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 Mobile Arthur R. Outlaw Convention
Center, One South Water Street, Mobile, Alabama 36602 on Thursday, April 24, 2014, 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 for the year
ended December 31, 2013.
The business to be conducted at the Annual Meeting consists of (1) the election of six
directors; (2) the ratification of the appointment of KPMG LLP as our independent registered
public accounting firm for the year ending December 31, 2014; (3) the approval of the
amendment and restatement of our 2009 Stock Incentive Plan; and (4) 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, 2014;
“FOR” the amendment and restatement of our 2009 Stock Incentive Plan; 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
Birmingham, Alabama
March 19, 2014
TABLE OF CONTENTS
NOTICE OF 2014 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL
24, 2014 ........................................................................................................................................... 1(cid:2)
ABOUT THE ANNUAL MEETING .............................................................................................. 3(cid:2)
PROPOSAL 1: ELECTION OF DIRECTORS ............................................................................... 7(cid:2)
THE ROLE OF THE BOARD OF DIRECTORS ........................................................................... 9(cid:2)
COMMITTEES OF THE BOARD OF DIRECTORS .................................................................. 10(cid:2)
INDEPENDENCE OF THE BOARD OF DIRECTORS .............................................................. 13(cid:2)
COMMUNICATIONS WITH DIRECTORS ............................................................................... 13(cid:2)
CORPORATE GOVERNANCE GUIDELINES .......................................................................... 13(cid:2)
CODE OF BUSINESS CONDUCT .............................................................................................. 14(cid:2)
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ............ 14(cid:2)
DIRECTOR COMPENSATION .................................................................................................. 15(cid:2)
MEETINGS OF THE BOARD OF DIRECTORS ........................................................................ 15(cid:2)
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................................... 15(cid:2)
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE .......................... 16(cid:2)
COMPENSATION DISCUSSION AND ANALYSIS ................................................................. 16(cid:2)
REPORT OF THE COMPENSATION COMMITTEE ................................................................ 22(cid:2)
EXECUTIVE COMPENSATION ................................................................................................ 23(cid:2)
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR
CHANGE IN CONTROL ............................................................................................................. 27(cid:2)
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .. 29(cid:2)
PROPOSAL 2: RATIFICATION OF KPMG LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER
31, 2014 ......................................................................................................................................... 31(cid:2)
REPORT OF THE AUDIT COMMITTEE ................................................................................... 32(cid:2)
PROPOSAL 3: APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE
2009 STOCK INCENTIVE PLAN ............................................................................................... 33(cid:2)
EQUITY COMPENSATION PLAN INFORMATION ............................................................... 42(cid:2)
PROPOSAL 4: ADVISORY VOTE ON EXECUTIVE COMPENSATION .............................. 42(cid:2)
STOCKHOLDER PROPOSALS .................................................................................................. 43(cid:2)
GENERAL INFORMATION ....................................................................................................... 44(cid:2)
APPENDIX A ............................................................................................................................ A-1
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SERVISFIRST BANCSHARES, INC.
850 Shades Creek Parkway, Suite 200
Birmingham, Alabama 35209
NOTICE OF 2014 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 24, 2014
To Our Stockholders:
Notice is hereby given that our Annual Meeting of Stockholders will be held at the
Mobile Arthur R. Outlaw Convention Center, One South Water Street, Mobile, Alabama 36602
on Thursday, April 24, 2014, 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, 2014;
3.
4.
5.
to approve the amendment and restatement of our 2009 Stock Incentive Plan;
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 Mobile Arthur R. Outlaw Convention Center, are
posted on our website at servisfirstbancshares.investorroom.com.
Stockholders of record as of the close of business on March 10, 2014 are entitled to
notice of, and to vote their shares in person or by proxy at, the Annual Meeting.
YOUR VOTE IS IMPORTANT
IS
IT
IMPORTANT THAT YOU RETURN YOUR PROXY CARD.
THEREFORE, WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL
MEETING IN PERSON, PLEASE SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED RETURN ENVELOPE.
1
(cid:2)
(cid:2)
IS REQUIRED
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.
IF MAILED
By Order of the Board of Directors,
Secretary and Chief Financial Officer
Birmingham, Alabama
March 19, 2014
2
2014 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 24, 2014, at 5:00 p.m., Central Daylight Time, at the
Mobile Arthur R. Outlaw Convention Center, One South Water Street, Mobile, Alabama 36602.
The Notice of Annual Meeting of Stockholders, this Proxy Statement and the accompanying
Proxy Card are being mailed on or about March 19, 2014 to our stockholders of record as of the
close of business on March 10, 2014, 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, 2014; (3) the approval of the
amendment and restatement of our 2009 Stock Incentive Plan; (4) an advisory vote on our
executive compensation; and (5) such other business as may properly come before the Annual
Meeting. Our board of directors is not aware of any matters that will be brought before the
Annual Meeting, other than procedural matters, that are not listed above. However, if any other
matters properly come before the Annual Meeting, the individuals named on the Proxy Card, or
their substitutes, will be authorized to vote on those matters in their own judgment.
Who is entitled to vote?
Only stockholders of record at the close of business on March 10, 2014, the record date
for the Annual Meeting, are entitled to receive notice of the Annual Meeting and to vote shares
of common stock held as of the record date at the Annual Meeting. Each outstanding share of
common stock entitles its holder to cast one vote on each matter to be voted upon. There are no
cumulative voting rights.
3
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 2014 Annual Meeting of
Stockholders.
What is a Proxy Statement?
It is a document that Securities and Exchange Commission (“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, 7,420,812 shares of our common stock, $0.001 par value per share, held by 1,562
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.
What is the effect of an “abstain” vote or a “broker non-vote” on the proposals?
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.
A “broker non-vote” occurs if your shares are not registered in your name (that is, you
hold your shares in “street name”) and you do not provide the record holder of your share
(usually a bank, broker or other nominee) with voting instructions on any matter as to which a
broker may not vote without instructions from you, but the broker nevertheless provides a proxy
for your shares. Shares as to which a “broker non-vote” occurs are considered present for
4
purposes of determining whether a quorum exists, but are not considered votes cast or shares
entitled to vote with respect to a voting matter. The election of directors, the approval of the
amendment and restatement of our 2009 Stock Incentive Plan and the advisory vote on executive
compensation are not matters on which a broker may vote without your instructions. However,
the ratification of the appointment of KPMG LLP as our independent registered public
accounting firm is a routine matter, and brokers who do not receive instructions from you on
how to vote on that matter generally may vote on that matter in their discretion.
How do I vote by proxy?
On or about March 19, 2014, 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, 2013 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 2014, as more fully described in Proposal 2 below; (3) the approval of the amendment and
restatement of our 2009 Stock Incentive Plan, as more fully described in Proposal 3 below; and
(4) an advisory vote approving our executive compensation, as more fully described in Proposal
4 below.
If your Proxy Card is properly executed and received in time for voting, and not revoked,
your shares will be voted in accordance with your instructions marked on the Proxy Card. In the
absence of any instructions or directions to the contrary on any proposal on a Proxy Card, the
Management Proxies will vote all shares of common stock for which such Proxy Cards have
5
been received in favor of the approval of the above proposals for which no instructions were
indicated.
Our board of directors does not know of any matters other than the above proposals that
may be brought before the Annual Meeting. If any other matters should come before the Annual
Meeting, the Management Proxies will have discretionary authority to vote all proxies not
marked to the contrary with respect to such matters in accordance with their best judgment.
In particular, the Management Proxies will have discretionary authority to vote with
respect to the following matters that may come before the Annual Meeting: (i) approval of the
minutes of the prior meeting if such approval does not amount to ratification of the action or
actions taken at that meeting; (ii) any proposal omitted from the Proxy Statement and form of
proxy pursuant to Rules 14a-8 and 14a-9 under the Securities Exchange Act of 1934 (the
“Exchange Act”); and (iii) matters incident to the conduct of the Annual Meeting. In connection
with such matters, the Management Proxies will vote in accordance with their best judgment.
Who pays for this proxy solicitation?
We do. We will pay all costs in connection with the meeting, including the cost of
preparing, assembling and mailing the Notice of the Annual Meeting, Proxy Statement, Proxy
Card and our Annual Report to Stockholders for the year ended December 31, 2013, 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, 2013 (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 10, 2014,
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 2015 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 2014 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
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
Name
Thomas A. Broughton III
Age
58
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
63
60
70
56
63
Director
2007 Director
2007 Director
2007 Director
2007 Director
2005 Director
2005 Director
2005 Director
2005 Director
The following summarizes the business experience and background of each of our nominees.
7
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
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
8
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 served as Chair of the United
Way and President of the Birmingham Rotary Club. He has served on numerous non- profit
boards including Baptist Health System as well as a Trustee of his alma mater, Washington and
Lee University. 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
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
9
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 Corporate
Governance and Nominations. The governing charter for each of the three committees is
available on our website www.servisfirstbank.com under the “Investor Relations” tab.
Audit Committee
The Audit Committee assists our board of directors in maintaining the integrity of our
financial statements and of our financial reporting processes and systems of internal audit
controls, as well as our compliance with legal and regulatory requirements. The Audit
Committee reviews the scope of independent audits and assesses the results. The Audit
Committee meets with management to consider the adequacy of the internal control over, and the
objectivity of, financial reporting. The Audit Committee also meets with our independent
auditors and with appropriate financial personnel concerning these matters. The Audit
Committee selects, determines the compensation of, appoints and oversees our independent
auditors. The independent auditors periodically meet with the Audit Committee and always have
unrestricted access to the Audit Committee. The Audit Committee, which currently consists of
Michael D. Fuller (Chairman), J. Richard Cashio and Stanley M. Brock, met four times in 2013.
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 17-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
10
independence of the Marketplace Rules of the NASDAQ Global 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 (Chairman), J. Richard Cashio and
James J. Filler, met one time in 2013. 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 Global Market and an “outside director” for purposes of Section 162(m)
of the Internal Revenue Code of 1986.
Corporate Governance and Nominations Committee
The Corporate Governance and Nominations 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 Corporate Governance and Nominations Committee, which currently consists of Michael D.
Fuller, J. Richard Cashio and Stanley M. Brock (Chairman), did not meet during 2013. 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.
The Corporate Governance and Nominations 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 2014.
In evaluating nominees for director, the Corporate Governance and Nominations
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
11
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, 2013.
Names
Corporate Governance and Nominations
Audit
Compensation
Committee Membership
Thomas A. Broughton III
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C.V. Smith
Advisory Boards
X
X
X
X
X
X
X
X
X
In addition to the boards of directors of the Company and the Bank, which are identical in
composition, the Bank also has a non-voting advisory board of directors in each of the
Huntsville, Montgomery, Dothan and Mobile, 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:
Mobile Region:
E. Wayne Bonner
Dr. Hoyt A. “Tres” Childs, III
David J. Slyman, Jr.
Irma Tuder
Sidney R. White
Danny J. Windham
Thomas J. Young
Ray B. Petty
Todd Strange
G.L. Pete Taylor
W. Ken Upchurch, III
Alan E. Weil, Jr.
Randy Billingsley
Steve Crawford
Lowell Friedman
Barry Gritter
Dr. James M. Harrison
James Henderson
Pensacola Region:
Dothan Region:
Thomas M. Bizzell
Bo Carter
Leo Cyr
Matt Durney
Dr. Mark S. Greskovich
Ray Russenberger
Sandy Sansing
Roger Webb
Jerry Adams
Charles H. Chapman III
John Downs
Charles E. Owens
William C. (Bill) Thompson
Ken Johnson
John Lewis
12
INDEPENDENCE OF THE BOARD OF DIRECTORS
Our common stock is not listed on any exchange; therefore, the Exchange Act requires
that we select an exchange’s director independence requirements with which to comply. We
currently are seeking to list our common stock on the NASDAQ Global Market, and so have
complied with the director independence requirements of the NASDAQ Global Market. Our
Corporate Governance and Nominations Committee has conducted and will in the future
conduct, as deemed necessary, a review of director independence utilizing the listing standards
of the NASDAQ Global Market. During its most recent review, our board considered
transactions and relationships between each director or any member of his immediate family and
us and the Bank. Our board also considered whether there were any transactions or relationships
between directors or with any member of their immediate family (or any entity of which a
director or an immediate family member is an executive officer, general partner or significant
equity holder). The purpose of this review was to determine whether any such relationships or
transactions existed that were inconsistent with a determination that a director is independent.
Independent directors must be free of any relationship with us or our management that may
impair the director’s ability to make independent judgments.
Our Corporate Governance and Nominations 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
13
listed company rules and the Sarbanes-Oxley Act of 2002. A copy of our Governance Guidelines
is available free of charge on our website at www.servisfirstbank.com under the “Investor
Relations” tab. Some of the principal subjects covered by our Governance Guidelines comprise:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Director Qualifications, which include: a board candidate’s independence, experience,
knowledge, skills, expertise, integrity, ability to make independent analytical inquiries;
his or her understanding of our business and the business environment in which we
operate; and the candidate’s ability and willingness to devote adequate time and effort to
board responsibilities, taking into account the candidate’s employment and other board
commitments.
Responsibilities of Directors, which include: acting in the best interests of all
stockholders; maintaining
independence; developing and maintaining a sound
understanding of our business and the industry in which we operate; preparing for and
attending board and board committee meetings; and providing active, objective and
constructive participation at those meetings.
Director Access to Management and, as Necessary and Appropriate, Independent
Advisors, which cover: encouraging presentations to our board from the officers
responsible for functional areas of our business and from outside consultants who are
engaged to conduct periodic reviews of various aspects of our operations or the quality of
certain of our assets, such as the loan portfolio.
Director Orientation and Continuing Education, such as: programs to familiarize new
directors with our business, strategic plans, significant financial, accounting and risk
management issues; our compliance programs and conflicts policies; our code of business
conduct and ethics and our corporate governance guidelines. In addition, each director is
expected to participate in continuing education programs relating to developments in our
business and in corporate governance.
Regularly Scheduled Executive Sessions, without Management, will be held by our board
and by the Audit Committee, which meets separately with our independent auditors.
CODE OF BUSINESS CONDUCT
Our board of directors has adopted a Code of Ethics that applies to all of our employees,
officers and directors. The Code of Ethics covers compliance with law; fair and honest dealings
with us, with competitors and with others; fair and honest disclosure to the public; and
procedures for compliance with the Code of Ethics. A copy of our Code of Ethics is available
free of charge on our website at www.servisfirstbank.com under the “Investor Relations” tab.
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, 2013, and currently, the
members of this committee are Hatton C. V. Smith, J. Richard Cashio and James J. Filler. No
14
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.”)
DIRECTOR COMPENSATION
The following table sets forth information regarding the compensation of our non-
employee directors for the year ended December 31, 2013. 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)
($)
28,200
28,200
23,450
24,200
22,600
Stock Awards
(c)
($)
0
0
0
0
0
Total
(h)
($)
28,200
28,200
23,450
24,200
22,600
MEETINGS OF THE BOARD OF DIRECTORS
Our board of directors held 13 meetings in 2013. 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. Each of Messrs. Broughton, Brock, Fuller,
Filler, Cashio and Smith attended the 2013 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:
(cid:2)
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
15
(cid:2)
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, 2013, including extensions of credit or
overdrafts, endorsements and guarantees outstanding on such date, was approximately
$13,117,000, which equaled 4.41% of our total equity capital as of that date. Less than 1% of
these loans were installment loans to individuals. These loans are secured by real estate and other
suitable collateral to the same extent, including loan to value ratios, as loans to similarly situated
unaffiliated borrowers. We anticipate making related party loans in the future to the same extent
as we have in the past.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, and
persons who own more than 10% of a registered class of our equity securities, to file with the
SEC, initial reports of ownership and reports of changes in ownership of common stock and
other equity securities. Executive officers, directors and greater than 10% stockholders are
required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based
solely upon information made available to us, we believe that each filing required to be made
pursuant to Section 16(a) was timely filed by our executive officers and directors and the
beneficial owners of more than 10% of our common stock, except for the following filings:
Form 4 filed on behalf of Stanley M. Brock on July 2, 2013, Form 4s filed on behalf of Richard
J. Cashio, James J. Fuller, Michael D. Fuller and Hatton C.V. Smith on July 8, 2013 and Form 4
filed on behalf of Clarence C. Pouncey on March 7, 2014, in each case reporting conversion of
preferred securities to 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.
16
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. In addition, the Compensation Committee retains compensation consultants from time
to time in order to obtain detailed comparisons of our executive compensation as compared to
our similarly sized competitors. The Compensation Committee did not retain a compensation
consultant during 2013, but plans to retain compensation consultants again in future years.
The Compensation Committee believes that executive compensation packages should
include cash, annual short-term cash incentives and long-term equity based incentives that
reward performance as measured against established goals. These goals may include any number
of criteria, may be unique to the particular executive officer based upon his or her duties, and
may include, among others, criteria based upon our net income, our asset growth, our loan
growth, such executive officer’s personal production and our efficiency and asset quality.
Additionally, the Compensation Committee believes that we should offer competitive benefit
17
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:
(cid:2)
(cid:2)
(cid:2)
to attract, retain and motivate our executive officers, including our named executive
officers;
to reward executives upon the achievement of measurable corporate, business unit and
individual performance goals; and
to align each executive’s interests with the creation of stockholder value.
Role of Say-on-Pay Advisory Vote
At the 2013 Annual Meeting of stockholders, our stockholders approved the advisory
say-on-pay proposal by the affirmative vote of 99% 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
job
intended
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.
to directly reflect an executive’s
is
Annual short-term cash incentives: This annual cash incentive is one of the performance-
based elements of our compensation. It is intended to motivate our executives and to provide a
current or immediate reward for short-term (annual) measurable performance.
Equity-based incentives: The grant of stock options and/or other equity-based incentive
compensation is the most important method we use to align the interests of our named executive
officers with the interests of our stockholders, which is another element of performance-based
compensation.
18
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
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
19
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 2013, an average of 38% 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 2013)
Annual
Short
Term Cash
Incentives
Equity-
Based
Incentives
Perquisites
and
Benefits
Annual
Base
Salary
Thomas A. Broughton III, Principal Executive Officer (“PEO”)
William M. Foshee, Principal Financial Officer (“PFO”)
Clarence C. Pouncey III
45
61
69
47
34
24
--
--
--
8
5
7
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 2013 base salary and
the
Compensation Committee’s and our board’s determination of the total compensation package
necessary to meet this objective.
incentive compensation reflect
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, 2013, the Compensation Committee increased the base
salaries of our named executive officers as follows: Thomas A. Broughton III to $315,000 from
$297,500, an increase of 5.9%; William M. Foshee to $220,000 from $210,000, an increase of
4.7% and Clarence C. Pouncey III to $255,000 from $244,000, an increase of 4.5%.
20
None of the named executive officers have employment agreements. See “Employment
Agreements” below for a more detailed discussion.
Annual Short-Term Cash Incentive Compensation
For the year ended December 31, 2013, 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 2013, 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 2013
performance.
Name
Performance Targets
Thomas A. Broughton III None
William M. Foshee
Net Income
Regulatory Compliance
2013 Incentive
Range (%)
None
2013 Incentive as
a Percentage of
Base Salary (%)
103.2%
2013 Incentive
Paid ($)
$325,000
0%-60%
55%
$121,000
Clarence C. Pouncey III Net Income
0%-60%
35.3%
$90,000
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
21
made a subjective determination for each named executive officer’s performance using, other
than in the case of Mr. Broughton, the above criteria as guidelines. The Compensation
Committee believed that, based upon our overall performance and the specific individual
performance levels of our named executive officers, it was appropriate to provide significant
cash incentive bonuses to all of our named executive officers for 2013. Accordingly, for the year
ended December 31, 2013 and based upon its subjective determination of our overall
performance and such officers’ individual performance for 2013, the Compensation Committee
awarded the cash incentive compensation set forth in the table above.
Equity-Based Incentive Compensation
In general, we have granted incentive stock options to our 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. However, in recognition
of the contributions made by our Chief Executive Officer, Mr. Broughton has received both
stock options and restricted stock awards from time to time. Mr. Foshee, our Chief Financial
Officer, has also received additional stock option grants since his initial hiring. None of our
named executive officers received grants of stock-based awards during the year ended December
13, 2013. 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, 2013.
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 or the Bank with or into another entity
where our stockholders before the transaction own less than 50% of our combined voting power
after the transaction, a sale of all or substantially all of our assets or a purchase of more than 50%
of the combined voting power of our outstanding capital stock in a single transaction or a series
of related transactions by one “person” (as that term is used in Section 13(d) of the Exchange
Act) or more than one person acting in concert.
Severance and Change in Control.
We do not have an employment or other agreement with Mr. Broughton that would
require us to pay him severance payments upon termination of his employment. We have entered
into change in control agreements with Mr. Foshee and Mr. Pouncey. See “Executive
Compensation — Employment Agreements”, “ — Change in Control Agreements” and “ —
Estimated Payments upon a Termination or Change in Control” below.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the board of directors of ServisFirst Bancshares, Inc.
has reviewed and discussed the Compensation Discussion and Analysis for the Company for the
year ended December 31, 2013 with management. In reliance on the reviews and discussions
with management, the Compensation Committee recommended to the board of directors, and the
22
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 2014 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
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, 2013, 2012 and 2011 to our named executive officers:
Name and Principal
Position Held
(a)
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
Year
(b)
2013
2012
2011
2013
2012
2011
2013
2012
2011
Salary
(c)
($)
Bonus
(d)
($)
315,000 325,000
297,500 315,000
283,250 275,000
255,000 90,000
244,000 145,000
235,000 125,000
220,000 121,000
210,000 130,000
200,000 120,000
Stock
Awards
(e)
($)
-
-
-
Option
Awards(1)
(f)
($)
-
-
152,740
Non-Equity
Incentive
Plan Comp
(g)
($)
-
-
-
Change in Pension
Value and Non-
Qualified Deferred
Compensation
Earnings
(h)
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
21,350
-
-
-
-
-
-
-
-
-
-
-
-
All Other
Compensation
(i)
($)
57,080(2)
56,667
48,679
24,587(3)
24,268
23,839
19,996(4)
19,876
15,101
Total
(j)
($)
697,080
669,167
759,669
369,587
413,268
383,839
360,996
359,876
356,451
(1)
(2)
(3)
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 2013 includes car allowance ($9,000), director’s fees
($22,200), country club allowance ($7,711), healthcare premiums ($7,173), matching
contributions to 401(k) plan ($10,000) and group life and long-term disability insurance
premiums ($996).
All Other Compensation for 2013 includes car allowance ($9,000), country club
allowance ($7,418), group life and long-term disability insurance premiums ($996) and
healthcare premiums ($7,173).
23
(4)
includes car allowance ($9,000), matching
All Other Compensation for 2013
contributions to 401(k) plan ($10,000) and group life and long-term disability insurance
premiums ($996).
Grants of Plan-Based Awards in 2013
The Company did not make any grants of plan-based awards to our named executive
officers during 2013.
Outstanding Equity Awards at Fiscal Year-End
The following table details all outstanding equity awards as of December 31, 2013:
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
($)
(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 ($)
(g)
166,000
-
-
Number of
securities
underlying
unexercised
options (#)
exercisable
(b)
Number of
Securities
underlying
unexercised
options (#)
unexercisable
(c)
Option
exercise
price
($)
(d)
Option
expiration
date
(e)
Number of
Shares or
Units of Stock
That Have
Not Vested (#)
(f)
8,500
10,000
20,000
5,000
5,000
4,000
$10.00 5/19/2017
$20.00 12/20/2017
$25.00 1/19/2021
$30.00 11/28/2021
$10.00 5/19/2015
$11.00 5/19/2016
$20.00 2/19/2018
$25.00 2/15/2020
$25.00 1/19/2021
$30.00 2/21/2022
$11.00 4/20/2016
11,000
10,000
5,000
2,500
2,500
5,000
Name
(a)
Thomas A. Broughton III (CEO) (1)
William M. Foshee (CFO) (2)
Clarence C. Pouncey III (3)
45,000
_____________________________
(1)
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 $41.50 per
share, the last sale price of the Company’s common stock known to the Company.
24
(2)
(3)
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.
The option to purchase 50,000 shares at $11.00 per share granted to Mr. Pouncey on
April 20, 2006 vests 9,000 shares per year beginning on April 20, 2009, with the final
5,000 shares vesting on April 20, 2014.
25
Plan Option Exercises and Stock Vested in 2013
The following table sets forth information regarding option exercises by and restricted stock
vesting for our named executive officers during 2013:
Name
(a)
Thomas A. Broughton III
William M. Foshee
Clarence C. Pouncey III
Option Awards
Stock Awards
Number of
Shares Acquired
on Exercise (#)
Value Realized
on Exercise ($)
Number of
Shares Acquired
on Vesting (#)
Value Realized
on Vesting ($)
(b)
9,000
-
-
(c)
$283,500
-
-
(d)
4,000
-
-
(e)
$166,000
-
-
Mr. Broughton exercised options for 9,000 shares at a price of $10.00 per share. 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, 2013. Based upon a value of $41.50
per share, the last sale price of the Company’s common stock known to the Company at the time
of exercise or vesting, as applicable, the value realized by Mr. Broughton on the exercise of such
options was $283,500 and upon vesting of such shares was $166,000.
Non-Plan Warrants and Stock Options
Upon the formation of the Bank in May 2005, we issued to each of our directors warrants
to purchase up to 10,000 shares of our common stock, or 60,000 shares in the aggregate, for a
purchase price of $10.00 per share, expiring in ten years. These warrants became fully vested in
May 2008.
We granted non-plan stock options to persons representing certain key business
relationships to purchase up to an aggregate of 55,000 shares of our common stock at between
$15.00 and $20.00 per share for 10 years. These stock options are “non-qualified stock options”
under the Internal Revenue Code and are not issued under our stock incentive plans. They vest
100% in a lump sum five years after their date of grant.
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.
26
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR
CHANGE IN CONTROL
Change in Control Agreements
General
We have 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 have been amended and restated to apply to a
change in control of the Company as well as the Bank.
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 the Bank or the Parent, 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 and the Company.
Definitions
The term “change in control” is defined in Mr. Foshee’s and Mr. Pouncey’s change in
control agreements to include:
(cid:2)
(cid:2)
a merger, consolidation or other corporate reorganization (other than a holding company
reorganization) involving either the Company or the Bank 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
27
(cid:2)
(cid:2)
(cid:2)
–
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;
individuals who, as of the effective date of the change in control agreement, constituted
our board of directors cease for any reason to constitute at least a majority of our board of
directors, except as otherwise provided in the agreement
approval by our stockholders of:
–
–
–
our complete liquidation or dissolution,
a complete liquidation or dissolution of the Bank, 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
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.
The change in control payments are due in the event that we terminate Mr. Foshee or Mr.
Pouncey without “cause” (as such term is defined in the agreements) any time within two years
after a change in control. In addition, the change of control payment is triggered in the event
that Mr. Foshee or Mr. Pouncey terminates his employment any time within two years after a
change in control for any of the following reasons: (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
28
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
Under the agreements, Mr. Foshee is entitled to a change in control payment equal to two
times his annual base salary at the time of the change in control and Mr. Pouncey is entitled to a
change in control payment equal to one times his annual base salary at the time of the change in
control. Assuming that we had a change in control as of December 31, 2013, 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
$440,000 to Mr. Foshee and $255,000 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, 2013, as defined
in either of our stock incentive plans, and further assuming that the value of the stock as of that
date was $41.50 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 $41.50 per share and their respective
exercise prices per share for such shares: (i) Thomas A. Broughton III — $296,500, (ii) William
M. Foshee - $152,500, and (iii) Clarence C. Pouncey, III - $152,500.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
As of December 31, 2013, 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
10, 2014 by: (i) each of our directors; (ii) our named executive officers; and (iii) all of our
directors and our executive officers as a group. Except as otherwise indicated, each person listed
below has sole voting and investment power with respect to all shares shown to be beneficially
owned by him except to the extent that such power is shared by a spouse under applicable law.
The information provided in the table is based on our records, information filed with the SEC
and information provided to the Company.
Name and Address of Beneficial Owner(l)
Amount and Nature of
Beneficial Ownership
Percentage of Outstanding
Common Stock (%)(2)
Thomas A. Broughton III
206,852
(3)(4)
2.79%
29
Stanley M. Brock
Michael D. Fuller
James J. Filler
J. Richard Cashio
Hatton C. V. Smith
William M. Foshee
Clarence C. Pouncey III
145,750
145,002
195,252
116,662
58,499
70,992
126,287
(3)(5)
(3)(6)
(3)
(3)(7)
(3)
(8)
(9)
All directors and executive officers as a group (8
persons)
1,065,296
(10)
_________________
1.96%
1.95%
2.63%
1.57%
*
*
1.69%
14.26%
*
(1)
(2)
(3)
(4)
(5)
(6)
Owns less than 1% of outstanding common stock.
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 7,420,812
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.
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 800 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 8,166 shares owned by his spouse and 1,900 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 11,250 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 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. Mr. Fuller has pledged 145,000 shares held by Tyrol, Inc. to the Bank, as
security for a loan.
30
(7)
(8)
(9)
Includes 3,792 shares owned by Mr. Cashio’s daughter for whom Mr. Cashio provides all
support. Mr. Cashio disclaims beneficial ownership of such shares. Mr. Cashio has
placed 87,922 shares in a margin account.
Includes 1,000 shares obtainable within 60 days pursuant to an option granted to Mr.
Foshee on 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. Does not
include 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 36,662 shares to
First National Bankers Bank.
Includes 50,000 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 4,620 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.
