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
($)
(i)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
(h)
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
(g)
$246,720
-
-
Option
exercise
price
($)
(d)
Option
expiration
date
(e)
Number of
Shares or
Units of Stock
That Have
Not Vested (#)
(f)
8,000
$10.00 5/19/2015
$25.00 1/19/2016
$20.00 12/20/2017
$30.00 11/28/2021
$10.00 5/19/2015
$11.00 4/20/2016
$20.00 2/19/2018
$25.00 2/16/2020
$25.00 1/19/2021
$30.00 2/21/2022
$11.00 4/20/2016
Number of
securities
underlying
unexercised
options (#)
exercisable
(b)
12,500
Number of
Securities
underlying
unexercised
options (#)
unexercisable
(c)
5,000
11,000
10,000
20,000
5,000
10,000
5,000
5,000
2,500
2,500
14,000
Name
(a)
Thomas A. Broughton III (CEO) (1)
William M. Foshee (CFO) (2)
Clarence C. Pouncey III (3)
36,000
_____________________________
(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 became fully vested on December 20, 2012. The option to purchase
11,000 shares at $25 per share granted to Mr. Broughton on January 19, 2011 vests
100% on January 19, 2016. 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 $30.84 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
27
$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. The option to purchase
2,500 shares at $30.00 per share granted to Mr. Foshee vests in a lump sum on February
21, 2017.
(3)
The option to purchase 50,000 shares at $11.00 per share granted to Mr. Pouncey on
April 20, 2006 vests 9,000 shares per year beginning on April 20, 2009, with the final
5,000 shares vesting on April 20, 2014.
Plan Option Exercises and Stock Vested in 2012
The following table sets forth information regarding option exercises by and restricted stock
vesting for our named executive officers during 2012:
Name
(a)
Thomas A. Broughton III
William M. Foshee
Clarence C. Pouncey III
Option Awards
Stock Awards
Number of
Shares Acquired
on Exercise (#)
Value Realized
on Exercise ($)
Number of
Shares Acquired
on Vesting (#)
Value Realized
on Vesting ($)
(b)
45,000
-
-
(c)
400,000
-
-
(d)
4,000
-
-
(e)
123,360
-
-
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, 2012. Based upon a
value of $30.84 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 $123,360.
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”
28
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 2012, each of Messrs. Brock, Fuller, Filler and Smith exercised their warrants to
purchase 10,000 shares of our common stock at a purchase price of $10.00 per share. In
addition, each of Messrs. Brock, Fuller, Filler, Cashio, and Smith exercised their options to
purchase 10,000 shares of our common stock at a purchase price of $20.00 per share.
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, 2012, 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.
Definitions
29
The term “change in control” is defined in Mr. Foshee’s and Mr. Pouncey’s change in
control agreements to include:
a merger, consolidation or other corporate reorganization (other than a holding company
reorganization) involving 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:
–
–
any acquisition by us, by any of our subsidiaries, or by any employee benefit plan
(or related trust) of us or our subsidiaries, or;
any acquisition by any corporation, entity, or group, if, following such acquisition,
more than 50% of the then-outstanding voting rights of such corporation, entity or
group are owned, directly or indirectly, by all or substantially all of the persons
who were the owners of our common stock immediately prior to such acquisition;
or
approval by our stockholders of:
–
–
our complete liquidation or dissolution, or
the sale or other disposition of all or substantially all our assets, other than to an
entity with respect to which immediately following such sale or other disposition,
more than 50% of, respectively, the then-outstanding shares of common stock of
such corporation, and the combined voting power of the then-outstanding voting
securities of such corporation entitled to vote generally in the election of directors,
is then beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of our
outstanding common stock, and our outstanding voting securities immediately
prior to such sale or other disposition, in substantially the same proportions as
their ownership, immediately prior to such sale or disposition, of our outstanding
common stock and our outstanding securities, as the case may be.
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
30
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 and restricted stock awards granted to the affected employee will
immediately vest upon a change in control.
Estimated Payments upon a Termination or Change in Control
Assuming that we had a change in control as of December 31, 2012, 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
$420,000 to Mr. Foshee and $244,000 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, 2012, as defined
in either of our stock incentive plans, and further assuming that the value of the stock as of that
date was $30.84 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 $30.84 per share and their
respective exercise prices per share for such shares: (i) Thomas A. Broughton III — $176,840,
(ii) William M. Foshee - $100,100, and (iii) Clarence C. Pouncey, III - $277,760.
31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
As of December 31, 2012, there was no person (including any group) who is known to us
to be the beneficial owner of more than 5% of our common stock.
Security Ownership of Management
The following table sets forth the beneficial ownership of our common stock as of March
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.
Amount and Nature of
Beneficial Ownership
Percentage of Outstanding
Common Stock (%)(2)
Name and Address of Beneficial Owner(l)
Thomas A. Broughton III
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
William M. Foshee
Clarence C. Pouncey III
202,652
147,250
145,002
195,252
117,862
63,500
69,992
119,667
(3)(4)
(3)(5)
(3)(6)
(3)(7)
(3)(8)
(3)(9)
(10)
(11)
All directors and executive officers as a group (8
persons)
1,061,177
(12)
_________________
3.22%
2.34%
2.31%
3.10%
1.88%
1.01%
1.11%
1.90%
16.46%
(1)
(2)
The addresses for all above listed individuals is 850 Shades Creek Parkway, Suite 200,
Birmingham, Alabama 35209.
Except as otherwise noted herein, the percentage is determined on the basis of 6,268,812
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.
32
(3)
(4)
(5)
(6)
(7)
(8)
Does not include 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.
Includes 12,500 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 and 10,000 shares obtainable
within 60 days pursuant to an option granted to Mr. Broughton on December 20, 2007 to
purchase 10,000 shares of common stock for $20.00 per share which vests 100% after
five years. Includes 400 shares owned by an adult child for whom Mr. Broughton
provides all support. 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. Mr. Broughton has pledged 27,000 shares to Business First
Bank, Baton Rouge, as security for a line of credit.
Includes 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. Includes 3,250 shares of
common stock owned by one of Mr. Brock’s children, as to which Mr. Brock may still
be deemed to be the beneficial owner. Mr. Brock disclaims beneficial ownership of all
shares not directly owned by him.
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 145,000 shares held
by Tyrol, Inc., which is owned by Mr. Fuller’s adult children. 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 Preferred Securities.
Includes 1,906 shares owned by Mr. Cashio’s daughter 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 disclaims
beneficial ownership of the shares owned by immediate family members. Includes the
shares underlying a warrant issued to Mr. Cashio pursuant to which Mr. Cashio may
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. Does not include 1,040 shares owned by Mr. Cashio’s
33
(9)
(10)
daughter. Mr. Cashio disclaims beneficial ownership of such shares. Mr. Cashio has
placed 87,922 shares in a margin account.
Includes 16,000 shares obtainable upon conversion of ServisFirst Capital Trust II’s 6.0%
Mandatory Convertible Trust Preferred Securities. Includes the shares underlying a
warrant issued to Mr. Smith pursuant to which Mr. Smith may 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 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 and 5,000 shares obtainable within 60 days pursuant to 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. Does not include 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, 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, or an option to purchase 2,500 shares of
common stock for $30.00 per share granted on February 21, 2012, which vests 100% on
February 21, 2017. Mr. Foshee has pledged 9,992 shares to First National Bankers Bank.
(11)
Includes 45,000 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. Does not include 333 shares
owned by Mr. Pouncey’s daughter. Mr. Pouncey disclaims beneficial ownership of
such shares.
(12)
Includes 176,900 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, 2013
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, 2013.
34
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 issue 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 ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2013.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our consolidated balance sheet as of December 31, 2012, and the related consolidated
statements of income, comprehensive income, stockholders’ equity and cash flows for the year
ended December 31, 2012 have been audited by KPMG LLP, our independent registered public
accounting firm, as stated in their report appearing in our 2012 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.
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, 2012. One hundred percent of the fees set forth below were pre-
approved by the Audit Committee.
(1) Audit fees
(2) Audit-related fees
(3) Tax fees
(4) All other fees
2012
$145,914
$44,105
$0
$0
2011
$124,975
$0
$0
$0
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
35
registered public accountants for the Company for the year ended December 31, 2012.
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, 2012 be included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2012.
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
36
have the opportunity to endorse or not endorse our executive compensation program and policies
through an advisory vote, commonly known as a “Say on Pay” vote, on the following resolution:
RESOLVED, that the compensation paid to the Company’s named executive officers 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 stockholders 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.
STOCKHOLDER PROPOSALS
Under Exchange Act Rule 14a-8, any stockholder desiring to submit a proposal for
inclusion in our proxy materials for our 2014 Annual Meeting of Stockholders must provide the
Company with a written copy of that proposal by no later than November 19, 2013, which is 120
days before the first anniversary of the date on which the Company’s proxy materials for 2013
were first released. However, if the date of our Annual Meeting in 2014 changes by more than
30 days from the date of our 2013 Annual Meeting, then the deadline would be a reasonable
time before we begin distributing our proxy materials for our 2014 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.
If a stockholder desires to bring other business before the 2014 Annual Meeting without
including such proposal in the Company’s proxy statement, the stockholder must notify the
Company in writing on or before February 3, 2014.
37
GENERAL INFORMATION
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.
By Order of the Board of Directors
SERVISFIRST BANCSHARES, INC.
William M. Foshee
Secretary and Chief Financial Officer
Birmingham, Alabama
March 19, 2013
38
Our Name is Our Mission
2012 Annual Report
ServisFirst Bank
www.servisfirstbank.com
ServisFirst Bancshares
www.servisfirstbancshares.com
Birmingham ▪ Dothan ▪ Huntsville ▪ Mobile ▪ Montgomery ▪ Pensacola
March 8, 2013
Dear Shareholder,
I am pleased to report that 2012 was a record earnings year for ServisFirst Bancshares. These earnings were driven by loan
growth of 29% in 2012. In light of our record profits your Board of Directors declared a special dividend of $.50 per share
payable on December 31, 2012. I cannot thank you enough for the support you have shown the Company and the Bank.
Your business and your referrals have been the key to our success to date. Please continue to call us when you see an
opportunity for the Bank.
Fully diluted earnings per share was $4.99 in 2012, an increase of 41% over 2011. Net income was $34 million in 2012, a
48% increase over 2011. Record low interest rates continue to be a challenge for our industry, and maturing investments
must be reinvested at much lower rates. The interest rate outlook is for rates to remain flat for some time, so we must have
rigid expense control to prosper in this environment.
Our book value per share reached $30.84 at year-end, which is more than triple our initial book value in May 2005. We
have not done a common stock offering since our Pensacola offering in 2011. Our increased profitability has allowed us
to grow without any additional capital raises and dilution. We plan to continue our practice of a stock offering in every
new region.
In 2012 we opened a loan production office in Mobile, Alabama, and at this point have two great bankers representing us
in Mobile. We feel that the market has great potential for growth and we plan to continue to build out our team in Mobile.
All existing regions were solidly profitable and our most recent region, Pensacola, has grown faster in both assets and
profitability than we had budgeted in 2012.
We are pleased with our strong asset quality. At year-end 2012, our non-performing loans plus foreclosed real estate were
less than 1% of all loans, which is well above industry standards. Our financial strength continues to attract many new
customers who desire a strong bank that is client focused, not a struggling bank. A bank with problem assets must focus
100% of management’s time on improving asset quality, not serving customers.
We continue to see opportunities for growth and are constantly looking at new markets. To date, we have chosen not to
acquire existing banks, as we are adverse to goodwill on our balance sheet. The people we want to join our team are not
actively looking for a job, so we must continue to seek out the best bankers in good markets in order to find opportunities
for growth.
I would like to thank our 30 directors across our footprint for their tireless work for ServisFirst. They serve the
shareholders well and are a key to our success. Our greatest challenge might be to work as hard today as we did eight
years ago, or whenever we each joined ServisFirst. Complacency usually comes with some degree of success and our
directors’ job is to ensure that does not happen to ServisFirst.
We appreciate your support and we will strive to grow your investment in 2013.
Sincerely,
Thomas A. Broughton III
President & CEO
2
Selected Balance Sheet Data:
Total Assets
Total Loans
Loans, net
Securities available for sale
Securities held to maturity
Cash and due from banks
Interest-bearing balances with banks
Fed funds sold
Mortgage loans held for sale
Restricted equity securities
Premises and equipment, net
Deposits
Other borrowings
Subordinated debentures
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
SELECTED FINANCIAL DATA
As of and for the years ended December 31,
2012
2011
2010
2009
2008
(Dollars in thousands except for share and per share data)
$
2,906,314
$
2,460,785
$
1,935,166
$
1,573,497
$
1,162,272
2,363,182
2,336,924
233,877
25,967
58,031
119,423
3,291
25,826
3,941
8,847
2,511,572
136,982
15,050
9,453
233,257
1,830,742
1,808,712
293,809
15,209
43,018
99,350
100,565
17,859
3,501
4,591
1,394,818
1,376,741
276,959
5,234
27,454
204,278
346
7,875
3,510
4,450
1,207,084
1,192,173
255,453
645
-
26,982
48,544
680
6,202
3,241
5,088
968,233
957,631
102,339
22,844
30,774
19,300
3,320
2,659
3,884
2,143,887
1,758,716
1,432,355
1,037,319
84,219
30,514
5,873
196,292
24,937
30,420
3,993
117,100
24,922
15,228
3,370
97,622
$
109,023
$
91,411
$
78,146
$
62,197
$
14,901
94,122
9,100
16,080
75,331
8,972
85,022
66,359
9,643
43,100
51,565
17,120
34,445
6,926
37,458
35,827
12,389
23,438
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
$
5.68
$
4.03
$
3.15
$
1.07
$
4.99
30.84
5,996,437
6,941,752
6,268,812
3.53
26.34
2.84
21.19
5,759,524
6,749,163
5,932,182
5,519,151
6,294,604
5,527,482
1.02
17.71
5,485,972
5,787,643
5,513,482
3
20,000
15,087
3,082
86,784
55,450
20,474
34,976
6,274
28,702
2,704
20,576
10,830
3,825
7,005
1.37
1.31
16.15
5,114,194
5,338,883
5,374,022
SELECTED FINANCIAL DATA
As of and for the years ended December 31,
2012
2011
2010
2009
2008
(Dollars in thousands except for share and per share data)
1.30 %
15.81 %
3.80 %
41.54 %
1.11 %
14.73 %
3.79 %
45.54 %
1.04 %
15.86 %
3.94 %
45.51 %
0.24 %
0.44 %
0.69 %
0.32 %
0.75 %
1.06 %
0.55 %
1.03 %
1.10 %
0.43 %
6.33 %
3.31 %
59.57 %
0.60 %
1.01 %
1.57 %
0.71 %
9.28 %
3.70 %
54.61 %
0.41 %
1.02 %
1.74 %
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
1.11 %
1.20 %
1.30 %
1.24 %
1.09 %
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
253.50 %
159.96 %
126.00 %
122.34 %
108.17 %
93.05 %
84.37 %
78.28 %
83.23 %
92.32 %
79.82 %
76.71 %
78.04 %
80.06 %
85.84 %
total deposits
21.71 %
16.96 %
14.24 %
14.75 %
11.71 %
Capital Adequacy Ratios:
Stockholders Equity to total assets
Total risked-based capital (3)
Tier 1 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
8.03 %
11.78 %
9.89 %
8.43 %
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 %
46.96 %
34.87 %
195.64 %
(16.10)%
27.43 %
41.36 %
18.11 %
29.20 %
17.15 %
18.83 %
24.30 %
27.16 %
31.38 %
21.90 %
67.63 %
178.43 %
(22.14)%
22.99 %
15.48 %
22.78 %
19.95 %
35.38 %
24.49 %
38.08 %
12.49 %
12.93 %
38.65 %
45.45 %
36.00 %
20.12 %
(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 assets. 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 7%.
4
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
Matt Durney
Pensacola, Florida
Ken Upchurch
Montgomery, Alabama
Alan E. Weil, Jr.
Montgomery, Alabama
5
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
MOBILE MAIN OFFICE
64 North Royal Street
Mobile, Alabama 36602
251.694.9494
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
PENSACOLA CORDOVA OFFICE
4980 North 12th Avenue
Pensacola, Florida 32504
850.266.9160
6
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders of
ServisFirst Bancshares, Inc. will be held at the
Vestavia Country Club, 400 Beaumont Drive,
Birmingham, Alabama 35216 on Thursday,
April 25, 2013, 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
filings with
the Securities and Exchange
Commission (SEC), including, but not limited to,
our first annual report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form
8-K, proxy statements and any amendments to
these reports. You may also obtain a copy of
any such report free of charge 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
SECURITIES COUNSEL
Bradley Arant Boult Cummings LLP
One Federal Place
1819 Fifth Avenue North
Birmingham, Alabama 35203
205.521.8000
7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______to_______
Commission file number 000-53149
SERVISFIRST BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
26-0734029
(I.R.S. Employer
Identification No.)
850 Shades Creek Parkway, Birmingham, Alabama 35209
(Zip Code)
(Address of Principal Executive Offices)
(205) 949-0302
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Titles of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
No
Yes
Yes
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and small reporting company” in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 30, 2012, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on
a stock price of $30.00 per share of Common Stock, was $159,534,480.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common stock, $.001 par value
Outstanding as of February 28, 2013
6,268,812
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 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on Form 10-K.
SERVISFIRST BANCSHARE, INC.
TABLE OF CONTENTS
FORM 10-K
DECEMBER 31, 2012
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I.
4
5
5
ITEM 1. BUSINESS
23
ITEM 1A. RISK FACTORS
31
ITEM 1B. UNRESOLVED STAFF COMMENTS
31
ITEM 2. PROPERTIES
32
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES 32
PART II.
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
INDEPENDENCE
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
32
32
35
37
56
58
101
101
102
102
102
102
102
102
102
102
102
105
106
3
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”, are “forward-looking statements” that are based
upon our current expectations and projections about future events. Forward-looking statements relate to future events or our
future financial performance and include statements about the competitiveness of the banking industry, potential regulatory
obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not
historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,”
“plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,”
“should,” “would,” “will,” and similar expressions, you should consider them as identifying forward-looking statements,
although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our
beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared and may not be
realized due to a variety of factors, including, but not limited to, the following:
the effects of the continued slow economic recovery and high unemployment;
the effects of continued deleveraging of United States citizens and businesses;
the effects of potential federal spending cuts due to the United States debt ceiling crisis;
the effects of continued depression of residential housing values and the slow market for sales and resales;
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 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.
4
PART I
Unless this Form 10-K indicates otherwise, the terms “we,” ”our,” “us,” “the Company,” “ServisFirst Bancshares” or
“ServisFirst” as used herein refer to ServisFirst Bancshares, Inc., and its subsidiaries, including ServisFirst Bank, which
sometimes is referred to as “our bank subsidiary” or “the Bank” and its other subsidiaries. References herein to the fiscal
years 2008, 2009, 2010, 2011 and 2012 mean our fiscal years ended December 31, 2008, 2009, 2010, 2011 and 2012,
respectively.
