SERVISFIRST BANCSHARES, INC. 850 Shades Creek Parkway, Suite 200 Birmingham, Alabama 35209 March 29, 2017 Dear Fellow Stockholder: You are cordially invited to attend the Annual Meeting of Stockholders of ServisFirst Bancshares, Inc. Our Annual Meeting will be held at The Club, Staterooms, 1 Robert S. Smith Drive, Birmingham, Alabama 35209, on Thursday, May 18, 2017, at 11:30 a.m., Central Daylight Time. We will have a luncheon 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, 2016. The business to be conducted at the Annual Meeting consists of (1) the election of six directors; (2) an advisory vote on executive compensation; (3) an advisory vote on the frequency of a stockholders’ advisory vote on executive compensation; (4) the ratification of the appointment of Dixon Hughes Goodman LLP as our independent registered public accounting firm for the year ending December 31, 2017; (5) the consideration of a stockholder proposal requesting our board of directors initiate the process to amend our corporate governance documents to provide that director nominees shall be elected by majority vote in uncontested director elections; and (6) such other business as may properly come before the Annual Meeting. Our board of directors unanimously recommends a vote ‘‘FOR’’ the election of the director nominees; ‘‘FOR’’ the ‘‘Say on Pay’’ advisory vote approving our executive compensation; ‘‘EVERY YEAR’’ for the advisory vote on the frequency of future ‘‘Say on Pay’’ advisory votes; ‘‘FOR’’ the ratification of the appointment of Dixon Hughes Goodman LLP as our independent registered public accounting firm for the year ending December 31, 2017; and ‘‘AGAINST’’ the adoption of the majority voting proposal. You may vote your shares by following your broker’s voting instructions, by submitting voting instructions by telephone or by Internet, by voting in person at the Annual Meeting or, if you requested to receive printed proxy materials, by completing and returning your proxy card. Instructions regarding the methods of voting are contained in the enclosed Proxy Statement and on the Notice of Internet Availability of Proxy Materials or 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 SERVISFIRST BANCSHARES, INC. 850 Shades Creek Parkway, Suite 200 Birmingham, Alabama 35209 NOTICE OF 2017 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 18, 2017 To Our Stockholders: Notice is hereby given that our Annual Meeting of Stockholders will be held at The Club, Staterooms, 1 Robert S. Smith Drive, Birmingham, Alabama 35209, on Thursday, May 18, 2017, at 11:30 a.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 conduct a ‘‘Say on Pay’’ advisory vote on our executive compensation; 3. to conduct an advisory vote on the frequency of future ‘‘Say on Pay’’ advisory votes; 4. to ratify the appointment of Dixon Hughes Goodman LLP as our independent registered public accounting firm for the year ending December 31, 2017; 5. to consider a stockholder proposal requesting our board of directors initiate the process to amend our corporate governance documents to provide that director nominees shall be elected by majority vote in uncontested director elections; and 6. to transact such other business as may properly come before the Annual Meeting or any postponement or adjournment thereof. Our board of directors unanimously recommends a vote ‘‘FOR’’ the election of the director nominees, ‘‘FOR’’ the ‘‘Say on Pay’’ advisory vote approving our executive compensation, ‘‘EVERY YEAR’’ for the advisory vote on the frequency of future ‘‘Say on Pay’’ advisory votes, ‘‘FOR’’ the ratification of the appointment of Dixon Hughes Goodman LLP as our independent registered public accounting firm for the year ending December 31, 2017, and ‘‘AGAINST’’ the adoption of the majority voting proposal. Our board of directors is not aware of any other business to come before the Annual Meeting. Directions to the Annual Meeting location at The Club, Staterooms, are available at www.edocumentview.com/SFBS. Stockholders of record as of the close of business on March 20, 2017 are entitled to notice of, and to vote their shares in person or by proxy at, the Annual Meeting. The proxy materials are first being made available to stockholders on March 29, 2017. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD MAY 18, 2017: Our Proxy Statement, form of proxy and 2016 Annual Report on Form 10-K are available at: www.edocumentview.com/SFBS YOUR VOTE IS IMPORTANT IT IS IMPORTANT THAT YOU SUBMIT VOTING INSTRUCTIONS BY TELEPHONE OR BY INTERNET OR, IF YOU REQUESTED TO RECEIVE PRINTED PROXY MATERIALS, BY RETURNING YOUR PROXY CARD. THEREFORE, WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE VOTE BY TELEPHONE OR BY INTERNET, SUBMIT VOTING INSTRUCTIONS OR SIGN, DATE AND RETURN THE PROXY CARD AS SOON AS POSSIBLE. STOCKHOLDERS OF RECORD WHO VOTE OVER THE TELEPHONE OR THE INTERNET, SUBMIT VOTING INSTRUCTIONS OR EXECUTE A PROXY CARD MAY NEVERTHELESS ATTEND THE ANNUAL MEETING, REVOKE THEIR PROXY AND VOTE THEIR SHARES IN PERSON. By Order of the Board of Directors, William M. Foshee Secretary and Chief Financial Officer Birmingham, Alabama March 29, 2017 Agenda and Voting Recommendations 1 Proposal 1: Election of Directors The board of directors unanimously recommends a vote FOR each director nominee. The six director nominees presented in this proposal are recommended for election to the board of directors. Additional information about each director and his or her qualifications may be found on page 1. Committee Memberships Name Director Since Age Primary Occupation Independent AC CC CGNC Thomas A. Broughton III 61 2007 President, Chief Executive Officer and Director of ServisFirst Bancshares, Inc. and ServisFirst Bank Stanley M. Brock 66 2007 Chairman of ServisFirst Bancshares, Inc. and ServisFirst Bank; President of Brock Investment Company, Ltd. Michael D. Fuller James J. Filler J. Richard Cashio Hatton C. V. Smith 63 73 59 66 2007 President of Double Oak Water Reclamation 2007 Retired Chief Executive Officer of Jefferson Iron & Metal Brokerage, Inc. 2007 Retired Chief Executive Officer of TASSCO, LLC 2007 President of National Accounts, Royal Cup Coffee (cid:4) (cid:4) (cid:4) (cid:4) (cid:4) C C C AC: Audit Committee CC: Compensation Committee CGNC: Corporate Governance & Nominations Committee C Committee Chair Committee Member Financial Expert 2 Proposal 2: Advisory Vote on Executive Compensation 3 Proposal 3: Advisory Vote on the Frequency of Future ‘‘Say on Pay’’ Votes The board of directors unanimously recommends a vote FOR the resolution. Additional information about executive compensation may be found on page 14. The board of directors unanimously recommends a vote of Every Year for the advisory vote on the frequency of future ‘‘Say on Pay’’ votes. Additional information about the advisory vote may be found on page 26. 4 Proposal 4: Ratify Appointment of the Independent Registered Public Accounting Firm 5 Proposal 5: Stockholder Proposal Regarding Director Election Majority Voting Standard The board of directors unanimously recommends a vote FOR the resolution. Additional information about the independent registered public accounting firm may be found on page 27. The board of directors unanimously recommends a vote AGAINST the resolution. Additional information about the stockholder proposal may be found on page 29. TABLE OF CONTENTS PROPOSAL 1: ELECTION OF DIRECTORS CORPORATE GOVERNANCE 1 4 4 Recent Corporate Governance Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Other Governance Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Board Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Role of Our Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Committees and Their Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Code of Conduct for Directors and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Communications with the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 DIRECTOR COMPENSATION 11 Director Compensation for Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 OWNERSHIP OF SERVISFIRST COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS 12 Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION 14 15 Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Grants of Plan-Based Awards for Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Outstanding Equity Awards at 2016 Fiscal Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Option Exercises and Stock Vested for Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Nonqualified Deferred Compensation Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Effect of Compensation Policies and Practices on Risk Management and Risk-Taking Incentives . . . . . . . . . . . . . . . 23 Potential Payments Upon Termination or Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 PROPOSAL 3: ADVISORY VOTE ON THE FREQUENCY OF FUTURE ‘‘SAY ON PAY’’ 26 VOTES PROPOSAL 4: RATIFY APPOINTMENT OF THE INDEPENDENT REGISTERED 27 PUBLIC ACCOUNTING FIRM Independent Registered Public Accounting Firm Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Audit Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 PROPOSAL 5: STOCKHOLDER PROPOSAL REGARDING DIRECTOR ELECTION 29 MAJORITY VOTING STANDARD Stockholder Proposal and Supporting Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 The Company’s Statement in Opposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 GENERAL INFORMATION 31 Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Questions and Answers About the 2017 Annual Meeting and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 [This page intentionally left blank.] 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 (which we refer to as 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. 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 2018 Annual Meeting of Stockholders and until their successors are elected and have qualified. Our board has nominated the six persons named below, all of whom currently serve as directors, for election as directors at the 2017 Annual Meeting. Each of our director nominees has served as a director of the bank since its inception in 2005 and as a director of the company since our formation in 2007. Each of these 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. Annual Election 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, except with respect to our director resignation policy. Information regarding directors and director nominees and their ages as of the record date is as follows: Committee Memberships Name Age Director Since Primary Occupation Independent AC CC CGNC Thomas A. Broughton III 61 2007 President, Chief Executive Officer and Director of ServisFirst Bancshares, Inc. and ServisFirst Bank Stanley M. Brock 66 2007 Chairman of ServisFirst Bancshares, Inc. and ServisFirst Bank; President of Brock Investment Company, Ltd. Michael D. Fuller James J. Filler J. Richard Cashio Hatton C. V. Smith 63 73 59 66 2007 President of Double Oak Water Reclamation 2007 Retired Chief Executive Officer of Jefferson Iron & Metal Brokerage, Inc. 2007 Retired Chief Executive Officer of TASSCO, LLC 2007 President of National Accounts, Royal Cup Coffee X X X X X [FE][M] [C][M] [C][M] [M] [M] [M] [M] [M] [C][M] AC: Audit Committee CC: Compensation Committee CGNC: Corporate Governance & Nominations Committee [C] Committee Chair [M] Committee Member [FE] Financial Expert The following summarizes the business experience and background of each of our nominees. Each of the director nominees also serves as director of the bank, and Mr. Broughton also serves as President and Chief Executive Officer of us and the bank. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 1 Thomas A. Broughton III Age: 61 Committees: None Director Since: 2007 Position: President, CEO and Director Bank Director Since: 2005 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. 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 Age: 66 Committees: Audit; Corporate Governance and Nominations (Chair) Director Since: 2007 Position: Chairman of the Board and Director Bank Director Since: 2005 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. Michael D. Fuller Age: 63 Committees: Audit (Chair); Corporate Governance and Nominations Director Since: 2007 Position: Director Bank Director Since: 2005 Mr. Fuller has served as a director of the company since 2007 and as a director of the bank since its inception in May 2005. For over 20 years, Mr. Fuller has been a private investor in real estate investments. Prior to that time, Mr. Fuller played professional football for nine years. Mr. Fuller has served as President of Double Oak Water Reclamation, a private wastewater collection and treatment facility in Shelby County, Alabama, since 1998. We believe that Mr. Fuller’s experience in the real estate sector, which is a major focus of our business, as well as his overall business experience and community presence, make him highly qualified to serve as a director. J. Richard Cashio Age: 59 Committees: Audit; Compensation; Corporate Governance and Nominations Director Since: 2007 Position: Director Bank Director Since: 2005 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 served as Chief Executive Officer of TASSCO, LLC from 2005 until January 2014 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. 2 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement James J. Filler Age: 73 Committees: Compensation Director Since: 2007 Position: Director Bank Director Since: 2005 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. Hatton C. V. Smith Age: 66 Committees: Compensation (Chair) Director Since: 2007 Position: Director Bank Director Since: 2005 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 served as the Chief Executive Officer of Royal Cup Coffee from 1996 until 2014 and in 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 Baptist Health System. We believe that Mr. Smith’s business experience, his strong roots in the greater Birmingham business and civic community, and his high profile and extensive community contacts make him highly qualified to serve as a director. The Board of Directors Unanimously Recommends a Vote ‘‘FOR’’ the Election of Each of the Board Nominees Named Above. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 3 CORPORATE GOVERNANCE Our business is managed under the direction of our board of directors. The board has the legal responsibility for overseeing the affairs and performance of the company. The primary responsibility of the board is to exercise their business judgment in what they believe to be in the best interests of the company and its stockholders. Recent Corporate Governance Initiatives We understand that corporate governance practices evolve over time, and we seek to adopt and use practices that we believe will be of value to our stockholders and will positively aid in the governance of the company. In connection with our annual corporate governance review, in 2015 we made changes to our corporate governance policies and procedures, including the adoption of an Incentive Compensation Clawback Policy, and in October 2016 we adopted a director resignation policy. Other Governance Practices Our board of directors believes that sound governance practices and policies provide an important framework to assist them in fulfilling their oversight duty. In March 2014, 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 Select Market’s listed company rules and the Sarbanes-Oxley Act of 2002. Each year our board of directors reviews our Governance Guidelines and other governance documents and modifies them as it deems appropriate. These documents include the Governance Guidelines, the committee charters, our Code of Business Conduct and Ethics, our Related Party Transactions Policy and other key policies and practices. Copies of the currently effective charters for each board committee, the Code of Business Conduct and Ethics, the Governance Guidelines and certain other corporate governance policies are available on the company’s website at www.servisfirstbank.com under the ‘‘Investor Relations’’ tab. Some of the principal subjects covered by our Governance Guidelines comprise: • • • • • Director Qualifications, which include: a board candidate’s independence, experience, knowledge, skills, expertise, integrity, ability to make independent analytical inquiries; his or her understanding of our business and the business environment in which we operate; and the candidate’s ability and willingness to devote adequate time and effort to board responsibilities, taking into account the candidate’s employment and other board commitments. Responsibilities of Directors, which include: acting in the best interests of all stockholders; maintaining independence; developing and maintaining a sound understanding of our business and the industry in which we operate; preparing for and attending board and board committee meetings; and providing active, objective and constructive participation at those meetings. Director Access to Management and, as Necessary and Appropriate, Independent Advisors, which covers: 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 bank’s loan portfolio. Director Orientation and Continuing Education, such as: programs to familiarize directors with any changes to our business, strategic plans, and 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. Director Resignation Policy In October 2016, our board approved and adopted a Director Resignation Policy. This policy provides that, in an uncontested election, any director nominee who receives a greater number of ‘‘Withhold’’ votes than votes ‘‘For’’ his or her election shall promptly tender his or her resignation to the Chairman of our board following the certification of the election results. The company’s Corporate Governance and Nominations Committee (‘‘CG&N Committee’’) will consider the offer of resignation and recommend to the board whether to accept or reject the resignation. Our board must then act on the recommendation within 90 days following certification of the election results following receipt of the recommendation. After the board makes a formal decision on the CG&N Committee’s recommendation, the company must publicly disclose the action on a Current Report on Form 8-K within four business days of the decision. If the board determines to take any action other than accepting 4 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement such resignation, the Current Report must also include the board’s rationale supporting its decision. A copy of our director resignation policy is available on our website www.servisfirstbank.com under the ‘‘Investor Relations’’ tab. Incentive Compensation Clawback Policy Our board has approved and adopted a Clawback Policy for recovery of incentive compensation from the company’s current and former executive officers under certain circumstances. The Clawback Policy is designed to comply with Section 10D of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) and proposed rule 10D-1. The Clawback Policy provides that, in the event the company is required to restate financial results due to material noncompliance with any financial reporting requirement under the securities laws, the board may adjust future compensation, cancel outstanding awards, seek recoupment of previous awards and take any other remedial and recovery action permitted by law, to recoup all or a portion of any incentive compensation approved, awarded or granted to an executive officer of the company after the date of adoption of the Clawback Policy and such award, vesting or payment occurred or was received during the three completed fiscal years immediately preceding the date on which the company is required to prepare the restatement. The Clawback Policy applies when the Compensation Committee has determined that the incentive compensation approved, awarded or granted was predicated upon the achievement of certain financial results that were the subject of the restatement and that a lesser amount of incentive compensation would have been approved, awarded or granted to the executive officer based upon the restated financial results. In each such instance, the company will seek to recoup the amounts by which an executive officer’s incentive compensation that was awarded, vested or paid during the three-year period referenced above exceeded the amounts that would have been awarded, vested or paid based on the restated financial results. Stock Ownership of Board and Executives Long-term stock ownership is deeply engrained in our culture and reflects our board’s strong commitment to the company’s success. We have reviewed the stock ownership policies of other financial institutions, the criteria identified by certain proxy advisory firms in determining whether a stock ownership policy is ‘‘rigorous’’ or ‘‘robust,’’ and the stock ownership of our directors and executive officers. We ultimately concluded not to adopt a formal stock ownership policy at this stage of the company’s existence primarily because the current ownership levels of our directors and, with one exception, our named executive officers far exceed the ownership requirements of even the most rigorous policies we reviewed. Using the market price and the number of shares of common stock beneficially owned as of December 31, 2016, each of our non-employee directors held common stock valued at well over 500 times such director’s annual retainer, our Chief Executive Officer held common stock valued at well over 75 times his annual base salary, and each of our other named executive officers, with the exception of Mr. Owens, held common stock valued at over 25 times his annual base salary. Our board annually reviews our Governance Guidelines and other governance documents and practices and modifies them as it deems appropriate. Although we will reconsider adopting stock ownership guidelines in the future, including in the event of board or management changes, we intend to operate the company in a way that we believe makes the most sense taking into account numerous factors. Policy Against Hedging Activities The company is dedicated to growing its business and enhancing stockholder value in an ethical way while being mindful of the need to avoid taking actions that pose undue risk or have the appearance of posing undue risk to the company. Our goal is to grow stockholder value in both the short term and in the longer term, and we expect our directors, officers and employees to have the same goals as the company. Consistent with these goals, our Insider Trading Policy prohibits any of our directors, officers and employees from engaging in hedging activities involving the company’s securities, including short sales, puts, calls, collars, swaps, forward sale contracts, or other derivative securities based on the company’s securities. Policy Against Pledging Activities Our Insider Trading Policy prohibits our directors, officers and employees from pledging our securities as collateral for loans unless approved by our Insider Trading Compliance Officer. While being mindful of the need to avoid taking actions that pose undue risk or appear to pose undue risk to our company, we also appreciate our situation may be unique. We are a public company that has, since the bank’s inception in 2005 and our formation in 2007, experienced a relatively high amount of success. As a result of this success, a significant portion of the wealth of some of our officers and employees resides in their ownership of our common stock. As detailed above, all of our directors and all but one of our executive officers owns enough shares of common stock to far exceed the multiples of base salary or annual cash retainer typically required by stock ownership guidelines. Accordingly, we provide our Insider Trading Compliance Officer with the discretion to permit pledges in certain limited circumstances. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 5 Board Independence The cornerstone of our corporate governance program is an independent and qualified board of directors. The board has established guidelines consistent with the current listing standards of the NASDAQ Global Select Market for determining director independence. You can find these guidelines in our Governance Guidelines, which are posted on the company’s website at www.servisfirstbank.com under the ‘‘Investor Relations’’ tab. During its most recent review, our board considered transactions and relationships between each director or any member of a director’s immediate family and us and the bank. Our board also considered whether there were any transactions or relationships between our company and any entity of which a director or an immediate family member of a director 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 CG&N Committee has determined in its business judgment that five of the company’s six directors are independent as defined in the applicable NASDAQ Global Select 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. The Role of Our Board of Directors The members of our board also are members of the board of directors of the bank, which accounts for substantially all of our 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 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 ‘‘Board Committees and Their Functions’’, are composed exclusively of independent directors. We believe that this structure further reinforces the board’s role as an objective overseer of our business, operations and day-to-day management. The Board’s Role in Risk Oversight Our board is ultimately responsible for the management of risks inherent in our business. In our day-to-day operations, senior management is responsible for instituting risk management practices that are consistent with our overall business strategy and risk tolerance. In addition, because our operations are conducted primarily through the 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 positions. The committee regularly reviews the rate sensitivity position on three-month, six-month and one-year time horizons; 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, which our board holds every month, 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. 6 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement Board Committees and Their Functions Our board maintains three standing committees that are each composed entirely of independent directors. The governing charter for each of the three committees is available on our website www.servisfirstbank.com under the ‘‘Investor Relations’’ tab. Name Audit Committee Compensation Committee Stanley M. Brock Michael D. Fuller James J. Filler J. Richard Cashio Hatton C. V. Smith C C Committee Chair Committee Member Financial Expert C Corporate Governance & Nominations Committee C Audit Committee Number of meetings in 2016: 4 Functions: • • 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; Reviews the scope of independent audits and assesses the results; • Meets with management to consider the adequacy of the internal control over, and the objectivity of, financial reporting, and meets with our independent auditors and with appropriate financial personnel concerning these matters; • • Selects, determines the compensation of, appoints and oversees our independent auditors, and evaluates their qualifications, performance and independence; and Reviews and approves all related party transactions of the company. Financial Expert: Our board has unanimously 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, including Mr. Brock’s 20-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 Audit Committee member meets the independence standards for Audit Committee membership under the rules of the Securities and Exchange Commission (‘‘SEC’’) and the rules of the NASDAQ Global Select Market. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 7 Compensation Committee Number of meetings in 2016: 6 Functions: • Annually reviews the performance and compensation of our Chief Executive Officer, who is not present during deliberations or voting with respect to his compensation; • Makes recommendations to the independent members of our board of directors with respect to the compensation of our Chief Executive Officer and all other executive officers of the company; • Makes determinations, either as a committee or together with the other independent directors, regarding the performance and compensation level of our Chief Executive Officer and our other named executive officers; • • Establishes the compensation structure for our senior management and approves the compensation of our senior executives; and Advises and reports to our board of directors at least annually, including with respect to the company’s incentive and equity-based compensation plans, and oversees the activities of the individuals and committees responsible for administering such plans. The Compensation Committee has the authority, in its sole discretion, to appoint, engage, retain and terminate any compensation consultant, legal counsel or other advisor to assist in the performance of its duties, and the company is responsible for providing appropriate funding to the Compensation Committee for payment of reasonable compensation to any such advisor retained by the Compensation Committee. Our board of directors has determined that each Compensation Committee member is independent under the rules of the NASDAQ Global Select Market and an ‘‘outside director’’ for purposes of Section 162(m) of the Internal Revenue Code of 1986. Corporate Governance and Nominations Committee Number of meetings in 2016: 0 Functions: • • • Establishes the criteria for selecting candidates for nomination to our board, actively seeks candidates who meet those criteria and makes recommendations to our board of directors to fill vacancies on, or make additions to, our board or any committee of our board (see ‘‘Other Governance Practices’’ for a detailed discussion of qualification criteria); Develops and recommends to our board standards to be applied in making determinations as to the absence of material relationships between the company and a director; Establishes the procedures for the evaluation and oversight of our board and management; and • Monitors and recommends changes in the organization and procedures of the board, in the size of the board or any board committee and in our corporate governance policies, and monitors the company’s corporate governance structure. The CG&N Committee will consider stockholder 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 the 2017 Annual Meeting. In evaluating nominees for director, the CG&N 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 CG&N Committee may consider other types of diversity in evaluating nominees, the committee does not follow any specific formula for considering factors such as race, gender or national origin in evaluating nominees and potential nominees, nor does it apply any quotas with respect to such factors. Our board of directors has determined that each member of the CG&N Committee is independent under the standards of independence of the rules of the NASDAQ Global Select Market. 8 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement Advisory Boards In addition to the boards of directors of the company and the bank, the bank also has a non-voting advisory board of directors in each of the Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola, Florida, Atlanta, Georgia, Charleston, South Carolina and Nashville, Tennessee markets. These advisory directors represent a wide array of business experience and community involvement in the service areas where they live. As residents of these 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: Atlanta Region Charleston Region Dothan Region J. Paul Austin, III Jeffrey B. Baker Mike Casey Paul Conley John Loud Zach Parker Brent Reid Peter McKellar Chris Mettler Weesie Newton Skip Sawin Daniel Vallini Jerry Adams Charles H. Chapman III Ronald DeVane John Downs Steve McCarroll Charles E. Owens William C. (Bill) Thompson Huntsville Region Mobile Region Montgomery 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 Steve Crawford Lowell Friedman Barry Gritter Dr. John A. Jernigan Ray B. Petty G.L. Pete Taylor Dr. James M. Harrison, Jr. W. Ken Upchurch, III James Henderson Richard D. Inge Kenneth S. Johnson John H. Lewis, Jr. Alan E. Weil, Jr. Nashville Region Pensacola Region Charles Robert Bone Thomas M. Bizzell Joe Cashia Ryan Chapman Brent Clements Todd Robinson Bo Carter Leo Cyr Matt Durney Dr. Mark S. Greskovich Ray Russenberger Sandy Sansing Roger Webb 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. No member of this committee has served as an officer or employee of the company, the bank or any other 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 ‘‘Compensation Discussion and Analysis’’ and ‘‘Board Committees and Their Functions.’’ SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 9 Director Attendance Our board of directors held twelve meetings in 2016. 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. While we do not have a formal policy regarding director attendance at our annual meetings, we generally expect our directors to attend if at all possible. Each director attended the 2016 Annual Meeting other than Messrs. Brock, Filler and Smith. Certain Relationships and Related Transactions We have not entered into any business transactions with related parties required to be disclosed under Rule 404(a) of Regulation S-K other than banking transactions in the ordinary course of our business with our directors and officers, as well as members of their families and corporations, partnerships or other organizations in which they have a controlling interest. Management recognizes that related party transactions can present unique risks and potential conflicts of interest (in appearance and in fact). Therefore, we maintain written policies around interactions with related parties which require that these transactions are entered into and maintained on the following terms: • • in the case of banking transactions, each is on substantially the same terms, including price or interest rate, collateral and fees, as those prevailing at the time for comparable transactions with unrelated parties that are not expected to involve more than the normal risk of collectability or present other unfavorable features to the bank; and in the case of any related party transactions, including banking transactions, each is approved by a majority of the directors who do not have an interest in the transaction. A copy of our policy governing related party transactions is available on our website www.servisfirstbank.com under the ‘‘Investor Relations’’ tab. The aggregate amount of indebtedness from our directors and executive officers (including their affiliates) to the bank as of December 31, 2016 was approximately $10.8 million, which equaled 2.07% of our total equity capital as of that date. Less than 1% of these loans were installment loans to individuals. Related party transactions are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral (where applicable), as those prevailing at the time for comparable transactions with persons not related to us, and do not involve more than normal risk of collectability or present other features unfavorable to us. As of the date of this Proxy Statement, no related party loans were categorized as non-accrual, past due, restructured or potential problem loans. We anticipate making related party loans in the future to the same extent as we have in the past. Code of Conduct for Directors and Employees Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. The Code of Business Conduct and 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 Business Conduct and Ethics. A copy of our Code of Business Conduct and Ethics is, and any amendment to or waiver from a provision of our Code of Business Conduct and Ethics will be, available free of charge on our website at www.servisfirstbank.com under the ‘‘Investor Relations’’ tab. Communications with the Board 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. 10 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement DIRECTOR COMPENSATION We believe our current board composition is unique. Each of our directors has been a member of our board since our formation in 2007 and a member of the board of the bank since its inception in 2005. As of March 20, 2017, our five non-employee directors beneficially owned, collectively, approximately 9.05% of our outstanding common stock. We try to structure director compensation to attract and retain qualified non-employee directors and to further align the interests of directors with the interests of our stockholders. The Compensation Committee periodically reviews non-employee director compensation trends and makes recommendations to the board on compensation for our non-employee directors. Annual Retainers and Meeting Fees Directors each receive an annual cash retainer of $15,000, except that our chairman of the board receives a $20,000 annual retainer and our audit committee chairman receives a $20,000 annual retainer. Directors are paid $600 for each board meeting or board event attended, and $250 for each committee meeting attended, other than compensation committee meetings that occur on the same day as full board meetings. Mr. Broughton is a named executive officer, and his compensation is reflected in the Summary Compensation Table. Director Compensation for Fiscal 2016 The following table sets forth information regarding the compensation of our non-employee directors for the year ended December 31, 2016. Name (a) Stanley M. Brock, Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . Michael D. Fuller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . James J. Filler . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Richard Cashio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hatton C. V. Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees earned or paid in cash (b) ($) 28,200(1) 28,200(1) 22,450 23,450(1) 21,850 Option Awards (d) ($) 0 0 0 0 0 Total (h) ($) 27,950 27,950 22,450 23,200 21,850 (1) Includes $250 paid to each audit committee member in 2017 for an audit committee meeting that took place in 2016. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 11 OWNERSHIP OF SERVISFIRST COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS The following table sets forth the beneficial ownership of our common stock as of March 20, 2017 by: (i) each of our directors; (ii) our named executive officers; (iii) all of our directors and our executive officers as a group; and (iv) each stockholder known by us to beneficially own more than 5% of our common stock. Except as otherwise indicated, each person listed below has sole voting and investment power with respect to all shares shown to be beneficially owned by him except to the extent that such power is shared by a spouse under applicable law. The information provided in the table is based on our records, information filed with the SEC and information provided to the company. Name and Address of Beneficial Owner(1) Five Percent Stockholders Blackrock, Inc.(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 East 52nd Street New York, NY 10055 The Vanguard Group(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Vanguard Blvd. Malvern, PA 19355 Directors and Executive Officers Thomas A. Broughton III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stanley M. Brock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael D. Fuller James J. Filler . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Richard Cashio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hatton C. V. Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William M. Foshee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clarence C. Pouncey III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rodney E. Rushing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Don G. Owens All directors and executive officers as a group (10 persons) . . . . . . . . . . . . . . . . . . Amount and Nature of Beneficial Ownership(2) Percentage of Outstanding Common Stock (%)(3) 5,001,599(5) 9.47% 2,942,769(5) 5.57% 1,068,580(7)(8) 890,420(7)(9) 1,371,402(10) 1,349,606(7) 745,820(7)(11) 422,994(7) 391,502(12) 719,135(13) 454,600(14) 0(15) 7,414,059(16) 2.02% 1.69% 2.60% 2.56% 1.41% * * 1.36% * * 14.04% * (1) (2) (3) (4) Indicates ownership of less than 1% of outstanding common stock. The address for all directors and executive officers is 850 Shades Creek Parkway, Suite 200, Birmingham, Alabama 35209. Share numbers (and exercise price with respect to options) reflect a 3-for-1 stock split that occurred on July 16, 2014 and a 2-for-1 stock split that occurred on December 20, 2016. Except as otherwise noted herein, the percentage is determined on the basis of 52,809,396 shares of our common stock outstanding plus securities deemed outstanding pursuant to Rule 13d-3 promulgated under 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. In a Schedule 13G filed January 30, 2017, Blackrock, Inc. reported having sole power to vote or to direct the vote of 4,914,815 shares of common stock, shared power to vote or direct the vote of zero shares of common stock, sole power to dispose or direct the disposition of 5,001,599 shares of common stock and shared power to dispose or to direct the disposition of zero shares of common stock. All information in this footnote was obtained from the Schedule 13G filed by Blackrock, Inc. (5) Reflects shares reported on Schedule 13G as beneficially owned as of December 31, 2016. (6) (7) (8) In a Schedule 13G filed February 13, 2017, The Vanguard Group reported having sole power to vote or direct the vote of 90,516 shares of common stock, shared power to vote or direct to vote 2,896 shares of common stock, sole power to dispose or direct the disposition of 2,851,575 shares of common stock and shared power to dispose or to direct the disposition of 91,194 shares of common stock. All information in this footnote was obtained from the Schedule 13G filed by The Vanguard Group. Except to the extent previously exercised, includes an option granted to each director on November 28, 2011 to purchase 60,000 shares of common stock for $5.00 per share which vested 100% after five years. Mr. Broughton previously exercised a portion of this option, acquiring 10,000 shares of common stock, leaving Mr. Broughton with an option to acquire 50,000 shares of common stock for $5.00 per share. Mr. Fuller previously exercised the entirety of this option, acquiring 60,000 shares of common stock. Does not include an option granted to each director on June 15, 2015 to purchase 13,000 shares of common stock for $18.57 per share which vests 100% after three years. Includes 54,540 shares owned by Mr. Broughton’s spouse and 14,040 shares of common stock owned by his two stepchildren, as to which Mr. Broughton may still be deemed to be the beneficial owner. Does not include an option granted to Mr. Broughton on January 20, 2015 to purchase 20,000 shares of common stock for $15.085 per share which vests 100% after five years. Does not include 13,800 shares of common stock owned by his adult daughter. Does not include 366,000 shares of common stock owned by TAB2, LLC, a limited liability company. Mr. Broughton no longer has a reportable beneficial interest in shares of common stock owned by TAB2, LLC. Mr. Broughton disclaims beneficial ownership of common stock held by his spouse, his adult daughter, his two stepchildren and TAB2, LLC. Mr. Broughton has pledged 27,000 shares to Business First Bank, Baton Rouge, as security for a line of credit. (9) Does not include 73,500 shares of common stock owned by one of Mr. Brock’s adult children, who does not live with Mr. Brock and for whom Mr. Brock does not provide support. Mr. Brock disclaims beneficial ownership of all shares not directly owned by him. 12 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement (10) Includes 91,500 shares held by Mr. Fuller’s spouse. Mr. Fuller disclaims beneficial ownership of such shares. Includes 869,936 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 364,372 shares to ServisFirst Bank. (11) Does not include 28,752 shares owned by Mr. Cashio’s adult daughter. Includes 184,000 shares held by Mr. Cashio’s spouse. Mr. Cashio disclaims (12) (13) (14) beneficial ownership of all shares not directly owned by him. Includes 24,000 shares held by Mr. Foshee’s spouse. Mr. Foshee disclaims beneficial ownership of such shares. Includes an option to purchase 30,000 shares at $4.165 per share granted to Mr. Foshee on February 16, 2010, 6,000 of which vested on February 16, 2014 and 24,000 of which vested on February 16, 2015. Includes an option granted on January 19, 2011 to purchase 15,000 shares of common stock for $4.165 per share which vested 100% on January 19, 2016. Includes an option to purchase 15,000 shares of common stock for $5.00 per share granted on February 21, 2012, which vested 100% on February 21, 2017. Mr. Foshee has pledged 34,000 shares to First National Bankers Bank and 48,000 shares to Morgan Stanley. Includes 19,133 shares beneficially owned by Mr. Pouncey’s wife through a limited liability company, and 6,000 shares of common stock owned by the Pouncey Education Trust. Members of Mr. Pouncey’s immediate family are among the beneficiaries of the trust and the reporting person is trustee of the trust. Mr. Pouncey disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. Includes an option granted on March 21, 2011 to purchase 150,000 shares of common stock for $5.00 per share which vested 100% on March 21, 2016. Does not include an option to purchase 15,000 shares of common stock for $6.915 per share granted on February 10, 2014, which vests 100% on February 10, 2021. (15) Does not include an option granted on October 31, 2012 to purchase up to 6,000 shares of common stock for $5.00 per share which vests 100% on October 31, 2017. Includes 500,000 shares obtainable within 60 days pursuant to the exercise of outstanding options or warrants. (16) Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company’s Section 16 officers, directors and persons who own more than 10% of the Company’s common stock to file reports of ownership and changes in ownership with the SEC. Based solely upon information made available to us, we believe that each filing required to be made pursuant to Section 16(a) of the Exchange Act was timely filed by our Section 16 officers and directors and the beneficial owners of more than 10% of our common stock, except for the following filings: (i) Mr. Richard Cashio had a late Form 4 filing on February 8, 2016 with respect to the acquisition of 700 shares of common stock that occurred on January 28, 2016, due to lack of sufficient trade information to timely make the filing; and (ii) Mr. Gregory Bryant had a late Form 4 filing on January 29, 2016 with respect to the grant by the company on January 25, 2016 of an option to acquire 25,000 shares of common stock and with respect to the award by the company on January 25, 2016 of 2,500 shares of restricted stock. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 13 PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION As required under Section 14A of the Exchange Act, we provide our stockholders with an annual advisory vote on the compensation of our named executive officers. At the 2016 Annual Meeting, approximately 97% of the votes cast (which excludes broker non-votes) supported our executive compensation program. Our Compensation Committee reviewed the results of the 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 recognizes that effective practices evolve, and the committee will continue to consider changes as needed to keep our executive compensation program competitive and tightly linked to performance. Consistent with our stockholders’ preference and prevailing demand, we expect to hold an advisory vote on executive compensation every year. This year, we are asking stockholders to approve the following resolution: RESOLVED, that the compensation paid to the company’s named executive officers as disclosed in the Proxy Statement for the 2017 Annual Meeting of Stockholders pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved. The advisory vote will not be binding on the Compensation Committee or the board of directors. However, they will carefully consider the outcome of the vote and take into consideration any specific concerns raised by investors when determining future compensation arrangements. The Board of Directors Unanimously Recommends a Vote ‘‘FOR’’ the Resolution Approving the Compensation Paid to Our Named Executive Officers. 14 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement EXECUTIVE COMPENSATION Compensation Discussion and Analysis (CD&A) This CD&A describes our executive compensation objectives and philosophy. It also describes our compensation program and reviews the compensation outcomes for fiscal 2016. Our ‘‘named executive officers’’ in 2016 were: • • Thomas A. Broughton III, President and Chief Executive Officer Clarence C. Pouncey III, Executive Vice President and Chief Operating Officer • William M. Foshee, Executive Vice President and Chief Financial Officer • • Rodney E. Rushing, Executive Vice President and Executive for Correspondent Banking Don G. Owens, Senior Vice President and Chief Credit Officer We are a bank holding company headquartered in Birmingham, Alabama. Our bank, founded in 2005, provides commercial banking services through 19 full-service banking offices located in Alabama, Georgia, South Carolina, Tennessee and Florida. We operate our bank using a simple business model based on organic loan and deposit growth, generated through high quality customer service, delivered by a team of experienced bankers focused on developing and maintaining long-term banking relationships with our target customers. 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 strive to translate this business model and strategy into higher profits for our stockholders. Our compensation program is intended to incentivize our named executive officers to pursue strategies and actions that promote both annual and longer-term value to stockholders, consistent with the intention of our business model. We have experienced accelerated growth and change in recent years — during the last four years, we have taken the company public through our initial public offering, increased our geographic footprint to include branch offices in South Carolina, Tennessee and Georgia, effectuated a 3-for-1 stock dividend and a 2-for-1 stock dividend and instituted a quarterly cash dividend while increasing our net income from approximately $34.4 million to approximately $81.5 million — and we believe our compensation processes have been designed to permit us to attract and retain the highly skilled executive and management staff who have been instrumental to our past successes and who will be key to our future. Each of our five named executive officers also holds the same position with the bank. All of such officers remain employees of the bank for payroll and tax purposes. The board of directors of the bank also has a compensation committee. At the time we became a bank holding company, our board of directors appointed a separate Compensation Committee, 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 Messrs. Broughton, Pouncey, Foshee, Rushing and Owens, 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 Compensation 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, retain and appropriately incentivize the most qualified and competent individuals as executive officers, we strive to maintain a compensation program that not only is competitive in our market but that also provides our Compensation Committee with the flexibility to determine incentive compensation using a common sense approach. 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. Our board and Compensation Committee have found that people do what you incentivize them to do. We believe that it is of paramount importance to be careful when setting absolute incentive compensation goals. Instead, our Compensation Committee is thoughtful about the objective performance measures it uses to incentivize executive officers and, when determining the incentive compensation of each executive, our Compensation Committee considers all available information, including the company’s overall performance. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 15 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 company, business unit and individual goals. These goals may include any number of criteria and may be unique to the particular executive officer based upon his or her duties, but the criteria typically include net income, asset growth and deposit growth and contain a credit quality component, in addition to considering such executive officer’s personal production. Above all, though, the Compensation Committee endeavors to use a common sense approach when determining incentive compensation and establishing incentive goals. To our Compensation Committee, a ‘‘common sense approach’’ means maintaining a compensation program that adapts to the circumstances and performance of each executive officer, considers the performance in the area of responsibility of such officer, including the achievement of established performance measures, and takes into account the company’s overall performance. Additionally, the Compensation Committee believes that we should offer competitive benefit plans, including health insurance and a 401(k) plan. We also have entered into change in control agreements that apply to particular circumstances where we believe it is important to ensure the retention of certain key executives during the critical period immediately preceding a change in control, if and when applicable. The Compensation Committee evaluates both performance and compensation to ensure that we maintain our ability to attract, retain and properly incentivize 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. Although our Compensation Committee has not designated a specific peer group for this purpose, it relies on general information about similarly sized financial institutions 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 2016, but it plans to retain compensation consultants again in future years. All of our named executive officers received stock options and were encouraged to purchase our stock when they joined the company. We want each of our executive officers to think like a stockholder, which means we want all of our executive officers to be substantial stockholders so that their interests are aligned with those of our other stockholders. 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 two basic objectives: • • to attract, retain and motivate our executive officers by fairly compensating them, which includes rewarding executives upon the achievement of measurable company, business unit and individual performance goals; and to align each executive’s interests with the creation of stockholder value — that is, we want our executives to be ‘‘long our stock’’ rather than ‘‘long a paycheck.’’ Elements of our Compensation Program Base salary: This element is intended to directly reflect an executive’s job responsibilities and his or her value to us. We also use this element to attract and retain our executives and, to some extent, acknowledge each executive’s individual efforts in furthering our strategic goals. Annual short-term cash incentives: This annual cash incentive is one of the performance-based elements of our compensation. It is intended to motivate our executives and to provide a current reward for short-term (annual) measurable performance. Equity-based incentives: The grant of stock options and/or other equity-based incentive compensation is the method we use to align the interests of our named executive officers with the interests of our stockholders, which is another element of performance-based compensation. Perquisites and benefits: These benefits and plans are intended to attract and retain qualified executives, by ensuring that our compensation program is competitive and provides an adequate opportunity for retirement savings. We believe that, to a limited degree, these programs tend to reward long-term service or loyalty to us. Change in control agreements: These agreements, or comparable provisions in an employment or similar agreement, provide a form of severance payable in the event we are the subject of a change in control. They are primarily intended to align the interests of our executives with our stockholders by providing for a secure financial transition in the event of termination in connection with a change in control. 16 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement General Compensation Policies To reward both short- and long-term performance in the compensation program and in furtherance of our compensation objectives noted above, our executive officer compensation philosophy includes the following principles: Compensation should be related to performance. The Compensation Committee believes that a significant portion of an executive officer’s compensation should be tied not only to individual performance, but also the company’s performance measured against both financial and non-financial goals and objectives. Incentive compensation should represent a portion of an executive officer’s total compensation. The Compensation Committee is committed to providing competitive compensation that reflects our performance and that of the individual officer or employee. Compensation levels should be competitive. The Compensation Committee reviews available data to ensure that our compensation is competitive with that provided by other comparable companies. The Compensation Committee believes that competitive compensation enhances our ability to attract and retain executive officers. Incentive compensation should balance short-term and long-term performance. The Compensation Committee seeks to achieve a balance between encouraging strong short-term annual results and ensuring our long-term viability and success. To reinforce the importance of balancing these perspectives, executive officers generally 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, which was amended and restated in 2014. 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 historically have not vested immediately, but rather require the officers and directors that receive such grants to earn them over a period of years with the company. The Compensation Committee does not use a specific formula to determine the amount allocated to each element of compensation. Instead, the Compensation Committee analyzes the total compensation paid to each executive and makes individual compensation decisions as to the mixture between base salary, annual short-term cash incentives and equity-based incentives. To date, in determining the amount or mixture of compensation to be paid to any executive, the Compensation Committee has not considered any severance payment to be paid under an employment agreement or change in control agreement or any equity-based incentives previously awarded. Further, because of the significant stock ownership of all but one of our named executive officers, the Compensation Committee has not adopted any specific stock ownership or holding guidelines that would affect such determinations. For fiscal year 2016, an average of 40.16% of our named executive officers’ compensation was in annual short-term cash incentives which, as described below, are largely performance-based awards. None of our named executive officers’ compensation was in long-term equity-based incentives or stock options for fiscal year 2016. 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 Thomas A. Broughton III, Principal Executive Officer (‘‘PEO’’) . . William M. Foshee, Principal Financial Officer (‘‘PFO’’) . . . . . . . Clarence C. Pouncey III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rodney E. Rushing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Don G. Owens Percentage of Total Compensation (Fiscal Year 2016) Annual Base Salary 41.62% 56.73% 58.07% 58.05% 70.34% Annual Short Term Cash Incentives 52.03% 36.71% 36.55% 34.87% 20.79% Equity-Based Incentives 0% 0% 0% 0% 0% Perquisites and Benefits 6.35% 6.56% 5.38% 7.08% 8.87% SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 17 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 2016 base salary and incentive compensation reflect the Compensation Committee’s and our board’s determination of the total compensation package necessary to meet this objective. Annual Base Salary The Compensation Committee endeavors to establish base salary levels for executives that are consistent and competitive with those provided for similarly situated executives of other similar financial institutions, taking into account each executive’s areas and level of responsibility. For the year ended December 31, 2016, the Compensation Committee increased the base salaries of our named executive officers as follows: • • • • • CEO: To $400,000 from $375,000, an increase of 6.67%; CFO: To $255,000 from $245,000, an increase of 4.08%; COO: To $286,000 from $275,000, an increase of 4.00%; Executive for Correspondent Banking: To $273,000 from $260,000, an increase of 5.00%; and CCO: To $203,000, from $194,688, an increase of 4.27%. None of our named executive officers have employment agreements. See ‘‘Potential Payments Upon Termination or Change in Control’’ below for a more detailed discussion. Annual Short-Term Cash Incentive Compensation For the year ended December 31, 2016, 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, asset growth and loan growth, the executive’s individual production and our 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 2016, the Committee established such ‘‘stretch’’ goals for Messrs. Foshee, Pouncey and Rushing, meaning that each of such officers had the opportunity to earn cash incentive compensation of 60% or more of their respective base salaries. Mr. Owens has ‘‘stretch’’ performance goals that would potentially allow for cash incentive compensation of 30% of his base salary. We do not have any contractual obligations to provide the opportunity to earn specified levels of cash incentive compensation or to limit cash incentive compensation to a specified percentage, 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. As discussed in more detail in ‘‘Corporate Governance — Other Governance Practices — Incentive Compensation Clawback Policy,’’ our board adopted a Clawback Policy to recover awards or payments if the relevant company performance measures upon which they are based are restated in a manner that would reduce the size of an award or payment. 18 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement Although the achievement of any of the specific and objective numerical targets set by the Compensation Committee does not alone ensure an incentive compensation award, 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 2016. Accordingly, for the year ended December 31, 2016 and based upon the attainment of the specific objective numerical targets, our overall performance and such officers’ individual performance for 2016, the Compensation Committee awarded the cash incentive compensation set forth in the table below. The table below details, 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 2016 performance. Name Thomas A. Broughton III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William M. Foshee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clarence C. Pouncey III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rodney E. Rushing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Don G. Owens Equity-Based Incentive Compensation 2016 Incentive Range (%) None 0% − 60% 0% − 60% 0% − 60% 0% − 30% 2016 Incentive as a Percentage of Base Salary (%) 125.00% 64.71% 62.94% 60.07% 29.56% 2016 Incentive Paid ($) $500,000 $165,000 $180,000 $164,000 $ 60,000 In general, we have granted stock options to our 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 stock options generally vest within seven years from their date of grant, with many grants not beginning to vest until three 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 31, 2016. See ‘‘Executive Compensation — Outstanding Equity Awards at Fiscal Year-End’’ 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, 2016. 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 Messrs. Broughton, Rushing or Owens that would require us to pay them severance payments upon termination of employment. We have entered into change in control agreements with Mr. Foshee and Mr. Pouncey. See ‘‘Executive Compensation — Potential Payments Upon Termination or Change in Control’’ for more information. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 19 Key Policies and Supplemental Information Director Resignation Policy: In the event that, in an uncontested election, a director receives more ‘‘Withhold’’ votes than votes ‘‘For’’ his or her election, he or she shall promptly tender his or her resignation to the Chairman of our board. The company’s CG&N Committee will then consider the offer of resignation and make a recommendation to our board which, in turn, must act on the recommendation. Robust Clawback Policy: In the event the company is required to restate financial results, the Compensation Committee may adjust future compensation, cancel outstanding stock or performance-based awards, or seek recoupment of previous awards from company officers. Significant Executive Investment in Company Stock: Long-term stock ownership is deeply engrained in our culture, to the company’s success. For more information, see ‘‘Corporate and it reflects our board’s strong commitment Governance — Other Governance Practices — Stock Ownership of Board and Executives.’’ Restrictions on Hedging or Pledging Company Stock: Executive officers and directors of the company are not permitted to use options, contracts or other arrangements to hedge their holdings of company stock. They also are prohibited from pledging company stock as security for loans without approval from our Insider Trading Compliance Officer. Compensation Committee Report 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, 2016 with management. In reliance on the reviews and discussions with management, the Compensation Committee recommended to the board of directors, and the board of directors has approved, that the Compensation Discussion and Analysis be included in the required company filings with the SEC, including the Proxy Statement for the 2017 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 20 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement Summary Compensation Table The following table sets forth the aggregate compensation paid by us or the bank 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 Rodney E. Rushing EVP and Executive for Correspondent Banking Don G. Owens SVP and Chief Credit Officer Year (b) 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014 Salary (c) ($) 400,000 375,000 350,000 Bonus (d) ($) 500,000 475,000 375,000 286,000 180,000 275,000 165,000 263,000 157,800 255,000 245,000 230,000 165,000 150,000 138,000 273,000 164,000 260,000 130,000 245,000 147,000 203,000 194,688 187,200 60,000 58,000 46,612 Stock Awards (e) ($) — — — Option Awards(1) (f) ($) — 136,325 — Non-Equity Incentive Plan Comp (g) ($) — — — Change in Pension Value and Non-Qualified Deferred Compensation Earnings (h) ($) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — All Other Compensation (i) ($) 61,076(2) 59,486 59,030 Total (j) ($) 961,076 1,045,811 784,030 26,517(3) 26,358 25,390 29,510(4) 29,355 23,521 33,274(5) 29,291 27,785 25,603(6) 24,755 21,865 492,517 466,358 446,190 449,510 424,355 391,521 470,274 419,291 419,785 288,603 277,443 255,677 (1) The amount in this column reflects the aggregate grant date fair value under FASB ASC Topic 718 of awards made during the applicable year. (2) All Other Compensation for 2016 includes car allowance ($9,000), director’s fees ($22,200), country club allowance ($8,143), healthcare premiums ($9,663), matching contributions to 401(k) plan ($10,600) and group life and long-term disability insurance premiums ($1,470). Mr. Broughton’s spouse travels with him on business trips using the company aircraft from time to time. The company has determined that Mrs. Broughton’s travel results in no additional incremental cost to the company. (3) All Other Compensation for 2016 includes car allowance ($9,000), country club allowance ($7,498), group life and long-term disability insurance premiums ($1,421) and healthcare premiums ($8,598). (4) All Other Compensation for 2016 includes car allowance ($9,000), matching contributions to 401(k) plan ($10,600), healthcare premiums ($8,598) and group life and long-term disability insurance premiums ($1,313). (5) All Other Compensation for 2016 includes car allowance ($9,000), healthcare premiums ($9,663), matching contributions to 401(k) plan ($9,815), group life and long-term disability insurance premiums ($1,376) and club dues ($3,420). (6) All Other Compensation for 2016 includes car allowance ($5,400), healthcare premiums ($8,598), matching contributions to 401(k) plan ($10,553) and group life and long-term disability insurance premiums ($1,052). Grants of Plan-Based Awards for Fiscal 2016 The company did not make any grants of plan-based awards to our named executive officers during 2016. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 21 Outstanding Equity Awards at 2016 Fiscal Year-End The below table details all outstanding equity awards as of December 31, 2016. Equity awards identified below that were issued prior to March 22, 2011 were granted under our 2005 Stock Incentive Plan and all other equity awards identified below were granted under our 2009 Amended and Restated Stock Incentive Plan. Option Awards Stock Awards Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (i) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (j) Number of Shares or Units of Stock That Have Not Vested (#) (g) Market Value of Shares or Units of Stock That Have Not Vested ($) (h) Number of securities underlying unexercised options (#) Exercisable (b) Number of Securities underlying unexercised options (#) Unexercisable (c) Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) Name (a) Thomas A. Broughton III (CEO)(1) 60,000 William M. Foshee (CFO)(2) Clarence C. Pouncey III Rodney E. Rushing(3) Don G. Owens(4) — — 30,000 15,000 15,000 — 150,000 — — — 20,000 13,000 — — — — — 15,000 6,000 — — — — — — — — — — Option exercise price ($) (e) Option expiration date (f) $ 5.00 11/28/2021 $15.085 01/20/2025 $ 18.57 06/15/2023 $ 4.165 2/15/2020 $ 4.165 1/19/2021 $ 5.00 2/21/2022 — — $ 5.00 03/21/2021 $ 6.915 02/10/2024 $ 5.00 10/31/2022 (1) (2) (3) (4) The option to purchase 60,000 shares at $5.00 per share granted to Mr. Broughton on November 28, 2011 vested 100% on November 28, 2016. Mr. Broughton has since exercised his option to acquire 10,000 of such shares. The option to purchase 20,000 shares at $15.085 per share granted to Mr. Broughton on January 20, 2015 vests 100% on January 20, 2020. The option to purchase 13,000 shares at $18.57 granted to Mr. Broughton on June 15, 2015 vests 100% on June 15, 2018. Share numbers and exercise price reflect 3-for-1 stock split that occurred on July 16, 2014 and 2-for-1 stock split that occurred on December 20, 2016. The option to purchase 30,000 shares at $4.165 per share was granted to Mr. Foshee on February 16, 2010, of which 6,000 shares vested on February 16, 2014 and 24,000 shares vested on February 16, 2015. The option to purchase 15,000 shares at $4.165 per share granted to Mr. Foshee on January 19, 2011 vested in a lump sum on January 19, 2016. The option to purchase 15,000 shares at $5.00 per share granted to Mr. Foshee on February 21, 2012 vested in a lump sum on February 21, 2017. Share numbers and exercise price reflect 3-for-1 stock split that occurred on July 16, 2014 and 2-for-1 stock split that occurred on December 20, 2016. The option to purchase 150,000 shares at $5.00 per share granted to Mr. Rushing on March 21, 2011 vested 100% on March 21, 2016. The option to purchase 15,000 shares at $6.915 per share granted to Mr. Rushing on February 10, 2014 vests 100% on February 10, 2021. Share numbers and exercise price reflect 3-for-1 stock split that occurred on July 16, 2014 and 2-for-1 stock split that occurred on December 20, 2016. The option to purchase 6,000 shares at $5.00 per share granted to Mr. Owens on October 31, 2012 vests 100% on October 31, 2017. Share numbers and exercise price reflect 3-for-1 stock split that occurred on July 16, 2014 and 2-for-1 stock split that occurred on December 20, 2016. 22 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement Option Exercises and Stock Vested for Fiscal 2016 The following table sets forth information regarding option exercises by and restricted stock vesting for our named executive officers during 2016: Name (a) Thomas A. Broughton III(1) . . . . . . . . . . . . . . . . . . . . . . . . William M. Foshee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clarence C. Pouncey III . . . . . . . . . . . . . . . . . . . . . . . . . . Rodney E. Rushing(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Don G. Owens Option Awards Stock Awards Number of Shares Acquired on Exercise (#) (b) 66,000 — — 60,000 — Value Realized on Exercise ($) (c) $1,028,610 — — $ 895,800 — Number of Shares Acquired on Vesting (#) (d) — — — — — Value Realized on Vesting ($) (e) — — — — — (1) Mr. Broughton exercised options for 66,000 shares at a price of approximately $4.165 per share. Based upon a value of $19.75 per share, the closing price of the company’s common stock on the date of exercise (after adjusting for the 2-for-1 stock split that occurred on December 20, 2016), the value realized by Mr. Broughton on the exercise of such options was $1,028,610. (2) Mr. Rushing exercised options for 60,000 shares at a price of $5.00 per share. Based upon a value of $19.93 per share, the closing price of the company’s common stock on the date of exercise (after adjusting for the 2-for-1 stock split that occurred on December 20, 2016), the value realized by Mr. Rushing on the exercise of such options was $895,800. Pension Benefits The company does not maintain any benefit plan that provides for payments or other benefits at, following or in connection with retirement, other than the company’s 401(k) plan. Nonqualified Deferred Compensation Plans The company does not maintain any defined contribution or other plans that provide for the deferral of compensation on a basis that is not tax-qualified. 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. Potential Payments Upon Termination or Change in Control Change in Control Agreements 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 in 2005, but each has been amended and restated to apply to a change in control of the company as well as the bank. Messrs. Foshee and 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 by the bank or the company, other than for ‘‘cause’’ or upon death, disability or attainment of normal retirement date, or by the employee in certain specific instances, in each case if such termination occurs within 24 months after a change in control. 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 individual upon his employment and consistent with general industry standards. Each of these agreements was approved by the board of directors of the bank and the company. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 23 The term ‘‘change in control’’ is defined in these change in control agreements as any of the following events: • • • • 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: (i) any acquisition by us, by any of our subsidiaries, or by any employee benefit plan (or related trust) of us or our subsidiaries, or (ii) 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; or approval by our stockholders of: (i) our or the bank’s complete liquidation or dissolution, or (ii) 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 defined in the change in control agreement) any time within two years after a change in control. In addition, the change in 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) he is assigned to duties or responsibilities that are materially inconsistent with his position, duties, responsibilities or status immediately preceding such change in control, or a change in his reporting responsibilities or titles in effect at such time resulting in a reduction of his responsibilities or position; (ii) the reduction of his 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 his level of benefits or supplemental compensation from those in effect immediately preceding such change in control; or (iii) his transfer to a location requiring a change in residence or a material increase in the amount of travel normally required of him in connection with his employment. In addition to the cash payments set forth in the change in control agreements, any stock options and restricted stock awards granted to the affected employee will immediately vest upon a change in control. 24 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 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, 2016, 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, we estimate that the following officers would receive the following benefits in a lump sum payment within 30 days of their respective termination: Cash Payment . . . . . . . . . . . . . . . . . . . . . . . . Pouncey $286,000 Foshee $510,000 Furthermore, assuming we had a change in control as of December 31, 2016, as defined in either of our stock incentive plans, and further assuming that the value of the stock as of that date was $37.44 per share (the closing price on December 30, 2016, the last day in 2016 on which the company’s stock was traded), then each of the named executive officers would become immediately vested in their unvested stock options as of such date. The following table contains a schedule of unvested stock options that would vest upon a change in control and the value of such unvested options based upon the difference between $37.44 per share and their respective exercise prices per share: Name Broughton . . . . . . . . . . . . . . . . . . . . . . . . . . . Pouncey . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foshee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rushing . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares Represented by Unvested Options (#) 33,000 — — 15,00 6,000 Value of Unvested Options ($) $692,410 — — $457,875 $194,640 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 25 PROPOSAL 3: ADVISORY VOTE ON THE FREQUENCY OF FUTURE ‘‘SAY ON PAY’’ VOTES The Dodd-Frank Act provides stockholders the opportunity to vote, on an advisory, or non-binding, basis, on how frequently they would like companies to hold an advisory vote on the compensation of executive officers in the manner done in Proposal 2 above. When voting, stockholders may indicate whether they would prefer an advisory vote on named executive officer compensation once every one, two or three years, or they may abstain from the vote. In accordance with this requirement of the Dodd-Frank Act, we are holding an advisory vote on the frequency of future stockholder advisory votes on our executive compensation program. After consideration of the frequency alternatives, our board believes that conducting an advisory vote on executive compensation ‘‘every year’’ is appropriate for the company and its stockholders at this time. If our board determines in the future that a less frequent vote would better serve stockholder interests, the board may make such a recommendation in connection with future advisory votes. Stockholders are not being asked to approve or disapprove the board’s recommendation. Instead, our board is providing a recommendation, but you are being asked to choose one of four options regarding this proposal. You may vote for us to hold advisory votes on our compensation every one, two or three years, or you may abstain from voting on the matter. The Board of Directors Unanimously Recommends a Vote of ‘‘EVERY YEAR’’ for the Advisory Vote on the Frequency of Future ‘‘Say On Pay’’ Votes. 26 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement PROPOSAL 4: RATIFY APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Independent Registered Public Accounting Firm Fees Subject to the ratification by our stockholders, our board of directors intends to engage Dixon Hughes Goodman LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2017. 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 Dixon Hughes Goodman LLP, the appointment of the independent registered public accounting 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 Dixon Hughes Goodman LLP as our Independent Registered Public Accounting Firm for the Year Ending December 31, 2017. Independent Registered Public Accounting Firm Our consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2016 have been audited by Dixon Hughes Goodman LLP, our independent registered public accounting firm, as stated in their report appearing in our 2016 Annual Report on Form 10-K. Dixon Hughes Goodman LLP was initially engaged as our independent registered public accounting firm on June 18, 2014. Representatives of Dixon Hughes Goodman 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 Dixon Hughes Goodman LLP pursuant to which it provided the audit and audit-related services described below for the fiscal year ended December 31, 2016. One hundred percent of the fees set forth below were pre-approved by the Audit Committee. Dixon Hughes Goodman LLP (1) Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Audit-related fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Tax fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) All other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $409,325(1) $ 8,700(2) $ 55,250(3) $ 38,650(4) 2015 $467,008(1) $ 67,500(5) $ 53,400(6) $ 0 (1) Consists of fees incurred in connection with the audit of the Company’s financial statements, with the review of quarterly financial statements, and SEC filings. (2) Consists of fees incurred in connection with the Company’s acquisition of Metro Bancshares, Inc. and fees incurred in connection with the audit of certain Tennessee public fund pledging. (3) Consists of fees incurred in connection with state tax return filings for the year ended 2015 and related state taxes, tax returns attributable to the Company’s acquisition of Metro Bancshares, Inc., and tax credit related tax matters. (4) Consists of fees incurred in connection with an assessment of loan operations process and workflow. (5) Consists of fees incurred in connection with the Company’s acquisition of Metro Bancshares, Inc., the filing of the Company’s shelf registration statement on Form S-3 and the Company’s subordinated debt sale. (6) Consists of fees incurred in connection with tax return filings of subsidiaries and tax returns attributable to the Company’s acquisition of Metro Bancshares, Inc. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 27 KPMG LLP (1) Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Audit-related fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Tax fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) All other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $0 $0 $0 $0 2015 0 $ $25,000(1) $ $ 0 0 (1) Consists of fees incurred in connection with the review of, and consent to the incorporation of Financial Statements in, the registration statement on Form S-4, as amended, filed with the SEC on November 24, 2014. Audit Committee Report 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 Dixon Hughes Goodman LLP, independent registered public accountants for the company for the year ended December 31, 2016. 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 Dixon Hughes Goodman LLP the matters required to be discussed by PCAOB Auditing Standard No. 1301, ‘‘Communications with Audit Committees.’’ The Audit Committee has received the written disclosures and confirming letter from Dixon Hughes Goodman LLP required by Independence Standards Board Standard No. 1, ‘‘Independence Discussions with Audit Committees,’’ and, in compliance with PCAOB Rule 3520, has discussed with Dixon Hughes Goodman LLP their independence from the company. Based on these reviews and discussions with management of the company and Dixon Hughes Goodman LLP referred to above, the Audit Committee has recommended to our board of directors that the audited consolidated financial statements of the company and its subsidiaries for the fiscal year ended December 31, 2016 be included in the company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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 28 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement PROPOSAL 5: STOCKHOLDER PROPOSAL REGARDING DIRECTOR ELECTION MAJORITY VOTING STANDARD Below is a stockholder proposal that we received from the California State Teachers’ Retirement System (‘‘CalSTRS’’), whose address is 100 Waterfront Place, MS-04, West Sacramento, California, 95605-2807. As of November 18, 2016, prior to the two-for-one stock split that occurred on December 20, 2016, CalSTRS beneficially owned 48,220 shares of our common stock. In accordance with SEC rules, we have set forth below a stockholder proposal, along with the supporting statement of the stockholder proponent. If properly presented by the proponent, the stockholder proposal will be voted upon at our Annual Meeting. As explained below, our board unanimously recommends that you vote ‘‘AGAINST’’ the stockholder proposal. Stockholder Proposal and Supporting Statement BE IT RESOLVED: That the shareholders of ServisFirst Bancshares, Inc. hereby request that the Board of Directors initiate the appropriate process to amend the Company’s articles of incorporation and/or bylaws to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained for contested director elections, that is, when the number of director nominees exceeds the number of board seats. SUPPORTING STATEMENT: In order to provide shareholders a meaningful role in director elections, the Company’s current director election standard should be changed from a plurality vote standard to a majority vote standard. The majority vote standard is the most appropriate voting standard for director elections where only board nominated candidates are on the ballot, and it will establish a challenging vote standard for board nominees to improve the performance of individual directors and entire boards. Under the Company’s current voting system, a nominee for the board can be elected with as little as a single affirmative vote, because ‘‘withheld’’ votes have no legal effect. A majority vote standard would require that a nominee receive a majority of the votes cast in order to be re-elected and continue to serve as a representative for the shareholders. In response to strong shareholder support a substantial number of the nation’s leading companies have adopted a majority vote standard in company bylaws or articles of incorporation. In fact, more than 94% of the companies in the S&P 500 have adopted majority voting for uncontested elections. We believe the Company needs to join the growing list of companies that have already adopted this standard. CalSTRS is a long-term shareholder of the Company and we believe that accountability is of upmost importance. We believe the plurality vote standard currently in place at the Company completely disenfranchises shareholders and makes the shareholder’s role in director elections meaningless. Majority voting in director elections will empower shareholders with the ability to remove poorly performing directors and increase the directors’ accountability to the owners of the Company, its shareholders. In addition, those directors who receive the majority support from the shareholders will know they have the backing of the very shareholders they represent. We therefore ask you to join us in requesting that the Board of directors promptly adopt the majority vote standard for director elections. Please vote FOR this proposal. The Company’s Statement in Opposition In October 2016, we adopted a director resignation policy, as more fully described in Proposal 1, that we believe already addresses the concerns raised by this stockholder proposal. In light of this policy, our board has carefully considered this stockholder proposal and, for the reasons provided below, believes that the company’s current method of electing directors is in the long-term best interests of the company and its stockholders. Under the company’s bylaws, stockholders who are dissatisfied with incumbent directors may recommend candidates for election to our board and may withhold their votes for incumbent directors. The company’s director resignation policy provides that, in an uncontested election, any incumbent director nominee who receives a greater number of ‘‘withhold’’ votes than votes ‘‘for’’ his or her election must promptly tender a written offer of resignation to the chairman of our board. Our CG&N Committee, which is composed entirely of independent directors, will consider the offer of resignation and recommend to the board whether to accept or reject the resignation. The board is then required to act on the tendered resignation. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 29 Unlike the company’s existing plurality voting standard and director resignation policy, the majority voting standard requested in the stockholder proposal creates the possibility that a vacancy could result on our board when an incumbent director fails to receive the votes necessary to be elected. Such vacancies could result in the company’s inability to comply with certain NASDAQ listing requirements or other securities regulations. This includes regulations related to director independence, committee composition and the maintenance of an audit committee financial expert. Our board believes that our current director election procedures, including our director resignation policy, provide the board the flexibility to appropriately respond to stockholder interests without the risk of the potential corporate governance complications that could result from the majority voting standard requested by the stockholder proposal. Contrary to the statements in the stockholder proposal which argue that withhold votes have no legal consequence, we believe that, as a result of the procedures described above, stockholders’ withhold votes are meaningful and provide an effective means for stockholders to influence the director election process. Furthermore, the proponent’s statement that a director could be elected with a single vote is highly unrealistic and contrary to actual voting experience. Since our formation in 2007, each of our director nominees has been elected by over 95% of the votes cast. Accordingly, a majority voting standard would have been irrelevant in these director elections. In addition, majority voting may be abused by a limited number of stockholders to advance special interests that are not in the long-term best interests of all stockholders. Our stockholder base includes a significant number of individual stockholders. Traditionally, such retail investors have been less likely to vote at stockholder meetings than large investors and hedge funds. As a result, a limited number of large investors could wield disproportionate influence despite owning considerably less than a majority of our shares. Empowering small factions of large stockholders to influence the Company’s business and operations would be a disservice to the overwhelming number of our long-term stockholders. For these reasons, our board believes our director resignation policy already accomplishes the objective of the stockholder proposal by providing stockholders with a significant voice in the election of directors, while preserving the flexibility for the board to exercise its independent judgment on a case-by-case basis in the best interests of the company and its stockholders. Accordingly, we believe that the adoption of a majority vote standard by amendment of our corporate governance documents is unnecessary. The Board of Directors Unanimously Recommends that Stockholders Vote ‘‘AGAINST’’ the Adoption of the Stockholder Proposal. 30 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement GENERAL INFORMATION Other Business 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. Questions and Answers About the 2017 Annual Meeting and Voting 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 2017 Annual Meeting of Stockholders. What are the purposes of the Annual Meeting? At the Annual Meeting, stockholders will vote on: (1) the election of six directors; (2) an advisory vote on our executive compensation; (3) an advisory vote on the frequency of a stockholders’ advisory vote on executive compensation; (4) the ratification of Dixon Hughes Goodman LLP as our independent public accounting firm for the year ending December 31, 2017; (5) the consideration of a stockholder proposal requesting our board of directors initiate the process to amend our corporate governance documents to provide that director nominees shall be elected by majority vote in uncontested director elections; and (6) 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. How do I receive a printed copy of proxy materials? To request a printed copy of the proxy materials, please call 1-866-641-4276, visit www.investorvote.com/SFBS or email investorvote@computershare.com with ‘‘Proxy Materials ServisFirst Bancshares, Inc.’’ in the subject line. To make your request, you will need the 15-digit control number printed on your Notice of Internet Availability of Proxy Materials or proxy card. Who is entitled to vote? Stockholders of record at the close of business on March 20, 2017, 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. As of the record date, 52,809,396 shares of our common stock were outstanding and entitled to vote. 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. How do I vote? If you hold your shares in a brokerage account in your broker’s or another nominee’s name (held in ‘‘street name’’), you are a beneficial owner and you should follow the voting directions provided by your broker or nominee: • • • • You may complete and mail a voting instruction form to your broker or nominee. If your broker allows, you may submit voting instructions by telephone or the Internet. You may use a mobile device, scanning the QR barcode on your voter instruction form or Notice of Internet Availability of Proxy Materials and following the prompts that appear on your mobile device. You may cast your vote in person at the 2017 Annual Meeting, but you must request a legal proxy from your broker or nominee and bring it to the Annual Meeting. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 31 If you hold your shares in your own name as a holder of record with our transfer agent, Computershare, you are a ‘‘stockholder of record’’ and may vote using any of the following methods: • • • • By going to the website www.investorvote.com/SFBS and following the instructions for Internet voting on the proxy card or Notice of Internet Availability of Proxy Materials that you received in the mail. You will need the 15-digit control number printed therein. You may also access instructions for telephone voting on the website. By using your mobile device to scan the QR barcode on your proxy card or Notice of Internet Availability of Proxy Materials and following the prompts that appear on your mobile device. If you received a printed copy of the proxy materials, by completing and mailing your proxy card in the prepaid return envelope, or if you reside in the United States or Canada, by dialing 1-800-662-8683 and following the instructions for telephone voting provided by the recorded message at that number. You will need your 15-digit control number printed on your proxy card. By casting your vote in person at the 2017 Annual Meeting. If you invest in our common stock through the company stock fund in the ServisFirst Bank 401(k) Profit Sharing Plan and Trust, you will receive instructions for submitting your voting directions from the 401(k) plan’s administrator, Lincoln Financial. The 401(k) plan’s trustees will vote shares held by the 401(k) plan in accordance with the tabulation. Any shares for which the trustees do not receive timely voting directions will be voted by the trustees in proportion to the shares for which directions were actually received. To allow the trustees sufficient time to process voting directions, the voting deadline for 401(k) plan participants is 5:00 p.m., Central Time, on May 12, 2017. What if I change my mind after I vote my shares? You can revoke or change your proxy at any time before it is voted at the 2017 Annual Meeting. If you hold your shares in a brokerage account in your broker’s or another nominee’s name (‘‘street name’’), you may revoke or change your vote: • • Via telephone or Internet, using the voting directions provided by your broker or nominee; or By casting your vote in person at the 2017 Annual Meeting, but you must present a legal proxy at the Annual Meeting. If you are a registered stockholder, you may revoke or change your vote by: • • • • Voting by telephone or the Internet, using the voting directions provided on the proxy card or Notice of Internet Availability of Proxy Materials that you received in the mail; Notifying our Secretary, William M. Foshee, in writing; Sending another executed proxy card dated later than the first proxy card; or Voting in person at the 2017 Annual Meeting. Attendance at the Annual Meeting will not revoke any proxy you have previously granted unless you specifically so request. If you invest in our common stock through the company stock fund in the ServisFirst Bank 401(k) Profit Sharing Plan and Trust, you may revoke or change your vote by following the instructions provided by the 401(k) plan’s administrator, Lincoln Financial. To allow the trustees sufficient time to process voting directions, the deadline for 401(k) plan participants to revoke or change their voting directions is 5:00 p.m., Central Time, on May 12, 2017. How many shares must be present to hold the 2017 Annual Meeting? More than one-half of the Company’s outstanding common stock as of the record date must be represented at the 2017 Annual Meeting in person or by proxy in order to hold the Annual Meeting. This is called a quorum. We will count your shares as present at the Annual Meeting if you: • • • Are present and vote in person at the Annual Meeting; Have properly submitted a proxy card or a voter instruction form, or voted by telephone or the Internet on a timely basis; or Hold your shares through a broker or otherwise in street name, and your broker uses its discretionary authority to vote your shares on Proposal Number 4. 32 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement As of the record date, 52,809,396 shares of our common stock, $0.001 par value per share, held by 589 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. How many votes are needed 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. However, if any nominee for director receives a greater number of ‘‘withhold’’ votes than votes ‘‘for’’ such election, our director resignation policy requires that such person must promptly tender his resignation to the Chairman of our board following certification of the Annual Meeting results. Although the advisory vote on the frequency of the advisory vote on executive compensation option is not binding on the Company, the option (every year, every two years or every three years) that receives the highest number of votes cast by the stockholders will be the frequency for the advisory vote on executive compensation deemed approved by the stockholders. 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, 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 shares (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 purposes of determining whether a quorum exists, but are not considered votes cast or shares entitled to vote with respect to a voting matter. None of the election of directors, the advisory vote on executive compensation, the advisory vote on the frequency of the advisory vote on executive compensation or the stockholder proposal are matters on which a broker may vote without your instructions. However, the ratification of the appointment of Dixon Hughes Goodman 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. Why did I receive a ‘‘Notice Regarding the Availability of Proxy Materials’’ but no proxy materials? We distribute our proxy materials to stockholders via the Internet under the ‘‘Notice and Access’’ approach permitted by the rules of the SEC. This approach conserves natural resources and reduces our distribution costs, while providing a timely and convenient method of accessing the materials and voting. On March 29, 2017, we mailed a ‘‘Notice Regarding the Availability of Proxy Materials’’ to stockholders, containing instructions on how to access the proxy materials on the Internet. What are the Board’s recommendations? Our board of directors unanimously recommends that stockholders vote your shares: (1) ‘‘FOR’’ the election of the six nominees for the board of directors, as more fully described in Proposal 1; (2) ‘‘FOR’’ the proposal regarding an advisory vote on executive compensation, as more fully described in Proposal 2; (3) ‘‘EVERY YEAR’’ for the proposal regarding an advisory vote on the frequency of a stockholders’ advisory vote on executive compensation, as more fully described in Proposal 3; and (4) ‘‘FOR’’ the ratification of Dixon Hughes Goodman LLP as our independent registered public accounting firm for 2017, as more fully described in Proposal 4. Our board of directors unanimously recommends that stockholders vote against the stockholder proposal requesting our board of directors initiate the process to amend our corporate governance documents to provide that director nominees shall be elected by majority vote in uncontested elections, as more fully described in Proposal 5. If you timely submit voting instructions by telephone or by Internet, or 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. In the absence of any instructions or directions to the contrary on any proposal on a proxy card, the management proxies will vote all shares of common stock for which such proxy cards have been received ‘‘for’’ Proposals 1, 2 and 4, ‘‘every year’’ for Proposal 3 and ‘‘against’’ Proposal 5. SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 33 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 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, as applicable, mailing the Notice of the Annual Meeting, Proxy Statement, proxy card and our Annual Report to Stockholders for the year ended December 31, 2016, as well as handling and tabulating the proxies returned. We have engaged Okapi Partners LLC to assist with the solicitation of proxies for an estimated fee of $7,500 plus expenses. In addition, 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, 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, 2016 (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 20, 2017, 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. Stockholder Proposals Under Exchange Act Rule 14a-8, any stockholder desiring to submit a proposal for inclusion in our proxy materials for our 2018 Annual Meeting of Stockholders must provide the company with a written copy of that proposal by no later than November 29, 2017, which is 120 days before the first anniversary of the date on which the company’s proxy materials for the 2017 Annual Meeting were first made available to stockholders. However, if the date of our Annual Meeting in 2018 changes by more than 30 days from the date of our 2017 Annual Meeting, then the deadline would be a reasonable time before we begin distributing our proxy materials for our 2018 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 2018 Annual Meeting without including such proposal in the company’s proxy statement, the stockholder must notify the company in writing on or before February 12, 2018. Our CG&N Committee will consider nominees for election to our board of directors. See ‘‘Corporate Governance — Board Committees and Their Functions — Corporate Governance and Nominations Committee’’ for details to be included in any such nomination. Nominations should be submitted in a timely manner in care of our Chief Financial Officer. 34 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement Solicitation of Proxies Our board of directors solicits the accompanying proxy for use at our Annual Meeting of Stockholders to be held on Thursday, May 18, 2017, at 11:30 a.m., Central Daylight Time, at The Club, Staterooms, 1 Robert S. Smith Drive, Birmingham, Alabama 35209. The Notice of Annual Meeting of Stockholders and this Proxy Statement are being made available on or about March 29, 2017 to our stockholders of record as of the close of business on March 20, 2017, 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. By Order of the Board of Directors SERVISFIRST BANCSHARES, INC. William M. Foshee Secretary and Chief Financial Officer Birmingham, Alabama March 29, 2017 SERVISFIRST BANCSHARES, INC. – Notice of 2017 Annual Meeting of Stockholders and Proxy Statement 35 [This page intentionally left blank.] Our Name is Our Mission 2016 Annual Report ServisFirst Bank www.servisfirstbank.com ServisFirst Bancshares http://servisfirstbancshares.investorroom.com/ Atlanta ▪ Birmingham ▪ Charleston ▪ Dothan ▪ Huntsville ▪ Mobile ▪ Montgomery ▪ Nashville ▪ Pensacola ▪ Tampa March 29, 2017 Dear Fellow Shareholder, We are pleased to report a record year in net income per share, loan growth, and deposit growth, with strong credit quality. Our goal every year is to have consistent net interest margins, modest charge-offs on loans, and a low efficiency ratio, while growing loans and deposits. We achieved these goals in 2016. Our organic growth rate has exceeded that of most high performing banks in 2016, and has for the past eleven years. We meet often with institutional investors who seem puzzled as to how we continue to be more successful. I have tried to say that we are different than most banks but as the recently retired Alabama Superintendent of Banking, John Harrison, told me after I said this to him, his response was “all banks claim they are different than everyone else.” With that, I understood that was not a good answer. My follow up answer being that we have better people, but we all claim that to be true. So, my answer is that we are a disciplined growth company that sets high standards for performance. In the years when we have not met our internal budget goals, our executive officers’ incentive compensation is much lower than the industry standard. We currently have 418 employees, a net addition of 88 from 2015 to 2016. Many of these new employees are in operations and support roles. Our goal in 2017, and ongoing is to make progress in loan officer efficiency with larger minimum portfolio sizes to improve profitability. Of the four most recent regions we have entered, Nashville, Atlanta and Tampa Bay all are large markets. Our challenge has been to prove that we can be as successful in large markets as we are in Dothan or Mobile, Alabama. Nashville is in their third year of operation and in the first year with a full-service banking office, as it was a loan production office prior to 2016. Nashville ended the year with over $400,000,000 in assets and we are proud they have reached profitability in 2016. Bradford Vieira and his team have done an outstanding job and we are optimistic about our future in the Nashville market. We recently opened a new full banking service office in Tampa Bay after a year in a loan production office in Pascoe County, Florida. Greg Bryant has assembled a highly capable team of bankers and we expect 2017 to be a year of solid progress in that dynamic market. We continue to make progress in all ten regions of ServisFirst Bank. We also have a Correspondent Banking Division that continues to grow, now serving over 300 correspondent banks, primarily in the Southeast. We offer comprehensive correspondent services to these banks and credit unions as well as a credit card program. Our credit quality is the single greatest asset we have at ServisFirst. Don Owens is our Chief Credit Officer; he and his team have done an outstanding job of managing the growth of our bank and maintaining high credit standards. The question we are asked the most by institutional investors is “can you continue to grow like you have in the past?” My answer is “yes, we can. As long as there are mergers, there will be opportunities for ServisFirst Bank.” Many of our bankers joined us after a merger where they did not think they were a good fit at the new bank. We appreciate your interest in ServisFirst Bancshares, Inc. and would continue to ask you to both bank with us and send us any referrals of new customers. Even our institutional investors have been very helpful in trying to refer new business, which we need and appreciate. Sincerely, Thomas A. Broughton III President & CEO 2 Total Return Performance 800 700 600 ServisFirst Bancshares, Inc. NASDAQ Composite NASDAQ Bank 500 400 300 e u l a V x e d n I 200 100 0 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 Index: ServisFirst Bancshares, Inc. NASDAQ Composite NASDAQ Bank Date 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 760.03 206.63 238.13 100.00 100.00 100.00 141.67 160.32 160.83 111.67 115.91 115.79 335.23 181.80 165.40 483.33 192.21 176.36 3 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 Federal funds purchased 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 tax expense Net income Net income available to common 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) Core Performance Data (3) Core net income available to common stockholders Core earnings per share, basic Core earnings per share, diluted Core return on average assets Core return on average stockholders' equity Core return on average common stockholders' equity Core efficiency ratio Asset Quality Ratios: Net charge-offs to average loans outstanding Non-performing loans to totals loans Non-performing assets to total assets SELECTED FINANCIAL DATA As of and for the years ended December 31, 2016 2015 2014 2013 2012 (Dollars in thousands except for share and per share data) $ $ $ $ 6,370,448 4,911,770 4,859,877 422,375 62,564 56,855 566,707 160,435 4,675 1,024 40,314 5,420,311 355,944 55,262 - 16,042 522,889 212,902 25,805 187,097 13,398 173,699 18,112 80,993 110,818 29,339 81,479 81,432 $ $ 5,095,509 4,216,375 4,172,956 342,938 27,426 46,614 270,836 34,785 8,249 4,954 19,434 4,223,888 352,360 55,637 - 14,477 449,147 179,975 17,704 162,271 12,847 149,424 13,963 74,382 89,005 25,465 63,540 63,260 $ $ 4,098,679 3,359,858 3,324,229 298,310 29,355 48,519 248,054 891 5,984 3,921 7,815 3,398,160 264,315 19,973 - 9,018 407,213 144,725 14,119 130,606 10,259 120,347 11,229 57,598 73,978 21,601 52,377 51,946 $ $ 3,520,699 2,858,868 2,828,205 265,728 32,274 61,370 188,411 8,634 8,134 4,230 8,351 3,019,642 174,380 19,940 - 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 $ $ 1.55 1.52 9.93 $ 1.23 1.20 8.65 $ 1.09 1.05 7.40 $ 1.00 0.95 5.83 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 2,511,572 117,065 19,917 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 0.95 0.82 5.14 52,450,896 53,608,372 52,636,896 51,426,466 52,885,108 51,945,396 47,710,002 49,636,442 49,603,036 41,214,426 43,612,050 44,100,072 35,978,622 41,650,512 37,612,872 1.42 % 16.64 % 10.53 % 3.42 % 39.47 % 1.38 % 14.56 % 10.04 % 3.75 % 42.21 % 1.39 % 14.43 % 9.57 % 3.68 % 40.61 % 1.32 % 15.70 % 8.79 % 3.80 % 38.78 % 1.31 % 15.99 % 10.02 % 3.80 % 41.54 % $ $ 65,027 1.27 1.23 1.42 % 53,558 1.12 1.08 1.43 % 14.96 % 14.88 % 15.73 % 40.73 % 16.74 % 38.86 % 0.11 % 0.34 % 0.34 % 0.13 % 0.18 % 0.26 % 4 0.17 % 0.30 % 0.41 % 0.33 % 0.34 % 0.64 % 0.24 % 0.44 % 0.69 % 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 CET1 capital (4) Tier 1 capital (5) Total capital (6) Leverage ratio (7) Growth Ratios: Percentage change in net income Percentage change in diluted net income per share Percentage change in assets Percentage change in net loans Percentage change in deposits Percentage change in equity 1.06 % 1.03 % 1.06 % 1.07 % 1.11 % 307.30 % 559.02 % 354.52 % 314.94 % 253.50 % 89.66 % 98.79 % 97.82 % 93.66 % 93.05 % 80.44 % 86.24 % 83.94 % 84.65 % 79.82 % 23.64 % 24.94 % 23.85 % 21.54 % 21.71 % 8.21 % 9.78 % 9.78 % 11.84 % 8.22 % 8.81 % 9.72 % 9.73 % 11.95 % 8.55 % 9.94 % NA 11.75 % 13.38 % 9.91 % 8.44 % NA 10.00 % 11.73 % 8.48 % 8.03 % NA 9.89 % 11.78 % 8.43 % 28.23 % 21.31 % 25.85 % 20.82 % 46.96 % 26.67 % 25.02 % 16.46 % 28.32 % 16.41 % 14.35 % 24.32 % 25.53 % 24.30 % 10.30 % 10.00 % 16.42 % 17.54 % 12.54 % 37.02 % 14.46 % 21.14 % 21.02 % 20.23 % 27.41 % 40.68 % 18.11 % 29.20 % 17.15 % 18.83 % (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 the 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) Core metrics for 2015 exclude a non-routine expense related to our acquisition of Metro Bancshares, Inc. and the merger of Metro Bank with and into the Bank, and a non-routine expense resulting from the initial funding of reserves for unfunded loan commitments consistent with guidance provided in the Federal Reserve Bank's Interagency Policy Statement SR 06-17. Core metrics for 2014 exclude a non-routine expense related to the correction of our accounting for vested stock options granted to our advisory board members in our Huntsville, Montgomery and Dothan, Alabama markets, and non-routine expense related to the acceleration of vesting of stock options previously granted to our advisory board members in our Mobile, Alabama and Pensacola, Florida markets. For a reconciliation of these non-GAAP measures to the most comparable GAAP measure, see "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures." None of the other periods included in our selected consolidated financial information are affected by such non-routine expenses. (4) CET1 capital ratio includes common stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets divided by total risk-weighted assets. (5) Tier 1 capital ratio includes CET1 and qualifying minority interest divided by total risk-weighted assets. (6) Total capital ratio includes Tier 1 capital plus qualifying portions of subordinated debt and allowance for loan losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. (7) Tier 1 leverage ratio includes Tier 1 capital divided by average assets less intangible assets. GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures We recorded expenses of $2.1 million for the first quarter of 2015 related to the acquisition of Metro Bancshares, Inc. and the merger of Metro Bank with and into the bank, and recorded an expense of $500,000 resulting from the initial funding of reserves for unfunded loan commitments for the first quarter of 2015, consistent with guidance provided in the Federal Reserve Bank’s Interagency Policy Statement SR 06-17. We recorded a non-routine expense of $0.7 million for the first quarter of 2014 resulting from the correction of our accounting for vested stock options previously granted to members of our advisory boards in our Huntsville, Montgomery and Dothan, Alabama markets, and we recorded a non-routine expense of $1.8 million for the second quarter of 2014 resulting from an acceleration of vesting of stock options previously granted to members of our advisory boards in our Mobile, Alabama and Pensacola, Florida markets. This change in accounting treatment is a non-cash item and does not impact our operating activities or cash from operations. The non-GAAP financial measures included in this annual report on Form 10-K results for the year ended December 31, 2015 are “core net income available to common stockholders,” “core earnings per share, basic,” “core earnings per share, diluted,” “core return on average assets,” “core return on average stockholders’ equity,” “core return on average common stockholders’ equity” and “core efficiency ratio.” Each of these seven core financial measures excludes the impact of the non-routine expense attributable to the correction of our accounting for stock options, the acceleration of vesting of stock options, expenses related to the acquisition of Metro and the initial funding of reserves for unfunded loan commitments. None of the other periods included in our selected financial data are affected by this correction and acceleration of vesting. “Core net income available to common stockholders” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense. “Core earnings per share, basic” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense, divided by weighted average shares outstanding. “Core earnings per share, diluted” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense, divided by weighted average diluted shares outstanding. “Core return on average assets” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average total assets. 5 “Core return of average stockholders’ equity” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average total stockholders’ equity. “Core return of average common stockholders’ equity” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average common stockholders’ equity. “Core efficiency ratio” is defined as non-interest expense, adjusted by the effect of the non-routine expense, divided by the sum of net interest income and non-interest income. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that these non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies, including those in our industry, use. The following reconciliation table provides a more detailed analysis of the non-GAAP financial measures for the years ended December 31, 2015 and 2014. All amounts are in thousands, except share and per share data. $ $ $ $ $ $ Provision for income taxes - GAAP Adjustments: Adjustment for non-routine expense Core income tax expense - non-GAAP Net income available to common stockholders - GAAP Adjustments: Adjustment for non-routine expense Core net income available to common stockholders - non-GAAP $ $ Earnings per share, basic - GAAP Weighted average shares outstanding, basic Core earnings per share, basic - non-GAAP Earnings per share, diluted - GAAP Weighted average shares outstanding, diluted Core earnings per share, diluted - non-GAAP Return on average assets - GAAP Net income - GAAP Adjustments: Adjustment for non-routine expense Core net income - non-GAAP Average assets Core return on average assets - non-GAAP Return on average stockholders' equity - GAAP Average stockholders' equity Core return on average stockholders' equity - non-GAAP Return on average common stockholders' equity Average common stockholders' equity Core return on average common stockholders' equity - non- Efficiency ratio - GAAP Non-interest expense - GAAP Adjustments: Adjustment for non-routine expense Core non-interest expense - non-GAAP Net interest income Non-interest income Total net interest income and non-interest income Core efficiency ratio - non-GAAP $ $ $ $ $ $ 2015 25,465 829 26,294 63,260 1,767 65,027 2.46 51,426,466 1.27 1.20 52,885,108 1.23 1.38 % 63,540 1,767 65,307 4,591,861 1.42 % 14.56 % 436,544 14.96 % 15.30 % 413,445 15.73 % 42.21 % 74,382 2,596 71,786 162,271 13,963 176,234 2014 21,601 865 22,466 51,946 1,612 53,558 2.18 47,710,002 1.13 1.05 49,636,442 1.08 1.39 % 52,377 1,612 53,989 3,758,184 1.44 % 14.43 % 359,963 15.00 % 16.23 % 320,005 16.74 % 40.61 % 57,598 2,477 55,121 130,606 11,229 141,835 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 40.73 % 38.86 % 6 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 Kenneth L. Barber Executive Vice President, Atlanta President and Chief Executive Officer G. Carlton Barker Executive Vice President, Montgomery President and Chief Executive Officer Gregory W. Bryant Executive Vice President, Tampa Bay President and Chief Executive Officer Andrew N. Kattos Executive Vice President, Huntsville President and Chief Executive Officer W. Bibb Lamar, Jr. Executive Vice President, Mobile President and Chief Executive Officer B. Harrison Morris III Executive Vice President, Dothan President and Chief Executive Officer Rex D. McKinney Executive Vice President, Pensacola President and Chief Executive Officer Rodney R. Rushing Executive Vice President, Correspondent Division Paul M. Schabacker Executive Vice President, Commercial Sales Thomas G. Trouche Executive Vice President, Charleston President and Chief Executive Officer OFFICERS AND DIRECTORS 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 BANK REGIONAL DIRECTORS ATLANTA, GEORGIA J. Paul Austin, III Jeffrey B. Baker Mike Casey Paul Conley John Loud Brent Reid Zach Parker CHARLESTON, SOUTH CAROLINA Peter McKellar Chris Mettler Weesie Newton Skip Sawin Daniel Vallini DOTHAN, ALABAMA Jerry Adams Charles H. Chapman Ronald Devane John Downs Steve McCarroll Charles Owens William C. Thompson HUNTSVILLE, ALABAMA E. Wayne Bonner Tres Childs David Slyman Irma Tuder Sidney White Danny Windham Tom Young 7 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 MOBILE, ALABAMA Richard D. Inge Stephen G. Crawford Lowell J. Friedman Barry E. Gritter James M. Harrison, Jr. James L. Henderson Kenneth S. Johnson John H. Lewis, Jr. MONTGOMERY, ALABAMA John Jernigan Ray Petty Todd Strange Pete Taylor Ken Upchurch Alan E. Weil, Jr. NASHVILLE, TENNESSEE Charles R. Bone Joe Cashia Ryan Chapman Brent Clements Todd Robinson PENSACOLA, FLORIDA Thomas M. Bizzell Bo Carter Leo Cyr Matt Durney Mark S. Greskovich Ray Russenberger Sandy Sansing Roger Webb OFFICES AND LOCATIONS HUNTSVILLE RESEARCH PARK 1267-A Enterprise Way Huntsville, Alabama 35806 256.722.7880 MOBILE MAIN OFFICE 2 North Royal Street Mobile, Alabama 36602 251.544.6950 MOBILE SPRING HILL OFFICE 4400 Old Shell Road Mobile, Alabama 36608 251.544.6900 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 NASHVILLE MAIN OFFICE 1801 West End Avenue Suite 850 Nashville, TN 37203 615.921.3500 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 TAMPA BAY OFFICE 4221 West Boy Scout Blvd, Suite 100 Tampa, Florida 33607 813.751.0801 ATLANTA MAIN OFFICE 300 Galleria Parkway SE Atlanta, Georgia 30339 678.504.2700 ATLANTA DOUGLASVILLE OFFICE 2801 Chapel Hill Road Douglasville, Georgia 30135 770.489.4443 ATLANTA KENNESAW OFFICE 2454 Kennesaw Due West Road Kennesaw, Georgia 30152 770.429.8400 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 CHARLESTON MAIN OFFICE 701 East Bay Street Suite 104 Charleston, SC 29403 843.414.3900 DOTHAN MAIN OFFICE 4801 West Main Street Dothan, Alabama 36305 334.340.4300 DOTHAN COTTONWOOD CORNERS 1640 Ross Clark Circle Suite 307 Dothan, Alabama 36301 334.340.4400 HUNTSVILLE MAIN OFFICE 401 Meridian Street Suite 100 Huntsville, Alabama 35801 256.722.7800 STOCKHOLDER INFORMATION INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Dixon Hughes Goodman LLP 191 Peachtree Street NE Suite 2700 Atlanta, Georgia 30303 404.575.8900 SECURITIES COUNSEL Bradley Arant Boult Cummings LLP One Federal Place 1819 Fifth Avenue North Birmingham, Alabama 35203 205.521.8000 ANNUAL MEETING The Annual Meeting of Stockholders of ServisFirst Bancshares, Inc. will be held at The Club, Staterooms, 1 Robert S. Smith Drive, Birmingham, Alabama 35209 on Thursday, May 18, 2017, at 11:30 AM 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 Computershare P.O. Box 30170 College Station, TX 77842-3170 1.800.368.5948 AVAILABLE INFORMATION Our corporate website is: 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 rates from the SEC’s Public Reference Room by calling the SEC at 1-800- SEC-0330. The SEC also maintains a website that contains such reports, proxy and information statements, and other information as we file electronically with the SEC by clicking on http://www.sec.gov. 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 OR (cid:133) 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 001-36452 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: Title of each class Common stock, par value $.001 per share Name of exchange on which registered The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None (Title 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 (cid:95) No (cid:133) Yes (cid:133) No (cid:95) 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 (cid:95) No (cid:133) 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 (cid:95) No (cid:133) 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. (cid:133) 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 (cid:95) Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller reporting company (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:95) As of June 30, 2016, the aggregate market value of the voting common stock held by non-affiliates of the registrant, based on a stock price of $49.39 per share of Common Stock ($24.695 per share as adjusted for December 2016 stock split), was $1,188,636,681. 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 23, 2017 52,759,896 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 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on Form 10-K. SERVISFIRST BANCSHARES, INC. TABLE OF CONTENTS FORM 10-K DECEMBER 31, 2016 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS PART I. ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. BUSINESS RISK FACTORS UNRESOLVED STAFF COMMENTS PROPERTIES LEGAL PROCEEDINGS MINE SAFETY DISCLOSURES PART II. ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 4 5 5 24 34 34 35 35 36 36 SELECTED FINANCIAL DATA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 6. ITEM 7. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. 37 39 56 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 58 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 99 99 CONTROLS AND PROCEDURES 100 OTHER INFORMATION PART III. ITEM 10. ITEM 11. ITEM 12. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. ITEM 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES SIGNATURES EXHIBIT INDEX 3 100 100 100 100 100 101 101 101 103 104 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 of 1934, as amended (the “Exhange 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: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the effects of adverse changes in the economy or business conditions, either nationally or in our market areas; 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, regulatory and accounting changes applicable to banks and other financial service providers, including the potential implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); the effects of hazardous weather; 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; our ability to keep pace with technology changes, including with respect to cyber-security and preventing breaches of our and third-party security systems involving our customers and other sensitive and confidential data; our ability to attract new or retain existing deposits, or to initiate new or retain current loans; credit risks, including the deterioration of the credit quality of our loan portfolio, increased default rates and loan losses or adverse changes in our portfolio or in specific industry concentrations of our loan portfolio; 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; an increase in the incidence or severity of fraud, illegal payments, security breaches or other illegal acts impacting our customers; the results of regulatory examinations; 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” and “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 2012, 2013, 2014, 2015 and 2016 mean our fiscal years ended December 31, 2012, 2013, 2014, 2015 and 2016, 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. Through our wholly-owned subsidiary bank, we operate 19 full-service banking offices located in Jefferson, Shelby, Madison, Montgomery, Houston and Mobile Counties of Alabama, Escambia and Hillsborough Counties of Florida, Cobb and Douglas Counties of Georgia, Charleston County, South Carolina and Davidson County, Tennessee in the metropolitan statistical areas (“MSAs”) of Birmingham-Hoover, Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola-Ferry Pass- Brent and Tampa-St. Petersburg-Clearwater, Florida, Atlanta-Sandy Springs-Roswell, Georgia, Charleston-North Charleston, South Carolina and Nashville- Davidson-Murfreesboro-Franklin, Tennessee. Through our 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, 2016, we had total assets of approximately $6.4 billion, total loans of approximately $4.9 billion, total deposits of approximately $5.4 billion and total stockholders’ equity of approximately $523 million. We operate our bank using a simple business model based on organic loan and deposit growth, generated through 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. This decentralized decision-making process allows individual lending officers varying levels of lending authority, based on the experience of the individual officer. When the total amount of loans to a borrower exceeds an officer’s lending authority, further approval must be obtained by the applicable regional chief executive officer (G. Carlton Barker – Montgomery, Andrew N. Kattos – Huntsville, B. Harrison Morris, III – Dothan, Rex D. McKinney – Pensacola, W. Bibb Lamar, Jr. – Mobile, Thomas G. Trouche – Charleston, Kenneth L. Barber – Atlanta or Gregory W. Bryant – Tampa Bay) and/or our senior management team. 