(10)
Includes 51,000 shares obtainable within 60 days pursuant to the exercise of outstanding
options or warrants.
PROPOSAL 2:
RATIFICATION OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2014
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, 2014.
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, 2014.
31
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our consolidated balance sheet as of December 31, 2013, and the related consolidated
statements of income, comprehensive income, stockholders’ equity and cash flows for the year
ended December 31, 2013 have been audited by KPMG LLP, our independent registered public
accounting firm, as stated in their report appearing in our 2013 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, 2013. 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
2013
$287,800
$24,196
$10,311
$0
2012
$145,914
$44,105
$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
registered public accountants for the Company for the year ended December 31, 2013.
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 PCAOB Auditing Standard No. 16, “Communications with Audit Committees.”
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
32
ended December 31, 2013 be included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2013.
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:
APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 2009 STOCK
INCENTIVE PLAN
In April 2009, our stockholders approved the 2009 Stock Incentive Plan. The Board of
Directors has determined that it is in the best interests of the Company to amend and restate the
2009 Stock Incentive Plan in certain respects, including an amendment to increase the number of
authorized shares. As amended and restated, the 2009 Stock Incentive Plan provides for the
granting to employees, officers and directors of the Company and its subsidiaries of stock
appreciation rights (“SARs”), restricted stock, stock options, and performance shares.
Proposal
On March 17, 2014, the board of directors adopted, subject to stockholder approval, an
amendment and restatement of our 2009 Stock Incentive Plan (the “Amended Stock Incentive
Plan”) (i) to add 500,000 shares to the number of shares authorized for issuance under the
Amended Stock Incentive Plan, (ii) to cap the maximum number of shares which may be
awarded to a participant in any fiscal year pursuant to stock options or SARs at 50,000 shares,
(iii) to provide that, to the extent incentive stock options become exercisable in amounts
exceeding $100,000 in value in any calendar year or otherwise fail to qualify as incentive stock
options, the overage or the portion that does not so qualify shall be treated as non-qualified
options, (iv) to impose certain limitations on the valuation of SARs, (v) to specify the
performance goals which may be used when making performance-based awards, (vi) to clarify
that incentive stock options are only transferrable in defined circumstances, and (vii) to clarify
that no action may be taken to lower the grant or exercise price of a nonqualified option or SAR
to an amount below fair market value without stockholder approval. When added to the
remaining shares available for issuance under the 2009 Stock Incentive Plan as of December 31,
2013, the increase in authorized shares will result in a total of 717,670 shares being available for
future issuances under the Amended Stock Incentive Plan.
If approved by the stockholders, the proposed amendment and restatement will be
effective with respect to awards made under the Amended Stock Incentive Plan on and after
April 24, 2014. The amendments will not be effective with respect to awards granted prior to that
date.
33
In addition, the Company is required to periodically resubmit the Amended Stock
Incentive Plan for stockholder approval so that the Amended Stock Incentive Plan may continue
to qualify as performance-based compensation under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the “Code”), which provides the Company with an exception from
the $1 million limitation on its federal income tax deduction for certain compensation paid under
the Amended Stock Incentive Plan (as described in more detail below) otherwise imposed by
Section 162(m). Stockholder approval is also required for purposes of qualifying certain
options issued under the plan as incentive stock options. A vote to approve the Amended Stock
Incentive Plan will also constitute approval of the performance conditions and material terms of
the Amended Stock Incentive Plan for purposes of Section 162(m) of the Code and reapproval of
the Amended Stock Incentive Plan for purposes of Section 422(b)(2) of the Code.
The board of directors believes that the approval of the Amended Stock Incentive Plan is
in the best interests of the Company and its stockholders, as the availability of an adequate
number of shares for issuance under the Amended Stock Incentive Plan and the ability to grant
stock incentives is an important factor in attracting, motivating and retaining qualified personnel
essential to the success of the Company.
Summary of the Amended Stock Incentive Plan
The following summary of the Amended Stock Incentive Plan does not contain all of the
terms and conditions of the Amended Stock Incentive Plan and is qualified in its entirety by the
specific language of the Amended Stock Incentive Plan, a copy of which is attached to this proxy
statement as Appendix A.
General
Purposes. The purpose of the Amended Stock Incentive Plan is to further the growth
and development of the Company and its direct and indirect subsidiaries by encouraging selected
employees, directors, consultants, agents, independent contractors and other persons who
contribute materially to the success of the Company with a means to obtain a proprietary interest
in the Company through the ownership of stock or performance-based incentives.
Administration. The Amended Stock Incentive Plan is administered by the
Compensation Committee, which shall be composed of not fewer than two non-employee
members of the board of directors. Subject to the provisions of the Amended Stock Incentive
Plan, the Certificate of Incorporation and the Bylaws of the Company, the Compensation
Committee has the exclusive power to (i) determine the types of awards to be granted, (ii)
designate the persons who are to be participants in the Amended Stock Incentive Plan, (iii)
determine the award to be made to each participant, (iii) determine the conditions under which
such awards will become payable, (iv) under certain circumstances, modify, amend or extend
outstanding awards and (v) establish the objectives and conditions for earning awards and
determining whether awards will be paid after the end of a performance period. The
Compensation Committee also has full power to administer and interpret the terms of the
Amended Stock Incentive Plan.
34
Termination, Amendment and Modification. The board of directors or the
Compensation Committee may at any time and from time to time alter, amend, suspend or
terminate the Amended Stock Incentive Plan without further stockholder approval. However,(i)
without stockholder approval as required by law, no action may be taken (a) which materially
changes the terms of incentive stock options or (b) which lowers the grant or exercise price of a
nonqualified stock option or SAR below fair market value, and (ii) no action taken with respect
to the Amended Stock Incentive Plan shall alter or impair any award previously granted a
participant under the Amended Stock Incentive Plan without the written consent of such
participant except to the extent such action is required by statute, or rules and regulations
promulgated thereunder.
Type of Awards
Stock Options. The Amended Stock Incentive Plan provides for the granting of both
incentive stock options within the meaning of Section 422 of the Code and nonqualified stock
options. The Compensation Committee will (a) determine and designate from time to time
those participants to whom options are to be granted, (b) determine the number of shares subject
to each option, (c) authorize the granting of incentive stock options, nonqualified stock options,
or a combination thereof and (d) determine the time or times when each option shall become
exercisable and the duration of the exercise period.
Stock options will be granted at an exercise price that is not less than 100% of the fair
market value of the shares of common stock subject to such stock options at the time of grant (or,
in the case of incentive stock options granted to stockholders which own more than 10% of the
common stock outstanding, not less than 110% of the fair market value. The purchase price of
the shares as to which a stock option shall be exercised shall be paid to the Company at the time
of exercise either (i) in cash or (ii) in stock already owned by the participant having a total fair
market value equal to the purchase price except as otherwise determined by the Compensation
Committee prior to exercise of the option.
With respect to the grant of incentive stock options, the Amended Stock Incentive Plan
contains certain additional provisions and restrictions consistent with those of the Code.
Stock Appreciation Rights (SARs). SARs may be granted under the Amended Stock
Incentive Plan in connection all or any part of nonqualified stock options, or independent of the
grant of nonqualified stock options. SARs permit the recipient to receive an amount determinable
in relation to any increase in fair market value of common stock between the date of grant and
the date of exercise. The amount awardable upon exercise of a SAR for each share covered by
the exercise is equal to the difference between the exercise price and the fair market value of the
share of common stock on the date of exercise. The Compensation Committee has discretion to
establish the terms of a SAR award at the time of grant, including the method of exercise,
method of settlement, form of consideration payable in settlement and any other terms and
conditions of the award; provided, however that the exercise price of a SAR shall not be less than
the fair market value of the underlying common stock on the date the SAR is granted. The
aggregate amount due on exercise of a SAR may be paid wholly or partly in cash or in common
stock, in the discretion of the Compensation Committee.
35
Restricted Stock. The Amended Stock Incentive Plan provides for the grant of
restricted stock. No shares of restricted stock may be sold or pledged until the restrictions on
such shares have lapsed or have been removed, and the certificates representing such shares of
common stock remain in the custody of the Company until the restrictions are satisfied. The
terms determinable by the Compensation Committee in each award of restricted stock include
the number of shares, the price, if any, to be paid by the participant, the time within which the
award may be subject to forfeiture, the nature of the restrictions (including performance goals, if
any) and the circumstances upon with restrictions will lapse. The Compensation Committee may,
in its sole discretion, require the automatic deferral of dividends or reinvestment of dividends for
the purchase of additional shares of restricted stock during the restricted period. During the
restricted period, the participant shall have the right to vote such shares of restricted stock.
Performance Awards. The Amended Stock Incentive Plan also provides for the grant
of awards in the form of performance shares and performance units. A performance award will
vest and become payable to and/or exercisable by a participant upon achievement during a
specified performance period of performance goals established by the Compensation Committee.
The Compensation Committee may establish performance goals using one or more of the
following criteria: (i) interest income or interest income growth; (ii) net interest income or net
interest income growth; (iii) net interest margin or net interest margin improvements; (iv) non-
interest income or non-interest income growth; (v) reductions in non-interest expense or
improvements in the Company’s efficiency ratio; (vi) reductions in non-accrual loans or other
problem assets; (vii) earnings before income taxes; (viii) net income; (ix) per share earnings; (x)
increases in core deposits, either in absolute dollars or as a percentage of total deposits, or both;
(xi) return on average equity; (xii) total stockholder return; (xiii) share price performance; (xiv)
return on average assets or on various categories of assets; (xv) comparisons of selected
Company performance metrics, including any of the metrics set forth in the preceding clauses, to
the comparable metrics of a selected peer group of banking institutions or a stock index, as
applicable; (xvi) individualized business or performance objections established for a participant;
or (xvii) any combination of the foregoing. Performance goals shall be established by the
Compensation Committee not later than ninety (90) days after the commencement of a
performance period, and the Compensation Committee shall not have discretion to increase the
amount of compensation payable following attainment of the performance goals. The value of
a performance share award shall be the fair market value of a share of common stock at the date
of the award. The Compensation Committee, in its discretion, may also grant dividend
equivalent rights with respect to earned but unpaid performance awards; however, performance
share awards shall have no voting rights until paid in shares of common stock.
Performance awards may be paid in cash or in shares of common stock of equivalent
value. Payment for performance awards shall be made as promptly as possible following
determination by the Compensation Committee that payment has been earned; provided that any
such payment shall be made no later than March 15th of the year following the year in which the
performance award is earned.
Effect of Termination of Employment or Service
36
Stock Options and SARs. If a participant’s employment or service with the Company
or a subsidiary terminates for any reason other than death, disability, retirement or a change in
control, the stock option or SAR shall expire on the earlier of (i) the last day of the term of the
stock option or SAR or (ii) the date that is three months after the date of termination. Upon
termination of employment by reason of death, disability or retirement, the stock option or SAR
shall expire on the earlier of (w) the last day of the term of the stock option or SAR or (x) the
first anniversary of the termination. An installment of a participant’s stock option or SAR shall
not become exercisable on the otherwise applicable vesting date of such award if the
participant’s termination occurs on or before such vesting date; provided, however, that stock
options and SARs shall become fully and immediately exercisable upon (y) the death or
disability of the participant or (z) the occurrence of a change in control. If the Compensation
Committee determines that a participant has committed an act of embezzlement, fraud,
dishonesty, breach of fiduciary duty or other bad act, the participant shall not be entitled to
exercise or receive payment for any award of stock options or SARs.
Restricted Stock. If a participant’s date of termination occurs during the restricted
period set forth in the award agreement, then the participant shall forfeit the restricted stock as of
the date of termination; provided, however, that if termination is due to the participant’s death,
disability or change in control, all unvested shares of restricted stock shall vest, free of all
restrictions otherwise imposed by the Amended Stock Incentive Plan. If the Compensation
Committee determines that a participant has committed an act of embezzlement, fraud,
dishonesty, breach of fiduciary duty or other bad act, the participant shall not be entitled to
exercise or receive payment for any award of restricted stock.
Performance Awards. If a participant’s employment or service with the Company
terminates during any performance period due to death, disability or retirement, the participant
shall be entitled to receive the prorated value of a performance award, determined at the end of
the performance period and based on the ratio of the number of days the participant is employed
during the performance period to the total number of days in the performance period, subject to
certification by the Compensation Committee. If a change in control occurs during the
performance period, and the participant’s date of termination does not occur before the change in
control date, the participant shall be entitled to receive the performance award that would have
been earned in accordance with the terms of the award as if 100% of the performance goals had
been achieved, but prorated based upon the number of days the participant is employed during
the performance period through the date of the change in control to the total number of days in
the performance period, subject to certification by the Compensation Committee. If the
Compensation Committee determines that a participant has committed an act of embezzlement,
fraud, dishonesty, breach of fiduciary duty or other bad act, the participant shall not be entitled to
exercise or receive payment for any performance award.
Change in Control. For purposes of the Amended Stock Incentive Plan, a “change in
control” shall mean any of the following events:
(cid:2)
acquisition by a person or a group of beneficial ownership of securities
representing more than 50% of the combined voting power in the election of
directors of the then-outstanding securities of the Company;
37
(cid:2)
(cid:2)
(cid:2)
during any period of two consecutive years or less, the individuals who at the
beginning of such period constituted a majority of the board of directors cease, for
any reason other than death, disability or retirement, to constitute a majority of the
board of directors, unless the election of or nomination for election of each new
director during such period was approved by a vote of at least a majority of the
directors still in office who were directors at the beginning of the period;
approval by the stockholders of any sale or disposition of substantially all of the
assets or earning power of the Company; or
approval by the stockholders of any merger, consolidation or statutory share
exchange to which the Company is a party and as a result of which the persons
who were stockholders of the Company immediately prior to such transaction
shall have beneficial ownership of less than 50% of the combined voting power in
the election of directors of the surviving corporation;
provided, however, that no such change in control shall be deemed to have occurred if, prior to
such event, the board of directors by a vote of 75% determines that the event not be treated as a
change in control.
Section 162(m) of the Code
Section 162(m) of the Code generally disallows a tax deduction to public companies for
compensation of more than $1 million paid in any year (not including amounts deferred) to a
corporation’s chief executive officer and the three most highly compensated executive officers
other than the chief executive officer (“covered employees”). However, compensation paid by
the Company that is “qualified performance-based compensation” under Section 162(m) may be
excepted from the $1 million limitation. The Plan Committee may make awards of restricted
stock, in addition to awards of performance shares, utilizing the performance measures discussed
above under the subheading “Performance Shares”, thereby allowing those awards to qualify for
the “qualified performance-based compensation” exception under Section 162(m) of the Code.
Stock option awards qualify as “qualified performance-based compensation” when awarded by
the Plan Committee since all options are valued at the fair market value of the stock on the date
of grant and the Stock Incentive Plan limits the maximum number of options which may be
received by any single participant during a single fiscal year. If the provisions of the Stock
Incentive Plan required to be approved by the stockholders under Section 162(m) in order for
awards under the Stock Incentive Plan to constitute “qualified performance-based compensation”
were to be materially modified by the Board of Directors without further stockholder approval,
as is permitted by the Stock Incentive Plan, then certain awards under the Stock Incentive Plan
might not thereafter constitute “qualified performance-based compensation” and could be subject
to the limit on deduction for compensation under Section 162(m).
Withholding for Payment of Taxes
The Amended Stock Incentive Plan provides for the withholding from, and payment by, a
participant of the employee’s share of any payroll or withholding taxes required by applicable
federal, state or local law. The Amended Stock Incentive Plan permits a participant to satisfy
such requirement, with the approval of the Compensation Committee, by surrender of shares of
38
common stock which the participant already owns or by having the Company withhold from the
participant a number of shares of common stock otherwise issuable under the award, in each case
having a fair market value equal to the amount of the applicable payroll and withholding taxes.
Changes in Capitalization and Similar Changes; Lapses or Forfeitures of Awards
In the event of any change in the outstanding shares of common stock by reason of any
stock dividend, recapitalization, stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase or share exchange, or other similar corporate transaction or event, the
aggregate number of shares of common stock with respect to which awards may be made under
the Amended Stock Incentive Plan, and the terms, types of shares and number of shares of any
outstanding awards under the Amended Stock Incentive Plan will be equitably adjusted. If any
award is forfeited, or if any stock option terminates, expires or lapses without being exercised,
shares of common stock subject to such awards will again be available for future grant.
Federal Income Tax Treatment
Incentive Stock Options. Incentive stock options granted under the Amended Stock
Incentive Plan will be subject to the applicable provisions of the Code, including Section 422,
Federal Income Tax Regulations and other administrative guidance issued thereunder. If shares
of common stock are issued to a participant upon the exercise of an incentive stock option, no
income will be recognized by the participant at the time of the grant of the incentive stock
option, and if no disposition of such shares is made by such participant within one year after the
exercise of the incentive stock option or within two years after the date the incentive stock option
was granted (a “disqualifying disposition”), then (i) no income, for regular income tax purposes,
will be realized by the participant at the date of exercise, (ii) upon sale of the shares acquired by
exercise of the incentive stock option, any amount realized in excess of the option price will be
taxable to the participant, for federal income tax purposes, as a long-term capital gain and any
loss sustained will be a long-term capital loss, and (iii) no deduction will be allowed to the
Company for federal income tax purposes. If a “disqualifying disposition” of such shares is
made, the participant will realize taxable ordinary income in an amount equal to the excess of the
fair market value of the shares purchased at the time of exercise over the option price (the
“bargain purchase element”) and the Company will be entitled to a federal income tax deduction
equal to such amount. The amount of any gain in excess of the bargain purchase element realized
upon a “disqualifying disposition” will be taxable as capital gain to the holder (for which the
Company will not be entitled a federal income tax deduction). Upon exercise of an incentive
stock option, the participant may be subject to alternative minimum tax. Under current law,
income realized upon the exercise of incentive stock options does not constitute “wages” for
purposes of the Federal Insurance Contribution Act (FICA) or the Federal Unemployment Tax
Act (FUTA).
Nonqualified Stock Options. With respect to nonqualified stock options granted to
participants under the Amended Stock Incentive Plan, (i) no income is realized by the participant
at the time the nonqualified stock option is granted, (ii) at exercise, ordinary income is realized
by the participant in an amount equal to the difference between the option price and the fair
market value of the shares on the date of exercise, such amount is treated as compensation and is
39
subject to both income and wage tax withholding, and the Company may claim a tax deduction
for the same amount, and (iii) on disposition, appreciation or depreciation after the date of
exercise is treated as either short-term or long-term capital gain or loss depending on the holding
period.
SARs. The amount of cash or the fair market value of any shares of common stock
received with respect to a SAR is includible in gross income as compensation in the year a
participant actually exercises a SAR. Such income will be subject to wage and income tax
withholding.
Restricted Stock. Unless the recipient makes an election under Section 83(b) of the
Code, the recipient will recognize ordinary income in an amount equal to the fair market value of
the shares upon becoming entitled to receive shares at the end of the applicable restriction period
without forfeiture. Delivery of the shares will be subject to both income and wage tax
withholding. The Company generally will be entitled to a deduction equal to the amount that is
taxable as ordinary compensation income to the recipient. The foregoing treatment will not apply
if the recipient makes a Section 83(b) election within 30 days of receiving the restricted stock.
Instead, the recipient will include in gross income as compensation for the taxable year in which
the restricted stock is received an amount equal to the excess of the fair market value of the
restricted stock at that time over the amount (if any) paid for the restricted stock. If restricted
stock for which a Section 83(b) election has been made is subsequently forfeited, no deduction
will be allowed in respect of such forfeiture.
Performance Awards. Performance shares granted under the Amended Stock
Incentive Plan will be subject to the applicable provisions of the Code, including Section 83, the
Federal Income Tax Regulations and other administrative guidance issued thereunder.
Participants who receive grants of performance shares (i) will not recognize any taxable income
at the time of the grant and (ii) upon settlement of the performance shares, the participant will
realize ordinary compensation income in an amount equal to the cash and the fair market value
of any shares of Company common stock received. The Company generally will be entitled to
a deduction equal to the amount that is taxable as ordinary compensation income to the
participant. The settlement of performance shares will be subject to wage and income tax
withholding.
Participation in the Amended Stock Incentive Plan
The grant of performance shares, stock options and restricted stock under the Amended
Stock Incentive Plan to employees, including officers, is subject to the discretion of the
Compensation Committee. The Amended Stock Incentive Plan limits the maximum aggregate
number of shares of stock represented by awards to a single participant during any one fiscal
year on or after April 24, 2013 to 50,000 shares. Our named executive officers did not receive
any share awards during fiscal 2013, and all other employees as a group received a total of
106,000 share awards during fiscal 2013. The following table sets forth information with
respect to the grant of performance awards, stock options and restricted stock pursuant to the
Amended Stock Incentive Plan to our named executive officers, to all current directors as a
40
group, and to all other employees as a group on during fiscal 2013. As of the date of this proxy
statement, no awards have been made to any of our executive officers during 2014.
New Plan Benefits
Number of
Securities
Underlying
Performance
Share
Awards
Number of
Securities
Underlying
Restricted
Stock
Awards
Number of
Securities
Underlying
Options
Granted
Option
Exercise
Price
($ per share)
Dollar
Value($)(1)
Name of Individual and Position
Broughton III, Thomas A. ..............
President and Chief
Executive Officer
Pouncey III, Clarence C. ................
EVP and Chief Operating
Officer
Foshee, William M. .......................
EVP and Chief Financial
Officer
All current executive officers as
a group (3 persons) ..............................
Non-executive directors as a
group (5 person) .................................
-
-
-
-
-
All other employees as a group ....
$2,128,300
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
46,000
60,000
-
-
-
-
-
(2)
(1) The amounts listed in this column reflect grant date fair value.
(2) 25,000 options were granted with an exercise price of $33 per share, and 35,000 options were
grated with an exercise price of $41.50 per share.
Required Vote
The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by
proxy by stockholders entitled to vote on the matter is required to approve the Amended Stock
Incentive Plan, which vote shall also constitute approval of the Amended Stock Incentive Plan
for purposes of Section 162(m) of the Code and reapproval of the Amended Stock Incentive Plan
for purposes of Section 422(b)(2) of the Code.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
“FOR” THE APPROVAL OF THE AMENDMENT AND RESTATEMENT OF OUR
2009 STOCK INCENTIVE PLAN.
41
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about our common stock that may be issued upon
the exercise of options and rights under all of our existing equity compensation plans and
arrangements as of December 31, 2013:
Plan Category
Equity compensation awards plans
approved by security holders
Equity compensation awards plans
not approved by security holders
Number of securities
issued/to be issued upon
exercise of outstanding
options, warrants and
rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
806,500
48,300
854,800
$
$
24.15
17.59
23.77
217,670
-
217,670
A description of our equity compensation plans is included on page 22 of this Proxy
Statement and in Note 14 to our financial statements included in our Annual Report on Form 10-
K for the year ended December 31, 2013.
PROPOSAL 4:
ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-
Frank Act”) included a provision that requires publicly-traded companies to hold an advisory, or
non-binding, stockholder vote to approve or disapprove the compensation of executive officers.
Consistent with that requirement, we are conducting an advisory vote on the compensation of the
executive officers named in this proxy statement. The compensation of our executive officers is
disclosed in this Proxy Statement under the headings “Executive Compensation” and
“Compensation Discussion and Analysis” above in accordance with rules and regulations of the
SEC.
We believe that the most effective executive compensation program is one that is
designed to reward the achievement of specific annual, long-term and strategic goals by us and
the Bank, and which aligns executives’ interests with those of our stockholders by rewarding
performance, with the ultimate objective of improving stockholder value. As a stockholder, you
have the opportunity to endorse or not endorse our executive compensation program and policies
through an advisory vote, commonly known as a “Say on Pay” vote, on the following resolution:
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.
42
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 2015 Annual Meeting of Stockholders must provide the
Company with a written copy of that proposal by no later than November 19, 2014, which is 120
days before the first anniversary of the date on which the Company’s proxy materials for 2014
were first released. However, if the date of our Annual Meeting in 2015 changes by more than 30
days from the date of our 2014 Annual Meeting, then the deadline would be a reasonable time
before we begin distributing our proxy materials for our 2015 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 2015 Annual Meeting without
including such proposal in the Company’s proxy statement, the stockholder must notify the
Company in writing on or before February 2, 2015.
43
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, 2014
44
SERVISFIRST BANCSHARES, INC. AMENDED AND RESTATED 2009 STOCK
INCENTIVE PLAN
1.
Establishment, Purpose and Duration of the Plan.
APPENDIX A
(a)
Establishment and Purpose.
ServisFirst Bancshares, Inc., a Delaware
corporation (the “Company”), has previously established and currently maintains an incentive
compensation plan known as the “ServisFirst Bancshares, Inc. 2009 Stock Incentive Plan.” The
Company is amending and restating the “ServisFirst Bancshares, Inc. 2009 Stock Incentive Plan”
as the “ServisFirst Bancshares, Inc. Amended and Restated 2009 Stock Incentive Plan” (the
“Plan”), as set forth herein. The purpose of the Plan is to further the growth and development
of the Company and its direct and indirect subsidiaries (each, a “Subsidiary” and collectively,
“Subsidiaries”) by encouraging selected employees, directors, consultants, agents, independent
contractors and other persons who contribute or are expected to contribute materially to the
Company's success (collectively, “Participants”) to obtain a proprietary interest in the Company
through the ownership of stock or receipt of performance-based incentives, thereby providing
such persons with added incentives to promote the best interests of the Company and affording
the Company a means of attracting
its service persons of outstanding ability.
Notwithstanding any contrary provision hereof, no Award (as defined in Section 2 below) may
be made to any Participant if such Award would cause this Plan to cease to be an “employee
benefit plan,” as such term is defined in Rule 405 under the Securities Act of 1933, and any such
Award shall be void and of no effect.
to
(b)
Effective Date and Duration. The Plan was originally made effective on March
26, 2009, the date of its adoption by the Board of Directors of the Company. The Board’s
adoption of amendments to the Plan that require shareholder approval for effectiveness and
approval of such amendments by the shareholders of the Company, shall be deemed to be a re-
adoption by the Board and re-approval by the shareholders of the Plan for the purposes of Code
Section 422(b)(2). The Plan is amended and restated effective April 24, 2014, subject to receipt
of stockholder approval, and shall remain in effect, subject to the right of the Board of Directors
to amend or terminate the Plan at any time pursuant to the provisions hereof, until all shares of
Common Stock of the Company subject to the Plan have been purchased or acquired pursuant to
the provisions hereof.
2.
Stock Subject to the Plan. An aggregate of 925,000 shares of the Company's Common
Stock, par value $.001 per share (the “Common Stock”), shall be reserved for issuance under the
Plan pursuant to the exercise of Options (as defined in Section 5 hereof), SARs (as defined in
Section 6(a) hereof), Restricted Stock (as defined in Section 6(b) hereof), or Performance Shares
(as defined in Section 6(c) hereof) (such Options, SARS, Restricted Stock and Performance
Shares are hereinafter collectively referred to as “Awards”). Such shares of Common Stock
may be, in whole or in part, authorized but unissued shares or issued shares that have been
reacquired by the Company. If, for any reason, an Option or SAR shall lapse, expire or
terminate without having been exercised in full, or if Restricted Stock or Performance Shares are
forfeited, the unused shares of Common Stock covered by such Option, Restricted Stock or
Performance Shares, or the number of shares of Common Stock upon which the SAR is based,
A-1
shall again be available for Awards under the Plan. The maximum number of shares of
Common Stock with respect to which Options or SARs may be granted to a Participant during
any Company fiscal year is 50,000.
Adjustments Upon Changes in Capitalization. If at any time after the date of grant of an
3.
Award, the Company shall by stock dividend, split-up, combination, reclassification or
exchange, or through merger, consolidation or otherwise, change its shares of Common Stock
into a different number or kind or class of shares or other securities or property, then the number
of shares available for grant under the Plan or subject to outstanding Awards and, with respect to
an Award, the price thereof, as applicable, shall be appropriately adjusted by the Compensation
Committee (as defined in Section 4(a) hereof), in its sole discretion, to prevent dilution or
enlargement of rights; provided, however, that the number of shares of Common Stock subject to
any Award shall always be a whole number and any adjustment shall be made in accordance
with the requirements under Internal Revenue Code (“Code”) Sections 83, 409A, 422, and 424,
as applicable.
4.
Administration.
(a)
Administration by Compensation Committee. The Plan shall be administered by
the Compensation Committee of the Board of Directors of the Company (“Compensation
Committee”). The Compensation Committee shall be composed of at least two non-employee
directors, in accordance with Rule 16b-3 promulgated pursuant to the Securities Exchange Act of
1934 (“Exchange Act”), or any successor rule thereto.
(b)
Powers of Compensation Committee. The Compensation Committee shall
administer the Plan and, subject to the provisions of the Plan and of the Certificate of
Incorporation and Bylaws of the Company, shall have sole authority in its discretion to
determine the types of Awards to be granted, the persons to whom, and the time or times at
which, Awards shall be granted, and the terms, conditions, and provisions of, and restrictions
relating to, each Award, including, without limitation, vesting provisions, and applicable
performance criteria. In making such determinations, the Compensation Committee may take
into account the nature of the services rendered by such Participants, their present and potential
contributions to the Company's success and such other factors as the Compensation Committee
in its sole discretion may deem relevant. The Compensation Committee shall also have the
authority to interpret the Plan; to prescribe, amend and rescind rules and regulations relating
thereto; to establish procedures deemed appropriate for the administration thereof; and to
determine the terms and provisions of the respective agreements which evidence the Awards that
are granted (collectively, “Award Agreements”), and to make all other determinations necessary
or advisable for the administration of the Plan, all of which determinations shall be conclusive
and not subject to review. All determinations and decisions made by the Compensation
Committee pursuant to the provisions of the Plan shall be final, conclusive and binding on all
persons, including the Company, its stockholders, directors, officers, employees, Participants,
and their respective estates and beneficiaries.