ITEM 1. BUSINESS
Overview
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 11 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. Additionally, we operate a loan production office in Mobile County of Alabama in the
Mobile MSA. As of December 31, 2012, we had total assets of approximately $2.9 billion, total loans of approximately $2.4
billion, total deposits of approximately $2.5 billion and total stockholders’ equity of approximately $233 million.
In January 2012, we formed SF Holding 1, Inc., an Alabama corporation, and its subsidiary, SF Realty 1, Inc., an Alabama
corporation. SF Realty 1 elected to be treated as a real estate investment trust (“REIT”) for U.S. income tax purposes. SF
Realty 1 holds and manages participations in residential mortgages and commercial real estate loans originated by ServisFirst
Bank. SF Holding 1, Inc. and SF Realty 1, Inc. are both consolidated into the Company.
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 started
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.
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.
Market Growth and Competition
The markets in which we operate enjoyed steady expansion in their deposit base until being negatively affected by the
recession and credit crisis beginning in 2008. We believe that the long-term growth potential of each of our markets is
substantial, and further believe that many local affluent professionals and small business owners 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 2002 to 2012 (deposit data reflects totals as reported by financial institutions as
of June 30th of each year) as follows:
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Jefferson/Shelby County, Alabama
Madison County, Alabama
Montgomery County, Alabama
Houston County, Alabama
Escambia County, Florida
$
2012
2002
Compound
Annual
Growth Rate
(Dollars in Billions)
26.6 $
5.9
6.6
2.1
3.5
15.1
3.4
3.2
1.3
2.6
5.83 %
5.67 %
7.51 %
4.91 %
3.02 %
The Bank is subject to intense competition from various financial institutions and other financial service providers. The Bank
competes for deposits with other local and regional 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, 2012, 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
Ranking
(Dollars in Millions)
Market
Share
Percentage
3
2
2
2
1
$
975.2 $
500.5
376.9
249.9
29,406.0
6,606.7
7,909.1
2,800.0
6
5
6
3
3.32 %
7.58 %
4.76 %
8.92 %
140.8
4,686.3
11
3.00 %
Together, deposits for all institutions in Jefferson, Shelby, Montgomery, Madison, and Houston Counties represented
approximately 48.75% of all the deposits in the State of Alabama at June 30, 2012. Deposits for all institutions in Escambia
County represent approximately 0.82% of all the deposits in the state of Florida at June 30, 2012.
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 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
PNC Bank, NA. 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
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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 desired
reputation as an urban bank with a community focus, we have employed the following operating strategies:
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.
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.
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.
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.
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.
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:
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.
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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.
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 usually will be collateralized. Generally, collateral consists of business assets, including any or all of
general intangibles, accounts receivables, inventory, equipment, or real estate. Collateral is subject to the risk that we may
have difficulty converting it to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility
and general collectability in a default situation. To mitigate this risk, we underwrite collateral to strict standards, including
valuations and general acceptability based on our ability to monitor its ongoing 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. 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
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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 recent credit crisis.
Beginning 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. Total construction loans increased $7.1 million in 2012. We maintained
our allocation of loan loss reserve for these loans at approximately $6.5 million, the same amount as allocated at the end 2011.
Charge-offs for construction loans increased from $2.6 million for 2011 to $3.1 million for 2012, but the overall quality of the
construction loan portfolio has improved with $14.4 million rated as substandard at December 31, 2012 compared to $19.5
million at December 31, 2011.
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 maturities 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, 2012, we had commitments to extend credit beyond current fundings of approximately $860.4 million,
had issued standby letters of credit in the amount of approximately $36.4 million, and had commitments for credit card
arrangements of approximately $25.7 million.
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Policy for Determining the Loan Loss Allowance
The allowance for loan losses represents our management’s assessment of the risk associated with extending credit and its
evaluation of the quality of the loan portfolio. In calculating the adequacy of the loan loss allowance, our management
evaluates the following factors:
the asset quality of individual loans;
changes in the national and local economy and business conditions/development, including underwriting standards,
collections, and charge-off and recovery practices;
changes in the nature and volume of the loan portfolio;
changes in the experience, ability and depth of our lending staff and management;
changes in the trend of the volume and severity of past-due loans and classified loans, and trends in the volume of
non-accrual loans, troubled debt restructurings and other modifications, as has occurred in the residential mortgage
markets and particularly for residential construction and development loans;
possible deterioration in collateral segments or other portfolio concentrations;
historical loss experience (when available) used for pools of loans (i.e. collateral types, borrowers, purposes, etc.);
changes in the quality of our loan review system and the degree of oversight by our board of directors; and
the effect of external factors such as competition and the legal and regulatory requirement on the level of estimated
credit losses in our current loan portfolio.
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 actively in 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 0.24% for the year ended December 31, 2012 from 0.32% for the year
ended December 31, 2011, which was down from 0.55% for the year ended December 31, 2010. Historical performance,
however, is not an indicator of future performance, and our future results could differ materially. As of December 31, 2012,
we had $10.4 million of non-accrual loans, of which 96% 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 $8.2 million
to commercial and industrial loans, and have a total loan loss reserve as of December 31, 2012 allocable to specific loan types
of $19.9 million. We also currently maintain a portion of the allowance for loan losses, which 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 qualitative factor portion of the allowance for loan losses is based on
management’s judgment regarding various external and internal factors including macroeconomic trends, management’s
10
assessment of the Company’s loan growth prospects and evaluations of internal risk controls. This qualitative factor portion
of the allowance for loan losses totaled $6.4 million, resulting in a total allowance for loan losses of $26.3 million at
December 31, 2012. 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, 2012.
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 FDIC’s full guarantee of
noninterest-bearing transaction accounts, as provided for by The Dodd-Frank Wall Street Reform and Consumer Protection
Act, expired on December 31, 2012.
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, mobile 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.
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Seasonality and Cycles
We do not consider our commercial banking business to be seasonal.
Employees
We had 234 full-time equivalent employees as of December 31, 2012. 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 our stock and 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”).
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:
acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank
holding company will, directly or indirectly, own or control more than 5% of the bank’s voting shares;
acquiring all or substantially all of the assets of any bank; or
merging or consolidating with any other bank holding company.
Additionally, the BHC Act provides that the Federal Reserve may not approve any of these transactions if such transaction
would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade,
unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs
of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
Under the BHC Act, if adequately capitalized and adequately managed, we or any other bank holding company located in
Alabama may purchase a bank located outside of Alabama. Conversely, an adequately capitalized and adequately managed
bank holding company located outside of Alabama may purchase a bank located inside Alabama. In each case, however,
restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will
result in specified concentrations of deposits.
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
12
acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or
otherwise obtaining control or a “controlling influence” over the bank holding company.
Permitted Activities
Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control of more
than 5% of the voting shares of any company engaged in the following activities:
banking or managing or controlling banks; and
any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the
business of banking.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of
banking include:
factoring accounts receivable;
making, acquiring, brokering or servicing loans and usual related activities;
leasing personal or real property;
operating a non-bank depository institution, such as a savings association;
trust company functions;
financial and investment advisory activities;
discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
acting as an agent or broker in selling credit life insurance and other types of insurance in connection with credit
transactions; and
performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these
activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank
holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or
stability of it or any of its bank subsidiaries.
In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to
become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature
or incidental or complementary to financial activity. The BHC Act expressly lists the following activities as financial in
nature:
lending, trust and other banking activities;
insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as
principal, agent, or broker for these purposes, in any state;
providing financial, investment, or advisory services;
issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
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underwriting, dealing in or making a market in securities;
other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling
banks as to be a proper incident to managing or controlling banks;
foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in
connection with banking operations abroad;
merchant banking through securities or insurance affiliates; and
insurance company portfolio investments.
For us to qualify to become a financial holding company, the Bank and any other depository institution subsidiary of ours
must be well-capitalized and well-managed and must have a Community Reinvestment Act rating of at least “satisfactory”.
Additionally, we must file an election with the Federal Reserve to become a financial holding company and must provide the
Federal Reserve with 30 days’ written notice prior to engaging in a permitted financial activity. We have not elected to
become a financial holding company at this time.
Support of Subsidiary Institutions
The Federal Deposit Insurance Act and Federal Reserve policy require a bank holding company to act as a source of financial
and managerial strength to its bank subsidiaries and to take measures to preserve and protect its bank subsidiaries in situations
where additional investments in a troubled bank may not otherwise be warranted. In addition, where a bank holding company
has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions are
responsible for any losses to the FDIC as a result of an affiliated depository institution’s failure. As a result, a bank holding
company may be required to loan money to a bank subsidiary in the form of subordinate capital notes or other instruments
which qualify as capital under bank regulatory rules. However, any loans from the holding company to such subsidiary banks
likely will be unsecured and subordinated to such bank’s depositors and perhaps to other creditors of the bank.
Bank Regulation and Supervision
The Bank is subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for
general regulatory oversight of our operations. These laws and regulations 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
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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, 2012, 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 institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required
to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must
guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The
controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of (i) 5% of an
undercapitalized subsidiary’s assets at the time it became undercapitalized and (ii) the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets,
making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital
restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower
capital category based on supervisory factors other than capital.
FDIC Insurance Assessments
The Bank is subject to risk-based deposit insurance premium assessments imposed by the FDIC upon Deposit Insurance Fund
members. Under the FDIC’s assessment system, an insured institution’s deposit insurance premium is computed by
multiplying the institution’s assessment base by the institution’s assessment rate. The following information applies to an
institution’s assessment base and assessment rate:
Assessment Base. An institution’s assessment base equals the institution’s average consolidated total assets during a
particular assessment period, minus the institution’s average tangible equity capital (i.e., Tier 1 capital) during such
period.
Assessment Rate. An institution’s assessment rate is assigned by the FDIC on a quarterly basis. To assign an
assessment rate, the FDIC designates an institution as falling into one of four risk categories, or as being a large and
highly complex financial institution. The FDIC determines an institution’s risk category based on the level of the
institution’s capitalization and on supervisory evaluations provided to the FDIC by the institution’s primary federal
regulator. Each risk category designation contains upward and downward adjustment factors based on long-term
unsecured debt and brokered deposits. Assessment rates currently range from 0.025% per annum for an institution in
the lowest risk category with the maximum downward adjustment, to 0.45% per annum for an institution in the
highest risk category with the maximum upward adjustment. For the fourth quarter of 2012, the Bank’s assessment
rate was set at $0.0142, or $0.0568 annually, per $100 of assessment base.
The FDIC’s current risk-based assessment system went into effect in 2011 and represents a major shift from the prior
assessment system. Under the prior system, an institution’s assessment base was based on the institution’s deposits, rather
than on the institution’s assets minus its tangible equity capital. The prior system also involved assessment rate adjustments
on account of an institution’s secured liabilities, and somewhat different adjustment methodologies than the new system for
long-term unsecured debt and brokered deposits.
In addition to its risk-based insurance assessments, 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 savings and loan industry. For the fourth quarter of 2012, the FICO assessment was equal to
$0.0016, or $0.0064 annually, per $100 of assessment base. These assessments will continue until the bonds mature in 2019.
We note that the FDIC has taken several actions in recent years to supplement the revenues received from its annual deposit
insurance premium assessments. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment
on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, subject to a cap of 10 basis points
times the institution’s assessment base for the second quarter 2009. That special assessment was collected on September 30,
2009. In addition, on November 17, 2009, the FDIC adopted a final rule that required all institutions to prepay their estimated
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The prepayment was collected on
December 30, 2009, and was mandatory for all banks except for those exempt under certain circumstances. The FDIC’s
possible need to further increase assessment rates and charge additional one-time assessment fees is generally considered to be
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greater in the current economic climate. If the FDIC were to take additional action in the future to supplement its assessment
revenues, such actions could have a negative impact on the Bank’s earnings in certain cases.
Termination of Deposit Insurance
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.
Liability of Commonly Controlled Depository Institutions
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, other general and senior creditors, and holders of
subordinated debt (other than affiliates) of the 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:
the Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs
of the community it serves;
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national origin, sex,
marital status or certain other prohibited factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision 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 Servicemembers’ Civil Relief Act, 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.
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Federal Laws Applicable to Deposit Transactions
The deposit operations of the Bank are subject to:
the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of financial records; and
the Electronic Funds Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau 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 and the Alabama Banking Department (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 FDIC has established
substantially similar measures for banks.
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, 2012, our consolidated
ratio of total capital to risk-weighted assets was 11.78%, and our ratio of Tier 1 capital to risk-weighted assets was 9.89%.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These
guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets,
of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and
implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally
are required to maintain a leverage ratio of at least 4%. At December 31, 2012, our leverage ratio was 8.43%. The guidelines
also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal
Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new
activities.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies,
including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered
deposits, and certain other restrictions on its business. As described above, significant additional restrictions can be imposed
on FDIC-insured depository institutions that fail to meet applicable capital requirements.
As of December 31, 2012, 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 of 10%, 6% and 5%, respectively. Our Bank was well-
capitalized under the prompt corrective action provisions as of December 31, 2012.
In addition to the foregoing federal requirements, the Bank is subject to a requirement of the Alabama Banking Department
that the Bank maintain a leverage ratio of 8%. At December 31, 2012, the Bank’s leverage ratio was 9.03%.
Potential Changes in Capital Adequacy Requirements
In December 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
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on the U.S. bank regulatory agencies, in June 2012 the agencies circulated proposed regulations that, once finalized, would
implement Basel III standards for U.S. insured depository institutions and their holding companies.
Basel III places more emphasis than current capital adequacy requirements on “Common Equity Tier 1” capital, or “CET1”,
which is predominantly made up of retained earnings and common stock instruments. The following represent important
requirements currently under consideration by U.S. bank regulatory agencies in response to Basel III:
Institutions must maintain CET1 equal to 4.5% of risk-weighted assets;
Institutions must maintain Tier 1 capital (i.e., CET1 and other forms of Tier 1 capital) equal to 6.0% of risk-weighted
assets;
Institutions must maintain total capital (i.e., Tier 1 capital and Tier 2 capital) equal to 8.0% of risk-weighted assets;
Institutions must maintain an additional “capital conservation buffer” of CET1 equal to 2.5% of risk-weighted assets;
Institutions must maintain Tier 1 capital equal to 4.0% of total assets;
Certain large or internationally-exposed institutions must comply with supplementary leverage ratio requirements that
take into account both on- and off-balance sheet exposures;
During periods of excessive credit growth that pose systemic risks in the national and international banking system,
certain large or internationally-exposed institutions could become subject to a “countercyclical buffer”, which could
require additional CET1 equal to 2.5% of risk-weighted assets;
Certain instruments that have counted as Tier 1 capital in the past, including certain types of cumulative perpetual
preferred stock and trust preferred instruments, no longer will count as Tier 1 capital;
Regulatory deductions from and adjustments to capital largely will apply to CET1 (instead of Tier 1 or total capital);
Unrealized gains and losses on available-for-sale debt securities, which are not currently counted for regulatory
capital purposes, will be counted for those purposes, which may result in increased volatility of regulatory capital for
financial institutions; and
In determining an institution’s risk-weighted assets, higher risk weights may be attributed to certain types of
residential mortgage loans and commercial real estate loans.
Initially, the U.S. bank regulatory agencies hoped to adopt final rules implementing Basel III by January 1, 2013. However,
final rules have not yet been issued. It is anticipated that, once final rules are issued, the Basel III requirements will be
implemented over time so that full implementation is achieved by January 2019. Ultimately, through the future
implementation of Basel III or other capital adequacy requirements, it is likely that the Company and the Bank will have to
maintain higher capital levels than financial institutions are required to maintain today.
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Liquidity
Financial institutions are subject to significant regulatory scrutiny regarding their liquidity positions. Various bank regulatory
publications, including FDIC Financial Institution Letter FIL-13-2010 (Funding and Liquidity Risk Management) and FDIC
Financial Institution Letter FIL-84-2008 (Liquidity Risk Management), address the identification, measurement, monitoring
and control of funding and liquidity risk by financial institutions. Regulatory scrutiny regarding liquidity has increased during
recent years, as the economic downturn that began in the late 2000s has added pressure to the liquidity of many financial
institutions.
In addition to addressing capital objectives, Basel III establishes two new liquidity metrics for financial institutions. The first
metric is the “Liquidity Coverage Ratio”, and it aims to require a financial institution to maintain sufficient high quality liquid
resources to survive an acute stress scenario that lasts for one month. The second metric is the “Net Stable Funding Ratio”,
and its objective is to require a financial institution to maintain a minimum amount of stable sources relative to the liquidity
profiles of the institution’s assets, as well as the potential for contingent liquidity needs arising from off-balance sheet
commitments, over a one-year horizon.
The Liquidity Coverage Ratio and the Net Stable Funding Ratio are currently being monitored for implementation, with the
view that they will be introduced as requirements in 2015 and 2018, respectively. We cannot yet provide concrete estimates as
to how those requirements, or any other regulatory positions regarding liquidity and funding, might affect the Company or the
Bank. However, we note that increased liquidity requirements generally would be expected to cause the Bank to invest its
assets more conservatively—and therefore at lower yields—than it otherwise might invest. Such lower-yield investments
likely would reduce the Bank’s revenue stream, and in turn its earnings potential.
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
requirement that a bank holding company must serve as a source of strength to its subsidiary banks also results in the position
of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its stockholders that
places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other
arrangements that may undermine the bank holding company’s ability to serve as such a source of strength. Our ability to pay
dividends is also subject to the provisions of Delaware corporate law.
The Alabama Banking Department also regulates the Bank’s dividend payments. 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 (the
Bank’s surplus currently exceeds 20% of its capital). Moreover, 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 $90.1 million in dividends as of December 31, 2012. 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.
Restrictions on Transactions with Affiliates
We are subject to Section 23A of the Federal Reserve Act, which places limits on the amount of:
a bank’s loans or extensions of credit to affiliates;
a bank’s investment in affiliates;
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assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates;
and
a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus
and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these
transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply
with other provisions designed to avoid the taking of low-quality assets.
We are also subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an institution from
engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as
favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated
companies.
The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and
their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with third parties and (2) must not involve more than
the normal risk of repayment or present other unfavorable features. There is also an aggregate limitation on all loans to
insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the
FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting
loans in violation of applicable restrictions. Alabama state banking laws also have similar provisions.
Lending Limits
Under Alabama law, the amount of loans which may be made by a bank in the aggregate to one person is limited. Alabama
law provides that unsecured loans by a bank to one person may not exceed an amount equal to 10% of the capital and
unimpaired surplus of the bank or 20% in the case of secured loans. For purposes of calculating these limits, loans to various
business interests of the borrower, including companies in which a substantial portion of the stock is owned or partnerships in
which a person is a partner, must be aggregated with those made to the borrower individually. Loans secured by certain
readily marketable collateral are exempt from these limitations, as are loans secured by deposits and certain government
securities.