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. 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 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. We previously formed SF Holding 1, Inc. as a subsidiary of our bank. We also formed SF Realty 1, Inc., SF FLA Realty, Inc., and SF GA Realty, Inc., as subsidiaries of SF Holding 1, Inc. In February 2016, we formed SF TN Realty, Inc. as a subsidiary of SF Holding 1, Inc. Also in February of 2016, we formed SF Intermediate Holding Company, Inc. and immediately following its formation our bank assigned all of the outstanding capital stock of SF Holding 1, Inc. to SF Intermediate Holding Company, Inc., such that SF Holding 1, Inc. is now a wholly owned first-tier subsidiary of SF Intermediate Holding Company, Inc. Each of SF Realty 1, Inc., SF FLA Realty, Inc., SF GA Realty, Inc. and SF TN Realty, Inc. hold and manage participations in residential mortgages and commercial real estate loans originated by our bank in Alabama, Florida, Georgia and Tennessee, respectively, and each have elected to be treated as a real estate investment trust, or REIT, for U.S. income tax purposes. Each of these entities is consolidated into the Company. As a bank holding company, we are subject to regulation by the Federal Reserve. We are required to file reports with the Federal Reserve and are subject to regular examinations by that agency. 5 History Our 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, the largest capital raise by a de novo bank in the history of Alabama. We were incorporated as a Delaware corporation in August 2007 for the purpose of acquiring all of the common stock of our 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 SEC, we became a reporting company within the meaning of the Exchange Act and have been filing annual, quarterly, and current reports, proxy statements and other information with the SEC since 2008. On May 19, 2014, we completed our initial public offering (the “Offering’) of common stock. Since the completion of the Offering, our common stock has traded on The NASDAQ Global Select Market under the symbol “SFBS”. Business Strategy We are 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 whom we believe are underserved by the larger regional banks operating 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. Focus on Core Banking Business. We deliver a broad array of core banking products to our customers. While many large regional competitors and national banks have chosen to develop non-traditional business lines to supplement their net interest income, we believe our focus on traditional commercial banking products driven by a high margin delivery system is a superior method to deliver returns to our stockholders. We emphasize an internal culture of keeping our operating costs as low as practical, which we believe 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, we provide correspondent banking services to more than 300 community banks located in 12 states throughout the southern 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. 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, as of December 31, 2016 our branches averaged approximately $285.3 million in total deposits. 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. In addition, unlike many traditional community banks, we place a strong emphasis on originating commercial and industrial loans, which comprised approximately 40.4% of our total loan portfolio as of December 31, 2016. 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 our borrowers and depositors directly and in person, while managing risk centrally and on a uniform basis. We intend to continue our growth by repeating this scalable model in each market in which 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 assigns significant responsibility and accountability to our regional chief executive officers, who we believe will drive our growth and success. We have developed a business culture whereby our management team, from the top down, is actively involved in sales, which we believe is a key differentiator from our competition. Identify Opportunities in Vibrant Markets. Since opening our original banking facility in Birmingham in 2005, as of December 31, 2016, we had expanded into nine additional markets. Our focus has been to expand opportunistically when we identify a strong banking team in a market with attractive economic characteristics and market demographics where we believe we can achieve a minimum of $300 million in deposits within five years of market entry. There are two primary factors we consider when determining whether to enter a new market: (cid:120) the availability of successful, experienced bankers with strong reputations in the market; and 6 (cid:120) the economic attributes of the market necessary to drive quality lending opportunities coupled with deposit-related characteristics of the potential market. Prior to entering a new market, historically we have identified and built 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 team 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 often assemble a non-voting advisory board of directors in our markets, 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, Pensacola and Atlanta markets. In addition to organic expansion, we may seek to expand through targeted acquisitions. Markets and Competition Our primary markets are broadly defined as the MSAs of Birmingham-Hoover, Huntsville, Montgomery, Dothan and Mobile, Alabama, Pensacola-Ferry Pass- Brent and Tampa-St. Petersburg-Clearwater, Florida, Atlanta-Sandy Springs-Roswell, Georgia, Charleston-North Charleston, South Carolina and Nashville- Davidson-Murfreesboro-Franklin, Tennessee. We draw most of our deposits from, and conduct most of our lending transactions in, these markets. According to Federal Deposit Insurance Corporation (“FDIC”) reports, total deposits in each of our primary market areas have expanded from 2006 to 2016 (deposit data reflects totals as reported by financial institutions as of June 30th of each year) as follows: Jefferson/Shelby County, Alabama Madison County, Alabama Montgomery County, Alabama Houston County, Alabama Mobile County, Alabama Escambia County, Florida Hillsborough County, Florida Cobb County, Georgia Douglas County, Georgia Charleston County, South Carolina Davidson County, Tennessee 2016 $ Compound Annual Growth Rate 2006 (Dollars in Billions) 34.7 $ 6.8 6.2 2.6 6.5 4.1 30.2 13.8 1.3 9.9 30.2 19.8 4.7 5.1 1.6 5.4 4.1 18.1 9.0 1.4 6.5 15.8 5.77% 3.76% 1.97% 4.97% 1.87% -% 5.25% 4.37% (0.74)% 4.30% 6.69% Our bank is subject to intense competition from various financial institutions and other financial service providers. Our bank competes for deposits with other commercial banks, savings and loan associations, credit unions and issuers of commercial paper and other securities, such as money-market and mutual funds. In making loans, our bank competes with other commercial banks, savings and loan associations, consumer finance companies, credit unions, leasing companies, interest-based lenders and other lenders. The following table illustrates our market share, by insured deposits, in our primary service areas at June 30, 2016 (the most recent date such numbers were reported by the FDIC), as reported by the FDIC: Market (1) Alabama: Birmingham-Hoover MSA Huntsville MSA Montgomery MSA Dothan MSA Mobile MSA Florida: Pensacola-Ferry Pass-Brent MSA Tampa-St. Petersburg-Clearwater MSA Georgia: Atlanta-Sandy Springs-Roswell MSA South Carolina: Charleston-North Charleston MSA Tennessee: Nashville-Davidson-Murfreesboro MSA Number of Branches Our Market Deposits Total Market Deposits (Dollars in Millions) Ranking Market Share Percentage $ 2,059.7 741.3 498.9 493.2 199.3 294.9 10.0 189.0 61.7 137.0 37,515.9 7,491.0 7,722.2 3,206.8 6,564.6 5,416.1 75,972.4 156,210.4 12,355.8 52,198.7 3 2 2 2 2 2 1 3 1 1 $ 7 5 3 6 2 7 7 62 43 19 40 5.49% 9.90% 6.46% 15.38% 3.04% 5.44% 0.01% 0.12% 0.50% 0.26% The following table illustrates the combined total deposits for all financial institutions in the counties in which we operate as a percent of the total of all deposits in each state at June 30, 2016, as reported by the FDIC: Alabama Florida Georgia South Carolina Tennessee 58.5% 6.4% 6.7% 12.5% 21.8% We entered our newest market, Tampa Bay, Florida, with the announcement on January 25, 2016 that we hired Gregory W. Bryant as our regional CEO to oversee our entrance and expansion there. Tampa Bay includes the cities of Tampa, St. Petersburg, Clearwater and Lakeland, with a total population of over 5 million. A number of major drivers contribute to the area’s diverse economy: MacDill Air Force Base, home to Central Command, contributes an estimated $5 billion annually to the local economy; Tampa International Airport, already home to numerous domestic and international carriers, is undergoing a $1 billion expansion; three major league sports teams call the area home; the University of South Florida is ranked 50th in the nation in research spending; the Port of Tampa is one of the country’s most diverse seaports, with a bustling cruise business, inbound and outbound bulk cargo, and large ship repair yards; and, the world class beaches mean a healthy tourism industry. Known for a vibrant base of small and mid-size businesses, the area is also home to a number of large employers, including Baycare Medical Systems, Publix Supermarkets, Home Shopping Network, Tech Data, Wellcare HMO, Moffitt Cancer Center, and Busch Gardens. 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, 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, 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, up to $3.0 million secured, must be obtained from the Regional CEO and/or our senior management team, 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 and 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 are 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. Commercial loans may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates. Perceived and actual risks may differ depending on the particular industry in which a borrower operates. General risks to an industry, such as an economic downturn or instability in the capital markets, or to a particular segment of an industry are monitored by senior management on an ongoing basis. When warranted, loans to individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed by the credit review committee or board of directors. Commercial and industrial borrowers are required to submit financial statements to us on a regular basis. We analyze these statements, looking for weaknesses and trends, and will assign the loan a risk grade accordingly. Based on this risk grade, the loan may receive an increased degree of scrutiny by management, up to and including additional loss reserves being required. Real Estate Loans We make commercial real estate loans, construction and development loans and residential real estate loans. Commercial Real Estate. Commercial real estate loans are generally limited to terms of five years or less, although payments are usually structured on the basis of a longer amortization. Interest rates may be fixed or adjustable, although rates generally will not be fixed for a period exceeding five years. In addition, we generally will require personal guarantees from the principal owners of the property supported by a review by our management of the principal owners’ personal financial statements. Commercial real estate lending presents risks not found in traditional residential real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to a single borrower. To mitigate these risks, we closely monitor our borrower concentration. These loans generally have shorter maturities than other loans, giving us an opportunity to reprice, restructure or decline renewal. As with other loans, all commercial real estate loans are graded depending upon strength of credit and performance. A higher risk grade will bring increased scrutiny by our management, the credit review committee and the board of directors. Construction and Development Loans. We make construction and development loans both on a pre-sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a speculative basis. Construction and development loans are generally made with a term of 12 to 24 months, with interest payable 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, construction and development loans typically have a greater degree of risk than other loan types. 9 To mitigate the risk of construction loan defaults in our portfolio, the board of directors and management tracks and monitors these loans closely. Total construction loans increased $91.8 million in 2016. Our allocation of loan loss reserve for these loans decreased $0.3 million to $5.1 million at December 31, 2016 compared to $5.4 million at the end 2015. Charge-offs increased slightly from $0.7 million for 2015 to $0.8 million for 2016, and the overall quality of the construction loan portfolio has remained consistent with $4.3 million rated as substandard at December 31, 2016 compared to $4.0 million at December 31, 2015. 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. 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 85%. Risks associated with these loans are generally less significant than those of other loans and involve bankruptcies, economic downturn, customer financial problems and fluctuations in the value of real estate, and 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 through 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, 2016, we had commitments to extend credit beyond current fundings of approximately $1.7 billion, had issued standby letters of credit in the amount of approximately $41.0 million, and had commitments for credit card arrangements of approximately $100.7 million. Policy for Determining the Loan Loss Allowance The allowance for loan losses represents our management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. In calculating the adequacy of the loan loss allowance, our management evaluates the following factors: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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 quarterly, and changes in the asset quality of individual loans are evaluated as needed. 10 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 underwritten and booked, 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 decreased to 0.11% for the year ended December 31, 2016 from 0.13% for the year ended December 31, 2015, which was down from 0.17% for the year ended December 31, 2014. Historical performance, however, is not an indicator of future performance, and our future results could differ materially. As of December 31, 2016, we had $10.6 million of non-accrual loans. We have allocated approximately $5.1 million of our allowance for loan losses to real estate construction, acquisition and development, and lot loans, $28.9 million to commercial and industrial loans, $17.5 million to real estate mortgage loans and $0.4 million to consumer loans and have a total loan loss reserve as of December 31, 2016 of $51.9 million. The loan loss reserve methodology incorporates qualitative factors which are 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. 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. 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, 2016. 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. 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. Our bank is a member of the FDIC, and thus our deposits (subject to applicable FDIC limits) are FDIC-insured. 11 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. Seasonality and Cycles We do not consider our commercial banking business to be seasonal. Employees We had 420 employees as of December 31, 2016. We consider our employee relations to be good, and we have no collective bargaining agreements with any employees. Supervision and Regulation Both we and our 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 our 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 Supervision and 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 Federal Reserve. Acquisition of Banks The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before: (cid:120) acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will, directly or indirectly, own or control more than 5% of the bank’s voting shares; acquiring all or substantially all of the assets of any bank; or (cid:120) (cid:120) 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 also is 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 in the section below titled “Supervision and Regulation—Bank Supervision and Regulation – Capital Adequacy.” 12 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. Permitted Activities Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities: (cid:120) (cid:120) 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 property; operating a non-bank depository institution, such as a savings association; trust company functions; financial and investment advisory activities; certain agency 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; 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; 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 (“CRA”) 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. 13 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 is 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 Supervision and Regulation Generally The bank is an Alabama state-chartered bank and, as such, is subject to examination and regulation by the Alabama State Banking Department (the “Alabama Banking Department”). The bank is not a member of the Federal Reserve System but is subject to various regulations and requirements promulgated by the Federal Reserve, the Consumer Financial Protection Bureau (the “CFPB”), the Federal Trade Commission, the Financial Crimes Enforcement Network, the Office of Foreign Assets Control (“OFAC”), and other federal regulatory agencies. State non-member banks are, in addition to regulation by the applicable state regulatory authority, subject to supervision and regular examination by the FDIC. 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 extensive state and federal banking laws and regulations to which the bank is subject 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. 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 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 initial offices in Pensacola, Florida, Nashville, Tennessee, Charleston, South Carolina, and Tampa Bay, Florida, 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. 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 (that is, Tier 1 capital) during such period. An institution’s assessment rate is assigned by the FDIC on a quarterly basis and is based on a number of factors related to the risk the institution poses to the Deposit Insurance Fund. Those factors include, among other things, the institution’s capital adequacy, liquidity, loan and deposit portfolio characteristics, asset quality, earnings, and rate of growth. For the fourth quarter of 2016, the bank’s assessment rate was set at $0.0137, or $0.055 annually, per $100 of assessment base. 14 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 2016, the bank’s FICO assessment was equal to $0.0014, or $0.0056 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. 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 response to those circumstances, the FDIC took several extraordinary actions, including imposing a one-time special assessment on insured institutions and requiring institutions to prepay quarterly assessments attributable to a three-year period. If the FDIC were to take those types of actions again 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. 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 (i) the default of a commonly controlled FDIC-insured depository institution or (ii) 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 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 and regulations, including, among others: (cid:120) (cid:120) (cid:120) the Federal Truth-In-Lending Act, as implemented by Regulation Z issued by the CFPB, governing, among other things, the disclosure of credit terms to consumers; the Real Estate Settlement Procedures Act, as implemented by Regulation X issued by the CFPB, prescribing, among other things, requirements in connection with residential mortgage loan applications, settlements, and servicing; the Home Mortgage Disclosure Act, as implemented by Regulation C issued by the CFPB, 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; 15 (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the Equal Credit Opportunity Act, as implemented by Regulation B issued by the CFPB, prohibiting discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or certain other prohibited factors in all aspects of credit transactions, imposing certain requirements regarding credit applications, and prescribing certain disclosure obligations; the Fair Credit Reporting Act, as implemented in part by Regulation V issued by the CFPB, governing the use and provision of information to credit reporting agencies by imposing, among other things, requirements for financial institutions to develop policies and procedures to identify potential identity theft, requirements for entities that furnish information to consumer reporting agencies (which would include the bank) to implement procedures and policies regarding the accuracy and integrity of the furnished information and respond to disputes from consumers regarding credit reporting issues, 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; the Fair Debt Collection Practices 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; the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and the Electronic Funds Transfer Act, as implemented by Regulation E issued by the CFPB, governing 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 General Information. 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 our case) and the FDIC and the Alabama Banking Department (in the case of the bank). Such standards are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (the “Basel Committee”). The implementation of Basel III for United States institutions began on January 1, 2015. Prior to that date, the risk-based capital rules applicable to us and the bank were based on the 1988 Capital Accord, known as Basel I, of the Basel Committee Current 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. United States Implementation of Basel III. In July 2013, the federal banking agencies published final rules (the “Basel III Capital Rules”) to implement, in part, the Basel III framework issued by the Basel Committee and certain provisions of the Dodd-Frank Act. The Basel III Capital Rules apply to banking organizations, including us and the bank. Among other things, the Basel III Capital Rules: (i) emphasize common equity tier 1 capital, or “CET1,” which is predominately made up of retained earnings and common stock instruments; (ii) specify that an institution’s 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 previous regulations. The Basel III Capital Rules also provide a permanent exemption from a 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. 16 The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios: (cid:120) (cid:120) (cid:120) 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. The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer of 2.5% above these required minimum capital ratio levels. The capital conservation buffer, which must consist of CET1, is designed to absorb losses during periods of economic stress. 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. The Basel III Capital Rules became 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. We and the bank are currently in compliance with Basel III Capital Rules. Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 established a system of “prompt corrective action” to resolve the problems of undercapitalized financial institutions. Under this system, which was modified by the Basel III Capital Rules, 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. At December 31, 2016, the bank was well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the bank had to maintain minimum total risk-based, tier 1 risk-based, CET1 risk-based, and tier 1 leverage ratios of 10%, 8%, 6.5% and 5%, respectively. 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 also is 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. 17 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, in September 2014, the federal banking agencies adopted final rules implementing a Liquidity Coverage Ratio requirement in the United States for larger banking organizations. In May 2016, the federal banking agencies issued proposed rules implementing a Net Stable Funding Ratio requirement, also for larger U.S. banking organizations. Neither we nor the bank is subject to either set of rules. 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, 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 shareholder. Statutory and regulatory limitations apply to the bank’s payment of dividends to us as well as to our payment of dividends to our stockholders. The requirement that a bank holding company must serve as a source of strength to its subsidiary banks also results in the position of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its stockholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Delaware corporate law. The Alabama Banking Department also regulates the bank’s dividend payments. Under Alabama law, a state-chartered bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its capital (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 (“Superintendent”) for its payment of dividends if the total of all dividends declared by the bank in any calendar year will exceed the total of (i) the bank’s net earnings (as defined by statute) for that year, plus (ii) 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 $189.1 million in dividends as of December 31, 2016. In addition, no dividends, withdrawals or transfers may be made from the bank’s surplus without the prior written approval of the Superintendent. The bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation 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 these 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 these 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. 18 The bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (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. 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 identify institutions potentially exposed to CRE concentration risk. An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land development, and other land representing 100% or more of the institution’s capital, or (iv) total CRE loans representing 300% or more of the institution’s capital, and the outstanding balance of the institution’s 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. In December 2015, the U.S. bank regulatory agencies issued guidance titled “Statement on Prudent Risk Management for Commercial Real Estate Lending” to remind financial institutions of existing guidance on prudent risk management practices for CRE lending activity, including the 2006 guidance described above. In the 2015 guidance, the agencies noted their belief that financial institutions had eased CRE underwriting standards in recent years. The 2015 guidance went on to identify actions that financial institutions should take to protect themselves from CRE-related credit losses during difficult economic cycles. The 2015 guidance also indicated that the agencies would pay special attention in the future to potential risks associated with CRE lending. Privacy and Data Security Under federal law as implemented by Regulation P, financial institutions are required to disclose their policies for collecting and protecting the non-public personal information of their consumer customers. Consumer customers generally may prevent financial institutions from sharing non-public 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. In addition, financial institutions are subject to various state privacy laws that may, among other things, impose data security requirements on all customer information, whether consumer or commercial customer information, and impose data breach notification obligations. The state data breach notification requirements generally apply based on the residence of the consumer and not on the bank’s presence in the state, location of the collateral property, or other variables. Anti-Terrorism and Money Laundering Legislation Our bank is subject to the USA Patriot Act, the Bank Secrecy Act, and the requirements of 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. 19 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 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 types 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 the bank is under the $10 billion level that caps income per transaction, the bank has 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. Banking institutions generally were required to comply with the Volcker Rule by July 2015, although certain parts of the rule did not (or do not) take effect until later dates. 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 have reviewed the scope of the final rule and have concluded that it does not impact our operations. The Dodd-Frank Act In July 2010, the Dodd-Frank Act was signed into law. As final rules and regulations implementing the Dodd-Frank Act continue to be adopted and implemented, this new law is significantly changing the bank regulatory environment 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, the full impact of the Dodd-Frank Act may not be known for many years. 20 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. (cid:120) (cid:120) (cid:120) (cid:120) The Dodd-Frank Act created the CFPB and gave it broad powers to supervise and enforce consumer protection laws. The CFPB 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 CFPB 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 became 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 prior law could have an adverse impact on our interest expense. The Dodd-Frank Act imposes many investor protection, corporate governance and executive compensation rules that have affected 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 clawback policies for executive officers; (iv) authorizes 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. (cid:120) Although 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 of the requirements under the Dodd-Frank Act were subject to rulemaking, and such rulemaking is either in place and effective or continuing to take effect over the next several years, making it difficult to anticipate the overall financial impact on the bank and us. However, compliance with the Dodd-Frank Act and its implementing regulations has resulted in and will continue to 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 United States financial system, including the Dodd-Frank Act and its related rules and regulations, subject us and the bank to a number of new regulatory compliance obligations, many of which may impose additional fees, costs, requirements, and restrictions. These fees, costs, 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. New proposals to change the laws and regulations governing the banking industry are frequently introduced in the United States Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on us and the bank, however, cannot be determined at this time. In this regard, bills are presently pending before Congress and certain state legislatures, and additional bills may be introduced in the future in Congress and state legislatures, to alter the structure, regulation and competitive relationships of financial institutions. We cannot predict whether or in what form any of these proposals will be adopted or the extent to which our business may be affected by any new regulation or statute. 21 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. Executive Officers of the Registrant A brief description of the background of each of our named executive officers is set forth below. Thomas A. Broughton, III (61) – 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 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 acquired 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. Clarence C. Pouncey, III (60) – 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. Prior to joining the Company, Mr. Pouncey was employed by SouthTrust Bank (subsequently, Wachovia Bank and now Wells Fargo Bank) at its corporate headquarters in Birmingham, in various capacities from 1978 to 2006, most recently as the Senior Vice President and Regional Manager of Real Estate Financial Services. During his employment with SouthTrust, Mr. Pouncey oversaw various operational and production functions in its nine-state footprint of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Texas and Virginia, and while employed by Wachovia, Mr. Pouncey oversaw various operational and production functions in Alabama, Arizona, Tennessee and Texas. William M. Foshee (62) – 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, a publicly traded bank holding company headquartered in the Huntsville MSA, from 2002 until it was acquired in 2005. Mr. Foshee is a Certified Public Accountant. Rodney E. Rushing (59) – Mr. Rushing has served as the Executive Vice President and Executive for Correspondent Banking for us and the bank since 2011. Prior to joining us, Mr. Rushing was employed at BBVA Compass from 1982 to 2011, most recently serving as Executive Vice President of Correspondent Banking. At the time of his departure in March 2011, the correspondent banking division of BBVA Compass provided correspondent banking services to over 600 financial institutions. Don G. Owens (65) – Mr. Owens has served as the Senior Vice President and Chief Credit Officer for us and the bank since 2012. Prior to joining us, Mr. Owens served as a retail branch manager of First Alabama Bank from 1973 to 1978, worked for C&I Bank (now Bank of America) from 1978 to 1982, including as a branch manager and commercial lender, worked for Republic Bank (now Bank of America) from 1982 to 1988, including as a commercial lender and credit administrator, and served as a Senior Vice President and Senior Loan Administrator for BBVA Compass from 1988 to 2012. A brief description of the background of each of our regional chief executive officers is set forth below. 22 Kenneth L. Barber (62) – Mr. Barber has served as Executive Vice President and Atlanta President and Chief Executive Officer of the Bank since February 1, 2015 when the Company acquired Metro Bancshares, Inc. Mr. Barber chartered Metro Bank in 2007, growing total assets to approximately $230 million before being acquired by the Company. Prior to Metro Bank, Mr. Barber served as the President and Chief Executive Officer of Georgian Bancorporation and its subsidiary, Georgian Bank. Prior to Georgian Bancorporation, Mr. Barber served as the President and Chief Executive Officer of Citizens & Merchants State Bank in Douglasville, Georgia. From 1976 to 1986, Mr. Barber served in various capacities for Wachovia Corporation, including Vice President of Commercial Lending. Mr. Barber has over 40 years of banking experience in Georgia. Mr. Barber has served on the Boards of Directors for the Douglas County and Cobb County Chambers of Commerce. He is actively involved in many church and civic activities. Mr. Barber holds a degree in Business Administration and Economics from the University of West Georgia and is a graduate of the University of Georgia’s banking school. G. Carlton Barker (68) – 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 Trustees. Gregory W. Bryant (53) – Mr. Bryant serves as Executive Vice President and Tampa Bay Area President and Chief Executive Officer of the Bank. His arrival at the Company was announced on January 25, 2016. Previously, Mr. Bryant was the President and CEO of Bay Cities Bank in Tampa, Florida from 2000 until its sale to Centennial Bank in October 2015. While at Bay Cities, Mr. Bryant was a member of the bank’s loan committee, compensation committee, audit committee, and ALCO committee. Mr. Bryant also served as the President of Florida Business BancGroup, the parent company of Bay Cities Bank. From 2005 to 2015, Mr. Bryant served as a Director of the Independent Banker’s Bank (Lake Mary, FL), a correspondent bank serving over 100 banks in Florida and South Georgia. While at IBB, Mr. Bryant served on the loan and executive committees. Prior to Bay Cities Bank, Mr. Bryant worked in various management capacities with GE Capital and SouthTrust Bank. Mr. Bryant served as Chair of the Florida Banker’s Association in 2012, and is active in the CEO Council of Tampa Bay and the Greater Tampa Chamber of Commerce. Andrew N. Kattos (47) – 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 Board for the Junior League as a Board Member and Finance Committee Member for the Huntsville Hospital Foundation. William Bibb Lamar, Jr. (72) – Mr. Lamar has served as the Mobile Regional Chief Executive Officer of the bank since March 2013. Mr. Lamar is a seasoned Mobile banker with over 40 years of leadership responsibilities. Mr. Lamar graduated from the University of Mobile. Mr. Lamar began his banking career with 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. Mr. Lamar has served on the State Banking Board for 16 years and was formerly President of the Alabama Bankers Association. Rex D. McKinney (54) – 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, including the senior lender position, at First American Bank/Coastal Bank and Trust (owned by Synovus Financial Corporation) starting in 1997. Mr. McKinney is a Past Board Member of the Rotary Club of Pensacola. He is Past President of the Pensacola Sports Association, a Past President of the Irish Politicians Club, a Member of the Pensacola Sports Association Foundation, Vice President of the Pensacola Country Club Board of Directors and also a Board Member of the Florida Bankers Association. B. Harrison Morris, III (40) – Mr. Morris has served as Dothan Regional Chief Executive Officer since February 2015 when the outgoing CEO, Ronald DeVane, retired from the Company. Prior to his promotion, Mr. Morris served as Executive Vice President and Dothan President since June 2010, following his promotion from Senior Lending Officer of the Dothan Region. Mr. Morris joined the Company in September 2008. Prior to joining the Company, Mr. Morris held various positions with Wachovia Bank and SouthTrust Bank since 1998. Mr. Morris is a trustee of the Wallace Community College Foundation Board, a member of the Dothan Area Chamber of Commerce Board, a member of the Wiregrass United Way Board and a member of the Wiregrass Chapter of the American Red Cross. Thomas G. Trouche (52) – Mr. Trouche has served as Executive Vice President and Charleston President and Chief Executive Officer of the Bank since December 2014. Prior to joining the Company, Mr. Trouche served in various roles with First Citizens Bank for over 13 years, most recently as their Coastal Division Executive. Mr. Trouche currently serves on the Board of Directors for the American Red Cross, and previously served as Chairman of the Board for Mason Preparatory School in Charleston. Mr. Trouche received his Bachelor of Arts degree in History from the College of Charleston. 23 ITEM 1A. RISK FACTORS. 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. Such risks and uncertainties could cause actual results to differ materially from those contained in forward-looking statements presented elsewhere by management. The following list identifies and briefly summarizes certain risk factors. This list should not be viewed as complete or comprehensive, and the risks identified below are not the only risks facing our company. 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 are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability 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 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 characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. An increase in interest rates could increase competition for deposits, decrease customer demand for loans due to the higher cost of obtaining credit, result in an increased number of delinquent loans and defaults or reduce the value of securities held for investment. 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 also is 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, including a return of recessionary conditions, and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects. 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 our named executive officers and our regional chief executive officers are extremely important to our success and the success of our bank. 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 Atlanta, Huntsville and Montgomery banking offices, we do not have employment agreements or non-competition agreements with any of our executive officers, including our named executive officers. 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. We may not be able to expand successfully into new markets. We have opened new offices and operations in five primary markets (Mobile, Alabama, Atlanta, Georgia, Nashville, Tennessee, Charleston, South Carolina and Tampa Bay, Florida) in the past four years. We may not be able to successfully manage this growth with sufficient human resources, training and operational, financial and technological resources. Any such failure could 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. 24 A prolonged downturn in the real estate market, especially in our primary markets, could result in losses and adversely affect our profitability. As of December 31, 2016, 51.7% of our loan portfolio was composed of commercial and consumer real estate loans, of which 67.3% was owner-occupied commercial or 1-4 family mortgage 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 after the time the credit is initially extended. A decline in real estate values, either in the regions we serve or across the country as occurred in the U.S. recession from 2007 to 2009, could impair the value of our collateral and our ability to sell the collateral upon 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. Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future. 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 of our recent growth, a large portion of our portfolio is relatively new, and therefore 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 largest loan relationships currently make up a significant percentage of our total loan portfolio. As of December 31, 2016, our 10 largest borrowing relationships totaled over $212 million in commitments (including unfunded commitments), or approximately 4% of our total loan portfolio. The concentration risk associated with having a small number of relatively large loan relationships is that, if one or more of these relationships were to become delinquent or suffer default, we could be at risk of material losses. The allowance for loan losses may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance 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 either the creditworthiness of our borrowers resulting in loans to borrowers who fail to repay their loans in accordance with the loan terms or the value of the collateral securing the repayment of their loans, or we fail to detect or respond to a deterioration in our loan quality in a timely manner. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses that we consider adequate to absorb losses inherent in the loan portfolio based on our assessment of the information available. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information. We target small and medium-sized businesses as loan customers. Because of their size, these borrowers may be less able to withstand competitive or economic pressures than larger borrowers in periods of economic weakness. Also, as we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors. Despite the effects of sustained economic weakness, we believe our allowance for loan losses is adequate. Our allowance for loan losses as of December 31, 2016 was $51.9 million, or 1.06% 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 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 have a material adverse effect on our business, financial condition, results of operations and prospects. 25 The internal controls that we have implemented in order to mitigate risks inherent to the business of banking might fail or be circumvented, which could have a material adverse effect on our business, financial condition, results of operations and prospects. Management regularly reviews and updates our internal controls and procedures that are designed to manage the various risks in our business, including credit risk, operational risk, and interest rate risk. No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met. If there were a failure of such a system, or if a system were circumvented, there could be a material adverse effect on our business, financial condition, results of operations and prospects. Our corporate structure provides for decision-making authority by our regional chief executive officers and banking teams. Our business, financial condition, results of operations and prospects could be negatively affected if our employees do not follow our internal policies or are negligent in their decision-making. We attract and retain our management talent by empowering them to make certain business decisions on a local level. Lending authorities are assigned to regional chief executive officers and their banking teams based on their experience. Additionally, all loans in excess of $2.0 million with some sample loans below this amount are reviewed by our centralized credit administration department in Birmingham. Moreover, for decisions that fall outside of the assigned authorities, our regional chief executive officers are required to obtain approval from our senior management team. Our local bankers may not follow our internal procedures or otherwise act in our best interests with respect to their decision-making. A failure of our employees to follow our internal policies, or actions taken by our employees that are negligent 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. Our current strategy is to grow organically and, if appropriate, supplement that growth with select acquisitions. Our ability to grow organically depends primarily on generating loans and deposits of acceptable risk and expense, and we may not be successful in continuing this organic growth. Our ability to identify appropriate markets for expansion, recruit and retain qualified personnel, and fund growth at a reasonable cost depends upon prevailing economic conditions, maintenance of sufficient capital, competitive factors, and changes in banking laws, among other factors. 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. Our continued pace of growth may 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: (cid:120) (cid:120) the sale of an aggregate of 3,750,000 shares of our common stock at $15.167 per share, or $56,874,000, exclusive of underwriting discounts, in our initial public offering completed May 19, 2014; and the sale of $34,750,000 in 5% subordinated notes due July 15, 2025 to accredited investor purchasers in July 2015. After giving effect to these transactions, we believe that we will have sufficient capital to meet our capital needs for our immediate growth plans. However, we will continue to need capital to support our longer-term growth plans. Our ability to access the capital markets, if needed, on a timely basis or at all will depend on a number of factors, such as the state of the financial markets, a loss of confidence in financial institutions generally, negative perceptions of our business or our financial strength, or other factors that would increase our cost of borrowing. If capital is not available on favorable terms when we need it, we will either have to 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. 26 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 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. Many of these competitors have substantially greater financial resources, larger lending limits, larger branch networks and less regulatory oversight than we do, and are able to offer a broader range of products and services than we can. 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: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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 markets 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 any of our market areas 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 markets. Therefore, our success will depend on the general economic conditions in these areas, and more particularly in Birmingham, Huntsville, Dothan, Montgomery and Mobile, Alabama, Pensacola and Tampa Bay, Florida, Atlanta, Georgia, Charleston, South Carolina and Nashville, Tennessee, 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 such markets than those of larger, more geographically diverse competitors. Our entry into Pensacola and Tampa Bay, Florida, Mobile, Alabama and Charleston, South Carolina increased our exposure to potential losses associated with hurricanes and similar natural disasters that are more common in coastal areas than in our other markets. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects any of the markets in which we operate, including existing or prospective property or borrowers in such markets may affect us and our profitability more significantly and more adversely than our more geographically diversified competitors, which could have a material adverse effect on our business, financial condition, results of operations and prospects. We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements. The banking and financial services industries are 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 greater resources to invest in technological improvements, and we may not be able to implement new technology-driven products and services, which could reduce our ability to effectively compete or increase our overall expenses and have a material adverse effect on our net income. Our information systems may experience a failure or interruption. We rely heavily on communications and information systems to conduct our business. Any failure or interruption in the operation of these systems could impair or prevent the effective operation of our customer relationship management, general ledger, deposit, lending, or other functions. While we have policies and procedures designed to prevent or limit the effect of a failure or interruption in the operation of our information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions impacting our information systems could damage our reputation, result in a loss of customer business, and expose us to additional regulatory scrutiny, civil litigation, and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. 27 We use information technology in our operations and offer online banking services to our customers, and unauthorized access to our or our customers’ confidential or proprietary information as a result of a cyber-attack or otherwise could expose us to reputational harm and litigation and adversely affect our ability to attract and retain customers. Information security risks for financial institutions have generally increased in recent years, in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. We are under continuous threat of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Therefore, the secure processing, transmission, and storage of information in connection with our online banking services are critical elements of our operations. However, our network could be vulnerable to unauthorized access, computer viruses and other malware, phishing schemes, human error or other security failures. In addition, our customers may use personal smartphones, tablet PCs, or other mobile devices that are beyond our control systems in order to access our products and services. Our technologies, systems and networks, and our customers’ devices, may become the target of cyber-attacks, electronic fraud, or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ confidential, proprietary, and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to spend significant capital and other resources to protect against these threats or to alleviate or investigate problems caused by such threats. To the extent that our activities or the activities of our customers involve the processing, storage, or transmission of confidential customer information, any breaches or unauthorized access to such information could present significant regulatory costs and expose us to litigation and other possible liabilities. Any inability to prevent these types of security threats could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and ability to generate deposits. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future. The occurrence of any cyber- attack or information security breach could result in potential liability to clients, reputational damage, damage to our competitive position, and the disruption of our operations, all of which could adversely affect our financial condition or results of operations. We are dependent upon outside third parties for the processing and handling of our records and data. We rely on software developed by third-party vendors to process various transactions. In some cases, we have contracted with third parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, loan and deposit processing, and securities portfolio accounting. While we perform a review of controls instituted by the applicable vendors over these programs in accordance with industry standards and perform our own testing of user controls, we must rely on the continued maintenance of controls by these third-party vendors, including safeguards over the security of customer data. In addition, we maintain, or contract with third parties to maintain, daily backups of key processing outputs in the event of a failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct business or process transactions, or incur damage to our reputation, if the third-party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such a disruption or breach of security may have a material adverse effect on our business. 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. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may impede or prohibit our ability to expand our market presence. 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. 28 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. As of December 31, 2016, we held $4.9 million in other real estate owned. 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. 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. 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 liability sensitive as of December 31, 2016, meaning that our net interest income and economic value of equity would decrease 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 or retain deposits, customer demand for loans, 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. The continuation of the current low interest rate environment or a deflationary environment with the possibility of negative interest rates could affect consumer and business behavior in ways that are adverse to us and could affect our ability to increase net interest income. 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, results of operations, financial condition 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 84% of the bank’s liabilities as of December 31, 2016 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, 77% 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, satisfy regulatory capital requirements, 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. 29 The fair value of our investment securities can fluctuate due to factors outside of our control. As of December 31, 2016, the fair value of our investment securities portfolio was approximately $485.7 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 or 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. 30 Risks Related to Our Industry We are subject to extensive regulation in the conduct of our business, which imposes additional costs on us and adversely affects our profitability. As a bank holding company, we are subject to federal regulation under the BHC Act, as amended, and the examination and reporting requirements of various federal and state agencies including the Federal Reserve, the FDIC and the Alabama Banking Department. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules, and standards, may limit our operations significantly and control the methods by which we conduct business, as they limit those of other banking organizations. Banking regulations are primarily intended to protect depositors, deposit insurance funds, and the banking system as a whole, and not stockholders or other creditors. These regulations affect lending practices, capital structure, investment practices, dividend policy, and overall growth, among other things. For example, federal and state consumer protection laws and regulations limit the manner in which we may offer and extend credit. In addition, the laws governing bankruptcy generally favor debtors, making it more expensive and more difficult to collect from customers who become subject to bankruptcy proceedings. We also may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations, particularly as a result of regulations adopted under the Dodd-Frank Act. This allocation of resources, as well as any failure to comply with applicable requirements, may negatively impact our financial condition and results of operations. Changes in laws, government regulation, monetary policy or accounting standards may have a material adverse effect on our results of operations. Financial institutions have been the subject of significant legislative and regulatory changes and may be the subject of further significant legislation or regulation in the future, none of which is within our control. New proposals for legislation continue to be introduced in the United States Congress that could further substantially increase regulation of the bank and non-bank financial services industries, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings, and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Changes to statutes, regulations, accounting standards or regulatory policies, including changes in their interpretation or implementation by regulators, could affect us in substantial and unpredictable ways. Such changes could, among other things, subject us to additional costs and lower revenues, limit the types of financial services and products that we may offer, ease restrictions on non-banks and thereby enhance their ability to offer competing financial services and products, increase compliance costs, and require a significant amount of management’s time and attention. Changes in accounting standards could materially impact, potentially even retroactively, how we report our financial condition and results of our operations. Failure to comply with statutes, regulations, or policies could result in sanctions by regulatory agencies, civil monetary penalties, or reputational damage, each of which could have a material adverse effect on our business, financial condition, and results of operations. A reduction in future corporate tax rates could have a material impact on the value of our deferred tax assets. The effects of future changes in tax laws or rates are not anticipated in the determination of the value of our net deferred tax assets. Changes in tax rates, such as those proposed by President Trump that, among other things, would lower the federal corporate tax rate from its current 35%, would decrease the amount of our net deferred tax assets, though uncertainty regarding the timing and magnitude of any reduction make it difficult to predict the overall impact on the Company of such a decrease. If a reduction in the federal tax rate occurs, we likely would recognize an income tax expense to reduce the deferred tax asset, which could adversely impact the price of our common stock. 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, compliance with various regulations 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. 31 FDIC deposit insurance assessments may continue to materially increase in the future, which would have an adverse effect on earnings. As a member institution of the FDIC, the bank is assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. The FDIC has adopted a Deposit Insurance Fund Restoration Plan, which requires the fund to attain a 1.35% reserve ratio by September 30, 2020. As a result of this requirement, the bank could be required to pay significantly higher premiums or additional special assessments that would adversely affect its earnings, thereby reducing the availability of funds to pay dividends to us. 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 CRA, 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 CRA 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. Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving the Company or the Bank, could adversely affect us or the financial services industry in general. The Company has been, and may in the future be, subject to various legal and regulatory proceedings. It is inherently difficult to assess the outcome of these matters, and there can be no assurance that we will prevail in any proceeding or litigation. Any such matter could result in substantial cost and diversion of our management’s efforts, which could have a material adverse effect on our financial condition and operating results. Further, adverse determinations in such matters could result in actions by our regulators that could materially adversely affect our business, financial condition or results of operations. The Company establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The Company may still incur legal costs for a matter even if it has not established a reserve. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter. The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could adversely affect our financial condition and results of operations. 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 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. 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. 32 Risks Related to Our Common Stock The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired. The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may impact the market price and trading volume of our common stock, including, without limitation: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) actual or anticipated fluctuations in our operating results, financial condition or asset quality; changes in economic or business conditions; the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve; publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; operating and stock price performance of companies that investors deemed comparable to us; future issuances of our common stock or other securities; additions to or departures of key personnel; proposed or adopted changes in laws, regulations or policies affecting us; perceptions in the marketplace regarding our competitors and/or us; significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and other news, announcements or disclosures (whether by us or others) related to us, our competitors, our core market or the financial services industry. The stock market and, in particular, the market for financial institution stocks, have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired. The rights of our common stockholders are subordinate to the rights of the holders of any preferred or any debt securities that we may issue. Our board of directors has the authority to issue in the aggregate up to 1,000,000 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. Because our ability to pay dividends on our common stock in the future will depend on our and our bank’s financial condition as well as factors outside of our control, our common stockholders bear the risk that no dividends will be paid on our common stock in future periods or that, if paid, such dividends will be reduced or eliminated, which may negatively impact the market price of our common stock. 33 We and our bank are subject to capital and other requirements which restrict our ability to pay dividends. In 2014, we began paying quarterly cash dividends. 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, 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 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. 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, 2016, our bank could pay approximately $189.1 million of dividends to us without prior approval of 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. 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 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 certificate of incorporation, as amended (or 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: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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. As of December 31, 2016, we operated through 19 banking offices. Our Shades Creek Parkway office also includes our corporate headquarters. We believe that our banking offices are in good condition, are suitable to our needs and, for the most part, are relatively new or refurbished. The following table gives pertinent details about our banking offices. 34 State, MSA, Office Address City Zip Code Owned or Leased Date Opened Alabama: Birmingham-Hoover: 850 Shades Creek Parkway, Suite 200 (1) 324 Richard Arrington Jr. Boulevard North 5403 Highway 280, Suite 401 Total Huntsville: 401 Meridian Street, Suite 100 1267 Enterprise Way, Suite A (1) Total Montgomery: 1 Commerce Street, Suite 200 8117 Vaughn Road, Unit 20 Total Dothan: 4801 West Main Street (1) 1640 Ross Clark Circle, Suite 307 Total Mobile: 100 St. Joseph Street (1) 4400 Old Shell Road Total Total Offices in Alabama Florida: Pensacola-Ferry Pass-Brent: 316 South Baylen Street, Suite 100 4980 North 12th Avenue Tampa-St. Petersburg-Clearwater: 2009 Osprey Lane Total Total Offices in Florida Georgia: Atlanta-Sandy Springs-Roswell 300 Galleria Parkway SE, Suite 100 2801 Chapel Hill Road 2454 Kennesaw Due West Road Total South Carolina: Charleston-North Charleston 1156 Bowman Road, Suite 200 Tennessee: Nashville: Birmingham Birmingham Birmingham Huntsville Huntsville 3 Offices 2 Offices 35209 35203 35242 Leased Leased Leased 3/2/2005 12/19/2005 8/15/2006 35801 35806 Leased Leased 11/21/2006 8/21/2006 Montgomery Montgomery 36104 36116 Leased Leased 6/4/2007 9/26/2007 Dothan Dothan Mobile Mobile Pensacola Pensacola Tampa 2 Offices 2 Offices 2 Offices 11 Offices 2 Offices 1 Office 3 Offices 36305 36301 Leased Leased 10/17/2008 2/1/2011 36602 36608 Leased Leased 7/9/2012 9/3/2014 32502 32504 Leased Owned 4/1/2011 8/27/2012 33549 Leased 1/4/2016 Atlanta Douglasville Kennesaw 30339 30135 30152 Leased Owned Owned 7/1/2015 1/28/2008 12/12/2011 3 Offices Mount Pleasant 29464 Leased 4/20/2015 1801 West End Avenue, Suite 850 (1) Nashville 37203 Leased 6/4/2013 Total offices 19 Offices (1) Offices relocated to this address. Original offices opened on date indicated. ITEM 3. LEGAL PROCEEDINGS. Neither we nor the bank is currently subject to any material legal proceedings. In the ordinary course of business, the bank is involved in routine litigation, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the bank’s business. Management does not believe that there are any threatened proceedings against us or the bank which will have a material effect on our or the bank’s business, financial position or results of operations. ITEM 4. MINE SAFETY DISCLOSURE. Not applicable. 35 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is listed on the NASDAQ Global Select Market under the symbol “SFBS.” As of February 23, 2017, there were 602 holders of record of our common stock. As of the close of business on February 23, 2017, the price of our common stock was $42.61 per share. All share and per share data in this Annual Report on Form 10-K is adjusted to reflect our two-for-one stock split in the form of a stock dividend effective on December 20, 2016 for stockholders of record on December 5, 2016. The following table sets forth the reported high and low sales prices of our common stock as quoted on the NASDAQ during each quarter of 2016 and 2015. High $ $ 23.39 26.36 26.79 38.65 Year Ended December 31, 2016 Low Cash Dividends Declared 0.04 0.04 0.04 0.04 0.16 17.06 21.66 23.46 25.00 $ $ High $ $ 16.50 19.00 21.58 24.94 2015 Low Cash Dividends Declared 0.03 0.03 0.03 0.03 0.12 14.94 16.20 12.39 18.97 $ $ First quarter Second quarter Third quarter Fourth quarter Dividends The principal source of our cash flow, including cash flow to pay dividends, comes from dividends that the bank pays to us as its sole shareholder. Statutory and regulatory limitations apply to the bank’s payment of dividends to us, as well as our payment of dividends to our stockholders. For a more complete discussion on the restrictions on dividends, see “Supervision and Regulation - Payment of Dividends” in Item 1. Recent Sales of Unregistered Securities We had no sales of unregistered securities in 2016 other than those previously reported in our reports filed with the Securities and Exchange Commission. Purchases of Equity Securities by the Registrant and Affiliated Purchasers We made no repurchases of our equity securities, and no “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) purchased any shares of our equity securities during the fourth quarter of the fiscal year ended December 31, 2016. Equity Compensation Plan Information The following table sets forth certain information as of December 31, 2016 relating to stock options granted under our 2005 Amended and Restated Stock Incentive Plan and our 2009 Amended and Restated Stock Incentive Plan and other options or warrants issued outside of such plans, if any. Equity Compensation Plans Approved by Security Holders Equity Compensation Plans Not Approved by Security Holders Plan Category Total 36 Number of Securities Issued/To Be Issued Upon Exercise of Outstanding Awards Weighted-average Exercise Price of Outstanding Awards 9.00 - 9.00 - 2,026,334 $ 2,026,334 $ Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans 3,947,020 - 3,947,020 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 483,176 shares (post-stock split) of restricted stock under the 2009 Amended and Restated 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. 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,” “Core Performance Ratios,” “Asset Quality Ratios,” “Liquidity Ratios,” “Capital Adequacy Ratios” and “Growth Ratios,” the selected historical consolidated financial data as of December 31, 2016, 2015, 2014, 2013 and 2012 and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 are derived from our audited consolidated financial statements and related notes. Selected Balance Sheet Data: Total Assets Total Loans Loans, net Securities available for sale Securities held to maturity Cash and due from banks Interest-bearing balances with banks Fed funds sold Mortgage loans held for sale Restricted equity securities Premises and equipment, net Deposits Federal funds purchased 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 tax expense 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) Core Performance Data (3) Core net income available to common stockholders Core earnings per share, basic 2016 As of and for the years ended December 31, 2014 (Dollars in thousands except for share and per share data) 2013 2015 $ $ $ $ $ 6,370,448 4,911,770 4,859,877 422,375 62,564 56,855 566,707 160,435 4,675 1,024 40,314 5,420,311 355,944 55,262 - 16,042 522,889 212,902 25,805 187,097 13,398 173,699 18,112 80,993 110,818 29,339 81,479 81,432 $ $ 5,095,509 4,216,375 4,172,956 342,938 27,426 46,614 270,836 34,785 8,249 4,954 19,434 4,223,888 352,360 55,637 - 14,477 449,147 179,975 17,704 162,271 12,847 149,424 13,963 74,382 89,005 25,465 63,540 63,260 $ $ 4,098,679 3,359,858 3,324,229 298,310 29,355 48,519 248,054 891 5,984 3,921 7,815 3,398,160 264,315 19,973 - 9,018 407,213 144,725 14,119 130,606 10,259 120,347 11,229 57,598 73,978 21,601 52,377 51,946 $ $ 3,520,699 2,858,868 2,828,205 265,728 32,274 61,370 188,411 8,634 8,134 4,230 8,351 3,019,642 174,380 19,940 - 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 $ 1.55 1.52 9.93 $ 1.23 1.20 8.65 $ 1.09 1.05 7.40 $ 1.00 0.95 5.83 2012 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 2,511,572 117,065 19,917 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 0.95 0.82 5.14 52,450,896 53,608,372 52,636,896 51,426,466 52,885,108 51,945,396 47,710,002 49,636,442 49,603,036 41,214,426 43,612,050 44,100,072 35,978,622 41,650,512 37,612,872 1.42% 16.64% 10.53% 3.42% 39.47% 1.38% 14.56% 10.04% 3.75% 42.21% 1.39% 14.43% 9.57% 3.68% 40.61% 1.32% 15.70% 8.79% 3.80% 38.78% 1.31% 15.99% 10.02% 3.80% 41.54% $ 65,027 1.27 $ 53,558 1.12 Core earnings per share, diluted Core return on average assets Core return on average stockholders' equity Core return on average common stockholders' equity Core efficiency ratio 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 CET1 capital (4) Tier 1 capital (5) Total capital (6) Leverage ratio (7) Growth Ratios: Percentage change in net income Percentage change in diluted net income per share Percentage change in assets Percentage change in net loans Percentage change in deposits Percentage change in equity 1.23 1.42% 14.96% 15.73% 40.73% 0.13% 0.18% 0.26% 1.03% 559.02% 98.79% 86.24% 24.94% 8.81% 9.72% 9.73% 11.95% 8.55% 21.31% 14.35% 24.32% 25.53% 24.30% 10.30% 1.08 1.43% 14.88% 16.74% 38.86% 0.17% 0.30% 0.41% 1.06% 354.52% 97.82% 83.94% 23.85% 9.94% NA 11.75% 13.38% 9.91% 25.85% 10.00% 16.42% 17.54% 12.54% 37.02% 0.11% 0.34% 0.34% 1.06% 307.30% 89.66% 80.44% 23.64% 8.21% 9.78% 9.78% 11.84% 8.22% 28.23% 26.67% 25.02% 16.46% 28.32% 16.41% 0.33% 0.34% 0.64% 1.07% 314.94% 93.66% 84.65% 21.54% 8.44% NA 10.00% 11.73% 8.48% 20.82% 14.46% 21.14% 21.02% 20.23% 27.41% 0.24% 0.44% 0.69% 1.11% 253.50% 93.05% 79.82% 21.71% 8.03% NA 9.89% 11.78% 8.43% 46.96% 40.68% 18.11% 29.20% 17.15% 18.83% (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 the 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) Core metrics for 2015 exclude a non-routine expense related to our acquisition of Metro Bancshares, Inc. and the merger of Metro Bank with and into the Bank, and a non-routine expense resulting from the initial funding of reserves for unfunded loan commitments consistent with guidance provided in the Federal Reserve Bank's Interagency Policy Statement SR 06-17. Core metrics for 2014 exclude a non-routine expense related to the correction of our accounting for vested stock options granted to our advisory board members in our Huntsville, Montgomery and Dothan, Alabama markets, and non-routine expense related to the acceleration of vesting of stock options previously granted to our advisory board members in our Mobile, Alabama and Pensacola, Florida markets. For a reconciliation of these non-GAAP measures to the most comparable GAAP measure, see "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures." None of the other periods included in our selected consolidated financial information are affected by such non-routine expenses. (4) CET1 capital ratio includes common stockholders' equity excluding unrealized gains/(losses) on securities available for sale, net of taxes, and intangible assets divided by total risk-weighted assets. (5) Tier 1 capital ratio includes CET1 and qualifying minority interest divided by total risk-weighted assets. (6) Total capital ratio includes Tier 1 capital plus qualifying portions of subordinated debt and allowance for loan losses (limited to 1.25% of risk-weighted assets) divided by total risk-weighted assets. (7) Tier 1 leverage ratio includes Tier 1 capital divided by average assets less intangible assets. 37 GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures We recorded expenses of $2.1 million for the first quarter of 2015 related to the acquisition of Metro Bancshares, Inc. and the merger of Metro Bank with and into the bank, and recorded an expense of $500,000 resulting from the initial funding of reserves for unfunded loan commitments for the first quarter of 2015, consistent with guidance provided in the Federal Reserve Bank’s Interagency Policy Statement SR 06-17. We recorded a non-routine expense of $0.7 million for the first quarter of 2014 resulting from the correction of our accounting for vested stock options previously granted to members of our advisory boards in our Huntsville, Montgomery and Dothan, Alabama markets, and we recorded a non-routine expense of $1.8 million for the second quarter of 2014 resulting from an acceleration of vesting of stock options previously granted to members of our advisory boards in our Mobile, Alabama and Pensacola, Florida markets. This change in accounting treatment is a non-cash item and does not impact our operating activities or cash from operations. The non-GAAP financial measures included in this annual report on Form 10-K results for the year ended December 31, 2016 are “core net income available to common stockholders,” “core earnings per share, basic,” “core earnings per share, diluted,” “core return on average assets,” “core return on average stockholders’ equity,” “core return on average common stockholders’ equity” and “core efficiency ratio.” Each of these seven core financial measures excludes the impact of the non-routine expense attributable to the correction of our accounting for stock options, the acceleration of vesting of stock options, expenses related to the acquisition of Metro and the initial funding of reserves for unfunded loan commitments. None of the other periods included in our selected financial data are affected by this correction and acceleration of vesting. “Core net income available to common stockholders” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense. “Core earnings per share, basic” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense, divided by weighted average shares outstanding. “Core earnings per share, diluted” is defined as net income available to common stockholders, adjusted by the net effect of the non-routine expense, divided by weighted average diluted shares outstanding. “Core return on average assets” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average total assets. “Core return of average stockholders’ equity” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average total stockholders’ equity. “Core return of average common stockholders’ equity” is defined as net income, adjusted by the net effect of the non-routine expense, divided by average common stockholders’ equity. “Core efficiency ratio” is defined as non-interest expense, adjusted by the effect of the non-routine expense, divided by the sum of net interest income and non- interest income. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that these non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies, including those in our industry, use. The following reconciliation table provides a more detailed analysis of the non-GAAP financial measures for the years ended December 31, 2015 and 2014. All amounts are in thousands, except share and per share data. 38 Provision for income taxes - GAAP Adjustments: Adjustment for non-routine expense Core income tax expense - non-GAAP Net income available to common stockholders - GAAP Adjustments: Adjustment for non-routine expense Core net income available to common stockholders - non-GAAP Earnings per share, basic - GAAP Weighted average shares outstanding, basic Core earnings per share, basic - non-GAAP Earnings per share, diluted - GAAP Weighted average shares outstanding, diluted Core earnings per share, diluted - non-GAAP Return on average assets - GAAP Net income - GAAP Adjustments: Adjustment for non-routine expense Core net income - non-GAAP Average assets Core return on average assets - non-GAAP Return on average stockholders' equity - GAAP Average stockholders' equity Core return on average stockholders' equity - non-GAAP Return on average common stockholders' equity Average common stockholders' equity Core return on average common stockholders' equity - non-GAAP Efficiency ratio - GAAP Non-interest expense - GAAP Adjustments: Adjustment for non-routine expense Core non-interest expense - non-GAAP Net interest income Non-interest income Total net interest income and non-interest income Core efficiency ratio - non-GAAP $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2015 2014 25,465 829 26,294 63,260 1,767 65,027 2.46 51,426,466 1.27 1.20 52,885,108 1.23 1.38% 63,540 1,767 65,307 4,591,861 1.42% 14.56% 436,544 14.96% 15.30% 413,445 15.73% 42.21% 74,382 2,596 71,786 162,271 13,963 176,234 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 21,601 865 22,466 51,946 1,612 53,558 2.18 47,710,002 1.13 1.05 49,636,442 1.08 1.39% 52,377 1,612 53,989 3,758,184 1.44% 14.43% 359,963 15.00% 16.23% 320,005 16.74% 40.61% 57,598 2,477 55,121 130,606 11,229 141,835 40.73% 38.86% 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 BHC Act headquartered in Birmingham, Alabama. Through our wholly-owned subsidiary bank, we operate 19 full service banking offices located in Jefferson, Shelby, Madison, Montgomery, Mobile and Houston Counties in Alabama, Escambia and Hillsborough Counties in Florida, Cobb and Douglas County in Georgia, Charleston County in South Carolina and Davidson County in Tennessee. These offices operate in the Birmingham-Hoover, Huntsville, Montgomery, Mobile and Dothan, Alabama MSAs, the Pensacola-Ferry Pass-Brent and Tampa-St. Petersburg- Clearwater, Florida MSAs, the Atlanta-Sandy Springs-Roswell, Georgia MSA, the Charleston-North Charleston, South Carolina MSA and the Nashville- Davidson-Murfreesboro-Franklin, Tennessee MSA. Our principal business is to accept deposits from the public and to make loans and other investments. Our principal source of funds for loans and investments are demand, time, savings, and other deposits and the amortization and prepayment of loans and borrowings. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses. Critical Accounting Policies Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the Notes to the Consolidated Financial Statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the 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. 39 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 ALLL. 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. Goodwill and Other Identifiable Intangible Assets Other identifiable intangible assets include a core deposit intangible recorded in connection with the acquisition of Metro. The core deposit intangible is being amortized over 7 years and the estimated useful life is periodically reviewed for reasonableness. The Company has recorded $13.6 million of goodwill in connection with the acquisition of Metro Bancshares, Inc. The Company tests its goodwill for impairment annually unless interim events or circumstances make it more likely than not that an impairment loss has occurred. Impairment is defined as the amount by which the implied fair value of the goodwill is less than the goodwill’s carrying value. Impairment losses, if incurred, would be charged to operating expense. For the purposes of evaluating goodwill, the Company has determined that it operates only one reporting unit. Results of Operations Net Income Net income available to common stockholders was $81.4 million for the year ended December 31, 2016, compared to $63.3 million for the year ended December 31, 2015. This increase in net income is primarily attributable to an increase in net interest income, which increased $24.8 million, or 15.3%, to $187.1 million in 2016 from $162.3 million in 2015. Noninterest income increased $4.5 million, or 33.1%, to $18.1 million in 2016 from $13.6 million in 2015. Noninterest expense increased by $7.0 million, or 9.5%, to $81.0 million in 2016 from $74.0 million in 2015. Basic and diluted net income per common share were $1.55 and $1.52, respectively, for the year ended December 31, 2016, compared to $1.23 and $1.20, respectively, for the year ended December 31, 2015. Return on average assets was 1.42% in 2016, compared to 1.38% in 2015, and return on average stockholders’ equity was 16.64% in 2016, compared to 14.56% in 2015. 