(c)
Definition of “Change in Control.” For purposes of the Plan, a “Change in
Control” shall mean any of the following events: (i) the acquisition at any time by a “person” or
“group” (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act) of
A-2
beneficial ownership (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly,
of securities representing more than 50% of the combined voting power in the election of
directors of the then-outstanding securities of the Company or any successor of the Company;
(ii) during any period of two consecutive years or less, the individuals who at the beginning of
such period constituted a majority of the Board of Directors cease, for any reason other than
death, disability or retirement, to constitute a majority of the Board of Directors, unless the
election of or nomination for election of each new director during such period was approved by a
vote of at least a majority of the directors still in office who were directors at the beginning of
the period; (iii) approval by the stockholders of the Company of any sale or disposition of
substantially all of the assets or earning power of the Company; or (iv) approval by the
stockholders of the Company of any merger, consolidation, or statutory share exchange to which
the Company is a party and as a result of which the persons who were stockholders of the
Company immediately prior to the effective date of the merger, consolidation or share exchange
shall have beneficial ownership of less than 50% of the combined voting power in the election of
directors of the surviving corporation; provided, however, that no Change in Control shall be
deemed to have occurred if, prior to such time as a Change in Control would otherwise be
deemed to have occurred in accordance with the foregoing, the Board of Directors, by vote of at
least 75% of the entire membership of the Board of Directors, determines that the event
otherwise qualifying as a Change in Control shall not be treated as a Change in Control
hereunder. Each determination concerning whether an event constitutes a Change in Control
under an Award Agreement shall be made in a consistent manner as to the particular event with
respect to all Award Agreements of all Participants in effect at the time of the event.
5.
Options.
(a)
General. The Company may grant options to purchase shares of Common
Stock (“Options”) subject to the provisions of this Plan and the applicable Award Agreement.
The Compensation Committee shall determine whether all or any portion of such Options shall
be incentive stock options (“Incentive Options”) qualifying under Code Section 422, or stock
options that do not so qualify (“Nonqualified Options”). Both Incentive Options and
Nonqualified Options may be granted to the same person at the same time; provided, however,
that each type of Option must be clearly designated, and any Option not expressly designed as an
Incentive Option shall be conclusively deemed to be a Nonqualified Option. Incentive Options
shall be granted within ten (10) years from the date this Plan is adopted or approved by the
stockholders, whichever is earlier, including the adoption and approval of any restatement of the
Plan. Incentive Options shall have a term of not more than ten (10) years from the date of
grant.
(b)
Exercise of Options. The exercise of an Option shall be contingent upon the
Company’s receipt from the holder thereof of a written representation that, at the time of such
exercise, it is the optionee's then-present intention to acquire the shares of Common Stock
subject to the Option for investment and not with a view to the distribution or resale thereof
(unless a registration statement covering such shares of Common Stock shall have been declared
effective by the Securities and Exchange Commission), and an Option may not be exercised for
fewer than ten shares at any one time (or the remaining shares then purchasable if less than ten)
and may not be exercised for fractional shares of Common Stock. No shares of Common Stock
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shall be issued upon exercise of an Option until full payment therefor has been made and any
withholding obligations of the Company have been satisfied.
(c)
No Rights as a Stockholder. The holder of an Option shall have none of the
rights of a stockholder with respect to the shares of Common Stock purchasable upon exercise of
the Option until a certificate for such shares shall have been issued to the holder upon due
exercise of the Option.
(d)
Incentive Options. Incentive Options will be granted at not less than 100% of
the Fair Market Value of the Common Stock subject to such Incentive Options at the time of
grant. Incentive Options may be granted only to employees (including officers) of the
Company or any Subsidiary; provided, however, that Incentive Options may not be granted to
any person who, at the time the Incentive Option is granted, owns (or is considered as owning
within the meaning of Code Section 424(d)) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any Subsidiary (a “10%
Owner”), unless at the time the Incentive Option is granted, its exercise price is at least 110% of
the Fair Market Value (as defined in Section 7 hereof) of the Common Stock and such Incentive
Option by its terms is not exercisable subsequent to five years from the date of grant. To the
extent that the aggregate Fair Market Value (determined on the date the Award is granted) of
Common Stock with respect to which Incentive Options are exercisable for the first time by any
Participant during any calendar year (under all plans of the Company and its Subsidiaries)
exceeds $100,000, or such Incentive Option otherwise does not comply with the federal income
tax rules governing Incentive Options, the Options or portions thereof that exceed such limit or
that do not comply with such rules (according to the order in which they were granted) shall be
treated as Nonqualified Options, notwithstanding any contrary provision of the applicable Option
Agreements.
(e)
Nonqualified Options. Nonqualified Options may be granted to any Company
employees (including employees who have been granted Incentive Options), directors,
consultants, agents, independent contractors and other persons whom the Compensation
Committee determines will contribute to the Company's success. Nonqualified Options shall be
granted at an exercise price that is no less than the Fair Market Value of the underlying Common
Stock on the date the Nonqualified Options are granted, and the number of shares of Common
Stock subject to the Nonqualified Options shall be fixed on the original date of grant of the
Nonqualified Options. The Nonqualified Options shall not include any feature for the deferral
of compensation other than the deferral of recognition of income until the later of the exercise or
disposition of the Nonqualified Options under Treasury Regulation Section 1.83-7, or the time
the Common Stock acquired pursuant to the exercise of the Nonqualified Options first becomes
substantially vested (as defined in Treasury Regulation Section 1.83-3(b)).
(f)
Substitute Options. Notwithstanding any other provision of this Plan, in the
event that the Company or a Subsidiary consummates a transaction described in Code Section
424(a) (e.g., the acquisition of property or stock from an unrelated corporation), persons who
become employees of the Company or any Subsidiary on account of such transaction may be
granted Incentive Options in substitution for the options granted by such former employer. If
such substitute Incentive Options are granted, the Compensation Committee, in its sole
discretion, consistent with Code Section 424(a), shall determine the exercise price of such
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substitute Options. The Compensation Committee may also grant substitute Nonqualified
Options in accordance with the requirements under Code Section 409A.
6.
Other Awards.
(a)
SARs. The Company may grant stock appreciation rights (“SARs”), subject to
the provisions of this Plan and the applicable Award Agreement. A SAR shall constitute the
right of the Participant to receive an amount equal to the appreciation, if any, in the Fair Market
Value of a share of Common Stock from the date of grant of such right to the date of payment.
Upon exercise of the SAR, the Company shall pay such amount in cash or shares of Common
Stock of equivalent value or in some combination thereof (as determined by the Compensation
Committee) as soon as practicable after the date on which such election is made in accordance
with the Award Agreement evidencing the SAR. Compensation payable under the SAR shall
not in any case be greater than the excess of the Fair Market Value of the Common Stock on the
date the SAR is exercised over an amount specified on the date of grant of the SAR (the SAR
exercise price), with respect to a number of shares fixed on or before the date of grant of the
right; the SAR exercise price shall never be less than the Fair Market Value of the underlying
Common Stock on the date the SAR is granted; and the SAR shall not include any feature for the
deferral of compensation other than the deferral of recognition of income until the exercise of the
SAR.
(b)
Restricted Stock. The Company may grant shares of restricted Common Stock
(“Restricted Stock”) under the Plan, subject to the provisions of this Plan and the applicable
Award Agreement. Restricted Stock shall be subject to forfeiture provisions and such other
restrictive terms and conditions as may be determined by the Compensation Committee in its
sole discretion and set forth in the applicable Award Agreement pursuant to which such
Restricted Stock is issued and shall not be transferable until all such restrictions and conditions
(other than securities law restrictions) have been satisfied. Restricted Stock shall be issued and
delivered at the time of grant or at such other time as is determined by the Compensation
Committee. Certificates evidencing shares of Restricted Stock shall bear a restrictive legend
referencing the risk of forfeiture and the non-transferability of such shares. The Compensation
Committee may, in its sole discretion, require the automatic deferral of dividends or
reinvestment of dividends for the purchase of additional shares of Restricted Stock. During the
period of restriction as set forth in the Award Agreement, the Participant owning shares of
Restricted Stock may exercise full voting rights with respect to such shares.
(c)
Performance Shares. The Company may grant the right to receive shares of
Common Stock subject to the attainment of performance objectives determined by the
Compensation Committee in its sole discretion (“Performance Shares”), subject to the provisions
of this Plan and the applicable Award Agreement. The performance goals to be met over a
specified period (the “Performance Period”), the amount of payment to be made if the
performance goals or other conditions are met and additional terms and conditions of the
issuance of Performance Shares shall be determined by the Compensation Committee and set
forth in the applicable Award Agreement. The value of a Performance Share at the time of an
Award shall be the Fair Market Value of a share of Common Stock at such time. An Award of
Performance Shares shall be expressed in terms of shares of Common Stock. After the
completion of a Performance Period, the performance of the Company, Subsidiary, division or
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individual, as the case may be, shall be measured against the performance goals or other
conditions, and the Compensation Committee shall determine whether all, none or a portion of
an Award shall be paid. The Compensation Committee shall pay any earned Performance
Shares as soon as practicable after they are earned in the form of cash, Common Stock of
equivalent value or in some combination thereof (as determined by the Compensation
Committee) having an aggregate Fair Market Value equal to the value of the earned Performance
Shares as of the date they are earned; provided that any payment shall be made no later than
March 15th of the year following the year in which the Performance Share is earned. Any
Common Stock used to pay earned Performance Shares may be issued subject to any restrictions
deemed appropriate by the Compensation Committee. In addition, the Compensation
Committee, in its discretion, may cancel any earned Performance Shares and grant Options to the
Participant which the Compensation Committee determines to be of equivalent value based on a
conversion formula stated in the applicable Award Agreement. The Compensation Committee,
in its discretion, may also grant dividend equivalent rights with respect to earned but unpaid
Performance Shares as evidenced by the applicable Award Agreement. Performance Shares
shall have no voting rights.
(d)
Performance-Based Awards. In the case of performance-based Awards that are
intended to satisfy Code Section 162(m) and that are granted to participants who are "covered
employees" under Code Section 162(m)(3), the applicable preestablished, objective performance
goals are limited to one or more of the following: (i) interest income or interest income growth,
(ii) net interest income or net interest income growth, (iii) net interest margin or net interest
margin improvements, (iv) non-interest income or non-interest income growth, (v) reductions in
non-interest expense or improvement in the Company’s efficiency ratio, (vi) reductions in non-
accrual loans or other problem assets, (vii) earnings before income taxes, (viii) net income, (ix)
per share earnings, (x) increases in core deposits, either in absolute dollars or as a percentage of
total deposits, or both, (xi) return on average equity, (xii) total stockholder return, (xiii) share
price performance, (xiv) return on average assets or on various categories of assets, (xv)
comparisons of selected Company performance metrics, including any of the metrics set forth in
the preceding clauses, to the comparable metrics of a selected peer group of banking institutions
or a stock index, as applicable, (xvi) individualized business or performance objectives
established for the participant, or (xvii) any combination of the foregoing. The goals will state,
in an objective formula or standard, the method for computing the amount of compensation
payable if the goals are attained. The objective formula or standard will preclude discretion to
increase the amount of compensation payable that would otherwise be due upon attainment of
the goals. Such goals shall be preestablished by the Compensation Committee not later than
ninety (90) days after the commencement of the Performance Period, provided the outcome is
substantially uncertain at the time the goals are established and provided that the goals are
established before 25 percent of the Performance Period has elapsed.
7.
Fair Market Value.
(a)
Periods During Which Common Stock is Publicly Traded. For purposes of the
Plan, the “Fair Market Value” as of any date means (i) with respect to an Award of an Incentive
Option and an Award that is intended to qualify under the “performance-based” exception set
forth in Code Section 162(m), the average of the high and low sales price of a share of Common
Stock on such date as reported by any national securities exchange on which the Common Stock
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is actively traded or, if no Common Stock is traded on such exchange on such date, then on the
next preceding date on which any Common Stock was traded on such exchange; or (ii) with
respect to all other Awards, the closing sales price of a share of Common Stock on such date as
reported by any national securities exchange on which the Common Stock is actively traded or, if
no Common Stock is traded on such exchange on such date, then on the next preceding date on
which any Common Stock was traded on such exchange.
(b)
Periods During Which Common Stock is Not Publicly Traded. Notwithstanding
subsection (a) above with respect to any date on which the Common Stock (or Common Stock
convertible therefrom) is not listed or traded as set forth in subsection (a), above, “Fair Market
Value” for a share of Common Stock as of any date of reference hereunder (the “Determination
Date”) shall be determined as provided for in this subsection. First, Fair Market Value shall be
as determined by the most recent appraisal conducted by a professional independent appraiser
engaged by the Company for the purpose of determining Fair Market Value under the Plan,
which appraisal is as of a date within twelve (12) months prior to the Determination Date.
Second, if no such appraisal has been made during such prior twelve (12)-month period, Fair
Market Value shall be determined by the highest of (i) the book value of the Common Stock as
of the last day of the Company's fiscal year next preceding the Determination Date (provided that
such stock is valued in the same manner for purposes of any nonlapse restriction applicable to
the transfer of any shares of such class of stock (or any substantially similar class of stock) to the
Company or any person that owns stock possessing more than ten (10) percent of the total
combined voting power of all classes of stock of the Company (applying the stock attribution
rules of Treas. Reg. § 1.424–1(d)), other than an arm’s length transaction involving the sale of all
or substantially all of the outstanding stock of the Company, and such valuation method is used
consistently for all such purposes), (ii) the average price per share of the Common Stock paid by
all persons (other than Participants) during the twelve (12) months prior to the Determination
Date in arms-length transactions with the Company, and (iii) the fair market value per share of
the Common Stock as determined by the Compensation Committee as of the Determination Date
(which, in the case of any SAR or Nonqualified Option, shall be a value determined by the
reasonable application of a reasonable valuation method). Notwithstanding the preceding, in
the case of the occurrence of a Change in Control involving the Company, for the period
beginning with the Change in Control and extending until the one-year period following the
Change in Control, Fair Market Value shall equal (x) in the case of a Change in Control
involving the sale of Common Stock to an entity, person or group, the average price per share of
Stock paid by the entity, person or group for the shares of Common Stock purchased by such
entity, person or group in the twelve (12)-month period ending on the Change in Control date or,
(y) in the case of a Change in Control involving the sale of substantially all of the assets of the
Company, the amount per share of Common Stock which each holder of record of Common
Stock immediately following such sale would receive as a liquidation distribution.
(c) Material Changes Affecting Fair Market Value. Notwithstanding subsection (b)
above, if, as of any Determination Date, subsection (a) above is inapplicable and, because of
material events occurring prior to the Determination Date but subsequent to an event to be used
to assess Fair Market Value under subsection (b) above, the Compensation Committee believes
in its sole and absolute discretion that a business development or other event has occurred
indicating that the amount otherwise determined under subsection (b) above does not accurately
reflect the fair market value of the Common Stock as of the Determination Date, the
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Compensation Committee shall have the right in its sole and absolute discretion, but not the
obligation, to obtain an independent appraisal of the Common Stock as of the Determination
Date, and such independent appraisal shall be conclusive to determine Fair Market Value as of
the Determination Date. Pending any such determination by an independent appraiser, any
payments due hereunder that require Fair Market Value assessment shall be delayed until the
appraisal is complete; provided that no payment shall be made later than March 15th of the year
following the year in which the payment is earned.
8.
Payment and Withholding.
(a)
Payment. Upon the exercise of an Option or Award that requires payment by a
Participant to the Company, the amount due to the Company shall be paid in cash or by check
payable to the order of the Company for the full purchase price of the shares of Common Stock
for which such election is made. Except as otherwise determined by the Compensation
Committee before the Option is exercised all or a part of the exercise price may be paid by the
Participant by delivery of shares of the Company’s Common Stock owned by the Participant and
acceptable to the Compensation Committee having an aggregate Fair Market Value (valued at
the date of exercise) that is equal to the amount of cash that would otherwise be required.
(b) Withholding. The Company shall have the right to deduct from all Awards paid
any federal, state, local or employment taxes that the Company deems are required by law to be
withheld with respect to such payments. Whenever shares of Common Stock are to be issued in
satisfaction of the exercise of an Award, the Company shall have the right to require the
Participant (or legal representative, as applicable) to remit to the Company an amount sufficient
to satisfy federal, state and local withholding tax requirements or make other arrangements
therefore prior to the delivery of any certificate or certificates for such shares. At the election
of the Participant, and subject to such rules and limitations as may be established by the
Compensation Committee from time to time, such withholding obligations may be satisfied
through the surrender of shares of the Company’s Common Stock which the Participant already
owns, or to which the Participant is otherwise entitled under the Plan.
9.
Non-Transferability of Awards. Except by will or pursuant to the laws of descent and
distribution or as provided in an Award Agreement, no benefit provided under this Plan shall be
subject to alienation, assignment or transfer by the Participant (or by any person entitled to such
benefit pursuant to the terms of this Plan), nor shall it be subject to attachment or other legal
process of whatever nature, and any attempted alienation, assignment, attachment or transfer
shall be void and of no effect whatsoever and, upon any such attempt, the benefit shall expire
and lapse; provided, however, that an Incentive Option is not transferable other than by will or
the laws of descent and distribution and is exercisable, during the Participant’s lifetime, only by
the Participant. Each Participant may, from time to time, designate any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any benefit under this
Plan is to be paid in case of the Participant’s death before the participant receives any or all of
such benefit. Each such designation shall revoke all prior designations by the same Participant,
shall be in a form prescribed by the Company, and shall be effective only when filed by the
Participant in writing with the Company during the Participant’s lifetime. In the absence of
such designation, benefits remaining unpaid at the Participant’s death shall be paid to the
Participant’s estate. Shares of Common Stock shall be delivered only to the Participant entitled
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to receive the same or to the Participant's authorized legal representative. Deposit of any sum
in any financial institution to the credit of any Participant (or of any person entitled to such sum
pursuant to the terms of this Plan) shall constitute payment to that Participant (or such person).
10.
Termination of Employment; Acceleration of Vesting
(a)
Options. Upon termination of employment for any reason other than death,
Disability (as defined below in this subsection 10(a)), Retirement or a Change in Control, any
Option held by the Participant shall expire on the earlier of (i) the last day of the term of the
Option, or (ii) the date that is three months after the date of termination of such employment.
Upon termination of employment by reason of death, Disability or Retirement, the Option held
by such Participant shall expire on the earlier of (w) the last day of the term of the Option or (x)
the date which is one year after the date of termination of such employment. Upon termination
of employment by reason of a Change in Control, the Option held by such Participant shall
expire on its original expiration date. The term “Disability” with respect to a Participant means
physical or mental inability to perform the normal duties of his employment or engagement as
determined by the Compensation Committee, after examination of the Participant by a physician,
selected by the Compensation Committee; provided, however, that if such Participant fails or
refuses to cooperate in such examination, the determination of his Disability shall be made by the
Compensation Committee in its sole discretion. The term “Retirement” with respect to a
Participant means the Participant’s termination of employment in a manner which qualifies the
Participant to receive immediately payable retirement benefits under any retirement plan adopted
or hereafter adopted by the Company, or which in the absence of any such retirement plan is
determined by the Compensation Committee to constitute retirement.
An installment of a Participant’s Option shall not become exercisable on the otherwise
applicable vesting date of such Award if the Participant’s date of termination occurs on or before
such vesting date. Notwithstanding the foregoing sentence, an Option shall become fully and
immediately exercisable upon (y) the death or Disability of the Participant or (z) or the
occurrence of a Change of Control.
(b)
SARs. Upon termination of employment for any reason other than death,
Disability, Retirement or a Change in Control, a SAR held by the Participant shall expire on the
earlier of (i) the last day of the term of the Option or (ii) the date which is three months after the
date of termination of such employment. Upon termination of employment by reason of death,
Disability or Retirement, the SAR held by such Participant shall expire on the earlier of (w) the
last day of the term of the SAR or (x) the date which is one year after the date of termination of
such employment. Upon termination of employment by reason of a Change in Control, the
SAR held by such Participant shall expire on its original expiration date. An installment of a
SAR shall not become exercisable on the otherwise applicable vesting date if the Participant’s
date of termination occurs before such vesting date. Notwithstanding the foregoing sentence, a
SAR shall become fully and immediately exercisable upon (y) the death or Disability of the
Participant or (z) the occurrence of a Change in Control.
(c)
Restricted Stock. If the Participant’s date of termination of employment does
not occur during the restricted period set forth in the Award Agreement (the “Restricted
Period”), then, at the end of the Restricted Period, the Participant shall become vested in the
shares of Restricted Stock, and shall own the shares free of all restrictions otherwise imposed.
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The Participant shall become vested in the shares of Restricted Stock, and become owner of the
shares free of all restrictions otherwise imposed by this Agreement, prior to the end of the
Restricted Period if the Participant’s date of termination of employment occurs by reason of the
Participant’s death, Disability or a Change in Control. Shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered until the expiration of the
Restricted Period or, if earlier, until the Participant is vested in the shares. Except as otherwise
provided in this subsection 10(c), if the Participant’s date of termination of employment occurs
prior to the end of the Restricted Period, the Participant shall forfeit the Restricted Stock as of the
Participant s date of termination.
(d)
Performance Shares. If the Participant’s employment with the Company
terminates during the Performance Period because of the Participant’s Retirement, Disability, or
death, the Participant shall be entitled to a prorated value of the Performance Shares earned,
determined at the end of the Performance Period, and based on the ratio of the number of days
the Participant is employed during the Performance Period to the total number of days in the
Performance Period, subject to the certification of the Compensation Committee. If a Change in
Control occurs during the Performance Period, and the Participant’s date of termination does not
occur before the Change in Control date, the Participant shall earn the Performance Shares that
would have been earned by the Participant in accordance with the terms of the Award as if 100%
of the Performance measures set forth in the Award Agreement for the Performance Period had
been achieved, but prorated based on the ratio of the number of days the Participant is employed
during the Performance Period through the date of the Change in Control, to the total number of
days in the Performance Period, subject to the certification of the Compensation Committee.
(e)
Forfeiture by Reason of Misconduct. Notwithstanding any other provision
hereof to the contrary, if the Compensation Committee determines that a Participant has
committed an act of embezzlement, fraud, dishonesty, breach of fiduciary duty or deliberate
disregard of any rules of the Company or any Subsidiary which results in loss, damage or injury
to the Company or any Subsidiary, neither the Participant nor his representative or estate shall be
entitled to exercise any Award or receive payment for an Award. In making such
determination, the Compensation Committee shall act fairly and may give the Participant an
opportunity to appear before the Compensation Committee and present evidence on his behalf.
(f)
Non-Employee Participants. With respect to Awards made to Participants who
are not employees of the Company or any Subsidiary, all references in this Section 10 to
termination of employment shall be deemed to refer to the effective date of termination of any
contractual arrangement (whether oral or written) pursuant to which any such non-employee
Participant provides services to the Company or its Subsidiaries.
11.
Deferrals. The Compensation Committee may permit a Participant to defer such
Participant’s receipt of the payment of cash or the delivery of Common Stock that would
otherwise be due to such Participant by virtue of the exercise of the lapse or waiver of
restrictions with respect to Restricted Stock or the satisfaction of any requirements or goals with
respect to Performance Shares. If any such deferral election is required or permitted, the
Compensation Committee shall, in its sole discretion, establish rules and procedures for such
payment deferral. Any deferral shall be made in accordance with Code Section 409A.
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No Right to Continued Employment or Engagement. Nothing contained in this Plan or
12.
in any Award Agreement shall confer upon any Participant any right to continue in the employ of
the Company or any Subsidiary or obligate the Company or any Subsidiary to continue the
engagement of any Participant or interfere in any way with the right of the Company or any such
Subsidiary to terminate such Participant's employment or engagement at any time.
Vesting of Rights Under Awards. Nothing contained in the Plan or in any resolution
13.
adopted by the Board of Directors shall constitute the vesting of any rights under any Award.
The vesting of such rights shall take place only pursuant to a written Award Agreement with
respect to such Award, in form and substance satisfactory to the Company, which shall be duly
executed and delivered by and on behalf of the Company and the Participant to whom the Award
shall be granted.
Agreement to Refrain from Sales.
14.
Holders of Options, Restricted Stock and
Performance Shares shall agree, pursuant to the applicable Award Agreement, to refrain from
selling or offering to sell the shares of Common Stock issuable upon exercise of the Options or
the unrestricted shares of Common Stock upon termination of the forfeiture and other restrictive
provisions of the Restrictive Stock and Performance Shares for such reasonable period of time
after the effective date of any registration statement relating to an underwritten offering of
securities of the Company, as may be requested by the managing underwriter of such
underwritten offering and approved by the Board of Directors.
The Board of Directors or
Termination, Amendment and Modification.
15.
the
Compensation Committee may at any time and from time to time alter, amend, suspend or
terminate this Plan in whole or in part, except (i) without such stockholder approval as may be
required by law, no such action may be taken which changes the minimum Incentive Option
price, increases the maximum term of Incentive Options, materially increases the benefits
accruing to Participants receiving Incentive Options hereunder, materially increases the number
of securities which may be issued pursuant to Incentive Options, extends the period for granting
Incentive Options past the tenth anniversary of the initial effective date of the Plan or materially
modifies the requirements as to eligibility for receipt of Incentive Options hereunder, (ii) without
stockholder approval as may be required by law, no such action may be taken which lowers the
grant or exercise price of a Nonqualified Option or SAR below the Fair Market Value on the date
of grant; and (iii) without the consent of the Participant to whom any Award shall theretofore
have been granted, no such action may be taken which adversely affects the rights of such
Participant concerning such Award, except to the extent such action is required by statute, or
rules and regulations promulgated thereunder, or as otherwise permitted hereunder.
16.
Indemnification. Each person who is or at any time serves as a member of the
Compensation Committee shall be indemnified and held harmless by the Company against and
from (i) any loss, cost, liability or expense that may be imposed upon or reasonably incurred by
such person in connection with or resulting from any claim, action, suit or proceeding to which
such person may be a party or in which such person may be involved by reason of any action or
failure to act under this Plan; and (ii) any and all amounts paid by such person in satisfaction of
judgment in any such action, suit or proceeding relating to the Plan. Each person covered by
this indemnification shall give the Company an opportunity, at its own expense, to handle and
defend the same before such person undertakes to handle and defend the same on such person's
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own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the charter or bylaws of the
Company, as a matter of law, or otherwise, or any power that the Company may have to
indemnify such person or hold such person harmless.
Reliance On Reports. Each member of the Compensation Committee shall be fully
17.
justified in relying or acting in good faith upon any report made by the independent public
accountants of the Company, any independent appraisal of the Common Stock and any other
information furnished in connection with this Plan. In no event shall any such person be liable
for any determination made or other action taken or any omission to act in reliance upon any
such report or information, or for any action taken, including the furnishing of information, or
failure to act, if on good faith, all consistent with and subject to the requirements of Section
141(e) of the General Corporation Law of the State of Delaware.
18. Miscellaneous.
(a)
Gender and Number. Whenever the context so requires, the singular shall
include the plural and the plural shall include the singular and the gender of any pronoun shall
include the other gender.
(b)
Severability. The invalidity of this Plan with respect to one or more persons
shall not affect the rights and obligations of any other person hereunder in any manner
whatsoever. The invalidity of one or more provisions of this Plan shall not affect the validity of
any other provision of this Plan in any manner whatsoever as long as the fundamental benefits
and obligations of the parties hereto are not materially modified by such invalidity.
(c)
Requirements of Law. The granting of Awards and the issuance of Common
Stock under the Plan shall be subject to all applicable laws, rules and regulations, and to such
approvals by any governmental agencies as may be required.
(d)
Governing Law. All matters relating to this Plan or to Awards granted
hereunder shall be governed by the laws of the State of Delaware, without regard to the
principles of conflict of laws thereof, except to the extent preempted by the laws of the United
States.
(e)
Compliance with Section 409A. Notwithstanding anything contained herein to
the contrary, this Plan shall be construed in a manner consistent with Code Section 409A and the
parties shall take such actions as are required to comply in good faith with the provisions of
Code Section 409A.
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2013 Annual Report
ServisFirst Bank
www.servisfirstbank.com
ServisFirst Bancshares
http://servisfirstbancshares.investorroom.com/
Birmingham ▪ Dothan ▪ Huntsville ▪ Mobile ▪ Montgomery ▪ Nashville ▪ Pensacola
March 11, 2014
Dear Shareholder,
I am pleased to report that 2013 was a record year for ServisFirst Bancshares. As we did last year, your Board of
Directors declared a special dividend of $0.50 per share, payable on December 16, 2013. In addition, the Board
intends to initiate the payment of our first quarterly dividend of $0.15 per share, payable on April 14, 2014 to
shareholders of record as of April 7, 2014.
Fully diluted earnings per share were $5.69 in 2013, an increase of 14% over 2012. Net income was $41.2 million
in 2013, a 20.8% increase over 2012.
We completed our offering in Mobile, Alabama of 250,000 shares of common stock at $41.50 per share on
December 2, 2013. We have an outstanding group of bankers in Mobile with deep roots in the community and we
are very pleased with the results to date. Mobile has a large maritime industry which will enable us to further
diversify our loan portfolio, a key factor in a bank’s staying power in an economic downturn. In addition, we expect
the aerospace industry to grow in Mobile with the Airbus plant now under construction.