Commercial Real Estate Concentration Limits
On December 12, 2006, the U.S. bank regulatory agencies issued guidance entitled “Concentrations in Commercial Real
Estate Lending, Sound Risk Management Practices” (the “Guidance”) to address increased concentrations in commercial real
estate (“CRE”) loans. The Guidance describes the criteria the Agencies will use as indicators to indentify institutions
potentially exposed to CRE concentration risk. An institution that has (1) experienced rapid growth in CRE lending, (2)
notable exposure to a specific type of CRE, (3) total reported loans for construction, land development, and other land
representing 100% or more of the institution’s capital, or (4) total CRE loans representing 300% or more of the institution’s
capital, and the outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months,
may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting confidential information of customers.
Customers generally may prevent financial institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under certain circumstances, such as the processing of transactions requested by the
consumer or when the financial institution is jointly sponsoring a product or service with certain nonaffiliated third parties.
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
The Fair Credit Reporting Act (the “FCRA”) imposes, among other things:
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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;
requirements for entities that furnish information to consumer reporting agencies (which would include the Bank) 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 also prohibits a business that receives consumer information from an affiliate from using that information for
marketing purposes unless the consumer is first provided 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.
Since 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 the requirements 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 and other 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
requirements.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected
by any new regulation or statute.
Effect of Governmental Monetary Policies
The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States
government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an
important impact on the operating results of commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve affect the
levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its
regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks
are subject. We cannot predict, and have no control over, the nature or impact of future changes in monetary and fiscal
policies.
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.
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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 final rules and regulations implementing the Dodd-Frank Act are adopted, this new law is significantly changing the
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 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 had 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 Consumer Financial Protection Bureau 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. Institutions with less than
$10 billion in assets will continue to be examined for compliance with consumer laws by their primary bank regulator.
The Dodd-Frank Act imposed new requirements regarding the origination and servicing of residential mortgage loans. The
law created a variety of new consumer protections, including limitations on the manner by which loan originators may be
compensated and an obligation on the part of lenders to verify a borrower’s “ability to repay” a residential mortgage loan.
Final rules implementing these latter statutory requirements have been released and will be generally effective in 2014.
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.
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 from us free of charge 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
22
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 we file electronically with the SEC. You may access this website by
clicking on http://www.sec.gov.
Executive Officers of the Registrant
The business experience of our executive officers who are not also directors is set forth below.
William M. Foshee (58) – 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 (56) – 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 (43) – Mr. Kattos has served as Executive Vice President and Huntsville President and Chief Executive
Officer of the Bank since April 2006. Prior to joining the Company, Mr. Kattos was employed by First Commercial Bank for
14 years, most recently as an Executive Vice President and Senior Lender in the Commercial Lending Department. Mr.
Kattos also serves on the advisory council of the University of Alabama in Huntsville School of Business.
G. Carlton Barker (64) – 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 (61) – 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 (50) – 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 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”.
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Risks Related to Our Industry
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 final rules and regulations implementing the Dodd-Frank Act are adopted, this 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 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 had 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 Consumer Financial Protection Bureau 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. 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.
Recent 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. Beginning with the economic recession in 2008 and
continuing through 2010, falling home prices, 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
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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 return of these
conditions in the near future would likely exacerbate the 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.
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 recent
recession had major adverse effects on the banking and financial industry, during which time many institutions saw a
significant amount of their market capitalization erode as they charged off loans and wrote down the value of other assets. 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,
25
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 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 $158.4 million at
December 31, 2012, comprising 6.7% of our total loans. Our commercial and industrial loans were $1,031.0 million at
December 31, 2012, comprising 43.6% 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, 2012, we had
an allowance for loan losses of $26.3 million, of which $6.5 million, or 24.7%, was allocated to real estate construction loans,
and $8.2 million, or 31.2%, 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.
Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be inadequate, which could
have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our earnings are affected by our ability to make loans, and thus we could sustain significant loan losses and consequently
significant net losses if we incorrectly assess either the creditworthiness of our borrowers resulting in loans to borrowers who
fail to repay their loans in accordance with the loan terms or the value of the collateral securing the repayment of their loans,
or we fail to detect or respond to a deterioration in our loan quality in a timely manner. Management makes various
assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and
the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an
allowance for loan losses that we consider adequate to absorb losses inherent in the loan portfolio based on our assessment of
the information available. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio
based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and
non-accruals, national and local economic conditions and other pertinent information. We target small and medium-sized
businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic
pressures than larger borrowers in periods of economic weakness. Also, as we expand into new markets, our determination of
the size of the allowance could be understated due to our lack of familiarity with market-specific factors. Despite the effects
of the ongoing economic decline, we believe our allowance for loan losses is adequate. Our allowance for loan losses as of
December 31, 2012 was $26.3 million, or 1.11% of total gross loans as of year-end.
26
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.
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 not 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 business strategy includes the continuation of our growth plans, and our financial condition and results of operations
could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to continue pursuing our growth strategy for our business through organic growth of our loan portfolio. Our
prospects must be considered in light of the risks, expenses and difficulties that can be encountered by financial service
companies in rapid growth stages, which include the risks associated with the following:
maintaining loan quality;
maintaining adequate management personnel and information systems to oversee such growth;
maintaining adequate control and compliance functions; and
securing capital and liquidity needed to support anticipated growth.
We may not be able to expand our presence in our existing markets or successfully enter new markets, and any expansion
could adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect
on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to
successfully implement our business strategy. Our ability to grow successfully will depend on a variety of factors, including
the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our
market areas and our ability to manage our growth.
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:
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;
27
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; and
the sale of $20,000,000 in 5.5% Subordinated Notes due November 9, 2022 to accredited investor purchasers, the
proceeds of which were used to pay off $15,000,000 in 8.5% subordinated debentures.
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
28
technological improvements than we have. We may not be able to implement new technology-driven products and services
effectively or be successful in marketing these products and services to our customers. As these technologies are improved in
the future, we may, in order to remain competitive, be required to make significant capital expenditures, which may increase
our overall expenses and have a material adverse effect on our net income.
We may encounter system failure or breaches of our network security, which could subject us to increased operating costs
as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are
dependent upon our ability to protect our computer equipment against physical damage or loss, as well as from security
breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Computer break-ins,
phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our
computer systems and network infrastructure, which may result in significant liability to us. While we, with the help of third
party service providers, intend to continue to implement security systems and establish operational procedures designed to
detect and prevent such break-ins, phishing and other disruptions, there can be no assurance that these systems and procedures
will be successful.
Lower lending limits than many of our competitors may limit our ability to attract borrowers.
During our early years of operation, and likely for many years thereafter, our legally mandated lending limits will be lower
than those of many of our competitors because we will have less capital than such competitors. Our lower lending limits may
discourage borrowers with lending needs that exceed those limits from doing business with us. While we may try to serve
these borrowers by selling loan participations to other financial institutions, this strategy may not succeed.
We may not be able to successfully expand into new markets.
We have opened new offices and operations in three primary markets (Dothan and Mobile, 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
29
to resign their employment at any time and accept an offer of employment from another company, including a competitor.
Additionally, our directors’ and advisory board members’ community involvement and diverse and extensive local business
relationships are important to our success. If the composition of our board of directors changes materially, our business may
also suffer. Similarly, if the composition of the respective advisory boards of the Bank change materially, our business may
suffer in such markets.
Our directors and executive officers own a significant portion of our common stock and can exert influence over our
business and corporate affairs.
Our directors and executive officers, as a group, beneficially owned approximately 16.26% of our outstanding common stock
as of December 31, 2012. 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 engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real
estate, subjecting us to the costs associated with the ownership of the real property.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment
and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real
estate.
The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including,
but not limited to:
general or local economic conditions;
environmental cleanup liability;
neighborhood assessments;
interest rates;
real estate tax rates;
operating expenses of the mortgaged properties;
supply of and demand for rental units or properties;
ability to obtain and maintain adequate occupancy of the properties;
zoning laws;
governmental and regulatory rules;
fiscal policies; and
natural disasters.
Risks Related to Our Common Stock
We have no current plans to pay dividends on our common stock.
We paid a cash dividend of $0.50 per common share on December 31, 2012. This was our first dividend and we have no
current intentions to pay dividends in the near future. 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, 2012, the Bank’s surplus was equal to 50.1% 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
30
“Superintendent”) for its payment of dividends if the total of all dividends declared by the Bank in any calendar year will
exceed the total of (1) the Bank’s net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the
preceding two years, less any required transfers to surplus. In addition, no dividends, withdrawals or transfers may be made
from the Bank’s surplus without the prior written approval of the Superintendent.
There are limitations on your ability to transfer your common stock.
There is no public trading market for the shares of our common stock, and we have no current plans to list our common stock
on any exchange. However, a brokerage firm may create a market for our common stock on the OTC/Bulletin Board or Pink
Sheets without our participation or approval upon the filing and approval by the FINRA OTC Compliance Unit of a Form 211.
As a result, unless a Form 211 is filed and approved, stockholders who may wish or need to dispose of all or part of their
investment in our common stock may not be able to do so effectively except by private direct negotiations with third parties,
assuming that third parties are willing to purchase our common stock.
Alabama and Delaware law limit the ability of others to acquire the Bank, which may restrict your ability to fully realize
the value of your common stock.
In many cases, stockholders receive a premium for their shares when one company purchases another. Alabama and Delaware
law makes it difficult for anyone to purchase the Bank or us without approval of our board of directors. Thus, your ability to
realize the potential benefits of any sale by us may be limited, even if such sale would represent a greater value for
stockholders than our continued independent operation.
Our Certificate of Incorporation authorizes the issuance of preferred stock which could adversely affect holders of our
common stock and discourage a takeover of us by a third party.
Our Certificate of Incorporation authorizes the board of directors to issue up to 1,000,000 shares of preferred stock without
any further action on the part of our stockholders. 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 stockholder 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 stockholders may impede a takeover
of us and prevent a transaction favorable to our stockholders.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or
by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this
“Risk Factors” section and elsewhere in this Annual Report on Form 10-K (including the documents incorporated herein by
reference) and is subject to the same market forces that affect the price of common stock in any company. As a result, an
investor may lose some or all of such investor’s investment in our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We operate through 11 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 gives pertinent details about our banking offices.
31
State
MSA
Office Address
City
Zip Code
Owned or
Leased
Date Opened
Alabama:
Birmingham-Hoover:
850 Shades Creek Parkway, Suite 200 (1)
324 Richard Arrington Jr. Boulevard North
5403 Highway 280, Suite 401
Birmingham
Birmingham
Birmingham
35209
35203
35242
Leased
Leased
Leased
3/2/2005
12/19/2005
8/15/2006
Total
Huntsville:
3 Offices
401 Meridian Street, Suite 100
1267 Enterprise Way, Suite A (1)
Huntsville
Huntsville
35801
35806
Leased
Leased
11/21/2006
8/21/2006
Total
Montgomery:
2 Offices
1 Commerce Street, Suite 200
8117 Vaughn Road, Unit 20
Montgomery
Montgomery
36104
36116
Leased
Leased
6/4/2007
9/26/2007
Total
Dothan:
2 Offices
4801 West Main Street (1)
1640 Ross Clark Circle
Dothan
Dothan
36305
36301
Leased
10/17/2008
2/1/2011
Total
Mobile:
2 Offices
64 North Royal Street (2)
Mobile
36602
Leased
7/9/2012
Total Offices in Alabama
9 Offices
Florida:
Pensacola-Ferry Pass-Brent:
316 South Balen Street
4980 North 12th Avenue
Total
Pensacola
Pensacola
32502
32504
Leased
Owned
4/1/2011
8/27/2012
2 Offices
(1) Offices relocated to this address. Original offices opened on date indicated.
(2) Office is a loan production office only.
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
Not applicable.
32
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, we have infrequent secondary trades in our common stock. The most recent sale of our common stock was at
$30.84 per share on February 7, 2013. As of December 31, 2012, we had approximately 1,258 stockholders of record holding
6,268,812 outstanding shares of our common stock. Also as of December 31, 2012, we had 778,500 shares of our common
stock currently subject to outstanding options to purchase such shares under the 2005 Amended and Restated Stock Incentive
Plan and the 2009 Stock Incentive Plan, 20,500 shares issued with restrictions under our 2009 Stock Incentive Plan, 50,000
shares of common stock subject to other outstanding options, 85,500 shares subject to warrants granted to investors in debt
issued by us, and 600,000 shares of common stock reserved for issuance upon conversion of outstanding mandatory
convertible trust preferred securities.
Dividends
We paid a cash dividend of $0.50 per common share on December 31, 2012. This was our first dividend, and we have no
plans to pay additional dividends in the near future. We anticipate that our future earnings, if any, will be retained 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 its Certificate
of Designation.
Recent Sales of Unregistered Securities
We had no sales of unregistered securities in 2012 other than those previously reported in our reports filed with the Securities
and Exchange Commission.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
We made no repurchases of our equity securities, and no “affiliated purchasers” (as defined in Rule 10b-18(a) (3) under the
Securities Exchange Act of 1934) purchased any shares of our equity securities during the fourth quarter of the fiscal year
ended December 31, 2012.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2012 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 Award-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 Awards
Weighted-average
Exercise Price of
Outstanding Awards
Number of Securities
Remaining Available For
Future Issuance Under
Equity Compensation Plans
799,000 $
50,000
849,000 $
21.26
17.50
21.04
257,000
-
257,000
We grant stock options as incentive to employees, officers, directors and consultants to attract or retain these individuals, to
maintain and enhance our long-term performance and profitability, and to allow these individuals to acquire an ownership
33
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.
On September 2, 2008, we granted warrants to purchase up to 75,000 shares of our common stock with a price of $25.00 per
share in connection with 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 with an exercise price of $25.00
per share in connection with the issuance of our Subordinated Note due June 1, 2016.
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 with an exercise 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 with an exercise 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.
We have granted restricted stock awards under the 2009 Stock Incentive Plan of 12,500 shares of common stock to six
employees. 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 with an exercise price of $30.00 per share. 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 Exchange 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, 2007 through December 31, 2012.
This comparison assumes $100 invested on December 31, 2007 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.
34
Total Return Performance
ServisFirst Bancshares, Inc.
NASDAQ Composite
NASDAQ Bank
180
160
140
120
100
80
60
40
20
e
u
l
a
V
x
e
d
n
I
0
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
Index:
ServisFirst Bancshares, Inc.
NASDAQ Composite
NASDAQ Bank
12/31/2007
100.00
100.00
100.00
12/31/2008
125.00
59.46
76.08
12/31/2009 12/31/2010
125.00
100.02
69.37
125.00
85.55
62.00
12/31/2011
150.00
98.22
60.75
12/31/2012
154.00
113.85
70.34
Date
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, 2012, 2011, 2010, 2009 and 2008 and for the
years ended December 31, 2012, 2011, 2010, 2009 and 2008 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
Premises and equipment, net
Deposits
Other borrowings
Subordinated debentures
Other liabilities
Stockholders Equity
As of and for the years ended December 31,
2012
2011
2010
2009
2008
(Dollars in thousands except for share and per share data)
$
2,906,314
$
2,460,785
$
1,935,166
$
1,573,497
$
1,162,272
2,363,182
2,336,924
233,877
25,967
58,031
119,423
3,291
25,826
3,941
8,847
2,511,572
136,982
15,050
9,453
233,257
1,830,742
1,808,712
293,809
15,209
43,018
99,350
100,565
17,859
3,501
4,591
1,394,818
1,376,741
276,959
5,234
27,454
204,278
346
7,875
3,510
4,450
1,207,084
1,192,173
255,453
645
-
26,982
48,544
680
6,202
3,241
5,088
968,233
957,631
102,339
22,844
30,774
19,300
3,320
2,659
3,884
2,143,887
1,758,716
1,432,355
1,037,319
84,219
30,514
5,873
196,292
35
24,937
30,420
3,993
117,100
24,922
15,228
3,370
97,622
20,000
15,087
3,082
86,784
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
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
$
109,023
$
91,411
$
78,146
$
62,197
$
14,901
94,122
9,100
85,022
9,643
43,100
51,565
17,120
34,445
16,080
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
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
$
5.68
$
4.03
$
3.15
$
1.07
$
4.99
30.84
5,996,437
6,941,752
6,268,812
3.53
26.35
2.84
21.19
5,759,524
6,749,163
5,932,182
5,519,151
6,294,604
5,527,482
1.02
17.71
5,485,972
5,787,643
5,513,482
55,450
20,474
34,976
6,274
28,702
2,704
20,576
10,830
3,825
7,005
1.37
1.31
16.15
5,114,194
5,338,883
5,374,022
1.30 %
15.81 %
3.80 %
41.54 %
1.11 %
14.73 %
3.79 %
45.54 %
1.04 %
15.86 %
3.94 %
45.51 %
0.24 %
0.44 %
0.69 %
0.32 %
0.75 %
1.06 %
0.55 %
1.03 %
1.10 %
0.43 %
6.33 %
3.31 %
59.57 %
0.60 %
1.01 %
1.57 %
0.71 %
9.28 %
3.70 %
54.61 %
0.41 %
1.02 %
1.74 %
gross loans
1.11 %
1.20 %
1.30 %
1.24 %
1.09 %
Allowance for loan losses to total
non-performing loans
253.50 %
159.96 %
126.00 %
122.34 %
108.17 %
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 1 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
93.05 %
84.37 %
78.28 %
83.23 %
92.32 %
79.82 %
76.71 %
78.04 %
80.06 %
85.84 %
21.71 %
16.96 %
14.24 %
14.75 %
11.71 %
8.03 %
11.78 %
9.89 %
8.43 %
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 %
46.96 %
34.87 %
195.64 %
(16.10)%
27.43 %
41.36 %
18.11 %
29.20 %
17.15 %
18.83 %
24.30 %
27.16 %
31.38 %
21.90 %
67.63 %
36
178.43 %
(22.14)%
22.99 %
15.48 %
22.78 %
19.95 %
35.38 %
24.49 %
38.08 %
12.49 %
12.93 %
38.65 %
45.45 %
36.00 %
20.12 %
(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 assets. 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 7%.
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.
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 11 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. Additionally, we opened a loan production office in Mobile, Alabama in July 2012. 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 current 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 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
37
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 an 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 (“OREO”), 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, 2012 was $34.4 million, compared to net income of $23.4 million for the year
ended December 31, 2011. This increase in net income is primarily attributable to an increase in net interest income, which
increased $18.8 million, or 24.9%, to $94.1 million in 2012 from $75.3 million in 2011. Noninterest income increased $2.7
million, or 39.1%, to $9.6 million in 2012 from $6.9 million in 2011. Noninterest expense increased by $5.6 million, or
14.9%, to $43.1 million in 2012 from $37.5 million in 2011. Basic and diluted net income per common share were $5.68 and
$4.99, respectively, for the year ended December 31, 2012, compared to $4.03 and $3.53, respectively, for the year ended
December 31, 2011. Return on average assets was 1.30% in 2012, compared to 1.11% in 2011, and return on average
stockholders’ equity was 15.81% in 2012, compared to 14.73% in 2011.