40 Net income available to common stockholders for the year ended December 31, 2015 was $63.3 million, compared to $51.9 million for the year ended December 31, 2014. This increase in net income is primarily attributable to an increase in net interest income, which increased $31.7 million, or 24.3%, to $162.3 million in 2015 from $130.6 million in 2014. Noninterest income increased $2.6 million, or 23.6%, to $13.6 million in 2015 from $11.0 million in 2014. Noninterest expense increased by $16.7 million, or 29.1%, to $74.0 million in 2015 from $57.3 million in 2014. Basic and diluted net income per common share were $1.23 and $1.20, respectively, for the year ended December 31, 2015, compared to $1.09 and $1.05, respectively, for the year ended December 31, 2014. Return on average assets was 1.38% in 2015, compared to 1.39% in 2014, and return on average stockholders’ equity was 14.56% in 2015, compared to 14.43% in 2014. The following table presents some ratios of our results of operations for the years ended December 31, 2016, 2015 and 2014. Return on average assets Return on average stockholders' equity Dividend payout ratio Average stockholders' equity to average total assets For the years ended December 31, 2015 2014 2016 1.42% 16.64% 10.53% 8.52% 1.38% 14.56% 10.04% 9.51% 1.39% 14.43% 9.57% 9.58% The following tables present a summary of our statements of income, including the percent change in each category, for the years ended December 31, 2016 compared to 2015, and for the years ended December 31, 2015 compared to 2014, respectively. 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 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 Income before income taxes Income taxes Net income Dividends on preferred stock Net income available to common stockholders 41 Year Ended December 31, 2016 2015 (Dollars in Thousands) Change from the Prior Year $ $ 212,902 $ 25,805 187,097 13,398 173,699 18,112 80,993 110,818 29,339 81,479 47 81,432 $ 179,975 17,704 162,271 12,847 149,424 13,577 73,996 89,005 25,465 63,540 280 63,260 18.30% 45.76% 15.30% 4.29% 16.25% 33.40% 9.46% 24.51% 15.21% 28.23% (83.21)% 28.73% Year Ended December 31, 2015 2014 (Dollars in Thousands) Change from the Prior Year $ $ 179,975 $ 17,704 162,271 12,847 149,424 13,577 73,996 89,005 25,465 63,540 280 63,260 $ 144,725 14,119 130,606 10,259 120,347 11,492 57,335 73,978 21,601 52,377 431 51,946 24.36% 25.39% 24.24% 25.23% 24.16% 18.14% 29.06% 20.31% 17.89% 21.31% (35.03)% 21.78% 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 $24.8 million, or 15.3%, to $187.1 million for the year ended December 31, 2016 from $162.3 million for the year ended December 31, 2015. This was due to an increase in total interest income of $32.9 million, or 18.3%, partially offset by an increase in total interest expense of $8.1 million, or 45.8%. The increase in total interest income was primarily attributable to a 17.3% increase in average loans outstanding from 2015 to 2016, which was the result of growth in all of our markets, including in Nashville, Tennessee, Charleston, South Carolina and Tampa Bay, Florida, our newest markets. Net interest income increased $31.7 million, or 24.3%, to $162.3 million for the year ended December 31, 2015 from $130.6 million for the year ended December 31, 2014. This was due to an increase in total interest income of $35.3 million, or 24.4%, partially offset by an increase in total interest expense of $3.6 million, or 25.4%. The increase in total interest income was primarily attributable to a 25.2% increase in average loans outstanding from 2014 to 2015, which was the result of growth in all of our markets. 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 years ended December 31, 2016, 2015 and 2014, 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. 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) 2016 Interest Earned / Paid Average Balance Average Yield / Rate Average Balance 2015 Interest Earned / Paid Average Yield / Rate Average Balance 2014 Interest Earned / Paid Average Yield / Rate Assets: Interest-earning assets: Loans, net of unearned income: Taxable (1) Tax-exempt (2) Total loans, net of unearned income Mortgage loans held for sale Debt securities: Taxable Tax-exempt (2) Total debt securities (3) Federal funds sold Restricted equity securities Interest-bearing balances with banks 490,301 Total interest-earning assets $ 5,525,174 $ 4,467,713 18,749 $ 199,598 911 4.47% $ 3,815,202 9,905 4.86 $ 170,723 496 4.47% $ 3,042,968 13,176 5.01 $ 135,487 527 4.45% 4.00 4,486,462 200,509 4.47 3,825,107 171,219 4.48 3,056,144 136,014 6,600 253 237,699 135,929 373,628 163,356 4,827 5,343 5,035 10,378 1,007 218 3.83 2.25 3.70 2.78 0.62 4.52 7,912 193,803 136,305 330,108 31,014 4,798 237 4,332 5,448 9,780 128 183 3.00 2.24 4.00 2.96 0.41 3.81 5,704 186,376 125,269 311,645 55,680 4,002 210 4,464 5,329 9,793 159 131 4.45 3.68 2.40 4.25 3.14 0.29 3.27 2,571 $ 214,936 0.52 189,361 3.89% $ 4,388,300 530 $ 182,077 0.28 167,782 4.15% $ 3,600,957 416 $ 146,723 0.25 4.07% Non-interest-earning assets: Cash and due from banks Net premises and equipment Allowance for loan losses, accrued interest and other assets Total assets 60,321 24,937 135,251 $ 5,745,683 60,778 17,206 125,577 $ 4,591,861 57,894 8,430 90,903 $ 3,758,184 Interest-bearing liabilities: Interest-bearing deposits: Checking Savings Money market Time deposits Total interest-bearing deposits $ $ 697,109 44,521 2,308,065 513,183 2,526 137 12,379 5,127 $ 0.36% $ 584,756 37,683 0.31 1,786,045 0.54 478,819 1.00 1,656 109 8,302 4,828 $ 0.28% $ 489,210 26,480 0.29 1,523,120 0.46 401,182 1.01 1,294 75 6,775 4,276 0.26% 0.28 0.44 1.07 3,562,878 20,169 0.57 2,887,303 14,895 0.52 2,439,992 12,420 0.51 Federal funds purchased Other borrowings Total interest-bearing liabilities Non-interest-bearing liabilities: Non-interest-bearing checking Other liabilities Stockholders' equity Unrealized gains on securities and derivatives Total liabilities and stockholders' equity Net interest income Net interest spread Net interest margin 433,743 55,468 2,766 2,870 0.64 5.17 272,031 37,272 860 1,948 0.32 5.23 202,690 19,957 567 1,132 0.28 5.67 $ 4,052,089 $ 25,805 0.64% $ 3,196,606 $ 17,703 0.55% $ 2,662,639 $ 14,119 0.53% 1,190,372 13,582 485,543 4,097 $ 5,745,683 944,019 14,692 432,064 4,480 723,338 12,244 355,060 4,903 $ 189,131 $ 164,374 $ 132,604 $ 4,591,861 $ 3,758,184 3.25% 3.42% 3.60% 3.75% 3.54% 3.68% (1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $2,273,000, $1,384,000 and $1,025,000 are included in interest income in 2016, 2015 and 2014, respectively. (2) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35%. (3) Net unrealized gains of $6,301,000, $6,679,000 and $7,545,000 are excluded from the yield calculation in 2016, 2015 and 2014, respectively. The following table reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-bearing assets and liabilities. For the Year Ended December 31, 2016 Compared to 2015 Increase (Decrease) in Interest Income and Expense Due to Changes in: Rate Volume Total 2015 Compared to 2014 Increase (Decrease) in Interest Income and Expense Due to Changes in: Rate Volume Total $ Interest-earning assets: Loans, net of unearned income: Taxable Tax-exempt Total loans, net of unearned income Mortgage loans held for sale Debt securities: Taxable Tax-exempt Total debt securities Federal funds sold Equity securities Interest-bearing balances with banks Total interest-earning assets Interest-bearing liabilities: Interest-bearing demand deposits Savings Money market Time deposits Total interest-bearing deposits Federal funds purchased Other borrowed funds Total interest-bearing liabilities Increase in net interest income $ (276) (15) (291) 59 24 (398) (374) 91 34 724 243 516 7 1,406 (44) 1,885 1,203 (19) - 3,069 (2,826) $ $ 28,875 $ 415 29,290 16 1,012 (413) 599 879 35 2,041 32,860 870 28 4,077 299 5,274 1,906 922 - 8,102 24,758 $ 34,553 (147) 34,406 71 174 452 626 (86) 28 56 35,101 266 32 1,211 793 2,302 212 911 - 3,425 31,676 $ $ 683 116 799 (44) (306) (333) (639) 55 24 58 253 96 2 316 (241) 173 81 (95) - 159 94 $ $ 35,236 (31) 35,205 27 (132) 119 (13) (31) 52 114 35,354 362 34 1,527 552 2,475 293 816 - 3,584 31,770 29,151 430 29,581 (43) 988 (15) 973 788 1 1,317 32,617 354 21 2,671 343 3,389 703 941 - 5,033 27,584 $ $ 42 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. From 2015 to 2016, we experienced an unfavorable variance relating to the interest rate component because average yields on loans decreased by one basis point, while average rates paid on interest-bearing deposits increased by nine basis points. From 2014 to 2015, we experienced a favorable variance relating to the interest rate component because average yields on loans increased more than average rates paid on interest-bearing deposits. Our growth in loans was the primary driver of our favorable volume component change and overall change in both 2016 and 2015. 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 3.25% and 3.42%, respectively, for the year ended December 31, 2016, compared to 3.60% and 3.75%, respectively, for the year ended December 31, 2015. The decrease in net interest spread and net interest margin in 2016 resulted from the maintenance of higher levels of liquidity. Our average interest-earning assets for the year ended December 31, 2016 increased $1.1 billion, or 25.9%, to $5.5 billion from $4.4 billion for the year ended December 31, 2015. 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 $855.5 million, or 26.8%, to $4.1 billion for the year ended December 31, 2016 from $3.2 billion for the year ended December 31, 2015. All of our markets had an increase in total deposits during 2016. The ratio of our average interest-earning assets to average interest-bearing liabilities was 136.4% and 137.3% for the years ended December 31, 2016 and 2015, respectively, as average noninterest-bearing deposits grew by $246.4 million, or 26.1%, from 2015 to 2016. Our average interest-earning assets produced a taxable equivalent yield of 3.89% for the year ended December 31, 2016, compared to 4.15% for the year ended December 31, 2015. The average rate paid on interest-bearing liabilities was 0.64% for the year ended December 31, 2016, compared to 0.55% for the year ended December 31, 2015. Our net interest spread and net interest margin were 3.60% and 3.75%, respectively, for the year ended December 31, 2015, compared to 3.54% and 3.68%, respectively, for the year ended December 31, 2014. Our average interest-earning assets for the year ended December 31, 2015 increased $787.3 million, or 21.9%, to $4.4 billion from $3.6 billion for the year ended December 31, 2014. This increase in our average interest-earning assets was attributable to the Metro acquisition, which included $182.4 million in earnings assets as of the closing date on January 31, 2015, continued core growth in all of our markets and increased loan production. Our average interest-bearing liabilities increased $534.0 million, or 20.1%, to $3.2 billion for the year ended December 31, 2015 from $2.7 billion for the year ended December 31, 2014. 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 137.3% and 135.2% for the years ended December 31, 2015 and 2014, respectively, as average noninterest-bearing deposits grew by $220.7 million, or 30.5%, from 2014 to 2015. Our average interest-earning assets produced a taxable equivalent yield of 4.15% for the year ended December 31, 2015, compared to 4.07% for the year ended December 31, 2014. The average rate paid on interest-bearing liabilities was 0.55% for the year ended December 31, 2015, compared to 0.53% for the year ended December 31, 2014. 43 Provision for Loan Losses The provision for loan losses represents the amount determined by management to be necessary to maintain the ALLL at a level capable of absorbing inherent losses in the loan portfolio. Our management reviews the adequacy of the ALLL on a quarterly basis. The ALLL 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, 2016, total loans rated Special Mention, Substandard, and Doubtful were $128.8 million, or 2.6% of total loans, compared to $117.0 million, or 2.8% of total loans, at December 31, 2015. 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 allowance for loan losses as a percentage of loans was diluted in 2015 by the acquisition of $149 million of loans of Metro Bank which were recorded at net fair value. The provision expense for loan losses was $13.4 million for the year ended December 31, 2016, an increase of $0.6 million from $12.8 million in 2015. This increase in provision expense for loan losses for 2016 is primarily attributable to loan growth. Also, nonperforming loans increased to $16.9 million, or 0.34% of total loans, at December 31, 2016 from $7.8 million, or 0.18% of total loans, at December 31, 2015. During 2016, we had net charged-off loans totaling $4.9 million, compared to net charged-off loans of $5.1 million for 2015. The ratio of net charged-off loans to average loans was 0.11% for 2016 compared to 0.13% for 2015. The ALLL totaled $51.9 million, or 1.06% of loans, net of unearned income, at December 31, 2016, compared to $43.4 million, or 1.03% of loans, net of unearned income, at December 31, 2015. The provision expense for loan losses was $12.8 million for the year ended December 31, 2015, an increase of $2.5 million from $10.3 million in 2014. This increase in provision expense for loan losses for 2015 is primarily attributable to loan growth. Also, nonperforming loans decreased to $7.8 million, or 0.18% of total loans, at December 31, 2015 from $10.1 million, or 0.30% of total loans, at December 31, 2014. During 2015, we had net charged-off loans totaling $5.1 million, compared to net charged-off loans of $5.3 million for 2014. The ratio of net charged-off loans to average loans was 0.13% for 2015 compared to 0.17% for 2014. The allowance for loan losses totaled $43.4 million, or 1.03% of loans, net of unearned income, at December 31, 2015, compared to $35.6 million, or 1.06% of loans, net of unearned income, at December 31, 2014. Noninterest Income Noninterest income increased $4.5 million, or 33.1%, to $18.1 million in 2016 from $13.6 million in 2015. Service charges on deposit accounts increased $0.3 million, or 5.9%, to $5.4 million in 2016 compared to 2015 due to increases in the number of accounts. Mortgage banking income increased $1.0 million, or 37.0%, to $3.7 million in 2016 compared to 2015 due to a 10% increase in the number of loans originated and improved operations, translating to an increase in net gains on sales. The cash surrender value of bank-owned life insurance contracts increased $0.2 million, or 7.7%, to $2.8 million in 2016 compared to 2015 which is the result of additional investment of $20.0 million in such contracts during 2016. Interchange income and other credit card revenue increased $1.1 million, or 52.4%, to $3.2 million in 2016 compared to 2015. A gain on sale of fixed assets of $1.4 million was recognized during 2016. Excluding this gain, other operating income increased $0.5 million, or 45.5%, to $1.1 million in 2016 compared to 2015. Noninterest income increased $2.6 million, or 23.6%, to $13.6 million in 2015 from $11.0 million in 2014. Service charges on deposit accounts increased $0.8 million, or 18.6%, to $5.1 million in 2015 compared to 2014 due to increases in the number of accounts resulting from organic growth and the acquisition of Metro Bancshares, Inc. in February 2015. The cash surrender value of bank-owned life insurance contracts increased $0.3 million, or 15.0%, to $2.6 million in 2015 compared to 2014 which is the result of additional investment of $15.0 million in such contracts in September 2014 and $2.7 million in contracts from the acquisition of Metro. Other operating income increased $0.9 million, or 34.5%, to $3.5 million in 2015 compared to 2014 due to loan growth. Mortgage banking income increased $0.6 million, or 31.0%, to $2.7 million in 2015 compared to 2014. The number of mortgages closed and sold increased by 21% from 2014 to 2015. 44 Noninterest Expense Noninterest expenses increased $7.0 million, or 9.5%, to $81.0 million for the year ended December 31, 2016 from $74.0 million for the year ended December 31, 2015. Higher salary and employee benefits expenses, equipment and occupancy expenses and professional services expenses drove this increase in total noninterest expense. Salary and employee benefits expenses increased $5.1 million, or 13.1%, to $44.0 million in 2016 compared to 2015. We had 412 full-time equivalent employees at December 31, 2016 compared to 371 at December 31, 2015, a 11.1% increase. Staffing the new Tampa Bay, Florida office and new hires in operations staffing in our Birmingham headquarters drove this increase in the number of employees during 2016. Equipment and occupancy expense increased $1.6 million, or 25.0%, to $8.0 million in 2016 compared to $6.4 million in 2015. This increase is the fully phased in expenses associated with the addition of our new office in the Cobb Galleria area of Atlanta and our relocation to larger offices in our newer markets of Nashville and Charleston during 2015, accelerating depreciation of leasehold improvements in anticipation of our move to our new headquarters building being constructed in Birmingham, and our new office in Tampa, Florida. Professional services expense increased $1.4 million, or 53.8%, to $4.0 million in 2016 compared to 2015. Most of this increase is the result of legal accruals for pending litigation in which we are defendants, which amounted to $1.1 million in 2016. FDIC assessments were up $0.7 million, or 25.9%, to $3.4 million in 2016 from $2.7 million in 2015, a result of increases in total assets, which is the major component of our assessment base, and higher assessment rates implemented by the FDIC starting with the second quarter of 2016 assessment. Expenses on other real estate owned decreased $0.4 million, or 33.3%, to $0.8 million in 2016 compared to 2015, a result of fewer properties owned during 2016. Other operating expenses increased $0.8 million, or 4.0%, to $20.9 million in 2016 compared to 2015. Higher data processing and loan expenses were the result of our organic growth and expansion into the Tampa, Florida region. Higher service charges from the Federal Reserve Bank of Atlanta were the result of increased processing of transactions by us for our correspondent banking clients. Changes in other operating expenses from 2015 to 2016 are detailed in Note 17, “Other Operating Income and Expenses,” to the Consolidated Financial Statements. Noninterest expenses increased $16.7 million, or 29.1%, to $74.0 million for the year ended December 31, 2015 from $57.3 million for the year ended December 31, 2014. This increase is largely attributable to increased salary and employee benefits expense and the write-down of investments in tax credit partnerships. Increases in salary and benefit expenses occurred as a result of Metro employees coming over in February 2015, staff additions related to our expansion into other new markets, increased incentive pay and general merit increases, offset by non-routine expenses in 2014 associated with the correction of accounting for vested stock options and acceleration of vesting of stock options previously granted to members of our advisory boards in our markets as explained further below. We had 371 full-time equivalent employees at December 31, 2015 compared to 298 at December 31, 2014, a 24.5% increase. The increase in number of employees is the result of Metro employees coming over, our continued expansion into new markets, additional sales and sales support staff in our existing regional markets and added support staff in our headquarters in Birmingham. Equipment and occupancy expense increased $0.8 million, or 15.2%, to $6.4 million in 2015 compared to $5.5 million in 2014. This increase is the result of the addition of the Metro Bank offices, our new office in the Cobb Galleria area of Atlanta and our relocation to larger offices in our newer markets of Nashville and Charleston. FDIC assessments were up $0.6 million, or 27.0%, to $2.7 million in 2015 from $2.1 million in 2014, mostly a result of increases in total assets, which is the major component of our assessment base. We incurred $2.1 million in expenses related to our acquisition and merger of Metro during 2015. Other operating expenses increased $5.5 million, or 36.8%, to $20.5 million in 2015 compared to $15.0 million in 2014. Write-downs and losses of our investments in tax credit partnerships were $4.1 million in 2015 in connection with tax credits recognized during the year. This compared to write-downs and losses in 2014 of $2.8 million. Tax credits increased by $2.0 million in 2015 compared to 2014, which is reflected in a lower effective tax rate for 2015. Changes in other operating expenses from 2014 to 2015 are detailed in Note 17, “Other Operating Income and Expenses,” to the Consolidated Financial Statements. Income Tax Expense Income tax expense was $29.3 million for the year ended December 31, 2016 compared to $25.5 million in 2015 and $21.6 million in 2014. Our effective tax rates for 2016, 2015 and 2014 were 26.47%, 28.61% and 29.20%, respectively. The decrease in the effective tax rate for 2015 and 2016 primarily relates to historic rehabilitation tax credits recognized in those years. Our primary permanent differences are related to tax exempt income on debt securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance. We have invested $102.5 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 own real estate investment trusts for the purpose of holding and managing participations in residential mortgages and commercial real estate loans originated by the bank. The trusts are majority-owned subsidiaries of a trust holding company, which in turn is a wholly-owned subsidiary of the bank. The trusts earn interest income on the loans they hold and incur operating expenses related to their activities. They pay their net earnings, in the form of dividends, to the bank, which receives a deduction for state income taxes. 45 Financial Condition Assets Total assets at December 31, 2016, were $6.4 billion, an increase of $1.3 billion, or 25.5%, over total assets of $5.1 billion at December 31, 2015. Average assets for the year ended December 31, 2016 were $5.7 billion, an increase of $1.1 billion, or 23.9%, over average assets of $4.6 billion for the year ended December 31, 2015. Loan growth was the primary reason for the increase in ending and average total assets. Year-end 2016 loans were $4.9 billion, up $0.7 billion, or 16.7%, over year-end 2015 total loans of $4.2 billion. Total assets at December 31, 2015, were $5.1 billion, an increase of $1.0 billion, or 24.4%, over total assets of $4.1 billion at December 31, 2014. Average assets for the year ended December 31, 2015 were $4.6 billion, an increase of $0.8 billion, or 21.1%, over average assets of $3.8 billion for the year ended December 31, 2014. Loan growth was the primary reason for the increase in ending and average total assets. Year-end 2015 loans were $4.2 billion, up $0.8 billion, or 23.5%, over year-end 2014 total loans of $3.4 billion. Earning assets include loans, securities, short-term investments and bank-owned life insurance contracts. We maintain a higher level of earning assets in our business model than do our peers because we allocate fewer of our resources to facilities, ATMs, cash and due-from-bank accounts used for transaction processing. Earning assets at December 31, 2016 were $6.2 billion, or 96.9% of total assets of $6.4 billion. Earning assets at December 31, 2015 were $5.0 billion, or 98.0% of total assets of $5.1 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, 2016, mortgage-backed securities represented 51% of the investment portfolio, state and municipal securities represented 30% of the investment portfolio, U.S. Treasury and government agencies represented 9% of the investment portfolio, and corporate debt represented 10% 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, 2016, any structured investment vehicles or any private-label mortgage-backed securities. The amortized cost of securities in our portfolio totaled $485.9 million at December 31, 2016, compared to $365.7 million at December 31, 2015. The following table presents the amortized cost of securities available for sale and held to maturity by type at December 31, 2016, 2015 and 2014. 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 Corporate debt Total 2016 December 31, 2015 (In Thousands) 2014 $ $ $ $ 45,998 228,843 139,504 8,985 423,330 19,164 5,888 37,512 62,564 $ $ $ $ 44,581 135,363 143,403 14,902 338,249 21,666 5,760 - 27,426 $ $ $ $ 50,363 92,439 132,780 15,821 291,403 23,804 5,551 - 29,355 The following table presents the amortized cost of our securities as of December 31, 2016 by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the taxable equivalent yields for each maturity range. 46 At December 31, 2016: Securities Available for Sale: U.S. Treasury and government agencies Mortgage-backed securities State and municipal securities Corporate debt Total Tax-equivalent Yield (1) 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 Corporate debt Total Tax-equivalent Yield (1) Mortgage-backed securities State and municipal securities Corporate debt Weighted average yield Maturity of Debt Securities - Amortized Cost Less Than One Year One Year through Five Years Six Years through Ten Years More Than Ten Years Total (In Thousands) $ $ $ $ $ $ $ $ 2,994 28 16,290 8,985 28,297 2.17% 5.24 3.63 1.92 2.93% - - - - -% - - -% $ $ $ $ 39,826 5,131 112,521 - 157,478 1.92% 3.41 3.04 - 2.77% - 250 - 250 -% 1.60 - 1.60% $ $ $ $ 3,178 34,271 10,693 - 48,142 1.77% 2.29 3.84 - 2.60% - 738 33,512 34,250 -% 4.90 5.38 5.37% $ $ $ $ - 189,413 - - 189,413 -% 2.12 - - 2.12% 19,164 4,900 4,000 28,064 2.93% 6.01 5.75 3.87% 45,998 228,843 139,504 8,985 423,330 1.93% 2.17 3.17 1.92 2.47% 19,164 5,888 37,512 62,564 2.93% 5.68 5.42 4.68% (1) Yields are presented on a fully-taxable equivalent basis using a tax rate of 35%. At December 31, 2016, we had $160.4 million in federal funds sold, compared with $34.8 million at December 31, 2015. At year-end 2016, 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 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 $4.9 billion at December 31, 2016. The following table shows the percentage of our total loan portfolio assigned to each of our markets. A large majority of our loan customers are located within our market MSAs, and so is the collateral for their loans. 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, AL Huntsville, AL Dothan, AL Montgomery, AL Mobile, AL Total Alabama Markets Pensacola, FL Tampa Bay, FL Total Florida Markets Nashville, TN Atlanta, GA Charleston, SC 47 Percentage of Total Loans Assigned to Market 44% 10% 10% 7% 6% 77% 7% 1% 8% 8% 4% 3% The following table details our loans at December 31, 2016, 2015, 2014, 2013 and 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 Loans Less: Allowance for loan losses Net Loans 2016 2015 2014 (Dollars in Thousands) 2013 2012 1,982,267 335,085 $ 1,760,479 243,267 $ 1,504,652 208,769 $ 1,285,878 151,868 $ 1,036,618 158,361 1,171,719 536,805 830,683 2,539,207 55,211 4,911,770 (51,893) 4,859,877 $ 1,014,669 444,134 698,779 2,157,582 55,047 4,216,375 (43,419) 4,172,956 $ 793,917 333,455 471,363 1,598,735 47,702 3,359,858 (35,629) 3,324,229 $ 710,372 278,621 391,396 1,380,389 40,733 2,858,868 (30,663) 2,828,205 $ 568,041 235,909 323,599 1,127,549 40,654 2,363,182 (26,258) 2,336,924 $ $ The following table details the percentage composition of our loan portfolio by type at December 31, 2016, 2015, 2014, 2013 and 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 Loans 2016 2015 2014 2013 2012 40.36% 6.82 23.86 10.93 16.91 51.70 1.12 100.00% 41.75% 5.77 24.07 10.53 16.57 51.17 1.31 100.00% 44.78% 6.21 23.63 9.92 14.03 47.58 1.43 100.00% 44.98% 5.31 24.85 9.74 13.69 48.28 1.43 100.00% 43.87% 6.70 24.04 9.98 13.69 47.71 1.72 100.00% The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2016: 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 $ $ $ $ 868,229 153,377 $ (in Thousands) 946,565 153,488 $ 167,473 28,220 $ 752,525 229,754 543,203 1,525,482 25,358 2,650,893 1,662,103 988,790 2,650,893 $ $ $ 304,902 202,441 152,279 659,622 1,003 856,318 457,824 398,494 856,318 $ $ $ $ 114,292 104,610 135,201 354,103 28,850 1,404,559 340,909 1,063,650 1,404,559 48 $ $ $ 1,982,267 335,085 1,171,719 536,805 830,683 2,539,207 55,211 4,911,770 (51,893) 4,859,877 2,460,836 2,450,934 4,911,770 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 2016 was 0.11%, compared to 0.13% for 2015. 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 Net charge-offs Provision for loan losses charged to expense Analysis of the Allowance for Loan Losses 2015 2016 2014 (Dollars in Thousands) 2013 2012 $ 43,419 $ 35,629 $ 30,663 $ 26,258 $ 22,030 (3,791) (815) (2) (269) (109) (380) (212) (5,198) 49 76 - 114 32 146 3 274 (3,802) (667) (211) (446) (447) (1,104) (171) (5,744) 279 238 - 169 - 169 1 687 (2,311) (1,267) (36) (1,529) (400) (1,965) (228) (5,771) 48 322 - 65 9 74 34 478 (1,932) (4,829) (1,100) (941) - (2,041) (210) (9,012) 66 296 32 4 - 36 11 409 (1,106) (3,088) (250) (311) (99) (660) (901) (5,755) 125 58 - 692 - 692 8 883 (4,924) 13,398 (5,057) 12,847 (5,293) 10,259 (8,603) 13,008 (4,872) 9,100 Allowance for loan losses at end of period $ 51,893 $ 43,419 $ 35,629 $ 30,663 $ 26,258 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 0.11% 0.30% 1.06% 237.23% 0.13% 0.34% 1.03% 329.96% 0.17% 0.34% 1.06% 210.95% 0.33% 0.50% 1.07% 135.70% 0.24% 0.45% 1.11% 130.77% 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, 2016. 49 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. 2016 2015 For the Years Ended December 31, 2014 2013 2012 Percentage of loans in each category to total loans Percentage of loans in each category to total loans Amount Amount Percentage of loans in each category to total loans Amount (Dollars in Thousands) Percentage of loans in each category to total loans Percentage of loans in each category to total loans Amount Amount $ 28,872 40.36% $ 21,495 41.75% $ 16,079 44.78% $ 13,576 44.98% $ 11,061 43.87% 5,125 17,504 392 51,893 6.82 51.70 1.12 100.00% $ 5,432 16,061 431 43,419 5.77 51.17 1.31 100.00% $ 6,395 12,112 1,043 35,629 6.21 47.58 1.43 100.00% $ 6,078 10,065 944 30,663 5.31 48.28 1.43 100.00% $ 6,907 7,964 326 26,258 6.70 47.71 1.72 100.00% Commercial, financial and agricultural Real estate - construction Real estate - mortgage Consumer 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 examination process. As of December 31, 2016, we had impaired loans of $45.6 million, an increase of $12.1 million from $33.5 million as of December 31, 2015. We allocated $8.2 million of our allowance for loan losses at December 31, 2016 to these impaired loans compared to $5.7 million at December 31, 2015. We had previous write- downs against impaired loans of $5.7 million at December 31, 2016, compared to $2.9 million at December 31, 2015. The recorded investment in impaired loans at December 31, 2016 is also inclusive of a purchase loan discount associated with the acquisition of Metro Bank totaling $0.2 million. The average recorded balance for 2016 of impaired loans was $45.7 million. 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. Our credit administration group performs verification and testing to ensure appropriate identification of impaired loans and that proper reserves are allocated to these loans. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. If further credit deterioration occurs and the criteria for nonaccrual status is met, all interest accrued but not collected is reversed against current interest income. Loans included as impaired and in nonaccrual status totaled $10.6 million at December 31, 2016, an increase of $2.8 million compared to $7.8 million at December 31, 2015. Interest income foregone throughout the year on nonaccrual loans was $516,000, and we recognized $629,000 of interest income on nonaccrual loans for the year ended December 31, 2016, compared to interest income foregone in 2015 of $678,000 and $602,000 of interest income recognized on nonaccrual loans for the year ended December 31, 2015. Of the $45.6 million of impaired loans reported as of December 31, 2016, $27.9 million were commercial and industrial loans, $13.4 million were real estate mortgage loans, $4.3 million were real estate construction loans and $3,000 were consumer loans. Of the $4.3 million of impaired real estate construction loans, $2.7 million were residential construction loans. The bank has procedures and processes in place intended to ensure that losses do not exceed the potential amounts documented in the bank’s impairment analyses and reduce potential losses in the remaining performing loans within our real estate construction portfolio. These include the following: (cid:120) We closely monitor the past due and overdraft reports on a weekly basis to identify deterioration as early as possible and the placement of identified loans on the watch list. (cid:120) 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. (cid:120) We require updated financial information, global inventory aging and interest carry analysis for existing customers to help identify potential future loan payment problems. (cid:120) 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. 50 Nonperforming Assets The table below summarizes our nonperforming assets at December 31, 2016, 2015, 2014, 2013 and 2012: 2014 2015 2016 Balance Number of Loans Balance Number of Loans Number of Loans Balance (Dollars in Thousands) 2013 2012 Balance Number of Loans Balance Number of Loans Nonaccrual loans: Commercial, financial and agricultural Real estate - construction Real estate - mortgage: Owner-occupied commercial 1-4 family mortgage Other mortgage Total real estate - mortgage Consumer Total nonaccrual loans 90+ days past due and accruing: Commercial, financial and agricultural Real estate - construction Real estate - mortgage: Owner-occupied commercial 1-4 family mortgage Other mortgage Total real estate - mortgage Consumer Total 90+ days past due and accruing Total nonperforming loans Plus: Other real estate owned and repossessions Total nonperforming assets Restructured accruing loans: Commercial, financial and agricultural Real estate - construction Real estate - mortgage: Owner-occupied commercial 1-4 family mortgage Other mortgage Total real estate - mortgage Consumer Total restructured accruing loans Total nonperforming assets and restructured accruing loans Gross interest income foregone on nonaccrual loans throughout year Interest income recognized on nonaccrual loans throughout year Ratios: Nonperforming loans to total loans Nonperforming assets to total loans plus other real estate owned and repossessions Nonperforming assets and restructured accruing loans to total loans plus other real estate owned and repossessions $ $ $ (1) $ $ $ $ $ $ $ $ 7,282 3,268 - 74 - 74 - 10,624 10 - 6,208 - - 6,208 45 6,263 16,887 4,988 21,875 354 - - - 204 204 - 558 13 5 - 1 - 1 - 19 1 - 1 - - 1 10 12 31 12 43 1 - - - 1 1 - 2 $ $ $ 1,918 4,000 - 198 1,619 1,817 31 7,766 - - - - - - 1 1 7,767 5,392 $ 13,159 $ $ $ 6,618 - - - 253 253 - 6,871 $ 7 7 - 2 5 7 1 22 - - - - - - 1 1 23 18 41 8 - - - 1 1 - 9 22,433 45 $ 20,030 50 516 629 0.34% 0.44% 0.46% $ $ 678 602 0.18% 0.31% 0.47% $ $ $ $ $ $ $ $ $ $ $ 172 5,049 683 1,596 959 3,238 666 9,125 925 - - - - - - 925 10,050 6,840 16,890 6,632 - - - 1,663 1,663 - 8,295 25,185 750 255 0.30% 0.50% 0.75% 2 19 3 2 1 6 2 29 - - - - - - 4 4 33 38 71 2 15 3 5 1 9 - 26 97 4 11 2 3 1 6 4 25 1 - - - - - - 1 26 22 48 8 - - - 2 2 - 10 58 $ $ $ 1,714 3,749 1,435 1,878 243 3,556 602 9,621 - - - 19 - 19 96 115 9,736 12,861 $ 22,597 $ $ $ $ 962 217 - 8,225 285 8,510 - 9,689 9 14 3 3 1 7 4 34 - - - 1 - 1 1 2 36 51 87 2 1 - 2 1 3 - 6 $ 276 6,460 2,786 453 240 3,479 135 $ 10,350 $ - - - - - - 8 $ 8 $ 10,358 9,721 $ 20,079 $ $ 1,168 3,213 3,121 1,709 302 5,132 - 9,513 $ 32,286 93 $ 29,592 $ $ 972 433 $ $ 850 155 0.34% 0.85% 1.12% 0.44% 0.85% 1.25% (1) $6.2 million commercial real estate loan that carries a 70% guarantee from the United States Department of Agriculture (USDA). The loan has paid current as of the date of this report and represents 28% of total nonperforming assets at December 31, 2016. 51 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. As of December 31, 2016, one commercial real estate loan with a balance of $6.2 million, of which 70% is guaranteed by the United States Department of Agriculture, was past due more than 90 days and still accruing interest. This loan, which comprises 28% of total nonperforming assets, has paid current as of the date of this report. 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. 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 December 31, 2016, 2015 and 2014: Types of Deposits: Non-interest-bearing demand deposits Interest-bearing demand deposits Money market accounts Savings accounts Time deposits, $250,000 and under Time deposits, over $250,000 Total deposits 2016 Average Deposits Average for Years Ended December 31, 2015 Average Balance Average Rate Paid Average Balance Average Rate Paid (Dollars in Thousands) 2014 Average Balance Average Rate Paid $ $ 1,190,372 697,109 2,308,065 44,521 238,565 274,618 4,753,250 -% $ 0.36% 0.54% 0.31% 0.92% 1.07% $ 944,019 584,756 1,786,045 37,683 237,086 241,730 3,831,319 -% $ 0.28% 0.46% 0.29% 0.98% 1.04% $ 723,338 489,210 1,523,120 26,480 209,361 191,821 3,163,330 -% 0.26% 0.44% 0.28% 1.04% 1.09% 52 The following table presents the maturities of our certificates of deposit as of December 31, 2016 and 2015. At December 31, 2016 Maturity Three months or less Over three through six months Over six months through one year Over one year Total At December 31, 2015 Maturity Three months or less Over three through six months Over six months through one year Over one year Total Over $250,000 (In Thousands) Less than or equal to $250,000 Total $ $ $ $ 39,050 33,207 70,802 150,607 293,666 $ $ 45,136 38,601 62,695 87,725 234,157 Over $250,000 (In Thousands) Less than or equal to $250,000 40,265 36,578 66,098 122,541 265,482 $ $ 41,128 45,128 65,463 85,242 236,961 $ $ $ $ 84,186 71,808 133,497 238,332 527,823 Total 81,393 81,706 131,561 207,783 502,443 Total average deposits for the year ended December 31, 2016 were $4.8 billion, an increase of $1.0 billion, or 24.1%, over total average deposits of $3.8 billion for the year ended December 31, 2015. Average noninterest-bearing deposits increased by $0.3 billion, or 26.1%, from $0.9 billion for the year ended December 31, 2015 to $1.2 billion for the year ended December 31, 2016. Total average deposits for the year ended December 31, 2015 were $3.8 billion, an increase of $0.6 billion, or 18.8%, over total average deposits of $3.2 billion for the year ended December 31, 2014. Average noninterest-bearing deposits increased by $0.2 billion, or 28.6%, from $0.7 billion for the year ended December 31, 2014 to $0.9 billion for the year ended December 31, 2015. Borrowed Funds We had available $378.0 million in unused federal funds lines of credit with regional banks as of December 31, 2016, compared to $180.0 million as of December 31, 2015. The increase was attributable to additional lines of credit initiated with new banks during 2016. These lines are subject to certain restrictions and in some cases collateral requirements. Federal funds purchased from correspondent banks of $433.7 million, $272.0 million and $202.6 million for 2016, 2015 and 2014, respectively. We paid average interest rates on these funds of 0.64%, 0.32% and 0.28% for the same three years, respectively. The maximum amount outstanding at month-end during 2016 and 2015 was $514.8 million and $352.4 million, respectively. Stockholders’ Equity Stockholders’ equity increased $73.8 million during 2016, to $522.9 million at December 31, 2016 from $449.1 million at December 31, 2015. The increase in stockholders’ equity resulted from net income of $81.5 million during the year ended December 31, 2016. 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. 53 The following table sets forth our credit arrangements and financial instruments whose contract amounts represent credit risk as of December 31, 2016, 2015 and 2014: Commitments to extend credit Credit card arrangements Standby letters of credit and financial guarantees Total 2016 2015 (In Thousands) 2014 1,667,015 100,678 40,991 1,808,684 $ $ 1,409,425 62,462 38,224 1,510,111 $ $ 1,156,682 45,155 33,280 1,235,117 $ $ 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, 2016 and 2015 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 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, 2016, our gap was within such ranges. See “—Quantitative and Qualitative Analysis of Market Risk” below in Item 7A for additional information. 54 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, 2016, our liquid assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $1.0 billion. Additionally, at such date we had available to us approximately $378.0 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. 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. 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. We also may continue periodic offerings of debt and equity securities. The following table reflects the contractual maturities of our term liabilities as of December 31, 2016. 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 Total 1 year or less Payments due by Period Over 1 - 3 years (In Thousands) Over 3 - 5 years Over 5 years $ $ 4,892,488 527,823 355,944 55,350 20,510 5,852,115 $ $ 4,892,488 289,491 355,944 - 3,986 5,541,909 $ $ - 169,883 - 600 6,984 177,467 $ $ - 66,103 - - 4,442 70,545 $ $ - 2,346 - 54,750 5,098 62,194 (1) Excludes interest. (2) Certificates of deposit give customers the right to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. Capital Adequacy As of December 31, 2016, 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 common equity tier 1 risk-based, Tier 1 risk-based, total 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, 2016. In addition, the Alabama Banking Department has required that the bank maintain a leverage ratio of 8.00%. 55 The following table sets forth (i) the capital ratios of the bank required by the FDIC to maintain “well-capitalized” status and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of December 31, 2016. CET 1 Capital Ratio Tier 1 Capital Ratio Total Capital Ratio Leverage ratio Well-Capitalized Actual at December 31, 2016 6.50% 8.00% 10.00% 5.00% 10.77% 10.78% 11.79% 9.06% For a description of capital ratios see Note 16 to “Notes to Consolidated Financial Statements.” Impact of Inflation Our consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation. Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and stockholders’ equity. Mortgage originations and refinancing tend to slow as interest rates increase, and likely will reduce our volume of such activities and the income from the sale of residential mortgage loans in the secondary market. Adoption of Recent Accounting Pronouncements New accounting standards are discussed in Note 1 to “Notes to Consolidated Financial Statements.” ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Like all financial institutions, we are subject to market risk from changes in interest rates. Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate- sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short term rates may be rising while longer term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates. To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall, or remain the same. Our asset liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next twelve months. The asset liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors. The asset liability committee employs multiple modeling scenarios to analyze the maturities of rate-sensitive assets and liabilities. The model measures the “gap” which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than “one,” the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 10% if interest rates change 100 basis points or more than 15% if interest rates change 200 basis points. As of December 31, 2016, our gap was within such ranges. 56 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, 2016. Management uses the one-year gap as the appropriate time period for setting strategy. 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 1-3 Months Rate Sensitive Gap Analysis 4-12 Months 1-5 Years (Dollars in Thousands) Over 5 Years Total $ $ $ $ $ 2,512,235 32,055 158,950 566,707 3,269,947 799,577 2,811,340 84,182 355,944 100 4,051,143 (781,196) (781,196) $ $ $ $ $ 443,125 56,569 - - 499,694 - - 205,295 - 300 205,595 294,099 (487,097) $ $ $ $ $ 1,721,690 306,475 1,485 - 2,029,650 - - 235,968 - 200 236,168 1,793,482 1,306,385 $ $ $ $ $ 239,395 90,864 - - 330,259 - - 2,344 - 54,662 57,006 273,253 1,579,638 $ $ $ $ $ 4,916,445 485,963 160,435 566,707 6,129,550 799,577 2,811,340 527,789 355,944 55,262 4,549,912 1,579,638 - (12.7)% (7.9)% 21.3% 25.8% 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 percentage 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 until the Federal Reserve increased its target rate by 0.25% to 0.50% in December 2015 and again by 0.25% to 0.75% in December 2016. At December 31, 2016, the negative 1.95% change for a 200 basis points rate change is well within the regulatory guidance range. The chart below identifies the EVE impact of an upward shift in rates of 100 and 200 basis points. Economic Value of Equity Under Rate Shock At December 31, 2016 Economic value of equity Actual dollar change Percent change 0 bps +100 bps (Dollars in Thousands) $ 522,889 $ 520,641 $ (2,248) +200 bps $ $ 512,693 (10,196) (0.43)% (1.95)% The one year gap ratio of negative 7.9% 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 decrease 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. 57 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, 2016 and 2015 Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 Notes to Consolidated Financial Statements 58 Page 59 60 61 62 63 64 65 66 67 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders ServisFirst Bancshares, Inc. We have audited the accompanying consolidated balance sheets of ServisFirst Bancshares, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company early adopted the provisions of Accounting Standards Update 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the year ended December 31, 2016. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal controls over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2017, expressed an unqualified opinion thereon. /s/ Dixon Hughes Goodman LLP Atlanta, Georgia February 28, 2017 59 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, 2016. 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 (2013). Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2016, based on these criteria. The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on the following page. SERVISFIRST BANCSHARES, INC. /s/THOMAS A. BROUGHTON, III THOMAS A. BROUGHTON, III President and Chief Executive Officer /s/WILLIAM M. FOSHEE WILLIAM M. FOSHEE Chief Financial Officer by by 60 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders ServisFirst Bancshares, Inc. We have audited internal control over financial reporting of ServisFirst Bancshares, Inc. and subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) 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 financial statements of ServisFirst Bancshares, Inc. and subsidiaries as of December 31, 2016 and 2015, and for each of the years in the three-year period ended December 31, 2016, and our report dated February 28, 2017, expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company’s early adoption of the provisions of Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the year ended December 31, 2016. /s/ Dixon Hughes Goodman LLP Atlanta, Georgia February 28, 2017 61 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2016 December 31, 2015 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 $63,302 and $27,910 at December 31, 2016 and 2015, respectively) 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 and repossessed assets Bank owned life insurance contracts Goodwill and other identifiable intangible assets Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest-bearing demand Interest-bearing Total deposits Federal funds purchased Other borrowings Accrued interest and dividends 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; no shares authorized or outstanding at December 31, 2016, and 40,000 shares authorized, no shares issued and outstanding at December 31, 2015 Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at December 31, 2016, and 1,000,000 authorized and 960,000 shares undesignated at December 31, 2015 Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,636,896 shares issued and outstanding at December 31, 2016, and 51,945,396 shares issued and outstanding at December 31, 2015 Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Total stockholders' equity attributable to ServisFirst Bancshares, Inc. Noncontrolling interest Total stockholders' equity Total liabilities and stockholders' equity See Notes to Consolidated Financial Statements 62 $ $ $ $ 56,855 566,707 160,435 783,997 422,375 62,564 1,024 4,675 4,911,770 (51,893) 4,859,877 40,314 15,801 27,132 4,988 114,388 14,996 18,317 6,370,448 1,281,605 4,138,706 5,420,311 355,944 55,262 4,401 11,641 5,847,559 - - 53 215,932 307,151 (624) 522,512 377 522,889 6,370,448 $ $ $ $ 46,614 270,836 34,785 352,235 342,938 27,426 4,954 8,249 4,216,375 (43,419) 4,172,956 19,434 13,698 23,425 5,392 91,594 15,330 17,878 5,095,509 1,053,467 3,170,421 4,223,888 352,360 55,637 2,369 12,108 4,646,362 - - 26 211,546 234,150 3,048 448,770 377 449,147 5,095,509 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) 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 (losses) 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 Merger 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 2016 Year Ended December 31, 2015 2014 $ $ $ $ 200,463 5,343 3,300 1,007 2,789 212,902 20,169 5,636 25,805 187,097 13,398 173,699 5,355 3,725 (3) 2,794 6,241 18,112 43,955 7,985 3,977 3,400 759 - 20,917 80,993 110,818 29,339 81,479 47 81,432 1.55 1.52 $ $ $ $ 171,302 4,331 3,499 127 716 179,975 14,894 2,810 17,704 162,271 12,847 149,424 5,088 2,682 29 2,621 3,157 13,577 38,913 6,389 2,607 2,660 1,227 2,100 20,100 73,996 89,005 25,465 63,540 280 63,260 1.23 1.20 $ $ $ $ 136,066 4,497 3,489 159 514 144,725 12,420 1,699 14,119 130,606 10,259 120,347 4,265 2,047 3 2,280 2,371 10,966 31,017 5,547 2,435 2,094 1,533 - 14,709 57,335 73,978 21,601 52,377 431 51,946 1.09 1.05 63 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (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 tatatax tax of $(1,980), $(767) and $316 for 2016, 2015 and 2014, respectively Reclassification adjustment for net losses (gains) on sale of securities in net income, net of tax of $(1), $10 and $1 for 2016, 2015 and 2014, respectively Other comprehensive (loss) income, net of tax Comprehensive income See Notes to Consolidated Financial Statements 64 2016 Year Ended December 31, 2015 2014 81,479 $ 63,540 $ 52,377 (3,674) 2 (3,672) 77,807 $ (1,423) (19) (1,442) 62,098 $ 601 (2) 599 52,976 $ $ SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In thousands, except share amounts) Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Noncontrolling Interest Total Stockholders' Equity Balance, December 31, 2013 $ Common dividends paid, $0.08 per share Common dividends declared, $0.03 per share Preferred dividends paid 3-for-1 common stock split, in the form of a stock dividend Issue 3,750,000 shares of common stock, net of issuance cost of $4,777 Issue 250 shares of REIT preferred stock Exercise 1,767,966 stock options and warrants, including tax benefit of $971 Stock based compensation expense Other comprehensive income, net of tax Net income Balance, December 31, 2014 Common dividends paid, $0.09 per share Common dividends declared, $0.03 per share Preferred dividends paid Issue 1,273,184 shares of common stock as consideration for Metro Bancshares, Inc. acquisition Capitalized costs to issue shelf registration Issue 1,051,000 shares of common stock upon exercise of stock options Excess tax benefit on exercise and vesting of stock options Issue 125 shares of REIT preferred stock Redeem 40,000 shares of preferred stock issued to the Department of the Treasury under TARP Stock based compensation expense Other comprehensive income, net of tax Net income Balance, December 31, 2015 Common dividends paid, $0.12 per share Common dividends declared, $0.04 per share Preferred dividends paid 2-for-1 common stock split, in the form of a stock dividend Issue 682,500 shares of common stock upon exercise of stock options Stock-based compensation expense Other comprehensive income Net income Balance, December 31, 2016 $ See Notes to Consolidated Financial Statements $ 39,958 - - - - - - - - - - 39,958 - - - - - - - - (39,958) - - - - - - - - - - - - - $ 7 - - - 17 1 - - - - - 25 - - - 1 - - - - - - - - 26 - - - 27 - - - - 53 $ $ 123,325 - - - $ 130,011 (3,609) (1,240) (431) $ 3,891 - - - - - - - - 599 - 4,490 - - - - - - - - - - (1,442) - 3,048 - - - - - - (3,672) - (624) $ - (17) 52,075 - 6,316 3,681 - - 185,397 - - - 19,355 (73) 3,801 1,843 - (42) 1,265 - - 211,546 - - - - - - - - 52,377 177,091 (4,643) (1,558) (280) - - - - - - - - 63,540 234,150 (6,299) (2,105) (47) - (27) 3,188 1,198 - - 215,932 $ - - - 81,479 307,151 $ $ 65 - - - - - - 250 - - - 2 252 - - - - - - - 125 - - - - 377 - - - - - - - - 377 $ $ 297,192 (3,609) (1,240) (431) - 52,076 250 6,316 3,681 599 52,379 407,213 (4,643) (1,558) (280) 19,356 (73) 3,801 1,843 125 (40,000) 1,265 (1,442) 63,540 449,147 (6,299) (2,105) (47) - 3,188 1,198 (3,672) 81,479 522,889 SERVISFIRST BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by Deferred tax benefit Provision for loan losses Depreciation Accretion on acquired loans Amortization of core deposit intangible Net amortization of debt securities available for sale Increase in accrued interest and dividends receivable Stock-based compensation expense Increase in accrued interest payable Proceeds from sale of mortgage loans held for sale Originations of mortgage loans held for sale Loss (gain) on sale of securities available for sale Gain on sale of mortgage loans held for sale Net (gain) loss on sale of other real estate owned and repossessed assets Write down of other real estate owned and repossessed assets Losses of tax credit partnerships Increase in cash surrender value of life insurance contracts 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 Proceeds from the sale of debt securities available for sale Purchase of securities held to maturity Proceeds from maturities, calls and paydowns of securities held to maturity Purchase of equity securities Proceeds from sale of equity securities Increase in loans Purchase of premises and equipment Purchase of bank-owned life insurance Expenditures to complete construction of other real estate owned Proceeds from sale of other real estate owned and repossessed assets Investment in tax credit partnerships Net cash paid in acquisition of Metro Bancshares, Inc. Net cash used in investing activities FINANCING ACTIVITIES Net increase in non-interest-bearing deposits Net increase in interest-bearing deposits Net increase in federal funds purchased Proceeds from issuance of 5% subordinated notes due July 15, 2025 Redemption of Series A Senior Non-Cumulative preferred stock Proceeds from sale of common stock, net Repayment of Federal Home Loan Bank advances Proceeds from sale of preferred stock, net Proceeds from exercise of stock options and warrants Capitalized costs to issue shelf registration Dividends paid on common stock Dividends paid on preferred stock Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year SUPPLEMENTAL DISCLOSURE Cash paid for: Interest Income taxes NONCASH TRANSACTIONS Other real estate acquired in settlement of loans Internally financed sales of other real estate owned Dividends declared Fair value of assets and liabilities from acquisition: Fair value of tangible assets acquired Other intangible assets acquired 2016 Year Ended December 31, 2015 2014 $ 81,479 $ 63,540 $ 52,377 (1,728) 13,398 2,724 (980) 334 4,197 (2,103) 1,198 2,032 130,131 (122,832) 3 (3,725) (18) 603 202 (2,794) (3,600) 98,521 (157,483) 65,347 6,085 (38,139) 3,001 (708) 4,628 (700,857) (22,205) (20,000) (3) 1,340 (2,655) - (861,649) 228,138 968,285 3,584 - - - (400) - 3,188 - (7,858) (47) 1,194,890 431,762 352,235 783,997 23,773 29,339 4,112 2,592 2,105 - - $ $ $ $ $ $ $ $ (4,876) 12,847 2,219 (1,954) 376 4,713 (2,000) 1,265 340 137,020 (136,603) (29) (2,682) 136 643 152 (2,621) 3,781 76,267 (81,781) 46,271 16,738 (202) 2,131 (534) - (710,917) (5,537) - (118) 3,428 (6,576) (12,383) (749,480) 195,729 454,245 85,870 34,750 (40,000) - (300) 125 3,801 (73) (5,883) (280) 727,984 54,771 297,464 352,235 17,275 27,063 2,092 1,799 1,558 204,985 15,707 $ $ $ $ (5,021) 10,259 1,838 - - 3,247 (952) 3,681 1,171 107,678 (103,481) (3) (2,047) 413 811 207 (2,280) (2,812) 65,086 (65,398) 32,833 173 - 2,919 - 320 (508,026) (1,307) (15,000) - 6,539 (2,145) - (549,092) 160,004 218,514 89,935 - - 52,076 - 250 6,316 - (3,609) (431) 523,055 39,049 258,415 297,464 12,948 27,278 2,417 675 1,240 - - Fair value of liabilities assumed Net identifiable assets acquired over liabilities assumed $ - - $ (180,410) 40,282 $ - - See Notes to Consolidated Financial Statements 66 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 has provided 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, Dothan and Mobile, Alabama, Pensacola and Tampa Bay, Florida, Atlanta, Georgia, Charleston, South Carolina and Nashville, Tennessee markets. The Bank owns all of the stock of SF Intermediate Holding Company, Inc., which, in turn, owns all of the stock of SF Holding 1, Inc., which, in turn, owns all of the common stock of the Company’s real estate investment trusts, SF Realty 1, Inc., SF FLA Realty, Inc., SF GA Realty, Inc. and SF TN Realty, Inc. More details about SF Intermediate Holding Company, Inc. and its subsidiaries are included in Note 11. 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, goodwill and other intangible assets 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 $39.2 million at December 31, 2016 and $26.6 million at December 31, 2015. 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 Equity Securities Carried at Cost Investments in restricted equity securities without a readily determinable market value are carried at cost. 67 Mortgage Loans Held for Sale The Company classifies certain residential mortgage loans as held for sale. Typically mortgage loans held for sale are sold to a third party investor within a very short time period. The loans are sold without recourse and servicing is not retained. Net fees earned from this banking service are recorded in noninterest income. In the course of originating mortgage loans and selling those loans in the secondary market, the Company makes various representations and warranties to the purchaser of the mortgage loans. 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 an insignificant level of investor repurchase demands. There were no expenses incurred as part of these buyback obligations for the years ended December 31, 2016 and 2015. 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. 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. Acquired loans are recorded at fair value at the date of acquisition, and accordingly no allowance for loan losses is transferred to the acquiring entity in connection with acquisition accounting. The fair values of loans with evidence of credit deterioration (purchased, credit impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit impaired loans. For purchased credit impaired loans, cash flows are estimated at Day 1 and discounted at a market interest rate which creates accretable yield to be recognized over the life of the loan. Contractual principal and interest payments not expected to be collected are considered non-accretable difference. Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each purchased credit impaired loan in comparison to management’s initial performance expectations. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods. 68 Acquired performing loans are accounted for using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Acquired performing loans are recorded as of the acquisition date at fair value, considering credit and other risks, with no separate allowance for loan losses account. Credit losses on the acquired performing loans are estimated in future periods based on analysis of the performing portfolio. A provision for loan losses is recognized for any further credit deterioration that occurs in these loans subsequent to the acquisition date. Fair value discounts on Day 1 are accreted as interest income over the life of the loans. Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Allowances for impaired loans are generally determined based on collateral values or the present value of the estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for losses on loans. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Foreclosed Real Estate Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property’s new basis. Any write downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in other operating expenses. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Assets which are disposed of are removed from the accounts and the resulting gains or losses are recorded in operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets (3 to 10 years). Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements. Goodwill and Other Identifiable Intangible Assets Other identifiable intangible assets include a core deposit intangible recorded in connection with the acquisition of Metro Bancshares, Inc. The core deposit intangible is being amortized over 7 years and the estimated useful life is periodically reviewed for reasonableness. The Company has recorded $13.6 million of goodwill at December 31, 2016 in connection with the acquisition of Metro Bancshares, Inc. The Company tests its goodwill for impairment annually unless interim events or circumstances make it more likely than not that an impairment loss has occurred. Impairment is defined as the amount by which the implied fair value of the goodwill is less than the goodwill’s carrying value. Impairment losses, if incurred, would be charged to operating expense. For the purposes of evaluating goodwill, the Company has determined that it operates only one reporting unit. 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. 69 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, 2016 and 2015 were not material and have not been recorded. 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. 70 Stock-Based Compensation At December 31, 2016, the Company had two stock-based compensation plans for grants of equity compensation to key employees and directors. These plans have been accounted for under the provisions of FASB ASC 718-10, Compensation – Stock Compensation with respect to employee stock options and under the provisions of FASB ASC 505-50, Equity-Based Payments to Non-Employees, with respect to non-employee stock options. Specifically, awards to employees are accounted for using the fair value based method of accounting. Stock compensation costs are recognized prospectively for all new awards granted under the stock-based compensation plans. Compensation expense related to share options is calculated using a method that is based on the underlying assumptions of the Black-Scholes-Merton option pricing model and is charged to expense over the requisite service period (e.g. vesting period). Compensation expense related to restricted stock awards is based upon the fair value of the awards on the date of grant and is charged to earnings over the requisite service period of the award. 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. Loan Commitments and Related Financial Instruments Financial instruments, which include credit card arrangements, commitments to make loans and standby letters of credit, are issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as stand-by letters of credit are considered financial guarantees in accordance with FASB ASC 460-10. The fair value of these financial guarantees is not material. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 23. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. 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, 2016, 2015 and 2014 was $544,000, $562,000 and $477,000, respectively. Advertising typically consists of local print media aimed at businesses that the Company targets as well as sponsorships of local events in which the Company’s clients and prospects are involved. Recently Adopted Accounting Pronouncements In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU were effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company awarded its first performance-based stock compensation during the first quarter of 2015, and is accounting for such award under the provisions of this amendment. In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under the ASU, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public entities, the amendments in ASU 2015-03 were effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company early adopted the amendments in ASU 2015-03 during the year ending December 31, 2015. 71 In August 2015, the FASB issue ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements: Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. The SEC staff has announced that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-15 was effective upon issuance for all entities. The Company, having early adopted the amendments in ASU 2015-03, considers the amendments in this ASU to have no effect on its consolidated financial statements. In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments modify the evaluation reporting organizations must perform to determine if certain legal entities should be consolidated as VIEs. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in ASU No. 2015-02 were effective for interim and annual reporting periods beginning after December 15, 2015. The Company holds limited partnership interests in partnerships that have bought Federal Low-Income Housing, Federal Historic Rehabilitation, and State of Alabama New Markets tax credits. The Company does not consider its interest in such partnerships to be subject to consolidation under VIE rules. In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company has adopted this ASU and will apply its provisions to future business combinations, if any. In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company elected to early adopt the provisions on this ASU during the second quarter of 2016, and retrospectively apply the changes in accounting for stock compensation back to the first quarter of 2016. In so doing, the Company has recognized a $4.8 million reduction in its provision for income taxes in 2016 related to the exercise and vesting of stock options and restricted stock. Prior to ASU 2016-09, such tax benefits were recorded as an increase to additional paid-in capital. In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. The Company has enhanced its disclosures regarding the impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures in this footnote. 72 Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU 2014-09, Revenue From Contracts With Customers (Topic 606), by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. The Company’s revenue is balanced between net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income. The Company has begun to scope its general ledger revenue items and assess its contracts with customers to identify its performance obligations and will continue to evaluate the impact of adoption on its noninterest income and on its disclosures. In January 2016, the FASB issued ASU 2016-1, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-1: (a) requires equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) requires an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company leases many of its banking offices under lease agreements it classifies as operating leases. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases. In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company is currently evaluating the impact of adopting the amendments on its consolidated financial statements. 73 In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of the amendments in this ASU on its consolidated financial statements, and is collecting data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, this ASU is not expected to have a material impact on the Company’s consolidated financial statements. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is intended to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses in order to provide stakeholders with more detailed reporting and less cost to analyze transactions. This ASU provides a screen to determine when a set of assets is not a business. It requires that when substantially all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update provide a framework to assist entities in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. The Company is currently evaluating the impact of the amendments in this ASU on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the amendments in this ASU on its consolidated financial statements. 74 NOTE 2. ACQUISITION On January 31, 2015, the Company completed its acquisition of Metro Bancshares, Inc. (“Metro”) and Metro Bank, Metro’s wholly-owned bank subsidiary, for an aggregate of $20.9 million in cash and 1,273,184 shares of Company common stock. The acquisition of Metro was the Company’s entrance into the greater Atlanta, Georgia area with two added banking offices. The following table provides a summary of the assets acquired and liabilities assumed as recorded by Metro, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. Assets acquired: Cash and cash equivalents Debt securities Equity securities Loans Allowance for loan losses Premises and equipment, net Accrued interest receivable Deferred taxes Other real estate owned Bank owned life insurance contracts Core deposit intangible Other assets Total assets acquired Deposits Federal funds purchased Other borrowings Accrued interest payable Other liabilities Total liabilities assumed Net assets acquired Consideration Paid: Cash Stock Total consideration paid Goodwill January 31, 2015 As recorded by Metro Fair value adjustments As recorded by the Company $ $ 8,543 $ 28,833 499 152,869 (1,621) 7,606 484 754 2,373 2,685 - 364 203,389 175,236 2,175 1,400 89 996 179,896 23,493 $ a b b c d e f g h - (41) - (3,874) 1,621 762 - 3,153 (25) - 2,090 - 3,686 518 - (4) - - 514 3,172 $ $ $ $ 8,543 28,792 499 148,995 - 8,368 484 3,907 2,348 2,685 2,090 364 207,075 175,754 2,175 1,396 89 996 180,410 26,665 (20,926) (19,356) (40,282) 13,617 Explanation of fair value adjustments: a- Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired debt securities portfolio. b- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses. c- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired. d- Adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial statement purposes and their basis for federal income tax purposes. e- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the other real estate owned acquired. f- Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition. g- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits. h- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the assumed debt. The estimated fair value of the purchased credit impaired loans acquired in the Metro transaction on January 31, 2015 was $5.1 million, which amount is immaterial to the Company’s consolidated financial statements. Pro forma financial information is not provided because such amounts are immaterial to the Company’s consolidated financial statements. 75 NOTE 3. DEBT SECURITIES The amortized cost and fair values of available-for-sale and held-to-maturity debt securities at December 31, 2016 and 2015 are summarized as follows: December 31, 2016 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 Corporate debt Total December 31, 2015 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 $ $ $ $ $ $ 45,998 228,843 139,504 8,985 423,330 19,164 5,888 37,512 62,564 44,581 135,363 143,403 14,902 338,249 21,666 5,760 27,426 $ $ $ $ $ $ 382 1,515 1,120 16 3,033 321 315 374 1,010 569 1,945 2,731 67 5,312 368 449 817 $ $ $ $ $ $ (126) $ (3,168) (694) - (3,988) $ (245) (12) (15) (272) $ (141) $ (354) (101) (27) (623) $ (332) (1) (333) $ 46,254 227,190 139,930 9,001 422,375 19,240 6,191 37,871 63,302 45,009 136,954 146,033 14,942 342,938 21,702 6,208 27,910 All mortgage-backed debt 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 2016 and 2015, there were no holdings of debt 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 debt securities as of December 31, 2016 and 2015 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. Debt securities available for sale Due within one year Due from one to five years Due from five to ten years Mortgage-backed securities Debt securities held to maturity Due from one to five years Due from five to ten years Due after ten years Mortgage-backed securities December 31, 2016 December 31, 2015 Amortized Cost Market Value Amortized Cost Market Value (In Thousands) $ $ $ $ 28,270 152,347 13,870 228,843 423,330 250 34,251 8,899 19,164 62,564 $ $ $ $ 28,400 153,003 13,782 227,190 422,375 250 34,617 9,195 19,240 63,302 $ $ $ $ 16,770 153,880 32,236 135,363 338,249 - 627 5,133 21,666 27,426 $ $ $ $ 16,868 156,311 32,805 136,954 342,938 - 659 5,549 21,702 27,910 The following table shows the gross unrealized losses and fair value of debt securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2016 and 2015. 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, 2016. There were no other-than-temporary impairments for the years ended December 31, 2016, 2015 and 2014. 76 Less Than Twelve Months Gross Unrealized Losses Fair Value Twelve Months or More Gross Unrealized Losses Fair Value (In Thousands) Total Gross Unrealized Losses Fair Value December 31, 2016 U.S. Treasury and government sponsored agencies Mortgage-backed securities State and municipal securities Corporate debt Total December 31, 2015 U.S. Treasury and government sponsored agencies Mortgage-backed securities State and municipal securities Corporate debt Total $ $ $ $ (126) $ (3,413) (698) (15) (4,252) $ (141) $ (354) (55) (27) (577) $ 10,865 174,225 64,502 3,034 252,626 3,886 56,609 15,464 2,961 78,920 $ $ $ $ $ - - (8) - (8) $ $ - (332) (47) - (379) $ - - 1,021 - 1,021 - 11,712 4,531 - 16,243 $ $ $ $ (126) $ (3,413) (706) (15) (4,260) $ (141) $ (686) (102) (27) (956) $ 10,865 174,225 65,523 3,034 253,647 3,886 68,321 19,995 2,961 95,163 At December 31, 2016, 5 of the Company’s 795 debt securities were in an unrealized loss position for more than 12 months. The following table summarizes information about sales of debt securities available for sale. Sale proceeds Gross realized gains Gross realized losses Net realized gain (loss) 2016 Years Ended December 31, 2015 (In Thousands) 2014 $ $ $ 6,085 $ 4 $ (7) (3) $ 16,738 $ 29 $ - 29 $ 173 3 - 3 The carrying value of debt securities pledged to secure public funds on deposits and for other purposes as required by law as of December 31, 2016 and 2015 was $246.0 million and $245.5 million, respectively. 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, (2) an investment in First National Bankers Bank stock, (3) an investment in a Community Reinvestment Act (“CRA”)-qualified mutual fund, and (4) an investment in common stock of a bank holding company that was acquired in the Metro Bancshares acquisition. The amount of investment in the Federal Home Loan Bank of Atlanta stock was $30,000 and $4.0 million at December 31, 2016 and 2015, respectively. The Company terminated its membership in the Federal Home Loan Bank of Atlanta effective November 11, 2016. The small amount of stock that remains outstanding relates to the principal reducing borrowing. The amount of investment in the First National Bankers Bank stock was $400,000 at December 31, 2016 and 2015. The amount of investment in the CRA-qualified mutual fund was $500,000 at December 31, 2016 and 2015. The amount of the investment in common stock of the bank holding company was $100,000 at December 31, 2016 and 2015. NOTE 4. LOANS The composition of loans at December 31, 2016 and 2015 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, 2016 2015 (In Thousands) 1,982,267 $ 335,085 1,171,719 536,805 830,683 2,539,207 55,211 4,911,770 (51,893) 4,859,877 $ 1,760,479 243,267 1,014,669 444,134 698,779 2,157,582 55,047 4,216,375 (43,419) 4,172,956 $ $ 77 Changes in the allowance for loan losses during the years ended December 31, 2016, 2015 and 2014, respectively are as follows: Balance, beginning of year Loans charged off Recoveries Provision for loan losses Balance, end of year $ $ 2016 Years Ended December 31, 2015 (In Thousands) 35,629 $ (5,744) 687 12,847 43,419 43,419 (5,198) 274 13,398 51,893 $ $ $ 2014 30,663 (5,771) 478 10,259 35,629 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. Inherent risks in the loan portfolio will differ based on type of loan. Specific risk characteristics by loan portfolio segment are listed below: Commercial and industrial loans include risks associated with borrower’s cash flow, debt service coverage and management’s expertise. These loans are subject to the risk that the Company may have difficulty converting collateral to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility and general collectability in a default situation. These commercial loans may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates. Real estate construction loans include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the proposed project. Construction lending is also subject to risks associated with sub-market dynamics, including population, employment trends and household income. During times of economic stress, this type of loan has typically had a greater degree of risk than other loan types. Real estate mortgage loans consist of loans secured by commercial and residential real estate. Commercial real estate lending is dependent upon successful management, marketing and expense supervision 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. Residential real estate lending risks are generally less significant than those of other loans. Real estate lending risks include fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems. Consumer loans 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. 78 The following table presents an analysis of the allowance for loan losses by portfolio segment as of December 31, 2016 and 2015. 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, 2016 and 2015, respectively, are as follows: Allowance for loan losses: Balance at December 31, 2015 Charge-offs Recoveries Provision Balance at December 31, 2016 Individually Evaluated for Impairment Collectively Evaluated for Impairment Loans: Ending Balance Individually Evaluated for Impairment Collectively Evaluated for Impairment Allowance for loan losses: Balance at December 31, 2014 Charge-offs Recoveries Provision Balance at December 31, 2015 Individually Evaluated for Impairment Collectively Evaluated for Impairment Loans: Ending Balance Individually Evaluated for Impairment Collectively Evaluated for Impairment Commercial, financial and agricultural $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 21,495 (3,791) 49 11,119 28,872 6,607 22,265 1,982,267 27,922 1,954,345 16,079 (3,802) 279 8,939 21,495 2,698 18,797 1,760,479 11,513 1,748,966 Real estate - construction Real estate - mortgage (In Thousands) Year Ended December 31, 2016 Consumer 5,432 (815) 76 432 5,125 $ $ 16,061 (380) 146 1,677 17,504 December 31, 2016 $ 622 16,882 923 4,202 $ 335,085 4,314 330,771 2,539,207 13,350 2,525,857 $ $ $ $ Year Ended December 31, 2015 6,395 (667) 238 (534) 5,432 $ $ 12,112 (1,104) 169 4,884 16,061 December 31, 2015 $ 1,730 14,331 1,223 4,209 $ 243,267 4,052 239,215 2,157,582 17,880 2,139,702 $ $ $ $ $ $ $ $ $ $ $ $ 431 (212) 3 170 392 - 392 55,211 3 55,208 1,043 (171) 1 (442) 431 32 399 55,047 46 55,001 Total 43,419 (5,198) 274 13,398 51,893 8,152 43,741 4,911,770 45,589 4,866,181 35,629 (5,744) 687 12,847 43,419 5,683 37,736 4,216,375 33,491 4,182,884 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: (cid:120) (cid:120) (cid:120) 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. (cid:120) Doubtful – loans that have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. 79 Loans by credit quality indicator as of December 31, 2016 and 2015 were as follows: December 31, 2016 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, 2015 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 1,893,664 324,958 $ 1,158,615 531,868 818,724 2,509,207 55,135 4,782,964 Pass 1,701,591 233,046 988,762 437,834 683,157 2,109,753 54,973 4,099,363 $ $ $ Special Mention 61,035 5,861 6,037 2,065 11,224 19,326 76 86,298 Special Mention 47,393 6,221 18,169 3,301 11,086 32,556 42 86,212 Substandard (In Thousands) 27,568 4,266 $ 7,067 2,872 735 10,674 - 42,508 $ Substandard (In Thousands) 11,495 4,000 $ 7,738 2,999 4,536 15,273 32 30,800 $ $ $ $ $ $ $ $ $ Doubtful Total Doubtful - - - - - - - - - - - - - - - - $ $ $ $ 1,982,267 335,085 1,171,719 536,805 830,683 2,539,207 55,211 4,911,770 Total 1,760,479 243,267 1,014,669 444,134 698,779 2,157,582 55,047 4,216,375 Nonperforming loans include nonaccrual loans and loans 90 or more days past due and still accruing. Loans by performance status as of December 31, 2016 and 2015 are as follows: December 31, 2016 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, 2015 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 $ $ $ $ 1,974,975 331,817 $ 7,292 3,268 $ 1,165,511 536,731 830,683 2,532,925 55,166 4,894,883 Performing 1,758,561 239,267 1,014,669 443,936 697,160 2,155,765 55,015 4,208,608 $ $ $ 6,208 74 - 6,282 45 16,887 Nonperforming (In Thousands) 1,918 4,000 - 198 1,619 1,817 32 7,767 $ $ $ 1,982,267 335,085 1,171,719 536,805 830,683 2,539,207 55,211 4,911,770 Total 1,760,479 243,267 1,014,669 444,134 698,779 2,157,582 55,047 4,216,375 80 Loans by past due status as of December 31, 2016 and 2015 are as follows: December 31, 2016 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 December 31, 2015 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 $ 710 59 - 160 95 255 52 1,076 $ 40 - - 129 811 940 17 997 $ $ $ 10 - $ 760 59 7,282 3,268 $ 1,974,225 331,758 $ 1,982,267 335,085 6,208 - - 6,208 45 6,263 $ 6,208 289 906 7,403 114 8,336 $ - 74 - 74 - 10,624 $ 1,165,511 536,442 829,777 2,531,730 55,097 4,892,810 $ 1,171,719 536,805 830,683 2,539,207 55,211 4,911,770 Past Due Status (Accruing Loans) 30-59 Days 60-89 Days 90+ Days Total Past Due (In Thousands) Non-Accrual Current Total Loans 50 198 - - - - 45 293 $ $ 35 12 - 210 - 210 6 263 $ $ - - - - - - 1 1 $ $ 85 210 - 210 - 210 52 557 $ $ 1,918 4,000 - 198 1,619 1,817 31 7,766 $ 1,758,476 239,057 $ 1,760,479 243,267 1,014,669 443,726 697,160 2,155,555 54,964 4,208,052 $ 1,014,669 444,134 698,779 2,157,582 55,047 4,216,375 $ 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. 81 The following table presents details of the Company’s impaired loans as of December 31, 2016 and 2015, 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 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 December 31, 2016 Unpaid Principal Balance Recorded Investment Related Allowance (In Thousands) Average Recorded Investment Interest Income Recognized in Period $ $ $ 1,003 938 2,615 1,899 940 5,454 3 7,398 26,919 3,376 6,924 972 - 7,896 - 38,191 27,922 4,314 9,539 2,871 940 13,350 3 45,589 $ $ 1,003 1,802 2,778 1,899 940 5,617 5 8,427 31,728 3,376 6,924 972 - 7,896 - 43,000 32,731 5,178 9,702 2,871 940 13,513 5 51,427 $ $ - - - - - - - - 6,607 923 348 274 - 622 - 8,152 6,607 923 348 274 - 622 - 8,152 December 31, 2015 Unpaid Principal Balance Recorded Investment Related Allowance (In Thousands) $ 478 161 $ 487 163 3,980 2,396 4,079 10,455 14 11,108 11,035 3,891 6,365 603 457 7,425 32 22,383 4,140 2,572 4,694 11,406 20 12,076 13,035 4,370 6,365 603 457 7,425 32 24,862 - - - - - - - - 2,698 1,223 1,328 263 139 1,730 32 5,683 $ $ $ 992 1,159 2,884 1,901 965 5,750 6 7,907 26,955 3,577 6,934 313 - 7,247 - 37,779 27,947 4,736 9,818 2,214 965 12,997 6 45,686 $ $ 64 3 166 102 60 328 - 395 1,162 68 362 19 - 381 - 1,611 1,226 71 528 121 60 709 - 2,006 Average Recorded Investment Interest Income Recognized in Period $ 482 370 3,815 2,409 4,559 10,783 18 11,653 13,882 3,920 9,958 567 880 11,405 34 29,241 24 1 214 147 222 583 1 609 672 - 568 19 17 604 - 1,276 11,513 13,522 2,698 14,364 696 Real estate - construction Real estate - mortgage: Owner-occupied commercial 1-4 family mortgage Other mortgage Total real estate - mortgage Consumer Total impaired loans 4,052 10,345 2,999 4,536 17,880 46 33,491 $ 4,533 10,505 3,175 5,151 18,831 52 36,938 $ $ 1,223 1,328 263 139 1,730 32 5,683 $ 4,290 13,773 2,976 5,439 22,188 52 40,894 $ 1 782 166 239 1,187 1 1,885 82 Troubled Debt Restructurings (“TDR”) at December 31, 2016 and 2015 totaled $7.3 million and $7.7 million, respectively. At December 31, 2016, the Company had a related allowance for loan losses of $2.3 million allocated to these TDRs, compared to $0.9 million at December 31, 2015. The Company’s TDRs for the years ended December 31, 2016 and 2015 have all resulted from term extensions rather than from interest rate reductions or debt forgiveness. The following tables present loans modified in a TDR during the periods presented by portfolio segment and the financial impact of those modifications. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. 