Nashville is a new market for us and we have a great team of commercial bankers there in a tremendous market. We
recently added a healthcare lender in Nashville who will help further diversify our loan portfolio. To this point, our
only healthcare, other than physician practices, is several nursing home operations in Alabama.
Our asset quality is strong and improved from 2012. Our financial strength makes us attractive to clients, as well as
bankers who are looking for a new home. We are constantly looking for bankers who want a place where they can
be a better banker for their clients. Our bankers have come from many different banks, but all come because they
are frustrated at their inability to service their clients at their former bank. We have only grown organically to this
point, but would consider buying banks in the future. However, they would need to be a great cultural fit, and there
are few banks like that.
We now have 38 directors across our footprint and they are a key part of our success to date. They work very hard
for the shareholders and constantly challenge our management and look for opportunities for our company.
Please keep us in mind when you see a banking opportunity and call us. We appreciate all your support and will
continue to try and grow your investment.
Sincerely,
Thomas A. Broughton III
President & CEO
2
SELECTED FINANCIAL DATA
As of and for the years ended December 31,
2013
2012
2011
2010
2009
(Dollars in thousands except for share and per share data)
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
$
$
3,520,699
2,858,868
2,828,205
266,220
32,274
61,370
188,411
8,634
8,134
3,738
8,351
3,019,642
194,320
-
9,545
297,192
$
2,906,314
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
$
$
126,081
13,619
112,462
13,008
$
109,023
14,901
94,122
9,100
99,454
10,010
47,489
61,975
20,358
41,617
41,201
85,022
9,643
43,100
51,565
17,120
34,445
34,045
for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes expenses
Net income
Net income available to common stockholders
Per common Share Data:
Net income, basic
Net income, diluted
Book value
Weighted average shares outstanding:
Basic
Diluted
Actual shares outstanding
$
$
$
$
$
2,460,785
1,830,742
1,808,712
293,809
15,209
43,018
99,350
100,565
17,859
3,501
4,591
2,143,887
84,219
30,514
5,873
196,292
91,411
16,080
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
23,238
1,935,166
1,394,818
1,376,741
276,959
5,234
27,454
204,278
346
7,875
3,510
4,450
1,758,716
24,937
30,420
3,993
117,100
78,146
15,260
62,886
10,350
52,536
5,169
30,969
26,736
9,358
17,378
17,378
1,573,497
1,207,084
1,192,173
255,453
645
26,982
48,544
680
6,202
3,241
5,088
1,432,355
24,922
15,228
3,370
97,622
62,197
18,337
43,860
10,685
33,175
4,413
28,930
8,658
2,780
5,878
5,878
1.07
1.02
17.71
$
6.00
5.69
35.00
5.68
4.99
30.84
$
$
$
4.03
3.53
26.34
$
$
$
3.15
2.84
21.19
$
$
$
6,869,071
7,268,675
7,350,012
5,996,437
6,941,752
6,268,812
5,759,524
6,749,163
5,932,182
5,519,151
6,294,604
5,527,482
5,485,972
5,787,643
5,513,482
3
SELECTED FINANCIAL DATA
As of and for the years ended December 31,
2013
2012
2011
2010
2009
(Dollars in thousands except for share and per share data)
1.31 %
15.54 %
8.79 %
3.80 %
38.78 %
1.30 %
15.81 %
10.02 %
3.80 %
41.54 %
1.11 %
14.73 %
- %
3.79 %
45.54 %
1.04 %
15.86 %
- %
3.94 %
45.51 %
0.43 %
6.33 %
- %
3.31 %
59.93 %
0.33 %
0.34 %
0.64 %
0.24 %
0.44 %
0.69 %
0.32 %
0.75 %
1.06 %
0.55 %
1.03 %
1.10 %
0.60 %
1.01 %
1.57 %
1.07 %
1.11 %
1.20 %
1.30 %
1.22 %
314.94 %
253.50 %
159.96 %
126.00 %
120.91 %
93.66 %
93.05 %
84.37 %
78.28 %
83.23 %
84.80 %
79.89 %
76.71 %
78.04 %
80.06 %
21.54 %
21.71 %
19.54 %
14.24 %
14.75 %
8.44 %
11.73 %
10.00 %
8.48 %
8.03 %
11.78 %
9.89 %
8.43 %
7.98 %
12.79 %
11.39 %
9.17 %
6.05 %
11.82 %
10.22 %
7.77 %
6.20 %
10.48 %
8.89 %
6.97 %
20.82 %
46.96 %
34.87 %
195.64 %
(16.09) %
14.03 %
21.14 %
21.02 %
20.23 %
27.41 %
41.36 %
18.11 %
29.20 %
17.15 %
18.83 %
24.30 %
27.16 %
31.38 %
21.90 %
67.63 %
178.43 %
22.99 %
15.48 %
22.78 %
19.95 %
(22.14) %
35.38 %
24.49 %
38.08 %
12.49 %
Selected Performance Ratios:
Return on average assets
Return on average stockholders' equity
Dividend payout ratio
Net interest margin (1)
Efficiency ratio (2)
Asset quality Ratios:
Net charge-offs to average
loans outstanding
Non-performing loans to totals loans
Non-performing assets to total assets
Allowance for loan losses to total
gross loans
Allowance for loan losses to total
non-performing loans
Liquidity Ratios:
Net loans to total deposits
Net average loans to average
earning assets
Noninterest-bearing deposits to
total deposits
Capital Adequacy Ratios:
Stockholders' Equity to total assets
Total risked-based capital (3)
Tier 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
Percentage change in equity
(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
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
Bibb Lamar
Executive Vice President, Mobile 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
David Slyman
Huntsville, Alabama
Irma Tuder
Huntsville, Alabama
Danny Windham
Huntsville, Alabama
Sidney White
Huntsville, Alabama
Tom Young
Huntsville, Alabama
Bo Carter
Pensacola, Florida
Leo Cyr
Pensacola, Florida
Matt Durney
Pensacola, Florida
Mark S. Greskovich
Pensacola, Florida
Ray Russenberger
Pensacola, Florida
Sandy Sansing
Pensacola, Florida
Roger Webb
Pensacola, Florida
Ray Petty
Montgomery, Alabama
Randall J. Billingsley
Mobile, Alabama
Todd Strange
Montgomery, Alabama
Stephen G. Crawford
Mobile, Alabama
Pete Taylor
Montgomery, Alabama
Lowell J. Friedman
Mobile, Alabama
Ken Upchurch
Montgomery, Alabama
James L. Henderson
Mobile, Alabama
Alan E. Weil, Jr.
Montgomery, Alabama
Barry E. Gritter
Mobile, Alabama
Jerry Adams
Dothan, Alabama
James M. Harrison, Jr.
Mobile, Alabama
Charles H Chapman
Dothan, Alabama
Kenneth S. Johnson
Mobile, Alabama
W Bibb Lamar, Jr.
Mobile, Alabama
John H. Lewis, Jr.
Mobile, Alabama
John Downs
Dothan, Alabama
Charles Owens
Dothan, Alabama
William C. Thompson
Dothan, Alabama
Thomas M. Bizzell
Pensacola, Florida
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
NASHVILLE MAIN OFFICE
611 Commerce St., Suite 3131
Nashville, TN 37203
615.921.3500
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
Mobile Arthur R. Outlaw Convention Center, 1
South Water Street, Mobile, AL 36602 on
Thursday, April 24, 2014, 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
is
website
corporate
AVAILABLE INFORMATION
Our
http://servisfirstbancshares.investorroom.com/.
We have direct links on this website to our Code
of Ethics and
the charters for our Audit,
Compensation and Corporate Governance and
Nominating Committees by clicking on the
“Investor Relations” tab. We also have direct
links to our filings with the Securities and
Exchange Commission (SEC), including, but not
limited to, our 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
[This page intentionally left blank.]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
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
(Address of Principal Executive Offices)
35209
(Zip Code)
(205) 949-0302
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Titles of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
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
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.
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, 2013, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on a stock price of $41.50 per share of
Common Stock, was $257,793,684.
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, 2014
7,420,812
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 2014 Annual Meeting of
Stockholders are incorporated by reference into Part III of this annual report on Form 10-K.
EXPLANATORY NOTE
In this Amendment No. 1 to Annual Report on Form 10-K, or this 10-K/A, unless otherwise indicated, we refer to ServisFirst Bancshares, Inc.,
a Delaware corporation, as “we,” ”our,” “us,” “the Company,” “ServisFirst Bancshares” or “ServisFirst” and to ServisFirst Bancshares, Inc.,
and its subsidiaries, including ServisFirst Bank, as “our bank subsidiary” or “the Bank.”
We are filing this Form 10-K/A to amend certain disclosures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013,
as originally filed with the Securities and Exchange Commission on March 7, 2014 (our “Report”), to correct certain inadvertent typographical
and clerical errors. The principal changes to our Report effected by this amendment are the following:
In Part I, Item 1A (Risk Factors), of our Report, we amended the risk factor related to the fair value of our investment securities portfolio as of
December 31, 2013, from $257.5 million to $297.5 million.
In Part II, Item 5 (Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities), of our
Report, we revised the amount of shares of our common stock subject to outstanding options to purchase shares of our common stock as of
December 31, 2013, from 816,500 to 776,300.
Part II, Item 6 (Selected Financial Data), of our Report, we revised the following line items to the following amounts as of and for the
corresponding years ended December 31:
“Book value,” changing the amount from 26.34 to 26.35 for 2011
“Actual shares outstanding,” changing the amount from 7,346,512 to 7,350,012 for 2013
“Return on average stockholders’ equity,” changing the amount from 15.55 to 15.54 for 2013
“Efficiency ratio,” changing the amount from 59.57 to 59.93 for 2009
“Allowance for loan losses to total gross loans,” changing the amount from 1.24 to 1.22 for 2009
“Allowance for loan losses to total non-performing loans,” changing the amount from 122.34 to 120.91 for 2009
“Net average loans to average earning assets,” changing the amount from 84.65 to 84.80 for 2013, and from 79.82 to 79.89 for 2012
“Noninterest-bearing deposits to total deposits,” changing the amount from 16.96 to 19.54 for 2011
“Stockholders’ equity to total assets,” changing the amount from 7.97 to 7.98 for 2011
“Percentage change in net income,” changing the amount from (16.10) to (16.09) for 2009
In Part II, Item 6 (Selected Financial Data), of our Report, we revised the “Net average loans to average assets” line item for the years ended
December 31, 2013 and 2012, changing the ratios from 84.65% to 84.80% and 79.82% to 79.89%, respectively.
In Part II, Item 8 (Financial Statements and Supplementary Data), of our Report, with respect to the line items “Dividends on preferred stock”
and “Net income available to common stockholders” in our Consolidated Statements of Income for the year ended December 31, 2013, we
revised “Dividends on preferred stock,” changing the amount from 400 to 416 (in thousands) and “Net income available to common
stockholders” from 41,217 to 41,201 (in thousands).
In part II, Item 8 (Financial Statements and Supplementary Data), of our Report, with respect to the line items “Net income available to
common stockholders” and “Net income available to common stockholders, adjusted for effect of debt conversion,” in our Note 20 Earnings
Per Common Share for the year ended December 31, 2013, we revised “Net income available to common stockholders,” changing the amount
from 41,217 to 41,201 (in thousands) and “Net income available to common stockholders, adjusted for effect of debt conversion,” changing the
amount from 41,332 to 41,316 (in thousands).
As required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and
principal financial officer are being filed as exhibits herewith.
As further required by Rule 12b-15, this Form 10-K/A sets forth the complete text of each item as amended. This Form 10-K/A does not affect
any section of our Report not specifically discussed herein and continues to speak as of the date of our Report. Other than as specially reflected
in this Form 10-K/A, this Form 10-K/A does not reflect events occurring after the filing of our Report or modify or update any related
disclosures. Accordingly, this Form 10-K/A should be read in conjunction with our other filings made with the SEC subsequent to the filing of
our Report.
2
SERVISFIRST BANCSHARES, INC.
TABLE OF CONTENTS
FORM 10-K
DECEMBER 31, 2013
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
ITEM 5
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
62
65
107
DISCLOSURES
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
3
4
4
25
38
38
39
40
40
40
42
44
107
108
108
108
108
108
108
108
109
109
111
112
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act. These “forward-looking statements” reflect our current views with respect to,
among other things, future events and our financial performance. The words “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,”
“continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and similar expressions are intended to identify such
forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-
looking statements are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ
materially from any results expressed or implied by such forward-looking statements. These statements should be considered subject to various
risks and uncertainties, and are made based upon management’s belief as well as assumptions made by, and information currently available to,
management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such risks include, without
limitation:
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 financial budgetary “sequester”;
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 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 any of our subsidiaries may from time to time be a party,
including our ability to successfully integrate any business that we acquire;
deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;
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 results of regulatory examinations;
changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including
regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
the effect of inaccuracies in our assumptions underlying the establishment of our loan loss reserves; and
other factors that are discussed in the section titled “Risk Factors” in Item 1A.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this
annual report on Form 10-K. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions
prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any
such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any
obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or
otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
4
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 2009, 2010, 2011, 2012 and 2013 mean our fiscal
years ended December 31, 2009, 2010, 2011, 2012 and 2013, respectively.
PART I
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. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through 12
full-service banking offices located in Alabama and the panhandle of Florida, as well as a loan production office in Nashville, Tennessee.
Through the Bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online
and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking
services to other financial institutions. As of December 31, 2013, we had total assets of approximately $3.5 billion, total loans of approximately
$2.9 billion, total deposits of approximately $3.0 billion and total stockholders’ equity of approximately $297 million.
We operate the Bank using a simple business model based on organic loan and deposit growth, generated by high quality customer service,
delivered by a team of experienced bankers focused on developing and maintaining long-term banking relationships with our target customers.
We utilize a uniform, centralized back office risk and credit platform to support a decentralized decision-making process executed locally by
our regional chief executive officers. Rather than relying on a more typical traditional, retail bank strategy of operating a broad base of multiple
brick and mortar branch locations in each market, our strategy focuses on operating a limited and efficient branch network with sizable
aggregate balances of total loans and deposits housed in each branch office. We believe that this approach more appropriately addresses our
customers’ banking needs and reflects a best-of-class delivery strategy for commercial banking services. This strategy allows us to deliver
targeted, high quality customer service, while achieving significantly lower efficiency ratios relative to the banking industry.
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 a 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.
In January 2012, we formed SF Holding 1, Inc., an Alabama corporation, and its majority-owned subsidiary, SF Realty 1, Inc., an Alabama
corporation. In November 2013, SF FLA Realty, Inc. was established as another majority-owned subsidiary of SF Holding 1, and is also an
Alabama corporation. SF Realty 1 and SF FLA Realty both elected to be treated as a real estate investment trust (“REIT”) for U.S. income tax
purposes. The companies hold and manage participations in residential mortgages and commercial real estate loans originated by ServisFirst
Bank. SF Holding 1, Inc. and its two subsidiaries are consolidated into the Company.
History
The Bank was founded by our President and Chief Executive Officer, Thomas A. Broughton, III, and commenced banking operations in May
2005 following an initial capital raise of $35 million. We were incorporated as a Delaware corporation in August 2007 for the purpose of
acquiring all of the common stock of the Bank, and in November 2007 our holding company became the sole shareholder of the Bank by virtue
of a plan of reorganization and agreement of merger. In May 2008, following our filing of a registration statement on Form 10 with the
Securities and Exchange Commission (or, “SEC”), we became a reporting company within the meaning of the Securities Exchange Act of 1934
(the “Exchange Act”) and have been filing annual, quarterly, and current reports, proxy statements and other information with the SEC since
2008.
5
Since inception, our bank has achieved significant growth, all of which has been generated organically. We achieved total asset milestones of
$1 billion in 2008, $2 billion in 2011 and $3 billion in 2013. In addition to total asset milestones, we have opened offices in six new markets,
and raised an aggregate of approximately $55.1 million to support our growth in these new locations through five separate private placements
of our common stock to predominately local, individual investors.
Business Strategy
We operate a full service commercial bank focused on providing competitive products, state of the art technology and quality service. Our
business philosophy is to operate as a metropolitan community bank emphasizing prompt, personalized customer service to the individuals and
businesses located in our primary markets. We aggressively market to our target customers, which include privately held businesses with $2
million to $250 million in annual sales, professionals and affluent consumers who we believe are underserved by the large regional banks that
operate in our markets. We also seek to capitalize on the extensive relationships that our management, directors, advisory directors and
stockholders have with the businesses and professionals in our markets. 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 markets.
Focus on Core Banking Business
We deliver a broad array of core banking products to our customers. Our management and employees focus on recognizing customers’ needs
and providing products and services to meet those needs. We emphasize an internal culture of keeping our operating costs as low as possible,
which in turn leads to greater operational efficiency. Additionally, our centralized technology and process infrastructure contribute to our low
operating costs. We believe this combination of products, operating efficiency and technology make us attractive to customers in our markets.
In addition, in 2011 we began providing correspondent banking services to various smaller community banks in our markets, and currently act
as a correspondent bank to approximately 150 community banks located throughout the southeastern United States. We provide a source of
clearing and liquidity to our correspondent bank customers, as well as a wide array of account, credit, settlement and international services. This
service is of a scale and quality that is unique for a bank our size and provides us with a core deposit base, solid revenue stream and a low cost
of funds.
Commercial Bank Emphasis
We have historically focused on people as opposed to places. This strategy translates into a smaller number of brick and mortar branch
locations relative to our size, but larger overall branch sizes in terms of total deposits. As a result, our branches (excluding those branches that
have been open less than three years) average approximately $341 million in total deposits. Whereas, in the more typical retail banking model,
branch banks continue to lose traffic to other banking channels which may prove to be an impediment to earnings growth for those banks that
have invested in large branch networks. We place a strong emphasis on commercial and industrial loans, which comprised 44.7% of our total
loan portfolio as of December 31, 2013. Our focus has been to expand opportunistically when we identify a strong banking team in a market
with appropriate economies and market demographics where we believe we can achieve a minimum of $300 million in deposits. We seek to
differentiate the Bank through our people, processes and technology. We do not believe that a traditional brick and mortar, retail-oriented
branch network model is required to succeed in the current marketplace. Our experience is that our services and operating philosophy are
attractive to customers in our markets who do not require numerous branch banks in a single market.
Scalable, Decentralized Business Model
We emphasize local decision-making by experienced bankers supported by centralized risk and credit oversight. We believe that the delivery by
our bankers of in-market customer decisions coupled with risk and credit support from our corporate headquarters, allows us to serve customers
directly and in person, while managing risk centrally and on a uniform basis. We intend to grow by repeating this scalable model in each market
where we are able to identify a strong banking team. Our goal in each market is to employ the highest quality bankers in that market. We then
empower those bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service
possible. We focus on a geographic model of organizational structure as opposed to a line of business model employed by most regional banks.
This structure gives significant responsibility and accountability to our regional chief executive officers which we believe will aid in our growth
and success. We have developed a business culture whereby our management, from the top down, is actively involved in sales, which is a key
differentiator from our competition. All calling officers are required to actively solicit new customers, who are primarily non-borrowers from
our bank, to build core deposits.
6
Identify Opportunities in Vibrant Markets
Since opening our original banking facility in Birmingham in 2005, we have expanded into six additional markets. There are two primary
factors we consider when determining whether to enter a new market:
the availability of successful, experienced bankers with strong reputations in the market; and
the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit-related attributes of
the potential market.
Prior to entering a new market, we identify and build a team of experienced, successful bankers with market-specific knowledge to lead the
bank’s operations in that market, including a regional chief executive officer. Generally, we or members of our senior management are familiar
with these individuals based on prior work experience and reputation, and strongly believe in the ability of such individuals to successfully
execute our business model. We also identify and build a non-voting advisory board of directors in each market, comprised of directors
representing a broad spectrum of business experience and community involvement in the market. We currently have advisory boards in each of
the Huntsville, Montgomery, Dothan, Mobile and Pensacola markets. While we currently have a loan production office in Nashville, Tennessee
with three experienced bankers (one of whom was hired in January 2014), we anticipate expanding this office into a full-service branch in the
future, assuming that we are able to identify and retain a full team of experienced bankers whom we believe can effectively execute our
business model.
Prior to opening a full-service banking office in a new market, historically we have raised capital through private placements to investors in the
local market, many of whom are also customers of our bank in such market. We believe having many of our customers as stockholders provides
us with a strong source of core deposits, aligns our and our customers’ interests, and fosters a platform for developing and maintaining the long-
term banking relationships we seek.
In addition to organic expansion, we may seek to expand through targeted acquisitions. Although we have not yet identified any
specific acquisition opportunity that meets our strict requirements, including a limited number of branches serving a vibrant market with a
strong deposit base, a premier banking team with individuals whom we believe can execute our business model, and at a price that we believe
provides attractive risk-adjusted returns, we routinely evaluate potential acquisition opportunities that we believe would be complementary to
our business. We do not, however, have any immediate plans, arrangements or understandings relating to any acquisition, and we do not believe
an acquisition is necessary to successfully implement our business model.
Market Growth and Competition
Our philosophy is to operate as a metropolitan community bank emphasizing prompt, personalized customer service to the individuals and
businesses located in our primary markets. Our primary markets are broadly defined as the metropolitan statistical areas (“MSAs”) of
Birmingham-Hoover, Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola-Ferry Pass-Brent, Florida, and Nashville, Tennessee.
We draw most of our deposits from, and conduct most of our lending transactions in, these markets.
The markets in which we operate have enjoyed steady expansion in their deposit base. 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 2003 to 2013 (deposit data reflects totals as reported by financial institutions as of June 30th of each year) as follows:
Compound
Jefferson/Shelby County, Alabama
Madison County, Alabama
Montgomery County, Alabama
Houston County, Alabama
Mobile County, Alabama
Escambia County, Florida
2013
$
2003
(Dollars in Billions)
16.3
3.7
3.6
1.3
4.7
3.1
24.8 $
6.1
6.5
2.2
6.0
3.5
4.29 %
5.13 %
6.09 %
5.40 %
2.47 %
1.22 %
Annual
Growth Rate
7
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, 2013, as reported by the FDIC:
Market
Alabama:
Birmingham-Hoover MSA
Huntsville MSA
Montgomery MSA
Dothan MSA
Mobile MSA
Florida:
Pensacola-Ferry Pass-Brent MSA
Number of
Branches
Our Market
Deposits
Total Market
Deposits
(Dollars in Millions)
Ranking
Market
Share
Percentage
3 $
2
2
2
1
2
1,217.3 $
540.8
374.2
327.1
15.2
30,175.1
6,805.7
7,810.1
2,883.9
6,041.6
202.9
4,638.0
5
5
7
3
18
8
4.03 %
7.95 %
4.79 %
11.34 %
0.25 %
4.38 %
Together, deposits for all institutions in Jefferson, Shelby, Madison, Montgomery, Houston and Mobile Counties represented approximately
56.04% of all the deposits in the State of Alabama at June 30, 2013. Deposits for all institutions in Escambia County represent approximately
0.79% of all the deposits in the state of Florida at June 30, 2013.
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, BBVA Compass Bank, BB&T and Synovus
Bank. 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.
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.
8
Commercial Loans
Our commercial lending activity is directed principally toward businesses and professional service firms whose demand for funds falls within
our legal lending limits. We 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 accounts receivable, 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 principal owners of the property supported by a
review by our management of the principal owners’ personal financial statements.
9
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 decreased $6.5 million in 2013. Our allocation of loan loss reserve for these loans decreased $0.7
million to $5.8 million at December 31, 2013 compared to $6.5 million at the end 2012. Charge-offs for construction loans increased from $3.1
million for 2012 to $4.8 million for 2013, but the overall quality of the construction loan portfolio has improved with $9.2 million rated as
substandard at December 31, 2013 compared to $14.4 million at December 31, 2012.
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, 2013, we had commitments to extend credit beyond current fundings of approximately $1.1 billion, had issued standby
letters of credit in the amount of approximately $40.4 million, and had commitments for credit card arrangements of approximately $38.1
million.
10
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 risk
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 granted, it is monitored by the account officer, management, internal loan review, and representatives of our independent
external loan review firm over 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 whether 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 any 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 increased to 0.33% for the year ended December 31, 2013 from 0.24% for the year ended December
31, 2012, which was down from 0.32% for the year ended December 31, 2011. Historical performance, however, is not an indicator of future
performance, and our future results could differ materially. As of December 31, 2013, we had $9.6 million non-accrual loans, of which 76%
are secured real estate loans. We have allocated approximately $5.8 million of our allowance for loan losses to real estate construction,
acquisition and development, and lot loans and $11.2 million to commercial and industrial loans, and have a total loan loss reserve as of
December 31, 2013 allocable to specific loan types of $25.4 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 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 $5.3 million,
resulting in a total allowance for loan losses of $30.7 million at December 31, 2013. 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.
11
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 60% 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, 2013.
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.
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 262 full-time equivalent employees as of December 31, 2013. 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 laws and regulations that impose restrictions on and provide for general
regulatory oversight of our operations. These laws and regulations require compliance with various consumer protection provisions applicable
to lending, deposits, brokerage and fiduciary activities. They also impose capital adequacy requirements and restrict our ability to repurchase
our stock and receive dividends from the Bank. These laws and regulations generally are intended to protect customers, rather than
stockholders. The following discussion describes material elements of the regulatory framework that applies to us. However, the description
below is not intended to summarize all laws and regulations applicable 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, as
amended (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 would, under the circumstances set
forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must
obtain the approval of the Federal Reserve under the BHC Act before acquiring 25% (5% in the case of an acquirer that is already a bank
holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a “controlling
influence” over the bank holding company.
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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.
Repurchase or Redemption of Securities
A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or redemption of its own then-
outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all
such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal
Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal
Reserve. The Federal Reserve has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet
certain conditions.
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 the Bank’s customers, rather than our 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 and is not a member of the Federal Reserve System, 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.
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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 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.
FDIC Insurance Assessments
The Bank’s deposits are insured by the FDIC to the full extent provided in the Federal Deposit Insurance Act, and the bank pays assessments to
the FDIC for that coverage. Under the FDIC’s risk-based deposit insurance 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 2013, the Bank’s assessment rate was set
at $0.0133, or $0.0532 annually, per $100 of assessment base.
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 2013, 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.
The FDIC is responsible for maintaining the adequacy of the Deposit Insurance Fund and the amount the bank pays for deposit insurance is
affected not only by the risk the bank poses to the Deposit Insurance Fund, but also by the adequacy of the fund to cover the risk posed by all
insured institutions. In recent years, systemic economic problems and changes in law have put pressure on the Deposit Insurance Fund. In this
regard, from 2008 to 2013, the United States experienced an unusually high number of bank failures, resulting in significant losses to the
Deposit Insurance Fund. Moreover, the Dodd-Frank Act permanently increased the standard maximum deposit insurance amount from
$100,000 to $250,000, and raised the minimum required Deposit Insurance Fund reserve ratio (i.e., the ratio of the amount on reserve in the
Deposit Insurance Fund to the total estimated insured deposits) from 1.15% to 1.35%. To support the Deposit Insurance Fund in light of these
types of pressures, the FDIC took several actions in 2009 to supplement the revenues received from its annual deposit insurance premium
assessments. Such actions included imposing a one-time special assessment on insured institutions and requiring that insured institutions
prepay their regular quarterly assessments for the fourth quarter of 2009 through 2012. The FDIC’s possible need to increase assessment rates,
charge additional one-time assessment fees, and take other extraordinary actions to support the Deposit Insurance Fund is generally considered
to be greater in the current economic climate. If the FDIC were to take these types of actions in the future, they could have a negative impact
on the bank’s earnings.
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.
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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 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.
Interest Rate Limitations
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 Consumer Credit and Deposit Transactions
The Bank’s loan and deposit operations are subject to a number of federal consumer protection laws, 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 all aspects of credit transactions;
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 debt collectors;
the Servicemembers’ Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of
persons in military service;
Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
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
The federal banking regulators view capital levels as important indicators of an institution’s financial soundness. In this regard, we and the
Bank are required to comply with the capital adequacy standards established by the Federal Reserve (in the case of ServisFirst Bancshares, Inc.)
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.
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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.
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. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital
requirements.
The current risk-based capital guidelines, commonly referred to as Basel I, are based upon the 1988 capital accord of the Basel Committee on
Banking Supervision (“Basel Committee”), an international committee of central banks and bank supervisors, as implemented by the U.S.
federal banking agencies. As discussed further below, the federal banking agencies have adopted separate risk-based capital guidelines for so-
called “core banks” based upon the Revised Framework for the International Convergence of Capital Measurement and Capital Standards
(“Basel II”) issued by the Basel Committee in November 2005, and recently adopted rules implementing the revised standards referred to as
Basel III.
Basel I
Under Federal Reserve regulations implementing the Basel I standards, 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, 2013, our consolidated ratio of total capital to risk-
weighted assets was 11.73%, and our ratio of Tier 1 capital to risk-weighted assets was 10.00%.
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, 2013, our
leverage ratio was 8.48%. 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.
As of December 31, 2013, 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, 2013.
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, 2013, the Bank’s leverage ratio was 8.98%.
Basel II
Under the final U.S. Basel II rules issued by the federal banking agencies, there are a small number of “core” banking organizations that have
been required to use the advanced approaches under Basel II for calculating risk-based capital related to credit risk and operational risk, instead
of the methodology reflected in the regulations effective prior to adoption of Basel II. The rules also require core banking organizations to have
rigorous processes for assessing overall capital adequacy in relation to their total risk profiles, and to publicly disclose certain information about
their risk profiles and capital adequacy. Neither we nor the bank are among the core banking organizations required to use Basel II advanced
approaches.