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 an 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 $1.7
million, or 32.7%, 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 1.11% 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.
38
Year Ended December 31,
2012
2011
(Dollars in Thousands)
109,023 $
14,901
91,411
16,080
$
94,122
9,100
85,022
9,643
43,100
51,565
17,120
34,445
400
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
200
Change from
the Prior Year
19.27 %
-7.33 %
24.94 %
1.43 %
28.12 %
39.23 %
15.06 %
43.93 %
38.19 %
46.96 %
100.00
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
$
34,045 $
23,238
46.51 %
Year Ended December 31,
2011
2010
(Dollars in Thousands)
Change from
the Prior Year
$
91,411 $
16,080
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
200
78,146
15,260
62,886
10,350
52,536
5,169
30,969
26,736
9,358
17,378
-
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 %
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.
Net interest income increased $18.8 million, or 24.9%, to $94.1 million for the year ended December 31, 2012 from $75.3
million for the year ended December 31, 2011. This was due to an increase in total interest income of $17.6 million, or
19.3%, and a decrease in total interest expense of $1.2 million, or a 7.3% reduction. The increase in total interest income was
primarily attributable to a 29.30% increase in average loans outstanding from 2011 to 2012, which was the result of growth in
all of our markets, including in Pensacola, Florida, and Mobile, Alabama, our newer markets entered during 2011 and 2012,
respectively.
39
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 $0.8, or 5.4%. The increase in total interest income was primarily
attributable to a 22.62% 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 entrance in 2011.
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, 2012 was $260 million, compared to $309 million at December 31, 2011. The
interest earned on investments decreased from $8.7 million in 2011 to $8.1 million in 2012. The lower income was a result of
lower yields on new securities purchased during 2012. The average taxable-equivalent yield on the investment portfolio
decreased from 3.69% in 2011 to 3.33% in 2012, or 36 basis points.
The investment portfolio at December 31, 2011 was $309 million, compared to $ 282 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
the 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 3.69% in 2011, or 39 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, 2012, 2011 and 2010, 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,
(In thousands, except Average Yields and Rates)
2012
2011
2010
Average
Balance
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
Interest
Earned /
Paid
Average
Yield /
Rate
Assets:
Interest-earning assets:
Loans, net of unearned income
Taxable (1)
Tax-exempt (2)
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
$ 2,034,478 $ 100,143
1,631
17,905
95
349
4.92 % $
5.82
1.95
1,573,500 $ 82,083
5.22 % $
1,283,204 $ 68,889
-
7,556
-
211
-
2.79
-
6,275
184,174
100,926
285,100
94,425
4,434
80,170
4,815
4,683
9,498
196
104
200
2.61
4.64
3.33
0.21
2.35
0.25
188,315
82,239
270,554
85,825
4,259
83,152
5,721
4,275
9,996
176
74
203
3.04
5.20
3.69
0.21
1.74
0.24
180,045
59,812
239,857
47,581
3,448
42,675
-
226
6,482
3,314
9,796
104
56
115
5.37 %
-
3.60
3.60
5.72
4.08
0.22
1.62
0.27
$ 2,518,143 $
110,585
4.39 % $ 2,024,846 $ 92,743
4.58 % $ 1,623,040 $ 79,186
4.88 %
38,467
6,074
65,504
28,304
4,813
29,094
24,837
4,914
23,087
Total assets
$ 2,628,188
$
2,087,057
$
1,675,878
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 liabilities
Stockholders' equity
Unrealized gains on securities and
derivatives
Total liabilities and
$
351,975 $
17,081
1,042,870
398,552
88,732
33,126
1,075
48
5,820
5,307
222
2,431
0.31 % $ 303,165 $ 1,134
10,088
0.28
902,290
0.56
330,221
1.33
19,335
0.25
41,866
7.34
47
6,675
5,192
49
2,983
0.37 % $
0.47
0.74
1.57
0.25
7.13
264,591 $ 1,253
2,978
775,544
255,326
4,901
52,186
15
5,994
4,679
31
3,288
0.47 %
0.50
0.77
1.83
0.63
6.30
$ 1,932,336 $
14,903
0.77 % $ 1,606,965 $ 16,080
1.00 % $ 1,355,526 $ 15,260
1.13 %
474,284
6,201
207,656
7,712
315,781
6,580
145,050
12,681
207,399
3,412
105,156
4,385
stockholders' equity
$ 2,628,188
$
2,087,057
$
1,675,878
Net interest spread
Net interest margin
3.62 %
3.80 %
3.58 %
3.79 %
3.75 %
3.94 %
(1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $372,000, $538,000 and $750,000 are included
in interest income in 2012, 2011 and 2010, respectively.
(2) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
(3) Unrealized gains of $11,998,000, $7,624,000 and $6,717,000 are excluded from the yield calculation in 2012, 2011 and 2010, respectively.
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.
41
For the Year Ended December 31,
2012 Compared to 2011 Increase (Decrease) in
Interest Income and Expense Due to Changes in:
2011 Compared to 2010 Increase (Decrease) in
Interest Income and Expense Due to Changes in:
Volume
Rate
Total
Volume
Rate
Total
$
Interest-earning assets:
Loans, net of unearned income
Taxable
Tax-exempt
Mortgages held for sale
Taxable
Tax-exempt
Federal funds sold
Restricted equity securities
with banks
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings
Money market
Time deposits
Federal funds purchased
Other borrowed funds
liabilities
22,910 $
95
218
(124)
900
18
3
(7)
24,013
167
25
941
980
174
(639)
1,648
(4,850) $
-
(80)
(782)
(492)
2
27
4
(6,171)
(226)
(24)
(1,796)
(865)
(1)
87
(2,825)
18,060 $
95
138
(906)
408
20
30
(3)
17,842
(59)
1
(855)
115
173
(552)
(1,177)
15,193 $
(1,999) $
-
41
287
1,177
78
14
100
16,890
166
33
947
1,242
47
(701)
1,734
-
(56)
(1,048)
(216)
(6)
4
(12)
(3,333)
(285)
(1)
(266)
(729)
(29)
396
(914)
13,194
-
(15)
(761)
961
72
18
88
13,557
(119)
32
681
513
18
(305)
820
Increase in net interest income
$
22,365 $
(3,346) $
19,019 $
15,156 $
(2,419) $
12,737
In the table above, changes in net interest income are attributable to (a) changes in average balances (volume variance), (b)
changes in rates (rate variance), or (c) changes in rate and average balances (rate/volume variance). The volume variance is
calculated as the change in average balances times the old rate. The rate variance is calculated as the change in rates times the
old average balance. The rate/volume variance is calculated as the change in rates times the change in average balances. The
rate/volume variance is allocated on a pro rata basis between the volume variance and the rate variance in the table above.
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 3.62% and 3.80%, respectively, for the year ended December 31, 2012,
compared to 3.58% and 3.79%, respectively, for the year ended December 31, 2011. Our average interest-earning assets for
the year ended December 31, 2012 increased $493.3 million, or 24.4%, to $2.5 billion from $2.0 billion for the year ended
December 31, 2011. 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 $325.4 million, or 20.2%, to $1.9 billion for the year ended
December 31, 2012 from $1.6 billion for the year ended December 31, 2011. This increase in our average interest-bearing
liabilities was primarily due to an increase in interest-bearing deposits in all our markets. We prepaid our $5 million 8.25%
subordinated note on June 2, 2012 and our $15 million 8.5% subordinated debenture on November 8, 2012. We issued $20
million in 5.5% subordinated notes due in November 9, 2022 in a private placement with accredited investors. The ratio of
our average interest-earning assets to average interest-bearing liabilities was 130.3% and 126.0% for the years ended
December 31, 2012 and 2011, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.39% for the year ended December 31, 2012,
compared to 4.58% for the year ended December 31, 2011. The average rate paid on interest-bearing liabilities was 0.77% for
the year ended December 31, 2012, compared to 1.00% for the year ended December 31, 2011.
42
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 $2.0 billion from $1.6 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 $1.6 billion for the year ended
December 31, 2011 from $1.4 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 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 130.3% and 126.0% for the
years ended December 31, 2012 and 2011, 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.
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, 2012, total loans rated
Special Mention, Substandard, and Doubtful were $100.7 million, or 4.3% of total loans, compared to $88.9 million, or 5.2%
of total loans, at December 31, 2011. 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 $9.1 million for the year ended December 31, 2012, an increase of $0.1 million
from $9.0 million in 2011. Also, nonperforming loans decreased to $10.4 million, or 0.44%, of total loans at December 31,
2012 from $13.8 million, or 0.75%, of total loans at December 31, 2011. During 2012, we had net charged-off loans totaling
$4.9 million, compared to net charged-off loans of $5.0 million for 2011. The ratio of net charged-off loans to average loans
was 0.24% for 2012 compared to 0.32% for 2011. The allowance for loan losses totaled $26.3 million, or 1.11% of loans, net
of unearned income, at December 31, 2012, compared to $22.0 million, or 1.20% of loans, net of unearned income, at
December 31, 2011.
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.
Noninterest Income
Noninterest income increased $2.7 million, or 39.2%, to $9.6 million in 2012 from $6.9 million in 2011. Noninterest income
increased $1.7 million, or 34.0%, to $6.9 million in 2011 from $5.2 million in 2010. Increases in the cash surrender value of
bank-owned life insurance contracts of $1.6 million in 2012, compared to $0.4 million in 2011, was a major component of the
43
increase in noninterest income from 2011 to 2012. Interchange income from credit card activity increased from $0.5 million
in 2011 to $1.0 million in 2012, resulting from increases in the number of cards sold, and from increased spending on existing
cards. There were no gains on the sale of available-for-sale securities during 2012, compared to $0.7 million during 2011, and
$108,000 during 2010.
Income from mortgage banking operations continued to be bolstered by refinancing activity in 2012 as the result of low
interest rates. For the year ended December 31, 2012, mortgage banking income increased $1.2 million, or 50.0%, to $3.6
million from $2.4 million for the year ended December 31, 2011. Income from mortgage banking operations for the year
ended December 31, 2011 increased $0.2 million from the year ended December 31, 2010. Income from service charges on
deposit accounts for the year ended December 31, 2012 increased $0.5 million, or 21.7%, from $2.3 million in 2011 to $2.8
million in 2012, and was flat at $2.3 million when comparing 2011 to 2010. The average balances on transaction deposit
accounts, from which service fees are derived, were up $354.9 million, or 23.2%, from 2011 to 2012. We also dropped our
earnings credit rate paid on deposits in April 2012 from 0.50% to 0.35%, which contributed to somewhat higher service fee
income. 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. We also had a flat earnings credit rate of
0.50% during all of 2010 and 2011. 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 $5.6 million, or 15.1%, to $43.1 million for the year ended December 31, 2012 from $37.5
million for the year ended December 31, 2011. 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 234 full-time equivalent employees at
December 31, 2012 compared to 210 at December 31, 2011. Equipment and occupancy expense increased $0.3 million, or
8.1% as a result of the opening of a new office in our Pensacola, Florida market. This office is housed in an owned facility.
FDIC assessments expensed during 2012 were down $0.2 million, or 11.1%, from $1.8 million in 2011 to $1.6 million in
2012. This was the result of changes by the FDIC, under the Dodd-Frank Act, in how the assessment base is determined, and
at what rates assessments are charged. These changes took effect during the second quarter of 2011. OREO expense
increased $1.9 million, or 237.5%, from $0.8 million in 2011 to $2.7 million in 2012. This increase was the result of increased
write-downs in the value of residential development properties in various stages of completion. Other noninterest expenses
increased $0.3 million, or 2.9%, to $10.7 million for the year ended December 31, 2012 from $10.4 million for the year ended
December 31, 2011. Other expenses in 2011 included $738,000 in prepayment penalties incurred as a result of our
prepayment of FHLB debt. Offsetting this during 2012 were increases in credit card processing expenses and other loan
expenses.
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 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, as discussed above. OREO expenses decreased from
$2.0 million in 2010 to $0.8 million 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
16 to the Consolidated Financial Statements.
Income Tax Expense
Income tax expense was $17.1 million for the year ended December 31, 2012 compared to $12.4 million in 2011 and $9.4
million in 2010. Our effective tax rates for 2012, 2011 and 2010 were 33.20%, 34.58% and 35.00%, respectively. Our
primary permanent differences are related to incentive stock option expenses and tax-free income.
We invested in bank-owned life insurance for certain named officers of the Bank in September 2011, and again in October
2012. The periodic increases in cash surrender value of those policies are tax exempt and therefore contribute to a larger
permanent difference between book income and taxable income.
44
We created a real estate investment trust in the first quarter of 2012 for the purposes of isolating certain real estate loans for
tracking purposes. The trust is a wholly-owned subsidiary of a trust holding company, which in turn is a wholly-owned
subsidiary of the Bank. The trust dividends its net earnings, primarily interest income derived from the loans it holds, to the
Bank, which receives a deduction for Alabama income tax.
Financial Condition
Assets
Total assets at December 31, 2012, were $2.9 billion, an increase of $0.4 billion, or 16.0% over total assets of $2.5 billion at
December 31, 2011. Average assets for the year ended December 31, 2012 were $2.6 billion, an increase of $0.5 billion, or
29.4%, over average assets of $2.1 billion for the year ended December 31, 2011. Loan growth was the primary reason for the
increase. Year-end 2012 loans were $2.4 billion, up $0.5 billion, or 27.8%, over year-end 2011 total loans of $1.8 billion.
Total assets at December 31, 2011, were $2.5 billion, an increase of $0.5 billion, or 26.3% over total assets of $1.9 billion at
December 31, 2010. Average assets for the year ended December 31, 2011 were $2.1 billion, an increase of $0.4 billion, or
23.5%, over average assets of $1.7 billion for the year ended December 31, 2010. Loan growth was the primary reason for the
increase. Year-end 2011 loans were $1.8 billion, up $0.4 billion, or 28.6%, over year-end 2010 total loans of $1.4 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, 2012 were $2.8
billion, or 97.5% of total assets of $2.9 billion. Earning assets at December 31, 2011 were $2.4 billion, or 97.6% of total
assets of $2.5 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
50% of our total investment portfolio should be composed of municipal securities. At December 31, 2012, mortgage-backed
securities represented 36% of the investment portfolio, state and municipal securities represented 48% of the investment
portfolio, U.S. Treasury and government agencies represented 11% of the investment portfolio, and corporate debt represented
5% of the investment portfolio.
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, 2012, any structured investment vehicles or any private-label mortgage-backed securities. The
amortized cost of securities in our portfolio totaled $248.6 million at December 31, 2012, compared to $297.9 million at
December 31, 2011. The following table provides the amortized cost of our securities as of December 31, 2012 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.
45
Maturity of Investment Securities - Amortized Cost
Less Than One
Year
One Year
throught Five
Years
Six Years
through Ten
Years
(In Thousands)
More Than Ten
Years
Total
$
$
10,003
-
1,968
-
15,304
69,298
51,250
12,638
$
$
2,053
-
56,733
1,039
-
-
2,368
-
$
27,360
69,298
112,319
13,677
$
11,971
$
148,490
$
59,825
$
2,368
$
222,654
1.90 %
-
3.90
-
2.23 %
2.37 %
3.63
3.70
1.29
3.33 %
4.88 %
-
4.80
7.07
4.84 %
- %
-
6.04
-
6.04 %
2.39 %
3.63
4.31
1.73
3.70 %
$
$
-
-
-
$
$
14,735
-
14,735
$
$
$
4,479
-
1,215
5,538
4,479
$
6,753
$
$
20,429
5,538
25,967
- %
-
- %
2.90 %
-
2.90 %
1.69 %
-
1.69 %
3.00 %
6.08
5.53 %
2.64 %
6.08
3.37 %
At December 31, 2012:
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, 2012, we had $3.3 million in federal funds sold, compared with $100.6 million at December 31, 2011. We
shifted balances held at correspondent banks to our reserve account at the Federal Reserve Bank of Atlanta to gain favorable
capital treatment at December 31, 2012.
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 $2.363 billion at December 31, 2012. 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.
46
Birmingham-Hoover, AL MSA
Huntsville, AL MSA
Montgomery, AL MSA
Dothan, AL MSA
Total Alabama MSAs
Pensacola, FL MSA
Percentage of
Total Loans in
MSA
53 %
17 %
11 %
13 %
93 %
7 %
The following table details our loans at December 31, 2012, 2011, 2010, 2009 and 2008:
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total Loans
Less: Allowance for loan losses
Net Loans
2012
2011
$
1,030,990 $
158,361
2010
(Dollars in Thousands)
536,620 $
172,055
799,464 $
151,218
2009
2008
461,088 $
224,178
325,968
235,162
568,041
235,909
323,599
1,127,549
46,282
2,363,182
(26,258)
2,336,924 $
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 $
$
147,197
137,019
93,412
377,628
29,475
968,233
(10,602)
957,631
The following table details the percentage composition of our loan portfolio by type at December 31, 2012, 2011, 2010, 2009
and 2008:
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total Loans
2012
2011
2010
2009
2008
43.63 %
6.70
43.67 %
8.26
38.47 %
12.34
38.20 %
18.57
33.67 %
24.29
24.04
9.98
13.69
47.71
1.96
100.00 %
21.77
11.21
12.85
45.83
2.24
100.00 %
19.41
14.28
12.82
46.51
2.68
100.00 %
16.90
13.71
9.92
40.53
2.70
100.00 %
15.20
14.15
9.65
39.00
3.04
100.00 %
The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2012:
47
Due in 1
year or less
Due in 1 to 5
years
Due after 5
years
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 Loans
Less: Allowance for loan losses
Net Loans
$
602,364 $
98,472
76,396
39,038
80,292
195,726
32,108
928,670 $
(in Thousands)
360,172 $
57,257
68,454 $
2,632
1,030,990
158,361
342,170
149,004
203,032
694,206
13,794
1,125,429 $
149,475
47,867
40,275
237,617
380
309,083 $
$
568,041
235,909
323,599
1,127,549
46,282
2,363,182
(26,258)
2,336,924
Interest rate sensitivity:
Fixed interest rates
Floating or adjustable rates
Total
(1) includes nonaccrual loans
Asset Quality
$
$
213,714 $
714,956
928,670 $
656,735 $
468,694
1,125,429 $
175,608 $
133,475
309,083 $
1,046,057
1,317,125
2,363,182
The following table presents a summary of changes in the allowance for loan losses over the past five fiscal years. Our net
charge-offs as a percentage of average loans for 2012 was 0.24%, compared to 0.32% for 2011. The largest balance of our
charge-offs is on real estate construction loans. Real estate construction loans represent 6.70% of our loan portfolio.