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 Commercial, financial and agricultural Real estate - construction Real estate - mortgage: Owner-occupied commercial 1-4 family mortgage Other mortgage Total real estate - mortgage Consumer Year Ended December 31, 2016 Pre- Post- Number of Contracts Modification Modification Outstanding Outstanding Recorded Recorded Investment Investment (In Thousands) 9 - - - 1 1 - 10 $ $ 7,099 - - - 234 234 - 7,333 $ $ 7,099 - - - 234 234 - 7,333 Year ended December 31, 2015 Pre- Post- Modification Modification Outstanding Outstanding Recorded Recorded Investment Investment Number of Contracts 8 - - - 1 1 - 9 $ $ 6,618 - - - 253 253 - 6,871 $ $ 6,618 - - - 253 253 - 6,871 83 The following table presents TDRs by portfolio segment which defaulted during the years ended December 31, 2016 and 2015, and which were modified in the previous twelve months (i.e., the twelve months prior to default). For purposes of this disclosure default is defined as 90 days past due and still accruing or placement on nonaccrual status. Defaulted during the period, where modified in a TDR twelve months prior to default Commercial, financial and agricultural Real estate - construction Real estate - mortgage: Owner occupied commercial 1-4 family mortgage Other mortgage Total real estate - mortgage Consumer Year Ended December 31, 2015 2016 $ $ 6,734 - - - - - - 6,734 $ $ - - - - - - - - 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, 2016 and 2015 are as follows: Balance, beginning of year Advances Repayments Balance, end of year NOTE 5. FORECLOSED PROPERTIES Years Ended December 31, 2016 2015 (In Thousands) 12,090 $ 9,763 (11,047) 10,806 $ 13,083 15,442 (16,435) 12,090 $ $ 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. Residential real estate loan foreclosures classified as OREO totaled $189,000 and $1,141,000 as of December 31, 2016 and 2015, respectively. No residential real estate loans were in the process of being foreclosed as of December 31, 2016. An analysis of foreclosed properties for the years ended December 31, 2016, 2015 and 2014 follows: Balance at beginning of year OREO acquired Transfers from loans and capitalized expenses Foreclosed properties sold Writedowns and partial liquidations Balance at end of year NOTE 6. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: Land and building Furniture and equipment Leasehold improvements Construction in progress Accumulated depreciation 84 2016 5,392 - 4,112 (3,931) (585) 4,988 2015 (In Thousands) 6,840 $ 2,348 2,210 (5,227) (779) 5,392 $ $ $ 2014 12,861 - 2,417 (7,214) (1,224) 6,840 $ $ December 31, 2016 2015 (In Thousands) 13,323 $ 18,668 7,469 14,115 53,575 (13,261) 40,314 $ 13,293 12,102 6,042 982 32,419 (12,985) 19,434 $ $ Increases in construction in progress are the result of the construction of a new headquarters building in Birmingham, Alabama. The new headquarters building will consist of approximately 97,500 square feet and will house the main office and all sales and operations staff currently housed in the Company’s current leased headquarters. The provisions for depreciation charged to occupancy and equipment expense for the years ended December 31, 2016, 2015 and 2014 were $2,724,000, $2,219,000 and $1,838,000, 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, 2016 are summarized as follows: 2017 2018 2019 2020 2021 Thereafter (In Thousands) 3,986 3,743 3,241 2,610 1,863 5,098 20,541 $ $ For the years ended December 31, 2016, 2015 and 2014, annual rental expense on operating leases was $3,759,000, $2,919,000 and $2,674,000, respectively. NOTE 7. 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, 2016 and 2015 was $96,000 and $199,000, respectively, and is included in other assets. The Company has invested in limited partnerships as a funding investor. The partnerships are single purpose entities that lend money to real estate investors for the purpose of acquiring and operating, or rehabbing, commercial property. The investments qualify for New Market Tax Credits under Internal Revenue Code Section 45D, as amended, or Historic Rehabilitation Tax Credits under Code Section 47, as amended, or Low-Income Housing Tax Credits under Code Section 42, as amended. For each of the partnerships, the Company acts strictly in a limited partner capacity. The Company has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the entity that most significantly impact the entities’ economic performance. The amount of recorded investment in these partnerships as of December 31, 2016 and 2015 was $24,117,000 and $25,311,000, respectively, of which $14,254,000 and $14,876,000 as of December 31, 2016 and 2015, respectively, are included in loans of the Company. The remaining amounts are included in other assets. NOTE 8. DEPOSITS Deposits at December 31, 2016 and 2015 were as follows: Noninterest-bearing demand Interest-bearing checking Savings Time deposits, $250,000 and under Time deposits, over $250,000 85 December 31, 2016 2015 (In Thousands) 1,281,605 $ 3,562,165 48,718 234,157 293,666 5,420,311 $ 1,053,467 2,626,575 41,403 236,961 265,482 4,223,888 $ $ The scheduled maturities of time deposits at December 31, 2016 were as follows: 2017 2018 2019 2020 2021 Thereafter (In Thousands) 289,490 116,024 53,859 20,992 45,112 2,346 527,823 $ $ At December 31, 2016 and 2015, overdraft deposits reclassified to loans were $2,033,000 and $1,594,000, respectively. NOTE 9. FEDERAL FUNDS PURCHASED At December 31, 2016, the Company had $355.9 million in federal funds purchased from its correspondent banks that are clients of its correspondent banking unit, compared to $352.4 million at December 31, 2015. Rates paid on these funds were between 0.75% and 0.80% as of December 31, 2016 and 0.55% and 0.75% as of December 31, 2015. At December 31, 2016, the Company had available lines of credit totaling approximately $378.0 million with various financial institutions for borrowing on a short-term basis, with no amount outstanding. Available lines totaled approximately $180.0 million at December 31, 2015. These lines are subject to annual renewals with varying interest rates. NOTE 10. OTHER BORROWINGS Other borrowings are comprised of: (cid:120) (cid:120) (cid:120) $20.0 million of the Company’s 5.5% Subordinated Notes due November 9, 2022, which were issued in a private placement in November 2012 and pay interest semi-annually. The Notes were not eligible for prepayment by the Company prior to November 9, 2015. $34.75 million of the Company’s 5% Subordinated Notes due July 15, 2025, which were issued in a private placement in July 2015 and pay interest semi-annually. The Notes may not be prepaid by the Company prior to July 15, 2020. $600,000 of principal reducing advances from the Federal Home Bank of Atlanta, which have an interest rate of 0.75% and require quarterly principal payments of $100,000 until maturity on May 22, 2018. Debt is reported net of unamortized issuance costs of $87,000 and $111,000 as of December 31, 2016 and 2015, respectively. NOTE 11. SF INTERMEDIATE HOLDING COMPANY, INC., SF HOLDING 1, INC., SF REALTY 1, INC., SF FLA REALTY, INC., SF GA REALTY, INC. AND SF TN REALTY, INC. In January 2012, the Company formed SF Holding 1, Inc., an Alabama corporation, and its subsidiary, SF Realty 1, Inc., an Alabama corporation. In September 2013, the Company formed SF FLA Realty, Inc., an Alabama corporation and a subsidiary of SF Holding 1, Inc. In May 2014, the Company formed SF GA Realty, Inc., an Alabama corporation and a subsidiary of SF Holding 1, Inc. In February 2016, the Company formed SF TN Realty, Inc., an Alabama corporation and a subsidiary of SF Holding 1, Inc. Also in February 2016, the Company formed SF Intermediate Holding Company, Inc., an Alabama corporation. Immediately following the formation of SF Intermediate Holding Company, Inc., ServisFirst Bank assigned all of the outstanding capital stock of SF Holding 1, Inc. to SF Intermediate Holding Company, Inc., such that SF Holding 1, Inc. now is a wholly-owned first tier subsidiary of SF Intermediate Holding Company, Inc. SF Realty 1, SF FLA Realty, SF GA Realty and SF TN Realty all hold and manage participations in residential mortgages and commercial real estate loans originated by ServisFirst Bank and have elected to be treated as real estate investment trusts (“REIT”) for U.S. income tax purposes. SF Intermediate Holding Company, Inc., SF Holding 1, Inc., SF Realty 1, Inc., SF FLA Realty, Inc., SF GA Realty, Inc. and SF TN Realty, Inc. are all consolidated into the Company. NOTE 12. PARTICIPATION IN THE SMALL BUSINESS LENDING FUND OF THE U.S. TREASURY DEPARTMENT On July 31, 2015, the Company redeemed all 40,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury Department on June 21, 2011, for $40,033,000 in the aggregate, including accrued dividends. 86 The Preferred Stock, Series A, was issued 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 was 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 was calculated on the aggregate Liquidation Amount, was initially set at 1% per annum based upon the current level of “Qualified Small Business Lending” (“QSBL”) by the Bank. The dividend rates for subsequent dividend periods were based upon the percentage change in qualified lending between each dividend period and the baseline QSBL level established at the time the Agreement was effective and would have increased to 9% in December 2015. Such dividend rate was 1% per annum throughout its period outstanding based on the QSBL by the Bank. NOTE 13. 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, 2016 and December 31, 2015 were not material. NOTE 14. EMPLOYEE AND DIRECTOR BENEFITS At December 31, 2016, the Company has two stock incentive plans, which are described below. The compensation cost that has been charged against income for the plans was approximately $1,198,000, $1,265,000 and $3,681,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Included in the expense for 2014 are non-routine expenses of approximately $2,503,000 resulting from a correction of our accounting for vested stock options previously granted to members of our advisory boards in our Huntsville, Montgomery and Dothan, Alabama markets, and from the acceleration of vesting of stock options granted to members of our advisory boards in our Mobile, Alabama and Pensacola, Florida markets. We historically accounted for such options to advisory board members under the provisions of FASB ASC Topic 718-10, Compensation – Stock Compensation, and now have determined to recognize as an expense the fair value of these vested options in accordance with the provisions of the FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees. 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 3,150,000 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 6,150,000 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 2019 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 originally permitted the grant of up to 2,550,000 shares of common stock. However, upon stockholder approval during 2014, the 2009 Plan was amended in order to allow the Company to grant stock options for up to 5,550,000 shares of common stock. The 2009 Plan authorizes the grant of stock appreciation rights, restricted stock, incentive stock options, non-qualified stock options, non-stock share equivalents, performance shares or performance units and other equity-based awards. 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. As of December 31, 2016, there are a total of 2,820,844 shares available to be granted under the 2009 Amended and Restated Stock Incentive Plan. 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 70 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. 87 Expected volatility Expected dividends Expected term (in years) Risk-free rate 2016 2015 2014 29.00% 0.64% 6 1.85% 24.00% 0.71% 6 1.85% 19.25% 1.31% 8 2.24% The weighted average grant-date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $6.00, $4.20 and $1.85, respectively. The following tables summarize stock option activity: Year Ended December 31, 2016: Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Exercisable at December 31, 2016 Year Ended December 31, 2015: Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Exercisable at December 31, 2015 Year Ended December 31, 2014: Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Exercisable at December 31, 2014 Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (In Thousands) 6.66 20.15 4.28 11.04 9.00 5.08 4.69 16.63 3.62 8.40 6.66 4.84 3.85 8.42 2.96 5.96 4.69 3.88 6.3 9.1 3.9 6.8 6.2 4.8 5.9 9.2 2.7 7.1 6.3 5.4 5.5 9.3 2.5 7.9 5.9 4.1 $ $ $ $ $ $ $ $ $ 42,746 4,166 22,629 818 57,636 30,051 38,256 2,311 21,177 - 42,746 7,775 14,300 2,339 22,679 - 38,256 14,901 Shares 2,498,834 241,000 (682,500) (31,000) 2,026,334 928,536 3,245,834 324,000 (1,051,000) (20,000) 2,498,834 410,836 4,657,800 278,000 (1,677,966) (12,000) 3,245,834 1,182,836 $ $ $ $ $ $ $ $ $ Exercisable options at December 31, 2016 were as follows: Range of Exercise Price Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) $ 4.17 5.00 5.50 6.92 15.74 234,336 $ 522,000 90,000 75,000 7,200 928,536 4.17 5.00 5.50 6.92 15.74 5.08 88 Aggregate Intrinsic Value (In Thousands) 7,797 16,934 2,875 2,289 156 30,051 3.6 $ 4.7 6.2 7.0 8.1 4.8 $ As of December 31, 2016, there was $2,248,000 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 2.7 years. The total fair value of shares vested during the years ended December 31, 2016, 2015 and 2014 was $1,908,000, $242,000 and $2,025,000, respectively. The fair value of shares vested during 2014 includes the accelerated vesting of nonemployee options awarded to the Company’s advisory directors in its Mobile, Alabama and Pensacola, Florida markets. Restricted Stock The Company has awarded 483,176 shares of restricted stock to certain officers, of which 364,500 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, 2016, there was $465,000 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized evenly over the remaining 1.7 years of the restricted stock’s vesting period. Stock Warrants The Company granted warrants for 90,000 shares of common stock with an exercise price of $4.167 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 exercised on May 14, 2014. 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 Company at June 15, 2005, the length of service and age requirements were waived. The Company matches employees’ contributions based on a percentage of salary contributed by participants and may make additional discretionary profit sharing contributions. The Company’s expense for the plan was $1,294,000, $1,080,000 and $811,000 for 2016, 2015 and 2014, respectively. NOTE 15. COMMON STOCK On November 16, 2016, the Company declared a two-for-one split of its common stock in the form of a stock dividend. On December 20, 2016, stockholders of record as of the close of business on December 5, 2016 received a distribution of one additional share of Company common stock for each common share owned. All share and per share amounts for all periods presented are reported giving effect to this two-for-one stock split. On January 31, 2015, the Company completed its acquisition of Metro Bancshares, Inc. and Metro Bank, its wholly-owned bank subsidiary, for an aggregate of $20.9 million in cash and 1,273,184 shares of Company common stock. On May 19, 2014, the Company completed its initial public offering of 3,750,000 shares of common stock at a public offering price of $15.167 per share. The Company received net proceeds of approximately $52.1 million from the offering, after deducting the underwriting discount and offering expenses. On June 16, 2014, the Company declared a three-for-one split of its common stock in the form of a stock dividend. On July 16, 2014, stockholders of record as of the close of business on July 9, 2014 received a distribution of two additional shares of Company common stock for each common share owned. All share and per share amounts for all periods presented are reported giving effect to this three-for-one stock split. NOTE 16. 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 $189.1 million in dividends as of December 31, 2016. 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. 89 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 common equity Tier 1 capital, 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, 2016, that the Bank meets all capital adequacy requirements to which it is subject. In July 2013, the Federal Reserve announced its approval of a final rule to implement the regulatory capital reforms developed by the Basel Committee on Banking Supervision (“Basel III”), among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization will also be required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer will be required to consist solely of common equity Tier 1, and the buffer will apply to all three risk- based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, beginning January 1, 2016 and becoming fully effective on January 1, 2019, and will ultimately consist of an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets. The applicable capital conservation buffer at December 31, 2016 was 0.625% and the Company and bank exceeded such requirement. As of December 31, 2016, 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 CET1, 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, 2016. The Company’s and Bank’s actual capital amounts and ratios are presented in the following table: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2016: CET I Capital to Risk Weighted Assets: Consolidated ServisFirst Bank Tier I Capital to Risk Weighted Assets: Consolidated ServisFirst Bank Total Capital to Risk Weighted Assets: Consolidated ServisFirst Bank Tier I Capital to Average Assets: Consolidated ServisFirst Bank As of December 31, 2015: CET I Capital to Risk Weighted Assets: Consolidated ServisFirst Bank Tier I Capital to Risk Weighted Assets: Consolidated ServisFirst Bank Total Capital to Risk Weighted Assets: Consolidated ServisFirst Bank Tier I Capital to Average Assets: Consolidated ServisFirst Bank $ $ 508,982 560,731 509,359 561,108 616,415 613,501 509,359 561,108 431,642 439,279 432,019 439,656 530,688 483,575 432,019 439,656 234,262 234,232 312,350 312,309 416,467 416,413 247,777 247,760 199,836 199,806 266,448 266,407 355,264 355,210 202,043 202,023 9.78% $ 10.77% 9.78% 10.78% 11.84% 11.79% 8.22% 9.06% 9.72% $ 9.89% 9.73% 9.90% 11.95% 10.89% 8.55% 8.71% 90 4.50% 4.50% $ 6.00% 6.00% 8.00% 8.00% 4.00% 4.00% 4.50% 4.50% $ 6.00% 6.00% 8.00% 8.00% 4.00% 4.00% N/A 338,335 N/A 416,413 N/A 520,516 N/A 309,700 N/A 288,608 N/A 355,210 N/A 444,012 N/A 252,529 N/A 6.50% N/A 8.00% N/A 10.00% N/A 5.00% N/A 6.50% N/A 8.00% N/A 10.00% N/A 5.00% NOTE 17. OTHER OPERATING INCOME AND EXPENSES The major components of other operating income and expense included in noninterest income and noninterest expense are as follows: Other Operating Income (Loss) gain on sale of other real estate owned Credit card income Gain (loss) on sale of fixed assets 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 Bank service charges Write-down investment in tax credit partnerships Other operational losses Other NOTE 18. 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 (benefit) Total income tax expense 2016 Years Ended December 31, 2015 (In Thousands) 2014 $ $ $ $ 18 3,222 1,399 1,602 6,241 377 740 4,832 1,510 555 1,594 544 781 769 407 1,341 2,519 264 4,684 20,917 $ $ $ $ (136) $ 2,079 (27) 1,241 3,157 $ 338 680 4,293 2,086 492 1,211 562 380 605 406 961 3,966 126 3,994 20,100 $ $ (413) 1,778 (5) 1,011 2,371 264 555 3,126 1,457 399 959 477 259 466 364 472 2,552 575 2,784 14,709 2016 Year Ended December 31, 2015 (In Thousands) 2014 $ $ 29,813 $ 1,254 31,067 (662) (1,066) (1,728) 29,339 $ 28,517 $ 1,824 30,341 (3,277) (1,599) (4,876) 25,465 $ 25,929 693 26,622 (3,778) (1,243) (5,021) 21,601 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 Excess tax benefit from stock compensation Federal tax credits Other Effective income tax and rate 91 Year Ended December 31, 2016 % of Pre-tax Earnings Amount (In Thousands) $ $ 38,786 254 (1,322) (978) (4,788) (2,652) 39 29,339 35.00% 0.23% (1.20)% (0.88)% (4.32)% (2.40)% 0.04% 26.47% 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 Federal tax credits 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 Federal tax credits Other Effective income tax and rate The components of net deferred tax asset are as follows: Year Ended December 31, 2015 Amount (In Thousands) % of Pre-tax Earnings 31,152 146 (1,308) (917) 3 (3,600) (11) 25,465 35.00% 0.16% (1.47)% (1.03)% -% (4.04)% (0.01)% 28.61% Year Ended December 31, 2014 Amount (In Thousands) % of Pre-tax Earnings 25,892 (358) (1,316) (798) (18) (1,659) (142) 21,601 35.00% (0.49)% (1.78)% (1.08)% (0.02)% (2.24)% (0.19)% 29.20% $ $ $ $ December 31, 2016 2015 (In Thousands) Deferred tax assets: Allowance for loan losses Other real estate owned Nonqualified equity awards Nonaccrual interest State tax credits Investments Deferred loan fees Reserve for unfunded commitments Accrued bonus Differences in amounts reflected in financial statements and income tax basis of assets acquired and $ liabilities assumed in acquisition Acquired net operating losses Net unrealized loss on securities available for sale Other deferred tax assets Total deferred tax assets Deferred tax liabilities: Net unrealized gain on securities available for sale Depreciation Prepaid expenses Acquired intangible assets Total deferred tax liabilities Net deferred tax assets $ 19,699 737 1,234 501 3,475 2,173 707 190 1,817 448 27 331 122 31,461 - 3,606 198 525 4,329 27,132 $ $ 16,482 1,136 1,576 441 2,313 1,826 642 190 - 972 1,398 - 228 27,204 1,641 1,285 202 651 3,779 23,425 The Company believes its net deferred tax asset is recoverable as of December 31, 2016 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, 2013 through 2016. The Company is also currently open to audit by several state departments of revenue for the years ended December 31, 2013 through 2016. 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. 92 Accrued interest and penalties on unrecognized income tax benefits totaled $94,000 and $61,000 as of December 31, 2016 and 2015, respectively. Unrecognized income tax benefits as of December 31, 2016 and December 31, 2015, that, if recognized, would impact the effective income tax rate totaled $1,375,000 and $1,173,000 (net of the federal benefit on state income tax issues), 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 2016, 2015 and 2014 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 NOTE 19. COMMITMENTS AND CONTINGENCIES Loan Commitments 2016 2015 (In Thousands) 804 $ 369 - - - - 1,173 $ $ $ 1,173 364 - - - (162) 1,375 $ $ 2014 437 367 - - - - 804 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 2016 2015 (In Thousands) 2014 $ $ 1,667,015 $ 100,678 40,991 1,808,684 $ 1,409,425 $ 62,462 38,224 1,510,111 $ 1,156,682 45,155 33,280 1,235,117 Commitments to extend credit, credit card arrangements, commercial letters of credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Company uses the same credit policies in making commitments and conditional obligations as it does for on- balance sheet financial instruments. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. NOTE 20. CONCENTRATIONS OF CREDIT The Company originates primarily commercial, residential, and consumer loans to customers in the Company’s market area. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy in the market area. The Company’s loan portfolio is concentrated primarily in loans secured by real estate, principally 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. 93 NOTE 21. 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. Year Ended December 31, 2015 (Dollar Amounts In Thousands Except Per Share Amounts) 2016 2014 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 Diluted earnings per common share NOTE 22. RELATED PARTY TRANSACTIONS 52,450,896 81,432 1.55 52,450,896 1,157,476 53,608,372 81,432 1.52 $ $ $ 51,426,466 63,260 1.23 51,426,466 1,458,642 52,885,108 63,260 1.20 $ $ $ $ 47,710,002 51,946 1.09 47,710,002 1,926,440 49,636,442 51,946 1.05 $ $ $ $ As more fully described in Note 4, the Company had outstanding loan balances to related parties as of December 31, 2016 and 2015 in the amount of $10.8 million and $12.1 million, respectively. Related party deposits totaled $7.9 million and $7.6 million at December 31, 2016 and 2015, respectively. NOTE 23. 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 pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing 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, as in the case of certain corporate securities, these securities are classified in Level 3 of the hierarchy. 94 Impaired Loans. Impaired loans are measured and reported at fair value when full payment under the loan terms is not probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $7,424,000 and $6,268,000 during the years ended December 31, 2016 and 2015, respectively. Other Real Estate Owned. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the valuation hierarchy. Net losses on the sale and write-downs of OREO of $585,000 and $743,000 was recognized during the years ended December 31, 2016 and 2015, respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level 3 of the hierarchy. The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of December 31, 2016 and December 31, 2015: 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 Total assets at fair value Fair Value Measurements at December 31, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Total $ $ - - - - - $ $ 46,254 227,190 139,930 9,001 422,375 $ $ - - - - - $ $ 46,254 227,190 139,930 9,001 422,375 Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Total - - - - - $ $ 45,009 136,954 146,033 14,942 342,938 $ $ - - - - - $ $ 45,009 136,954 146,033 14,942 342,938 $ $ 95 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 Assets Measured on a Nonrecurring Basis: Impaired loans Other real estate owned Total assets at fair value Fair Value Measurements at December 31, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) $ - - - Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Total - - - $ $ 37,437 4,988 42,425 $ $ 37,437 4,988 42,425 Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Total $ $ - - - $ $ - - - $ $ 27,808 5,392 33,200 $ $ 27,808 5,392 33,200 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 due from banks: 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. Equity securities: Fair values for other investments are considered to be their cost as they are redeemed at par value. Federal funds sold: The carrying amounts reported in the statements of financial condition approximate those assets’ fair values. Mortgage loans held for sale: Loans are committed to be delivered to investors on a “best efforts delivery” basis within 30 days or origination. Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values. Bank owned life insurance contracts: The carrying amounts in the statements of condition approximate these assets’ fair value. 96 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. 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. Federal funds purchased: The carrying amounts in the statements of condition approximate these liabilities’ fair value. Other borrowings: The fair values of other borrowings 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. 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, 2016 and December 31, 2015 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. Financial Assets: Level 1 Inputs: Cash and cash equivalents Level 2 Inputs: Debt securities available for sale Debt securities held to maturity Equity securities Federal funds sold Mortgage loans held for sale Bank owned life insurance contracts Level 3 Inputs: Debt securities held to maturity Loans, net Financial Liabilities: Level 2 Inputs: Deposits Federal funds purchased Other borrowings December 31, 2016 Carrying Amount Fair Value 2015 Carrying Amount Fair Value (In Thousands) $ $ $ $ $ $ $ $ 623,562 422,375 25,052 1,024 160,435 4,675 114,388 37,512 4,859,877 5,420,311 355,944 55,262 $ $ $ $ 623,562 422,375 25,431 1,024 160,435 4,736 114,388 37,871 4,872,689 5,417,320 355,944 54,203 $ $ $ $ 317,450 342,938 27,426 4,954 34,785 8,249 91,594 - 4,172,956 4,223,888 352,360 55,637 317,450 342,938 27,910 4,954 34,785 8,249 91,594 - 4,179,835 4,223,181 352,360 54,480 NOTE 24. PARENT COMPANY FINANCIAL INFORMATION The following information presents the condensed balance sheet of the Company as of December 31, 2016 and 2015 and the condensed statements of income and cash flows for the years ended December 31, 2016, 2015 and 2014. 97 CONDENSED BALANCE SHEETS (In Thousands) ASSETS Cash and due from banks Investment in subsidiary Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Other borrowings 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; no shares authorized, issued and outstanding at December 31, 2016, and 40,000 shares authorized, no shares issued and outstanding at December 31, 2015 Preferred stock, par value $0.001 per share; 1,000,000 authorized and undesignated at December 31, 2016 and 1,000,000 authorized and 960,000 shares undesignated at December 31, 2015 Common stock, par value $0.001 per share; 100,000,000 shares authorized; 52,636,896 shares issued and outstanding at December 31, 2016 and 51,945,396 shares issued and outstanding at December 31, 2015 Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Total stockholders' equity Total liabilites and stockholders' equity December 31, 2016 December 31, 2015 $ $ $ $ 6,060 574,261 375 580,696 54,663 3,521 58,184 - - - - - - 53 215,932 307,151 (624) 522,512 580,696 $ $ $ $ 48,182 456,407 375 504,964 54,639 1,555 56,194 - - - - - - 26 211,546 234,150 3,048 448,770 504,964 CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 and 2014 (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 2016 2015 2014 $ $ $ 2,500 2 2,502 2,208 2,208 81,138 81,432 - 81,432 $ 20,000 1 20,001 1,603 1,603 45,095 63,493 233 63,260 $ $ 12,000 - 12,000 1,183 1,183 41,529 52,346 400 51,946 STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (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 provided by operating activities Investing activities Investment in subsidiary Net cash paid in acquisition Other Net cash used in investing activities Financing activities Proceeds from other borrowings Redemption of preferred stock Proceeds from issuance of common stock, net Dividends paid on common stock Dividends paid on preferred stock 2016 2015 2014 $ 81,432 $ 63,493 $ 52,346 1,443 (81,139) 1,736 (36,000) - - (36,000) - - - (7,858) - (271) (45,095) 18,127 - (20,926) 736 (20,190) 34,750 (40,000) - (5,883) (233) 165 (41,529) 10,982 - - - - - - 52,076 (3,609) (400) 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 (7,858) (42,122) 48,182 6,060 $ (11,366) (13,429) 61,611 48,182 $ 48,067 59,049 2,562 61,611 $ 98 NOTE 25. SUBSEQUENT EVENTS The Company has evaluated all subsequent events through the date of this filing to ensure that this Form 10-K includes appropriate disclosure of events both recognized in the financial statements as of December 31, 2016, and events which occurred subsequent to December 31, 2016 but were not recognized in the consolidated financial statements. NOTE 26. 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 2016 Quarter Ended (Dollars in thousands, except per share data) March 31 June 30 September 30 December 31 49,961 5,782 44,179 2,059 19,956 0.38 0.37 $ $ $ 52,050 6,159 45,891 3,800 18,853 0.36 0.36 $ $ $ 54,691 6,773 47,918 3,464 20,909 0.40 0.39 2015 Quarter Ended (Dollars in thousands, except per share data) March 31 June 30 September 30 40,783 3,746 37,037 2,405 12,955 0.26 0.25 $ $ $ 44,209 3,998 40,211 4,062 14,346 0.28 0.27 $ $ $ 46,532 4,670 41,862 3,072 16,233 0.32 0.31 $ $ $ $ $ $ 56,200 7,091 49,109 4,075 21,714 0.41 0.40 December 31 48,451 5,290 43,161 3,308 19,726 0.38 0.37 $ $ $ $ $ $ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no disagreements with accountants regarding accounting and financial disclosure matters during the year ended December 31, 2016. 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, 2016. 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, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 99 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, 2016, 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 (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2016, based on those criteria. See “Report of Management on Internal Control Over Financial Reporting.” The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, has been audited by Dixon Hughes Goodman LLP, an independent registered public accounting firm, as stated in their report herein — “Report of Independent Registered Public Accounting Firm.” ITEM 9B. OTHER INFORMATION. None 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 2017 Annual Meeting of Stockholders. Information regarding the Company’s executive officers is provided in Part I, Item 1 of this 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 2017 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 2017 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 2017 Annual Meeting of Stockholders. 100 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 2017 Annual Meeting of Stockholders. 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, 2016 and 2015 Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 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 59 60 61 62 63 64 65 66 67 2.1 3.1 3.2 3.3 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 Plan of Reorganization and Agreement of Merger dated August 29, 2007 (1) Restated Certificate of Incorporation, as amended (2) Certificate of Elimination of the Senior-Non Cumulative Perpetual Preferred Stock, Series A (3) Bylaws (Restated for SEC filing purposes only) (4) Form of Common Stock Certificate (5) Revised Form of Common Stock Certificate (6) 2005 Amended and Restated Stock Incentive Plan (7) Amended and Restated Change in Control Agreement with William M. Foshee dated March 5, 2014 (8) Amended and Restated Change in Control Agreement with Clarence C. Pouncey III dated March 5, 2014 (9) Employment Agreement of Andrew N. Kattos dated April 27, 2006 (10) Employment Agreement of G. Carlton Barker dated February 1, 2007 (11) 2009 Amended and Restated Stock Incentive Plan (12) Note Purchase Agreement, dated November 9, 2012 between the Company and the purchasers party thereto (13) Note Purchase Agreement, dated July 15, 2015 between the Company and the purchasers party thereto (14) First Amendment to the ServisFirst Bancshares, Inc. Amended and Restated 2009 Stock Incentive Plan (15) First Amendment to the ServisFirst Bancshares, Inc. Amended and Restated 2005 Stock Incentive Plan (15) Form of Nonqualified Stock Option Award pursuant to the ServisFirst Bancshares, Inc. Amended and Restated 2009 Stock Incentive Plan (15) Form of Restricted Stock Award Agreement pursuant to the ServisFirst Bancshares, Inc. Amended and Restated 2009 Stock Incentive Plan (16) 101 10.13 10.14 10.15 11 14 21 23 24 31.1 31.2 32.1 32.2 Loan Agreement, dated as of September 1, 2016, by and between ServisFirst Bancshares, Inc. and NexBank SSB (17) Revolving Promissory Note dated as of September 1, 2016 (17) Pledge and Security Agreement dated as of September 1, 2016 by and between ServisFirst Bancshares, Inc. and NexBank SSB (17) Statement Regarding Computation of Earnings Per Share is included herein at Note 21 to the Consolidated Financial Statements in Item 8. Code of Ethics for Principal Financial Officers (18) List of Subsidiaries Consent of Dixon Hughes Goodman 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) Registrant hereby incorporates by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 10, filed on March 28, 2008. (2) Registrant hereby incorporates by reference to Exhibit 3.3 to the Registrant's Current Report on Form 8-K, filed June 24, 2016. (3) Registrant hereby incorporates by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K, filed on June 28, 2016. (4) Registrant hereby incorporates by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on April 4, 2014. (5) Registrant hereby incorporates by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form 10, filed on March 28, 2008. (6) Registrant hereby incorporates by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on September 15, 2008, Commission File No. 0-53149. (7) Registrant hereby incorporates by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form 10, filed on March 28, 2008. (8) Registrant hereby incorporates by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K, filed on March 7, 2014. (9) Registrant hereby incorporates by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K, filed on March 7, 2014. (10) Registrant hereby incorporates by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form 10, filed on March 28, 2008. (11) Registrant hereby incorporates by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form 10, filed on March 28, 2008. (12) Registrant hereby incorporates by reference to Appendix A to the Registrant's Definitive Proxy Statement on Schedule 14A, filed on March 18, 2014. (13) Registrant hereby incorporates by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on November 15, 2012. (14) Registrant hereby incorporates by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on July 20, 2015. (15) Registrant hereby incorporates by reference to Exhibits 10.1, 10.2 and 10.3 to the Company’s Quarterly Report on Form 10-Q, filed November 1, 2016. (16) Registrant hereby incorporates by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8, filed June 17, 2014. (17) Registrant hereby incorporates by reference to Exhibits 10.1, 10.2 and 10.3 to the Company’s Current Report on Form 8-K, filed September 2, 2016. (18) Registrant hereby incorporates by reference to Exhibit 14 to the Registrant's Annual Report on Form 10-K, filed on March 10, 2009. 102 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. SIGNATURES By: /s/Thomas A. Broughton, III Thomas A. Broughton, III President and Chief Executive Officer Dated: February 28, 2017 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 /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 Title President, Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date February 28, 2017 February 28, 2017 Chairman of the Board February 28, 2017 Director Director Director Director February 28, 2017 February 28, 2017 February 28, 2017 February 28, 2017 *The undersigned, acting pursuant to a Power of Attorney, has signed this Annual Report on Form 10-K for and on behalf of the persons indicated above as such persons’ true and lawful attorney-in-fact and in their names, places and stated, in the capacities indicated above and on the date indicated below. /s/ William M. Foshee William M. Foshee Attorney-in-Fact February 28, 2017 103 (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 32.2 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF List of Subsidiaries Consent of Dixon Hughes Goodman 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 XBRL Instance Document XBRL Schema Documents XBRL Calculation Linkbase Document XBRL Label Linkbase Document XBRL Presentation Linkbase Document XBRL Definition Linkbase Document 104 List of Subsidiaries Subsidiaries Jurisdiction of State of Incorporation Exhibit 21 ServisFirst Bank (1) SF Intermediate Holding Company, Inc. (2) SF Holding 1, Inc. (3) SF Realty 1, Inc. (4) SF FLA Realty, Inc. (5) SF GA Realty, Inc. (6) SF TN Realty, Inc. (7) Alabama Alabama Alabama Alabama Alabama Alabama Alabama (1) ServisFirst Bank is organized under the laws of the State of Alabama and is a wholly-owned subsidiary of ServisFirst Bancshares, Inc. (2) SF Intermediate Holding Company, Inc. is a wholly-owned subsidiary of ServisFirst Bank. (3) SF Holding 1, Inc. is a wholly-owned subsidiary of SF Intermediate Holding, Inc. (4) SF Realty 1 Inc. is a majority-owned subsidiary of SF Holding 1, Inc. (5) SF FLA Realty, Inc. is a majority-owned subsidiary of SF Holding 1, Inc. (6) SF GA Realty, Inc. is a majority-owned subsidiary of SF Holding 1, Inc. (7) SF TN Realty, Inc. is a wholly-owned subsidiary of SF Holding 1, Inc. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 The Board of Directors ServisFirst Bancshares, Inc. We consent to the incorporation by reference in the registration statements (Nos. 333-170507, 333-196825 and 333-213869) on Form S-8 and (No. 333-203385) on Form S-3 of ServisFirst Bancshares, Inc. of our reports dated February 28, 2017, with respect to the consolidated financial statements of ServisFirst Bancshares, Inc. and subsidiaries (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company’s early adoption of the provisions of Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the year ended December 31, 2016) and the effectiveness of internal control over financial reporting, which reports appear in ServisFirst Bancshares Inc.’s 2016 Annual Report on Form 10-K. /s/ Dixon Hughes Goodman LLP Atlanta, Georgia February 28, 2017 POWER OF ATTORNEY EXHIBIT 24 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes Thomas A. Broughton III and William M. Foshee, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign on his behalf the ServisFirst Bancshares, Inc. Annual Report on Form 10-K for the year ended December 31, 2016. Hereby executed by the following persons in the capacities indicated on February 21, 2017, in Birmingham, Alabama. Name /s/ Stanley M. Brock Stanley M. Brock /s/ Joseph R. Cashio Joseph R. Cashio /s/ James J. Filler James J. Filler /s/ Michael D. Fuller Michael D. Fuller /s/ Hatton C.V. Smith Hatton C.V. Smith Title Chairman of the Board Director Director Director Director Exhibit 31.1 I, Thomas A. Broughton III, certify that: 1. I have reviewed this Annual Report on Form 10-K of ServisFirst Bancshares, Inc.; Section 302 Certification of the CEO 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 control 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: February 28, 2017 /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. Exhibit 31.2 I, William M. Foshee, certify that: 1. I have reviewed this Annual Report on Form 10-K of ServisFirst Bancshares, Inc.; Section 302 Certification of the CFO 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 control 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: February 28, 2017 /s/William M. Foshee William M. Foshee Chief Financial Officer A signed original of this written statement has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request Section 906 Certification of the CEO CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.1 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of ServisFirst Bancshares, Inc. (the “Company”) certifies that, to his knowledge, the Annual Report on Form 10-K of the Company for the year ended December 31, 2016, 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: February 28, 2017 /s/Thomas A. Broughton III Thomas A. Broughton III President and Chief Executive Officer A signed original of this written statement has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. Section 906 Certification of the CFO CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.2 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of ServisFirst Bancshares, Inc. (the “Company”) certifies that, to his knowledge, the Annual Report on Form 10-K of the Company for the year ended December 31, 2016, 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: February 28, 2017 /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.