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On December 16, 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation,
known as Basel III. The Basel III calibration and phase-in arrangements were previously endorsed by the Seoul G20 Leaders Summit in
November 2010. Under these standards, when fully phased-in on January 1, 2019, banking institutions would be required to satisfy three risk-
based capital ratios:
A new common equity tier 1 capital to risk-weighted assets ratio of at least 7.0%, inclusive of a 4.5% minimum common equity tier 1
capital ratio, net of regulatory deductions, and a new 2.5% “capital conservation buffer” of common equity to risk-weighted assets;
A tier 1 capital ratio of at least 8.5%, inclusive of the 2.5% capital conservation buffer; and
A total capital ratio of at least 10.5%, inclusive of the 2.5% capital conservation buffer.
Basel III places more emphasis than current capital adequacy requirements on common equity tier 1 capital, or “CET1”, which is predominately
made up of retained earnings and common stock instruments. Basel III also introduces a capital conservation buffer, which is designed to
absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above the minimum but below the capital conservation
buffer may face constraints on dividends, equity repurchases, and compensation based on the amount of such shortfall. The Basel Committee
also announced that a “countercyclical buffer” of 0% to 2.5% of CET1 or other loss-absorbing capital “will be implemented according to
national circumstances” as an “extension” of the conservation buffer during periods of excess credit growth.
Basel III also introduced a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets. The Basel
Committee had initially planned for member nations to begin implementing the Basel III requirements by January 1, 2013, with full
implementation by January 1, 2019. On November 9, 2012, U.S. regulators announced that implementation of Basel III’s first requirements
would be delayed.
United States Implementation of Basel III
In July 2013, the federal banking agencies published final rules (the “Basel III Capital Rules”) that revised their risk-based and leverage capital
requirements and their method for calculating risk-weighted assets to implement, in part, agreements reached by the Basel Committee and
certain provisions of the Dodd-Frank Act. The Basel III Capital Rules will apply to banking organizations, including us and the bank.
Among other things, the Basel III Capital Rules: (i) introduce CET1; (ii) specify that tier 1 capital consists of CET1 and additional financial
instruments satisfying specified requirements that permit inclusion in tier 1 capital; (iii) define CET1 narrowly by requiring that most
deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the
scope of the deductions or adjustments from capital as compared to the existing regulations. The Basel III Capital Rules also provide a
permanent exemption from the proposed phase out of existing trust preferred securities and cumulative perpetual preferred stock from
regulatory capital for banking organizations with less than $15 billion in total consolidated assets as of December 31, 2009.
The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios:
4.5% based upon CET1;
6.0% based upon tier 1 capital; and
8.0% based upon total regulatory capital.
A minimum leverage ratio (tier 1 capital as a percentage of total assets) of 4.0% is also required under the Basel III Capital Rules (even for
highly rated institutions). The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer of 2.5% above these
required minimum capital ratio levels. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face
restrictions on capital distributions or discretionary bonus payments to executive officers.
As a result of the enactment of the Basel III Capital Rules, we and the bank could be subject to increased required capital levels. The Basel III
Capital Rules become effective as applied to us and the bank on January 1, 2015, with a phase in period that generally extends from January 1,
2015, through January 1, 2019.
The ultimate impact of the new capital standards on us and the bank is currently being reviewed and will depend on a number of factors,
including the implementation of the new Basel III Capital Rules and any additional related rulemaking by the U.S. banking agencies.
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Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of “prompt corrective action” to resolve the
problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into which all
institutions are placed. The federal banking agencies have also specified by regulation the relevant capital thresholds for each of those
categories. When effective, the Basel III Capital Rules will amend those thresholds to reflect both (i) the generally heightened requirements for
regulatory capital ratios, and (ii) the introduction of the CET1 capital measure. At December 31, 2013, 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.
Liquidity
Financial institutions are subject to significant regulatory scrutiny regarding their liquidity positions. This scrutiny has increased during recent
years, as the economic downturn that began in the late 2000s negatively affected the liquidity of many financial institutions. 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.
Basel III also addresses liquidity management by proposing 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.
In the Basel III Capital Rules, the federal banking regulators did not address either the Liquidity Coverage Ratio or the Net Stable Funding
Ratio. However, on November 29, 2013, the Federal Reserve, FDIC and Office of the Comptroller of the Currency jointly issued a proposed
rule implementing a Liquidity Coverage Ratio requirement in the United States for larger banking organizations. Neither we nor the bank would
be subject to such requirement as proposed.
The Liquidity Coverage Ratio and the Net Stable Funding Ratio continue to be monitored for implementation, and we cannot yet provide
concrete estimates as to how those requirements, or any other regulatory positions regarding liquidity and funding, might affect us or our 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.
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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 (our bank’s surplus currently exceeds
20% of its capital). Moreover, our 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 our bank in any calendar year will exceed the total of (1)
our 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, our bank would be limited to paying $110.9 million in dividends as of December 31, 2013. In addition, no
dividends, withdrawals or transfers may be made from our bank’s surplus without the prior written approval of the Superintendent.
Our 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 Federal Deposit Corporation Insurance 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 and Insiders
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;
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;
a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate;
a bank’s transactions with an affiliate involving the borrowing or lending of securities to the extent they create credit exposure to the
affiliate; and
a bank’s derivative transactions with an affiliate to the extent they create credit exposure to the 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, certain 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.
Our 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 (i) 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 (ii) 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.
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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
In December, 2006, the U.S. bank regulatory agencies issued guidance entitled “Concentrations in Commercial Real Estate Lending, Sound
Risk Management Practices” 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 non-public personal information of their consumer
customers. Consumer customers generally may prevent financial institutions from sharing nonpublic personal 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 offering a product or service with a nonaffiliated financial institution. 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:
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 our 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;
requirements for mortgage lenders to disclose credit scores to consumers; and
limitations on the ability of a business that receives consumer information from an affiliate to use that information for marketing
purposes.
Anti-Terrorism and Money Laundering Legislation
Our 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 (“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. Our bank has established a customer identification program
pursuant to Section 326 of the USA PATRIOT Act and maintains records of cash purchases of negotiable instruments, files reports of certain
cash transactions exceeding $10,000 (daily aggregate amount), and reports suspicious activity that might signify money laundering, tax evasion,
or other criminal activities pursuant to the Bank Secrecy Act. Our bank otherwise has implemented policies and procedures to comply with the
foregoing requirements.
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Effect of Governmental Monetary Policies
Our 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 (the “Sarbanes-Oxley Act”) 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 Exchange Act. 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.
Overdraft Fees
The Federal Reserve has adopted amendments under its Regulation E that impose restrictions on banks’ abilities to charge overdraft fees. The
rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer
consents, or opts in, to the overdraft service for those type of transactions.
Interchange Fees
The Dodd-Frank Act, through a provision known as the Durbin Amendment, required the Federal Reserve to establish standards for interchange
fees that are “reasonable and proportional” to the cost of processing the debit card transaction and imposes other requirements on card
networks. Institutions like the bank with less than $10 billion in assets are exempt. However, while we are under the $10 billion level that caps
income per transaction, we have been affected by federal regulations that prohibit network exclusivity arrangements and routing restrictions.
Essentially, issuers and networks must allow transaction processing through a minimum of two unaffiliated networks.
The Volcker Rule
On December 10, 2013, five U.S. financial regulators, including the Federal Reserve and the FDIC, adopted a final rule implementing the so-
called “Volcker Rule.” The Volcker Rule was created by Section 619 of the Dodd-Frank Act and prohibits “banking entities” from engaging in
“proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds.” Although the
final rule provides some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply
to banking entities of any size, including us and the bank. The final rule becomes effective April 1, 2014, but the Federal Reserve has extended
the conformance period for all banking entities until July 21, 2015.
While the final rule and its accompanying materials comprise approximately 1,000 pages, banking entities that do not engage in any of the
activities covered by the Volcker Rule (other than with respect to certain U.S. government obligations) are not required to adopt any formal
compliance program specific to the Volcker Rule. We are currently reviewing the scope of the final rule to determine its impact on our
operations.
The Dodd-Frank Act
On July 21, 2010, 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.
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A number of the effects of the Dodd-Frank Act are described or otherwise accounted for in various parts of this Supervision and Regulation
section. The following items provide a brief description of certain other provisions of the Dodd-Frank Act that may be relevant to us and the
bank.
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 are effective in 2014.
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 addresses many aspects of investor protection, corporate governance and executive compensation that
will affect most U.S. publicly traded companies. The Dodd-Frank Act (i) requires publicly traded companies to give
stockholders a non-binding vote on executive compensation and golden parachute payments; (ii) enhances independence
requirements for compensation committee members; (iii) requires companies listed on national securities exchanges to adopt
incentive-based compensation claw-back policies for executive officers; (iv) authorizes the Securities and Exchange
Commission (the “SEC”) to promulgate rules that would allow stockholders to nominate their own candidates using a
company’s proxy materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive compensation
that encourages inappropriate risks.
While insured depository institutions have long been subject to the FDIC’s resolution process, the Dodd-Frank Act creates a
new mechanism for the FDIC to conduct the orderly liquidation of certain “covered financial companies,” including bank
holding companies and systemically significant non-bank financial companies. Upon certain findings being made, the FDIC
may be appointed receiver for a covered financial company, and would conduct an orderly liquidation of the entity. The
FDIC liquidation process is modeled on the existing Federal Deposit Insurance Act bank resolution process, and generally
gives the FDIC more discretion than in the traditional bankruptcy context. The FDIC has issued final rules implementing the
orderly liquidation authority.
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.
Other Legislation and Regulatory Action relating to Financial Institutions
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.
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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 and the states in which we do business. 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.
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.
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 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 (59) – 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 (57) – 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 (44) – 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 (65) – 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 (62) – 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.
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Rex D. McKinney (51) – 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.
William B. Lamar (70) - Mr. Lamar has served as Executive Vice President and Mobile President and Chief Executive Officer of the Bank
since March 2013. Prior to joining the Company, Mr. Lamar was employed by Merchants National, now Regions Bank where he spent more
than 20 years in various leadership roles. Most recently, Mr. Lamar was the CEO of BankTrust for over 20 years. He has served on the
Alabama State Banking Board for 15 years and was formerly President of Alabama Banker’s Association.
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”.
Risks Related To Our Business
As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex
ways by weak economic conditions.
Our businesses and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers
in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S.
economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about
the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates is a concern
for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over
the stability of the euro and other currencies, could affect the stability of global financial markets, which could hinder U.S. economic growth.
Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed
prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and
commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized
by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our
investment portfolio. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these
factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal
government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond
our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our
business, financial condition, results of operations and prospects.
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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 business and operations.
We are led by an experienced core management team with substantial experience in the markets that we serve, and our operating strategy
focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the
performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management.
Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to
execute our business plan may be lengthy. 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, Clarence C. Pouncey, III and William M.
Foshee are extremely important to our success and the success of our bank. Mr. Broughton has extensive executive-level banking experience
and is the President and Chief Executive Officer of us and the bank. Mr. Pouncey has extensive operating banking experience and is an
Executive Vice President and the Chief Operating Officer of us and the bank. Mr. Foshee has extensive financial and accounting banking
experience and is an Executive Vice President and the Chief Financial Officer of us and the bank. If any of Mr. Broughton, Mr. Pouncey or Mr.
Foshee 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, Mobile 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 Messrs. Broughton, Pouncey and Foshee. In the absence of these types of
agreements, our executive officers are free to resign their employment at any time and accept an offer of employment from another company,
including a competitor. Additionally, our directors’ and advisory board members’ community involvement and diverse and extensive local
business relationships are important to our success. Any material change in the composition of our board of directors or the respective advisory
boards of the bank could have a material adverse effect on our business, financial condition, results of operations and prospects.
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 business, financial condition, results of operations and prospects.
The severity of the decline in the U.S. economy has adversely affected the performance and market value of many of our loans. Years of
stagnation following steep declines in the residential housing market have directly affected our construction and land development loans, while
sustained high unemployment and general economic weakness have adversely affected parts of our commercial and industrial loan portfolio.
Our construction and land development loan portfolio comprised $151.9 million, or 5.3% of our total loans, at December 31, 2013. Our
commercial and industrial loans were $1.3 billion at December 31, 2013, or 44.7% of our total loans. Construction loans are often riskier than
home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown like the one we have recently
experienced, 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, 2013, we had an allowance for loan losses of $30.7 million, of which $5.8 million, or 18.9%, was allocated to
real estate construction loans, and $11.2 million, or 36.5%, 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 business,
financial condition, results of operations and prospects.
A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2013, approximately 48.3% of our loan portfolio was composed of commercial and consumer real estate loans. The real
estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value
during the time the credit is extended. The recent recession has adversely affected real estate market values across the country and values may
continue to decline. A further decline in real estate values could further impair the value of our collateral and our ability to sell the collateral
upon any foreclosure, which would likely require us to increase our provision for loan losses. In the event of a default with respect to any of
these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan.
If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our
allowance for loan losses, our profitability could be adversely affected, which could have a material adverse effect on our business, financial
condition, results of operations and prospects.
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Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our growth over the past several years, a large portion of loans in our loan portfolio and of our lending relationships is of
relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some
period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer
portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level
that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision
for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our high concentration of large loans to certain borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to originate and retain large loans. Many of these loans have
been made to a small number of borrowers, resulting in a high concentration of large loans to certain borrowers. As of December 31, 2013, our
10 largest borrowing relationships ranged from approximately $17.2 million to $21.9 million (including unfunded commitments) and averaged
approximately $19.0 million in total commitments. Along with other risks inherent in these loans, such as the deterioration of the underlying
businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these
borrowers becomes unable to repay its loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce
or death, our nonperforming loans and our provision for loan losses could increase significantly, which could have a material adverse effect on
our business, financial condition, results of operations and prospects.
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 the creditworthiness of our borrowers resulting in loans to borrowers who fail to repay their loans in accordance with
the loan terms, incorrectly value the collateral securing the repayment of their loans, or fail to detect or respond to a deterioration in 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 sustained economic weakness, we believe our allowance for loan losses is adequate. Our
allowance for loan losses as of December 31, 2013 was $30.7 million, or 1.07% of total gross loans.
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 have a material adverse effect on our business, financial condition, results
of operations and 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 have a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail to design, implement and 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 business, financial condition, results of operations and prospects.
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.
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We believe that a control system, no matter how well designed and managed, 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 of could have a material adverse effect on
our business, financial condition, results of operations and prospects.
Our business strategy includes the continuation of our growth plans, and our business, financial condition, results of operations and
prospects 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. 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. Failure to manage our growth effectively could adversely affect our ability to successfully implement our business strategy, which
could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may not be able to successfully expand into new markets.
We have opened new offices in three primary markets (Pensacola, Florida, Mobile, Alabama and Nashville, Tennessee) 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 limit our ability to be successful in these new markets and may have a material adverse effect on our
business, financial condition, results of operations and prospects.
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 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 40,000 shares of our senior non-cumulative perpetual preferred stock, Series A, par value $.001 per share
(or “Series A Preferred Stock”) to the United States Department of the Treasury (“Treasury”) in connection with the
Treasury’s Small Business Lending Fund program for gross proceeds of $40,000,000 on June 21, 2011;
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;
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 our 8.5% subordinated debentures; and
the sale of an aggregate of 250,000 shares of our common stock at $41.50 per share, or $10,375,000, in a private placement
completed on December 2, 2013.
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After giving effect to these transactions, we will still 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. Either of such events could have a material adverse effect on our business,
financial condition, results of operations and prospects.
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.
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.
Our ability to compete successfully will depend on a number of factors, including, among other things:
our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound
banking practices;
the scope, relevance and pricing of products and services that we offer;
customer satisfaction with our products and services;
industry and general economic trends; and
our ability to keep pace with technological advances and to invest in new technology.
Increased competition could require us to increase the rates that we pay on deposits or lower the rates that we offer on loans, which could
reduce our profitability. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which
could have a material adverse effect on our business, financial condition, results of operations and prospects.
Unpredictable economic conditions or a natural disaster in the state of Alabama, the panhandle of the state of Florida or the Nashville,
Tennessee area, particularly the Birmingham-Hoover, Huntsville, Montgomery, Mobile and Dothan, Alabama MSAs, the Pensacola-Ferry
Pass-Brent, Florida MSA or the Nashville, Tennessee 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, the panhandle of the state of Florida and the Nashville, Tennessee MSA. Therefore, our success will depend on the
general economic conditions in these areas, 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, Florida or Tennessee,
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, Florida and Mobile, Alabama
markets increased our exposure to potential losses associated with hurricanes and similar natural disasters that are more common on the Gulf
Coast than in our other markets. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects Alabama,
the panhandle of Florida or the Nashville, Tennessee MSA, or existing or prospective property or borrowers in such areas, may affect us and
our profitability more significantly and more adversely than our more geographically diverse competitors, which could have a material adverse
effect on our business, financial condition, results of operations and prospects.
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We encounter technological change continually and have fewer resources than many of our competitors to invest in technological
improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and
services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce
costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that
will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven
products and services effectively or be successful in marketing these products and services to our customers. As these technologies are
improved in the future, we may, in order to remain competitive, be required to make significant capital expenditures, which may increase our
overall expenses and have a material adverse effect on our results of operations.
We depend on our information technology and telecommunications systems and third-party servicers, and any systems failures or
interruptions could adversely affect our operations and financial condition.
Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and
third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. For
example, Jack Henry & Associates, Inc. provides our entire core banking system through a service bureau arrangement. The failure of these
systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our
operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could
experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If
significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation,
result in a loss of customer business, and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a
material adverse effect on our business, financial condition, results of operations and prospects.
We may bear costs associated with the proliferation of computer theft and cybercrime.
We necessarily collect, use and hold data concerning individuals and businesses with whom we have a banking relationship. Threats to data
security, including unauthorized access and cyber attacks, rapidly emerge and change, exposing us to additional costs for protection or
remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory
requirements. It is difficult and near impossible to defend against every risk being posed by changing technologies as well as criminals intent on
committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result
in a breach of our data security. Patching and other measures to protect existing systems and servers could be inadequate, especially on systems
that are being retired. Controls employed by our information technology department and third-party vendors could prove inadequate. We could
also experience a breach by intentional or negligent conduct on the part of our employees or other internal sources. Our systems and those of
our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from
catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily
operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage,
any of which could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition and
prospects.
We may not be able to successfully expand into new markets.
We have opened new offices and operations in three primary markets (Pensacola, Florida, Mobile, Alabama and Nashville, Tennessee) 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.
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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. Our failure to sustain our historical rate of growth or
adequately manage the factors that have contributed to our growth could have a material adverse effect on our business, financial condition,
results of operations and prospects.
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 16.46% of our outstanding common stock as of December
31, 2013. 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.
Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate could have a material adverse effect
on our business, financial condition, results of operations and prospects.
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Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely
affect our growth and profitability.
The federal bank regulatory agencies have indicated their view that banks with high concentrations of loans secured by commercial real estate
are subject to increased risk and should hold higher capital than regulatory minimums to maintain an appropriate cushion against loss that is
commensurate with the perceived risk. Because a significant portion of our loan portfolio is dependent on commercial real estate, a change in
the regulatory capital requirements applicable to us as a result of these policies could limit our ability to leverage our capital, which could have
a material adverse effect on our business, financial condition, results of operations and prospects.
The dividend rate on our Series A Preferred Stock fluctuates based on the changes in our “qualified small business lending” and other
factors and may increase, which could adversely affect income to common stockholders.
We issued $40.0 million in Series A Preferred Stock to the Treasury on June 21, 2011 in connection with the Treasury’s Small Business
Lending Fund program. Dividends on each share of our Series A Preferred Stock are payable on the liquidation amount at an annual rate
calculated based upon the “percentage change in qualified lending” of the bank between each dividend period and the “baseline” level of
“qualified small business lending” of the bank. Such dividend rate may vary from 1% per annum to 7% per annum for the eleventh through the
eighteenth dividend periods and that portion of the nineteenth dividend period ending on the four and one-half year anniversary of the date of
issuance of the Series A Preferred Stock (or, the dividend periods from October 1, 2013 through and including December 20, 2015). The
dividend rate increases to a fixed rate of 9% after 4.5 years from the issuance of our Series A Preferred Stock (or, on December 21, 2015),
regardless of the previous rate, until all of the preferred shares are redeemed. If we are unable to maintain our “qualified small business
lending” at certain levels, if we fail to comply with certain other terms of our Series A Preferred Stock, or if we are unable to redeem our Series
A Preferred Stock within 4.5 years following issuance, the dividend rate on our Series A Preferred Stock could result in materially greater
dividend payments, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are subject to interest rate risk, which could adversely affect our profitability.
Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between
our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities,
such as deposits and borrowings. We have positioned our asset portfolio to benefit in a higher or lower interest rate environment, but this may
not remain true in the future. Our interest sensitivity profile was somewhat asset sensitive as of December 31, 2013, meaning that our net
interest income and economic value of equity would increase more from rising interest rates than from falling interest rates. Interest rates are
highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and
regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System (or, the “Federal Reserve”). Changes in monetary
policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on
deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial
assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate
than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.
Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates
paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse
effect on our business, financial condition, results of operations and prospects.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to
repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also
necessitate further increases to the allowance for loan losses which could have a material adverse effect on our business, financial condition,
results of operations and prospects.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of
an inability to liquidate assets or obtain adequate funding. An inability to raise funds through deposits, borrowings, the sale of loans and other
sources could have a substantial negative effect on our liquidity. In particular, approximately 74.0% of the bank’s liabilities as of December 31,
2013 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison,
81.2% of the assets of the bank were loans, which cannot be called or sold in the same time frame. Our access to funding sources in amounts
adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Market conditions or other events could also negatively affect the level or cost of funding, affecting
our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations and fund asset growth and new
business transactions at a reasonable cost, in a timely manner and without adverse consequences. Any substantial, unexpected or prolonged
change in the level or cost of liquidity could have a material adverse effect on our ability to meet deposit withdrawals and other customer needs,
which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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The fair value of our investment securities can fluctuate due to factors outside of our control.
As of December 31, 2013, the fair value of our investment securities portfolio was approximately $297.5 million. Factors beyond our control
can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these
securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to
the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among
others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other
comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The
process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the
future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving
all contractual principal and interest payments on the security. Our failure to assess any currency impairments or losses with respect to our
securities could have a material adverse effect on our business, financial condition, results of operations and prospects.
Deterioration in the fiscal position of the U.S. federal government and downgrades in Treasury and federal agency securities could
adversely affect us and our banking operations.
The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating
agencies of the credit rating of the U.S. government and federal agencies. However, in addition to causing economic and financial market
disruptions, any future downgrade, failure to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal
government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental
agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on
favorable terms. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed
income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Also, the adverse
consequences of any downgrade could extend to those to whom we extend credit and could adversely affect their ability to repay their loans.
Any of these developments could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial
institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have
exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions
about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and
could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business,
financial condition, results of operations and prospects.
We are subject to environmental liability risk associated with our lending activities.
In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. As a result, we could be subject
to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property
damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be
required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to
common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Any
significant environmental liabilities could have a material adverse effect on our business, financial condition, results of operations and
prospects.
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Risks Related to Our Industry
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
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“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.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules
effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are
subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than "small bank holding
companies" (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most
of the required minimum regulatory capital ratios, they introduce a new common equity Tier 1 capital ratio and the concept of a capital
conservation buffer. The Basel III Rules also expand the current definition of capital by establishing additional criteria that capital instruments
must meet to be considered additional Tier 1 capital (that is, Tier 1 capital in addition to common equity) and Tier 2 capital. A number of
instruments that now generally qualify as Tier 1 capital will not qualify or their qualifications will change when the Basel III Rules are fully
implemented. However, the Basel III Rules permit banking organizations with less than $15 billion in assets to retain, through a one-time
election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III
Rules have maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements,
including the common equity Tier 1 capital ratio. In order to be a "well-capitalized" depository institution under the new regime, an institution
must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more;
and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital.
Generally, financial institutions will become subject to the Basel III Rules on January 1, 2015 with a phase-in period through 2019 for many of
the changes.
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 “Exchange Act”), the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the
Securities and Exchange Commission (or, the “SEC”). These laws and regulations increase the scope, complexity and cost of corporate
governance, reporting and disclosure practices over those of non-public or non-reporting companies. Despite our conducting business in a
highly regulated environment, these laws and regulations have different requirements for compliance than we experienced prior to becoming a
reporting company. Our expenses related to services rendered by our accountants, legal counsel and consultants have increased in order to
ensure compliance with these laws and regulations that we became subject to as a reporting company and may increase further as we become a
public company and grow in size. These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws
applicable to us may impact the profitability of our business activities and may change certain of our business practices, including our ability to
offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional
costs, including increased compliance costs, which could have a material adverse effect on our business, financial condition, results of
operations and prospects.
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Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC and the Alabama Banking Department periodically examine our business, including our compliance with laws
and regulations. If, as a result of an examination, a federal or state banking agency were to determine that our financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that
we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include
the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil
monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be
corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.
Any regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our FDIC deposit insurance premiums and assessments may increase.
The deposits of the bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance
assessments. The bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the
level of supervisory concern that it poses. High levels of bank failures since the beginning of the financial crisis and increases in the statutory
deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to
maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC increased deposit insurance
assessment rates and charged a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special
assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments,
increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue
certain business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and
prospects.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and
failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for
enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act
or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief,
restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may
also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have
a material adverse effect on our business, financial condition, results of operations and prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and
regulations.
The Bank Secrecy Act, the USA Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and
maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Federal
Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has
recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice,
Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules
enforced by the Office of Foreign Assets Control (“OFAC”). If our policies, procedures and systems are deemed deficient, we would be subject
to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain
regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement
adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these
results could have a material adverse effect on our business, financial condition, results of operations and prospects.
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.
36
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 SEC 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 will result in additional
operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and
prospects.
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 adverse effect on our business, financial condition, and results of operations and prospects.
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 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, and have a material adverse effect on our business, financial condition,
results of operations and prospects.
37
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 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 and
have a material adverse effect on our business, financial condition, results of operations and prospects.
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. Our inability to manage interest rate risk and
fluctuations could have a material adverse effect on our business, financial condition, results of operations and prospects.
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. We do not have any control over monetary policies implemented by the Federal Reserve or otherwise and any changes in these
policies could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Our Common Stock
The rights of our common stockholders are subordinate to the rights of the holders of our Series A Preferred Stock and any debt securities
that we may issue and may be subordinate to the holders of any other class of preferred stock that we may issue in the future.
We have issued 40,000 shares of our Series A Preferred Stock to the Treasury in connection with our participation in the Small Business
Lending Fund program. These shares have certain rights that are senior to our common stock. As a result, we must make payments on the
preferred stock before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the
holders of the Series A Preferred Stock must be satisfied in full before any distributions can be made to the holders of our common stock. Our
board of directors has the authority to issue in the aggregate up to one million shares of preferred stock, and to determine the terms of each issue
of preferred stock, without stockholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue in the
future will also be senior to our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future
will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts
is uncertain. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other
borrowings will negatively affect the market price of our common stock.
38
We and our banking subsidiary are subject to capital and other requirements which restrict our ability to pay dividends.
On September 19, 2013, we announced the approval of the initiation of quarterly cash dividends beginning in 2014. Future declarations of
quarterly dividends will be subject to the approval of our board of directors, subject to limits imposed on us by our regulators. In order to pay
any dividends, we will need to receive dividends from our bank or have other sources of funds. Under Alabama law, our bank is subject to
restrictions on the payment of dividends to us, which are similar to those applicable to national banks. In addition, the bank must maintain
certain capital levels, which may restrict the ability of the bank to pay dividends to us and our ability to pay dividends to our stockholders. As
of December 31, 2013, our bank could pay approximately $110.9 million of dividends to us without prior approval of the Superintendent of
Banks of the Alabama Banking Department (the “Superintendent”). However, the payment of dividends is also subject to declaration by our
board of directors, which takes into account our financial condition, earnings, general economic conditions and other factors, including
statutory and regulatory restrictions. There can be no assurance that dividends will in fact be paid on our common stock in future periods or
that, if paid, such dividends will not be reduced or eliminated.
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 make 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.
There are limitations on your ability to transfer your common stock.
There currently is no public trading market for the shares of our common stock. 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 or we register shares of our common stock with the
SEC and list such shares on a national exchange, 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.
Our Certificate of Incorporation, as amended, 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, as amended (or, our “charter”) authorizes our 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 our Series A 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 and is subject to risk of loss.
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.
Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover more difficult
Certain provisions of our charter and bylaws, as amended, and corporate and federal banking laws, could make it more difficult for a third party
to acquire control of our organization, even if those events were perceived by many of our stockholders as beneficial to their interests. These
provisions, and the corporate and banking laws and regulations applicable to us:
39
provide that special meetings of stockholders may be called at any time by the Chairman of our board of directors, by the
President or by order of the board of directors;
enable our board of directors to issue preferred stock up to the authorized amount, with such preferences, limitations and relative
rights, including voting rights, as may be determined from time to time by the board;
enable our board of directors to increase the number of persons serving as directors and to fill the vacancies created as a result of
the increase by a majority vote of the directors present at the meeting;
enable our board of directors to amend our bylaws without stockholder approval; and
do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to
vote in any election of directors to elect all of the directors standing for election, if they should so choose).