48
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
2012
2011
(Dollars in Thousands)
2010
2009
2008
$ 22,030
$ 18,077
$ 14,737
$ 10,602
$
7,732
(1,106)
(3,088)
(250)
(311)
(99)
(660)
(901)
(5,755)
125
58
-
692
-
692
8
883
(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
(545)
(2,264)
-
(480)
(459)
(939)
(118)
(3,866)
264
-
-
-
-
-
198
462
Net charge-offs
(4,872)
(5,019)
(7,010)
(6,550)
(3,404)
Provision for loan losses charged to expense
9,100
8,972
10,350
10,685
6,274
Allowance for loan losses at end of period
$ 26,258
$ 22,030
$ 18,077
$ 14,737
$ 10,602
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
0.24 %
0.45 %
0.32 %
0.57 %
0.55 %
0.81 %
0.60 %
1.00 %
0.41 %
0.76 %
1.11 %
130.77 %
1.20 %
84.48 %
1.30 %
84.82 %
1.24 %
60.34 %
1.09 %
52.68 %
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. In assessing the adequacy of the allowance for
loan losses, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current
economic conditions and other factors considered necessary to maintain the allowance at an adequate level. Our management
feels that the allowance was adequate at December 31, 2012.
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.
49
2012
Percentage
of loans in
each
category to
For the Years Ended December 31,
2010
2011
2009
2008
Percentage
of loans in
each
category to
Percentage
of loans in
each
category to
total loans Amount
Percentage
of loans in
each
category to
total loans Amount
Percentage
of loans in
each
category to
total loans
Amount total loans Amount total loans Amount
(Dollars in Thousands)
Commercial,
financial and
agricultural $
Real estate -
construction
Real estate -
mortgage
Consumer
Qualitative
factors
8,233
43.63 % $
6,627
43.67 % $
5,348
38.47 % $
3,135
38.20 % $
1,489
33.67 %
6,511
6.70
6,542
8.26
6,373
12.34
6,295
18.57
5,473
24.29
4,912
47.71
3,295
45.83
2,443
46.51
2,102
40.53
40
39.00
199
1.96
531
2.24
749
2.68
115
2.70
5
3.04
6,403
-
5,035
-
3,164
-
3,090
-
3,595
-
Total
$
26,258 100.00 % $
22,030 100.00 % $
18,077 100.00 % $
14,737 100.00 % $
10,602 100.00 %
We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to
withstand competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur at a
level where the loan loss reserve is not sufficient to cover actual loan losses, our earnings will decrease. 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, 2012, we had impaired loans of $37.4 million inclusive of nonaccrual loans, an increase of $0.1 million
from $37.3 million as of December 31, 2011. We allocated $3.5 million of our allowance for loan losses at December 31,
2012 to these impaired loans. We had previous write-downs against impaired loans of $2.6 million at December 31, 2012,
compared to $1.2 million at December 31, 2011. The average balance for 2012 of loans impaired as of December 31, 2012
was $37.9 million. Interest income foregone on these impaired loans was $850,000 for the year ended December 31, 2012,
and we recognized $1.3 million of interest income on these impaired loans for the year ended December 31, 2012. 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 $37.4 million of impaired loans reported as of December 31, 2012, $14.4 million were real estate construction loans,
$6.2 million were residential real estate loans, $3.9 million were commercial and industrial loans, $8.3 million were
commercial real estate loans and $4.5 million were other mortgage loans. Of the $14.4 million of impaired real estate
construction loans, $6.9 million (a total of 17 loans with seven builders) were residential construction loans, and $4.1 million
consisted of various residential lot loans to three 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:
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.
50
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 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.
We require updated financial information, global inventory aging and interest carry analysis for existing builders to
help identify potential future loan payment problems.
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
The table below summarizes our nonperforming assets at December 31, 2012, 2011, 2010, 2009 and 2008:
2012
2011
2010
2009
2008
Number
Number
Number
Number
Number
Balance
of Loans
Balance
of Loans
Balance
of Loans
Balance
of Loans
Balance
of Loans
(Dollars in Thousands)
Nonaccrual loans:
Commercial, financial
and agricultural
$
276
2 $
1,179
7 $
2,164
8 $
2,032
2 $
-
Real estate -
construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate -
mortgage
Consumer
6,460
19
10,063
21
10,722
24
8,100
13
5,035
2,786
453
240
3,479
135
3
2
1
6
2
792
670
693
2,155
375
2
4
1
7
1
635
202
-
837
624
1
1
-
2
1
909
265
615
1,789
-
2
2
1
5
-
237
558
1,883
2,678
-
-
22
2
1
1
4
-
Total nonaccrual loans
$
10,350
29 $
13,772
36 $
14,347
35 $
11,921
20 $
7,713
26
$
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
$
-
-
-
-
-
-
8
8
- $
-
-
-
-
-
4
4 $
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
- $
14
1 $
1,939
-
-
-
-
-
-
-
-
-
253
-
253
-
-
1
-
1
-
-
-
-
-
-
-
- $
267
2 $
1,939
Total nonperforming
loans
Plus: Other real estate
owned and repossessions
Total nonperforming
assets
$
10,358
33 $
13,772
36 $
14,347
35 $
12,188
22 $
9,652
9,721
38
12,305
39
6,966
39
12,525
51
10,473
$
20,079
71 $
26,077
75 $
21,313
74 $
24,713
73 $
20,125
51
1
-
-
-
-
-
-
1
27
25
52
$
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
1,168
2 $
1,369
2 $
2,398
3,213
15
-
-
3,121
1,709
302
5,132
-
3
5
1
9
-
2,785
-
331
3,116
-
3
-
1
4
-
-
-
-
-
-
-
9 $
-
-
-
-
-
-
-
-
845
-
-
845
-
- $
-
1
-
-
1
-
$
9,513
26 $
4,485
6 $
2,398
9 $
845
1 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
29,592
97 $
30,562
81 $
23,711
83 $
25,558
74 $
20,125
52
Gross interest income
foregone on nonaccrual
loans througout year
Interest income
recognized on nonaccrual
loans througout year
$
$
Ratios:
Nonperforming loans
to total loans
Nonperforming assets to
total loans plus other
real estate owned
Nonperforming loans plus
restructured accruing
loans to total loans
plus other real estate
owned and repossessions
850
$
1,371
155
$
263
$
$
510
418
$
$
647
310
$
$
735
287
0.44 %
0.75 %
1.03 %
1.01 %
1.02 %
0.85 %
1.41 %
1.52 %
2.02 %
2.07 %
0.84 %
0.99 %
1.19 %
1.06 %
1.00 %
The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to
discontinue accruing interest on a loan (i.e., place the loan on nonaccrual 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 nonaccrual status before it becomes 90 days delinquent unless management
believes that the collection of interest is expected. 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 nonaccrual loans is
recognized only as received. If we believe that a loan will not be collected in full, we will increase the allowance for loan
losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual 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 2012, 2011 and 2010:
52
Average Deposits
Average for Years Ended December 31,
2011
2010
2012
Average
Balance
Average Rate
Paid
Average Rate
Average
Balance
Paid
(Dollars in Thousands)
Average
Balance
Average Rate
Paid
$
$
474,284
351,975
1,042,870
17,081
69,906
328,646
2,284,762
- %
0.31 %
0.56 %
0.28 %
1.24 %
1.35 %
$
$
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 %
$
$
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 %
$100,000 or more
(In Thousands)
$
$
81,299 $
33,712
89,215
122,275
326,501 $
Less than $100,000
Total
20,910 $
9,351
17,236
21,682
69,179 $
102,209
43,063
106,451
143,957
395,680
Types of Deposits:
Non-interest-bearing demand
deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Time deposits
Time deposits, $100,000 and over
Total deposits
At December 31, 2012
Maturity
Three months or less
Over three through six months
Over six months through one year
Over one year
Total
Total average deposits for the year ended December 31, 2012 were $2.3 billion, an increase of $0.4 billion, or 21.1%, over
total average deposits of $1.9 billion for the year ended December 31, 2011. Average noninterest-bearing deposits increased
by $0.2 billion, or 66.7%, from $0.3 billion for the year ended December 31, 2011 to $0.5 billion for the year ended December
31, 2012.
Total average deposits for the year ended December 31, 2011 were $1.9 billion, an increase of $0.4 billion, or 26.7%, over
total average deposits of $1.5 billion for the year ended December 31, 2010. Average noninterest-bearing deposits increased
by $0.1 billion, or 50.0%, from $0.2 billion for the year ended December 31, 2010 to $0.3 billion for the year ended December
31, 2011.
We have never had brokered deposits.
Borrowed Funds
We had available approximately $130 million in unused federal funds lines of credit with regional banks as of December 31,
2012, compared to $140 million as of December 31, 2011. These lines are subject to certain restrictions and collateral
requirements.
Stockholders’ Equity
Stockholders’ equity increased $37.0 million during 2012, to $233.3 million at December 31, 2012 from $196.3 million at
December 31, 2011. The increase in stockholders’ equity resulted primarily from net income of $34.0 million during the year
ended December 31, 2012 and contributed capital from the exercise of stock options during 2012.
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 purchase 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 with an exercise price of $25.00 per share in the third
quarter of 2008. These warrants were issued in connection with our 8.5% trust preferred securities, which were redeemed on
November 8, 2012.
53
We issued warrants to purchase 15,000 shares of our common stock with an exercise 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, which
was paid off on June 1, 2012.
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 with an exercise 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 with an exercise price of $20.00 per share. These stock options are non-
qualified and are not part of either of our stock incentive plans. They are fully vested 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, with an exercise price of $20.00 per share, expiring in ten years. These are non-qualified stock
options that become fully vested on December 19, 2012.
We have granted 32,500 shares of restricted stock under the 2009 Stock Incentive Plan. These share generally vest five years
from the date of grant, 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 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 with an exercise price of $30.00 per share. 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.
The following table sets forth our credit arrangements and financial instruments whose contract amounts represent credit risk
as of December 31, 2012, 2011 and 2010:
Commitments to extend credit
Credit card arrangements
Standby letters of credit and
2012
2011
2010
(In Thousands)
$
860,421 $
25,699
697,939 $
19,686
538,719
17,601
financial guarantees
36,374
42,937
47,103
Total
$
922,494 $
760,562 $
603,423
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
54
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
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, 2012 and 2011, the Bank was party to two swaps with notional amounts
totaling approximately $11.1 million with customers, and two swaps with notional amounts totaling approximately $11.1
million with a regional correspondent bank. These swaps qualify as derivatives, but are not designated as hedging
instruments.
The Bank has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis.
When a rate is committed to a borrower, it is based on the best price that day and locked with our investor for our customer for
a 30-day period. In the event the loan is not delivered to the investor, the Bank has no risk or exposure with the investor. The
interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair values of
our agreements with investors and rate lock commitments to customers as of December 31, 2012 and 2011 were not material.
Asset and Liability Management
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are
“interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the
volume of rate-sensitive liabilities repricing during the same period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest
income while a positive gap would tend to adversely affect net interest income.
Our asset liability and investment committee 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, 2012, 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.
55
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,
2012, our liquid assets, represented by cash and due from banks, federal funds sold and available-for-sale securities, totaled
$414.6 million. Additionally, at such date we had available to us approximately $130.0 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 help finance our continued growth and planned expansion activities, we completed a private placement of stock pursuant to
subscription agreements effective December 31, 2008 and issued and sold 139,460 shares of our common stock for $25.00 per
share in January 2009 for an aggregate purchase price of $3.5 million. In addition, on March 15, 2010, we completed a private
placement of $15.0 million in 6.0% Mandatory Convertible Trust Preferred Securities which convert into shares of our
common stock on March 15, 2013. 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 $40.0 million. Also, on November 9, 2012, we completed
the private placement of $20.0 million in 5.50% Subordinated Notes due November 9, 2022. The proceeds from these notes
were used to pay off our 8.50% subordinated debentures. 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.
The following table reflects the contractual maturities of our term liabilities as of December 31, 2012. The amounts shown do
not reflect any early withdrawal or prepayment assumptions.
Total
Payments due by Period
Over 1 - 3
years
1 year or less
(In Thousands)
Over 3 - 5
years
Over 5 years
Contractual Obligations (1)
Deposits without a stated maturity
Certificates of deposit (2)
Federal funds purchased
Other borrowings
Subordinated debentures
Operating lease commitments
Total
$
$
2,115,892 $
395,680
117,065
20,000
15,000
13,606
2,677,243 $
- $
247,482
117,065
-
15,000
1,972
381,519 $
- $
108,600
-
-
-
3,919
112,519 $
- $
39,598
-
-
-
3,660
43,258 $
-
-
-
20,000
-
4,055
24,055
(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, 2012, 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, 2012. 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, 2012.
56
Total risk-based capital
Tier 1 capital
Leverage ratio
Well-
Capitalized
Actual at
December 31,
2012
10.00 %
11.78 %
6.00 %
5.00 %
9.89 %
8.43 %
For a description of capital ratios see Note 15 to “Notes to Consolidated Financial Statements”.
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.
Adoption of Recent Accounting Pronouncements
New accounting standards are discussed in Note 1 to “Notes to 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, 2012, our gap was
within such ranges.
57
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, 2012. Management uses the one year gap as the
appropriate time period for setting strategy.
1-3 Months
Rate Sensitive Gap Analysis
4-12 Months
1-5 Years
Over 5 Years
Total
(Dollars in Thousands)
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
$
1,471,421
27,139
3,291
$
235,343
35,428
-
587,217
129,440
-
117,218
1,619,069
$
-
270,771
$
2,205
718,862
$
$
$
$
449,373
1,121,343
82,771
117,065
-
15,050
1,785,602
$
$
-
-
164,738
-
-
-
164,738
$
$
-
-
148,198
-
-
-
148,198
(166,533)
$
106,033
$
570,664
$
$
$
$
$
$
$
95,026
71,778
-
2,389,007
263,785
3,291
-
166,804
$
119,423
2,775,506
-
-
(25)
-
19,917
-
19,892
$
$
449,373
1,121,343
395,682
117,065
19,917
15,050
2,118,430
146,912
$
657,076
657,076
-
Cumulative sensitivity gap
$
(166,533)
$
(60,500)
$
510,164
Percent of cumulative sensitivity Gap
to total interest-earning assets
(6.0)%
(2.2)%
18.4 %
23.7 %
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, 2012, the 5.10% 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, 2012
0 bps
+100 bps
+200 bps
Economic value of equity
$
233,257 $
(Dollars in Thousands)
239,088
Actual dollar change
$
5,831
$
$
245,153
11,896
Percent change
2.50 %
5.10 %
The one year gap ratio of negative 2.2% indicates that we would show a small decrease 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.
58
The above analysis may not on its own be an entirely accurate indicator of how net interest income or EVE will be affected by
changes in interest rates. Income associated with interest earning assets and costs associated with interest bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates
may have a significant impact on net interest income. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates.
Our asset liability committee develops its view of future rate trends by monitoring economic indicators, examining the views
of economists and other experts, and understanding the current status of our balance sheet and conducts a quarterly analysis of
the rate sensitivity position. The results of the analysis are reported to our board of directors.
59
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, 2012 and 2011
Consolidated Statements of Income for the Years Ended December 31,
2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity for Years Ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
Page
61
62
63
64
65
66
67
68
69
71
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
ServisFirst Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of ServisFirst Bancshares, Inc. and subsidiaries as of
December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the years 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
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 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. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations
and their cash flows for each of the years 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, 2012, 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 12, 2013 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
Birmingham, Alabama
March 12, 2013
61
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors
ServisFirst Bancshares, Inc.
Birmingham, Alabama
We have audited the accompanying consolidated statement of income, comprehensive income, stockholders’ equity and cash
flows for the year 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 results of
their operations and their cash flows for the year ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
Birmingham, Alabama
March 8, 2011
62
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,
2012. 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, 2012, 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.
by
by
SERVISFIRST BANCSHARES, INC.
/s/THOMAS A. BROUGHTON, III
THOMAS A. BROUGHTON, III
President and Chief Executive Officer
/s/WILLIAM M. FOSHEE
WILLIAM M. FOSHEE
Chief Financial Officer
63
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, 2012, 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, 2012, 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, 2012, and the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended, and our report
dated March 12, 2013 expressed an unqualified opinion on these consolidated financial statements.
/s/ KPMG LLP
Birmingham, Alabama
March 12, 2013
64
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, 2012
December 31, 2011
ASSETS
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 $27,350 and $15,999 at
December 31, 2012 and 2011, 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 asset, net
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 $0.001
(liquidation preference $1,000), net of discount; 40,000 shares authorized,
40,000 shares issued and outstanding at December 31, 2012 and at
December 31, 2011
Preferred stock, par value $0.001 per share; 1,000,000 authorized and
960,000 currently undesignated
Common stock, par value $0.001 per share; 50,000,000 shares authorized;
6,268,812 shares issued and outstanding at December 31, 2012 and
5,932,182 shares issued and outstanding at December 31, 2011
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
65
$
$
$
$
58,031
119,423
3,291
180,745
233,877
25,967
3,941
25,826
2,363,182
(26,258)
2,336,924
8,847
9,158
7,386
9,685
57,014
6,944
2,906,314
$
$
545,174
1,966,398
2,511,572
117,065
19,917
15,050
942
8,511
2,673,057
39,958
-
6
93,505
92,492
7,296
233,257
$
2,906,314
$
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
39,958
-
6
87,805
61,581
6,942
196,292
2,460,785
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
2011
2012
2010
$
100,462 $
4,814
3,246
196
305
109,023
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
Increase in cash surrender value life insurance
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
Basic earnings per common share
Diluted earnings per common share
See Notes to Consolidated Financial Statements.