These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances
in which our stockholders might otherwise receive a premium over the market price of our shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We operate through 13 banking offices, including our loan production office in Nashville Tennessee. 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.
State
MSA
Office Address
Alabama:
Birmingham-Hoover:
City
Zip Code
Owned or
Leased
Date Opened
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
Leased
10/17/2008
2/1/2011
Total
Mobile:
2 Offices
64 North Royal Street
Mobile
36602
Leased
7/9/2012
Total Offices in Alabama
Florida:
Pensacola-Ferry Pass-Brent:
316 South Balen Street
4980 North 12th Avenue
Total
Tennessee:
Nashville:
1 Office
10 Offices
Pensacola
Pensacola
32502
32504
Leased
Owned
4/1/2011
8/27/2012
2 Offices
611 Commerce Street (2)
Nashville
37203
Leased
6/4/2013
Total offices
1 Office
13 Offices
(1) Offices relocated to this address. Original offices opened on date indicated.
(2) Office is a loan production office only.
40
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.
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. Consequently, we have infrequent secondary trades in our common stock. The most recent
sale of our common stock was at $41.50 per share on February 4, 2014. As of February 28, 2014, we had 1,562 stockholders of record holding
7,420,812 outstanding shares of our common stock. As of December 31, 2013, we had 776,300 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 and
78,500 shares issued with restrictions under our 2009 Stock Incentive Plan,.
Dividends
We paid a cash dividend of $0.50 per common share on December 31, 2012 and $0.50 per common share on December 16, 2013. In September
2013, we announced a plan to initiate the payment of a quarterly cash dividend beginning in 2014. The first quarterly cash dividend of $0.15 per
common share will be payable on April 14, 2014 to stockholders of record as of April 7, 2014. Future declarations of quarterly cash dividends
will be subject to the approval of the Board and may be adjusted as business needs or market conditions change. 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 stockholder. 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 also 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 2013 other than those previously reported in our reports filed with the Securities and Exchange
Commission.
41
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, 2013.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2013 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
806,500 $
48,300
854,800 $
Weighted-average
Exercise Price of
Outstanding Awards
24.15
Number of Securities
Remaining Available For
Future Issuance Under
Equity Compensation Plans
217,670
17.59
23.77
-
217,670
We award stock options as incentive to employees, officers, directors and consultants to attract or retain these individuals, to maintain and
enhance our long-term performance and profitability, and to allow these individuals to acquire an ownership interest in our Company. Our
compensation committee administers this program, making all decisions regarding grants and amendments to these awards. An incentive stock
option may not be exercised later than 90 days after an option holder terminates his or her employment with us unless such termination is a
consequence of such option holder’s death or disability, in which case the option period may be extended for up to one year after termination of
employment. All of our issued options will vest immediately upon a transaction in which we merge or consolidate with or into any other
corporation (unless we are the surviving corporation), or sell or otherwise transfer our property, assets or business substantially in its entirety to
a successor corporation. At that time, upon the exercise of an option, the option holder will receive the number of shares of stock or other
securities or property, including cash, to which the holder of a like number of shares of common stock would have been entitled upon the
merger, consolidation, sale or transfer if such option had been exercised in full immediately prior thereto. All of our issued options have a term
of 10 years. This means the options must be exercised within 10 years from the date of the grant.
We have granted 78,500 shares of restricted stock under the 2009 Stock Incentive Plan. These shares generally vest between three and 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.
We granted 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.
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.
42
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, 2008 through December 31, 2013. This comparison assumes $100
invested on December 31, 2008 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.
Index:
ServisFirst Bancshares, Inc.
NASDAQ Composite
NASDAQ Bank
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
100.00
100.00
100.00
100.00
143.89
81.50
100.00
168.22
91.18
120.00
165.19
79.85
123.00
191.47
92.46
166.00
264.84
128.43
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, 2013, 2012, 2011, 2010 and 2009 and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 are derived from our
audited consolidated financial statements and related notes.
43
$
$
$
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
Net income available to common stockholders
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
Dividend payout ratio
Net interest margin (1)
Efficiency ratio (2)
Asset quality Ratios:
Net charge-offs to average loans outstanding
Non-performing loans to totals loans
Non-performing assets to total assets
Allowance for loan losses to total gross loans
Allowance for loan losses to total non-performing
loans
Liquidity Ratios:
Net loans to total deposits
Net average loans to average earning assets
Noninterest-bearing deposits to total deposits
Capital Adequacy Ratios:
Stockholders' Equity to total assets
Total risked-based capital (3)
Tier 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
2013
As of and for the years ended December 31,
2010
2011
2012
(Dollars in thousands except for share and per share data)
2009
3,520,699 $
2,858,868
2,828,205
266,220
32,274
61,370
188,411
8,634
8,134
3,738
8,351
3,019,642
194,320
-
9,545
297,192
126,081 $
13,619
112,462
13,008
99,454
10,010
47,489
61,975
20,358
41,617
41,201
2,906,314 $
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
109,023 $
14,901
94,122
9,100
85,022
9,643
43,100
51,565
17,120
34,445
34,045
6.00 $
5.69
35.00
5.68 $
4.99 $
30.84 $
2,460,785 $
1,830,742
1,808,712
293,809
15,209
43,018
99,350
100,565
17,859
3,501
4,591
2,143,887
84,219
30,514
5,873
196,292
1,935,166 $
1,394,818
1,376,741
276,959
5,234
27,454
204,278
346
7,875
3,510
4,450
1,758,716
24,937
30,420
3,993
117,100
1,573,497
1,207,084
1,192,173
255,453
645
26,982
48,544
680
6,202
3,241
5,088
1,432,355
24,922
15,228
3,370
97,622
91,411 $
16,080
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
23,238
4.03 $
3.53 $
26.35 $
78,146 $
15,260
62,886
10,350
52,536
5,169
30,969
26,736
9,358
17,378
17,378
3.15 $
2.84 $
21.19 $
62,197
18,337
43,860
10,685
33,175
4,413
28,930
8,658
2,780
5,878
5,878
1.07
1.02
17.71
6,869,071
7,268,675
7,350,012
5,996,437
6,941,752
6,268,812
5,759,524
6,749,163
5,932,182
5,519,151
6,294,604
5,527,482
5,485,972
5,787,643
5,513,482
1.31 %
15.54 %
8.79 %
3.80 %
38.78 %
0.33 %
0.34 %
0.64 %
1.07 %
1.30 %
15.81 %
10.02 %
3.80 %
41.54 %
0.24 %
0.44 %
0.69 %
1.11 %
1.11 %
14.73 %
- %
3.79 %
45.54 %
0.32 %
0.75 %
1.06 %
1.20 %
1.04 %
15.86 %
- %
3.94 %
45.51 %
0.55 %
1.03 %
1.10 %
1.30 %
0.43 %
6.33 %
- %
3.31 %
59.93 %
0.60 %
1.01 %
1.57 %
1.22 %
314.94 %
253.50 %
159.96 %
126.00 %
120.91 %
93.66 %
84.80 %
21.54 %
8.44 %
11.73 %
10.00 %
8.48 %
20.82 %
14.03 %
21.14 %
21.02 %
20.23 %
27.41 %
93.05 %
79.89 %
21.71 %
8.03 %
11.78 %
9.89 %
8.43 %
46.96 %
41.36 %
18.11 %
29.20 %
17.15 %
18.83 %
84.37 %
76.71 %
19.54 %
7.98 %
12.79 %
11.39 %
9.17 %
34.87 %
24.30 %
27.16 %
31.38 %
21.90 %
67.63 %
78.28 %
78.04 %
14.24 %
6.05 %
11.82 %
10.22 %
7.77 %
195.64 %
178.43 %
22.99 %
15.48 %
22.78 %
19.95 %
83.23 %
80.06 %
14.75 %
6.20 %
10.48 %
8.89 %
6.97 %
(16.09) %
(22.14) %
35.38 %
24.49 %
38.08 %
12.49 %
Percentage change in equity
(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.
44
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 12 full service banking offices located in Jefferson, Shelby, Madison, Montgomery,
Mobile and Houston Counties in Alabama, and in Escambia County in Florida. These offices operate in the Birmingham-Hoover, Huntsville,
Montgomery, Mobile and Dothan, Alabama MSAs, and in the Pensacola-Ferry Pass-Brent, Florida MSA. Additionally, we opened a loan
production office in Nashville, Tennessee in June 2013. 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.
45
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 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 available to common stockholders was $41.2 million for the year ended December 31, 2013, compared to $34.0 million for the year
ended December 31, 2012. This increase in net income is primarily attributable to an increase in net interest income, which increased $18.4
million, or 19.6%, to $112.5 million in 2013 from $94.1 million in 2012. Noninterest income increased $0.4 million, or 4.2%, to $10.0 million
in 2013 from $9.6 million in 2012. Noninterest expense increased by $4.4 million, or 10.2%, to $47.5 million in 2013 from $43.1 million in
2012. Basic and diluted net income per common share were $6.00 and $5.69, respectively, for the year ended December 31, 2013, compared to
$5.68 and $4.99, respectively, for the year ended December 31, 2012. Return on average assets was 1.31% in 2013, compared to 1.30% in
2012, and return on average stockholders’ equity was 15.54% in 2013, compared to 15.81% in 2012.
Net income for the year ended December 31, 2012 was $34.0 million, compared to net income of $23.2 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 25.0%, 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.
46
The following table presents some ratios of our results of operations for the years ended December 31, 2013, 2012 and 2011.
For the years ended December 31,
2012
2011
2013
Return on average assets
Return on average stockholders' equity
Dividend payout ratio
Average stockholders' equity to
average total assets
1.31 %
15.54 %
8.79 %
1.30 %
15.81 %
10.02 %
1.11 %
14.73 %
- %
8.43 %
8.19 %
7.56 %
The following tables present a summary of our statements of income, including the percent change in each category, for the years ended
December 31, 2013 compared to 2012, and for the years ended December 31, 2012 compared to 2011, respectively.
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
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
Year Ended December 31,
2013
2012
(Dollars in Thousands)
Change from
the Prior Year
$
126,081 $
13,619
112,462
13,008
109,023
14,901
94,122
9,100
99,454
10,010
47,489
61,975
20,358
41,617
416
$
41,201
85,022
9,643
43,100
51,565
17,120
34,445
400
34,045
$
15.65 %
-8.60 %
19.49 %
42.95 %
16.97 %
3.81 %
10.18 %
20.19 %
18.91 %
20.82 %
4.00 %
21.02 %
Year Ended December 31,
2012
2011
(Dollars in Thousands)
Change from
the Prior Year
$
109,023 $
14,901
94,122
9,100
85,022
9,643
43,100
51,565
17,120
34,445
400
91,411
16,080
75,331
8,972
66,359
6,926
37,458
35,827
12,389
23,438
200
19.27 %
-7.33 %
24.94 %
1.43 %
28.12 %
39.23 %
15.06 %
43.93 %
38.19 %
46.96 %
100.00 %
$
34,045 $
23,238
46.51 %
47
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 $18.4 million, or 19.5%, to $112.5 million for the year ended December 31, 2013 from $94.1 million for the year
ended December 31, 2012. This was due to an increase in total interest income of $17.1 million, or 15.6%, and a decrease in total interest
expense of $1.3 million, or a 8.6% reduction. The increase in total interest income was primarily attributable to a 26.50% increase in average
loans outstanding from 2012 to 2013, which was the result of growth in all of our markets, including in Mobile, Alabama and Nashville,
Tennessee, our two newest markets.
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 -7.3%. 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, our newest market
entrance in 2011.
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, 2013, 2012 and 2011, 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.
48
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)
Average
Balance
2013
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
2012
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance
2011
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
$ 2,573,621 $
3,274
12,953
118,032
170
306
4.59 % $
5.19
2.36
2,034,478
1,631
17,905
$
100,143
95
349
4.92 % $
5.82
1.95
1,573,500 $
-
7,556
82,083
-
211
149,996
115,829
265,825
44,106
4,299
100,417
3,906
4,884
8,790
110
93
280
2.60
4.22
3.31
0.25
2.16
0.28
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
5.22 %
-
2.79
3.04
5.20
3.69
0.21
1.74
0.24
Total interest-earning assets
$ 3,004,495 $
127,781
4.25 % $
2,518,143
$
110,585
4.39 % $
2,024,846 $
92,743
4.58 %
45,528
9,148
84,297
$ 3,143,468
38,467
6,074
65,504
2,628,188
$
28,304
4,813
$
29,094
2,087,057
Non-interest-earning assets:
Cash and due from banks
Net premises and equipment
Allowance for loan losses,
accrued interest and
other assets
Total assets
Interest-bearing liabilities:
Interest-bearing deposits:
Checking
Savings
$
433,931 $
21,793
1,201
61
0.28 % $
0.28
351,975
17,081
$
Money market
Time deposits
Federal funds purchased
Other borrowings
1,244,957
404,927
167,063
21,780
5,810
4,758
462
1,327
0.47
1.18
0.28
6.09
1,042,870
398,552
88,732
33,126
1,074
48
5,820
5,307
222
2,430
0.31 % $
0.28
303,165 $
10,088
0.56
1.33
0.25
7.34
902,290
330,221
19,335
41,866
1,133
47
6,675
5,192
49
2,984
0.37 %
0.47
0.74
1.57
0.25
7.13
Total interest-bearing liabilities
$ 2,294,451 $
13,619
0.59 % $
1,932,336
$
14,901
0.77 % $
1,606,965 $
16,080
1.00 %
Non-interest-bearing liabilities:
Non-interest-bearing
checking
Other liabilities
Stockholders' equity
Unrealized gains on securities
and derivatives
576,072
7,835
259,631
5,479
474,284
6,200
207,656
7,712
Total liabilities and
stockholders' equity
$
3,143,468
Net interest spread
Net interest margin
$
2,628,188
3.66 %
3.80 %
$
3.62 %
3.80 %
315,781
6,580
145,050
12,681
2,087,057
3.58 %
3.79 %
(1)
(2)
(3)
Non-accrual loans are included in average loan balances in all periods. Loan fees of $551,000, $372,000 and $538,000 are included in
interest income in 2013, 2012 and 2011, respectively.
Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%.
Unrealized gains of $8,408,000, $11,998,000 and $7,624,000 are excluded from the yield calculation in 2013, 2012 and 2011,
respectively.
49
The following table reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-bearing assets and
liabilities.
For the Year Ended December 31,
2013 Compared to 2012 Increase (Decrease) in Interest
Income and Expense Due to Changes in:
Rate
Total
Volume
2012 Compared to 2011 Increase (Decrease) in Interest
Income and Expense Due to Changes in:
Rate
Total
Volume
$
Interest-earning assets:
Loans, net of unearned income
Taxable
Tax-exempt
Mortgages held for sale
Taxable
Tax-exempt
Federal funds sold
Restricted equity securities
Interest-bearing balances
with banks
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings
Money market
Time deposits
Federal funds purchased
Other borrowed funds
Total interest-bearing
liabilities
Increase in net interest income
$
25,097 $
86
(108)
(890)
652
(119)
(3)
54
24,769
234
13
1,028
84
215
(738)
836
23,933 $
(7,208) $
(11)
65
(19)
(451)
33
(8)
26
(7,573)
(107)
-
(1,038)
(633)
25
(365)
(2,118)
(5,455) $
$
17,889
75
(43)
(909)
201
(86)
(11)
80
17,196
127
13
(10)
(549)
240
(1,103)
(1,282)
18,478
$
22,910 $
95
218
(124)
900
18
3
(7)
24,013
167
25
941
980
174
(641)
1,646
22,367 $
(4,850) $
-
(80)
(782)
(492)
2
27
4
(6,171)
(226)
(24)
(1,796)
(865)
(1)
87
(2,825)
(3,346) $
18,060
95
138
(906)
408
20
30
(3)
17,842
(59)
1
(855)
115
173
(554)
(1,179)
19,021
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 3.66% and 3.80%, respectively, for the year ended December 31, 2013, compared to 3.62%
and 3.80%, respectively, for the year ended December 31, 2012. Our average interest-earning assets for the year ended December 31, 2013
increased $486.4 million, or 19.3%, to $3.0 billion from $2.5 billion for the year ended December 31, 2012. This increase in our average
interest-earning assets was due to continued core growth in all of our markets and increased loan production. Our average interest-bearing
liabilities increased $362.1 million, or 18.7%, to $2.3 billion for the year ended December 31, 2013 from $1.9 billion for the year ended
December 31, 2012. This increase in our average interest-bearing liabilities was primarily due to an increase in interest-bearing deposits in all
our markets. The ratio of our average interest-earning assets to average interest-bearing liabilities was 130.9% and 130.3% for the years ended
December 31, 2013 and 2012, respectively.
Our average interest-earning assets produced a taxable equivalent yield of 4.25% for the year ended December 31, 2013, compared to 4.39% for
the year ended December 31, 2012. The average rate paid on interest-bearing liabilities was 0.59% for the year ended December 31, 2013,
compared to 0.77% for the year ended December 31, 2012.
50
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.
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, 2013, total loans rated Special Mention,
Substandard, and Doubtful were $93.2 million, or 3.3% of total loans, compared to $100.7 million, or 4.3% of total loans, at December 31,
2012. 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 $13.0 million for the year ended December 31, 2013, an increase of $3.9 million from $9.1 million in
2012. This increase in provision expense for loan losses is primarily attributable to growth in the loan portfolio and elevated net charge-offs for
2013 compared to 2012. Our management maintains a proactive approach in managing nonperforming loans, which decreased to $9.7 million,
or 0.34%, of total loans at December 31, 2013 from $10.4 million, or 0.44%, of total loans at December 31, 2012. During 2013, we had net
charged-off loans totaling $8.6 million, compared to net charged-off loans of $4.9 million for 2012. The ratio of net charged-off loans to
average loans was 0.33% for 2013 compared to 0.24% for 2012. The allowance for loan losses totaled $30.7 million, or 1.07% of loans, net of
unearned income, at December 31, 2013, compared to $26.3 million, or 1.11% of loans, net of unearned income, at December 31, 2012.
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.
Noninterest Income
Noninterest income increased $0.4 million, or 4.2%, to $10.0 million in 2013 from $9.6 million in 2012. Service charges on deposit accounts
increased $0.4 million, or 14.3%, to $3.2 million in 2013 compared to 2012 due to increases in the number of accounts. Increases in the cash
surrender value of bank-owned life insurance contracts were up $0.4 million, or 25.0%, to $2.0 million in 2013 compared to 2012 which is the
result of additional investment of $10.0 million in such contracts in September 2013. Other operating income increased $0.4 million, or 23.5%,
to $2.1 million in 2013 compared to 2012. Mortgage banking income decreased $1.1 million, or 30.6%, to $2.5 million in 2013 compared to
2012. Higher mortgage rates and a general slow-down in refinance activity during 2013 compared to 2012 lead to lower mortgage banking
revenue.
51
Noninterest income increased $2.7 million, or 39.1%, to $9.6 million in 2012 from $6.9 million in 2011. 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 increase in
noninterest income from 2011 to 2012. Service charges on deposit accounts increased $0.5 million, or 21.7%, to $2.8 million in 2012 compared
to 2011. The average balances on transaction deposit accounts, from which service fees are derived, were up $354.9 million, or 23.2%, from
2012 to 2013. 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. 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.
Noninterest Expense
Noninterest expenses increased $4.4 million, or 10.2%, to $47.5 million for the year ended December 31, 2013 from $43.1 million for the year
ended December 31, 2012. This increase is largely attributable to increased salary and employee benefits expense, which is a result of staff
additions related to our expansion, increased incentive pay, and general merit increases. We had 262 full-time equivalent employees at
December 31, 2013 compared to 234 at December 31, 2012. Equipment and occupancy expense increased $1.2 million, or 30.0%, to $5.2
million in 2013 compared to $4.0 million in 2012. Much of this increase is the result of operating an airplane we purchased in the fourth quarter
of 2012. Additionally, we opened a new loan production office in Nashville, Tennessee and expanded our space in our Mobile, Alabama office.
FDIC assessments were up $0.2 million, or 12.5%, to $1.8 million in 2013 from $1.6 million in 2012, mostly a result of increases in total assets,
which is the major component of our assessment base. OREO expense decreased $1.3 million, or 48.1%, to $1.4 million in 2013 from $2.7
million in 2012. This large decrease was the result of fewer write-downs in residential development properties during 2013 compared to 2012.
Other noninterest expenses increased $0.2 million, or 1.9 %, to $10.9 million compared to $10.7 million in 2012.
Noninterest expenses increased $5.6 million, or 14.9%, 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.
Income Tax Expense
Income tax expense was $20.4 million for the year ended December 31, 2013 compared to $17.1 million in 2012 and $12.4 million in 2011.
Our effective tax rates for 2013, 2012 and 2011 were 32.85%, 33.20% and 34.58%, respectively. Our primary permanent differences are related
to tax exempt income on securities and, Alabama income tax benefits on real estate investment trust dividends and incentive stock option
expenses.
We invested $65.0 million in bank-owned life insurance for certain named officers of the Bank. 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.
We created real estate investment trusts for the purposes of isolating certain real estate loans in Alabama and Florida for tracking purposes. The
trusts are wholly-owned subsidiaries of a trust holding company, which in turn is a wholly-owned subsidiary of the Bank. The trusts pay a
dividend of their net earnings, primarily interest income derived from the loans they hold, to the Bank, which receives a deduction for state
income tax.
52
Financial Condition
Assets
Total assets at December 31, 2013, were $3.5 billion, an increase of $0.6 billion, or 20.7% over total assets of $2.9 billion at December 31,
2012. Average assets for the year ended December 31, 2013 were $3.1 billion, an increase of $0.5 billion, or 23.8%, over average assets of $2.6
billion for the year ended December 31, 2012. Loan growth was the primary reason for the increase. Year-end 2013 loans were $2.9 billion, up
$0.5 billion, or 20.8%, over year-end 2012 total loans of $2.4 billion.
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 23.8%, 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
$0.6 billion, or 33.3%, over year-end 2011 total loans of $1.8 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, 2013 were $3.4 billion, or 97.6% of total assets of $3.5 billion. Earning assets
at December 31, 2012 were $2.8 billion, or 97.5% of total assets of $2.9 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 60% of our total investment
portfolio should be composed of municipal securities. At December 31, 2013, mortgage-backed securities represented 39% of the investment
portfolio, state and municipal securities represented 45% 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, 2013, any structured investment vehicles or any private-label mortgage-backed securities. The amortized cost of securities in our
portfolio totaled $292.5 million at December 31, 2013, compared to $248.6 million at December 31, 2012. All such securities held are traded in
liquid markets. The following table presents the amortized cost of securities available for sale and held to maturity by type at December 31,
2013, 2012 and 2011.
Securities Available for Sale
U.S. Treasury and government agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
Securities Held to Maturity
Mortgage-backed securities
State and municipal securities
Total
2013
December 31,
2012
2011
$
$
$
$
31,641 $
85,764
127,083
15,738
260,226 $
27,360 $
69,298
112,319
13,677
222,654 $
26,730 $
5,544
32,274 $
20,429 $
5,538
25,967 $
98,169
88,118
95,331
1,030
282,648
9,676
5,533
15,209
The following table presents the amortized cost of our securities as of December 31, 2013 by their stated maturities (this maturity schedule
excludes security prepayment and call features), as well as the taxable equivalent yields for each maturity range.
53
At December 31, 2013:
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
Maturity of Debt Securities - Amortized Cost
Less Than One
Year
One Year through
Five Years
Six Years
through Ten
Years
(In Thousands)
More Than Ten
Years
Total
$
$
$
$
$
59
195
5,600
-
5,854 $
5.02 %
8.47
4.95
-
5.07 %
-
-
-
$
$
- %
-
- %
$
22,676
83,929
70,106
9,753
186,464 $
8,906 $
1,147
50,283
5,985
66,321 $
$
-
493
1,094
-
1,587 $
31,641
85,764
127,083
15,738
260,226
2.17 %
2.99
3.54
1.33
3.01 %
2.31 %
3.51
4.53
1.17
3.91 %
- %
3.46
6.17
-
5.33 %
2.21 %
3.01
4.02
1.27
3.30 %
$
2,382
-
2,382 $
24,348 $
-
24,348 $
$
-
5,544
5,544 $
26,730
5,544
32,274
3.94 %
-
3.94 %
2.69 %
-
2.69 %
- %
6.27
6.27 %
2.80 %
6.27
3.40 %
(1) Yields are presented on a fully-taxable equivalent basis using a tax rate of 35%.
At December 31, 2013, we had $8.6 million in federal funds sold, compared with $3.3 million at December 31, 2012. At the end of each of the
two years, we shifted balances held at correspondent banks to our reserve account at the Federal Reserve Bank of Atlanta to gain favorable
capital treatment. At year-end 2013, there were no holdings of securities of any issuer, other than US government and its agencies, in an amount
greater than 10% of stockholders’ equity.
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 $2.859 billion at December 31, 2013. 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.
Birmingham-Hoover, AL MSA
Huntsville, AL MSA
Montgomery, AL MSA
Dothan, AL MSA
Mobile, AL MSA
Total Alabama MSAs
Pensacola, FL MSA
Nashville, TN MSA
Percentage of
Total Loans in
MSA
50 %
15 %
10 %
13 %
3 %
91 %
8 %
1 %
54
The following table details our loans at December 31, 2013, 2012, 2011, 2010 and 2009:
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total Loans
Less: Allowance for loan losses
Net Loans
2013
2012
2011
(Dollars in Thousands)
2010
2009
$
1,278,649 $
151,868
1,030,990 $
158,361
799,464 $
151,218
536,620 $
172,055
461,088
224,178
710,372
278,621
391,396
1,380,389
47,962
2,858,868
(30,663)
2,828,205 $
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
$
The following table details the percentage composition of our loan portfolio by type at December 31, 2013, 2012, 2011, 2010 and 2009:
Commercial, financial and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied commercial
1-4 family mortgage
Other mortgage
Total real estate - mortgage
Consumer
Total Loans
2013
2012
2011
2010
2009
44.73 %
5.31
24.85
9.74
13.69
48.28
1.68
100.00 %
43.63 %
6.70
24.04
9.98
13.69
47.71
1.96
100.00 %
43.67 %
8.26
21.77
11.21
12.85
45.83
2.24
100.00 %
38.47 %
12.34
19.41
14.28
12.82
46.51
2.68
100.00 %
38.20 %
18.57
16.90
13.71
9.92
40.53
2.70
100.00 %
The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2013:
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
Interest rate sensitivity:
Fixed interest rates
Floating or adjustable rates
Total
Due in 1
year or less
Due in 1 to 5
years
Due after 5
years
Total
(in Thousands)
$
717,845 $
81,886
482,849 $
56,776
77,955 $
13,206
1,278,649
151,868
71,785
42,147
75,648
189,580
33,369
1,022,680 $
405,715
204,955
261,341
872,011
13,996
1,425,632 $
$
232,872
31,519
54,407
318,798
597
410,556 $
$
710,372
278,621
391,396
1,380,389
47,962
2,858,868
(30,663)
2,828,205
$
$
197,627 $
825,053
1,022,680 $
933,986 $
491,646
1,425,632 $
263,538 $
147,018
410,556 $
1,395,151
1,463,717
2,858,868
55
Asset Quality
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 2013 was 0.33%, compared to 0.24% for 2012. The largest balance of our charge-offs is on real estate
construction loans. Real estate construction loans represent 5.31% of our loan portfolio.
Analysis of the Allowance for Loan Losses
2013
2012
2011
(Dollars in Thousands)
2010
2009
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
$ 26,258 $ 22,030 $ 18,077 $ 14,737 $ 10,602
(1,932)
(4,829)
(1,106)
(3,088)
(1,096)
(2,594)
(1,667)
(3,488)
(1,100)
(941)
-
(2,041)
(210)
(9,012)
(250)
(311)
(99)
(660)
(901)
(5,755)
-
(1,096)
-
(1,096)
(867)
(5,653)
(548)
(1,227)
-
(1,775)
(278)
(7,208)
66
296
32
4
-
36
11
409
125
58
-
692
-
692
8
883
361
180
12
-
-
12
81
634
97
53
12
20
-
32
16
198
(2,616)
(3,322)
-
(522)
(9)
(531)
(207)
(6,676)
-
108
-
3
-
3
15
126
Net charge-offs
(8,603)
(4,872)
(5,019)
(7,010)
(6,550)
Provision for loan losses charged to expense
13,008
9,100
8,972 10,350 10,685
Allowance for loan losses at end of period
$ 30,663 $ 26,258 $ 22,030 $ 18,077 $ 14,737
As a percent of year to date average loans:
Net charge-offs
Provision for loan losses
Allowance for loan losses as a percentage of:
Year-end loans
Nonperforming assets
0.33 %
0.50 %
0.24 %
0.45 %
0.32 %
0.57 %
0.55 %
0.81 %
0.60 %
1.00 %
1.07 %
1.11 %
135.70 % 130.77 %
1.20 %
84.48 %
1.30 %
84.82 %
1.24 %
60.34 %
The allowance for loan losses is established and maintained at levels needed to absorb anticipated credit losses from identified and otherwise
inherent risks in the loan portfolio as of the balance sheet date. 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,
2013.
56
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.