$
$
$
82,294
5,721
2,943
176
277
91,411
13,047
3,033
16,080
75,331
8,972
66,359
2,290
2,373
666
390
1,207
6,926
19,518
3,697
1,213
1,796
820
10,414
37,458
35,827
12,389
23,438
200
23,238
4.03
3.53
$
$
$
$
69,115
6,482
2,274
104
171
78,146
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
3.15
2.84
12,249
2,652
14,901
94,122
9,100
85,022
2,756
3,560
-
1,624
1,703
9,643
22,587
4,014
1,455
1,595
2,727
10,722
43,100
51,565
17,120
34,445
400
34,045 $
5.68 $
4.99 $
66
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(In thousands)
Net income
Other comprehensive income, net of tax:
Unrealized holding gains arising during period from securities available for sale,
net of tax of $191, $2,944 and $755 for 2012, 2011 and 2010, respectively
Reclassification adjustment for net gains on sale of securities in net income, net
of tax benefit of $252 and $39 for 2011 and 2010, respectively
Other comprehensive income, net of tax
Comprehensive income
See Notes to Consolidated Financial Statements
2012
2011
2010
$
34,445 $
23,438 $
17,378
354
4,519
1,334
-
354
34,799 $
(414)
4,105
27,543 $
(70)
1,264
18,642
$
67
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(In thousands, except share amounts)
(Unaudited)
Balance, December 31, 2009
$
Exercise 10,000 stock options, including tax benefit
Stock-based compensation expense
Other comprehensive income
Net income
Balance, December 31, 2010
Sale of 340,000 shares of common stock
Sale of 40,000 shares of preferred stock, net
Preferred dividends paid
Exercise 64,700 stock options, including tax benefit
Stock-based compensation expense
Other comprehensive income
Net income
Balance, December 31, 2011
Dividends paid
Preferred dividends paid
Exercise 332,630 stock options and
warrants, including tax benefit
Stock-based compensation expense
Other comprehensive income
Net income
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
- $
-
-
-
-
6 $
-
-
-
-
75,078 $
123
713
-
-
20,965 $
-
-
-
17,378
-
-
39,958
-
-
-
-
-
39,958
-
-
-
-
-
-
6
-
-
-
-
-
-
-
6
-
-
-
-
-
-
75,914
10,159
-
-
757
975
-
-
87,805
-
-
4,651
1,049
-
-
38,343
-
-
(200)
-
-
-
23,438
61,581
(3,134)
(400)
-
-
-
34,445
1,573 $
-
-
1,264
-
2,837
-
-
-
-
-
4,105
-
6,942
-
-
-
-
354
-
97,622
123
713
1,264
17,378
117,100
10,159
39,958
(200)
757
975
4,105
23,438
196,292
(3,134)
(400)
4,651
1,049
354
34,445
Balance, December 31, 2012
$
39,958 $
6 $
93,505 $
92,492 $
7,296 $
233,257
See Notes to Consolidated Financial Statements
68
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(In thousands) (Unaudited)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
Deferred tax benefit
Provision for loan losses
Depreciation and amortization
Net amortization of investments
Market value adjustment of interest rate cap
Increase in accrued interest and dividends receivable
Stock-based compensation expense
(Decrease) increase in accrued interest payable
Proceeds from sale of mortgage loans held for sale
Originations of mortgage loans held for sale
Gain on sale of securities available for sale
Gain on sale of mortgage loans held for sale
Net loss (gain) on sale of other real estate owned
Write down of other real estate owned
Decrease in special prepaid FDIC insurance assessments
Increase in cash surrender value of life insurance contracts
Loss on prepayment of other borrowings
Excess tax benefits from the exercise of warrants
Net change in other assets, liabilities, and other
operating activities
Net cash provided by operating activities
INVESTMENT ACTIVITIES
Purchase of securities available for sale
Proceeds from maturities, calls and paydowns of securities
available for sale
Purchase of securities held to maturity
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
Additions to other real estate owned
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net increase in federal funds purchased
Proceeds from other borrowings
Proceeds from issuance of subordinated debentures
Redemption of subordinated debentures
Proceeds from sale of common stock, net
Proceeds from sale of preferred stock, net
Proceeds from exercise of stock options and warrants
Excess tax benefits from exercise of stock options and warrants
Repayment of other borrowings
Dividends on common stock
Dividends on preferred stock
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
2012
2011
2010
$
34,445 $
23,438 $
17,378
(2,181)
9,100
1,218
1,079
9
(966)
1,049
(3)
239,292
(243,699)
-
(3,560)
105
2,189
1,322
(1,624)
-
(381)
3,790
41,184
(1,240)
8,972
1,173
958
106
(1,202)
975
47
169,172
(177,200)
(666)
(2,373)
(76)
326
1,492
(390)
738
(127)
(2,212)
10,350
1,066
823
45
(790)
713
(128)
174,760
(175,046)
(108)
(2,174)
203
1,051
2,538
-
-
-
200
24,323
1,106
29,575
(47,867)
(102,190)
(84,425)
106,783
(11,701)
943
(540,019)
(5,474)
(787)
-
(15,000)
-
347
2,967
-
(509,808)
126,364
241,321
37,800
19,917
-
(15,464)
-
-
4,651
381
(5,000)
(3,134)
(400)
406,436
(62,188)
242,933
69
28,575
(15,441)
31,889
(4,589)
5,466
(449,449)
(1,314)
(543)
-
(40,000)
63,270
552
3,334
-
-
(197,572)
(428)
(269)
(160)
-
32,297
-
7,995
(75)
(507,740)
(215,337)
168,320
216,851
79,265
-
-
-
10,032
39,958
757
127
(20,738)
-
(200)
494,372
10,955
231,978
39,183
287,178
-
-
15,050
-
-
-
123
-
-
-
-
341,534
155,772
76,206
Cash and cash equivalents at end of year
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest
Income taxes
NONCASH TRANSACTIONS
Transfers of loans from held for sale to held for investment
Other real estate acquired in settlement of loans
Internally financed sales of other real estate owned
See Notes to Consolidated Financial Statements.
$
180,745 $
242,933 $
231,978
$
$
14,904 $
13,134
16,033 $
15,837
15,388
6,958
- $
2,695
24
417 $
9,029
136
787
5,372
1,757
70
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
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 Mobile, Alabama and Pensacola, Florida markets.
The Bank has a subsidiary, SF Holding 1, Inc., which has a subsidiary, SF Realty 1, Inc., which operates as a real estate
investment trust. More details about SF Holding 1, Inc. and SF Realty 1, Inc. are included in Note 10.
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 $16.0 million at December 31, 2012 and $7.5
million at December 31, 2011.
Debt 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 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.
71
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. The loans are sold without recourse and servicing is not retained.
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 years ended December 31, 2012 and
2011.
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, 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.
72
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. At the time of
foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property’s new basis. Any
write downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After
foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs incurred in
maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in other
operating expenses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major
improvements that significantly extend the useful lives of the assets are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. Assets which are disposed of are removed from the accounts and the
resulting gains or losses are recorded in operations. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets (3 to 10 years).
Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives
of the improvements.
Derivatives and Hedging Activities
As part of its overall interest rate risk management, the Company uses derivative instruments, which can include interest
rate swaps, caps, and floors. 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.
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.
73
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, 2012 and 2011 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, 2012, the Company was party to
two swaps with notional amounts totaling approximately $11.1 million with customers, and two swaps with notional
amounts totaling approximately $11.1 million with a regional correspondent bank. These swaps qualify as derivatives, but
are not designated as hedging instruments.
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, 2012, the Company had two stock-based employee compensation plans for grants of equity compensation
to key employees. These plans have been accounted for under the provisions of FASB ASC 718-10, Compensation – Stock
Compensation. The stock-based employee compensation plans are more fully described in Note 13.
Earnings per Common Share
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential
common shares issuable under stock options and warrants.
Loan Commitments and Related Financial Instruments
Financial instruments, which include credit card arrangements, commitments to make loans and standby letters of credit, are
issued to meet customer financing needs. The face amount for these items represents the exposure to loss before
considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10.
The fair value of these financial guarantees is not material.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully
disclosed in Note 22. 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. Accumulated comprehensive income,
which is recognized as a separate component of equity, includes unrealized gains and losses on securities available for sale.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2012, 2011 and 2010
was $454,000, $406,000 and $313,000, respectively. Advertising typically consists of local print media aimed at businesses
that the Company targets as well as sponsorships of local events that the Company’s clients and prospects are involved with.
74
Recently Adopted 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 removed 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 eliminated 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 were 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 was not
permitted. The Company adopted these amendments when required, and they did not have any 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 outlined 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 were to be applied prospectively. For public entities, the
amendments were effective for interim and annual periods beginning after December 31, 2011. Early application was not
permitted. The Company adopted these amendments when required, and they did not have a material effect on its financial
position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income, which amended 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 were to be applied retrospectively. For public entities, the amendments were effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011. Early adoption was permitted. This
update had no impact on financial reporting of the Company.
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 deferred the effective date pertaining to reclassification adjustments out of other accumulated
comprehensive income in ASU 2011-05, until the FASB was able to reconsider those requirements. All other requirements
of ASU 2011-05 were 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 were to 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. This update, like ASU No.
2011-05, had no impact on financial reporting of the Company.
Recent Accounting Pronouncements
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.
NOTE 2.
DEBT SECURITIES
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2012 and 2011 are
summarized as follows:
75
December 31, 2012
Securities Available for Sale
U.S. Treasury and government sponsored agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
Mortgage-backed securities
State and municipal securities
Total
December 31, 2011
Securities Available for Sale
U.S. Treasury and government sponsored agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
Mortgage-backed securities
State and municipal securities
Total
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
Market
Value
$
$
$
$
$
$
27,360
69,298
112,319
13,677
222,654
20,429
5,538
25,967
98,169
88,118
95,331
1,030
282,648
9,676
5,533
$
15,209
$
$
1,026
4,168
5,941
210
11,345
768
655
1,423
$
1,512
4,462
5,230
51
11,255
410
380
790
$
$
-
-
(83)
(39)
(122)
(40)
-
(40)
(59)
-
(35)
-
(94)
-
-
-
$
$
$
$
28,386
73,466
118,177
13,848
233,877
21,157
6,193
27,350
99,622
92,580
100,526
1,081
293,809
10,086
5,913
15,999
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 2012 and 2011, 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, 2012 and 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.
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
December 31, 2012
December 31, 2011
Amortized Cost Market Value Amortized Cost Market Value
(In Thousands)
$
$
$
$
11,971
79,192
59,825
2,368
69,298
222,654
5,538
20,429
25,967
$
$
$
$
12,052 $
81,940
63,801
2,618
73,466
233,877 $
10,664
112,488
65,509
5,868
88,118
282,647
6,193 $
21,157
27,350 $
5,533
9,676
15,209
$
$
$
$
10,762
114,227
69,864
6,376
92,580
293,809
5,913
10,086
15,999
76
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, 2012 and 2011. 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, 2012. There were no other-than-temporary impairments for the years ended December 31, 2012, 2011 and
2010.
Less Than Twelve Months
Twelve Months or More
Total
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
(In Thousands)
Gross
Unrealized
Losses
Fair Value
$
$
$
$
‐ $
(40)
(83)
(39)
(162) $
‐ $
4,439
8,801
4,882
18,122 $
(59) $
‐
(35)
‐
(94) $
15,074 $
‐
4,559
‐
19,633 $
‐ $
‐
‐
‐
‐ $
‐ $
‐
‐
‐
‐ $
‐ $
‐
166
‐
166 $
‐ $
(40)
(83)
(39)
(162) $
‐ $
‐
‐
‐
‐ $
(59) $
‐
(35)
‐
(94) $
‐
4,439
8,967
4,882
18,288
15,074
‐
4,559
‐
19,633
December 31, 2012
U.S. Treasury and government
sponsored agencies
Mortgage‐backed securities
State and municipal securities
Corporate debt
Total
December 31, 2011
U.S. Treasury and government
sponsored agencies
Mortgage‐backed securities
State and municipal securities
Corporate debt
Total
At December 31, 2012, only one of the Company’s 572 debt securities was in an unrealized loss position for more than 12
months.
During 2012, 10 government agency sponsored mortgage-backed securities with an amortized cost of $23.6 million and one
government agency bond with an amortized cost of $1.5 million were bought. 15 government agency securities with a total
amortized cost of $61.0 million were called during 2012, three U.S. Treasury securities with an amortized cost of $10.0
million matured. During 2011, 16 government agency bonds with an amortized cost of $63.2 million and 20 government
agency sponsored mortgage-backed securities with an amortized cost of $29.9 million were bought. Nine U.S. Treasury notes,
six government agency bonds and five government agency sponsored mortgage-backed securities were sold with an amortized
cost of $56.1 million and a net gain on sale in the amount of $992,000. There were no sales of securities during 2012. During
2011, Losses on sales of securities of $326,000, netted against the gains above, resulted in net gain on sales of securities of
$666,000 for the year. During 2010, bonds with a total amortized cost of $32.2 million were sold with total gains recognized
in the amount of $108,000.
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, 2012 and 2011 was $210.0 million and $197.9 million, respectively.
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 $3.7 million and $3.3 million at December 31, 2012 and
2011, respectively. The amount of investment in the First National Bankers Bank stock was $250,000 at December 31, 2012
and 2011.
77
NOTE 3.
LOANS
The composition of loans at December 31, 2012 and 2011 is summarized as follows:
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total Loans
Less: Allowance for loan losses
Net Loans
December 31,
2012
2011
(In Thousands)
$
1,030,990
158,361
$
799,464
151,218
568,041
235,909
323,599
1,127,549
46,282
2,363,182
(26,258)
2,336,924
398,601
205,182
235,251
839,034
41,026
1,830,742
(22,030)
1,808,712
$
$
Changes in the allowance for loan losses during the years ended December 31, 2012, 2011 and 2010, respectively are as
follows:
Balance, beginning of year
Loans charged off
Recoveries
Provision for loan losses
Balance, end of year
$
$
2012
Years Ended December 31,
2011
(In Thousands)
18,077
$
(5,653)
634
8,972
22,030
22,030
(5,755)
883
9,100
26,258
$
$
$
2010
14,737
(7,208)
198
10,350
18,077
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 portion of the reserve classified as qualitative factors, 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. This qualitative factor 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 Company’s loan growth prospects, and evaluations of internal risk controls.
The following table presents an analysis of the allowance for loan losses by portfolio segment as of December 31, 2012 and
2011. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and
those associated with loans collectively evaluated.
Changes in the allowance for loan losses, segregated by loan type, during the years ended December 31, 2012 and 2011,
respectively, are as follows:
78
Commercial,
financial and Real estate - Real estate -
agricultural
construction
mortgage
Qualitative
Consumer
Factors
Total
(In Thousands)
Year Ended December 31, 2012
Allowance for loan losses:
Balance at December 31, 2011
Chargeoffs
Recoveries
Provision
Balance at December 31, 2012
$
$
6,627 $
(1,106)
125
2,587
8,233 $
6,542 $
(3,088)
58
2,999
6,511 $
3,295 $
(660)
692
1,585
4,912 $
531 $
(901)
8
561
199 $
5,035 $
-
-
1,368
6,403 $
22,030
(5,755)
883
9,100
26,258
Individually Evaluated for Impairment $
Collectively Evaluated for Impairment
577 $
7,656
1,013 $
5,498
1,921 $
2,991
- $
199
- $
6,403
3,511
22,747
December 31, 2012
Loans:
Ending Balance
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
$
Allowance for loan losses:
Balance at December 31, 2010
Chargeoffs
Recoveries
Provision
$
Balance at December 31, 2011
$
1,030,990 $
3,910
1,027,080
158,361 $
14,422
143,939
1,127,549 $
18,927
1,108,622
46,282 $
135
46,147
- $
-
-
2,363,182
37,394
2,325,788
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
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
Loans:
Ending Balance
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
$
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
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 weaknesses
are not corrected.
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.
79
Loans by credit quality indicator as of December 31, 2012 and 2011 were as follows:
December 31, 2012
Pass
Special
Mention
Substandard
Doubtful
Total
(In Thousands)
$
1,004,043 $
121,168
19,172
22,771
$
7,775 $
14,422
$
-
-
1,030,990
158,361
555,536
223,152
312,473
1,091,161
46,076
4,142
6,379
6,674
17,195
71
8,363
6,378
4,452
19,193
135
-
-
-
-
-
-
568,041
235,909
323,599
1,127,549
46,282
$
2,363,182
Total
$
2,262,448 $
59,209
$
41,525 $
December 31, 2011
Pass
Special
Mention
Substandard
Doubtful
Total
(In Thousands)
$
780,270 $
117,244
11,775
14,472
$
7,419 $
19,502
$
-
-
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
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate mortgage
Consumer
385,084
194,447
224,807
804,338
40,353
7,333
4,835
7,034
19,202
96
6,184
5,900
3,410
15,494
577
-
-
-
-
-
-
398,601
205,182
235,251
839,034
41,026
$
1,830,742
Total
$
1,742,205 $
45,545
$
42,992 $
80
Loans by performance status as of December 31, 2012 and 2011 are as follows:
December 31, 2012
Performing
Nonperforming
Total
(In Thousands)
$
1,030,714
151,901
$
276
6,460
$
1,030,990
158,361
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, 2011
Performing
Nonperforming
(In Thousands)
$
798,285
141,155
$
1,179
10,063
568,041
235,909
323,599
1,127,549
46,282
2,363,182
Total
799,464
151,218
398,601
205,182
235,251
839,034
41,026
1,830,742
$
$
$
565,255
235,456
323,359
1,124,070
46,139
2,352,824
$
2,786
453
240
3,479
143
10,358
397,809
204,512
234,558
836,879
40,651
1,816,970
$
792
670
693
2,155
375
13,772
81
Loans by past due status as of December 31, 2012 and 2011 are as follows:
December 31, 2012
Past Due Status (Accruing Loans)
30-59 Days
60-89 Days
90+ Days
Total Past
Due
Non-Accrual Current
Total Loans
(In Thousands)
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
$
1,699 $
-
385 $
-
- $
-
2,084 $
-
276 $
6,460
1,028,630 $ 1,030,990
158,361
151,901
1,480
420
516
2,416
108
10
16
-
26
-
-
-
-
-
8
1,490
436
516
2,442
116
2,786
453
240
563,765
235,020
322,843
568,041
235,909
323,599
3,479
1,121,628
1,127,549
135
46,031
46,282
$
4,223 $
411 $
8 $
4,642 $
10,350 $
2,348,190 $ 2,363,182
December 31, 2011
Past Due Status (Accruing Loans)
30-59 Days
60-89 Days
90+ Days
Total Past
Due
Non-Accrual Current
Total Loans
(In Thousands)
$
- $
2,234
- $
-
- $
-
- $
2,234
1,179 $
10,063
798,285 $
138,921
799,464
151,218
-
2,107
-
2,107
-
4,341 $
-
-
-
-
84
84 $
$
-
-
-
-
-
- $
-
792
397,809
398,601
2,107
-
670
693
202,405
234,558
205,182
235,251
2,107
84
4,425 $
2,155
375
13,772 $
834,772
40,567
839,034
41,026
1,812,545 $ 1,830,742
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
The following table presents details of the Company’s impaired loans as of December 31, 2012 and 2011, respectively. Loans
which have been fully charged off do not appear in the tables.
82
December 31, 2012
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In Thousands)
Average
Recorded
Investment
Interest Income
Recognized
in Period
$
2,602 $
6,872
2,856 $
7,894
- $
-
2,313 $
7,631
-
-
-
-
-
-
577
1,013
779
1,007
135
1,921
-
3,511
577
1,013
779
1,007
135
1,921
-
3,511 $
5,411
2,177
4,206
11,794
296
22,034
1,325
6,961
3,277
4,001
307
7,585
-
15,871
3,638
14,592
8,688
6,178
4,513
19,379
296
37,905 $
105
188
145
108
275
528
6
827
90
154
77
139
20
236
-
480
195
342
222
247
295
764
6
1,307
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
Total with no allowance recorded
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
5,111
2,166
4,151
11,428
135
21,037
1,308
7,550
3,195
4,002
302
7,499
-
16,357
5,361
2,388
4,249
11,998
344
23,092
1,308
8,137
3,195
4,002
302
7,499
-
16,944
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
Total impaired loans
$
3,910
14,422
8,306
6,168
4,453
18,927
135
37,394 $
4,164
16,031
8,556
6,390
4,551
19,497
344
40,036 $
83
December 31, 2011
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In Thousands)
Average
Recorded
Investment
Interest Income
Recognized in
Period
1,264 $
11,583
2,493
1,293
2,837
6,623
173
19,643
4,314
4,679
3,515
4,397
331
8,243
374
17,610
5,578
16,262
6,008
5,690
3,168
14,866
547
37,253 $
1,264 $
12,573
2,493
1,293
2,837
6,623
173
20,633
4,314
4,679
3,515
4,397
331
8,243
624
17,860
5,578
17,252
6,008
5,690
3,168
14,866
797
38,493 $
- $
-
-
-
-
-
-
-
1,382
1,482
88
904
-
992
325
4,181
1,382
1,482
88
904
-
992
325
4,181 $
1,501 $
10,406
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
6,027
5,725
3,083
14,835
598
35,483 $
74
226
153
44
162
359
6
665
226
94
365
198
22
585
-
905
300
320
518
242
184
944
6
1,570
$
With no allowance recorded:
Commercial, financial
and agricultural
Real estate - construction
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total with no allowance recorded
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
Total impaired loans
$
Troubled Debt Restructurings (“TDR”) at December 31, 2012 and 2011 totaled $12.3 million and $4.5 million, respectively.
The increase for the year primarily consists of two relationships that were added in the first and third quarters of 2012. At
December 31, 2012, the Company had a related allowance for loan losses of $1,442,000 allocated to these TDRs, compared to
$439,000 at December 31, 2011. The Company had three TDR loans to one borrower in the amount of $2.8 million enter into
payment default status during the first quarter of 2012. The assets securing these loans are under a letter of intent to sell at a
purchase price that is expected to be sufficient to pay the full principal owed. The final contract is still in negotiation. All
other loans classified as TDRs as of December 31, 2012 are performing as agreed under the terms of their restructured plans.
The following table presents an analysis of TDRs as of December 31, 2012 and 2011.
84
December 31, 2012
Pre-
Post-
Modification Modification
Outstanding
Outstanding
Recorded
Investment
Recorded
Investment
December 31, 2011
Pre-
Post-
Modification Modification
Outstanding
Outstanding
Recorded
Investment
Recorded
Investment
Number of
Contracts
Number of
Contracts
(In Thousands)
2 $
15
1,168 $
3,213
1,168
3,213
2 $
-
1,369 $
-
3
5
1
9
-
3,121
1,709
302
5,132
-
26 $
9,513 $
3,121
1,709
302
5,132
-
9,513
3
-
1
4
-
2,785
-
331
3,116
-
6 $
4,485 $
1,369
-
2,785
-
331
3,116
-
4,485
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
- $
-
3
-
-
3
-
3 $
-
-
2,786
-
-
2,786
-
2,786
- $
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
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
Troubled Debt Restructurings
That Subsequently Defaulted
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, 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 years ended December 31, 2012
and 2011 are as follows:
Years Ended December 31,
2012
2011
Balance, beginning of year
Advances
Repayments
Participations
Balance, end of year
$
$
(In Thousands)
$
9,047
7,630
(8,096)
3,819
12,400
$
6,825
7,926
(4,204)
(1,500)
9,047
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, 2012, 2011 and 2010 follows:
85
Balance at beginning of year
Transfers from loans and capitalized expenses
Foreclosed properties sold
Writedowns and partial liquidations
Balance at end of year
2012
$ 12,275
2,695
(2,967)
(2,318)
$ 9,685
2011
$ 6,966
9,029
(3,334)
(386)
$ 12,275
2010
$ 12,525
5,447
(7,995)
(3,011)
$ 6,966
NOTE 5.
PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Land and building
Furniture and equipment
Leasehold improvements
Accumulated depreciation
December 31,
2012
(In
Thousands)
2011
$
$
1,724 $
8,642
4,742
15,108
(6,261)
8,847 $
-
5,224
4,436
9,660
(5,069)
4,591
The provisions for depreciation charged to occupancy and equipment expense for the years ended December 31, 2012, 2011
and 2010 were $1,218,000, $1,173,000 and $1,066,000, respectively.
The Company leases land and building space under non-cancellable operating leases. Future minimum lease payments under
non-cancellable operating leases are summarized as follows:
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, 2012, 2011 and 2010, annual rental expense on operating leases was $2,195,000,
$2,060,000 and $1,734,000, respectively.
NOTE 6.
VARIABLE INTEREST ENTITIES (VIEs)
The Company utilizes special purpose entities (SPEs) that constitute investments in limited partnerships that undertake certain
development projects to achieve federal and state tax credits. These SPEs are typically structured as VIEs and are thus subject
to consolidation by the reporting enterprise that absorbs the majority of the economic risks and rewards of the VIE. To
determine whether it must consolidate a VIE, the Company analyzes the design of the VIE to identify the sources of variability
within the VIE, including an assessment of the nature of risks created by the assets and other contractual obligations of the
VIE, and determines whether it will absorb a majority of that variability.
The Company has invested in a limited partnership for which it determined it is not the primary beneficiary, and which thus is
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, 2012 and 2011 was $313,000 and $504,000, respectively, and is included in
other assets.
86
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, 2012 and 2011 was $3,192,000 and $3,403,000, respectively, of which
$2,270,000 in 2012 and 2011 is included in loans of the Company. The remaining amounts are included in other assets.
NOTE 7.
DEPOSITS
Deposits at December 31, 2012 and 2011 were as follows:
Noninterest-bearing demand
Interest-bearing checking
Savings
Time
Time, $100,000 and over
December 31,
2012
2011
(In Thousands)
$
545,174 $
1,551,158
19,560
69,179
326,501
2,511,572 $
$
418,810
1,325,451
15,638
71,368
312,620
2,143,887
The scheduled maturities of time deposits at December 31, 2012 were as follows:
2013
2014
2015
2016
2017
$
$
(In Thousands)
247,482
87,433
21,167
26,437
13,161
395,680
At December 31, 2012 and 2011, overdraft deposits reclassified to loans were $3,860,000 and $876,000, respectively.
NOTE 8.
FEDERAL FUNDS PURCHASED
At December 31, 2012, The Company had $117.1 million in federal funds purchased from its respondent banks that are clients
of its correspondent banking unit, compared to $79.3 million at December 31, 2011. The Company was paying an interest rate
of 0.25% on these balances at December 31, 2012.
At December 31, 2012, the Company had available lines of credit totaling approximately $130 million with various financial
institutions for borrowing on a short-term basis, with no amount outstanding. Available lines with these same banks totaled
approximately $140 million at December 31, 2011. These lines are subject to annual renewals with varying interest rates.
NOTE 9.
OTHER BORROWINGS
Other borrowings of $19.9 million are comprised of the Company’s 5.5% Subordinated Notes due November 9, 2022, which
were issued in a private placement in November 2012. The notes pay interest semi-annually.
On June 1, 2012, the Company paid off its 8.25% Subordinated Note due June 1, 2016 in the aggregate principal amount of $5
million. This note was payable to one accredited investor and was issued on June 23, 2009.
On November 8, 2012, the Company redeemed all of its outstanding 8.5% Junior Subordinated Deferrable Interest Debentures
due 2038, which were held by ServisFirst Capital Trust I. As a result, all of the outstanding 8.5% Trust Preferred Securities
and 8.5% Common Securities of the Trust were redeemed. The redemption price for the Trust Preferred Securities was $1,000
per security, for a total principal amount of $15 million, plus accrued distributions up to the redemption date. The Junior
Subordinated Debentures were originally issued on September 2, 2008, and in accordance with their terms, were subject to
87
option redemption by the Company on or after September 1, 2011. Pursuant to the terms of its Amended and Restated Trust
Agreement, ServisFirst Capital Trust I is required to use the proceeds it receives from the redemption of the Junior
Subordinated Debentures to redeem its Trust Preferred Securities and 8.5% Common Securities on the same day.
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.
NOTE 10.
SF HOLDING 1, INC. AND SF REALTY 1, INC.
In January 2012, the Company formed SF Holding 1, Inc., an Alabama corporation, and its subsidiary, SF Realty 1, Inc., an
Alabama corporation. SF Realty 1 elected to be treated as a real estate investment trust (“REIT”) for U.S. income tax
purposes. SF Realty 1 holds and manages participations in residential mortgages and commercial real estate loans originated
by ServisFirst Bank. SF Holding 1, Inc. and SF Realty 1, Inc. are both consolidated into the Company.
NOTE 11.
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 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 12.
DERIVATIVES
During 2008, the Company entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet customer
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, 2012, the Company was party to two swaps with
notional amounts totaling approximately $11.1 million with customers and two swaps with notional amounts totaling
approximately $11.1 million with a regional correspondent bank. These swaps qualify as derivatives, but are not designated as
hedging instruments. The Company has recorded the value of these swaps at $490,000 in offsetting entries in other assets and
other liabilities.
88
The Company has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis.
When a rate is committed to a borrower, it is based on the best price that day and locked with the investor for the customer for
a 30-day period. In the event the loan is not delivered to the investor, the Company has no risk or exposure with the investor.
The interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. The fair
values of the Company’s agreements with investors and rate lock commitments to customers as of December 31, 2012 and
December 31, 2011 were not material.
NOTE 13.
EMPLOYEE AND DIRECTOR BENEFITS
At December 31, 2012, the Company has two stock-based compensation plans, which are described below. The compensation
cost that has been charged against income for the plans was approximately $1,049,000, $975,000 and $713,000 for the years
ended December 31, 2012, 2011 and 2010, 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 stockholder
approval during 2006, the 2005 Plan was amended in order to allow the Company to grant stock options for up to 1,025,000
shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the 2005 Plan.
Option awards are generally granted with an exercise price equal to the estimated fair market value of the Company’s stock at
the date of grant; those option awards vest in varying amounts from 2007 through 2015 and are based on continuous service
during that vesting period and have a ten-year contractual term. Dividends are not paid on unexercised options and dividends
are not subject to vesting. The 2005 Plan provides for accelerated vesting if there is a change in control (as defined in the
2005 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, 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, 2012, there are a total of 257,000 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 vested 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 79 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
2012
2011
19.80 %
- %
6.5
1.05 %
26.50 %
0.37 %
6.5
2.21 %
2010
26.00 %
- %
7.0
2.10 %
The weighted average grant-date fair value of options granted during the years ended December 31, 2012, December 31, 2011
and December 31, 2010 was $6.59, $7.82 and $7.91, respectively.
The following tables summarize stock option activity.:
89
Year Ended December 31, 2012:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Shares
Aggregate
Intrinsic Value
(In Thousands)
1,073,800 $
45,500
(288,130)
(14,670)
816,500 $
18.33
30.00
12.71
24.54
20.87
6.0 $
9.3
2.4
-
5.8 $
12,508
130
5,846
-
9,905
Exercisable at December 31, 2012
412,825 $
14.03
3.6 $
7,831
Year Ended December 31, 2011:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
881,000 $
233,500
(40,700)
-
1,073,800 $
15.65
27.16
10.53
15.00
18.33
6.9 $
9.3
3.8
-
6.0 $
8,238
-
792
-
12,508
Exercisable at December 31, 2011
442,940 $
13.19
4.4 $
7,447
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
6.8 $
9.4
-
-
6.9 $
8,483
-
150
-
8,238
Exercisable at December 31, 2010
272,627 $
11.96
5.1 $
3,555
Exercisable options at December 31, 2012 were as follows:
Range of
Exercise Price
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (years)
$
10.00
11.00
15.00
20.00
25.00
106,500 $
119,500
101,830
47,995
37,000
412,825 $
10.00
11.00
15.00
20.00
25.00
14.03
Aggregate
Intrinsic Value
(In Thousands)
2,450
2,629
1,833
624
296
7,832
2.4 $
3.3
3.9
4.8
5.7
3.6 $
As of December 31, 2012, there was $1,795,000 of total unrecognized compensation cost related to non-vested stock options.
The cost is expected to be recognized on the straight-line method over the next 2.1 years. The total fair value of shares vested
during the year ended December 31, 2012 was $404,000.
90
Restricted Stock
The Company has issued restricted stock, and currently has 20,500 non-vested shares issued. The value of restricted stock
awards is determined to be the current value of the Company’s stock, and this total value will be recognized as compensation
expense over the vesting period, which is five years from the date of grant. As of December 31, 2012, there was $360,000 of
total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over
the remaining 1.7 years of the restricted stock’s vesting period.
Stock Warrants
In recognition of the efforts and financial risks undertaken by the organizers of ServisFirst Bank (the “Bank”) in 2005, the
Bank granted warrants to organizers to purchase a total of 60,000 shares of Bank common stock at a price of $10, which was
the fair market value of the Bank’s common stock at the date of the grant. The warrants became warrants to purchase a like
number of shares of the Company’s common stock upon the formation of the Company as a holding company for the Bank.
The warrants vest in equal annual increments over a three-year period commencing on the first anniversary date of the Bank’s
incorporation and will terminate on the tenth anniversary of the incorporation date. All of these warrants were exercised as of
December 31, 2012 and there were 20,000 outstanding as of December 31, 2011.
The Company issued warrants for 75,000 shares of common stock with an exercise price of $25 per share in the third quarter
of 2008. These warrants were issued in connection with trust preferred securities. There were 70,500 warrants outstanding as
of December 31, 2012 and 75,000 warrants were outstanding as of December 31, 2011.
The Company issued warrants for 15,000 shares of common stock with an exercise price of $25 per share in the second quarter
of 2009. These warrants were issued in connection with the issuance of the Company’s 8.25% Subordinated Note.
As of December 31, 2012, all warrants were fully vested.
Retirement Plans
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
$1,167,000, $946,000 and $377,000 for 2012, 2011 and 2010, respectively. The Company’s board of directors approved
additional discretionary matches for 2012 and 2011 based on the profits of the Company during those years. The additional
matches were 4% and 3%, respectively, and amounted to $576,000 and $432,000, respectively, and are included in the
expenses above.
NOTE 14.
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
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 15.
REGULATORY MATTERS
The Bank is subject to dividend restrictions set forth in the Alabama Banking Code and 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 these restrictions, the Bank would be limited to paying $90.1 million in dividends as of December 31, 2012.
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.
91
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, 2012, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2012, the most recent notification from the Federal Deposit Insurance Corporation categorized ServisFirst
Bank as well capitalized under the regulatory framework for prompt corrective action. 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, 2012.
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, 2012:
Total Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
$
287,136
284,141
11.78 % $
11.66 %
194,943
194,942
8.00 %
8.00 % $
N/A
243,678
N/A
10.00 %
Tier I Capital to Risk Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average Assets:
Consolidated
ServisFirst Bank
As of December 31, 2011:
Total Capital to Risk Weighted Assets:
240,961
257,883
9.89 %
10.58 %
97,472
97,471
240,961
257,883
8.43 %
9.03 %
114,323
114,227
4.00 %
4.00 %
4.00 %
4.00 %
N/A
146,207
N/A
142,784
N/A
6.00 %
N/A
5.00 %
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
11.39 %
11.23 %
219,350
216,295
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 %
NOTE 16.
OTHER OPERATING INCOME AND EXPENSES
The major components of other operating income and expense included in noninterest income and noninterest expense are as
follows:
92
2012
Years Ended December 31,
2011
(In Thousands)
2010
Other Operating Income
(Loss) gain on sale of other real estate owned
Credit card income
Other
Other Operating Expenses
Postage
Telephone
Data processing
Other loan expenses
Supplies
Customer and public relations
Marketing
Sales and use tax
Donations and contributions
Directors fees
Prepayment penalties FHLB advances
Other
$
$
$
$
(105) $
1,064
744
1,703 $
76 $
481
650
1,207 $
159 $
385
2,202
2,836
320
791
454
198
482
286
-
2,609
10,722 $
194 $
409
2,023
2,406
356
689
406
208
437
235
738
2,313
10,414 $
(203)
30
744
571
173
358
1,983
1,027
263
477
313
141
261
216
-
2,071
7,283
NOTE 17.
INCOME TAXES
The components of income tax expense are as follows:
2012
Year Ended December 31,
2011
(In Thousands)
2010
Current
Deferred
$
Income tax expense
$
19,301 $
(2,181)
17,120 $
13,629 $
(1,240)
12,389 $
11,570
(2,212)
9,358
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:
93
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
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
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
Depreciation
Deferred loan fees
Allowance for loan losses
Nonqualified equity awards
Other
Net deferred income tax assets
Year Ended December 31, 2012
% of Pre-tax
Earnings
Amount
(In Thousands)
$
18,047
35.00 %
709
(1,007)
(568)
121
(182)
17,120
1.37 %
(1.95)%
(1.10)%
0.23 %
(0.35)%
33.20 %
$
Year Ended December 31, 2011
% of Pre-tax
Earnings
Amount
(In Thousands)
$
12,540
35.00 %
967
(875)
(137)
128
(234)
12,389
2.70 %
(2.44)%
(0.38)%
0.36 %
(0.65)%
34.59 %
$
Year Ended December 31, 2010
% of Pre-tax
Earnings
Amount
(In Thousands)
$
9,358
35.00 %
715
(773)
144
(86)
9,358
2.67 %
(2.89)%
0.54 %
(0.32)%
35.00 %
2012
$
December 31,
2011
(In Thousands)
452
115
(4,220)
(489)
(176)
8,509
436
287
4,914 $
1,064 $
101
(3,929)
(509)
(237)
10,142
583
171
7,386 $
2010
646
127
(1,528)
(206)
(72)
6,974
194
231
6,366
$
$
$
The Company believes its net deferred tax asset is recoverable as of December 31, 2012 based on the expectation of future
taxable income and other relevant considerations.
94
Accounting Standards Codification (“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, 2012,
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, 2012. As of December 31, 2012, 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, 2010 through 2012. The Company is also currently open to audit by the State of Alabama for the years ended
December 31, 2010 through 2012, and open to audit by the state of Florida for the years ended December 31, 2011 and 2012,
as we opened our first office in the State of Florida in 2011.
NOTE 18.
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 approximate commitments and contingent
liabilities is as follows:
Commitments to extend credit
Credit card arrangements
Standby letters of credit and
financial guarantees
Total
2012
2011
2010
(In Thousands)
$
860,421 $
25,699
697,939 $
19,686
538,719
17,601
36,374
922,494 $
42,937
760,562 $
47,103
603,423
$
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 19.
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 the market area.
The Company’s loan portfolio is concentrated primarily 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.
NOTE 20.
EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted earnings per common share include
the dilutive effect of additional potential common shares issuable under stock options and warrants, as well as the
common shares issuable upon conversion of the Company’s 6% Mandatory Convertible Trust Preferred Securities due
March 15, 2040.