2013
2012
For the Years Ended December 31,
2011
2010
2009
Percentage
of loans in
each
Amount
category to
total loans Amount
Percentage
of loans in
each
category to
total loans
Percentage
of loans in
each
category to
total loans
Amount
(Dollars in Thousands)
Percentage
of loans in
each
category to
total loans
Amount
Percentage
of loans in
each
category to
total loans
Amount
$
11,170
44.73 %
$
8,233
43.63 %
$
6,627
43.67 %
$
5,348
38.47 %
$
3,135
38.20 %
5,809
5.31
6,511
6.70
7,495
48.28
4,912
47.71
6,542
3,295
8.26
45.83
6,373
12.34
2,443
46.51
6,295
2,102
18.57
40.53
855
5,334
30,663
1.68
-
100.00 % $
199
6,403
26,258
1.96
-
100.00 % $
531
5,035
22,030
2.24
-
100.00 % $
749
3,164
18,077
2.68
-
100.00 % $
115
3,090
14,737
2.70
-
100.00 %
$
Commercial, financial and
agricultural
Real estate -
construction
Real estate -
mortgage
Consumer
Qualitative factors
Total
We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand
competitive or economic pressures than larger borrowers in periods of economic weakness. If loan losses occur 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, 2013, we had impaired loans of $32.0 million inclusive of nonaccrual loans, a decrease of $5.4 million from $37.4 million
as of December 31, 2012. We allocated $6.3 million of our allowance for loan losses at December 31, 2013 to these impaired loans. We had
previous write-downs against impaired loans of $1.3 million at December 31, 2013, compared to $2.6 million at December 31, 2012. The
average balance for 2013 of loans impaired as of December 31, 2013 was $30.7 million. Interest income foregone throughout the year on
impaired loans was $972,000 for the year ended December 31, 2013, and we recognized $1.1 million of interest income on these impaired loans
for the year ended December 31, 2013. 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 $32.0 million of impaired loans reported as of December 31, 2013, $9.2 million were real estate construction loans, $12.3 million were
residential real estate loans, $3.9 million were commercial and industrial loans, $2.1 million were commercial real estate loans and $3.8 million
were other mortgage loans. Of the $9.2 million of impaired real estate construction loans, $7.3 million (a total of 23 loans with six builders)
were residential construction loans, and $135,000 consisted of various residential lot loans to two builders.
57
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.
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, 2013, 2012, 2011, 2010 and 2009:
2013
2012
2011
Balance
Number
of Loans Balance
Number
of Loans
Balance
Number
of Loans
Balance
2010
Number
of Loans
2009
Number
of Loans
Balance
(Dollars in Thousands)
$
1,714
9 $
276
2
$
1,179
7
$
2,164
8
$
2,032
3,749
14
6,460
19
10,063
21
10,722
24
8,100
1,435
1,878
243
3,556
602
9,621
3
3
1
2,786
453
240
7
4
34 $
3,479
135
10,350
3
2
1
792
670
693
6
2
29 $
2,155
375
13,772
2
4
1
635
202
-
837
7
1
624
36 $ 14,347
1
1
-
909
265
615
1,789
2
1
-
35 $ 11,921
Total nonaccrual loans
$
2
13
2
2
1
5
-
20
1
-
-
1
-
1
-
2
22
51
73
-
-
1
-
-
1
-
1
$
-
-
-
19
-
19
96
- $
-
-
1
-
1
1
$
115
2 $
-
-
-
-
-
-
8
8
$
-
-
-
-
-
-
4
4 $
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
14
-
-
253
-
253
-
- $
267
$
9,736
36 $
10,358
33
$
13,772
36
$ 14,347
35
$ 12,188
12,861
51
9,721
38
12,305
39
6,966
39
12,525
$
22,597
87 $
20,079
71
$
26,077
75
$ 21,313
74
$ 24,713
$
962
2 $
1,168
2
$
1,369
2
$
2,398
9
$
217
1
3,213
15
-
-
8,225
285
8,510
-
-
2
1
3
-
3,121
1,709
302
5,132
-
3
5
1
9
-
2,785
-
331
3,116
-
-
3
-
1
4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
845
-
-
845
-
$
9,689
6 $
9,513
26
$
4,485
6
$
2,398
9
$
845
$
32,286
93 $
29,592
97
$
30,562
81
$ 23,711
83
$ 25,558
74
$
972
$
850
$
1,371
$
510
$
647
$
433
$
155
$
263
$
418
$
310
0.34 %
0.79 %
0.44 %
0.85 %
0.75 %
1.41 %
1.03 %
1.52 %
1.01 %
2.02 %
0.68 %
0.84 %
0.99 %
1.19 %
1.06 %
Nonaccrual loans:
Commercial, financial
and agricultural
Real estate -
construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate -
mortgage
Consumer
90+ days past due
and accruing:
Commercial, financial
and agricultural
Real estate -
construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate
mortgage
Consumer
Total 90+ days past due
and accruing
Total nonperforming
loans
Plus: Other real estate
owned and repossessions
Total nonperforming
assets
Restructured accruing loans:
Commercial, financial
and agricultural
Real estate -
construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate -
mortgage
Consumer
Total restructured
accruing loans
Total nonperforming
assets and restructured
accruing loans
Gross interest income
foregone on nonaccrual
loans 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
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. There are not any loans, outside of those included in the table above, that cause management to have serious doubts as to
the ability of borrowers to comply with present repayment terms.
58
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 competitive 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 2013, 2012 and 2011:
2013
Average
Balance
Average Rate
Paid
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
$
$
576,072
433,931
1,244,957
21,793
69,247
335,680
2,681,680
- % $
0.28 %
0.47 %
0.28 %
1.01 %
1.13 %
$
Average Deposits
Average for Years Ended December 31,
2012
Average
Balance
Average Rate
Paid
(Dollars in Thousands)
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 %
$
2011
Average
Balance
Average Rate
Paid
315,781
303,165
902,290
10,088
65,484
264,737
1,861,545
- %
0.37 %
0.74 %
0.47 %
1.44 %
1.60 %
The following table presents the maturities of our certificates of deposit as of December 31, 2013 and 2012.
At December 31, 2013
Maturity
Three months or less
Over three through six months
Over six months through one year
Over one year
Total
At December 31, 2012
Maturity
Three months or less
Over three through six months
Over six months through one year
Over one year
Total
$100,000 or more
Less than $100,000
Total
(In Thousands)
$
$
56,566 $
62,916
90,609
134,214
344,305 $
15,105 $
12,863
22,429
19,918
70,315 $
71,671
75,779
113,038
154,132
414,620
$100,000 or more
Less than $100,000
Total
(In Thousands)
$
$
81,299 $
33,712
89,215
122,275
326,501 $
20,910 $
9,351
17,236
21,682
69,179 $
102,209
43,063
106,451
143,957
395,680
Total average deposits for the year ended December 31, 2013 were $2.7 billion, an increase of $0.4 billion, or 21.1%, over total average
deposits of $2.3 billion for the year ended December 31, 2012. Average noninterest-bearing deposits increased by $0.1 billion, or 20.0%, from
$0.5 billion for the year ended December 31, 2012 to $0.6 billion for the year ended December 31, 2013.
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.
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, 2013 and 2012.
These lines are subject to certain restrictions and collateral requirements.
59
Stockholders’ Equity
Stockholders’ equity increased $63.9 million during 2013, to $297.2 million at December 31, 2013 from $233.3 million at December 31, 2012.
The increase in stockholders’ equity resulted from net income of $41.2 million during the year ended December 31, 2013, $15.0 million from
the mandatory conversion of our mandatorily convertible subordinated debentures on March 15, 2013, $10.3 million from the sale of 250,000
common shares in a private placement on December 2, 2013 and $3.3 million equity contributed upon the exercise of stock options and
warrants during 2013. These increases were partially offset when we paid a $0.50 cash dividend on each share of our common stock on
December 16, 2013 for a total dividend paid out of $3.7 million.
We granted 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 granted 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.
We granted 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 became fully vested on
December 19, 2012. 50,000 of these options were exercised in December 2012.
We have granted 78,500 shares of restricted stock under the 2009 Stock Incentive Plan. These shares generally vest between three and 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.
On December 16, 2013, we granted options to persons representing key business relationships to purchase up to an aggregate of 35,000 shares
of our common stock with an exercise price of $41.50 per share. These stock options are non-qualified and fully vest on the fifth anniversary of
their grant.
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.
60
The following table sets forth our credit arrangements and financial instruments whose contract amounts represent credit risk as of December
31, 2013, 2012 and 2011:
Commitments to extend credit
Credit card arrangements
Standby letters of credit and financial guarantees
Total
2013
2012
(In Thousands)
2011
$
$
1,052,902 $
38,122
40,371
1,131,395 $
860,421 $
25,699
36,374
922,494 $
697,939
19,686
42,937
760,562
Commitments to extend credit beyond current fundings are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by us upon extension of credit is based on our management’s credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar
transactions. All letters of credit are due within one year or less of the original commitment date. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers.
Derivatives
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, 2013 and 2012 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, 2013, our gap was within such ranges. See “—Quantitative and Qualitative Analysis of Market Risk” below in Item 7A for
additional information.
61
Liquidity and Capital Adequacy
Liquidity
Liquidity is defined as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, or other cash demands and
disbursement needs, and otherwise to operate on an ongoing basis.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of
liquidity at both levels is critical, because the Company and the Bank have different funding needs and sources, and each are subject to
regulatory guidelines and requirements. We are subject to general FDIC guidelines which require a minimum level of liquidity. Management
believes our liquidity ratios meet or exceed these guidelines. Our management is not currently aware of any trends or demands that are
reasonably likely to result in liquidity increasing or decreasing in any material manner.
The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position.
In the event of compression in liquidity due to a run-off in deposits, we have a liquidity policy and procedure that provides for certain actions
under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans and the
curtailment of loan commitments and funding. At December 31, 2013, 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 converted 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 5.5% Subordinated Notes due November 9, 2022. The
proceeds from these notes were used to pay off our 8.5% subordinated debentures. Additionally, on September 12, 2013, we issued and sold in
a private placement 35, 035 shares of our common stock for $41.50 per share, for an aggregate purchase price of $1,453,952.50, and on
December 2, 2013, we held a second and final closing under such private placement, in which we issued and sold 214,965 shares of our
common stock for $41.50 per share, for an aggregate purchase price of $8,921,047.50.
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, 2013. The amounts shown do not reflect any
early withdrawal or prepayment assumptions.
Contractual Obligations (1)
Deposits without a stated maturity
Certificates of deposit (2)
Federal funds purchased
Other borrowings
Operating lease commitments
Total
Payments due by Period
Over 1 - 3
Over 3 - 5
Total
1 year or less
years
(In Thousands)
years
Over 5 years
$
$
2,605,022 $
414,620
174,380
19,940
16,064
3,230,026 $
- $
260,489
174,380
-
2,453
437,322 $
- $
106,796
-
-
4,891
111,687 $
- $
47,335
-
-
4,098
51,433 $
-
-
-
19,940
4,622
24,562
(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.
62
Capital Adequacy
As of December 31, 2013, 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, 2013. 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, 2013.
Total risk-based capital
Tier 1 capital
Leverage ratio
Well-
Capitalized
Actual at
December 31,
2013
10.00 %
6.00 %
5.00 %
11.73 %
10.00 %
8.48 %
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.
63
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, 2013, our gap was within
such ranges.
The model measures scheduled maturities in periods of three months, four to twelve months, one to five years and over five years. The chart
below illustrates our rate-sensitive position at December 31, 2013. 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
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
Total interest-bearing liabilities
Interest sensitivity gap
Cumulative sensitivity gap
Percent of cumulative sensitivity Gap
to total interest-earning assets
(Dollars in Thousands)
$
$
1,589,067
28,893
8,634
$
318,304
23,324
-
849,949 $
174,084
-
109,682
75,931
-
$ 2,867,002
302,232
8,634
186,206
1,812,800
$
$
1,715
343,343
$
490
1,024,523 $
-
185,613
188,411
$ 3,366,279
$
$
$
500,128
1,454,438
71,671
174,380
-
2,200,617
(387,817)
(387,817)
$
$
$
-
-
188,817
-
-
188,817
154,526
(233,291)
$
$
$
- $
-
154,140
-
-
154,140
870,383 $
637,092 $
-
-
(8)
-
19,940
19,932
165,681
802,773
$ 500,128
1,454,438
414,620
174,380
19,940
2,563,506
$ 802,773
-
$
(11.5)%
(6.9) %
18.9 %
23.8 %
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, 2013, the -0.63% change for a 200 basis points rate change is well within the regulatory
guidance range.
64
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, 2013
Economic value of equity
$
297,192 $
0 bps
+100 bps
(Dollars in Thousands)
297,341 $
+200 bps
298,054
Actual dollar change
Percent change
$
149 $
862
0.05 %
0.29 %
The one year gap ratio of negative 6.9% indicates that we would show a 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.
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.
65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulations S-X and by Item 302 of Regulation S-K are set forth in the pages
listed below.
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Balance Sheets at December 31, 2013 and 2012
Consolidated Statements of Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Page
66
67
68
69
70
71
72
73
74
66
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, 2013 and
2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our 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, 2013 and 2012, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2013, 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, 2013, based on criteria established in Internal Control —
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 7, 2014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Birmingham, Alabama
March 7, 2014
67
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, 2013. 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 (1992). Based on this assessment, management determined that the Company maintained effective internal
control over financial reporting as of December 31, 2013, 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
68
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, 2013, based on criteria established in
Internal Control — Integrated Framework (1992) 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, 2013, based on criteria established in Internal Control — Integrated Framework (1992) 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 sheets of ServisFirst Bancshares, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2013, and our report dated March 7, 2014 expressed an unqualified opinion on these consolidated financial statements.
/s/ KPMG LLP
Birmingham, Alabama
March 7, 2014
69
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
Cash and due from banks
Interest-bearing balances due from depository institutions
Federal funds sold
Cash and cash equivalents
Available for sale debt securities, at fair value
Held to maturity debt securities (fair value of $31,315 and $27,350 at
December 31, 2013 and 2012, 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, 2013 and at
December 31, 2012
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;
7,350,012 shares issued and outstanding at December 31, 2013 and
6,268,812 shares issued and outstanding at December 31, 2012
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
December 31, 2013
December 31, 2012
$
$
$
$
61,370 $
188,411
8,634
258,415
266,220
32,274
3,738
8,134
2,858,868
(30,663)
2,828,205
8,351
10,262
11,018
12,861
69,008
12,213
3,520,699 $
650,456 $
2,369,186
3,019,642
174,380
19,940
-
769
8,776
3,223,507
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
39,958
-
-
7
123,325
130,011
3,891
297,192
3,520,699 $
6
93,505
92,492
7,296
233,257
2,906,314
70
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
2013
Year Ended December 31,
2012
2011
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.
$
$
$
$
118,285 $
3,888
3,407
128
373
126,081
11,830
1,789
13,619
112,462
13,008
99,454
3,228
2,513
131
1,994
2,144
10,010
26,324
5,202
1,809
1,799
1,426
10,929
47,489
61,975
20,358
41,617
416
41,201 $
6.00 $
5.69 $
100,462 $
4,814
3,246
196
305
109,023
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 $
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
71
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains arising during period from
securities available for sale, net of tax (benefit) of $(1,781),
$191 and $2,944 for 2013, 2012 and 2011, respectively
Reclassification adjustment for net gains on sale of securities in
net income, net of tax of $45 and $252 for 2013
and 2011, respectively
Other comprehensive (loss) income, net of tax
Comprehensive income
See Notes to Consolidated Financial Statements
2013
2012
2011
$
41,617
$
34,445
$
23,438
(3,319)
354
4,519
(86)
(3,405)
38,212
$
-
354
34,799
$
(414)
4,105
27,543
$
72
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands, except share amounts)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
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
Balance, December 31, 2012
Sale of 250,000 shares of common
stock
Dividends paid
Preferred dividends paid
Exercise 164,700 stock options and
warrants, including tax benefit
Issuance of 600,000 shares upon
mandatory conversion of
subordinated mandatorily
convertible debentures
Stock-based compensation expense
Other comprehensive loss
Net income
Balance, December 31, 2013
$
See Notes to Consolidated Financial Statements
$
-
-
39,958
-
-
-
-
-
39,958
-
-
-
-
-
-
39,958
-
-
-
-
-
-
-
-
39,958 $
6 $
75,914 $
38,343 $
2,837 $
117,100
-
-
-
-
-
-
-
6
-
-
-
-
-
-
6
-
-
-
-
1
-
-
-
7 $
10,159
-
-
757
975
-
-
87,805
-
-
4,651
1,049
-
-
93,505
10,337
-
-
3,279
-
-
(200)
-
-
-
23,438
61,581
(3,134)
(400)
-
-
-
34,445
92,492
-
(3,682)
(416)
-
14,999
1,205
-
-
123,325 $
-
-
-
41,617
130,011 $
-
-
-
-
-
4,105
-
6,942
-
-
-
-
354
-
7,296
-
-
-
-
-
-
(3,405)
-
3,891 $
10,159
39,958
(200)
757
975
4,105
23,438
196,292
(3,134)
(400)
4,651
1,049
354
34,445
233,257
10,337
(3,682)
(416)
3,279
15,000
1,205
(3,405)
41,617
297,192
73
SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands)
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 bank-owned life insurance contracts
Proceeds from sale of securities available for sale
Proceeds from sale of restricted equity securities
Proceeds from sale of other real estate owned and repossessed assets
Investment in tax credit partnerships
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
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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Interest
Income taxes
NONCASH TRANSACTIONS
Conversion of mandatorily convertible subordinated debentures
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.
2013
2012
2011
$
41,617 $
34,445 $
23,438
(1,805)
13,008
1,841
1,122
-
(1,104)
1,205
(173)
192,576
(172,371)
(131)
(2,513)
159
433
2,498
(1,994)
-
(262)
(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)
92
74,198
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)
200
24,323
(83,455)
(47,867)
(102,190)
40,959
(10,668)
106,783
(11,701)
4,361
(515,644)
(1,346)
-
(10,000)
4,140
203
7,664
(7,907)
(571,693)
105,282
402,788
57,315
-
-
10,337
-
3,279
262
-
(3,682)
(416)
575,165
77,670
180,745
258,415 $
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
180,745 $
28,575
(15,441)
5,466
(449,449)
(1,314)
(543)
(40,000)
63,270
552
3,334
-
(507,740)
168,320
216,851
79,265
-
-
10,032
39,958
757
127
(20,738)
-
(200)
494,372
10,955
231,978
242,933
13,792 $
20,878
14,904 $
13,134
16,033
15,837
(15,000) $
-
11,355
-
- $
-
2,695
24
-
417
9,029
136
$
$
$
74
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 $24.4 million at December 31, 2013 and $16.0 million at December 31, 2012.
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.
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.
75
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. Each loan is underwritten using government agency guidelines. 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 insignificant level of investor repurchase demands. There were no expenses incurred as part of these buyback
obligations for the years ended December 31, 2013 and 2012.
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. A loan may be returned to accrual status if the
Company is reasonably assured of repayment of principal and interest and the borrower has demonstrated sustained performance for a period
of at least six months. 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.
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.
76
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.
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, 2013
and 2012 were not material and have not been recorded.
77
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.
The Company follows the provisions of ASC 740-10, Income Taxes. ASC 740-10 establishes a single model to address accounting for
uncertain tax positions. ASC 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. ASC 740-10 also provides guidance on derecognition measurement
classification interest and penalties, accounting in interim periods, disclosure, and transition. ASC 740-10 provides a two-step process in the
evaluation of a tax position. The first step is recognition. A Company determines whether it is more likely than not that a tax position will be
sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the
position. The second step is measurement. A tax position that meets the more likely than not recognition threshold is measured at the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Stock-Based Compensation
At December 31, 2013, 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, 2013, 2012 and 2011 was $532,000,
$454,000 and $406,000, 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.
78
Recently Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures
about Offsetting Assets and Liabilities, which amended 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 international
financial reporting standards (“IFRS”). Companies were required to apply this amendment for fiscal years beginning on or after January 1,
2013, and interim periods within those years. The Company has adopted this update, but such adoption had no impact on its financial position
or results of operations.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income, which requires a reporting entity to provide information about the amounts reclassified out of
accumulated comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net
income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line
items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same
reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is
required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. Companies
were required to apply this amendment prospectively for fiscal years, and interim periods within those years, beginning after December 15,
2012. The Company has adopted this update, but such adoption had no impact on its financial position or results of operations.
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or
Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the Fed Funds Effective Swap Rate
to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the U.S. Treasury and London Interbank Offered
Rate. The ASU also amends previous rules by removing the restriction on using different benchmark rates for similar hedges. This amendment
applies to all entities that elect to apply hedge accounting of the benchmark interest rate. The amendments in this ASU were effective for
qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company has adopted this update, but such
adoption had no impact on its financial position or results of operations.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, which provides guidance for the recognition,
measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation
is fixed at the reporting date. The amendments in this ASU are effective for fiscal years, and interim reporting periods within those years,
beginning after December 15, 2013. The Company will evaluate these amendments but does not believe they will have an impact on its
financial position or results of operations.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides that an unrecognized tax benefit, or a
portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or
the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the
unrecognized tax benefit should be presented as a liability. These amendments in this ASU are effective for fiscal years, and interim reporting
periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company will
evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.
In January 2014, the FASB issued ASU No. 2014-1, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in
Qualified Affordable Housing Projects, which provides guidance on accounting for investments by a reporting entity in flow-through limited
liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. It permits reporting
entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional
amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial investment in
proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a
component of income tax expense (benefit). The amendments are effective for public entities for annual periods and interim reporting periods
within those annual periods, beginning after December 15, 2014, and are effective for all entities other than public entities for annual periods
beginning after December 15, 2014, and interim reporting periods within annual periods beginning after December 15, 2015. Early adoption is
permitted and retrospective application is required for all periods presented. The Company does not currently invest in such affordable housing
projects, but will elect an accounting policy to apply the amendments if, and when, it does invest in such affordable housing projects.
79
In January 2014, the FASB issued ASU No. 2014-4, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging
Issues Task Force). The guidance clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be
considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a
portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is considered to have
received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining
legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real
estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The
amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held
by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process
of foreclosure. The amendments of ASU 2014-04 are effective for interim and annual periods beginning after December 15, 2014, and may be
applied using either a modified retrospective transition method or a prospective transition method as described in ASU 2014-04. The Company
will evaluate this amendment but does not believe they will have an 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, 2013 and 2012 are summarized as
follows:
December 31, 2013
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, 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
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
Market
Value
$
$
$
$
31,641 $
85,764
127,083
15,738
260,226
26,730
5,544
32,274 $
27,360 $
69,298
112,319
13,677
222,654
20,429
5,538
25,967 $
674 $
2,574
3,430
163
6,841
266
197
463 $
1,026 $
4,168
5,941
210
11,345
768
655
1,423 $
(41) $
(98)
(682)
(26)
(847)
(1,422)
-
(1,422) $
- $
-
(83)
(39)
(122)
(40)
-
(40) $
32,274
88,240
129,831
15,875
266,220
25,574
5,741
31,315
28,386
73,466
118,177
13,848
233,877
21,157
6,193
27,350
80
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 2013 and 2012, 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, 2013 and 2012 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.
December 31, 2013
December 31, 2012
Amortized Cost
Market Value
Amortized Cost Market Value
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
$
$
$
$
(In Thousands)
5,659 $
102,535
65,174
1,094
85,764
260,226 $
5,717 $
104,887
66,229
1,147
88,240
266,220 $
11,971 $
79,192
59,825
2,368
69,298
222,654 $
5,544 $
26,730
32,274 $
5,741 $
25,574
31,315 $
5,538 $
20,429
25,967 $
12,052
81,940
63,801
2,618
73,466
233,877
6,193
21,157
27,350
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, 2013 and 2012. 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, 2013. There were no other-than-temporary impairments for the years ended December 31, 2013, 2012 and 2011.
Less Than Twelve Months
Gross
Unrealized
Twelve Months or More
Gross
Unrealized
Total
Gross
Unrealized
Losses
Fair Value
Losses
Fair Value
Losses
Fair Value
(In Thousands)
December 31, 2013
U.S. Treasury and government
sponsored agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
December 31, 2012
U.S. Treasury and government
sponsored agencies
Mortgage-backed securities
State and municipal securities
Corporate debt
Total
$
$
$
(41) $
(852)
(607)
(26)
(1,526) $
5,854 $
21,365
30,666
5,958
63,843 $
- $
(668)
(75)
-
(743) $
- $
6,691
3,443
-
10,134 $
(41) $
(1,520)
(682)
(26)
(2,269) $
5,854
28,056
34,109
5,958
73,977
(40)
(83)
(39)
(162) $
4,439
8,801
4,882
18,122 $
-
-
-
- $
-
166
-
166 $
(40)
(83)
(39)
(162) $
4,439
8,967
4,882
18,288
81
At December 31, 2013, 17 of the Company’s 664 debt securities were in an unrealized loss position for more than 12 months.
During 2013, 28 government agency sponsored mortgage-backed securities with an amortized cost of $50.0 million and 12 U.S. Treasury
securities with an amortized cost of $16.6 million were bought. Two corporate bonds were sold for $4.1 million and a realized gain on sale of
$131,000. Two corporate bonds with an amortized cost of $6.0 million were also bought during 2013. 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 and 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.
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, 2013 and 2012 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, 2013 and 2012, respectively. The amount of investment in the
First National Bankers Bank stock was $250,000 at December 31, 2013 and 2012.
NOTE 3. LOANS
The composition of loans at December 31, 2013 and 2012 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,
2013
2012
(In Thousands)
$
1,278,649 $
151,868
1,030,990
158,361
710,372
278,621
391,396
1,380,389
47,962
2,858,868
(30,663)
2,828,205 $
568,041
235,909
323,599
1,127,549
46,282
2,363,182
(26,258)
2,336,924
$
Changes in the allowance for loan losses during the years ended December 31, 2013, 2012 and 2011, respectively are as follows:
2013
Years Ended December 31,
2012
(In Thousands)
2011
Balance, beginning of year
Loans charged off
Recoveries
Provision for loan losses
Balance, end of year
$
$
26,258 $
(9,012)
409
13,008
30,663 $
22,030 $
(5,755)
883
9,100
26,258 $
18,077
(5,653)
634
8,972
22,030
82
The Company assesses the adequacy of its allowance for loan losses at 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, 2013 and 2012. 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, 2013 and 2012, respectively, are as
follows:
83
Commercial,
financial and
agricultural
Real estate -
construction
Real estate -
mortgage
Qualitative
Consumer
Factors
Total
(In Thousands)
Year Ended December 31, 2013
Allowance for loan losses:
Balance at December 31, 2012
$
Chargeoffs
Recoveries
Provision
Balance at December 31, 2013
$
8,233 $
(1,932)
66
4,803
11,170 $
6,511 $
(4,829)
296
3,831
5,809 $
4,912 $
(2,041)
36
4,588
7,495 $
199 $
(210)
11
855
855 $
6,403 $
-
-
(1,069)
5,334 $
26,258
(9,012)
409
13,008
30,663
Individually Evaluated for Impairment $
Collectively Evaluated for Impairment
1,992 $
9,178
1,597 $
4,212
1,982 $
5,513
699 $
156
- $
5,334
6,270
24,393
December 31, 2013
Loans:
$
Ending Balance
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
Allowance for loan losses:
Balance at December 31, 2011
$
Chargeoffs
Recoveries
Provision
Balance at December 31, 2012
$
1,278,649 $
3,827
1,274,822
151,868 $
9,238
142,630
1,380,389 $
18,202
1,362,187
47,962 $
699
47,263
- $
-
-
2,858,868
31,966
2,826,902
Year Ended 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
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
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.
84
Loans by credit quality indicator as of December 31, 2013 and 2012 were as follows:
December 31, 2013
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, 2012
Commercial, financial
and agricultural
Real estate - construction
Real estate - mortgage:
Owner-occupied
commercial
1-4 family mortgage
Other mortgage
Total real estate mortgage
Consumer
Total
Pass
Special
Mention
Substandard Doubtful
Total
(In Thousands)
$
1,238,109 $
139,239
34,883 $
3,392
5,657 $
9,237
- $
-
1,278,649
151,868
696,687
265,019
379,419
1,341,125
47,243
2,765,716 $
$
11,545
1,253
8,179
20,977
3
59,255 $
2,140
12,349
3,798
18,287
716
33,897 $
-
-
-
-
-
- $
710,372
278,621
391,396
1,380,389
47,962
2,858,868
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
2,262,448 $
$
4,142
6,379
6,674
17,195
71
59,209 $
8,363
6,378
4,452
19,193
135
41,525 $
-
-
-
-
-
- $
568,041
235,909
323,599
1,127,549
46,282
2,363,182
85
Loans by performance status as of December 31, 2013 and 2012 are as follows:
December 31, 2013
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, 2012
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
Performing
Nonperforming
(In Thousands)
Total
$
1,276,935 $
148,118
1,714 $
3,750
1,278,649
151,868
708,937
276,725
391,153
1,376,815
47,264
2,849,132 $
$
1,435
1,896
243
3,574
698
9,736 $
710,372
278,621
391,396
1,380,389
47,962
2,858,868
Performing
Nonperforming
(In Thousands)
Total
$
1,030,714 $
151,901
276 $
6,460
1,030,990
158,361
565,255
235,456
323,359
1,124,070
46,139
2,352,824 $
$
2,786
453
240
3,479
143
10,358 $
568,041
235,909
323,599
1,127,549
46,282
2,363,182
86
Loans by past due status as of December 31, 2013 and 2012 are as follows:
December 31, 2013
Past Due Status (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
30-59 Days
60-89 Days
90+ Days
Total Past
Due
(In Thousands)
Non-Accrual
Current
Total Loans
$
$
73 $
-
-
177
-
177
89
339 $
$
-
-
-
-
-
-
97
97 $
$
-
-
-
19
-
19
96
115 $
73 $
-
1,714 $
3,750
1,276,862 $
148,118
1,278,649
151,868
-
196
-
196
282
551 $
1,435
1,877
243
3,555
602
9,621 $
708,937
276,548
391,153
710,372
278,621
391,396
1,376,638
47,078
2,848,696 $
1,380,389
47,962
2,858,868
December 31, 2012
Past Due Status (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
30-59 Days
60-89 Days
90+ Days
Total Past
Due
(In Thousands)
Non-Accrual
Current
Total Loans
$
1,699 $
-
1,480
420
516
2,416
108
4,223 $
$
385 $
-
10
16
-
26
-
411 $
$
-
-
-
-
-
-
8
8 $
2,084 $
-
276 $
6,460
1,028,630 $
151,901
1,030,990
158,361
1,490
436
516
2,442
116
4,642 $
2,786
453
240
563,765
235,020
322,843
568,041
235,909
323,599
3,479
135
10,350 $
1,121,628
46,031
2,348,190 $
1,127,549
46,282
2,363,182
Fair value estimates for specifically impaired loans are derived from appraised values based on the current market value or as is value of the
property, normally from recently received and reviewed appraisals. Appraisals are obtained from state-certified appraisers and are based on
certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are
reviewed by our credit administration department to ensure they are acceptable, and values are adjusted down for costs associated with asset
disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. As subsequent
events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.