95
2012
Years Ended December 31,
2011
(Dollar Amounts In Thousands Except Per Share
Amounts)
2010
5,996,437
34,045 $
5.68
5,759,524
23,238 $
4.03 $
5,519,151
17,378
3.15
$
$
5,996,437
5,759,524
5,519,151
945,315
989,639
775,453
6,941,752
34,045 $
6,749,163
23,238 $
6,294,604
17,378
569 $
568 $
473
34,614 $
4.99 $
23,806 $
3.53 $
17,851
2.84
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 available to common stockholders, adjusted
for effect of debt conversion
Diluted earnings per common share
$
$
$
$
NOTE 21.
RELATED PARTY TRANSACTIONS
Loans
As more fully described in Note 3, the Company had outstanding loan balances to related parties as of December 31, 2012 and
2011 in the amount of $12.4 million and $9.0 million, respectively.
NOTE 22.
FAIR VALUE MEASUREMENT
Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used
to measure fair value, as of the measurement date, into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The
fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest
priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.
Debt Securities. Where quoted prices are available in an active market, securities are classified within Level 1 of the
hierarchy. Level 1 securities include highly liquid government securities such as U.S. treasuries and exchange-traded equity
securities. For securities traded in secondary markets for which quoted market prices are not available, the Company
generally relies on prices obtained from independent vendors. 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 service 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 cases
where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.
96
Interest Rate Swap Agreements. The fair value is estimated by a third party using inputs that are observable or that can be
corroborated by observable market data and, therefore, are classified within Level 2 of the hierarchy. These fair value
estimations include primarily market observable inputs such as yield curves and option volatilities, and include the value
associated with counterparty credit risk.
Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not
probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a
discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are
based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating cash flows
does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value
than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is
generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates,
capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values,
if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or
market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition.
Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based
on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation
hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.
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. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted
accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired
loans that are measured at fair value on a nonrecurring basis was $4,586,000 and $5,419,000 during the years ended December
31, 2012 and 2011, 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 owned (“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. A net loss on the sale and write-downs of OREO of $2,166,000 and
$266,000 was recognized during the years ended December 31, 2012 and 2011. These charges were for write-downs in the
value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the
hierarchy.
The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as
of December 31, 2012 and December 31, 2011:
97
Fair Value Measurements at December 31, 2012 Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Total
- $
-
-
-
-
28,386 $
73,466
118,177
13,848
389
- $
-
-
-
-
28,386
73,466
118,177
13,848
389
Assets Measured on a Recurring Basis:
Available-for-sale securities:
U.S. Treasury and government sponsored agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Interest rate swap agreements
$
Liabilities Measured on a Recurring Basis:
Interest rate swap agreements
$
- $
389 $
- $
389
Assets Measured on a Recurring Basis:
Available-for-sale securities
U.S. Treasury and government sponsored 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:
Interest rate swap agreements
$
$
$
Fair Value Measurements at December 31, 2011 Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Total
- $
-
-
-
-
-
- $
- $
99,622 $
92,580
100,526
1,081
617
9
294,435 $
617 $
- $
-
-
-
-
-
- $
- $
99,622
92,580
100,526
1,081
617
9
294,435
617
98
The carrying amount and estimated fair value of the Company’s financial instruments were as follows::
Fair Value Measurements at December 31, 2012 Using
Quoted Prices in
Active Markets
Significant Other
Significant
for Identical
Observable
Unobservable
Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
Total
Assets Measured on a Nonrecurring Basis:
Impaired loans, net of related allowance
$
Other real estate owned and repossessed assets
Total assets at fair value
(In Thousands)
-
-
-
- $
-
- $
33,883 $
9,685
43,568 $
33,883
9,685
43,568
Fair Value Measurements at December 31, 2011 Using
Quoted Prices in
Active Markets
Significant Other
Significant
for Identical
Observable
Unobservable
Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
Total
Assets Measured on a Nonrecurring Basis:
Impaired loans, net of related allowance
Other real estate owned
Total assets at fair value
$
$
(In Thousands)
- $
-
- $
- $
-
- $
33,072 $
12,275
45,347 $
33,072
12,275
45,347
The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other
than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly,
the fair value estimates may not be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain
financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate
fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial
instruments.
Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the
hierarchy. Level 1 securities include highly liquid government securities such as U.S. treasuries and exchange-traded equity
securities. For securities traded in secondary markets for which quoted market prices are not available, the Company
generally relies on prices obtained from independent vendors. 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 service 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 cases
where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.
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 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
99
value as prescribed by ASC 820 and generally produces a higher value than an exit-price approach. The measurement of the
fair value of loans is classified within Level 3 of the fair value hierarchy.
Mortgage loans held for sale: Loans are committed to be delivered to investors on a “best efforts delivery” basis within 30
days of origination. Due to this short turn-around time, the carrying amounts of the Company’s loan purchase agreements
with investors approximate their fair values.
Derivatives: The fair value of the derivative agreements are estimated by a third party using inputs that are observable or can
be corroborated by observable market data. As part of the Company’s procedures, the price provided from the third party is
evaluated for reasonableness given market changes. These measurements are classified within Level 2 of the fair value
hierarchy.
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 using interest rates currently offered for deposits with similar remaining maturities. The fair
value of the Company’s time deposits do not take into consideration the value of the Company’s long-term relationships with
depositors, which may have significant value. Measurements of the fair value of certificates of deposit are classified within
Level 2 of the fair value hierarchy.
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. These
measurements are classified within Level 2 in the fair value hierarchy.
Subordinated debentures: The fair value of subordinated debentures 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. These
measurements are classified within Level 2 in the fair value hierarchy.
Loan commitments: The fair values of the Company’s off-balance sheet financial instruments are based on fees currently
charged to enter into similar agreements. Since the majority of the Company’s other off-balance-sheet instruments consist of
non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.
The carrying amount, estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments as
of December 31, 2012 and December 31, 2011 are presented in the following table. This table includes those financial assets
and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.
The Company’s financial assets and financial liabilities which are carried at fair value were as follows:.
100
December 31,
2012
2011
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(In Thousands)
Financial Assets:
Level 2 Inputs:
$
Investment securities available for sale
Investment securities held to maturity
Restricted equity securities
Mortgage loans held for sale
Bank owned life insurance contracts
Derivatives
233,877 $
25,967
3,941
25,826
57,014
389
233,877 $
27,350
3,941
25,826
57,014
389
293,809 $
15,209
3,501
17,859
40,390
626
293,809
15,999
3,501
17,859
40,390
626
Level 3 Inputs:
Loans, net
Financial Liabilities:
Level 2 Inputs:
Deposits
Other borrowings
Subordinated debentures
Derivatives
$
2,336,924 $
2,327,780 $
1,808,712 $
1,811,612
$
2,511,572 $
19,917
15,050
389
2,516,320 $
19,917
15,050
389
2,143,887 $
4,954
30,514
617
2,150,308
5,377
27,402
617
NOTE 23.
PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheet of the Company as of December 31, 2012 and 2011 and the
condensed statements of income and cash flows for the years ended December 31, 2012, 2011 and 2010.
BALANCE SHEETS DECEMBER 31, 2012 AND 2011
(In Thousands)
ASSETS
Cash and due from banks
Investment in subsidiary
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other borrowings
Subordinated debentures
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, 2012 and no shares
authorized, issued and outstanding at December 31, 2011
Common stock, par value $.001 per share; 50,000,000 shares authorized;
6,268,812 shares issued and outstanding at December 31, 2012 and
5,932,182 shares issued and outstanding at December 31, 2011
Additional paid-in capital
Retained earnings
101
$
$
$
2012
2011
3,264 $
265,229
18
268,511 $
2,908
223,753
293
226,954
19,917 $
15,050
287
35,254
-
30,514
148
30,662
39,958
39,958
6
93,505
92,492
6
87,805
61,581
Accumulated other comprehensive income
Total stockholders' equity
Total liabilites and stockholders' equity
7,296
233,257
268,511 $
6,942
196,292
226,954
$
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Income:
Dividends received from subsidiary
Other income
Total income
Interest on borrowings
Other operating expenses
Total expenses
undistributed earnings of subsidiary
Income tax benefit
earnings of subsidiary
Equity in undistributed earnings of subsidiary
Net income
Dividends on preferred stock
Net income available to common stockholders
2012
2011
2010
$
$
- $
41
41
2,213
325
2,538
(2,497)
(944)
(1,553)
35,998
34,445
400
34,045 $
800 $
43
843
2,345
291
2,636
(1,793)
(976)
(817)
24,255
23,438
200
23,238 $
1,230
42
1,272
2,236
295
2,531
(1,259)
(924)
(335)
17,713
17,378
-
17,378
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Other
Equity in undistributed earnings of subsidiary
Net cash (used in) provided by operating activities
Investing activities
Investment in subsidiary
Net cash used in investing activities
Financing activities
Proceeds from other borrowings
Repayment of subordinated debentures
Proceeds from issuance of subordinated debentures
Proceeds from issuance of preferred stock
Proceeds from issuance of common stock
Dividends on preferred stock
Dividends on common stock
Net cash provided by financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2012
2011
2010
$
34,445 $
23,438 $
17,378
878
(35,998)
(675)
-
-
19,917
(15,464)
-
-
112
(400)
(3,134)
1,031
$
$
356 $
2,908
3,264 $
(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
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.
102
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
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
$
$
$
$
$
$
2012 Quarter Ended
(Dollars in thousands, except per share data)
March 31
June 30
September 30
25,571 $
3,833
21,738
2,383
8,155
1.37 $
1.20 $
26,654 $
3,749
22,905
3,083
8,231
1.38 $
1.21 $
December 31
29,055
3,624
25,431
2,449
8,457
1.40
1.23
27,743 $
3,695
24,048
1,185
9,202
1.53 $
1.35 $
2011 Quarter Ended
(Dollars in thousands, except per share data)
March 31
June 30
September 30
20,961 $
3,985
16,976
2,231
4,871
0.88 $
0.77 $
22,080 $
4,032
18,048
1,494
5,845
1.02 $
0.89 $
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 $
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, 2012.
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, 2012.
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, 2012, that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
under Exchange Act Rules 13a-15(f) and 14d-14(f). Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
As of December 31, 2012, 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, 2012, based on
those criteria.
103
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, 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.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
We respond to this Item by incorporating by reference the material responsive to this Item in our definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with our 2013 Annual Meeting of Stockholders.
Information regarding the Company’s executive officers is provided in Part I, Item 1 of the Form 10-K.
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.
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 2013 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 2013 Annual Meeting of Stockholders. The
information called for by this item relating to “Securities Authorized for Issuance Under Equity Compensation Plans” is
provided in Part II, Item 5 of this Form 10-K.
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 2013 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 2013 Annual Meeting of Stockholders.
ITEM 15.
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
PART IV
(a) The following statements are filed as a part of this Annual Report on Form 10-K
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on
104
Page
61
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, 2012 and 2011
Consolidated Statements of Income for the Years Ended December 31,
2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
(b) The following exhibits are furnished with this Annual Report on Form 10-K
EXHIBIT NO.
NAME OF EXHIBIT
62
63
64
65
66
67
68
69
71
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.1
4.11
10.1
Plan of Reorganization and Agreement of Merger dated August 29, 2007 (1)
Certificate of Incorporation, as amended (2)
Bylaws (1)
Form of Common Stock Certificate (1)
Revised Form of Common Stock Certificate (3)
Form of Common Stock Purchase Warrant dated September 2, 2008 (4)
Warrant to Purchase Share of Common Stock dated June 23, 2009 (7)
Amended and Restated Trust Agreement of ServisFirst Capital Trust II, dated March 15, 2010 (8)
Indenture dated March 15, 2010, by and between ServisFirst Bancshares, Inc. and Wilmington
Trust Company (8)
Preferred Securities Guaranty Agreement, dated March 15, 2010, by and between ServisFirst
Bancshares, Inc. and Wilmington Trust Company (8)
Small Business Fund - Securities Purchase Agreement dated June 21, 2011 between the Secretary
of the Treasury and ServisFirst Bancshares, Inc. (9)
Certificate of Designation of Senior Non-cumulative Perpetual Preferred Stock, Series A of
ServisFirst Bancshares, Inc. (9)
Note Purchase Agreement, dated November 9, 2012, between ServisFirst Bancshares, Inc. and
certain accredited investors (10)
Form of 5.50% Subordinated Note due November 9, 2022 (10)
2005 Amended and Restated Stock Incentive Plan (1)*
105
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
Change in Control Agreement with William M. Foshee date May 20, 2005 (1)*
Change in Control Agreement with Clarence C. Pouncey III date 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 (5)*
Statement Regarding Computation of Earnings Per Share is included herein at Note 20 to the
Consolidated Financial Statements in Item 8.
Code of Ethics for Principal Financial Officers (6)
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
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
XBRL Instance Document
XBRL Schema Documents
XBRL Calculation Linkbase Document
XBRL Label Linkbase Document
XBRL Presentation Linkbase Document
XBRL Definition Linkbase Document
(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 Exhibit 3.01 of ServisFirst Bancshares, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2012, and incorporated herein by reference.
(3) 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.
(4) 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.
(5) Previously filed as an exhibit to ServisFirst Bancshares, Inc.'s Definitive Proxy Statement on Schedule 14A
relating to the 2009 Annual Meeting of Stockholders and incorporated herein by reference.
(6) Previously filed as an exhibit to ServisFirst Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.
(7) Previously filed as an exhibit to ServisFirst Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
106
December 31, 2009, and incorporated herein by reference.
(8) 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.
(9) 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.
(10) Previously filed as an exhibit to ServisFirst Bancshares, Inc.'s Current Report on Form 8-K dated November 8,
2012, and incorporated herein by reference.
* Management contract or compensatory plan arrangements.
107
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.
SIGNATURES
SERVISFIRST BANCSHARES, INC.
By: /s/Thomas A. Broughton, III
Thomas A. Broughton, III
President and Chief Executive Officer
Dated: March 12, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/Thomas A. Broughton, III
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
President, Chief Executive
Officer and Director (Principal
Executive Officer)
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 12, 2013
March 12, 2013
Chairman of the Board
March 12, 2013
Director
Director
Director
Director
March 12, 2013
March 12, 2013
March 12, 2013
March 12, 2013
_________________
*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 and on the date indicated below.
/s/ William M. Foshee
William M. Foshee
Attorney-in-Fact
March 12, 2013
108
EXHIBIT INDEX
(b) The following exhibits are furnished with this Annual Report on Form 10-K
EXHIBIT NO. NAME OF EXHIBIT
21
23.1
23.2
24
31.1
31.2
32.1
32.2
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
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Documents
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
List of Subsidiaries
Subsidiaries
ServisFirst Bank (1)
ServisFirst Capital Trust II (2)
SF Holding 1, Inc. (3)
SF Realty 1, Inc. (4)
Jurisdiction or State of Incorporation
Alabama
Delaware
Alabama
Alabama
(1) ServisFirst Bank is organized under the laws of the State of Alabama and is a wholly-owned subsidiary of ServisFirst
Bancshares, Inc.
(2) ServisFirst Capital Trust II is a statutory business trust which was established to issue capital trust preferred securities and is a
wholly-owned subsidiary of ServisFirst Bancshares, Inc.
(3) SF Holding 1, Inc. is a wholly-owned subsidiary of ServisFirst Bank
(4) SF Realty 1, Inc. is a wholly owned-subsidiary of SF Holding 1, Inc.
109
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the registration statements (No. 333-170507) on Form S-8 of ServisFirst
Bancshares, Inc. of our reports dated March 12, 2013, with respect to the consolidated balance sheets of ServisFirst
Bancshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the effectiveness of internal
control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012 Annual Report on
Form 10-K of ServisFirst Bancshares, Inc.
/s/ KPMG LLP
Birmingham, Alabama
March 12, 2013
Exhibit 23: Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-170507) of ServisFirst
Bancshares, Inc. of our report dated March 8, 2011, with respect to the consolidated financial statements of ServisFirst
Bancshares, Inc. included in the Annual Report on Form 10-K for the year ended December 31, 2010.
Birmingham, Alabama
March 12, 2013
POWER OF ATTORNEY
EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes Thomas A.
Broughton III and William M. Foshee, and each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all capacities to sign on his behalf the ServisFirst
Bancshares, Inc. Annual Report on Form 10-K for the year ended December 31, 2012.
Hereby executed by the following persons in the capacities indicated on February 28, 2013, in Birmingham, Alabama.
Name
Title
/s/ Stanley M. Brock
Stanley M. Brock
/s/ Joseph R. Cashio
Joseph R. Cashio
/s/ James J. Filler
James J. Filler
/s/ Michael D. Fuller
Michael D. Fuller
/s/ Hatton C.V. Smith
Hatton C.V. Smith
Chairman of the Board
Director
Director
Director
Director
Section 302 Certification of the CEO
I, Thomas A. Broughton III, certify that:
1.
I have reviewed this Annual Report on Form 10-K of ServisFirst Bancshares, Inc.;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report, based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
person’s performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2013
/s/ Thomas A. Broughton III
Thomas A. Broughton III
President and Chief Executive Officer
A signed original of this written statement has been provided to the registrant and will be retained by the registrant and
furnished to the Securities and Exchange Commission or its staff upon request.
Section 302 Certification of the CFO
I, William M. Foshee, certify that:
1.
I have reviewed this Annual Report on Form 10-K of ServisFirst Bancshares, Inc.;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report, based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2013
/s/William M. Foshee
William M. Foshee
Chief Financial Officer
A signed original of this written statement has been provided to the registrant and will be retained by the registrant and
furnished to the Securities and Exchange Commission or its staff upon request
Section 906 Certification of the CEO
CERTIFICATION OF PERIODIC FINANCIAL REPORT
PURSUANT TO 18 U.S.C. SECTION 1350
Exhibit 32.1
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned
officer of ServisFirst Bancshares, Inc. (the “Company”) certifies that, to his knowledge, the Annual Report on Form 10-K of
the Company for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of
the Company.
Date: March 12, 2013
/s/Thomas A. Broughton III__________
Thomas A. Broughton III
President and Chief Executive Officer
A signed original of this written statement has been provided to the registrant and will be retained by the registrant and
furnished to the Securities and Exchange Commission or its staff upon request.
Section 906 Certification of the CFO
CERTIFICATION OF PERIODIC FINANCIAL REPORT
PURSUANT TO 18 U.S.C. SECTION 1350
Exhibit 32.2
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned
officer of ServisFirst Bancshares, Inc. (the “Company”) certifies that, to his knowledge, the Annual Report on Form 10-K of
the Company for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of
the Company.
Date: March 12, 2013
/s/William M. Foshee______________
William M. Foshee
Chief Financial Officer
A signed original of this written statement has been provided to the registrant and will be retained by the registrant and
furnished to the Securities and Exchange Commission or its staff upon request.