87
The following table presents details of the Company’s impaired loans as of December 31, 2013 and 2012, respectively. Loans which have been
fully charged off do not appear in the tables.
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
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
December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest Income
Recognized
in Period
(In Thousands)
$
1,210 $
1,967
1,210 $
2,405
577
1,198
2,311
4,086
-
7,263
2,618
7,270
1,509
11,120
1,487
14,116
699
24,703
577
1,198
2,311
4,086
-
7,701
2,958
7,750
1,509
11,120
1,586
14,215
699
25,622
3,828
9,237
4,168
10,155
2,086
12,318
3,798
18,202
699
31,966 $
2,086
12,318
3,897
18,301
699
33,323 $
$
- $
-
-
-
-
-
-
-
1,992
1,597
620
1,210
152
1,982
699
6,270
1,992
1,597
620
1,210
152
1,982
699
6,270 $
1,196 $
1,363
603
1,200
1,901
3,704
-
6,263
2,844
6,564
1,573
10,743
1,873
14,189
790
24,387
4,040
7,927
2,176
11,943
3,774
17,893
790
30,650 $
63
32
32
55
123
210
-
305
98
200
38
342
96
476
28
802
161
232
70
397
219
686
28
1,107
88
December 31, 2012
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In Thousands)
Average
Recorded
Investment
Interest Income
Recognized in
Period
2,602 $
6,872
5,111
2,166
4,151
11,428
135
21,037
1,308
7,550
3,195
4,002
302
7,499
16,357
3,910
14,422
8,306
6,168
4,453
18,927
135
37,394 $
2,856 $
7,894
5,361
2,388
4,249
11,998
344
23,092
1,308
8,137
3,195
4,002
302
7,499
16,944
4,164
16,031
8,556
6,390
4,551
19,497
344
40,036 $
- $
-
-
-
-
-
-
-
577
1,013
779
1,007
135
1,921
3,511
577
1,013
779
1,007
135
1,921
-
3,511 $
2,313 $
7,631
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
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
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, 2013 and 2012 totaled $14.2 million and $12.3 million, respectively. The increase
primarily consists of one relationship that was added in the fourth quarter totaling $8.0 million offset by pay-offs of $4.9 million and charge-
offs of 0.9 million during 2013. The Company’s TDRs have resulted primarily from allowing the borrower to pay interest-only for an extended
period of time, or through interest rate reductions rather than from debt forgiveness. At December 31, 2013, the Company had a related
allowance for loan losses of $2,411,000 allocated to these TDRs, compared to $1,442,000 at December 31, 2012. The Company had eleven
TDR loans to one borrower in the amount of $4.8 million enter into payment default status during the fourth quarter of 2013. All other loans
classified as TDRs as of December 31, 2013 are performing as agreed under the terms of their restructured plans. The following table presents
an analysis of TDRs as of December 31, 2013 and 2012.
89
December 31, 2013
Pre-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Post-
Modification
Outstanding
Recorded
Investment
December 31, 2012
Pre-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Post-
Modification
Outstanding
Recorded
Investment
(In Thousands)
5 $
7
-
4
1
5
-
17 $
2,029 $
1,781
-
10,073
285
10,358
-
14,168 $
2,029
1,781
-
10,073
285
10,358
-
14,168
2 $
15
6
5
1
12
-
29 $
1,168 $
3,213
5,907
1,709
302
7,918
-
12,299 $
1,168
3,213
5,907
1,709
302
7,918
-
12,299
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
3 $
6
-
2
-
2
-
11 $
1,067
1,564
-
1,848
-
1,848
-
4,479
- $
-
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, 2013 and 2012 are as follows:
Balance, beginning of year
Advances
Repayments
Participations
Balance, end of year
NOTE 4. FORECLOSED PROPERTIES
Years Ended December 31,
2013
2012
(In Thousands)
12,400 $
4,975
(4,258)
-
13,117 $
9,047
7,630
(8,096)
3,819
12,400
$
$
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.
90
An analysis of foreclosed properties (in thousands) for the years ended December 31, 2013, 2012 and 2011 follows:
Balance at beginning of year
Transfers from loans and capitalized expenses
Foreclosed properties sold
Writedowns and partial liquidations
Balance at end of year
2013
2012
2011
9,685 $
11,244
(7,664)
(593)
12,672 $
12,275 $
2,695
(2,967)
(2,318)
9,685 $
6,966
9,029
(3,334)
(386)
12,275
$
$
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
Land and building
Furniture and equipment
Leasehold improvements
Accumulated depreciation
December 31,
2013
2012
$
$
1,724 $
9,579
5,131
16,434
(8,083)
8,351 $
1,724
8,642
4,742
15,108
(6,261)
8,847
The provisions for depreciation charged to occupancy and equipment expense for the years ended December 31, 2013, 2012 and 2011 were
$1,841,000, $1,218,000 and $1,173,000, respectively.
The Company leases land and building space under non-cancellable operating leases. Future minimum lease payments under non-cancellable
operating leases at December 31, 2013 are summarized as follows:
2014
2015
2016
2017
2018
Thereafter
(In Thousands)
2,453
$
2,462
2,429
2,164
1,934
4,622
16,064
$
For the years ended December 31, 2013, 2012 and 2011, annual rental expense on operating leases was $2,488,000, $2,195,000 and $2,060,000,
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,
2013 and 2012 was $313,000, and is included in other assets.
91
The Company has invested in limited partnerships as funding investor. The partnerships are single purpose entities that lend money to real
estate investors for the purpose of acquiring and operating commercial property. The investments qualify 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 VIEs, and thus has consolidated these partnership assets and liabilities into its consolidated financial statements. The amount of
recorded investment in these partnerships as of December 31, 2013 and 2012 was $26,005,000 and $3,192,000, respectively, of which
$17,386,000 and $2,270,000 in 2013 and 2012, respectively, is included in loans of the Company. The remaining amounts are included in other
assets.
NOTE 7. DEPOSITS
Deposits at December 31, 2013 and 2012 were as follows:
Noninterest-bearing demand
Interest-bearing checking
Savings
Time
Time, $100,000 and over
December 31,
2013
2012
(In Thousands)
$
$
650,456 $
1,930,676
23,890
70,316
344,304
3,019,642 $
545,174
1,551,158
19,560
69,179
326,501
2,511,572
The scheduled maturities of time deposits at December 31, 2013 were as follows:
2014
2015
2016
2017
2018
(In Thousands)
$
$
260,487
52,887
53,911
16,828
30,507
414,620
At December 31, 2013 and 2012, overdraft deposits reclassified to loans were $1,602,000 and $3,860,000, respectively.
NOTE 8. FEDERAL FUNDS PURCHASED
At December 31, 2013, the Company had $174.4 million in federal funds purchased from its respondent banks that are clients of its
correspondent banking unit, compared to $117.1 million at December 31, 2012. The Company was paying an interest rate of 0.25% on these
balances at December 31, 2013.
At December 31, 2013, 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 $130 million at
December 31, 2012. 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 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.
92
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 in the amount of $738,000 were paid to the FHLB, which were 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
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, 2013 and December 31, 2012 were not material.
93
NOTE 13. EMPLOYEE AND DIRECTOR BENEFITS
At December 31, 2013, 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 $1,205,000, $1,049,000 and $975,000 for the years ended December 31, 2013,
2012 and 2011, 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 through 2018 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, 2013, there are a total of 166,000 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
2013
2012
2011
18.65 %
- %
7
1.72 %
19.80 %
- %
6
1.05 %
26.50 %
0.37 %
7
2.21 %
The weighted average grant-date fair value of options granted during the years ended December 31, 2013, December 31, 2012 and December
31, 2011 was $9.11, $6.59 and $7.82, respectively.
94
The following tables summarize stock option activity:
Year Ended December 31, 2013:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic Value
(In Thousands)
816,500 $
60,000
(94,200)
(6,000)
776,300 $
20.87
37.96
13.44
22.50
23.08
5.8 $
9.7
2.8
5.6
5.5 $
9,905
213
2,532
-
14,300
Exercisable at December 31, 2013:
387,244 $
16.20
3.2 $
9,797
Year Ended December 31, 2012:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
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
Exercisable options at December 31, 2013 were as follows:
Range of
Exercise Price
Shares
Weighted
Average
Exercise Price
$
10.00
33,000 $
11.00 108,000
15.00 113,500
52,994
20.00
79,750
25.00
387,244 $
10.00
11.00
15.00
20.00
25.00
16.20
Weighted
Average
Remaining
Contractual
Term (years)
1.4 $
2.3
3.0
4.1
4.7
3.2 $
Aggregate
Intrinsic Value
(In Thousands)
1,040
3,294
3,008
1,139
1,316
9,797
As of December 31, 2013, there was $1,636,000 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 2.2 years. The total fair value of shares vested during the year ended
December 31, 2013 was $705,000.
Restricted Stock
The Company has awarded 78,500 shares of restricted stock to certain officers, of which 16,000 shares are vested. The value of restricted stock
is determined to be the current value of the Company’s stock at the grant date, and this total value will be recognized as compensation expense
over the vesting period. As of December 31, 2013, there was $1,453,000 of total unrecognized compensation cost related to non-vested
restricted stock. The cost is expected to be recognized evenly over the remaining 2.1 years of the restricted stock’s vesting period.
95
Stock Warrants
The Company granted 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. 4,500 of these warrants were exercised in 2012, and the remaining 70,500
warrants were exercised in 2013.
The Company granted 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. All of these warrants were
outstanding as of December 31, 2013.
As of December 31, 2013, 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 $878,000, $1,167,000 and $946,000 for 2013, 2012 and 2011,
respectively. The Company’s board of directors approved additional discretionary matches for 2013, 2012 and 2011 based on the profits of the
Company during those years. The additional matches were 1%, 4% and 3%, respectively, and amounted to $200,000, $576,000 and $432,000,
respectively, and are included in the expenses above.
NOTE 14. COMMON STOCK
During 2013, the Company completed private placements of 250,000 shares of common stock. The shares were issued and sold at $41.50 per
share to 110 accredited investors and 14 non-accredited investors. This sale of stock resulted in net proceeds of $10,337,000. This includes
stock offering expenses of $38,000.
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 $110.9 million in dividends as of December 31, 2013.
The Bank is subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken,
could have a direct material effect on the Bank and the financial statements. Under regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and
classification under the prompt corrective guidelines are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to
adjusted total assets (as defined). Management believes, as of December 31, 2013, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2013, 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, 2013.
96
The Company’s and Bank’s actual capital amounts and ratios are presented in the following table:
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
To Be Well Capitalized Under
Prompt Corrective Action
Provisions
Amount
Ratio
As of December 31, 2013:
Total Capital to Risk
Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Risk
Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average
Assets:
Consolidated
ServisFirst Bank
As of December 31, 2012:
Total Capital to Risk
Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Risk
Weighted Assets:
Consolidated
ServisFirst Bank
Tier I Capital to Average
Assets:
Consolidated
ServisFirst Bank
$
343,904
341,256
11.73 % $
11.64 %
234,617
234,601
8.00 %
8.00 % $
N/A
293,252
N/A
10.00 %
293,301
310,593
10.00 %
10.59 %
117,308
117,301
4.00 %
4.00 %
N/A
175,951
293,301
310,593
8.48 %
8.98 %
138,373
138,331
4.00 %
4.00 %
N/A
172,913
N/A
6.00 %
N/A
5.00 %
$
287,136
284,141
11.78 % $
11.66 %
194,943
194,942
8.00 %
8.00 % $
N/A
243,678
N/A
10.00 %
240,961
257,883
9.89 %
10.58 %
97,472
97,471
4.00 %
4.00 %
N/A
146,207
240,961
257,883
8.43 %
9.03 %
114,323
114,227
4.00 %
4.00 %
N/A
142,784
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:
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
2013
Years Ended December 31,
2012
(In Thousands)
2011
$
$
$
$
(159) $
1,425
878
2,144 $
(105) $
1,064
744
1,703 $
195 $
465
2,535
1,882
380
838
532
309
370
341
-
3,082
10,929 $
159 $
385
2,202
2,836
320
791
454
198
482
286
-
2,609
10,722 $
76
481
650
1,207
194
409
2,023
2,406
356
689
406
208
437
235
738
2,313
10,414
97
NOTE 17. INCOME TAXES
The components of income tax expense are as follows:
Current tax expense:
Federal
State
Total current tax expense
Deferred tax expense (benefit):
Federal
State
Total deferred tax expense
Total income tax expense
$
2013
Year Ended December 31,
2012
(In Thousands)
2011
$
21,264 $
899
22,163
17,993 $
1,308
19,301
(1,616)
(189)
(1,805)
20,358 $
(1,999)
(182)
(2,181)
17,120 $
12,045
1,584
13,629
(1,100)
(140)
(1,240)
12,389
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:
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
Bank owned life insurance contracts
Incentive stock option expense
Other
Effective income tax and rate
Year Ended December 31, 2013
% of Pre-tax
Earnings
Amount
(In Thousands)
$
21,691
558
(1,200)
(698)
66
(59)
20,358
$
Year Ended December 31, 2012
% of Pre-tax
Earnings
Amount
(In Thousands)
$
18,047
709
(1,007)
(568)
121
(182)
17,120
$
Year Ended December 31, 2011
% of Pre-tax
Earnings
Amount
(In Thousands)
$
12,540
35.00 %
0.90 %
(1.94) %
(1.13) %
0.11 %
(0.09) %
32.85 %
35.00 %
1.37 %
(1.95) %
(1.10) %
0.23 %
(0.35) %
33.20 %
35.00 %
2.70 %
(2.44) %
(0.38) %
0.36 %
(0.65) %
34.59 %
967
(875)
(137)
128
(234)
12,389
$
98
The components of net deferred tax asset are as follows:
Deferred tax assets:
Allowance for loan losses
Other real estate owned
Nonqualified equity awards
Nonaccrual interest
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Net unrealized gain on securities available for sale
Depreciation
Prepaid expenses
Deferred loan fees
Investments
Other deferred tax liabilities
Total deferred tax liabilities
Net deferred income tax assets
December 31,
2013
2012
(In Thousands)
11,844 $
1,222
773
374
141
14,354
2,102
514
161
83
229
247
3,336
11,018 $
10,142
1,064
583
491
114
12,394
3,929
510
140
237
93
99
5,008
7,386
$
$
The Company believes its net deferred tax asset is recoverable as of December 31, 2013 based on the expectation of future taxable income and
other relevant considerations.
The Company and its subsidiaries file a consolidated U.S. Federal income tax return and various consolidated and separate company state
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 2013. The Company is also currently open to audit by several state departments of revenue for the years ended
December 31, 2010 through 2013. The audit periods differ depending on the date the Company began business activities in each state.
Currently, there are no years for which the Company filed a federal or state income tax return that are under examination by the IRS or any state
department of revenue.
Accrued interest and penalties on unrecognized income tax benefits totaled $0 and $6,000 as of January 1, 2013 and December 31, 2013,
respectively. Unrecognized income tax benefits as of January 1, 2013 and December 31, 2013, that, if recognized, would impact the effective
income tax rate totaled $161,000 and $437,000 (net of the federal benefit on state income tax issues), respectively, which includes interest and
penalties of $6,000 and $0, respectively. The Company does not expect any of the uncertain tax positions to be settled or resolved during the
next twelve months.
The following table presents a summary of the changes during 2013, 2012 and 2011 in the amount of unrecognized tax benefits that are
included in the consolidated balance sheets.
Balance, beginning of year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Settlements
Lapse of statute
Balance, end of year
2013
2012
2011
$
$
(In Thousands)
161 $
276
-
-
-
-
437 $
- $
-
-
161
-
-
161 $
-
-
-
-
-
-
-
99
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
2013
2012
(In Thousands)
2011
1,052,902 $
38,122
860,421 $
25,699
697,939
19,686
40,371
1,131,395 $
36,374
922,494 $
42,937
760,562
$
$
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.
100
2013
Years Ended December 31,
2012
2011
(Dollar Amounts In Thousands Except Per Share Amounts)
$
$
$
$
$
$
6,869,071
41,201 $
6.00 $
5,996,437
34,045 $
5.68
5,759,524
23,238
4.03
6,869,071
5,996,437
5,759,524
399,604
945,315
989,639
7,268,675
41,201 $
6,941,752
34,045 $
6,749,163
23,238
115 $
569 $
41,316 $
5.69 $
34,614 $
4.99 $
568
23,806
3.53
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, 2013 and 2012 in the
amount of $13.1 million and $12.4 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.
101
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. Specific
allowances for impaired loans are based on comparisons of the recorded carrying values of the loans to the present value of the estimated cash
flows of these loans at each loan’s original effective interest rate, the fair value of the collateral or the observable market prices of the loans.
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 $9,589,000 and $4,586,000 during the years ended December 31, 2013 and 2012,
respectively.
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 $868,000 and $2,166,000 was recognized during the years ended December 31,
2013 and 2012. 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.
102
The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of December 31,
2013 and December 31, 2012:
Fair Value Measurements at December 31, 2013 Using
Quoted Prices in
Active Markets Significant Other
for Identical
Assets (Level 1)
(Level 2)
Observable Inputs Unobservable
Significant
Inputs (Level 3)
Total
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
Total assets at fair value
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
Total assets at fair value
Liabilities Measured on a Recurring Basis:
Interest rate swap agreements
(In Thousands)
$
$
$
-
-
-
-
- $
$
32,274
88,240
129,831
15,875
266,220 $
$
-
-
-
-
- $
32,274
88,240
129,831
15,875
266,220
Fair Value Measurements at December 31, 2012 Using
Quoted Prices in
Active Markets Significant Other
for Identical
Assets (Level 1)
(Level 2)
Observable Inputs Unobservable
Significant
Inputs (Level 3)
Total
(In Thousands)
$
$
$
-
$
-
-
-
-
- $
- $
28,386
$
73,466
118,177
13,848
389
234,266 $
-
$
-
-
-
-
- $
28,386
73,466
118,177
13,848
389
234,266
389 $
- $
389
103
The carrying amount and estimated fair value of the Company’s financial instruments were as follows::
Assets Measured on a Nonrecurring Basis:
Impaired loans
Other real estate owned and repossessed assets
Total assets at fair value
Fair Value Measurements at December 31, 2013 Using
Quoted Prices in
Active Markets Significant Other
Significant
for Identical
Unobservable
Observable
Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
(In Thousands)
Total
$
-
-
-
- $
-
- $
25,696 $
12,861
38,557 $
25,696
12,861
38,557
Fair Value Measurements at December 31, 2012 Using
Quoted Prices in
Active Markets Significant Other
for Identical
Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Unobservable
Observable
Significant
Total
Assets Measured on a Nonrecurring Basis:
Impaired loans
Other real estate owned
Total assets at fair value
(In Thousands)
$
$
- $
-
- $
- $
-
- $
33,883 $
9,721
43,604 $
33,883
9,721
43,604
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.
Cash and cash equivalents: The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.
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 fair value hierarchy.
Restricted equity securities: Fair values for other investments are considered to be their cost as they are redeemed at par value.
104
Loans, net: 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 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 agreements 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.
Accrued interest and dividends receivable: The carrying amounts in the statements of condition approximate these assets’ fair value.
Bank owned life insurance contracts: The carrying amounts in the statements of condition approximate these assets’ fair value.
Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate
their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation 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 values of 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 as Level 2
in the fair value hierarchy.
Subordinated debentures: The fair values 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 as Level 2 in the
fair value hierarchy.
Accrued interest payable: The carrying amounts in the statements of condition approximate these assets’ fair value.
Loan commitments: The fair values of the Company’s off-balance-sheet financial instruments are based on fees currently charged to enter
into similar agreements. Since the majority of the Company’s other off-balance-sheet financial instruments consists 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,
2013 and December 31, 2012 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.
105
The Company’s financial assets and financial liabilities which are carried at fair value were as follows:.
Financial Assets:
Level 2 Inputs:
Debt securities available for sale
Debt securities held to maturity
Restricted equity securities
Federal funds sold
Mortgage loans held for sale
Bank owned life insurance contracts
Derivatives
Level 3 Inputs:
Loans, net
Financial Liabilities:
Level 2 Inputs:
Deposits
Federal funds purchased
Other borrowings
Subordinated debentures
Derivatives
December 31,
2013
2012
Carrying
Amount
Fair Value
Carrying Amount Fair Value
(In Thousands)
$
266,220 $
32,274
3,738
8,634
8,134
69,008
-
266,220 $
31,315
3,738
8,634
8,134
69,008
-
233,877 $
25,967
3,941
3,291
25,826
57,014
389
233,877
27,350
3,941
3,291
25,826
57,014
389
$ 2,828,205 $ 2,825,924 $
2,336,924 $ 2,327,780
$ 3,019,642 $ 3,021,847 $
174,380
19,940
-
-
174,380
19,940
-
-
2,511,572 $ 2,516,320
117,065
19,917
15,050
389
117,065
19,917
15,050
389
NOTE 23. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets of the Parent Company as of December 31, 2013 and 2012 and the condensed
statements of income and cash flows for the years ended December 31, 2013, 2012 and 2011.
CONDENSED BALANCE SHEETS DECEMBER 31, 2013 AND 2012
(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, 2013 and 2012
Common stock, par value $.001 per share; 50,000,000 shares authorized;
7,350,012 shares issued and outstanding at December 31, 2013 and
6,268,812 shares issued and outstanding at December 31, 2012
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
2013
2012
2,562 $
314,489
194
317,245 $
3,264
265,229
18
268,511
19,940 $
-
113
20,053
19,917
15,050
287
35,254
39,958
39,958
7
123,325
130,011
3,891
297,192
317,245 $
6
93,505
92,492
7,296
233,257
268,511
$
$
$
$
106
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Income:
Dividends received from subsidiary
Other income
Total income
Expense:
Other expenses
Total expenses
Equity in undistributed earnings of subsidiary
Net income
Dividends on preferred stock
Net income available to common stockholders
$
2013
2012
2011
4,750 $
1
4,751
1,147
1,147
38,013
41,617
400
41,217
- $
41
41
1,594
1,594
35,998
34,445
400
34,045
800
43
843
1,660
1,660
24,255
23,438
200
23,238
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 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
2013
2012
2011
$
41,617 $
34,445 $
23,438
(224)
(38,013)
3,380
(10,499)
(10,499)
-
-
-
10,499
(400)
(3,682)
6,417
(702) $
3,264
2,562 $
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
$
$
107
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data derived from our consolidated financial statements. Such data is only a
summary and should be read in conjunction with our historical consolidated financial statements and related notes continued in this annual
report on Form 10-K.
Interest income
Interest expense
Net interest income
Provision for loan 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
2013 Quarter Ended
(Dollars in thousands, except per share data)
March 31
$
29,165 $
3,264
25,901
4,284
$
$
9,151
1.44 $
1.31 $
June 30
September 30 December 31
30,692 $
3,211
27,481
3,334
9,586
1.39 $
1.34 $
32,499 $
3,534
28,965
3,034
10,712
1.53 $
1.46 $
33,725
3,610
30,115
2,356
11,752
1.64
1.58
2012 Quarter Ended
(Dollars in thousands, except per share data)
March 31
$
25,571 $
3,833
21,738
2,383
$
$
8,155
1.37 $
1.20 $
June 30
September 30 December 31
26,654 $
3,749
22,905
3,083
8,231
1.38 $
1.21 $
27,743 $
3,695
24,048
1,185
9,202
1.53 $
1.35 $
29,055
3,624
25,431
2,449
8,457
1.40
1.23
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, 2013.
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, 2013.
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, 2013, 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, 2013, 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, 2013, based on those criteria.
108
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, 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.
The Company, the Bank and William M. Foshee entered into an amended and restated change in control agreement on March 5, 2014. This
agreement amends and restates in its entirety that certain change in control agreement between the Bank and Mr. Foshee, dated May 20, 2005.
The purposes of the amended and restated change in control agreement with Mr. Foshee are to clarify that a “Change in Control”, as defined in
the agreement, includes a change in control of the Company in addition to a change in control of the Bank, and to add that a change in control
of the board composition of the Company, in certain instances as set forth therein, constitutes a change in control.
The Company, the Bank and Clarence C. Pouncey, III entered into an amended and restated change in control agreement on March 5, 2014.
This agreement amends and restates in its entirety that certain change in control agreement between the Bank and Mr. Pouncey, dated June 20,
2006. The sole purpose of the amended and restated change in control agreement with Mr. Pouncey is to clarify that a “Change in Control,” as
defined in the agreement, includes a change in control of the Company in addition to a change in control of the Bank.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
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 2014 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 2014 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 2014 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 2014 Annual Meeting of Stockholders.
ITEM 14.
PRINCIPAL ACCOUNTANT 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 2014 Annual Meeting of Stockholders.
109
ITEM 15.
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
(a) The following statements are filed as a part of this Annual Report on Form 10-K
PART IV
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, 2013 and 2012
Consolidated Statements of Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
(b) The following exhibits are furnished with this Annual Report on Form 10-K
EXHIBIT NO.
NAME OF EXHIBIT
Page
66
67
68
69
70
71
72
73
74
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
Plan of Reorganization and Agreement of Merger dated August 29, 2007 (1)
Certificate of Incorporation, as amended (Restated for SEC filing purposes only) (2)
Bylaws (Restated for SEC filing purposes only) (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)
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 (9)
Form of 5.50% Subordinated Note due November 9, 2022 (9)
2005 Amended and Restated Stock Incentive Plan (1)*
Amended and Restated Change in Control Agreement with William M. Foshee dated March 5, 2014 (10)*
110
10.3
10.4
10.5
10.6
11
14
21
23
24
31.1
31.2
32.1
32.2
Amended and Restated Change in Control Agreement with Clarence C. Pouncey III dated March 5, 2014 (10)*
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
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
(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 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 June 21, 2011, and incorporated herein by
reference.
(9) 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.
111
(10) Filed herewith
* Management contract or compensatory plan arrangements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SERVISFIRST BANCSHARES, INC.
By:
/s/Thomas A. Broughton, III
Thomas A. Broughton, III
President and Chief Executive Officer
Dated: March 17, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
Signature
Title
/s/Thomas A. Broughton, III
Thomas A. Broughton, III
/s/ William M. Foshee
William M. Foshee
*
*
*
*
*
Stanley M. Brock
Michael D. Fuller
James J. Filler
Joseph R. Cashio
Hatton C. V. Smith
President, Chief Executive
Officer and Director (Principal
Executive Officer)
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date
March 17, 2014
March 17, 2014
Chairman of the Board
March 17, 2014
Director
Director
Director
Director
March 17, 2014
March 17, 2014
March 17, 2014
March 17, 2014
*The undersigned, acting pursuant to a Power of Attorney, has signed this Amendment No. 1 to 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 17, 2014
(b) The following exhibits are furnished with this Annual Report on Form 10-K
EXHIBIT NO.
NAME OF EXHIBIT
EXHIBIT INDEX
21
23
24
31.1
31.2
32.1
32.2
List of Subsidiaries
Consent of KPMG LLP
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
Consent of Independent Registered Public Accounting Firm
Exhibit 23
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 7, 2014, with respect to the consolidated balance sheets of ServisFirst Bancshares, Inc.
and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the
effectiveness of internal control over financial reporting as of December 31, 2013, which reports appear in the Amendment No. 1
to the December 31, 2013 Annual Report on Form 10-K of ServisFirst Bancshares, Inc.
/s/ KPMG LLP
Birmingham, Alabama
March 13, 2014
Exhibit 31.1
I, Thomas A. Broughton III, certify that:
Section 302 Certification of the CEO
1.
I have reviewed this Amendment No. 1 to Annual Report on Form 10-K of ServisFirst Bancshares, Inc.;
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 17, 2014
/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
Exhibit 31.2
I, William M. Foshee, certify that:
1.
I have reviewed this Amendment No. 1 to Annual Report on Form 10-K of ServisFirst Bancshares, Inc.;
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 17, 2014
/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 Amendment No. 1 to Annual Report
on Form 10-K of the Company for the year ended December 31, 2013, 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 17, 2014
/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 Amendment No. 1 to Annual Report
on Form 10-K of the Company for the year ended December 31, 2013, 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 17, 2014
/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.